SURRENDERING SOVEREIGNTY:

Europe lacks scope to revive economy Rosemary Righter, 2/04/08, Times of London)

On display, yet again, is the contrast between America's rapid financial reflexes and the semi-paralysis inflicted on most of Europe's governments by the surrender of their powers to set national interest rates and the scant fiscal leeway available to them. Despite the gloomy January jobs data in the US, the chances are that America's economic retrenchment will be painful but shorter than seemed likely before the Fed acted and Congress rushed to supplement rate cuts with a hefty fiscal stimulus. There is little, by contrast, that most European governments can do to reverse the steep slides in consumer and business confidence that Eurostat is already recording.

With headline eurozone inflation hitting 3.2 per cent in January, the highest for a decade, and with strong upward pressures on wages in Germany and France, little mercy can be expected from the European Central Bank, while public debt and deficits are already too high in the major economies to allow for significant pump-priming. So far, so familiar. But this time there is no room for British schadenfreude, because the British economy is also running out of road.

As Chancellor, Mr Brown's favourite boast was “no more boom and bust”. It will haunt him from now on. “Prudent” fiscal policy, which he claimed almost to have invented, is about saving in sunny seasons against a rainy day. It is starting to rain hard. And Mr Brown has not been saving. The public finances are as sick as a soaked parrot. Alistair Darling has medicine ready, but it risks choking the patient.

Over the next five years, public spending is set to fall to an eight-year low as a proportion of national income, while taxes rise to a 24-year high. The Treasury's goal is to move current spending into the black in 2009-10, meeting Mr Brown's famous but shopsoiled golden rule about balancing current budgets over the economic cycle; and to keep public debt below 40 per cent of GDP, the other Brown golden rule. No less than 48 per cent of the “proceeds of growth” will pour into government coffers. But this assumes that the “proceeds of growth” will hold up, as taxes rise and public spending falls against a background of sagging house prices and weaker tax revenues from the City.

Keeping to an arbitrary and capricious 40% goal is obviously foolish, given how little else they can control anymore, but it's also impossible for housing prices to decline in the longer term given immigration levels.

Posted by Orrin Judd at February 4, 2008 7:54 AM