Happy New Year to all my readers. Thank you for your New Year resolutions.
I have suggested the government resolve to get inflation down (December 30th) and to make it more worthwhile to grow a business here (December 29th) in the UK. There is a third resolution that I propose to them if they wish to have a successful year handling the economy. They must avoid all further involvement in the gathering Euro crisis.
The government gave themselves some room to avoid more invovement in bail outs when they stressed that the Republic of Ireland was a very special case as a near neighbour sharing a land frontier with us, with substantial banking connections. None of the other Euroland members meet the first of those criteria.
The Euro countries need work outs more than they need bail outs. Indeed, forcing them into IMF/EU packages of future borrowings may make the problems worse, not better. The Republic of Ireland may express disapproval when the electors go to the polls. There could be trouble forming a government which simply accepts all the conditions imposed on the Irish loan and accepts the package as presented which will be a straightjacket for the Irish economy for many months to come.
Spain needs to buttress its banks quickly and convincingly. The EU itself found five groups of Cajas did not meet its unstressful stress texts last summer. The UK should not fall for the argument that because there are cross holdings with UK banks we have some duty to help in this process. Nor is it necessarily the right thing to do to refinance the Spanish state on special terms so it in turn can finance the banks. If there are problems with any Spanish banks continuing to own UK banking interests, then let them sell those to new private sector owners. Governments need to get away from thinking they must act as lenders or share buyers of last resort to banks in trouble. There need to be market based solutions. In the meantime the European Central Bank should continue to act as the lender of last resort to Euroland banks, as Euroland regulators tell us they are all solvent.
Nor should the UK be dragged into any refinancing of a governement which has been overspending. There may need to be a third package for Greece, still struggling under the weight of debt and the deflationary policies forced on it by the last two ackages.
2011 could bring the next phases of the Euro crisis. The bail outs of Greece and Ireland have not mended those troubled economies. They needed work outs, not bail outs. The UK government should make sure it is not part of any future bail out party. We cannot afford to dish out more of the wrong medicine to failing Euro economies.
In the New Year in Ireland it may prove difficult forming a government in the new Parliament of MPs who want to follow the letter and word of the EU/IMF bail out agreement. Adding cuts and tax rises to tight money and an overvalued currency is not a great formula for fixing a distressed economy. Greece too might find the going tough under its revised terms from this autumn. The Greek economy is not growing, under the EU/IMF cosh.
The UK government said that Ireland was a very special case. If the officials seek to argue that Spain has strong common bank holdings and substantial links through the financial sector, Ministers should respond that the Spanish owned banks in the UK are solvent businesses which the Spanish banks can sell to new owners in the private sector should need arise. There is no need for the UK to ride to the rescue, to help refinance European Central Bank loans to Spanish banks.
Nor does it make sense for heavily indebted and high borrowing UK to borrow yet more to lend on to overstretched Euro member states governments. Those of us who fought long and hard to keep the UK out of the Euro did so in part to avoid UK taxpayers having to go to the rescue of states in the Union who overdid the borrowing. It makes no sense to behave as if we had joined when it comes to paying the bills for this ill judged scheme.
The UK’s government finances are still stretched. Taxpayers will not take kindly to any further extension of the UK’s credit to lend on to Euro governments. The UK can help Euroland sort itself out by not offering an easy palliative in the form of more loans. Somehow Euroland has to learn to live within its means, and grow its means to get closer to its amibitions. Lending more without putting in place a currency and a monetary policy that allows recovery is not the right answer. The ECB was keen to scramble out of some of its lending to Ireland. It did not necessarily result in a policy for the Republic that will guarantee economic success.
The Uk has to concentrate hard on getting its own spending under control and its deficit down. It needs a stronger growth strategy, to take advantage of the freedom it has by not belonging to the Euro to set a competitive level of its currency and a sensible monetary policy. The freedom so far has helped a bit with the growth, but at the expense of higher inflation. It is going to be a difficult year ahead getting the balance right.
As the PM says, the heavy lift to cut the deficit gets underway in 2011. Readers should remember that as total public spending goes up every year in cash terms this Parliament, the heavy lift takes place through more tax revenue. That’s why 2011 starts with a hike in VAT and petrol duty, not with spending cuts.