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Euro-beating

25 October 2011 By Ian Campbell

An EU protest vote by members of his own party has knocked the UK prime minister. For the moment, the Conservative party rebellion is largely symbolic. But it could be the thin end of the wedge. David Cameron, just like Margaret Thatcher before him, risks being undermined by his party’s euro-divisions.

But Cameron’s more immediate European problem is that euro crisis looks very likely to drag an already-weak UK into recession. Cameron, rightly dedicated to reducing public spending, could get caught in the crossfire. Fiscal policy revisions may be necessary.

Cameron’s left-leaning political opponents blame too-tight fiscal policy for the UK’s weakness. It’s true that even before Europe took another turn for the worse, the UK was sliding towards recession. In August unemployment rose to a near 17-year high of 2.57 million. British households aren’t spending. They fear losing their jobs and their finances are being doused by inflation of 5.2 percent while their incomes rise by less than 2 percent. Britain’s recovery isn’t going to begin at home. The trouble is, it won’t begin in Europe either. And 47 percent of UK exports go to the euro zone.

Latest growth numbers for Europe are still worse than the UK’s. Economic activity in the euro zone contracted in October at the fastest rate for 27 months. The risk of outright recession is high. Things are so bad the European Central Bank might even cut its interest rate.

So where does that leave UK policy-makers? The Bank of England has already acted, upping quantitative easing by 75 billion pounds at least in part because it sees euro zone troubles getting worse.

But in efforts to head off another recession, fiscal measures may have more weight. David Cameron and George Osborne, the Chancellor of the Exchequer, could amend their much vaunted Plan A – swift deficit reduction – in one of two ways. They could cut taxes, especially on the low-paid. Or they could increase spending in job-creating areas such as infrastructure projects and social housing.

Care will have to be taken to ensure the UK does not lose credibility on deficit reduction. Planned cuts must stay in place. But plain Plan A is unlikely to remain an option if recession is to be avoided. Europe won’t just go away.

 

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