The MT Diary

Europe's other hapless Gordon; Singapore bounces back (but no celebrating); timid Tories.

by Howard Davies
Last Updated: 31 Aug 2010

First, a quiz question to tease your friends and relations over the holidays. Which EU country, not a member of the euro area, has a huge budget deficit, an economy still in recession, and a deeply unpopular Socialist government under a prime minister called Gordon who is almost certain to lose the general election scheduled for next spring?

Too easy, I guess. You shouted 'Hungary' in unison. The capital letter on 'Socialist' gave it away. New Labour doesn't like to think of itself that way. Gordon Bajnai, a modest and courteous economist, is not ashamed of the label.

There is one big difference between Budapest and London (apart from the goose and red cabbage). The IMF is in charge of its fiscal policy. The Hungarians may not think so, but that could turn out to be an advantage. They are getting on now with the painful adjustments they need, while we await our election before the bill is presented. So there is a good chance that they'll emerge from the slough of economic despond more quickly.

On a sunny winter Saturday, things did not look so gloomy in Pest. Since the forint has tumbled with the pound, it was a good place for Christmas shopping. The only drawback was that the 07.05 easyJet from Luton was full of a stag party, dressed in girly clothes, and well-oiled before take-off. I suppose you have to admire the stamina, but the impression Brits abroad give is of a country drinking itself into oblivion, with no thought for the morrow. David Hare's next play could be a re-imagining of the last days of the Roman Empire, with Gordon Brown as Nero.

If you need to go to Singapore, you shouldn't start from Budapest, but needs must. The upside is that I can now answer a Mastermind quiz on the shops in Munich airport.

Singapore has bounced back remarkably, after one quarter when the economy fell at an annual rate of 20%. The Chinese spending boom has pulled them along nicely, as it has the Australians. The hotels are buzzing again, even in the rainy season. And that ever so slightly bossy tendency has reappeared.

With my body clock still on Central European Time, I lounged in the bar of the Stamford Hotel watching the Manchester City-Birmingham game. At half-time (00:45 on their watches), I was thinking warmly of another bottle of Tiger when the waitress pointed out, politely but firmly, that I was the only guest left, and they were planning to close. 'It's only half-time,' I feebly protested. 'But you look tired, and bored,' she responded. The first wasn't strictly true, but I had to admit to the second. There's no talent in Birmingham, of course, but it takes a special skill to make a Man City team including Tevez, Santa Cruz and Wright-Phillips play boring football. Mark Hughes is up to the job, however. So it was off to bed for me. I suppose I should be grateful to him for saving me from myself.

In Singapore, and indeed anywhere else one goes these days, there is growing concern, and puzzlement, about the UK.

To foreign eyes, there is a dangerous appearance of drift. The public sector's deficit mounts ever higher, with the rating agencies muttering about a downgrade, yet the Government seems unconcerned. With interest rates close to zero, sterling has no visible means of support if another sell-off threatens. Only the dollar's chronic weakness keeps the pound out of the spotlight. The financial authorities all say different things about what needs to be done to the banks. There is a desperate need for positive direction from the top, yet the election is still six months away. Why, people ask, is there not more public and media pressure for an election now, in the national interest?

It is hard to know the answer. It just doesn't happen that way, is the best one can do. I suppose the truth is that the Tories don't especially want to be in power just now, and are hoping that the economy will have shown a few signs of life by the time they come into their dismal inheritance. Then they can get on with the business of knocking it on the head with swingeing spending cuts.

The risk is that in the meantime there is a severe loss of confidence, we face a good old-fashioned gilt-buyers' strike, and sterling falls a lot further before overseas investors can be persuaded that our debt represents a buying opportunity. A sharp fall in sterling, coinciding with the VAT increase in the pipeline, could create an uncomfortable spike in inflation.

But if I go on this way, I'll soon be accused of being unpatriotic and of talking the economy down. There must be some offsetting good news on the horizon.

I suppose there is, but on the distant horizon is precisely where it remains just now. Manufacturing ought to be getting a boost from the devaluation, and it is, but the benefit is so far being seen more in wider margins than in increased output, so the impact on employment is small. Investment banking (known in Goldman Sachs as 'doing God's work') is more profitable, but that doesn't play well with anyone other than the Masters and Mistresses of the Universe - now friendless folk, shunned by polite company.

BBC management is enjoying life, too, benefiting from ITV's troubles. Again, oddly, their chunky pay packages, augmented by free parking, do not make the nation's heart sing. We are a country of real curmudgeons, and no mistake.

- Howard Davies is the director of the London School of Economics

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