Cautious cheers for Cameron
by David Marsh
Mon 2 Aug 2010
Who says the British don't understand the art of coalition government?
Many normally expert observers from abroad, especially some who should have known better on fixed-income markets, believed the administration emanating from the U.K.'s inconclusive parliamentary elections in May would be short-lived and unstable. In fact, as it approaches the milestone of three months in office, the Conservative-Liberal Democrat government under Tory Prime Minister David Cameron is starting to look remarkably successful.
Of course, it's still a bit early to give a long-term verdict. But the fresh-faced, previously untried Cameron seems to have transmogrified into a figure of genuine prime ministerial quality with astounding speed. Particularly in economic policy, the unlikely-looking Cameron-led team seems to be settling into a sustainable groove that should produce a solid performance for some years to come.
What does the future hold? I am bold enough to venture three predictions.
First, the U.K. government will not fall apart during the five-year term. Because the British Conservatives failed to win a majority in the May poll, and the Lib Dems also did less well than expected, the two governing parties both need each other. They have overturned their mutual pre-election suspicion and have learned how to get on with each other.
The Liberals, of course, might get fed up with cooperating with the Tories and could be tempted to desert the government at some stage.
The reason might be because of a feeling that their policies in areas like Europe (where the Lib Dems have a generally positive view) or nuclear energy (where they are highly reticent) were being ignored. If that happened, though, they would probably be punished by the electorate for plunging the country into political instability -- and would likely suffer a setback in the ensuing emergency elections, that would bring their score below even the levels of three months ago. So the Lib Dems seem condemned to stick limpet-like to the Tories.
In fact, at present, Cameron is relentlessly seeking the political middle ground. He is pandering so much to Liberal ideas in fields like fiscal or social policy that his own right-wing backbenchers are growing restive. But they can hardly bring down the government because they have no other place to go.
Second, sterling -- ensconced as it is outside economic and monetary union (EMU) -- will continue to show an upward trend against the euro shows. This is a result of relatively good British economic performance, as well as the difficulties that continue to overshadow the single currency. The euro, of course, is a somewhat imbalanced alliance of 16 economies, whereas if you buy the pound you are just getting Britain.
If currency operators had the chance to acquire a new "Euro-Nord" made up simply of the solidly-run creditor countries of northern Europe, then sterling would certainly fall. But Euro-fragmentation into two geographic zones is hardly likely in the shorter term. This is why the euro -- despite the current phase of perkiness against the dollar -- will remain caught in the cross-fire of the equal and opposite economic structures and processes in Northern and Southern Europe.
Third, rebalancing Britain's bloated budget deficit (peaking at 11% to 12% of GDP) in the wake of the recession-induced Keynesian stimulus will be less difficult than many expected. The economy is reacting with surprising vigor -- but only after a certain lag -- to the fillip imparted by sterling's sharp effective devaluation in 2007-2008. This will have an automatic effect in reducing the fiscal shortfall. One sign of this was the surprising buoyancy of the second quarter GDP figures, showing growth at an annual rate of 4.4%.
Another positive factor is that -- under pressure from the Liberals -- the Cameron-led government has been far less active than expected in distributing tax cuts to well-heeled Tory voters, helping to save billions in government revenue.
Cameron and his team have also been helped by the record of Gordon Brown, his prime ministerial predecessor, who for 10 previous years was the Labour Chancellor of the Exchequer. The British Treasury under Brown, despite the carefully-concocted self-image of undying Puritanism, was in fact deeply addicted to deficit spending. This has built into the fiscal system a degree of wasteful excess that the new Chancellor George Osborne should be able to strip away without undue pain -- greatly facilitating the task of deficit reduction.
Already in spring-time I predicted in this column that a coalition government would be formed relatively quickly and that -- in view of the problems affecting the euro -- British government bonds would acquire "safe haven" status, despite the massive budget deficit.
Over the past three months, both predictions that have come true. Forecasting with any accuracy over a longer period is of course a great deal more difficult. Nevertheless, I am sticking to my confidence in U.K. economic resilience. The more fixed-income specialists tell me that Albion is heading for a fall, the greater my obstinate optimism about the fate of the British economy.
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