Cameron’s coalition faces first big test
U.K. leader will defuse dissent on both flanks
by David Marsh
Wed 6 Oct 2010
Conservative-Liberal Democrat coalition government that came to power five months ago has had a solid start. But the fault lines are now starting to show through. They are centred on two of the most sensitive issues in British politics: the armed forces and the banks.
Prime Minister David Cameron faces a showdown on two fronts – from the right and left. For all the gloom-mongering over the alleged fragility of the U.K. government, those two yardsticks of British economic health, the price of sterling and of British government bonds, have held up surprisingly well – as I predicted at the beginning of the year.
Whether this continues will depend partly on whether Cameron calms down a growing flutter of opposition now growing more acute on both flanks of his centre-right grouping.
Where are the stirrings of unrest coming from? Liam Fox, the staunchly conservative defence secretary from Cameron’s own Tory party, has mounted a defiant attack on the Treasury’s promotion of steep cuts in military spending, claiming that the planned 19% cut over four years could have “grave consequences” for the country. The broadside is given additional strength by Britain’s continued embroilment in a long war in Afghanistan as well as in myriad military duties in other foreign trouble-spots.
Fox, a long-time rival to Cameron, has become the darling of the generals and admirals for standing up to his boss over defence cuts. The top brass say these could have a catastrophic effect not just on morale and performance of the armed forces, but more generally on the U.K.’s political standing abroad.
The other row is built around Vince Cable, the gritty economist who is one of the Liberal Democrats’ leading ministers. In his high-profile position as business secretary, he has assailed the avarice of the banking sector – normally one of the key supports of the Tory constituency. Cable’s view -- that the banks have still not worked through their penance for the mistakes leading up to the near-economic collapse of 2007-08 -- is shared by many in the U.K.
This puts pressure on the government not only to press on with controversial ideas -- hotly contested by the bankers -- for breaking up large banks, but also to bring in fresh taxes and regulatory hurdles on banking activities. These are both steps that banking representatives say could spur a series of important institutions to relocate their activities abroad.
Cameron, for the time being, is sitting pretty. Above all because of the malaise in the euro area, I am sticking to my view that sterling and U.K. bond prices will remain relatively firm, and that the coalition will hold through to the next election that will not take place for another four or five years. But that will depend on Cameron finding both a statesmanlike and a trouble-shooting touch to stifle dissent in both dissonant camps.
For the moment, the world’s investing classes are still buying U.K. government bonds. At the start of 2010, Britain’s triple A rating looked wobbly, rocked by be exaggerated (some might say, self-interested) statements such as that of Bill Gross of Pimco, who wrote in January: “The U.K. is a must to avoid. Its gilts are resting on a bed of nitroglycerine.” Anyone who acted on Gross’ statement and sold U.K. gilts would be nursing serious losses, in view of the steady rise in British government prices since then.
Along with the U.S. as well as other European states that are not members of economic and monetary union (EMU), Britain has benefited during the European sovereign debt crisis from “safe haven” flows of funds into non-euro currencies.
Sterling has been astonishingly steady this year with the Bank of England’s trade-weighted index (2005=100) hovering around 80 with only minor fluctuations. The phenomenon has been supported by confidence-inspiring assessments of the coalition government’s initial deficit-cutting initiatives. A recent assessment by the International Monetary Fund concluded that the U.K. government’s plans “greatly reduces the risk of a costly loss of confidence in public finances.”
All this could be put at risk if Cameron loses his knack for balancing acts. Picking simultaneous fights with the banks and the military would not be a sensible policy. My hunch is that he will do neither – which means that Fox may be strengthened, and Cable weakened, by the political arguments now raging around Westminster and Whitehall.
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