Bill Jamieson: UK flirting with liaison dangereuse

Published on 27/05/2012 00:00

‘Something about Christine Lagarde causes men to go weak at the knees’

IF THE indefatigable Robert Peston is any guide, there is something about Christine Lagarde which causes men to go weak at the knees. Last week the BBC’s business guru verbally fell apart on the radio when asked whether he was smitten by the head of the International Monetary Fund.

Mr Peston is not alone. Ms Lagarde is quite the most striking figure in global economics and finance. She is a woman of evident personal magnetism. It is not just that she conveys a total command of her brief. It is the delivery of her economic assessments with such mannered inflection and gesture; the ability to communicate with her eyes and body; the alluring smile; the nuanced wording; the hypnotic mobility of her wrists and hands. Her mesmeric performances convey beguiling knowledge and power: a fragrant mistress of all she surveys.

I now hear that no less than George Osborne, the Chancellor, may be similarly smitten. Indeed, such was the care and precision with which she delivered her economic assessment of the UK last week, that she and Mr Osborne may have entered into a liaison dangereuse.

How he must have tingled when Ms Lagarde, in a startling turn of phrase, said that when she looked back at the UK’s deficit in May 2010 and imagined there had been no deficit reduction plan, “I shiver”. What man of any gallantry would not rush forward with a fur-lined cloak? Well, Ed Balls for one. But after the shiver came an admonition: the UK, she said, had now to attend to encouraging growth. This was more to the shadow chancellor’s liking, even if the policy responses recommended were not quite in accord with his own spending preferences. It is here that Ms Lagarde may have opened an escape door for Mr Osborne.

This is more than can be said for the outcome of yet another “Europe crisis summit” held last week. There have now been no less than 18 of these in the past three years, each ending with a vacuous communiqué from the hapless Herman von Rompuy or some such, expressing support for the euro and “agreement on policies to stimulate growth”. Yet not once have these summits produced an outcome that has come anywhere near to addressing the fundamental problems that have brought the single currency and many of its economies to such an appalling state.

What has unfolded across the Eurozone is a crisis far worse than any imagined by Eurosceptics back in the early 1990s. Not only has the ruinous one-size-fits-all interest rate prescription brought Greece to its knees, but it has virtually put paid to the Spanish banking system. Such has been the sustained policy ineptitude at the head of this monumental debacle that is hard to see how the institutions of the EU, from its useless summits to its irrelevant parliament, can recapture any credibility.

Here in the UK business confidence has been increasingly battered by the unfolding Eurozone disaster. According to official figures last week, the economy in the first quarter slowed by even more than feared. Consumer spending is notably weak, the process of household sector de-leveraging compounded by appalling weather through April and much of May.

But it is much worse than a spell of poor weather. According to the OECD, the adjustment period for household debt to return to its 2000 level is likely to take about ten years, limiting consumption growth for years ahead, and with unemployment climbing to 9 per cent in 2013.

With no evident upturn in sight, little wonder that the word “depression” is being used ever more frequently. There is no precise measure of what is, or is not, a state of depression. But Keynes’ definition ominously fits today’s conditions all too well: a “chronic condition of subnormal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse”.

This is the spectre now haunting the UK, putting Mr Osborne under growing pressure to act. The problem, of course, is that he cannot lurch into a programme of government spending stimulus without a massive loss of credibility and conceding in the process a major political victory to Ed Balls. It is here that Ms Lagarde may have thrown the Chancellor a lifeline. She has said that any stimulus should be budget-neutral and not involve more public spending – the crude borrow-and-splurge that Mr Balls appears to be advocating. Rather, she hinted at central bank action, a temporary cut in VAT and budget-neutral measures such as infrastructure spending financed through savings. Indeed, a troubling fact – as uncomfortable for the shadow chancellor as for Mr Osborne – is that public expenditure has not shrunk. It continues to grow. Figures for the public finances show that government borrowing rose to £12.4 billion in April compared with £8bn a year ago, due in large measure to a 3.8 per cent rise in government spending over the period. So much for the charge that public spending cuts are to blame for poor growth.

Mr Osborne now needs to move towards policies to boost growth without handing a political gift to the opposition. Here the Bank of England is likely to assist with a combination of an interest rate reduction and resumption of quantitative easing next month or soon after. This could involve BoE purchases of corporate bonds or securitised new bank loans to the SME sector.

It might also take the form of a temporary boost to capital investment and tax cuts targeted to stimulate activity, such as the lowering or suspension of VAT on home extensions and improvements. This would help both the building sector and consumer spending through extra demand for furniture and fittings, without compromising the government’s planned squeeze on current spending.

If, as seems likely, the Eurozone crisis deepens further, Ms Lagarde has effectively given the Chancellor protective cover: not only would it be permissible for him to stimulate growth, it might even be imperative faced with a euro hurricane. In such a scenario, of course, both America and Europe will have shifted mightily in that direction. Who would then admonish the Chancellor in such desperate circumstances? By then, even the finely nuanced points of the alluring Ms Lagarde may be no more than a blur in the emergency policy panic.