UK News Insights from the UK and beyond Mon, 28 Jul 2014 09:20:35 +0000 en-US hourly 1 UK’s strong GDP has a soft centre Fri, 25 Jul 2014 14:17:42 +0000 By Ian Campbell

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Fly the flag. The headlines will be about the solid milestone. The UK finally replanted its flag on its 2008 GDP growth peak, three years after Germany and the United States reclaimed theirs and after a mere five years of ultra-low interest rates. But the landscape – the details of the second-quarter GDP – has its uncomfortably rocky side.

The Bank of England’s Monetary Policy Committee will see some grounds for concern. The 0.8 percent growth from the first quarter was generated almost entirely by the dominant services sector, which sprinted up by 1 percent. The rate of growth of industrial production slipped from 0.7 percent in the first quarter to 0.4 percent - equivalent to a meagre annualised rate of just 1.6 percent. Construction output contracted by 0.5 percent, bad news in a country needing houses.

The UK’s ascent, as in the past, is a straggling one, with services showing signs of leaving industry and manufacturing lagging behind. The UK’s close-to-record external current account deficit of over 4 percent of GDP is more evidence of that. Weak international competitiveness still looks like a big British growth-inhibiting problem, not helped by the fast recent rise in the pound.

The risks of a British slowdown reflect a wider trend. The Bundesbank believes German second-quarter GDP stagnated, and the International Monetary fund just cut its expected global growth rate for the year, with emerging markets less strong than before. Weak Europe and a slow-growing world are tough on UK exports.

Services might keep the UK climbing. But here, too, there are dangers. With wages up only an annual 0.3 percent in the three months to May, Britons are still not able to spend freely, even if more of them have jobs.

Some MPC members have recently been edging closer to endorsing an increase in rates soon. But the committee will watch closely for further signs of weakness in industry and wages. The pound may ease back from its $1.70 heights. The British economy is back to its peak. Storming on beyond it will get harder.

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UK banks have much to fear from latest probe Fri, 18 Jul 2014 14:27:58 +0000 By Chris Hughes

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The latest competition review of UK banking should aim to be the last. An antitrust probe in 2000 led to limited price controls after concluding that British lenders made excess profit. There were two more big investigations after the financial crisis. Yet concerns about market inefficiencies persist. That suggests the Competition and Markets Authority should do something radical this time.

The CMA says it is minded to conduct a comprehensive investigation of UK banking later this year. The industry is at least as oligopolistic as it was 14 years ago. Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland have 77 percent of personal accounts and 85 percent of small-business banking.

So-called challenger banks have emerged from disposals by Lloyds and RBS as mandated by the European Commission. But the market has become more concentrated, especially in mortgages, after Lloyds swallowed Halifax and Bank of Scotland and several former building societies collapsed. Customer dissatisfaction is high. Yet just 4 percent of SME customers and 3 percent of personal customers switch accounts annually. The banks say things are already changing for the better. Twas ever thus.

Having more players, each with roughly equal market power, would be a better market structure. But how to get there? The CMA can force divestments – it broke up airports group BAA. Selling Gatwick is one thing; dismantling a big bank is another. The recent carve-outs have shown the difficulty of such moves, as Sanford Bernstein notes.

The obvious remedy would be to promote transparency. Personal banking is generally provided on a fee-free basis. Banks have traditionally recouped the cost elsewhere, in particular overdraft fees and cross-selling (or mis-selling) products like insurance. As a result, customers cannot make informed choices as they do not know the price of what they are buying.

Forcing banks to charge the economic cost of their services would kill free banking and cause a stink. But it would enable genuine price comparison and informed switching. The CMA, being independent, is the only body that could realistically make it happen. If it did, investors could expect profits to fall. But consumers could expect competition and standards to rise.

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London real estate at an inflection point Thu, 17 Jul 2014 10:33:31 +0000 By George Hay

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Most real estate valuers in London think property prices in the UK capital are about to fall. That prediction has been easy to make and easier to get wrong in the last five years. This time, the evidence that global investors’ favourite housing market has peaked is looking credible.

House prices in London as a whole are still rising on a monthly and annual basis, and are 20 percent more expensive than a year ago, according to the Office for National Statistics. But there is stasis in the process upstream. The Royal Institution of Chartered Surveyors’ latest monthly survey shows a sharp dip in those wanting to buy in London, and an even sharper jump in those keen to sell.

Monthly sales volumes are off 17 percent in Greater London since December, says the Land Registry. A small majority of RICS’ members now expect values in the city to fall in sympathy.

The picture is of domestic demand falling away. That is not surprising. Median prices in the capital are 10 times average London earnings, as measured by the Greater London Authority. Banks are reluctant to advance mortgages at multiples exceeding four times salary. Meanwhile, a soft rental market is a deterrent to debt-funded investors. Rents rose just 1.4 percent in the year to March; lowly rental yields are below mortgage finance costs in some parts of the market. And UK rates may rise later this year.

This leaves the London sales market open only to those with sizeable cash resources. The city has attracted hordes of such buyers globally in a period of financial repression. But if the buyer-seller imbalance has shifted, this foreign money will need to work harder for prices to hold. The snag is that London is no longer a bargain for the global buyer. A 15 percent charge on properties bought through tax-avoiding corporate shells has already hit demand, the city’s real estate agents say. Sterling has risen 15 percent against the dollar since July 2013.

There is a near-sacred belief held in the UK, London and internationally that house prices in the city can only rise. That view might not withstand the economics of supply and demand.

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Meet the Tea Party — European edition Tue, 27 May 2014 19:47:46 +0000 schneider combo

Europe finally has its own Tea Party. Or something like it.

Last weekend, citizens of 21 nations elected members of a new European parliament. The result? An outpouring of rage.

Angry voters across the continent and Britain cast ballots for protest parties, mostly on the far right, which doubled their number of seats and now account for close to one third of the parliament. French Prime Minister Manuel Vallis called the vote “more than a news alert . . . it is a shock, an earthquake.”

palin -- leeWhat were the voters angry about? Well, everything. The parties that made big gains were anti-Europe, anti-common currency, anti-integration, anti-bureaucrat and anti-politician. They were also anti-immigrant. Angry voters were protesting immigration from within the Common Market (mostly by Eastern Europeans, who have the right to work in any European country) and from outside Europe (mostly by Muslims).

Anything else? Yes.

“This is a bad day for the European Union when a party with such an openly racist, xenophobic and anti-Semitic program gets 25 percent of the vote in France,'' the president of the European parliament said after it became clear that the far-right National Front led the polling in France.

In Britain, it was the first election in more than 100 years when one of the two major parties did not lead the polls. First place went to the UK Independence Party (UKIP) whose charismatic leader, Nigel Farage, wants Britain out of the European Union and immigrants out of Britain. British Prime Minister David Cameron once described UKIP as “a bunch of fruitcakes, loonies and closet racists.”

Anything else? Yes. Anti-American sentiment was a factor. Parties of the far right are openly resentful of the U.S. “hegemony” over Europe. For 70 years, the United States has supported the technocrats and financial elites who run Europe. “The European Union is the poodle of the United States,” a French National Front politician complained.

The driving force behind all this protest is not ideology. It's hardship. Europe's response to the 2008 financial crisis was different from that of the United States.  Americans elected President Barack Obama, whose free-spending ways and government bailouts generated the Tea Party protest. In Europe, bureaucrats and bankers enforced a policy of painful austerity.

cameronThe idea was to reduce government debt by slashing public spending -- exactly the kinds of policies the U.S. Tea Party favors. The result, predictably, was mass unemployment and despair. And now an outpouring of angry protest.

In the United States, the Tea Party protest is anti-big government. In Europe, it's anti-austerity. In both places, it's anti-establishment.

How did European governments get away with imposing a regime of what one American commentator called “savage austerity? Because Europe has an elitist political culture.

Economic and social elites have long enjoyed a monopoly of authority. Educated European elites, for example, agree that the death penalty is cruel and barbaric. So it's banned. Popular opinion may disagree, but the people defer to the elite.

Not in the United States. The United States has a populist political culture.  Here, the people rule. If the governing elites defy public opinion, they pay a price.

“The great danger is populism,” Herman Van Rompuy, the president of the European Council, warned in 2010.   In the United States, populism isn't a danger.  It's a principle of governing.

cruz -- defund obamacareRight-wing populism in Europe is not just critical of America. It's also pro-Russia and openly admiring of its president, Vladimir Putin. Why? Because the despised European elites are hostile to Russia. So far-right leaders in Europe openly praise Putin's aggressive nationalism and his defiance of the United States.

Farage called Putin the world leader he most admired “as an operator, but not as a human being.”  Marine Le Pen, leader of the France’s National Front,  expressed respect for Putin and calls for a “pan-European union” that could include Russia. The far right now sees Russia the same way the far left once did -- as an alternative to U.S. hegemony.

And something else. Many right-wing European voters agree with Putin's reactionary cultural views, like his opposition to gays and his criticism of the West as morally decadent. The far right expressed revulsion this month when a bearded Austrian drag queen won the Eurovision Song Contest -- Europe's version of American Idol. Putin attacked the winner for putting her deviant lifestyle “up for show.”

Somehow it all fits together as one package. Speaking before the Russian parliament in 2013, Aymeric Chauprade, a foreign-policy adviser to the leader of the French National Front, called for a new European order free from servitude to “a technocratic elite serving the American and European financial oligarchy” and from its “enslavement by consumerist urges and sexual impulses.”

A pro-European integration, pro-U.S. consensus has ruled in Europe since World War Two. This year, for the first time, it's facing a large-scale protest.

Van Rompuy is probably wrong when he says populism is a great danger to Europe. Compared to national governments, the European parliament doesn't do much or matter much. That's why voters all over Europe felt free to send a radical message with their votes without fearing any frightening consequences.

But in another sense, the president of the European Council was right. The new populism is a great danger -- to him and to the people who run Europe.


PHOTO (TOP): Marine Le Pen (L); Senator Ted Cruz (C); Nigel Farage (R). REUTERS/Files.

PHOTO (INSERT 1): Senator Mike Lee (L)(R-Utah) watches as former Alaska Governor Sarah Palin hands out American flags to protesters during the 'Million Vet March on the Memorials' at the National World War Two Memorial in Washington, October 13, 2013. REUTERS/Joshua Roberts

PHOTO (INSERT 2): British Prime Minister David Cameron arrives at an informal summit of European Union leaders in Brussels, May 27, 2014.  REUTERS/Francois Lenoir

PHOTO (INSERT 3): Senator Ted Cruz (R-Tex.) (R) greets attendees as he arrives to speak at the Tea Party Patriots 'Exempt America from Obamacare' rally on the west lawn of the Capitol in Washington, September 10, 2013. REUTERS/Jonathan Ernst

Correction: Due to an editing error, the number of countries participating in last weekend's election was misstated. Only 21 of the 28 European Union nations held votes.

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Europe is under siege from both the left and right Thu, 22 May 2014 01:30:06 +0000 eu combo

Elections will begin on Thursday across the 28 European Union member states to elect national representatives to the European Parliament, which regulates trade, borders and some elements of foreign policy. Though this is a continent-wide election, voters historically use it to send a message to their own nation’s governing party. With the meteoric rise of anti-European populism on the political left and right, however, things promise to buck that trend this time.

This was not how things were supposed to be. Five years ago, at a meeting of the European Union’s heads of state and government in Lisbon, Portugal, European leaders signed a treaty that foresaw these elections as defining the political direction of the European Union. This week’s elections are supposed to mark a turning point, as competing progressive, liberal, green and conservative visions of Europe’s future vied for popular support.

Instead, Europe is in a mess -- and the future of the European Union seems in doubt.

eu elections -- parliamentEuropean Parliament political groups have decided to use the Lisbon Treaty for a power grab, interpreting a vague commitment about political direction as their right to nominate and impose candidates for president of the European Commission. Yet the real winners in this week's election are likely to be the anti-European populists now calling for a dissolution of Europe.

Across Europe, mainstream political parties on both the center-right and the center-left have been hemorrhaging support. This began with the 2008 global financial crisis and continued through the euro sovereign-debt crisis that followed. European rules and the bailout conditions of European partners forced many nations to adopt austerity policies, which prolonged the economic crisis.

At the same time, the free movement of workers across the EU intensified migration and competition for low-skilled work as economic insecurity rose. The combination of Europe’s enduring economic malaise and its growing diversity has proven fertile ground for populists. Their message that Europe is the problem rather than the solution resonates among those who have lost out or who are fearful of change.

On the right, the focus of anti-European populists tends to be in opposition to immigration and the invasiveness of European legislation, which they claim undermines national sovereignty. This is the case in Britain, where Nigel Farage’s UK Independence Party is riding high in the polls despite constant accusations of racism. The same is true for Martine Le Pen’s National Front in France. Both nationalist parties could win the largest share of the vote in their respective countries, as could Geert Wilders’ PVV in the Netherlands and Heinz-Christian Strache in Austria.

eu -- merkelOn the left, the anti-European movement coalesces around a harsher anti-market stance and resistance to the restrictive austerity bias of European economic policy. In Germany, Die Linke has become the main opposition to the grand coalition led by Chancellor Angela Merkel. Hard-left anti-Europeans are also likely to perform well in France, Spain and the Czech Republic.

Among this new group, the Greek Alex Tsipras has emerged as a leader. He did well in recent pan-European presidential debates, and this is likely to help lead his leftist party to victory in Greece.

So this week’s election could turn out quite differently than many expected. A clear victory for either a progressive or conservative vision of Europe seems unlikely. The almost certain success of the anti-European parties, who could win as many as a third of all parliamentary seats, will dramatically change the political calculus.

The natural reaction of Europe’s political elite will be to form a “pro-Europe, pro-reform” grand coalition and work to contain the influence of the populist parliamentarians. While this might be good for policy, it’s likely to prove bad politics.

eu elections -- docsA business-as-usual approach will exacerbate the disconnect between the European Parliament and its citizens. Instead, the new European Parliament should listen to the concerns of the voters who have elected the populists.

Unless the European elite in Brussels works to revive widespread economic prosperity and middle-class fortunes, providing a vision and narrative that helps all Europeans adapt to social and cultural change, the populist protest is only likely to grow.

This is not just background noise. The message they send is a crucial signal Europe’s elite need to hear.


PHOTO (TOP):Clockwise from top left: Heinz-Christian Strache, head of the Freedom Party in Austria; Martine Le Pen, head of the National Front in France; Nigel Farage of the UK Independence Party, and Geert Wilders of the PVV in the Netherlands. REUTERS/Combo

PHOTO (INSERT 1): Members of the European Parliament take part in a voting session at the European Parliament in Strasbourg, November 20, 2013. Picture taken with a fisheye lens. REUTERS/Vincent Kessler

PHOTO (INSERT 2): A cyclist passes European election posters of Socialist candidate for European Commission President Martin Schulz (R) of the Social Democratic Party and German Chancellor Angela Merkel, who is head of the Christian Democratic Union, in Hamburg, May 20, 2014.  REUTERS/Fabian Bimmer

PHOTO (INSERT 3): An employee prepares electoral documents to be sent to voters for the coming European elections, in Strasbourg, May 15, 2014. REUTERS/Vincent Kessler

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Fighting for the future of conservativism Tue, 13 May 2014 03:15:36 +0000 Britain's Prime Minister David Cameron delivers a speech to placard waving Conservatives during an European election campaign rally at a science park in Bristol

Establishment Republicans have been delighted by the victory of Thom Tillis, their favored candidate in last week’s North Carolina primary. After expensive advertising campaigns by establishment bagmen like the U.S. Chamber of Commerce and Karl Rove’s American Crossroads, mainstream conservatives believe they have a candidate who can beat Democrat Kay Hagan to win a valuable Senate seat in November.

Some commentators see Tillis’s triumph as a sign that other impending GOP primary races will also deliver electable candidates. Having watched the Senate slip from Republican grasp in 2012, as Tea Party candidates such as Todd Akin in Missouri, Christine O’Donnell in Delaware and Richard Mourdock in Indiana depicted the party as too extreme, they say the Tea Party is in retreat.

Not so fast. The experience of conservative parties elsewhere suggests that when pragmatists triumph over dogmatists, the dogmatists either regroup and go on to overwhelm the moderates, eventually making the party their own. Or they set up their own party -- and trounce the moderates at the ballot box.

ThatcherThat is happening in Britain. The Conservatives, once Britain’s natural governing party, find themselves about to be pressed into third place in the European Parliament elections. They will be runners-up not only to the Labor Party but also to the populist United Kingdom Independence Party, their ideological nemesis. Like the Tea Party, the Independence Party has set itself up as the true conscience of conservatism.

There was a time when the European left was riven over dogma, with middle-ground Social Democrats jostling with hard-line Socialists. In Britain through the 1970s and 1980s, there was a three-way split, with middle-of-the-road Labor candidates noisily fending off assaults from the far left as well as Social Democratic reformers. This left Margaret Thatcher’s Tories free to win three elections in a row.

In France the left was terminally split between the Socialists and the Communists -- to the delight of the conservative Gaullists.

In both Britain and France, the rift on the left has been healed. Having suffered defeat after defeat, the moderates galvanized themselves and either purged their ranks of unelectable dogmatic Socialists or, in France, put their Communist rivals out of business for good. Pragmatism finally triumphed over dogmatism.

While the left was wising up, however, conservative parties on both sides of the Atlantic that used to win elections by giving short shrift to ideology began busily acquiring dogma.

In Britain, the Tories abandoned centuries of pragmatism and embraced Thatcherism -- a heady cocktail of free-market ideas, suspicion of foreigners and a strident dislike of the centralizing powers of the European Union. This is the British equivalent of states’ rights.

In the United States, a first run at radicalizing the Republican Party was made by the libertarian-minded Senator Barry Goldwater of Arizona, who won the GOP presidential nomination in 1964 but was trounced by President Lyndon B. Johnson. In defeat, the ultraconservatives did not give up. They instead transferred their affections to Ronald Reagan, an acceptable face of ideological conservatism who won the presidency twice in a row.

British Prime Minister Margaret Thatcher and President Reagan share a laugh during a meeting of the Allied leaders in New YorkBoth Reagan and Thatcher introduced into their previously practical parties a market-based doctrine. They began lauding the works of Austrian economists, Ludwig von Mises and Friedrich Hayek, and University of Chicago economists, in particular Milton Friedman.

Thatcher was so ardently committed to textbook conservatism, she used to hand out a book list to her Cabinet. She even had Friedman teach them a lesson in monetarism.

For those who wondered where Reagan’s ideas came from, he referred them to his decades of Saturday radio broadcasts. There he had laid out the tenets by which he thought the United States should be governed.

Both Reagan and Thatcher suggested that answers to political problems were to be found in texts. Both left their parties an inheritance of profound divisions between moderates and ultraconservatives. The fissures continue to run through the Republican Party, distracting from their primary purpose -- winning elections -- in favor of being content to lose rather than abandon ideological principles.

In Britain, after Tony Blair’s Labor Party took three elections in a row, the Tory warring factions papered over their differences. The bitter disagreements over how to run the economy, over immigration and over Britain’s role in Europe still remain, however.

The failure of the fundamentalists within the British Conservative Party to represent the wishes of ultraconservative voters led to the rise of the populist Independence Party, with an anti-immigrant, anti-European Union, anti-establishment platform that threatens to drive the Conservatives to defeat in the general election next year.

Republican political consultant Rove speaks with the National Journal's Brownstein during the fifth annual Washington Ideas Forum at the Newseum in WashingtonThe Republican Party finds itself in a similar dilemma, riven between old-school, pro-business conservatives who are moderate on such things as immigration reform and states’ rights, and the Tea Party, an angry, populist, grass-roots movement that holds to an anti-big business, anti-Wall Street, anti-immigration, pro-states’ rights agenda. All GOP candidates, particularly presidential wannabes, must be measured against this.

Devotion to dogmatism proved disastrous in the 2012 presidential primaries. The Republican Party was presented with a number of candidates who would say or do just about anything to win approval from the vociferous Tea Party.

The establishment candidate, Mitt Romney, could not disguise the discomfort with which he was obliged to abandon his middle-ground positions, where most American voters feel comfortable. By Election Day, however, it was too late to recast himself as a moderate. He lost.

Fresh from their primary victory this month in North Carolina, establishment Republicans led by Republican National Committee Chairman Reince Priebus are  hoping to defang the Tea Party by limiting the number of televised presidential primary debates. They seek to limit the damage the divisive process does to the image of their nominee among general-election voters.

Already, Tea Party members smell a rat. They feel, with justification, they are being sold down the river, as they have so often been in the past. The stage is set for a post-2016 showdown in which the Tea Party either defeats the GOP establishment for good and conquers the commanding heights of the party – or, like Britain’s Independence Party, they break away and start fielding candidates of their own.

The complexion of the 2016 contest is therefore becoming clearer. Assuming that Secretary of State Hillary Clinton finally agrees to champion the Democrats, we can look forward to a prolonged campaign in which the main thrust of the Republican assault, irrespective of who wins the GOP primary race, will be Libya (Benghazi) and Lewinsky (Monica).

For Republicans, however, it is do or die. If they fail to win and Clinton serves two terms, the soul of the Republican Party will be up for grabs. Whether the moderates or the dogmatists win that final battle will determine the future of conservatism in the United States for decades to come.

Nicholas Wapshott is the author of Ronald Reagan and Margaret Thatcher: A Political Marriage, and Keynes Hayek: The Clash That Defined Modern Economics. Read extracts here.


PHOTO (TOP): Britain's Prime Minister David Cameron delivers a speech to placard waving Conservatives during an European election campaign rally at a science park in Bristol, May 8, 2014. REUTERS/Andrew Winning

PHOTO (INSERT 1): British Prime Minister Margaret Thatcher points a finger as she answers questions at a news conference in London, June 8, 1987. REUTERS/Roy Letkey

PHOTO (INSERT 2): British Prime Minister Margaret Thatcher and President Ronadl Reagan share a laugh during a meeting of the Allied leaders in New York, October 24, 1985. REUTERS/Chas Cancellare

PHOTO (INSERT 3): Republican political consultant Karl Rove speaks at the fifth annual Washington Ideas Forum at the Newseum in Washington, November 14, 2013. REUTERS/Gary Cameron



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Britain and the limits of austerity Mon, 05 May 2014 13:53:18 +0000 The Bank of England is seen in the City of London

The British economy has experienced the most rapid growth in the G7 over the last few months. It increased at an annual rate of more than 3 percent in the last quarter -- even as the U.S. economy barely grew, continental Europe remained in the doldrums and Japan struggled to maintain momentum in the face of a major new valued added tax increase.

Many have seized on Britain’s strong performance as vindication of the austerity policy that Britain has followed since 2010, and evidence against the secular stagnation idea that lack of demand is a medium-term constraint on growth in the industrial world.

Interpreting the British strategy correctly is crucial because of the political stakes in Britain, the question of future British economic policy and, most important, because the British experience influences economic policy debates around the globe. Unfortunately, when properly interpreted, the British experience refutes the austerity advocates and confirms John Maynard Keynes’s warning about the dangers of indiscriminate budget cutting during an economic downturn.

A protester holds a placard during a rally in Trafalgar Square in central LondonStart with the British economy’s current situation. While growth has been rapid recently, this is only because of the depth of the hole that Britain dug for itself. While the U.S. gross domestic product is now well above its pre-crisis peak, in Britain GDP remains below previous peak levels and even short of levels predicted when austerity policies were implemented. Not surprisingly given this dismal record, the debt to GDP ratio is now nearly 10 percentage points higher than forecast, and the date when budget balance is predicted has been pushed back to the end of the decade.

The common excuse offered for Britain’s poor performance is its dependence on financial services. Yet the New York metropolitan area, far more dependent on financial services than Britain, has seen GDP comfortably outstrip its previous peak. Though the euro area has performed poorly, even a casual look at trade statistics confirms that this cannot account for most of Britain’s poor growth.

The U.S. economy grew at a rate of 9 percent for a number of years after the trough of the Great Depression in 1933. Such rapid growth in peacetime is unheard of in U.S. history. Why did it happen? Only because of the depth of the Depression. No one has ever taken the pace of the U.S. recovery from the Great Depression as any validation of the austerity policies that helped create it. Similarly, part of the story of British growth is that it is simply catching up after a major crisis caused a huge output gap to develop.

History shows that deeper recessions are followed by stronger recoveries. For example, the New York metropolitan area, though falling relative to the rest of the country in the 2008 fiscal collapse, enjoyed more rapid growth after.

Two additional points about Britain’s growth require emphasis. First, the acceleration in growth has less to do with austerity spurring growth than with a slowdown in the pace at which austerity is imposed. Whether one looks at the deficit itself, or the various structural deficit measures advanced by local and international organizations, the pace of fiscal contraction has slowed over the last two years. Slowing fiscal contraction means the decrement to growth caused by fiscal policy is becoming more attenuated.

All things being equal, this would be expected to produce more favorable growth performance. Ironically, the greater the fiscal multiplier is, the greater would be the predicted turnaround when the pace of contraction slowed. So the turnaround in growth over the last 18 months is as much evidence against austerity as it is pro-austerity.

Demonstrators protest outside the Houses of parliament in central LondonSecond, in the face of deficit reduction’s potential damage to demand and economic growth, the British government has been forced to introduce a number of extraordinary measures to support lending. Most significant is the so-called Help to Buy program that gives low teaser rate mortgages to some households and guarantees the mortgages of others so they can put only 5 percent down. There are also special programs to reward banks for lending to small business and involve the central bank in export finance.

Especially in the case of Help to Buy, which manages to encompass most of the sins of the U.S. government-sponsored enterprises, all these programs are highly problematic. The austerity program’s stated goal was to improve confidence in Britain as a sovereign credit. Yet, guaranteeing mortgages en masse is actually creating a huge potential government liability, as do other loan guarantee programs.

In addition, subsidized credit for mortgages risks recreating real estate bubbles -- house prices in London have increased much faster than GDP over the last year. And of course, programs that benefit homeowners rather than renters have perverse distributional consequences.

Britain’s growth then reflects a combination of the depth of the hole it found itself in, the moderation in the trend toward deeper and deeper austerity and the effects of possibly creating a bubble through government loans.

It may still be better for the citizens of Britain than any alternative. But it certainly should not be seen as any kind of inspiration to other countries.


PHOTO (TOP): The Bank of England is seen in the City of London. August 7, 2013. REUTERS/Toby Melville

PHOTO (INSERT 1): A protester holds a placard during a rally in Trafalgar Square in central London, May 1, 2013. REUTERS/Toby Melville

PHOTO (INSERT 2): Demonstrators protest outside the Houses of parliament in central London, March 21, 2012. REUTERS/Paul Hackett

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The UK’s paradox of faith Wed, 23 Apr 2014 14:32:18 +0000

When David Cameron recently proclaimed in the Church Times -- the organ of the Church of England -- that he was a Christian, that his faith helped guide him through life and work and that Britain is a Christian country and should be proud of it, he was met with a wall of disapproval.

When a European leader says he's a Christian and that he lives in a Christian country, he's asking for trouble. The approved political position in Europe is that religion should be commended for its sterling values when it cares for the poor and condemned when it is used as a rationale for terrorism. Otherwise, politicians should steer clear and leave it to the clergy.

European states are not the United States, and thus not “nations under God,” (though only since 1954, when the words were added to the pledge of allegiance). EU states are nations under constitutions that prescribe secularism. They say that all faiths may (peacefully) flourish and that none shall have priority.

Two famed British authors, Terry Pratchett and Philip Pullman, ganged up on Cameron with 50 others in a letter to the Daily Telegraph. They wrote that the prime minister is playing a dangerous and divisive game. He has not accepted that the country is mainly non-religious and he will upset other faiths in a country that has lots of them, not just Christianity, they wrote.

One reason for the Church Times article may be the European Union (EU) parliament elections next month. The anti-EU UK Independence Party, which makes a point of believing in good old British values, is expected to do well. A spin doctor might argue that a judiciously placed article affirming the nation's Christian attachment might do a little good for Cameron.

Critics incorrectly assumed that this was all there was to it. Cameron wrote that he is a “classic” Anglican, whose church attendance is irregular. But there's no reason to think that he can't both ride the UKIP’s coattails and actually believe that his religion has meaning for him and for his country.

Did Cameron’s article do harm? On the contrary.

A nation’s constitution does not enable religious exclusion on its own. Exclusion also depends on the nature of civil society in which the privileges and problems of religion are sorted out. The Pope and the Vatican exercise a huge influence on politics, media and society in Italy. The crucifix may be displayed in Italian classrooms. But its constitution is proudly secular.

In France, the secularism that has been branded into the country's public behavior since the 1789 Revolution is more strictly observed. The French state was willing to fight with its Islamic population, the largest in Europe, over women wearing a headscarf in public buildings -- including schools. The state won. When President Francois Hollande's affair with an actress was reported earlier this year, the religious angle was unexplored because it wasn't thought to be relevant.

In the UnitedStates, a presidential candidate who professes atheism would find it tough-going in a country where religious observance is still (though falling) in the majority. The most serious question that came up against Barack Obama when he first ran in 2008 was not a matter of political orientation, but about which church he belonged to.

The U.S. Constitution, protecting those who had fled religious persecution in Europe, abjures any smack of a state religion. America is a country of competing faiths, which in part gives them the vigor that they show.

Cameron speaks against one of Britain’s many paradoxes. Its second chamber of parliament was, until the 1990s, full of lords and ladies whose titles in some cases went back to medieval times and the illicit couplings of kings. Even now, in a hard fought compromise, some 92 remain. Yet Britain’s democracy is robust.

The Church of England is a state religion, with bishops in the House of Lords, the primate, the Archbishop of Canterbury -- who is appointed by the prime minister -- and with the Queen at its head. One of her titles is "Defender of the Faith" -- though she has never said a public word in its defense as congregations dwindle and amid debates over women bishops or gay marriage.

The benign paradox is that this state church, long past any power to enforce its faith on anyone, is actually the best guarantee to other faiths that they will find a place in the state and have leave to prosper. Being a state church means ensuring that a multi-faith society with sometimes hostile factions can find accommodation. This happens through drawing them into forums where they may talk and even pray together.

There are many currents in the Church of England, as in every great church. Most of these are united in a determination to be like the good and active neighbor; happy that the street is more diverse and anxious that it be at peace.

This is the vision of Christianity that Cameron invokes in his article. There can be much to sneer at. For the enthusiastic believer, the piece is too milk-and-water. For the egalitarian, it's too condescending, a form of noblesse oblige. For those who see other faiths as an abomination, it's... an abomination.

For the letter writers to the Telegraph, Cameron's article serves only to divide. Yet important voices among those who are supposed to be its victims did not think so. Farooq Murad, secretary of the Muslim Council of Britain, said of course Britain is culturally Christian. Anil Bhanot, head of the Hindu Council UK, said he is "very comfortable" with British Christianity. They seem to understand the British paradox better than the great and the good who signed the letter.

PHOTO: British Prime Minister David Cameron (C) lights a candle as he visits the Church of the Nativity in the West Bank town of Bethlehem March 13, 2014. REUTERS/Thomas Coex/Pool

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How to trust BP again Tue, 18 Mar 2014 21:52:51 +0000

The Environmental Protection Agency is allowing BP to once again bid on new leases in the Gulf of Mexico -- which could happen as early as Wednesday.

As a condition of lifting its ban, the E.P.A. last week issued 53 pages of requirements for the company, which now must create a beefed-up code of conduct for employees; establish a zero tolerance policy for retaliation against whistleblowers; train senior leaders in ethics, and dole out bonuses related to issues like safety and environmental sustainability.

But BP had much of that in place before the 2010 Deepwater Horizon disaster, which killed 11 people and spilled millions of gallons of oil into the Gulf of Mexico. During my time as a manager of policy development at BP (which ended in 2008), I had to certify every year that I complied with the company’s code of conduct. I used the company hotline when I thought a manager was behaving inappropriately, and was impressed by how my complaint was handled.

Then came Deepwater Horizon. I was as appalled and angry as everyone else in the aftermath of the explosion, as BP repeatedly failed to cap the gushing well and multiple investigations portrayed BP as a company that took too many risks and cut corners in pursuit of profits.

I had to reconcile the BP I thought I knew well with the one that emerged after the disaster. I spoke with peers in other industries -- like apparel and technology -- that push for safer and more sustainable practices.

I wanted to learn what it really means to be a responsible company, and what it would take for me -- and by extension the E.P.A. and the American people -- to trust BP again.

Here are three of the themes that emerged from my conversations about good corporate behavior, which we should demand from BP as it bids on new leases in the Gulf:

Senior executives need to bear witness. Upper management is often removed from how their decisions impact people and communities at the far reaches of their supply chain. A director of Disney’s International Labor Standards Program told me that once her chief financial officer visited factories in Asia that make Disney-branded products, her team received more support for their work improving labor conditions there.

BP should have monthly meetings with communities affected by the spill -- not just with compliance auditors in suits. I want to know that the ubiquitous photo of the oil-covered seagull -- along with positive scenes of thriving Gulf communities to motivate staff -- is hanging on every BP wall.

Study what works, as well as what doesn’t. In Vietnam, the NGO Save the Children made headway against the longstanding problem of malnourished children by studying the few families that had healthy kids and emulating their practices, rather than trying to impose solutions from the outside.

During my time with BP, I regularly reached out to experts and NGOs for their expertise on human rights and sustainable development, and commissioned studies on potential social and environmental impacts to help manage those risks. That was excellent practice, but did not occur in all of the other 99 countries where BP did business. BP should be required to regularly review best practices internally, in its industry, and in other industries with similar challenges.

Seat the right people at the grown-up table. It’s all well and good to employ people with words like “ethics” and “sustainability” in their titles, especially in the industries that present the biggest risks to people and the planet. But are those people involved when big decisions are made? At Newmont Mining, the executive vice president of sustainability and external relations sits on the company’s investment council, the committee that determines which projects get recommended to the board for investment. If it doesn’t already, BP should give such executives real power, allowing them to decide which projects get funded.

I’m cautiously optimistic that BP can get it right. The companies that have the best programs to protect people and the environment are often the ones that have had the biggest problems.

Take Yahoo, for starters. Before it launches a new product in a new market, Yahoo assesses risks to user privacy and free expression. But it only started doing so after the Chinese government forced it to turn over data used to identify journalist Shi Tao -- who was then imprisoned for disclosing state secrets.

Apple started working with the Fair Labor Association to ensure people are treated and paid properly in its Foxconn supplier factories -- after a New York Times exposé revealed harsh working conditions in those plants.

Scores of apparel companies have committed to upgrade factories in Bangladesh -- after the Rana Plaza building collapsed in 2013, killing over 1,100 garment workers.

Similar incidents may still happen in the future, due to the countries where these companies operate and the risks of their industries.

But that’s no excuse for not doing everything possible to prevent another disaster. As the Presidential Oil Spill Commission’s final report noted, “Even inherently risky businesses can be made safer, given the right motivations and systems-safety management practices.”

Indeed. We have to look beyond a glossy code of conduct and off-the-shelf training programs to what BP executives are seeing and studying, and who’s in the room making decisions, as the company re-enters the Gulf.

PHOTOS: Water is sprayed onto burning natural gas at the source of the Deepwater Horizon oil spill in the Gulf of Mexico off the coast of Louisiana June 19, 2010. REUTERS/Lee Celano 

A boat passes through heavily oiled marsh near Pass a Loutre, Louisiana May 20, 2010. REUTERS/Lee Celano

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Budget day: Politics not economics Mon, 17 Mar 2014 11:17:28 +0000 --Sam Hill is Senior UK economist at RBC. The opinions expressed are his own.--

The headlines generated by the forthcoming UK budget are likely to be political rather than economic; the general election is next year. Despite a faster than expected fall in unemployment and inflation, macroeconomic developments since the December autumn statement present limited scope for forecast revisions to government borrowing. But come the post-budget analysis, some of the seemingly esoteric revised economic assumptions may have important consequences for how the budget is perceived politically.

The modest changes we do expect to the economic forecasts would be seen as positive in essence. Small upgrades to the growth outlook should translate into borrowing reductions of  between £3 billion and £6 billion per year throughout the five-year horizon. That would leave the underlying measure of borrowing at £332 billion for the six years to 2018-19, down from £358 billion in the existing forecast from December, which itself represented a significant improvement on last year’s budget.

In these terms the presentation of the budget maths looks, on the face of it, to be a good news story for the government. It can claim deficit reduction is getting back on track. The complication comes though in the assessment that is made by the Office for Budget Responsibility (OBR) about the responsible way to approach tackling the rest of the deficit from here.

The risk for the government is that the OBR’s updated outlook leads to the conclusion that further tax hikes or spending cuts are needed – despite those falls in the overall borrowing forecast. Whether or not this happens depends on how much below its capacity size the OBR thinks the economy is operating, both now and in future. The further below full potential the economy is judged to be, the more of the deficit it is safe to assume will disappear naturally as the economy grows. Conversely, if the OBR say there is no spare capacity, the entire remaining deficit from that point must be dealt with by announcing further policy tightening. This portion of the deficit is the structural deficit.

In December’s Autumn Statement the OBR judged the economy to be operating 2.1% below capacity with the gap closing over five years. Since then, the strong performance in the labour market means that they are likely to have to revise that to a smaller gap. Furthermore, the Bank of England has said spare capacity is smaller at 1%-1.5% and that it will be eroded over just 2-3 years.

So there is a risk the economy will be operating at full capacity sooner than the OBR thought making a larger proportion of the deficit deemed to be structural, despite faster economic growth. RBC research has shown that it wouldn’t be unreasonable for a further £10 billion of tax hikes or spending cuts to be needed by 2016-17 to prevent the structural deficit increasing using the BoE assessment of spare capacity. And it is the structural deficit that the government set as its fiscal rule.

So just over a year before an election, the government will be sensitive about announcing new taxes or cuts, but the other side of the coin is that they will probably want to make a virtue of their fiscal discipline. Watch out then for how much the structural deficit is affected by the judgement on spare capacity in the economy. If it increases significantly, the government will have a tough choice; questions over commitment to cutting the deficit or further tightening pre-election.


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