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- The Observer,
- Sunday May 18, 2003
All have won prizes. The Prime Minister can assure his European counterparts and the euro lobby here that he is trying. The Chancellor can once again kick the euro ball into touch. And an ancient part of the Constitution, the British Cabinet, can enjoy a temporary revival.
I am indebted to my old friend Dr Alan Watkins - from whose 70th birthday celebrations I spent most of last week recovering - for the thought that, on the issue of the euro, Blair and Brown resemble those characters in David Copperfield, Messrs Spenlow and Jorkins. Spenlow, you will recall, was the proctor who would indicate that while he himself would very much like to say yes, his partner, Mr Jorkins, had reservations.
The fact of the matter is that the Prime Minister has reservations, too. Neither Blair nor Brown thinks it is possible to win a referendum on the euro either now or in the near future.
As for the Treasury, it will never agree to the idea that the time is ripe. The Treasury only agreed to join the Exchange Rate Mechanism in 1990 when all other options for controlling inflation failed. These options, older readers may recall, included the pursuit of faster growth in the 1960s, incomes policies in the 1970s, and the attempt to control a wide variety of motorway-sounding measures of the money supply in the 1980s.
I tell a lie: there was one option that worked: massive deflation leading to the kind of rise in unemployment that motivated Gordon Brown, in part, to pursue the post of Chancellor. The problem with massive deflation was that it was politically and socially intolerable. And when the policy was reversed, along came the Lawson Boom and a return to what is known as double-digit inflation.
Basically, although they were feted around the world for inventing privatisation as a diversion from unemployment and a way of cooking the public sector books (as well as enriching their friends) the Conservatives in the 1980s threw in the towel on macro-economic policy; with the towel went the monetarist flannel.
Entry to the ERM in 1990 was a last refuge of a scoundrel who was not over-patriotic: for the main motivation of Nigel Lawson, who preached the need for entry to the ERM until he was writing resignation letters, was the conclusion that the Germans knew best, and we might as well attach ourselves to their inflation policies, but not, in Lawson's case, to the prospective single currency.
These days there is hardly a commentator in the land who does not proclaim that we went into the ERM at the wrong rate, for the wrong reasons and at the wrong time. But I can assure you that those of us who said this at the time could have fitted comfortably into a BMW.
It was during our brief sojourn (1990-92) in the ERM that the German inflation rate so admired by the Conservatives accelerated as a result of the boom caused initially by German unification. The tightening of European monetary policy required to deal with that boom did not help a British economy mired in recession. And the terms of German monetary unification caused economic problems from which that economy has yet to recover.
My old friend Karl Otto-Pohl, then president of the Bundesbank, did his duty in opposing the terms, and resigned over the issue. The manner of German monetary unification was essentially 'political'. And it is the potential overriding of economic considerations by political ones that disturbs Gordon Brown with regard to the euro.
Lord Gilmour, the historian and former Tory Cabinet Minister, believes Blair made a vital error in effectively giving the Treasury the power to decide whether or not Britain should enter the euro. 'Since the Treasury is just about the only institution in the world that thinks it is good at running the British economy, its answer was always bound to be negative,' says Gilmour.
For the interesting thing is that the Treasury has recovered its confidence after the debacles of the 1980s and early 1990s. An institution that looked across the Channel because it had run out of options now believes it has a better formula for running the economy than its continental neighbours. It therefore has no desire to adopt what it regards as an inferior model.
But it is noteworthy that the Chancellor himself, who was in favour of the single currency at a time when Tony Blair was sceptical, is once again deliberately making pro-European noises these days.
The Chancellor, being a Celt, has fewer hang-ups about surrendering the pound than the English do. But he is very serious about eliminating, or minimising, unnecessary economic risks.
Also, he does not wish to offer a chink of light to the Conservative Party. Now most of us know that these days the Conservatives would not recognise a chink of light if they saw one. But the Chancellor would prefer to take no chances, and would rather see the Conservatives continue to tear themselves apart than risk giving them a eurosceptical political opening.
My own impression is that Gordon Brown is not - for all the spin to the contrary - viscerally against joining the euro, but takes a very long view of these matters indeed. Apart from anything else, he is not the only one who is concerned about the beleaguered state of the Eurozone economy.
The big question in the medium term is how long the Treasury's new-found confidence in its policies will last. One of the reasons our economy appears to be in better shape than the Eurozone is that we have enjoyed - yes enjoyed - a rip-roaring consumer boom which has only recently displayed signs of mortality.
As the House of Commons Treasury Committee states overtly, and the Bank of England more covertly, the Treasury's forecasts for the next two years seem to be based on a confidence that is not entirely shared by the rest of us.
Mervyn King, the Bank's deputy governor, tried to minimise differences with the Treasury over forecasts when introducing the Bank's quarterly Inflation Report last week.
Nevertheless, while hoping that government spending, a better overseas trade performance (thanks to the recent devaluation) and ('in due course') a recovery in investment would compensate for much weaker growth in consumption, he admitted that in the short term the risks to economic activity were on the down side.
The boost to government spending represents New Labour's delayed effort to do something about the public services and the infrastructure. It is welcome, and entirely accidental, Keynesianism. It is creating lots of employment, to counteract the collapse of jobs in manufacturing and elsewhere. But the peak of the Chancellor's reputation for creating employment may have been passed; recently there has been a growth of what looks suspiciously like involuntary part-time working.
I should like, incidentally, to recommend the Bank's Inflation Report as containing a wealth of information about the economy which might be useful to students.
Moreover, given the state of the world economy one welcomes Mervyn King's statement: 'Lest you conclude that the Monetary Policy Committee has become positively Panglossian, I should assure you that the Committee does not believe that all is for the best in the best of all possible worlds.'
I'll say ..
