THE ECONOMIC CONSEQUENCES OF MR LAMONT

Less than four months into their fourth term, the Tories are in an almighty mess on the economy. The re­covery they promised has foiled to mate­rialise. Every economic indicator shows that the recession is as deep as ever. Company failures are still growing. So is unemployment. A Confederation of British Industry survey published this week reports that 57 per cent of manufac­turers’ order books are below normal and two-thirds of manufacturers are working below capacity.

True to form, the Chancellor, Norman Lamont, has responded by claiming yet again that recovery is imminent and ar­guing for patience while his anti-infla­tionary policies create the foundations for sustained growth. He has ignored crit­ics who have argued that sterling is over­valued, that the fight against inflation is not the main priority at the depth of a re­cession or that the reduction of public spending is idiotic in an economy suffer­ing a collapse in demand.

In such circumstances, and with its new Shadow Cabinet in place, there is no reason why Labour cannot have a field day baiting the Government over its performance – and indeed this week Gordon Brown, the new Shadow Chancellor, set to work with relish.

But it is one thing to attack the Govern­ment and another to come up with an altentative to its policies. And Labour is rather short of ideas about how it would do things differently.

It is true that the party has, since the election, made it clear that it would not be averse to devaluation of sterling, al­beit by way of a general realignment of currencies within the exchange rate mechanism of the European Monetary System involving, crucially, the revalua­tion upwards of the Deutschmark. It is true, too, that Labour has said that a re­cession is not the time to engage in public spending cuts, which will remove yet more demand from an already depressed economy. Then there are Labour’s long­standing commitments to “supply-side” measures: extra spending on training, tax breaks for investment and so on.

All of this is most sensible. Sterling is over-valued, spending cuts are a bad idea and supply-side measures are essential. But it does not add up to a radical alter­native to the Tories* basic approach. De­valuation of the pound against the Deutschmark within the ERM would certainly ease the pressure on British ex­porters for a while, which is what makes it necessary. 

But it is no panacea. Be­cause of the import-reliance of the British economy, its most significant effect would be to cut real wages for a while – hardly die stuff of socialist dreams, even if it temporarily improved competitivity. Sim­ilarly, the spending cuts, effectively the downside of over-generous pledges in the run-up to the election, are not particular­ly significant in macroeconomic terms (although they could well be viciously shared out). And supply-side measures are not a short-term answer to recession. 

So what should Labour do? The traditional left response is to call for a reflationary alternative economic strategy for Britain. But any nation-state-based at­tempt to reflate would founder in the face of a massive flight of capital. Britain sim­ply is not big enough to cope with the mo­bility of capital in the contemporary glob­al economy. What would be possible, how­ever, is a co-ordinated Europe-wide reflationary strategy, organised either inter-governmentally or through new Euro­pean economic institutions. Labour should start work now with its European social democratic sister parties on pre­cisely such a programme, making the call for Europe-wide reflation the core of its assault on the Tories’ miserable economic record.