Tony Blair has gained enormous prestige and goodwill in the United States by his staunch support of the U.S.-led invasion of Iraq and by British troops’ substantial and superbly executed participation in it. But admirers of the Anglo-American alliance should beware: Economically, the weasels are taking over, and their political takeover cannot be far behind.
In a “Bear’s Lair” column “Weasel Economics” of Feb. 10, I analyzed the economic position of France and Germany, and concluded that, since they were severely threatened economically by the U.S.-led project of greater globalization, free trade, and emergence of the major Asian economies into prominence, their attempts to derail U.S. initiatives were readily explicable.
By following protectionist policies and attempting to form a tightly bound “Fortress Europa” EU, France and Germany could preserve for as long as possible the living standards of their citizens in the face of intensified world competition. Of course, given the very high educational and skill levels of the French and German workforces, such living standards could also be preserved, indefinitely after a few years of economic pain, by France and Germany reforming their overcosseted state sectors and actuarially unsound pension systems, but that is currently politically unappealing to both governments.
Since the middle 1980s, Britain has been in a very different position from France and Germany — one of the factors which has caused friction between Britain and the EU mainstream. The actuarial problem of Britain’s pension system was solved by Margaret Thatcher’s pension reforms of the 1980s, which reduced the guaranteed state pension benefit to a level that was readily fundable whatever the demographic profile of the British workforce. The top rates of income tax were reduced, in the two great reforming budgets of 1979 and 1988, so that British entrepreneurship, which had become more or less moribund during the 1970s, revived and began to flourish. The budget deficit (Public Sector Borrowing Requirement) was reduced from 5 percent of GDP to zero, while public spending (Total Managed Expenditure, on the current HM Treasury definition) peaked at 49.9 percent of GDP in 1975-76, dropped to 39.3 percent of GDP in 1988-89, rose again to 44.1 percent of GDP in 1992-93 and then dropped to a low of 37.4 percent of GDP in 1999-2000. As I have written before, both the level of public spending and its rate of change between them account for about half the variation between countries and periods in economic growth rates, so it is not surprising that in the period 1982-2000 British economic growth was robust, far in excess of her major EU partners.
Britain, in short, has so far been a beneficiary, not a loser, in the move to globalization and free trade — as indeed one would have expected given the country’s economic history. It is thus unsurprising that, even under a Labor government (albeit one led by the centrist Blair) Britain’s instinct has been to support the U.S. rather than her EU “weasel” partners.
Going forward, Britain is coming to a fork in the road. On the one hand, the EU Constitution is almost through the drafting process, and is intended to be ready for ratification by the end of the Italian presidency of the EU in December 2003, before the advent of 10 new EU members in May 2004. Further, Chancellor of the Exchequer Gordon Brown has promised a report on Britain’s readiness to join the euro by June 2003, after which, if the report recommends joining, it will be difficult for Blair to avoid staging the euro referendum he has promised as a precondition to entry.
On the other hand, opinion in the United States is remarkably pro-British, and various current and former members of the U.S. Senate, such as former Sen. Phil Gramm, R-Texas, and Sen. Mitch McConnell, R-Ky., have postulated offering Britain a free trade agreement with the United States. This could either be along the lines of the bilateral agreement likely to be signed with Singapore during the visit to Washington of Singapore Prime Minister Goh Chok Tong in early May or, even more radically, it could involve Britain entering as a full member of the North American Free Trade Agreement.
Blair therefore will have a stark choice before him. While France and Germany clearly wish to repair to an extent their damaged relationship with Washington, there is no doubt that acceptance of a deal along the lines postulated by Gramm and McConnell would be incompatible with British membership of an EU whose Constitution in any way resembled the draft currently being discussed by the Giscard d’Estaing constitutional commission.
To a Thatcherite, and probably to majority opinion in the current Conservative party including its leader Iain Duncan Smith, the choice is an easy one. Membership of a centralized federalist EU, in which foreign and defense policy have been devolved to Brussels, is highly unattractive both on nationalist and ideological grounds (there can I think be no conceivable doubt that such an entity would by almost entirely Socialist in its outlook). Of course, leaving the EU altogether might prove economically damaging if what remained of the EU erected trade barriers against Britain, and certainly a “Fortress Britain” of only 58 million people on 1.5 small islands would be unlikely to benefit economically. However, if NAFTA membership is on offer, then isolation is off the table, and Britain can negotiate with both the EU and the United States from a position of strength, ideally achieving a free trade agreement with few strings attached with both.
But Blair is not a Thatcherite. Not even close. He is committed to remaining “at the heart of Europe,” he favors British membership of the euro and his principal political support comes from among the affluent centrist “chattering classes” who are internationalist, strongly pro-Europe and slightly anti-American.
Of course there is still a substantial element in the Labor party of working-class nationalists, that would like to break loose from the bonds of Brussels, and are consequently flirting with the Duncan Smith Conservative party ?- the “swing” to the Conservatives in 2001 was notably higher in the Labor “heartland” seats such as Sunderland than in the “chattering classes” seats in the Home Counties, and this tendency is likely to be amplified in the upcoming May local elections. Nevertheless, majority opinion in the Labor party, particularly among its committed members, while less pro-Europe than Blair, is also quite strongly anti-American.
Thus a Gramm-McConnell initiative, if one emerges, may be a friendly gesture towards Britain but can be only an embarrassment to Blair, since it will give additional credibility to the Conservative party position that there are alternatives to further entanglement in a centralist EU.
There is however a further complication, which will be revealed to world view in the budget to be presented to the House of Commons by Brown Wednesday. In November’s pre-budget report, Brown projected a borrowing requirement of 24 billion pounds ($38 billion) for the fiscal year 2003-4, sharply up from the almost balanced budget he had projected in March 2002. Even that projection was based on economic growth of 2.75 percent for the current fiscal year, believed to be well over 0.5 percent above what is now estimated. A new National Insurance surcharge, effectively 1 percent on the standard rate of income tax for both employers and employees, valued at 8 billion pounds ($13 billion) came into effect Sunday.
The problem, of course, has been public spending, fairly restrained in Blair’s first term but now increasing very much faster than economic growth, as Brown pours money into education and the National Heath Service which, both being wholly unreformed monopoly public sector providers are likely to absorb the extra resources without providing an iota of discernable additional output. From its nadir of 37.4 percent of GDP in 1999-2000, public spending has already risen to 41.2 percent of GDP (on April 2002 projections, which will be significantly increased Wednesday) in 2003-04 and cannot fail to increase further, probably well above the 1992-93 peak of 44.1 percent of GDP, in the remaining years of Blair’s current electoral term (which must end, at latest, in May 2006.)
As mentioned above, more than half the variation in economic growth rates is explained statistically by either the level of public spending as a percentage of GDP or its rate of growth. An increase from 37.4 percent of GDP in 1999-2000 to say 45 percent of GDP in 2005-6 cannot fail to have a huge braking effect on Britain’s economic growth, both current and prospective. This in turn will exacerbate the budget deficit, which Wednesday’s figures, let alone those in the 2004 and 2005 budgets, will undoubtedly show swelling uncontrollably unless recourse is had to very substantial extra taxation.
In short with low economic growth, higher social contributions, and a government share of the economy that is rapidly expanding, Britain is closer and closer to sharing the plight of France and Germany — perhaps with the additional wrinkle that Britain’s traditionally chaotic labor relations will render the quality of life very much more unpleasant than in those sybaritic if decadent societies. The City of London, too, traditionally Britain’s most internationally successful business, has been largely taken over by foreign banks, which have shown themselves completely incompetent to manage its businesses and are hemorrhaging both financially and in terms of staff numbers as a result. In short, from being a major beneficiary of globalization, Britain stands to become as threatened by it as are its continental neighbors.
The solution, for Blair, is obvious. Dependent as he is on grudging support from a left of center party, he cannot escape the economic trap into which Britain is descending — at least, not without joining the Conservatives. Time, therefore to become a Weasel. Expect much less support from him for U.S. initiatives going forward.
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
This article originally appeared on United Press International.