Wolfgang Munchau:Bubble bursts for Brown(FT)
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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
- 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.