He vows to stay the tough course he has set, and warns that, if we don’t, the markets will wreak havoc. I was leader writer at the Financial Times when Norman Lamont gave that speech at the Mansion House dinner in 1991.
Twenty years on, I listened to George Osborne give essentially the same speech last week. Osborne said he was determined to stick to Britain’s unprecedentedly tough deficit reduction plan. He vowed not to be blown off course, however “choppy”’ things get. At the time, the FT was firmly backing the ERM policy, but we leader writers all feared it was doomed. The FT’s leader after Lamont’s speech said: “It is not just that the chancellor is complacent, but also that he might as well commend what he cannot alter.” And that was the point of the ERM – it was not impossible but very hard to change course. Lamont clearly privately wanted to. But there was no way out. He persevered, but within a year, despite all the tough talk, sterling eventually crashed out of the ERM.
I hope Osborne is reflecting on the lessons of this period – boxing yourself in so hard to one economic policy goal is dangerous. Talking tough doesn’t make you right and, in the end, doesn’t make you credible. There is an important lesson here for EU policymakers contemplating the crisis in Greece. There are three tests for a credible economic plan. First, there must be a transparent plan with clear medium-term goals. Second, that plan must have sufficient political support for it to be implemented. Third, it has to work – which means that the goals must be realistic and achievable, the plan must deliver results and the policy must be flexible enough to deal with unforeseen events.It is this third test that countries across Europe are failing.
Osborne and his fellow EU finance ministers like to lecture Greece and Portugal about the need for austerity. But austerity is not going to solve the solvency problem these countries face. Locked into the euro – unlike Britain, thankfully – Greece and Portugal have no exchange rate flexibility and are stuck with the same rising interest rates as countries such as Germany. Combined with drastic fiscal tightening this is a toxic cocktail. Osborne’s logic is that if Greece, Ireland and Portugal had adopted the same approach that he is taking, they would not be facing such severe and deepening crises. The problem for him – and for them – is that they did. In fact, the Portuguese Chancellor went one better by introducing two VAT rises in the past year. But what they have all discovered is that it doesn’t matter how much they cut spending or how much they raise taxes; if they can’t create jobs and growth, their debt and deficit problems get even worse and market confidence falls further still.
We are at the point where more austerity packages and further tough talking make things worse. EU finance ministers need to face up to the fact that Greece needs economic growth to succeed. It is now very hard to see how Greece can stay in the single currency without a change of strategy on fiscal austerity and a substantial restructuring. In Britain – even outside the euro – my concern is that we are starting to see the same pattern. The economy has not grown over the past six months and unemployment is set to be 200,000 higher than expected. I fear it will do long-term damage to our economy, undermine long-term credibility, investment and confidence – and ultimately make it harder to get the deficit down.
Unlike Lamont, Osborne has the flexibility to set a new and credible course. That is why I find it so frustrating that he has boxed himself in and now has to stubbornly ignore the mounting evidence that it is not working. The cautious and credible thing for Osborne to do is not plough on and simply hope for the best, but to change course now. If he finds himself singing in the bath, it will be too late.
