The Anglo-Saxon Blues

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The British E.U. presidency and the French and Dutch rejections of the E.U. constitution have given Tony Blair and Gordon Brown a golden opportunity to spread their economic gospel to wary Continental neighbors. Convinced that doubts about the benefits of European integration are the result of the poor economic performance of the euro zone, the Prime Minister feels the time is right to advocate labor-market flexibility, increased financial liberalization and reduced public subsidies. I beg to differ. Britain has not got all the answers, even if its unemployment figures are the stuff Chirac's dreams are made of. Blair's economic track record is good, but not that good. It compares reasonably well with that of the euro area, but the foundations were laid by his predecessor, Conservative Prime Minister John Major. During Major's government, Britain recorded an average growth of around 3% a year, twice as high as the countries preparing to join the euro. The difference then was caused by restrictive fiscal and monetary policies pursued by those wanting to meet the Maastricht convergence criteria, whereas Britain promoted domestic consumption while squeezing or privatizing its public services. Consequently, from 1992 to 1997, unemployment fell in Britain from 9.8% to 7.2%, whereas in the euro countries it rose from 8% up to 10.6%. Blair and Brown held to the same policy, sticking to low public spending. Once freed from the shackles of the convergence process, the euro zone grew as fast and created as many jobs as Britain between 1997 and 2001 more in the case of France. Since then, however, Britain has outperformed the biggest euro countries like Germany, France and Italy, and now boasts a 4.8% unemployment rate compared with 8.7% in the euro area and around 10% in France and Germany. But this is the consequence of a covert but drastic change in policy. In its second term, Blair's government hiked spending on public services; that was the key to recent job growth. John Edmonds, research fellow at London's King's College, and Andrew Glyn, fellow in economics at Oxford's Corpus Christi College, acknowledge that Britain has the lowest benefits for the first year of unemployment of any O.E.C.D. country, and the lightest labor legislation and the longest working hours in pre-enlargement Europe. But they argue that these factors do not explain British job creation. The two authors attribute Britain's dynamism to "a good oldfashioned Keynesian expansion." Their view was strengthened last week when the E.U. officially rebuked Britain for excessive deficit spending. But Britain may soon find that it cannot finance such a spending spree. Tax revenue might dry up as the wheels come off the main engine of British growth: credit-fueled consumer spending. Now that house prices are stagnating, households are less inclined to borrow and purchase. Given its poor export competitiveness and low productivity, industry cannot count on foreign demand. An economic slowdown would jeopardize New Labour's social-reform agenda. Some reductions of inequalities have been made, but 17% of the population and 3.5 million children still live below the poverty line. Blair's government has made efforts to change Britain's image as a country of private wealth and public squalor, but standards of education, health care and public transport remain woefully below what is expected in continental countries. If the British economy begins to tank, Blair's message will quickly lose its appeal, at home and abroad.