Type your text, and hit enter to search:
Faith + Politics
Faith + Politics
> The other great crisis
the other great crisis
While attention was last week focused on the crisis surrounding News Corp, another crisis was slowly burning away elsewhere in Europe. Italy was facing a sovereign debt crisis. The shockwaves of the financial crisis continue to reverberate. There are lessons here for the UK and for Labour.
The catalyst was Silvio Berlusconi. The Italian premier criticised his well respected finance minister as the country considered budget cuts. Market attention had been focused on so-called peripheral countries in the Eurozone - Greece, Portugal, and Ireland, as well as on Spain. Now crosshairs have also focused on Italy. The yield on Italian government debt jumped last week - in other words, Italian government bond prices fell. The government sold tranches of new debt, but at higher interest rates. The prospect loomed of a downward spiral in which higher costing debt required more debt to be issued, so driving up the cost further.
Why did this happen to Italy? It is a much larger economy than Greece and it has a primary surplus outgoings. However, Italy's public debt is 120 per cent of its GDP and the GDP growth rate is relatively low. In a quieter time in British politics we would expect George Osborne to be claiming loudly that Italy's travails demonstrated that his spending cuts are justified, as he has done over Greece.
There are key differences between the UK and Italy. One is that the UK is outside the euro; the UK could ultimately print money so it will always pay back its debt (at a risk of higher inflation). Our net debt-GDP ratio, while high by our recent standards, is only expected to peak around 70 per cent, which is well below Italy's. The average maturity of our government debt, at 14 years, is almost twice that of Italy. Another difference is that the UK does have a plan to bring debt down. We might not like the plan, believing it risks growth and cuts spending too far and too fast, but to the world at large this country at least has a plan that it has embarked upon.
The risks to the UK include lower than expected GDP growth, leading to lower tax receipts and hence lower public debt reduction (and a debt-GDP ratio that is higher for longer). This is what the sharp spending cuts may bring to pass. The market debate about Italy has included comment on its growth outlook. Where a country has a high debt level but poor growth outlook, the bond markets can take fright. That is why a government needs not only a credible plan to reduce public debt to manageable levels, but also a clear idea of how growth will be encouraged. This is lacking under our Tory-Liberal Democrat government.
This article was
first published by Progress
on 19 July 2011.
Progress, 19 July 2011, 19/07/2011
Inflation and interest rates: can we curb the cost of living without a recession?
Not an easy task given uncertainties, especially if energy and commodity prices do fall later in the year. Ultimately, radical economic reform required.
The shock of war: inflation and central banks
Central banks are struggling to head off general inflation while dealing with price shocks that will be negative for growth. They waited too long, which has made their tasks more difficult.
Has the Bank of England done too little too late?
The Bank of England has raised interest rates, but that does not mean it has been most effectively managing inflation risks.
What should the Bank of England do about inflation?
The Bank should signal it will act if higher prices look likely to translate to higher inflation rate.
Covid has hit the poor hardest. Is the IMF right to call for a Jubilee?
The IMF's Fiscal Monitor is actually quite radical.
A fiscal No Man's Land: Modern Monetary Theory and the Budget
Spare a thought for finance ministers, and the opposition counterparts who aspire to replace them. The conventional wisdom was that they should at least make an attempt to follow fiscal rules. Now, there are no rules.
Some Humility is in order for years of austerity
My letter in the Financial Times on the need for a framework for economic policy decision-making.
Fixing The post-Covid economy
Responding to Brian Griffiths' article in The Article on the risks of inflation.