Britain has watched Europe’s sovereign debt crisis from the sidelines without a clear government, without a credible fiscal policy and without contagion from the markets.
This luck will not last if fiscal policy remains unchanged for long.
With Gordon Brown’s resignation gambit today, the chances of a rainbow alliance has grown and the chances of a Conservative Liberal alliance has declined a bit, although Mr Cameron must still be favourite to be prime minister. Whoever gains power, the economic need for a fiscal strategy will immediately be clear. And there is no European sugar daddy to bail Britain out, now the UK shunned the eurozone rescue package.
If the Treasury does not tell the new chancellor the time for fiscal games is over, expect that message to come from the Bank of England on Wednesday.
The Bank is going ahead with its quarterly inflation report as planned and says it does not see the communications challenge as particularly tricky. Mervyn King has already called repeatedly for a credible fiscal policy. That has gained headlines but had no wider significance. Now the stakes are really high. The next government may depend upon it.
