UK News

from Breakingviews:

UK’s problem: it’s the best in Europe

By Ian Campbell

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

UK GDP stalled in the fourth quarter, contracting by 0.2 percent. That’s bad. But which major west European economy will perform best in 2012? It’s the UK again, the IMF predicted this week.

Britain’s main problem is that it’s doing best in a troubled continent. If it achieves the meagre 0.6 percent growth the IMF predicts in 2012 it will have grown twice as fast as France or Germany and have evaded the 0.5 recession the IMF forecasts for the euro zone as a whole. The euro zone’s fiscal pain is the main obstacle to a firmer British recovery.

UK cuts, it’s true, aren’t helping growth in the short term. Since April austerity has kicked in hard, booting 193,000 unfortunate public sector employees out of work. Unemployment has risen to 2.7 million and will go higher.

But it is Europe, more than government cuts, which has dragged the UK back into negative territory. Half of British exports go to the euro zone. In December the CBI’s export order balance dropped to a 23-month low. Export weakness helps explain why industrial production plunged by 1.2 percent in the fourth quarter. Service industries, more domestically oriented, held up better.

December economic surveys point again to slightly firmer UK growth. The problem is that the European risk isn’t about to go away. In Italy and Spain the IMF foresees deep recessions, GDP declines of close to 2 percent this year and more shrinkage in 2013. What will that do to southern Europe’s debt servicing capacity?

from Breakingviews:

The real UK plan B: protecting against euro chaos

By Hugo Dixon and George Hay The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

Pundits say Britain needs a plan B to boost growth. What it really needs is a contingency scheme to handle a euro explosion. The central planks should be for the government to keep adequate fiscal firepower in reserve to handle a crisis and to shore up the country’s banks.

The two points are linked. If the government used all its fiscal headroom now in an attempt to prevent a double-dip recession, it might find it had no capacity to react if things go from bad to worse across the English Channel. Debt is already forecast to peak at 78 percent of GDP in 2014/2015, according to the Office for Budget Responsibility. But that assumes the euro zone finds a solution to its problems. If not, the UK will be dragged into a deep recession and its debt will balloon: the tax take would fall, social expenditure would rise and money would be pumped into the banks.

If the single currency breaks up, there will probably be banking panics across the euro zone. Britain’s lenders would also be vulnerable. That’s partly because they hold 15 billion pounds of the sovereign debt of Greece, Portugal, Italy, Spain and Ireland. But the main problem would be their 144 billion pound exposure to those countries’ private sectors. A euro collapse would turn many good loans bad. Royal Bank of Scotland, Barclays and Lloyds Banking Group would be the three banks most in the firing line.

Extra capital alone wouldn’t stop these banks running out of cash in the aftermath of a breakup. The government and Bank of England would also need to provide them with a liquidity backstop, as they did in 2008. As then, support could have two elements: the Treasury could guarantee new issues of wholesale bank debt; and the BoE could restart its Special Liquidity Scheme, which allowed lenders to swap illiquid assets for government bonds for a period of three years.

One option would be to wait until a breakup before doing any of this. But the UK might then find itself on the back foot, having to fight a full-blown panic. It would be better to get at least part of the contingency plan moving now.

from The Great Debate:

The perils of protectionism

By Gordon Brown The views expressed are his own.

Next week's 2011 G20 meeting has the power to write a new chapter in the response to the economic downturn. But every day, as nations announce currency controls, capital controls, new tariffs and other protectionist measures, the G2O’s room for maneuver is being significantly narrowed. Already the cumulative impact of a wave of mercantilist measures is threatening to turn decades of globalization into reverse, returning us to the economic history of the 1930s, and condemning at least the western parts of the world to a decade of low growth and high unemployment.

Three years ago when the financial crisis first hit, the G2O communiqués were explicit in warning of the dangers of a new protectionism. Led by the head of the World Trade Organization (WTO), Pascal Lamy, we embarked on a forlorn attempt to use the crisis to deliver a world trade deal -- and were frustrated by an irresoluble dispute on agricultural imports between two countries, India and the USA. But now, in the absence of any co-ordinated global action, member countries have been retreating into their national silos -- and the trickle of protectionist announcements threatens to become a flood. Switzerland led costly action to protect its overvalued currency and has been followed by currency interventions in Japan (with perhaps more to come), India, Indonesia, and South Korea. Brazil, which had itself warned of currency wars, then imposed direct tariffs on manufactured imports -- a hefty car tax designed to protect its own native auto industry against emerging market imports. Other countries are now considering mimicking them. Capital controls are also now in vogue, and of course the U.S. Senate has just voted to label China a “currency manipulator.”

The 2011 WTO report, just published, warns of divergences in regulatory frameworks in preferential trade agreements. And in the next few days the WTO will release its submission to the G20.  It will note  a  rise in  trade-restrictive measures and describe the outlook ahead as “less restraint in the adoption of new trade-restrictive measures and less determination to dismantle existing ones.” Perhaps as worrying  is the growing resort to what I call “home country bias.” Today French banks are selling off their foreign assets and focusing their large portfolios on France itself. French banks have 8 trillion euros in total assets and if the plan is to run them down at 5 percent a year, then by 2014 we will see a 1.2 trillion-euro reduction in investments outside France. European bank liabilities are on the order of 32 trillion euros and when, as we can expect, the same mercantilist approaches to liquidating assets spreads to Germany, the Netherlands, and beyond, growth will be put at risk.

When in 2008 the financial crisis first hit us, money started to flow out of Eastern Europe, whose banking system is dominated by French, German, Italian, and Austrian banks. To soften the impact, we put in place a European Union/IMF guarantee that was sufficiently robust to prevent a massive outflow of bank funds. No similar guarantee is now available and,  faced with capital flight, growth forecasts for Eastern Europe in 2012 are now half what they were.

The process of deleveraging with a home country bias is not restricted to European banks. Many American banks are now deserting Europe and, as the home bias becomes more pronounced, we risk a further round of tit-for-tat actions. This protectionism is the undesirable but inevitable result of a failure of countries to co-ordinate economic policies out of the crisis. Since a high point of cooperation in 2009, we have failed to secure not only a trade agreement but both a climate change agreement and the implementation of G20 decisions to create global financial standards, including a much needed global early warning system.

The new protectionism will make people question whether an era marked by open global flows of capital and the global sourcing of goods is sustainable and whether the very idea of a “global village” of irreversible economic interdependence and integration is now at risk. The biographer of Keynes, Robert Skidelsky, has written in apocryphal terms of “a disorderly, acrimonious retreat from globalization [that] is bound to overshoot its mark, reviving the economics and the politics of the 1930s; but leading in an era of nuclear proliferation, to consequences even more terrifying.”

No-one comes out well in Ireland’s political posturing

Poker, chess, chicken. Pick whichever analogy you like: there’s a high stakes game being played in Irish politics and it’s not a game their international partners much like. Since Ireland said on Sunday it would be asking for help from the EU and IMF –  little more than  two days ago, though it seems like a lifetime — the pieces of the political game have moved almost without cease. Ironically, though, the net result may be little different to what was forecast before the tumultuous events of the past 48 hours: a four-year austerity plan outlining 15 billion euros in savings, a by-election Fianna Fail are set to lose, the harshest budget on record on December 7, and an election in early 2011.

It started with the government’s bailout appeal. What should have led to a few weeks of EU/IMF negotiations was immediately overshadowed by the surprise move of the junior coalition party, the Greens, who stunned voters – and, it appears, their partners Fianna Fail themself, itself, when it announced it would not continue to be part of the government once 2011 budget measures were implemented.

Next move came from two politicians that few knew were even playing in the game: the independent lawmakers on whom the government relies for parliamentary majority. Jackie Healy-Rae and Michael Lowry threw the success of the budget – and the immediate future of the government – into doubt after saying they might not back the budget after all. This threw the ball to opposition parties Fine Gael and Labour who took it, ran with it, and demanded a snap election.

Back to Prime Minister Brian Cowen, whose poker face kept everyone guessing for several tense hours. He was to make a statement, the government reported. The Twittersphere ignited with rumours he would resign, markets wobbled. But no, Cowen stood firm and swatted the ball  back to the opposition. I’ll call an election, he said, but not before the budget is passed and implemented — effectively daring Fine Gael and Labour to vote it down and so be branded unpatriotic and self-interested in the process.

Then, stalemate. The opposistion went strangely quiet as they mulled what to do. Fine Gael disappeared into a huddle for over three hours to devise a plan. Then Fien Gael’s Enda Kenny showed his hand: ‘Bring forward the budget date’ he demanded with a flourish. Cowen stood up, paused for a few seconds, and simply said ‘No’.

There may be no more hands left to play, if you choose to view this as a high stakes poker game, or moves to make, if you’d prefer chess. The budget looks likely to go ahead on December 7, it looks likely to pass since Fine Gael have now also started trotting out the national interest line. And an election will follow in early 2011. But the net result of the last few days’ political posturing has been to add to international uncertainty about Ireland, and raise the ire of political partners, who have been at pains to stress that Ireland must get its four-year plan and budget out as planned if it wants aid. No-one has come out well, nerves are shredded, and Irish people appear fed up and frustrated by the gaming. The four-year plan may put a halt to the manoeuvres for now – expect plenty more before the year is out.

from MacroScope:

It’s all Germany’s fault

It is fairly commonplace at the moment for U.S. and UK financial analysts -- what continental Europeans call the Anglo-Saxons -- to predict the collapse of the euro zone,  a project they were mostly sceptical about in the first place.  MacroScope touched on this on two occasions in March.

The latest foray into this area comes from Alan Brown,  global chief  investment officer at the large UK fund firm  Schroders. But he does it with twist,  blaming what he sees as the eventual  collapse of the euro zone not on the structure itself nor  on the profligacy of peripheral economies, but on Germany's response to the crisis.

Brown reckons countries like Greece cannot do what is needed.

If Greece does all that it is asked to do, it’s debt/GDP ratio will rise to around 150 percent as debt continues to accumulate and the denominator declines as a result of a renewed recession and deflation. With debt at 150 percent and real interest rates anywhere near today’s level, Greece would have to run a primary surplus of around 8 percent  of GDP just to stabilise its debt ratio.

In the best of worlds, Brown says, German and other northern euro zone countries would solve the problem by stimulating their own economies to offset the deflationary impact of measures to improve public finances in the profligacies.

Increased demand from Germany (and other Northern European countries) would boost demand for goods and services from the South helping to maintain growth in the euro zone region as a whole and to reduce the current chronic current account imbalances.

Brown says the trouble is  that is not likely to happen. Germany has actually done the opposite, launching its own austerity programme.

Is powerful Mandy talking up the euro?

When Prime Minister Gordon Brown reshuffled his cabinet last week, fending off a challenge to his authority, a significant outcome was the creation of one of the most powerful ministerial jobs Britain has seen in years.

Peter Mandelson, a former European commissioner who has twice served in British governments in the past and twice been forced to resign, was reconfirmed as secretary of state for business, but also given greatly expanded authorities that make him a powerful if unofficial number two to Brown.

Much fun has been made of Mandelson’s new title, which because he has been elevated to the House of Lords in order to serve in the cabinet now officially reads as: