Brian Monteith: Responsibility for economic renaissance lies here

We can’t blame the EU for our recession, no matter how much the coalition might like to, writes Brian Monteith

For governments to maintain their dominance in the political arena they have to have a credible, believable explanation for the economic condition of the country in which they operate. The Conservative and Liberal Democrat coalition has thus far constructed a seemingly insurmountable edifice from the arguments in support of the need for austerity.

The axiom that we cannot reduce the nation’s massive indebtedness by creating more debt is understood, be it on a public, corporate or personal scale. So strong and compelling has this concrete monolith become in the public consciousness that the Labour Party now accepts that it is fruitless to try and scale its heights and instead its alternative is to chip away at any brutalist protrusions and ugly gargoyles that the Tories leave exposed.

The less attractive aspects of George Osborne’s budget and Iain Duncan-Smith’s welfare benefit reforms will continue to be the focus of the Labour assaults, but in the main the alternative being offered is little different if it is identifiable at all.

The old idea that in the good times revenues are amassed to reduce past debts and in the poor times fresh borrowings can then be made has been ruined by Gordon Brown borrowing in the good times to maintain the illusion of economic growth while government revenues melted away. This error has left Ed Miliband and Ed Balls with nowhere to turn and so when the recession returned officially last week, there was a great deal of hot air expelled at Prime Minister’s question time but the coalition edifice remained.

And yet there is now hope for the Labour Party and, as is so often the case in politics, it has little to do with the opposition party’s analysis or foresight, both of which are sadly lacking. The explanation being given for the double-dip recession is that the continuing crisis in the eurozone has held back Britain’s own economic growth and that the planned escape from recession has faltered and will now be slower and more gradual than expected.

It all sounds credible enough for almost daily we see on the news bulletins yet more evidence of unrest in Greece and Spain, a crisis of confidence France and Italy, and the markets discounting against businesses that might be drawn down into a pitch lake of debt, never to emerge again.

But there is a huge flaw in the Treasury’s briefing and it was astutely drawn to the attention of Scotsman readers last Saturday by Neil Craig in one of his regular and incisive contributions to the letters page. The eurozone, Mr Craig pointed out, accounts for only 40 per cent of UK exports. The rest of the world accounts for the remaining 60 per cent and in that larger fraction economic growth has been averaging a staggering 6 per cent per annum. Singling out the failure of eurozone countries to buy enough of our goods and services just does not paper over the cracks now appearing in the coalition’s previously impregnable defences.

Two lessons are obvious from Neil Craig’s observation: the first, that the Treasury explanation is insufficient to explain why British economic growth has halted; and the second that if we want economic growth of even just 3 per cent, we must create the economic circumstances closer to those countries outside the eurozone than those in it.

The dilemma for the Europhile British establishment is that the failure of the government to liberalise the British economy and create enough financial incentives for us to attract greater investment goes hand-in-hand with our close association with the eurozone and the smothering directives of the EU.

We can see in France that the public can tire of the argument that austerity is good for it and a prerequisite for our economic salvation. There, Nicolas Sarkozy faces the loss of his presidency to the socialist Francois Hollande, and the state wishes to burn more money that can only be raised by raising already damaging taxes or borrowing under punitive conditions.

If the British public begins to doubt the Osborne-Treasury excuse and sees the French trying a new approach, there is every possibility that there will be a loss of nerve and the coalition will come under huge public pressure to change course. If the Labour Party can construct an attractive narrative that explains where its road to Damascus lies, then it may yet recover sufficiently to come back into power if the coalition collapses under the weight of its own contradictions and an early general election is forced.

The greatest threat to Labour in this beneficial scenario is not anything that the government can do, for it remains ignorant of the supply-side liberalisation that it could introduce and prejudiced against the taxation reform that would benefit us all, but that any new French experiment is given long enough to bring about a disorderly collapse of the eurozone.

For every time that there is another riot in Athens, demonstration in Rome or march of the unemployed in Madrid, the British public will cling to the belief that it is Johnny Foreigner’s fault that we are not trading our way to recovery when we should be taking responsibility for our own economic renaissance. For Conservatives and Liberal Democrats, their best hope is that with every eurozone crisis, coalition ministers are able to extricate Britain from damaging European encumbrances so that we may replicate the conditions that encourage rather than limit the growth-orientated economies with which we compete and trade.

Mr Hollande wishes to have a new European Treaty and is opposed to Germany’s austere approach to debt reduction. Such possible conflicts will give Cameron an opportunity to hold out for a gradually looser relationship with the EU. If he looks at the figures Neil Craig has reminded us about, he will see the sense of reducing the UK’s fixation with European trade. Whether he will be given that opportunity now lies, ironically, in the hands of the French public casting Sarkozy into the wilderness rather than anything he or the British public can do.

• Brian Monteith is policy director of ThinkScotland.org