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Analysis
A question of bragging rights

A question of bragging rights

Debt once again fuelling Britain’s economy

by Bob Bischof in London

Mon 21 Mar 2016

Part of Britain's EU ‘leave’ campaigners’ strategy is to paint Europe, particularly the euro area, as a failing political and economic entity. They point to the UK’s superior growth rate – 2.2% in 2015 – and low unemployment, and boast about Britain being the fifth largest economy in the world, one which could easily stand alone.

There isn't much reporting in the British press about the latest figures out of Europe. In fact the EU has made good progress over the last few years.

Euro area unemployment was 10.3% in January, down from 11.3% a year earlier. In the 28 countries that make up the EU, unemployment was 8.9%, down from 9.8% in January 2015 – the lowest level since May 2009. Unemployment fell in 24 countries. In 2015, GDP grew by 1.6% in the euro area and 1.9% in the EU as a whole.

These unemployment figures are still disappointingly high and the growth rates lacklustre. But they are being achieved while countries put their public finances in order. Austerity is actually working – with a bit of help from the European Central Bank.

Wolfgang Schäuble, the German finance minister, has set the example with a second year of budget surplus, despite the problems in emerging markets and Germany’s migrant crisis, which saw over 1m refugees arrive last year.

Looking at how Britain achieved 2.2% GDP growth last year, with the annual deficit rising rather than falling and private household debt exceeding the catastrophic pre-crisis levels of 2008, I must ask who has the bragging rights here. Debt is once again fuelling the British economy through consumption rather than the hoped for revival in manufacturing and investment. The current account deficit has hit new records. And George Osborne's latest budget shows the chancellor of the exchequer is skating on very thin ice.

Brexit would make matters worse. It may trigger further depreciation of sterling – according to some economists to around parity with the euro – which could stoke inflation and force the Bank of England to raise interest rates. Outside the euro area, sterling is vulnerable to speculative surges and high volatility – much to the detriment of British exporters.

Osborne was trying hard on budget day on 15 March to balance the books with spending cuts and tax rises in a weakening economy. Not an easy task when he needs to keep his party and the country happy before the referendum.

Nonetheless, the people of Europe are getting fed up with austerity and their political elites, and falling for the extremists on the left and right. Mainstream politicians who support the need for prudence – and know that neither the state nor private households can live beyond their means in the long run – are paying a high price for their honesty and competence.

That is the policy followed by Germany. Britain on 23 June has to decide whether it will join the Germans in supporting this course.

Bob Bischof is Chairman of the German-British Forum, Vice-President of the German-British Chamber of Industry and Commerce, and a member of the OMFIF Advisory Board. This is No.16 in the series.

OMFIF's series on the UK EU referendum presents a wide variety of perspectives from Britain and around the world ahead of the 23 June poll. We are assuring a balance between many different points of view, in line with OMFIF’s overall neutral stance on the issue.

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