George Osborne is right when he says that ‘I told you so is not a policy.’ Politicians should learn from the mistakes of the past and then act accordingly. But that’s precisely where the Chancellor is failing. His reaction to the Irish Economic Crisis fails to recognise the bleak reality and lines up Britain with the most blinkered advocates of Euro Zone unity with potentially appalling consequences for British public finances.
The first thing we need to appreciate is that it is not an act of good neighbourliness to conspire with European Union officials to imprison the Irish people in a deflation trap, where there is no hope for economic recovery. Deflation and more deflation is not a prescription that will cure the patient. Irish Government spending is being cut on a draconian scale, taxes are being raised and significant falls in consumer expenditure are being planned. Their debt burden will be colossal and the excessively high interest rates will prove to be an ongoing burden. And there’s no possibility of monetary easing or of exchange rate depreciation to offset the extreme deflationary pressures which will occur. The recent pronouncements from the European Central Bank show that it is incapable of devising a policy of monetary easing for Ireland and even worse, 2011 will probably see ECB interest rates rise in response to the rapid expansion of the German economy. In other words, bad as things already are in the Irish Republic, the EU, the ECB and the German Government are set to make them much worse.
Here, in 1981,364 economists – including someone called Mervyn King – condemned Mrs Thatcher’s Government for tightening fiscal policy as the United Kingdom emerged from a recession. They failed to understand the counter prevailing impact of an expansion of monetary policy. One has to wonder why the Governor of the Bank of England (someone called Mervyn King) hasn’t warned George Osborne about the huge deflationary impact that will now affect the Irish economy without any offsetting monetary relaxation.
In 1992/3 a Conservative Government once again tightened British fiscal policy but at the same time loosened monetary policy and allowed sterling to find its natural level in the market place. Our economy then embarked upon a period of prolonged economic growth. The economic policies now being imposed on Ireland by the European Union are dangerous and damaging and the Chancellor of the Exchequer should not be putting £7 billion of taxpayers’ money into supporting this folly. You can only pity Dublin, and the misery Brussels is inflicting on Ireland, when you realise what in the last few days even Iceland has been able to do. For Reykjavik has secured an agreement from the British Government to a 3% rate of interest on its outstanding loans, rather than the 5.8% being required from Ireland. In due course under the EU’s plan, over 20% of Irish public expenditure would be interest payments.
One might expect that the Labour Party would be opposed to the deflationary implications of these policies that are going to impose hardship upon the Irish people for no good purpose, but the loyalty of the Labour Party to the European Project overrides all such concerns. Though it should be noted that Alistair Darling did prevent UK’s taxpayers’ money being used in the bailout of the Greek economy.
Britain’s own finances are still sufficiently precarious that we cannot afford to risk losing £7billion of taxpayers’ money in a flawed economic strategy. Some believe it is necessary for the UK to make our individual loan to Dublin because of the involvement of British banks in the Irish economy. However, George Osborne denies that this is another bailout for the UK banking system and defends the validity of the stress testing of our banks which has already taken place. There has been UK bank lending into the Irish property bubble yet there’s no prospect of Irish property values rising as a result of this “rescue” strategy. Indeed values may well fall further in a deflationary spiral and bankers’ collateral in such circumstances would therefore be further reduced.
2011 is likely to see the default of several Eurozone countries and it would be advisable to conserve the UK’s resources so that we are better able to deal specifically with the banking crisis that will then ensue. There is thus a very real risk that the British bilateral loan may not be recoverable in the event of an Irish default. Informed opinion in the Irish press now regards default as a more than possible outcome and around 50% of the Irish electorate favours defaulting. If and when other countries in the Eurozone default, Ireland is liable to take the same course rather than engage in a futile and masochistic period of prolonged deflation.
In trying to distance himself from the economic blundering of Eurozone officials, George Osborne is now creating on a significant risk for the British taxpayer. In an attempted display of independence and in an effort to gain support from Eurosceptical Tories for the package, the Chancellor has chosen to make a considerable amount of the UK's advance through the instrument of a bilateral loan. By this action, he has deprived the UK taxpayer of the preferred security that would have been available if the whole of the £7 billion advance had been made by way of an IMF loan. Instead the UK and the Eurozone countries will stand shoulder to shoulder, ranking behind the IMF, when the likely consequences of a default arises. While this wasn’t prudent, wasn’t necessary and won’t do the Irish any good, the real tragedy is that George Osborne’s needless generosity won’t do us any good but could well do us a lot of harm.
Barry Legg is Chairman of the Bruges Group, a former Chairman of the Treasury Select Committee, and an Associate of the Institute of Taxation and wrote this article for Critical Reaction