Cameron is ignoring the crisis on the continent—big mistakeby Rachel Reeves / January 25, 2012 / Leave a comment
The slowing European economy is receiving neither fiscal stabilisation nor monetary stimulus. Imposing punitive austerity measures and prolonged recession on countries with large deficits will not help them to address weaknesses in their economies. The real roots of the current crisis are therefore going unaddressed.
The decision, taken last month by the ratings agency Standard & Poor’s (S&P), to downgrade nine of the eurozone’s 17 member states was a humiliation for those nations. It was also a wake-up call—a reminder, if one were needed, that Britain cannot remain a passive spectator in this European crisis. There is an urgent need for Europe to check its pervading political disorganisation and sense of drift. Britain must play its part in this.
Almost half of our exports go to the euro area, and Britain’s banking system remains highly exposed to European credit risk. Uncertainty over the European situation is now adding to firms’ reluctance to hire and invest in Britain, added to which the austerity cuts of the past year and a half have hit consumer demand and confidence. The British economy is therefore in no position to withstand a deep European contraction, and certainly not a full-blown financial seizure.
Most of the commentary and diplomacy around the eurozone crisis has focused on the need for debt repayment and fiscal austerity. But just as the attempt to eliminate the deficit without a strategy for jobs and growth has failed in Britain, a focus on cuts and tax increases in Europe will be self-defeating if it prevents struggling economies from growing.
S&P said as much when explaining last month’s decision to downgrade, commenting that: “a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.”
To prevent this, eurozone leaders must follow the logic of monetary union and ensure the European Central Bank restores market confidence. It must become lender of last resort, just as the US Federal Reserve is for the dollar, the Bank of Japan for the yen and the Bank of England for sterling. The ECB must step in to support countries with financing problems; the European Financial Stability Facility, which currently has that responsibility, was also downgraded last month. China, with its huge reserves, won’t help if Europe’s own institutions refuse to play their part.