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Bubble bursts for UK (by Jerome a Paris)

by whataboutbob Mon Jul 25th, 2005 at 06:49:41 AM EST

posted on behalf of Jerome, who is still at the beach

Wolfgang Munchau:Bubble bursts for Brown(FT)(behind subscription wall)

Until about a year ago, the British were almost euphoric about the performance of their economy. After more than 10 years of uninterrupted growth, the UK had managed to achieve full employment, combined with a high degree of macroeconomic stability. It was unbearable to listen to Gordon Brown, chancellor of the exchequer, hectoring other European finance ministers on his supposedly superior economic success. Now business confidence in the UK appears to have declined. The chairman of a large UK manufacturer complained to me recently that “Britain is going the way of ‘old Europe’?”.

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In terms of fiscal policy, Britain’s convergence with “old Europe” started some time ago, and is now almost complete. This was apparent last week, when the Treasury discovered the art of bending the rules of fiscal policy. The only difference is that the British cheat in a far more transparent manner than anyone else.


What masquerades as an economic miracle in the UK may in fact be nothing other than an old-fashioned Keynesian spending boom. The period of strong growth in the last few years may be simply the first part of a boom-and-bust cycle.


A few European countries have matched the US performance: Finland, for example. But this is clearly not true of the UK, which is still struggling to overcome its age-old problem of skill shortages.


When it comes to the economic effects of the housing market, I also fear the UK may be closer to the Netherlands, where a boom-bust cycle produced violent swings in economic output, than to the US, where the link between the housing market and the economy is not nearly as catastrophic. We have already observed the first signs of a slowdown in UK house prices, followed by a slowdown in retail spending.

From the evidence so far, it is quite probable that the British economy has entered a period of economic weakness.

I would add a few more things:

- the oil windfall of the past few years may or may not last as production is beginning to decline rapidly. The high oil prices have contributed at least 0.5% per year to GDP growth in recent years. The UK will suddenly have to deal with the issues that come with being a net energy importer, including security of supply issues, control of energy companies and long term stability of suppliers; higher oil prices will start becoming a net negative for the country, just at a time when the increases are likely to be pretty steep (my prediction as you know);

- I seriously doubt that the US will escape the housing bubble bursting. The UK is just a year or two ahead. Prices are already beginning to decline in London, and the example of the Netherlands has shown that even price stability (i.e. an end to price increases) is enough to trigger nasty economic consequences; this being the biggest bubble ever (in both absolute and relative terms), the bust part of the cycle is going to be as painful as the boom one has been "fun";

- the massive increase in public sector spending (remember that the UK has created fewer jobs overall than France in the past 10 years, but more public sector jobs) cannot last at a time when the budget deficit is becoming pretty large (if is breaching the Maastricht rules - to which the UK is not bound, of course, but it shows that the budgetary problems are at least of the same magnitude as in France or Germany, despite a supposedly perkier economy);

- the economic impact of the terrorist bombings cannot be ascertained but is unlikely to be positive. Killing innocent people in the streets is not going to boost the morale of the population...

This all comes at a time when the UK is isolated on the European scene, with ferociously hostile France and Germany literally ready to block Blair on anything he tries, and the rest of the world blaming Blair for his Iraqi adventure. The apparent unity against terrorism is just that - apparent, as each national security apparatus is fighting for its own turf and cooperation still remains a matter of individual contacts and informal networks rather than formal policies.

Welcome back to earth, Messrs Blair and Brown.

From yesterday's Observer:

Cash-strapped shoppers will wait until Christmas before delivering a much-needed boost to the struggling economy, the influential Ernst and Young Item Club warns today, as retailers count the cost of last week's renewed assault on London.

After official figures showed GDP growth has slipped to its weakest level in 12 years and manufacturing is in recession, Item Club's Peter Spencer said it would take at least one rate cut from the Bank of England to kick-start a recovery.

From the same newspaper, a week ago:

The British housing market will record zero growth this year, according to data out this week. That would make it the worst performance since 1995 and reignite fears of a prolonged slowdown.

Activity in the property market is already 25 per cent lower than a year ago and the Royal Institution of Chartered Surveyors, which will release a downbeat snapshot of the market this week, now believes prices will be flat over the year as a whole.

Meanwhile the media barrage continues. The French mass media -- even public service -- keep banging on about the UK's fantastic success (compared, of course, to dowdy France). Yesterday on France 5, (public service TV channel), in the programme "25 à Table", a magazine about EU 25, the presenter was in London talking about "the insolent good health" of the UK economy, while a Mr Expert came on to tell us that there was quite simply an economic boom going on...

Question: how long before the media narrative changes on this one?

by afew (afew(a in a circle)eurotrib_dot_com) on Mon Jul 25th, 2005 at 08:13:07 AM EST
Question: how long before the media narrative changes on this one?

I'd say late fall/ winter. The US economy just peaked last week. The Globe is facing tremendous purchasing power problems with America tapped out and many developing countries trying to limit consumption to boost growth. Soon we will need to start giving away bags of money.

Anecdotes: GM & Ford have to reduce prices on cars. Microsoft has to sell xbox360 at a loss. Part of the reason why is that people don't have the purchasing power comensurate with the new technology. The only money they can get is Greenspan's fiat money in the form of bloated home loans. Try raising wages, and if you're concerned about inflation (I'm not) tax the $#!& out of the rich to offset the wage increases.

by Coriolanus on Mon Jul 25th, 2005 at 08:26:24 AM EST
[ Parent ]
Question: how long before the media narrative changes on this one?

Also, when the progressive European blogging community gets organized enough so it can collectively start having an impact on what the news media says. Hold their toes to the collective fire, so to speak. Via blogger headlines speaking the truth (like this one), E mail storms to media and politicians, creating an echo chamber by having numerous blogs talk about similar issues, letters to the editors, getting the ear (and tongue) of people who are more progressive and in the mainstream Euro media, etc.  

and if you're concerned about inflation (I'm not) tax the $#!& out of the rich to offset the wage increases. I feel the same way...tax the rich!

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia

by whataboutbob on Mon Jul 25th, 2005 at 12:47:35 PM EST
[ Parent ]
Hey Jerome, why this visceral need to show that the UK economic system is in trouble? Is it really so important to "prove" that Britain is a failure to somehow justify something about continental Europe's superiority? I'm just a poor American, and I really don't understand what drives this ongoing contest. Please help me understand what is going on!

I look over at the BBC world news site, and the two top business stories there are that Germany's fourth largest bank is involved in a Russian money-laundering scheme
and that France's Danone, the sixth largest food company in the world, is in the midst of a share price manipulation scandal because of a rumored takeover attempt.

Now obviously neither of these are as big a story as would be the failure of the "Anglo-Saxon model," but seriously, I can't find that collapse reported in the English press. There are articles that talk about Britain's 1.9% inflation rate (Germany: 1.9% ), her 1.7% growth rate (Euro area projection: 1.3% ), and her manufacturing softness, a stagnant housing market, and rumors of an interest rate decrease.

Meanwhile, France continues with an unemployment rate of 10.2% (Germany: 11.7%) and has a record low consumer confidence figure. I suppose that a housing shortage so bad that people are renting 10 square meter rooms without bathing facilities, as is done in Paris, is better than Britain's leveling of housing prices?

Germany's economy probably stagnated this quarter, and the ongoing collapse of the Euro combined with increasing crude oil prices will put big inflationary pressure on all of Europe. At least, that's what it says at

I would certainly agree that the global economy has problems. But it hardly seems that the current short-term difficulties that everybody is experiencing are an indication of some sort of failure of the Anglo-Saxon liberal model in comparison to the French model. To demonstrate that, you would need a couple of years, probably, of strong Euro-area economies and weak Anglo-Saxon-area economies. That simply hasn't happened.

Personally I don't know what is going on. It's impossible for me to do a comparison of the economies or the living situations. Maybe it's worse being a Pakistani in Leeds than a Moroccan in Paris, or maybe not. But it does seem as if there is some sort of subliminal need for the British to prove that the French system is bad, and for the French to prove that the British system is bad.

Why this constant bickering?

by asdf on Mon Jul 25th, 2005 at 09:34:02 AM EST
Thank you for asking the question. I have been reading here since the blog's inception, but have not felt entirely comfortable. My discomfort is mostly to do with my perception that there is an undercurrent of anti-english feeling here. I am well aware that perceptions can be wrong, but my discomfort is enough to make me be wary of posting much.
by Boudicca (badgerval at hotmail dot com) on Mon Jul 25th, 2005 at 10:07:23 AM EST
[ Parent ]
Please don't let your discomfort prevent you form posting, that would be a pity. The more my stories are criticised, the better they can be next time, as I absorb your input. I am grateful for asdf's contrarian points of view (which is not systematic, as I see that we agree on other things) which forces me to make my points clearer and more "reality-based".

As I argue to him below, there is this constant bickering, but one voice is heard much less than the other in English language publications, thus my "enthusiasm" for such posts. It is very easy to find info that goes against my positions, so feel free to argue that what I'm writing is deluded!

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Jul 25th, 2005 at 10:32:17 AM EST
[ Parent ]
Proudly-named Boudicca, I too am a Briton. I don't think there's "anti-English" feeling here. It's not a matter of crowing over a change in the UK economic climate. It's a matter of being fed up of a media narrative (correction: a corporate-capitalist free-market-serving narrative) that tells us that the economic success story is the US and the UK; the failure story is "old Europe" (read France and Germany). Now perhaps that narrative is less perceptible from within the UK (though it seems to me Blair bangs on about it fairly often), but it is perceptible to those living in "old Europe".

Why? No doubt because, according to this narrative, the onus is on "old Europe" to make major policy changes (ie, open up, free up, reduce regulation, reduce income redistribution, weaken social security). The way to get those policy changes is to get new leaders voted in, eg Merkel, Sarkozy. The way to get them voted in is to persuade the "old Europe" electorate that the way of doing things here is doomed and we have to bow to the evident success of free-market economics.

Rightly or wrongly, most people around here are not persuaded of that. And are pissed off with constantly hearing the same spin. Please don't take a reaction to abusive spin for anti-anyone feeling. There are people of loads of nationalities here who get on fine.

by afew (afew(a in a circle)eurotrib_dot_com) on Mon Jul 25th, 2005 at 10:45:24 AM EST
[ Parent ]
FWIW, personally I'm anglophile to the point of often feeling like an Englishman by conviction (gastronomical tastes excepted).

The world's northernmost desert wind.
by Sirocco (sirocco2005ATgmail.com) on Mon Jul 25th, 2005 at 11:22:04 AM EST
[ Parent ]
I agree that it is petty bickering. The problem is that in the english language press and blogosphere, you pretty much hear only one side of that bickering, i.e. the one that uses the word "collapse" when the euro falls back to where it was a year ago (after presumably climbing the other way beforehand - but then, it was the euro's strength that was a worry), the "housing shortage" from a very specific story about regulations applying to some student bedrooms in Paris) or "riots" whenever there is a demonstration in Paris.

So I am just trying to present the other side of the story, which is not presented enough. and the reason this is important is that, in my view, a lot of the current French malaise is linked to the fact that everybody is saying, day in and day out, that france's economy is fucked up, stagnant, hopeless and so forth, when it is far from the case. France has a real unemployment problem, from a macroeconomic policy choice made 30 years ago and never changed, but the rest is not so bad, and I'd like to fight this perception.

There is an ideological ocnfrontation between the anglo-saxon laisser-faire model and the continental one, so yes it makes a lot of sense to point out the huge flaws in the model that is currently trying to takeover the continent, with the help of our impotent elites.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Jul 25th, 2005 at 10:25:51 AM EST
[ Parent ]
I'm just curious if apologists from Britain on the continent will continue to laud its economic system as the best alternative to the continental systems?

Mikhail from SF
by Tsarrio (dj_tsar@yahoo.com) on Mon Jul 25th, 2005 at 10:54:11 AM EST
What I'm really concerned about...is that what is going on is really about spin...which the American Right is really good at...spinning and not telling the truth. It would be a lot better if all the economies simply told the truth, so we could know really what is working or not. But that's not the way it works. For gawds sake, in America, Greenspan is even spinning...he's a right wing political hack. No one wants to really talk about the truth, or about the concerns, or about a whole lot of people in trouble in the US.

So I...and others here..feel a need to fight the spin. Yes asdf, you can quote all the financial pages you want, but I will argue that most of those papers have cards in this game, and are not objective. And so I refer you back to the article I posted last week (as just on example): The Secret Euroland Success


I see this as nothing less than an attack by the neo-liberals, to make more money for the wealthy. If that's the system any of you believe in, at least admit it. I don't though...I think there should be economic justice in a society...there should be no  poverty.

Also, as far as the British system...yes there may  appear to be an anti-Brit kind of voice here, but I can say that I am clear that my feelings are about the Bush-Blair (and earlier, Reagan-Thatcher) governments...not at all about the British people or way of life. Hey, I have British family in London...and I don't believe for one moment that the British govt. fiscal policies necessarily reflect the will of the British people. And I for one, have been waiting for more British input here. Its valued. Its welcomed. Speak up, please...you are invited to add your voice to the debate.

okay, end of rant...

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia

by whataboutbob on Mon Jul 25th, 2005 at 01:11:01 PM EST
let me be anti-Brit again:

at today's press conference between Blair and Villepin, you had the French and UK flags. With every other (European)visitor, you have the two national flags and the EU flag in between. I wonder why the difference?

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Jul 25th, 2005 at 04:44:58 PM EST
[ Parent ]
The problem is that there has to be some sort of comparison between the various approaches to running a country. Looking at one or two statistics doesn't do it, and it's impossible to look at all of them. And yes, the various magazines and commentators all have bias of some sort or another.

On the other hand I think that there is an honest attempt by a majority of academic economists to do as fair a comparison as possible. Basically, nobody wants to be proven wrong in the long run. So it's probably ok to compare the "standardized" unemployment figures between countries even though everybody knows they aren't perfect. You have to start somewhere.

The bottom line is that you have to choose a handful of basic metrics and use them to compare countries. Things like per capita GDP, unemployment rate, health care outcomes, poverty rate, tax rate, inflation rate, and a few others are the best information available to compare systems.

As a side comment, please note that my "the Euro is crashing" comments are a direct (perhaps too blunt) response to Jerome's "the Euro will replace the dollar as the reserve currency" comments of a few months ago. I think the context of this little struggle he and I are enjoying is understood, but perhaps not, so I say it openly: Obviously the Euro is not crashing.

by asdf on Mon Jul 25th, 2005 at 11:36:13 PM EST
[ Parent ]
Boats, planes, trains, autos.

The UK is directly connected to the continent by one form of transport, but their are cultural and political gaps. America isn't all that much farther by plain or ship, and in terms of the internet it is much closer.

by Coriolanus on Mon Jul 25th, 2005 at 05:08:32 PM EST

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