The British budget.

[Sheilbh]

Yet he apparently courts this possibility with his policies. After 12 years in Downing street perhaps the man is totally detached from reality, or maybe he simply doesn't care about anything apart from his personal position.

I think he identifies his interests with the party's and with the country's.  I wonder if that's inevitable for leaders after a while.  And it's worth saying it's not his policies in the past 12 months that'll drive us to the IMF.  It was his policies for the previous 5-6 years when in Number 11.  Had we been in a decent fiscal position in this crisis we could and should have done what we have.  It's the cumulative effect that's dangerous.

I believe that Labour would still lose the next election if they adopted sensible policies immediately. However, they face a generation in the wilderness at best with their current ones, whereas doing the decent thing now could see them back in power within 5 years.

I think Labour's lost the public, but I'm not sure the Tories have won them yet.

I also think that now more than ever sensible policies aren't going to be popular.  It's sensible to bail out major banks to the tune of billions, it'll be unpopular because what people want is an auto de fe for Fred Goodwin and the negative of not doing it remains hypothetical so people can say it wasn't unnecessary.  The right thing to do in our situation is to have what the Irish have done and have a budget that raises taxes and cuts spending.  I don't think even the Tories have steeled themselves for that yet.

[Alatriste]

Some comments:

- Generally speaking, austerity is a terribly bad idea during a crisis, made even more dangerous because it sounds reasonable. But if adopted austerity lowers demand even more and makes the situation even more serious.

- Yeah, Japan and Germany are royally screwed. That happens when your country is a great exporter and your markets are in problems. You are severely hit _twice_, by your domestic crisis and by the others too. By the way, I find Chinese statistics quite hard to believe... probably things aren't exactly rosy in Beijing these days. I can't but laugh when I read some articles telling me that all of Spain's economic problems would have been avoided if we only had became an industrial exporter country...

- I don't know the details but that green policy measures don't look so bad to me... carbon sequestration is a solution if it is trapped for, say, 1,000,000 years, and saying that electric cars or the related infraestructure will never work is really too radical. The problem with electric cars has always been that without the infraestructure they are impractical but private corporations will never create the infraestructure without a high number of electric cars to use it... and this is where a big state program can be helpful.

- Regarding euro versus sterling, we in Spain have our share of loonies shouting that without the euro our economy wouldn't be in problems (bollocks) or that without the euro we could devaluate out of it... which is less stupid but still wrong IMHO.

Devaluation doesn't make one magically more competitive: it has a heavy impact on confidence, sinks one's currency in the markets, has a big inflationary impact (for example, trough oil) and generally impoverishes consumers (depressing demand as a consequence). It can be an emergency exit to very difficult situations, but it is being sold as a fast, sure, painless solution to crisis and it simply isn't.

- Regarding Iceland the Icelanders just chose a new government. Guess who wants to join the European Union and adopt the Euro ASAP...

[Richard Hakluyt]

"And it's worth saying it's not his policies in the past 12 months that'll drive us to the IMF.  It was his policies for the previous 5-6 years when in Number 11.  Had we been in a decent fiscal position in this crisis we could and should have done what we have.  It's the cumulative effect that's dangerous."

I fully agree with this btw, it is actually the main cause of my anger with the government over their management of the economy. You recall the constant fiddling with the economic cycle dates so that Brown could justify his profligacy, dishonest and disgusting 

[Richard Hakluyt]

@Alatriste, RE : your observations.

I don't think anyone is advocating immediate austerity in the UK. What is of concern is that about half of the deficit is structural and a long-term plan to address that problem is required. Darling looked like an ostrich with it's head in the sand as he made his budget speech.

I'm in favour of the cleaner coal-fired stations, to think that we can do without fossil fuels totally in the next couple of decades is a fantasy. Not sure about the electric cars, I suspect it's decorative flim-flam.

Yes devaluation has a mixed bag of results and consequences. In this particular instance, however, the boost to inflation may be a positive as there are many concerns about possible deflation in the UK. (The consumer price index is actually already in negative territory, though this is primarily due to the decrease in housing costs caused by falling interest rates).

[Alatriste]

To suggest we can abandon oil in 10-20 years is certainly delusional barring a truely exceptional new scientific discovery ot technological breaktrough.

Regarding inflation/deflation there is some debate in the press. Some say we are dangerously near deflation or already entering in it. Others maintain we are seeing a 'fake' deflation caused by the decrease in housing costs and falling oil & food prices, that were exceptionally high a year ago (some use the term 'deinflation' to define the situation).

IMHO if prices fall the causes will have only historic or scientific interest.... no matter if we are experimenting deflation or 'deinflation' demand will plummet and unemployment soar. A good moment to reread Keynes, I think...

[Zanza]

- Yeah, Japan and Germany are royally screwed. That happens when your country is a great exporter and your markets are in problems. You are severely hit _twice_, by your domestic crisis and by the others too. By the way, I find Chinese statistics quite hard to believe... probably things aren't exactly rosy in Beijing these days. I can't but laugh when I read some articles telling me that all of Spain's economic problems would have been avoided if we only had became an industrial exporter country...

Building your  economy on a real estate boom doesn't really cut it either apparently.

[The Larch]

Building your  economy on a real estate boom doesn't really cut it either apparently.

We already know, that's why we have an unemployment level that would make people from other countries faint. 

[Alatriste]

- Yeah, Japan and Germany are royally screwed. That happens when your country is a great exporter and your markets are in problems. You are severely hit _twice_, by your domestic crisis and by the others too. By the way, I find Chinese statistics quite hard to believe... probably things aren't exactly rosy in Beijing these days. I can't but laugh when I read some articles telling me that all of Spain's economic problems would have been avoided if we only had became an industrial exporter country...

Building your  economy on a real estate boom doesn't really cut it either apparently.

Indeed. Trouble is, those articles are selling an outright lie. Not even the authors can really believe hardware exporters are inmune to economic crisis, you need only eyes to see or ears to listen to know that...

And now we enter the ugly region where politics and economy dance intimately together: those authors are defending Spain should become more 'competitive' - and a few are even daring enough to say explicitly that the way to succeed at that would be a much lower salary level, less pensions, less subsidies and less everything - and defeat Chinese, Philippines, Vietnamese, etc, at their own game of weak currencies, cheap labor and export oriented industry (of course that means abandoning the euro and devaluating like there is no tomorrow).

I don't it _could_ be done, I don't think it _should_ be done and, worse still, I don't think it would be worth the pain when even if we succeeded we would become a new South Korea, a country with a population a bit higher than ours and a GNP a bit lower than ours... in other words, less productive per capita.

[Zanza]

Wage depression is what Germany did for the last ten years or so. German wages grew much slower than in other Euro countries for that time and thus the labor costs are competitive again.

The result you get is lower domestic consumption and an overreliance on exports which hurts in situations like this. So that's not the way out either.

[Richard Hakluyt]

Germany and Japan have got the hangover and didn't even get to go to the preceding party 

Which does seem rather unfair, but I guess international economics is not very interested in fairness 

[Iormlund]

Wages in Spain have already gone backwards for the last decade. And they weren't at German levels nor anywhere near that. We are perfectly competitive on that front. Hell I doubt I make a third of what an engineer ears in Germany.

[Sheilbh]

- Generally speaking, austerity is a terribly bad idea during a crisis, made even more dangerous because it sounds reasonable. But if adopted austerity lowers demand even more and makes the situation even more serious.

Sometimes it's necessary.  We're not in quite as bad a state as Ireland but we're not far.  They're Supplementary Budget (which I had to read ) is pretty tough but it'll get worse at the full budget this autumn.  Ultimately it's the sort of thing a Chancellor's going to have to do.

In this particular instance, however, the boost to inflation may be a positive as there are many concerns about possible deflation in the UK. (The consumer price index is actually already in negative territory, though this is primarily due to the decrease in housing costs caused by falling interest rates).

It's not quite that simple (my retail knowledge shines again :p).  The Retail Price Index which includes goods and housing has fallen.  We now have -0.4% deflation according to that measure. 

Brown, when giving independence to the Bank of England, chose to use the Consumer Price Index which excludes housing costs as the BofE measure for inflation.  Inflation's rising on that scale (against predictions) and currently stands at 3.2% requiring the Governor to write a letter to the Chancellor explaining how he's going to tackle inflation.  The rise largely down to the loss of value of Sterling.

So we're in the weird position of experiencing both deflation and what the government considers an unacceptable level of inflation.

And here the prices of food and household energy are increasing fastest.

[Richard Hakluyt]

Ah, I've muddled the two measures up.

This inflation/deflation mix is quite nasty IMO. I think the situation is particularly adverse for people on lower salaries and pensions. In practice some individuals are experiencing a high personal level of inflation, whereas others are seeing the opposite.

[Alatriste]

Wages in Spain have already gone backwards for the last decade. And they weren't at German levels nor anywhere near that. We are perfectly competitive on that front. Hell I doubt I make a third of what an engineer ears in Germany.

We are in a weird situation: Spain's GNP is behaving far better than most (it's indeed sad that a -3% be 'better than most' but it is, the Euro zone is expected to lose -4,2%, Britain -4,1%, Germany -5,6%, Japan -6,2%...) proving that the core of our economy is competitive and sound, and still unemployment is soaring, behaving much worse. Traditionally our unemployment has been the highest in the European Union in good and bad times, but that's no consolation.

Regarding inflation, I think it is behaving just like Britain's. Officially we are on the verge of deflation (-0,1%) but some experts are saying the same, that buried below housing, oil and food there is an inflationary surge at work (now, I wonder if discounting housing, oil and food makes any sense, as those three fields account for a very sizeable portion of anyone's expenses, both directly and indirectly).

[Richard Hakluyt]

Yes, Spanish unemployment has been unreasonably high, even during the height of the boom........even during a labour shortage 

There must be something about your mixture of welfare rules and employment protection laws that encourages people to define themselves as unemployed. Again, taking the long view, any Spanish government should be trying to solve this deep-seated problem.