Opinions & Ideas

Category: Financial Times


George Osborne, current Chancellor of the Exchequer in the UK, is the subject of a biography entitled “The Austerity Chancellor” by Janan Ganesh of the “Financial Times”.

“Austerity” is obviously a relative term, given that, after four years of it, the UK still has the second largest structural deficit in the developed world after Japan, and debt that is £100 billion more than was planned back in 2010. Austerity is not over, in that current plans, accepted in principle by both parties are to turn the deficit of 5% of GDP into a surplus by 2019/20. Politicians who think the Northern Ireland block grant will be increased, if they protest enough, should keep that in mind.

Janan Ganesh blames this continuing financial gap on the under performance of the overall EU economy, which provides the UK with its export market for its services and goods. In that sense, Mario Draghi ‘s comment that he would do “whatever it takes” to underpin the European economy may have contributed as much to the recent recovery in the UK economy as anything Osborne himself did.

George Osborne came from a comfortable London home, did his degree in history, and could have entered many professions, but chose politics from an early age. He worked first as a political advisor to the Major Government in the Department of Agriculture during the BSE crisis, and then to William Hague when he became leader of the Opposition. Although a metropolitan Londoner, he succeeded in being adopted as the candidate for the safely Conservative Tatton constituency, near Liverpool.

He has always managed to stay close to whoever was leader of his party, and briefed several of them on how best to exploit the ordeal of Prime Ministers Questions. He has a talent for devastating one liners.

His close and trusting relationship, as Chancellor, with Prime Minister David Cameron is in marked contrast to the destructive relationship that existed in the New Labour government between Chancellor George Brown and Prime Minister Tony Blair. According to Ganesh, Osborne is an unabashed admirer of Tony Blair, as a master politician, and holds Brown in ill disguised contempt.

Osborne and Cameron do not have identical political views. Osborne is a classical liberal on social as well as economic issues. Cameron has a more sentimental streak, with his emphasis on “the Big Society”, an attempt to encourage voluntary organisations to be more active in tackling social problems.

Will Osborne still be Chancellor after the General Election?

Polls show that, while voters like David Cameron much more than they like Ed Miliband, 52% of them profess to “like” the Labour party, while only 33% “like” the Conservatives. 

Incidentally this is less than the 40%, who say they like the Lib Dems, which suggests that, despite huge efforts, the Conservatives have yet to shed the harsh image they acquired in Mrs Thatcher’s later years.

Voters have low expectations of Ed Miliband, and this means that, in the campaign, he has an easier job than Cameron, unless he makes some big mistakes.

All he needs to do is perform above very low expectations, and people will be favourably surprised. In contrast, the Conservatives will have the much more difficult task of exposing the contradiction between Labour’s professed commitment to eliminating the deficit, and their simultaneous opposition to “austerity”.



Wolfgang Munchau wrote in the “Financial Times” last week that the problems of the eurozone show that
“A monetary union without a political union is simply not viable”
This sort of statement is being made with increasing frequency by economists, none of whom seem to go much further is explaining what they really mean, and why. The statement is left hanging there, as if it was so obvious that it needs no further elaboration.
There are genuine problems, which prompt writes to say that the eurozone needs a political union to solve them. But he problem in the Eurozone is just a smaller version of the problems of the world economy.

We have had one set of countries(the hoarders) who have been cutting costs, exporting aggressively, saving the profits, and then lending the money on to another set of countries (the spendthrifts) who have been spending the money, building up property bubbles and paying themselves improved wages.
On a global scale, China and Japan are the hoarders, and the United States and Britain have been the spendthrifts.

Within the Eurozone, Germany, the Netherlands and Austria have been the hoarders, and Greece, Ireland, Spain Portugal and some others have been the spendthrifts.
For the economy to rebalance, the spendthrifts have to become hoarders, and the hoarders spendthrifts. If there were no spendthrifts, the hoarders would never have been able to sell their exports. So we all depend on one another in the end.

The questions Wolfgang Munchau and others, who say the euro can only work if there is a political union, need to answer are

1.) Who should be in the political union? All the existing eurozone states, or only some of them?

2.) If the Eurozone becomes a political union, what do we do with the existing European Union , which contains a number of countries who will refuse to join a political union or the euro eg. Britain?

3.) What should be the content of the political union? A common tax would obviously be part of it, but what taxes would be European and what taxes would remain national?

4.) How would a political union turn spendthrifts into hoarders and vice versa? What powers would it use to achieve this, and with whose authority?

5.) How much tax would have to go to the centre and how could it be spent to mitigate the problems now being experienced without creating a permanent dependency of some states on others?
The experience of federations like Canada and the United States does not suggest that an enlarged Federal Budget automatically leads to convergence between poorer and richer regions. Mississippi and Newfoundland are still as poor, relative to the rest of the US and Canada respectively, as they ever were.

6.) How would one make a political union democratic? Would the President of the political union be directly elected or would the eurozone parliament elect the Government?
A political union that lacked real democratic legitimacy would not work. But as we saw with the Lisbon Treaty, getting agreement on that will not be easy.

7.) Given that these questions will not be answered quickly, what do we do in the meantime to save the spendthrifts from their folly in borrowing all this money, and the hoarders from their folly in lending it?

I fear that talk of a political union is really a bit of a distraction. We need a set of practical proposals, that will be accepted as fair by both hoarders and spendthrifts. Maybe these proposals need some form of democratic legitimation by a single eurozone wide referendum. A risky strategy perhaps, but we are living in times when the risks of doing nothing are getting higher all the time.

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