LONDON — Having kept their own currency and central bank, British politicians pride themselves on their foresight in staying outside the beleaguered euro.
But a dramatic move by the Bank of England to offer billions in cheap loans to banks to kick-start lending underlines how standing aloof from the single currency has only helped Britain so much.
Caught in the crosswinds of the euro zone debt crisis, and confronted by a barrage of gloomy statistics, the British government has acknowledged the need to jolt the economy out of a double dip recession.
Still, there is no sign of a more fundamental policy shift, for example to tax cuts or to curb an austerity program that will see the biggest public spending cuts in decades.
Addressing a banquet in the City of London, Britain’s main financial district, late Thursday, the chancellor of the Exchequer, George Osborne, dwelled at length on the harshness of an environment that is, in his words, “as difficult perhaps as any our country or our continent has faced outside of war.”
In his speech Mr. Osborne seemed to modify the political message that austerity would provide the platform for a quick economic rebound ahead of Britain’s next elections, expected in 2014. Instead he argued that a hair shirt was necessary to “keep Britain safe from the storm.”
The mounting economic gloom was compounded Friday by Britain’s Office for National Statistics, which said the country’s trade deficit in April was £4.4 billion, or $6.9 billion, compared with £3 billion in March and the widest gap since August 2005.
There was an 8.6 percent month-on-month reduction in exports, and construction activity was down 13 percent in April from March. While there is no doubt that the euro zone crisis has worsened Britain’s slowdown, its economy was laboring anyway from the consequences of the country’s catastrophic financial crash.
Unlike Germany or France, Britain is in recession, with a budget deficit of more than 8 percent in the last fiscal year. According to the European Commission, Britain’s gross debt level will exceed 91 percent of gross domestic product this year and 94 percent in 2013.
Unemployment hovers at around 8 percent. All of which has intensified the austerity debate in Britain with opposition politicians appealing for a switch to “Plan B” to revive growth.
“Britain is the only major economy in the world apart from Italy that is in recession,” Ed Balls, the shadow chancellor, told the BBC Friday.
“Our economy is flat on its back and the chancellor’s policy has failed.” By contrast Mr. Osborne sees his deficit-reduction program as crucial to maintaining the confidence of the financial markets that permits Britain to borrow more cheaply than almost all of its European neighbors, including several with lower budget deficits.
Politically, budget reduction is also the cornerstone of the detailed coalition agreement that forms the basis of the Conservative and Liberal Democratic government that took power in May 2010.
According to one parliamentarian from the Conservative Party, which is led by Prime Minister David Cameron, the British economy may be “tanking.”
Yet a full U-turn cannot be contemplated because deficit reduction is at the heart of the coalition program, and because of the loss of face it would entail, said the parliamentarian, who spoke on condition of anonymity due to the sensitivity of the subject.
“Cameron and Osborne trade a great deal on their competence and U-turns do not smack of competence,” he said.
“Political mythology dictates that you do not do U-turns if you want to succeed.” So, for the time being, the Bank of England, rather the Treasury, is in the vanguard of efforts to arrest further stagnation.
After Thursday’s announcement, about £80 billion could be pumped into the system on condition that the money goes to free up loans to business and domestic borrowers.
European stocks rose Friday after the Bank of England announced the credit-easing measures, with bank shares leading the rally.
Yet many are skeptical about the prospects of success in an environment in which creditworthy firms prefer to stockpile cash rather than to borrow to expand. Commercial banks are also likely to remain reluctant to lend to riskier clients.
While welcoming the new initiative, Graeme Leach, chief economist at the Institute of Directors, said that “the liquidity scheme will need to be massively expanded” if contagion spreads across the euro zone.
“The funding-for-lending scheme helps the supply of money and the demand for it, by lowering the cost of borrowing,” he said.
“But the core problem remains. Companies alarmed by the euro crisis will not be eager to borrow regardless of the cost."
“Growth cannot wait,” added John Longworth, director general of the British Chambers of Commerce. “In addition to these schemes, the government must also look to more radical measures.”
“Investment in infrastructure to create robust rail, air, maritime, energy and digital networks could be privately funded or kick-started by the public sector, with pension funds and sovereign wealth funds able to purchase the assets when the projects are completed,” he added.
One of the ironies of Britain’s economic plight was evident from a passage of Mr. Osborne’s speech in which he argued that “a resolution of the euro zone crisis would do more than anything else to give the U.K. economy a boost.”
He then promised that Britain would stay outside further European economic integration, including any banking union in the single currency area, and that he would “protect our taxpayers from lasting euro zone entanglements that would cost us dearly.”
nytimes.com
But a dramatic move by the Bank of England to offer billions in cheap loans to banks to kick-start lending underlines how standing aloof from the single currency has only helped Britain so much.
Caught in the crosswinds of the euro zone debt crisis, and confronted by a barrage of gloomy statistics, the British government has acknowledged the need to jolt the economy out of a double dip recession.
Still, there is no sign of a more fundamental policy shift, for example to tax cuts or to curb an austerity program that will see the biggest public spending cuts in decades.
Addressing a banquet in the City of London, Britain’s main financial district, late Thursday, the chancellor of the Exchequer, George Osborne, dwelled at length on the harshness of an environment that is, in his words, “as difficult perhaps as any our country or our continent has faced outside of war.”
In his speech Mr. Osborne seemed to modify the political message that austerity would provide the platform for a quick economic rebound ahead of Britain’s next elections, expected in 2014. Instead he argued that a hair shirt was necessary to “keep Britain safe from the storm.”
The mounting economic gloom was compounded Friday by Britain’s Office for National Statistics, which said the country’s trade deficit in April was £4.4 billion, or $6.9 billion, compared with £3 billion in March and the widest gap since August 2005.
There was an 8.6 percent month-on-month reduction in exports, and construction activity was down 13 percent in April from March. While there is no doubt that the euro zone crisis has worsened Britain’s slowdown, its economy was laboring anyway from the consequences of the country’s catastrophic financial crash.
Unlike Germany or France, Britain is in recession, with a budget deficit of more than 8 percent in the last fiscal year. According to the European Commission, Britain’s gross debt level will exceed 91 percent of gross domestic product this year and 94 percent in 2013.
Unemployment hovers at around 8 percent. All of which has intensified the austerity debate in Britain with opposition politicians appealing for a switch to “Plan B” to revive growth.
“Britain is the only major economy in the world apart from Italy that is in recession,” Ed Balls, the shadow chancellor, told the BBC Friday.
“Our economy is flat on its back and the chancellor’s policy has failed.” By contrast Mr. Osborne sees his deficit-reduction program as crucial to maintaining the confidence of the financial markets that permits Britain to borrow more cheaply than almost all of its European neighbors, including several with lower budget deficits.
Politically, budget reduction is also the cornerstone of the detailed coalition agreement that forms the basis of the Conservative and Liberal Democratic government that took power in May 2010.
According to one parliamentarian from the Conservative Party, which is led by Prime Minister David Cameron, the British economy may be “tanking.”
Yet a full U-turn cannot be contemplated because deficit reduction is at the heart of the coalition program, and because of the loss of face it would entail, said the parliamentarian, who spoke on condition of anonymity due to the sensitivity of the subject.
“Cameron and Osborne trade a great deal on their competence and U-turns do not smack of competence,” he said.
“Political mythology dictates that you do not do U-turns if you want to succeed.” So, for the time being, the Bank of England, rather the Treasury, is in the vanguard of efforts to arrest further stagnation.
After Thursday’s announcement, about £80 billion could be pumped into the system on condition that the money goes to free up loans to business and domestic borrowers.
European stocks rose Friday after the Bank of England announced the credit-easing measures, with bank shares leading the rally.
Yet many are skeptical about the prospects of success in an environment in which creditworthy firms prefer to stockpile cash rather than to borrow to expand. Commercial banks are also likely to remain reluctant to lend to riskier clients.
While welcoming the new initiative, Graeme Leach, chief economist at the Institute of Directors, said that “the liquidity scheme will need to be massively expanded” if contagion spreads across the euro zone.
“The funding-for-lending scheme helps the supply of money and the demand for it, by lowering the cost of borrowing,” he said.
“But the core problem remains. Companies alarmed by the euro crisis will not be eager to borrow regardless of the cost."
“Growth cannot wait,” added John Longworth, director general of the British Chambers of Commerce. “In addition to these schemes, the government must also look to more radical measures.”
“Investment in infrastructure to create robust rail, air, maritime, energy and digital networks could be privately funded or kick-started by the public sector, with pension funds and sovereign wealth funds able to purchase the assets when the projects are completed,” he added.
One of the ironies of Britain’s economic plight was evident from a passage of Mr. Osborne’s speech in which he argued that “a resolution of the euro zone crisis would do more than anything else to give the U.K. economy a boost.”
He then promised that Britain would stay outside further European economic integration, including any banking union in the single currency area, and that he would “protect our taxpayers from lasting euro zone entanglements that would cost us dearly.”
nytimes.com
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