Subject: An Irish bail-out and a British nightmare - Stephens - FT
From: "Michael Andrews" <[email-masked]>
To: "Hunter Biden" <[email-masked]>, "Devon Archer" <[email-masked]>, "Eric Schwerin" <[email-masked]>, "Curtis Hastings" <[email-masked]>
Date: Mon, 22 Nov 2010 14:55:56 -0500

Please read, I think the ramifications may be similar for US, if out  
right wing seeks deep cuts to soon.

An Irish bail-out and a British nightmare

By Philip Stephens
Published: November 22 2010 19:45 | Last updated: November 22 2010 19:45
This is not the time to gloat. Heavily indebted Britain is borrowing  
another £7bn or so to lend to catastrophically indebted Ireland. Tory  
Eurosceptics are not sure whether to cheer or jeer – to savour the  
eurozone crisis or to berate David Cameron’s government for  
contributing to the Irish bail-out.

As it happens, Ireland’s property-boom-turned-banking-bust had little  
to do with its membership of the single currency. Ireland is not  
Greece. The closer parallels are with Iceland and, dare one say it,  
Britain. Gordon Brown got precious few things right as prime minister,  
but his bank rescue package probably saved Britain from Ireland’s fate.

EDITOR’S CHOICE
Philip Stephens: A referendum lock on Britain’s ambition - Nov-15

More from Philip Stephens - Aug-23

Philip Stephens: Cameron keeps a rendezvous with reality - Nov-08

Philip Stephens: Obama speaks the truth about power - Oct-28

Philip Stephens: Spending cuts fail fairness test - Oct-11

Those who imagine the euro to be responsible for Europe’s ills are  
left to explain Britain’s financial mess or why, say, France has ended  
up with a much smaller fiscal deficit.

As for Britain’s contribution to the Irish package, George Osborne was  
suitably dismissive of his critics. The chancellor – no fan of the  
euro – observed that a carping “we-told-you-so” approach scarcely  
amounts to an intelligent economic policy.

The self-interest behind the British loan (those fulminating that the  
money would be better spent on schools and hospitals should note it is  
a loan) is self-evident. Britain is Ireland’s biggest creditor. Its  
banking system is heavily exposed to Ireland’s banks. So are its  
export industries: Ireland is a bigger market for British goods than  
the four Bric countries put together.

This is before you get to less tangible things such as neighbourly  
solidarity and sustaining the political trust required to safeguard a  
fragile peace in Northern Ireland. I heard one Tory Eurosceptic  
declare that Britain’s duty was to help Ireland reclaim its  
sovereignty by forcing it out of the single currency. There is a  
contradiction in there somewhere.

On the other hand, there is nothing like someone else’s misfortune to  
make people feel good about their own troubles. Listening to the  
sceptics was to imagine that Britain’s recovery is now plain sailing.  
If only that were so. Britain has just about sorted out its banks,  
but, as far as making inroads into the deficit is concerned, it is  
about where Ireland was a year ago.

At first, the vigour with which Dublin wielded the spending axe won  
plaudits from bond markets. But the deflationary impact of the cuts  
has since seen the deficit widen. That is the fear haunting Britain as  
its own cuts bite into Whitehall budgets.

The nervousness is apparent at the Bank of England, where the monetary  
policy committee has all but suspended its inflation target. The MPC  
could never admit as much, of course. But all the evidence says it has  
concluded that sustaining economic recovery counts for more than  
keeping prices down.

We are not talking here about letting inflation rip. Rather, the MPC  
seems to have decided that it can live with rises in the consumer  
prices index of 3 per cent or so – a percentage point above the  
official target of 2 per cent.

On the other hand, inflation as measured by the more widely recognised  
retail prices index looks firmly stuck above 4 per cent. And the  
Bank’s own forecasts suggest that the pace of price rises will  
accelerate in coming months. It will be 2012 before the official  
target comes back into full view.

Mervyn King, the Bank governor, is one of the foremost fiscal hawks.  
He has promised Mr Osborne that the MPC stands ready to pump even more  
cheap money into the economy if the recovery falters as a result of  
the fiscal squeeze. With the base rate already 0.5 per cent that will  
be easier said than done.

That said, the MPC has made an intelligent choice. Competitive  
austerity may be the current European fashion, but growth is the sine  
qua non of successful repair of the public finances. Governments  
cannot deflate their way back to budget balance – a proposition that  
Ireland’s latest austerity package may yet test to destruction.

Rising inflation, though, carries its own costs. It cuts household  
incomes and redistributes from savers to borrowers. It has  
particularly harsh effects on those dependent on fixed incomes – the  
more so at a time of historically low interest rates.

When British policymakers congratulate themselves for not swapping  
sterling for the euro what they really mean is that keeping the pound  
has given them the chance to devalue it. Sterling is now worth about  
20 per cent less than it was three years ago.

What the policymakers do not say is that they have simply chosen  
higher inflation over more direct ways of taking money from consumers.

Inflation can also develop a mind of its own; a little can quickly  
become a lot if wages start to chase prices. A cursory glance at  
Britain’s postwar history tells you that the competitive advantages  
that flow from devaluation are fairly easily squandered.

Britain needs buoyant export markets – starting with Ireland. The real  
nightmare for Mr Osborne is a combination of faltering growth and  
rising inflation. No, there is nothing yet for Britain to gloat about.