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Greg Hands, the Tory MP for Hammersmith and Fulham, is a self-avowed
Thatcherite, best known around Westminster for his membership of the
socially conservative Cornerstone group and his Eurosceptic views. However,
he also has a German wife and speaks the language fluently.
Last week, as news broke of a startling interview with Peer Steinbrück, the
German finance minister, Hands put his linguistic skills to good use.
Steinbrück had thrown aside diplomatic protocol and laid into the policies of
the British government, specifically its attempts to haul the economy out of
recession.
“The speed at which proposals are put together under pressure that don’t even
pass an economic test is breathtaking and depressing,” he told Newsweek
magazine.
“Our British friends are now cutting their value-added tax [from 17.5% to 15%]
. . . Are you really going to buy a DVD player because it now costs £39.10
instead of £39.90?
“All this will do is raise Britain’s debt to a level that will take a whole
generation to work off.” Gordon Brown’s approach, he said, was “crass
Keynesianism”.
On reading Steinbrück’s comments, Hands immediately called an old friend,
Steffen Kampeter, a German MP and economic adviser to Angela Merkel, the
chancellor, to ask what he thought. As it happened, Kampeter had just given
an interview to Der Spiegel magazine giving full support to Steinbrück – and
was more than happy to issue a statement in English so the British public
could also hear his views on what he described as a “complete failure of
Labour policy”.
Europe’s finance ministers had made no secret of their irritation at Brown’s
conduct when he was chancellor at European Union meetings, frequently
lecturing them on fiscal responsibility and often pointedly refusing to
listen to their speeches, reportedly removing his headphones.
“After years of lecturing us on how we need to share in the gains of
uncontrolled financial markets, Labour politicians can’t now expect us to
share in their losses,” said Kampeter.
On Thursday, armed with the explosive comments, Hands toured the House of
Commons press gallery brandishing copies of the statement.
The government tried to brush off the remarks as the product of internal
German politics. Ministers were, however, rattled enough to get the British
ambassador to Germany to ring the finance ministry formally to complain
about them.
For David Cameron, the Tory leader, who has been on the back foot during the
financial crisis, it was manna from heaven. Now Tory criticisms of Brown’s
giveaway prebudget report were being echoed in Germany. It was all the
sweeter because Brown had claimed that the Tories were isolated in their “do
nothing” response to the crisis.
Even better, following the warning by George Osborne, the shadow chancellor,
last month that the government’s fiscal irresponsibility was undermining the
pound, it coincided with sterling’s plunge to a record low of just €1.11
against the single currency, with some tourist rates dropping to
euro-sterling parity.
At prime minister’s questions on Wednesday, Brown had committed a slip of the
tongue, saying that he had “saved the world” when he meant to say that he
had saved Britain’s banks. Now a very important economic figure – the
finance minister of the world’s third-largest economy – was saying he was
doing far from that.
Who is right? Has Brown seriously misjudged his response to the recession? And
does this spat have any wider ramifications for British consumers?
Angela Merkel, the German chancellor, found a homely metaphor when she
addressed her Christian Democrat party’s annual conference earlier this
month. The theme of her speech was Verantwortung, or responsibility, and her
tone was almost Thatcherite. “As we are in Stuttgart, you should ask a
Swabian housewife,” she said. “She would give us some short and correct
advice, which would be this: you cannot live beyond your means in the long
run.”
Merkel was not finished. “We are not going to participate in this senseless
race for billions,” she added. “We have to have the courage to swim against
the tide.” Governments had a responsibility to future generations of
taxpayers.
The German fear of debt is striking – having obligations of just a couple of
hundred euros on the national debt register can see someone refused credit.
So the response of Merkel and her government to the recession was
predictable. She has refused to throw money at the problem, as Brown has
done. Merkel has become known as “Frau Nein”, or Mrs No, for her refusal to
act.
Contrary to the Labour spin, Steinbrück is not an isolated figure in German
politics. Merkel’s reluctance to act and Kampeter’s intervention show the
concerns about the British approach go right to the top.
The British response to the crisis has been the opposite of Germany’s. When
Alistair Darling, the chancellor, unveiled his borrowing forecasts last
month, their scale shocked the markets.
Instead of a £38 billion budget deficit next year, it would be £118 billion.
Britain’s national debt would double to more than £1,000 billion. Brown’s
fiscal rules, which he had said were inviolable, were unceremoniously
dumped.
While a fiscal boost may have been desirable, and was supported by the
International Monetary Fund and the Bank of England, Britain was probably
the least well-placed country to deliver it, with the budget deficit already
high after years of rapidly rising public spending.
Public borrowing will rise to 8% of gross domestic product next year, a
postwar record, and could go higher if the Treasury’s forecasts of recovery
prove too optimistic. Most of that, however, would have happened even
without a Vat cut.
In Germany, by contrast, the government’s cautious approach means that, though
it will suffer a recession as deep as Britain’s, public borrowing will rise
to only 3% of GDP.
Critics of Germany’s approach say that, as the world’s biggest exporter, it is
adopting a “free rider” approach, taking advantage of other countries’
willingness to spend money while keeping a tight hold on its own purse
strings. When the recovery comes, so the theory goes, they will be better
placed to take advantage of it, having not run up huge bills in the
meantime.
Ray Barrell, an economist with Britain’s National Institute of Economic and
Social Research, said this was exactly the right time for governments to try
to boost their economies. With interest rates limited in their impact
because of the credit crunch, it was necessary for countries to adopt
“Keynesian” remedies.
“It is widely accepted that there is some need for fiscal action in Europe,”
he said. “Peer Steinbrück has criticised the recent fiscal package in the UK
as endangering solvency with no net benefit in the long run. We would argue
the reverse.”
Economists at Citigroup warned on Friday that Germany’s reluctance to provide
a big fiscal boost, allied with constraints on other single currency
economies, would mean the eurozone recession would be longer than elsewhere.
Even in Germany there is dissent over whether the government is doing enough.
Michael Glos, the economics minister, has called for tax cuts of €25 billion
(£22 billion) from January 1, bigger than Brown’s public spending boost last
month. He is backed by leading economists and institutes, who have
criticised Merkel for not giving a bigger boost to the economy.
While the arguments on which approach is right will not be settled until the
recovery begins, they do have an effect on the situation now – and on
consumers in particular.
As far as the financial markets are concerned, Germany’s fiscal conservatives
are winning the day. While there are plenty of economic problems in the
eurozone, fears about the rise in UK debt have unsettled currency dealers
and persuaded them to desert sterling, something that became increasingly
evident last week as the pound plunged to record low after record low
against the euro.
Harold Wilson, the Labour prime minister who presided over a devaluation of
the pound, insisted that the “pound in your pocket” had not lost its value.
Britons are finding that the pound in their pocket is suddenly worth a lot
less.
Last week, at St Pancras Eurostar terminal in London, British travellers were
coming to terms with being the poor men and women of Europe.
Ann Lyon, a lecturer en route to Brussels, had just exchanged some currency.
“It is a bit disconcerting,” she said. “I asked for £40 worth of euros and I
got told I was getting €40. I always thought in terms of €3 for every £2, so
it is a huge difference. We have got in the habit of feeling rather smug
when we look at prices in Europe, but that is all over now.”
Eileen Marshall, a retired librarian from Wakefield, who was returning from a
holiday to France, agreed. She said: “Avignon is pretty pricey anyway but I
must admit I got a shock when the pound went down so far. I remember when I
first went this year, it was €1.39, so I didn’t get many euros then. Then it
went down to €1.28, and now look at it. We’ve had a very nice time of it
travelling to Europe for a long time, and now that’s all changed.”
It is not just the pound’s drop against the euro. A few months ago, with
sterling at more than $2, travel supplements were full of adverts for
shopping trips in New York. Now it is very different.
“You can definitely can tell a difference compared with six months ago, or
even three months ago,” said Katharine Haywood, 35, stepping off a
transatlantic flight at Heathrow. “I go to New York a few times a year for
work and this time it was so obvious in hotel bills and expenses like that.
I will still go shopping when I go there, but I’ll shop for bargains rather
than just assuming that everything is a deal.”
The ramifications are being felt not just by those travelling abroad, but also
by businesses in Britain.
The fall in the pound, coupled with the severe recession in the building
industry, is reversing one solid trend of recent years: immigration. The
number of arrivals from eastern Europe dropped by 39% in the July-September
quarter compared with a year earlier and many earlier arrivals are returning
home.
“I am losing 30% of my pay packet,” said Janek Lutomski, a Polish builder from
Devon. “It used to 6 or 6.5 zlotys to the pound but now it has dropped to
4.5. A lot of people who have been in England for a few years always wanted
to go back to Poland in the end, and when the pound dropped, they thought
now was a good time to go. What is the point in paying rent and high living
costs if the pound is so low?”
Without such a ready supply of cheap and skilled labour, the economy’s
recovery will be more difficult.
It is, however, not all gloom. Stephen Alambritis, of the Federation of Small
Businesses, said the pound’s fall offered an opportunity. “If we’re clever
about this as a nation, we could see an export-led recovery,” he said. “Our
overseas embassies should be refocused on this and concentrating on
developing our exports.
“It is swings and roundabouts – good for exporters, very difficult for
importers. I hope more people will visit the UK, and that will help some
businesses. Ideally the Germans will go to Regent Street rather than New
York for their shopping.”
They might, but it is a long shot in such straitened times.
The war of words between Britain and Germany apparently came to an end on
Friday in Brussels with a harmonious “family photo” at the summit of EU
leaders and Brown insisting that there was now unanimity on tackling the
crisis.
He stressed that all 27 EU countries had signed up to an “ambitious”
pan-European economic stimulus package worth €200 billion, designed to dig
the continent out of recession, equivalent to 1.5% of GDP.
But despite Brown’s claims of success, EU diplomats said Britain had been
forced to give ground to Germany over the 1.5% pledge. Brown had wanted the
summit to commit countries in writing to introducing economic stimuli worth
“at least” 1.5% of GDP. Under German pressure, this was watered down to
“about” 1.5%.
“The €200 billion is more figurative, meaning that if everyone committed 1.5%
then it would all add up,” explained one diplomat, adding that the text
agreed by leaders had been left deliberately flexible.
The pledge to commit “about” 1.5% of GDP could let Germany off the hook,
particularly if other countries announce bigger packages.
As the self-appointed “saviour of the global economy” Brown will know that the
political fallout for him if his strategy fails will be big. Voters have
suddenly been given a reminder that not everybody believes he is going the
right way about solving the economic crisis.
Additional reporting: Jonathan Oliver, Holly Watt, Nicola Smith, Michael
Woodhead.
