It wasn’t just ill chosen words by Euro leaders which triggered the Stock market crash. It was also a series of figures which pointed to a slowing of world growth in the US and elsewhere.
Many in markets have long understood that many western countries have been living on too much debt. The Credit Crunch shifted some of that debt from the private sector and banks, to the governments, in a desperate attempt to keep things going “as normal”. Now on both sides of the Atlantic people are questioning how much longer western countries can carry on spending on overdraft, before the costs of servicing the debts become too great to keep it all going.
There remains a fundamental imbalance in world economies that we have often discussed on this site. The emerging market economies have been expanding rapidly. They make an ever more astonishing array of goods, providing world markets with high quality products at affordable prices for the west. They are building large surpluses based on export, and lending money to the west to allow it to continue to buy their goods.
The western economies, with a few exceptions, are borrowing large sums to be able to consume more than they earn. Much of this borrowing and spending is now done in the public sector following the C redit Crunch. They export too little, import too much, and delay adjustments by flexing the credit card.
Neither side of this imbalance is healthy, but the debtor nations are in the weaker position. They have the more vulnerable living standards, maintained by too much borrowing. They either have to export much more, or cut back. The Emerging market economies now have the option of making and selling more to themselves, as the West reins back on its own consumption when it can no longer borrow so much.
The West has been in the business of trying to delay or avoid the adjustment, by switching from excessive private sector to heavy public sector borrowing. If growth now slows too much the west’s ability to borrow is damaged. Lenders will see tax revenues disappointing, and borrowing levels forced up above the government plans. At a certain point, as has happened for several EU countries already, markets effectively say they will lend no more, forcing more drastic measures on a reluctant country.
The messages for the UK are simple. The UK must distance itself as much as posssbile from the Euro crash. It must argue for less EU law and costs for the UK as we agree to whatever Euroland wants to do to try to keep itself going. The UK government has to do more to attract and stimulate business investment and activity here, and has to intensify its efforts to cut public borrowing. All overborrowed sovereigns will come under this spotlight, so the UK has to show solid achievement in deficit reduction to back up its plan to get the deficit down in the next four years. If revenue disappoints through slower world growth, it just means the government has to be better at controlling costs. It needs a productivity revolution in the public services.