Storm Clouds

This Blog and my book are adamant in saying continuously that we cannot come out of the recession following the financial crisis with the same model that took us in. This is becoming ever clearer. It is also becoming clear that the worst may be far from over and that the apparent recovery based on pumped up government spending, rather than a reconditioned economy with all the dead wood cut out, may not be sustained or be sustainable. In other words a false dawn.

The clouds are these. First came the fraud charges at Goldman Sachs. This raised serious concerns about exactly what banks are doing to make money. Then came the banking reforms in the U.S which will curb those activities and make them more riskey for the banks. Next came Greece and the discovery that it was not just Greece, but the Euro, which is in trouble. There followed the realisation that the European  banks are not as well capitalised as those in the UK and the US and  have lent very large sums to the high spending governments in the South and to the property speculators in those countries. Smaller Spanish banks started to go under at the weekend needing government rescue.

Meanwhile Italy, Spain and Portugal have all rushed through austerity measures to try and prop up their debt ridden economies, but it may be too little too late. There is now a very real risk of a meltdown in Europe. Even if that is avoided there is going to be a weak Euro and a weak European economy. This gives to Britain the worst possible hand. The pound is down against the dollar making our raw materials and energy costs higher, whilst the falling Euro makes our exports to Europe, in pounds, less competitive. This is sixty per cent of our trade. On top of that the austerity measures in the spendthrift countries will dampen the ‘soft’ markets where sales have been easiest.

Our new government has a lot to think about. There was a subdued nervousness yesterday on the government benches where Tories and Lib Dems rubbed shoulders uneasily for the first time. The Labour benches looked more relaxed. Here they were at last free from responsibility for what happens next. They have an opportunity to find a new leader and re-position themselves in the political spectrum. If they get it right their day will come again.

Meanwhile the coalition is faced with a tough budget, higher taxes, dramatic cuts and a wholesale vanishing of public sector jobs, many of them pointless. However desirable and absolutely necessary all this is, it will not make it easier to bear, nor will it make the rising tide of unemployment look smaller. The honeymoon period for the new government may well be cut very short. The opposition may come to see its election defeat as a blessing.