21 October 2012

Philippe Legrain: Don't blame the euro mess for Britain's plight

UK policy-makers should stop blaming the economy's plight on the crisis in the eurozone and engage in deeper soul-searching about the country's enduring economic weakness, writes Legrain, an independent economic adviser to President Barroso, in the WSJ.

Yes, four years into the financial crisis, Britain's economy is still shrinking, but 'what do you expect with the mess in the eurozone on our doorstep?' Yet this misplaced smugness has contributed to a dangerous complacency about the UK's economic prospects. Indeed, Spain's crisis-hit economy is in many respects adjusting more successfully to the post-bubble world than Britain's. 

Britain and Spain face a similar economic challenge: Now that their pre-crisis growth model based on debt-fuelled consumption has broken down, they need to shift toward export-led growth. It is an article of faith among eurosceptics that having its own currency gives Britain a powerful advantage, and that without the option of devaluation Spain will struggle to restore its external competitiveness. The facts tell a different story...

In effect, Britain has failed to diversify its exports away from financial services, for which demand is falling in the West and which are still only a tiny share of emerging economies' imports.

Britain's economy has actually shrunk fractionally more over the past year than the eurozone's has. Over the past two years, the eurozone's economy has grown by a total of 1.1 per cent, Britain's by only 0.2 per cent. Is it really plausible that the financial crisis in the eurozone has hit Britain's economy harder than it has hit the eurozone itself?

It goes without saying that Britain is fortunate to have avoided the soaring bond yields and wrenching capital flight that Spain has suffered. Its labor market functions much better. Its fiscal tightening has also been less extreme. Yet all that makes its economic underperformance even more glaring. Britain's economy is still 4 per cent smaller than it was at its peak in the first quarter of 2008—again, a worse performance than that of the eurozone as a whole and only slightly better than Spain's. That is nothing to feel smug about.

Full article

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