UK: SMITH ON ECONOMICS - PROGNOSTICATIONS OF THE SEASON. - Who will win the election? Will Britain apply for EMU membership? Is boom-and-bust a thing of the past? These three questions, suggests David Smith, make 1997 a momentous year. David Smith sugges

Last Updated: 31 Aug 2010

Who will win the election? Will Britain apply for EMU membership? Is boom-and-bust a thing of the past? These three questions, suggests David Smith, make 1997 a momentous year. David Smith suggests.

Every year at this time, people like me turn up with a series of predictions for the coming 12 months. It is a seasonal ritual every bit a part of the scene as New Year hangovers or January sales.

And most years, however much we try to stop ourselves, we rarely avoid attaching a little hyperbole to our prognostications, just to keep you interested.

The coming year, I predict, will be a momentous year, for three reasons. The first, and most obvious, concerns British politics. Either we shall see a change of government after what will by then be 18 years of Conservative rule. Or, if not, we shall have learned that Britain has effectively become a one-party state. For, make no mistake, the effect of a Labour defeat would be momentous in its consequences for the party.

Second, we shall know this year whether economic and monetary union (EMU) is going ahead and, more particularly, whether Britain is going to be part of it. The Government, whoever is at the helm, has to apply for membership by the end of 1997.

Thirdly, this will be the year which will give us further clues about whether the economy has cast off its boom and bust tendencies, as Kenneth Clarke and John Major insist. If they are wrong, the post-election hangover, if not quite in the 1992 class, could be a painful one.

Tories are narrowing the gap

Let me take these in turn. The broad position as we enter the electoral home straight is that the Conservatives are narrowing the gap on Labour, but at too slow a rate to stand a chance of overtaking Tony Blair's party before the winning post. From this, if we could take the opinion polls at face value, we would conclude that Major does not have a prayer and that the prime minister should be looking for alternative accommodation in London.

I suspect, along with others, that the opinion polls are flattering Labour.

The true position, and certainly the one that both major parties use in their calculations, is that Labour is eight to 10 points ahead, not 15 to 20. This is a gap that the Tories could close, but only if they begin to make decisive progress now. So far their progress has been two steps forward, and then one or one-and-a-half steps back. Labour is the favourite to win, but with a smaller majority than anything currently indicated by the polls. Whichever party loses will come under tremendous pressure to change its approach to satisfy the vocal minorities that each has. Either way the present position, of both parties jostling for the middle ground, seems unlikely to survive the election.

On EMU, I think we can be fairly certain that a re-elected Conservative government will not apply to be in the first rank of EMU participants, in spite of the chancellor's enthusiasm. The present generation of Conservatives is too scarred by the 1990-2 experience of exchange rate mechanism (ERM) to be able to seriously contemplate taking sterling into EMU. ERM entry, it should be remembered, occurred against a backdrop of widespread public and party support for membership. There is little prospect of a sceptical cabinet notwithstanding Clarke and Michael Heseltine trying to mould public and party opinion in favour of joining EMU, at least until monetary union is up and running successfully.

In the waiting room 'til 2000?

Labour's position is different. The party has made much of its determination to foster better relations with Europe. This means, at the very least, ending Britain's opt-out from the European social chapter. It will also mean a more positive attitude towards EMU, not least because no Labour government has ever avoided punishment at the hands of the currency markets.

What it will not mean, though, is an immediate decision to enter EMU.

Labour will be able to argue that, after 18 years in the political wilderness, it needs more time before contemplating such a huge decision and has recently announced that such a decision will be taken at a referendum. Thus, under Labour we will enter the 'waiting room' of potential entrants, including Italy and Spain, who are more likely to join between the start of the final stage of EMU on 1 January 1999, and the conversion from national currencies to the euro in the first half of 2002. This may not be a bad position to be in - it will show willing while offering an escape route in the event of the whole thing being a disaster.

No need for a sledgehammer

How about boom and bust?

The chancellor is attempting a very tricky operation which is to ensure that the economy is growing rapidly in election year, with plenty of forecasters predicting 4% growth for 1997, while maintaining an overall impression of a stable, low-inflation economy. This is not, as I wrote last month, the late 1980s all over again but when the British economy does go above trend (trend being about 2.5% growth) it does have a habit of throwing up old problems.

What we will find out is whether the economy has helpful self-correcting properties, to prevent serious problems from breaking out. What I am thinking of here, in particular, is that the mere threat of higher interest rates will make people rein back their spending in such a way as to make draconian rate rises unnecessary. If the economy does have such self-correcting properties, and I that think it does, the policy sledgehammer could be kept safely in the toolshed.

My expectations, or rather my three hostages to fortune, are therefore as follows. We will have a Labour government, but one with a smallish overall majority. We will not, by the end of 1997, have committed ourselves to entering EMU, although we will be in a position to do so when the 'time is ripe'. And the economy, while growing rapidly at election-time will be slowing by the end of the year. I suggest you cut out and keep this piece to see how right, or wrong, I am.

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