MacroScope

The British government faces another potentially thorny day with the International Monetary Fund delivering its annual review of the UK economy. If David Cameron has a consistent policy, it’s that the only way to get Britain back on its feet is to cut spending and debt. Trouble is, we know the IMF doesn’t agree and advocates a more growth-fostering approach. Finance minister George Osborne has changed rhetorical tack in response but is walking a tightrope as a result.

This comes at a time when there are distinct signs that Cameron’s Conservative party is unraveling and not just over Europe. Unless he gets a grip soon, who knows what further concessions may be made on an EU referendum which could push Britain further towards the exit door. It remains unlikely that the coalition government will fall apart before 2015 elections, not least because the junior, pro-EU Liberal Democrat partners face electoral evisceration according to the polls. It’s even less likely that Cameron will be toppled by fractious members of his party. But it’s no longer impossible.

Britain’s LibDem deputy prime minister will take the unusual step of holding a news conference to say the coalition will hold together until 2015. Another big flashpoint looms this summer with the government’s spending review where hardline Conservatives will push for big welfare cuts and the LibDems will resist. Former foreign secretary Geoffrey Howe, the man who did more than anyone else to end Margaret Thatcher’s reign, says Cameron is losing control of his party. From the other side of the political divide, Peter Mandelson says he has to lead not follow. Hard to argue with either of them.

Monthly UK public sector debt and retail sales figures will give a snapshot of the state of the economy and minutes from the Bank of England’s last policy meeting will show if outgoing governor Mervyn King and a minority continued to press in vain for more money printing.

After a one-day EU summit in Brussels, Cameron will hold evening talks with France’s Francois Hollande. The latter has been calling for more euro zone leaders’ meeting to beef up a drive for united economic government. That would push Britain further to the margins of the EU. The pair have some hatchets to bury. France has sounded distinctly less conciliatory than Germany to Cameron’s stated intention of renegotiating Britain’s relationship with the EU, after which he is promising an in-out referendum.And Cameron’s offer to roll out the red carpet to French entrepreneurs who did not wish to pay Hollande’s 75 percent top tax rate still rankles in Paris.

Britain’s David Cameron began the day on Monday gently slapping down two Cabinet colleagues who said if they had a vote today, they would opt to leave the EU. It was senseless, he said, to throw in the towel before he had had a chance to renegotiate Britain’s relationship with Europe. He ended it by caving into rebels in his Conservative party who are demanding legislation now to commit to an in/out referendum before the next election.

The 25 year history of the Conservatives and Europe – internecine warfare and successive election defeats as they obsessed about something which figures low on most Britons’ priority list – suggests no good can come of this and if Cameron wins the 2015 election it moves Britain incrementally closer to the EU exit door. The more immediate question is whether Cameron has lanced the boil. Again, history suggests that if you give ground to the eurosceptics they merely demand more. And what the PM’s pro-EU Liberal Democrat coalition partners make of this isn’t hard to imagine which means he might not even have the numbers to get the bill through parliament. One of the leading rebels seized on that point, saying the move could well fail.

The anti-EU fringe party UKIP, which could well not win a single seat at the next election but has seriously spooked the Conservatives with strong showings in recent local elections, must be laughing all the way to the bank. If it can remake the Conservative party in its own image, its job will be done. But just as likely is a split party. The irony of Cameron doing all this while in Washington to bang the drum for an EU/U.S. trade deal is hard to ignore. President Obama pointedly said the British premier should fix its relationship with the EU.  If Cameron believes Britain should remain part of its main trading bloc, as he says he does, he is going to have to start explaining why and that is difficult to imagine.

It seems eons since the euro zone finance ministers’ meetings which made such a hash of the Cyprus bailout but they were only two months ago. Monday’s Eurogroup will be altogether less eventful with some of the gathering probably a little jaded having spent part of their weekend at the G7 outside London where the usual differences about growth versus austerity and banking reform were aired.

No one will be sorry for a more routine meeting and there are no icebergs on the horizon but the agenda is still a full one. Featuring will be the economic situation on the basis of the Commission’s latest forecasts, the state of play in Cyprus, the decision already taken to release more bailout money to Greece, the new steps taken by Portugal to fill the gaps in its budget after the country’s top court struck some measures out, a review of European Commission reports on what is ailing Spain and Slovenia and a broad discussion about the merits of the ESM bailout being allowed to recapitalise bank retroactively from next year.

Italy offers a range of bonds at auction worth up to 8 billion euros which should be snapped up given the European Central Bank’s underwriting of the euro zone and Japanese money coursing through the financial system.

It’s European Central Bank day and we have it on very good authority that a quarter-point interest rate cut is on the cards, which will take rates to a record low 0.5 percent. A plunge in euro zone inflation to 1.2 percent, way below the target of close to but below 2 percent, has cemented the case for action.

In terms of reviving the euro zone economy this is pea shooter and elephant territory. The ECB has consistently diagnosed the key problem that already ultra-low interest rates are not transmitted to high debt corners of the euro zone, where lending rates are much higher and credit restricted. A rate cut won’t change that. It also illuminates the gulf in approach with the Bank of Japan and Federal Reserve who continue to print money at a furious rate.

The Fed said on Wednesday it would continue buying $85 billion in bonds with new money each month and added it would step up purchases if needed to protect the economy, dousing recent suggestions that the programme could be wound up in the months ahead. Nonetheless, a euro rate cut will help at the margins.

Finally, finally, finally we get the much-vaunted David Cameron speech on Britain’s relationship with Europe.

So, what will Cameron say? Most bluntly he will promise a straight in-or-out EU referendum if he wins an election in 2015 and after he has negotiated a “new settlement”. He correctly notes that public disillusionment with Europe is at an all-time high, which is precisely why offering a referendum could lead to Britain leaving the bloc, something even Cameron doesn’t want, although he argues a vote could lance that boil.

A new EU must be built upon five principles, he says: competitiveness, flexibility, power flowing back to member states, democratic accountability and fairness. But there appears to be no detail on the powers he would attempt to claw back, after which he says he would campaign to stay in the bloc.

Is Italy about to add some bite to its bark as far as the euro zone is concerned? Quite possibly. An opinion poll last night showed Silvio Berlusconi’s centre-right coalition is charging up along the rails, increasing the chances of a messy election result with the front-running centre-left unable to form a stable government.

Although it retains a strong lead, the way votes are carved up in the Senate could easily rob it of a majority in the upper house. The huge media coverage Berlusconi can command via his empire may be starting to tell. Technocrat premier Mario Monti, who could yet play a key part in a centre-left administration if his centrist grouping is needed in a coalition, responded to the polling evidence by launching a stinging attack on Berlusconi.

Markets have so far been utterly sanguine about the late February election but if Berlusconi’s resurgence continues, that could change abruptly. The favoured outcome would be a PD (centre-left) government supported by Monti who would act as guarantor of economic reforms needed to increase Italian competitiveness and growth. But a chunk of the Democrat Party (PD) want a sharp change of course from Monti’s austerity path, and its main coalition partner on the left, the SEL, are implacably opposed to his policies. So nothing is certain.

After a long, long wait, Britain’s David Cameron is poised to make his big speech on his country’s future ties with Europe.

It was supposed to be delivered in the autumn but has been delayed as the realization has dawned that there is no obviously good outcome for the ruling Conservative party’s leadership which faces implacable eurosceptics within its rank-and-file, many of whom want out of the EU completely. Cameron almost certainly doesn’t want out but may be pushed in that direction if he cannot deliver the repatriated powers from the EU that he has suggested are possible.

It’s hard to see other European leaders playing ball, particularly since Cameron took the unusual step of wielding Britain’s veto at a summit just over a year ago. Whatever he says, a bout of internecine warfare in his party is quite possible on an issue that has ripped it apart before.

Followers of the dismal science will note the passing of Sir Alan Walters on January 3. Walters was the controversial economist who advised Margaret Thatcher during what turned out — regardless of whether seen as good or bad — to be a revolution in matters both monetary and social.

Walters was one of the first British economists to challenge Keynesian orthodoxy and argue for a monetarist approach to tackling inflation. He may be best remembered, however, for his opposition to the pound joining the Exchange Rate Mechanism, out of which sterling famously crashed in 1992, and for partly prompting the resignation of Chancellor of the Exchequer Nigel Lawson who felt he had too much influence on Thatcher.

In an obituary, The Guardian newspaper concluded: “In the early days of Thatcher’s government, he was a valued member of the small group of outsiders who provided intellectual and academic support for its policies. His departure in 1989 was a symptom, rather than a cause, of the complete breakdown of trust between the prime minister and her chancellor.”