Amid the frenetic activity surrounding the response to last week’s riots, a cautiously-written, but telling article by George Osborne and a group of other finance ministers in today’s FT risks slipping by unnoticed.
The piece is moderate in tone, but has the chance to be controversial on a number of levels:
1) It calls for other countries to follow broadly the UK deficit reduction plan. When the ministers write that there should be “credible fiscal consolidation in countries with large deficits”, it is a clear message to western economies: cut your deficits now.
2) It shows how reliant Osborne thinks the UK (and other indebted countries) will be on demand from other countries as they cut their own budgets: this will include Brics economies as well as larger economic powers with surpluses, such as Germany. The piece says deficit reduction “must be matched by a rebalancing of global demand in order to support growth”. Osborne’s critics would say this risks putting UK growth at the mercy of big emerging economies. Do we really want to rely on China revaluing its currency to support demand, for example? It is something the Chinese have been very reluctant to do in the past.
3) The piece makes barbed comments about both the eurozone and the US. On the former, the ministers write: “The eurozone in particular must take decisive steps to reassure markets.” The implication is that it is not doing so at the moment, which adds to the criticism Osborne has made publicly about the need for greater fiscal integration in the eurozone.
And on the US: “The United States plays an especially important role in restoring confidence. Credible fiscal commitments are in its own interests and the world’s.” Again the implication is that the US does not yet have “credible fiscal commitments”. Osborne pointed out in the Commons last week that Barack Obama’s original deficit reduction plan was close to his own. This piece suggests Osborne (and others) believes the fact that it had to be changed substantially to win Republican support has diluted its credibility: a suggestion that could alienate the chancellor’s natural right-wing allies in the States.
Jim Pickard
Kiran Stacey