The mt diary: Howard Davies

After Greenspan, who?; Gallic gloom; prepare to tighten belts; cost of Iraq threat to PM.

Last Updated: 31 Aug 2010

On a long car journey, the Davies family were talking, as you do, about the people we regard as heroes and villains in the world today. The Aussies did well in the villain stakes; heroes were harder to find. I made a few suggestions but prevaricated.

My eldest son forced me off the fence. 'Who is really your number one hero - is it Alan Greenspan or Eric Clapton?'

It's a tough one and getting tougher as the Fedmeister approaches retirement at last. (There is no statutory retirement age for guitarists, which is lucky for Keith Richards.) Greenspan's record has been quite outstanding on inflation and growth, though some argue that he sat back while the bubble inflated, and others believe that the US is on the verge of another dangerous expansion, stimulated by an over-loose monetary policy.

It will be a little while before we can be sure about that, but my hunch is that Greenspan's high reputation will survive this episode relatively intact.

Succeeding him will not be easy. The runners and riders are saddling up. Ben Bernanke is the insiders' choice, but Martin Feldstein and Glenn Hubbard - thought to be more on the President's wavelength - are also in the chase. So far, there's been no mention of Clapton, no doubt on the grounds that he's British. But if Mervyn King ever stumbles, Gordon Brown could do a lot worse.

In France, of course, they don't do rock stars, except ersatz Elvis-impersonators like Johnny Hallyday. But they do offer poets, and one of them is their prime minister.

Dominique de Villepin was the matinee-idol foreign minister who irritated the Americans so much in the run-up to the Iraq war. His appointment to the Matignon by Chirac seemed an extraordinary response to the referendum result, and his popularity rating was almost invisible. Yet a trip to France at the end of the summer revealed that, malgre tout, he is on the way up. His high-profile opposition to a - possibly imaginary - Pepsi threat to the independence of Danone was just the sort of thing to appeal to the French distrust of les Amerloques. It's hard to believe that standing up for the inalienable rights of Express Dairies to lose money would have the same effect here.

The French remain, however, full of gloom: 10% unemployment is the heart of the problem. Delocalisation, whereby French jobs disappear to India and China, seems to have a higher profile there - and losing the Olympics didn't help. The only fun they've had lately was seeing Peter Mandelson buried in an avalanche of Chinese bras.

You would need a heart of stone not to take some pleasure in all this Gallic misfortune. But France is a huge market for the UK, so it would be better for us if the French cheered up. Perhaps we should let them win the Six Nations.

One thing that would go down well would be the abandonment of the British EU Budget rebate, or le cheque Britannique, as the French know it.

We are quite clear about the merits of the rebate. It's our money and we want it back. The French see things differently, as a pamphlet from Notre Europe, a think-tank founded by Jacques Delors, explains. In the first place, they do the numbers differently, so that it is not at all so clear that we are uniquely disadvantaged. But then they point out that if we all insisted on getting back from the EU the precise amount we put in, there would be no point in the whole exercise. The Budget must be about doing things collectively that benefit the entire Union in the long run, and which promote 'solidarity'.

When the French invoke the word solidarity, you know their argument won't fly on this side of the Channel. As Margaret Thatcher might have said, 'there's no such thing as solidarity'. Yet in France it is a catch-all term to justify any policy that lacks obvious logic.

If the French ask Gordon Brown to give up his cheque to promote European solidarity, I can imagine what his reply will be. But with or without a generous contribution from our community partners, next year's public spending round looks like being tight. The Commission may even declare us to be in 'excessive deficit', under the terms of the Maastricht Treaty (which we did sign, remember). Growth forecasts are being cut left, right and centre. Both the Bank and the CBI are less optimistic than they were.

Though corporate profitability is healthy, consumer spending is flagging - which is bound to reduce VAT receipts.

So it may be that even for favoured sons like the NHS and the school system, belts will have to be tightened. The Golden Rule can surely not be revised again to allow even more borrowing. Treasury speechwriters may need to reach back to the '70s - phrases such as Tony Crosland's 'the party's over' may come in handy next winter.

And if belts really are pulled in a hole or two, people might begin to focus on the cost of our boys in Iraq, about which the Government likes to say as little as possible.

A quick flit to Chicago the other day reminded me that in the US, the war is more controversial now than it was two years ago. The Bush administration is on the defensive. If the security situation in Iraq remains as bad, I forecast difficult months ahead for the PM, as the pressure to cut costs and commitment mounts.

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

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