Christine Lagarde's attack on Osbornomics is damning

The new IMF boss's comments make awkward reading for George Osborne.

On 6 June 2011, George Osborne said that he had been "vindicated" in a debate over spending cuts after the International Monetary Fund backed his austerity measures. Launching the fund's annual assessment at the Treasury, the Chancellor positively swooned over the verdict and the acting managing director of the IMF John Lipsky's support for his failing policies.

"The IMF have publicly asked themselves the question of whether it is time to adjust macroeconomic policies -- in other words, 'Is it time to change course?'" he said. "They have concluded definitively that the answer is no.''

Today's developments suggest that if there ever was any vindication, which was never credible of course, it has now fled.

To be fair to the IMF, the original report did warn that:

If the economy experiences a prolonged period of weak growth and high unemployment . . . then some combination of the following would need to be considered: (i) expanded asset purchases by the Bank of England and (ii) temporary tax cuts. Such tax cuts are faster to implement and more credibly temporary than expenditure shifts and should be targeted to investment, low-income households or job creation to increase their multipliers.

This has now happened as growth disappoints.

Today's release of growth data for the second quarter of 2011 from Europe were scarily bad with the eurozone economy growing only 0.2 per cent and there may well be worse to follow. This is the smallest increase since the recovery began in the third quarter of 2009. This is bad for UK growth -- which was also 0.2 per cent for the second quarter of 2011 -- given our dependence on exports to the slowing euro area.

Growth has slowed sharply from the 0.8 per cent increase seen in the first quarter. Growth in France and Portugal was zero, while Germany grew by only 0.1 per cent, compared with market expectations of 0.5 per cent. The Netherlands (0.1 per cent), Italy (0.3 per cent) and Spain (0.2 per cent) also showed very little growth.

As can be seen below the UK has performed badly compared to our European counterparts for whom we have complete data. Based on data for the last three quarters, which is how the table is presented, the UK ranks next to last ahead only of Portugal and tied fourth from last with Italy using data for the last four quarters, ahead of Portugal, Romania and Spain. No vindication here George, I'm afraid.

 

According to a Treasury spokesman, Osborne chatted with Christine Lagarde, the new managing director of the IMF, while he was on his holidays in Hollywood. I suspect Slasher wasn't too happy about what she said, given his frequent claims that the IMF, Uncle Tom Cobley and all supported his misguided and disastrous macroeconomic policy.

Writing in today's Financial Times, Lagarde argues that deficit-reduction plans must not harm growth as the austerity programme clearly is doing in the UK. She writes:

For the advanced economies, there is an unmistakable need to restore fiscal sustainability through credible consolidation plans. At the same time, we know that slamming on the brakes too quickly will hurt the recovery and worsen job prospects. So fiscal adjustment must resolve the conundrum of being neither too fast nor too slow . . . What is needed is a dual focus on medium-term consolidation and short-term support for growth and jobs.

That may sound contradictory but the two are mutually reinforcing. Decisions on future consolidation, tackling the issues that will bring sustained fiscal improvement, create space in the near term for policies that support growth and jobs. By the same token, support for growth in the near term is vital to the credibility of any agreement on consolidation. After all, who will believe that commitments to cuts are going to survive a lengthy stagnation with prolonged high unemployment and social dissatisfaction?

I could have written this.

Recall that Osborne opposed Gordon Brown's candidacy and supported Lagarde's in the job, so this is highly embarrassing.

Commenting, Ed Balls, Labour's shadow chancellor, said:

The slowdown of a number of European economies is obviously a serious cause for concern. The Managing Director of the IMF, Christine Lagarde, is right to say that "slamming on the brakes too quickly will hurt the recovery and worsen job prospects". The evidence for George Osborne's claim that Britain is a safe haven has collapsed and his dangerous complacency is being exposed. That is why the Chancellor should take heed of the IMF's latest advice. The IMF were right to warn George Osborne a few months ago that he would need to change course if the UK continued to stagnate. His decision to continue to ignore wise advice is not just complacent it is deeply reckless -- a dangerous gamble with jobs, investment and living standards, too.

Osborne's claim that his policies have succeeded because of the fall in bond yields looks like a stretch, given -- as Peter Tasker noted in the FT last week -- that no OECD country that issues its own currency is suffering from rising borrowing costs. The IMF does not support the coalition's failing economic policies. Vindicated my foot. It's time to stimulate growth and jobs.

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

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The Brexit Beartraps, #2: Could dropping out of the open skies agreement cancel your holiday?

Flying to Europe is about to get a lot more difficult.

So what is it this time, eh? Brexit is going to wipe out every banana planet on the entire planet? Brexit will get the Last Night of the Proms cancelled? Brexit will bring about World War Three?

To be honest, I think we’re pretty well covered already on that last score, but no, this week it’s nothing so terrifying. It’s just that Brexit might get your holiday cancelled.

What are you blithering about now?

Well, only if you want to holiday in Europe, I suppose. If you’re going to Blackpool you’ll be fine. Or Pakistan, according to some people...

You’re making this up.

I’m honestly not, though we can’t entirely rule out the possibility somebody is. Last month Michael O’Leary, the Ryanair boss who attracts headlines the way certain other things attract flies, warned that, “There is a real prospect... that there are going to be no flights between the UK and Europe for a period of weeks, months beyond March 2019... We will be cancelling people’s holidays for summer of 2019.”

He’s just trying to block Brexit, the bloody saboteur.

Well, yes, he’s been quite explicit about that, and says we should just ignore the referendum result. Honestly, he’s so Remainiac he makes me look like Dan Hannan.

But he’s not wrong that there are issues: please fasten your seatbelt, and brace yourself for some turbulence.

Not so long ago, aviation was a very national sort of a business: many of the big airports were owned by nation states, and the airline industry was dominated by the state-backed national flag carriers (British Airways, Air France and so on). Since governments set airline regulations too, that meant those airlines were given all sorts of competitive advantages in their own country, and pretty much everyone faced barriers to entry in others. 

The EU changed all that. Since 1994, the European Single Aviation Market (ESAM) has allowed free movement of people and cargo; established common rules over safety, security, the environment and so on; and ensured fair competition between European airlines. It also means that an AOC – an Air Operator Certificate, the bit of paper an airline needs to fly – from any European country would be enough to operate in all of them. 

Do we really need all these acronyms?

No, alas, we need more of them. There’s also ECAA, the European Common Aviation Area – that’s the area ESAM covers; basically, ESAM is the aviation bit of the single market, and ECAA the aviation bit of the European Economic Area, or EEA. Then there’s ESAA, the European Aviation Safety Agency, which regulates, well, you can probably guess what it regulates to be honest.

All this may sound a bit dry-

It is.

-it is a bit dry, yes. But it’s also the thing that made it much easier to travel around Europe. It made the European aviation industry much more competitive, which is where the whole cheap flights thing came from.

In a speech last December, Andrew Haines, the boss of Britain’s Civil Aviation Authority said that, since 2000, the number of destinations served from UK airports has doubled; since 1993, fares have dropped by a third. Which is brilliant.

Brexit, though, means we’re probably going to have to pull out of these arrangements.

Stop talking Britain down.

Don’t tell me, tell Brexit secretary David Davis. To monitor and enforce all these international agreements, you need an international court system. That’s the European Court of Justice, which ministers have repeatedly made clear that we’re leaving.

So: last March, when Davis was asked by a select committee whether the open skies system would persist, he replied: “One would presume that would not apply to us” – although he promised he’d fight for a successor, which is very reassuring. 

We can always holiday elsewhere. 

Perhaps you can – O’Leary also claimed (I’m still not making this up) that a senior Brexit minister had told him that lost European airline traffic could be made up for through a bilateral agreement with Pakistan. Which seems a bit optimistic to me, but what do I know.

Intercontinental flights are still likely to be more difficult, though. Since 2007, flights between Europe and the US have operated under a separate open skies agreement, and leaving the EU means we’re we’re about to fall out of that, too.  

Surely we’ll just revert to whatever rules there were before.

Apparently not. Airlines for America – a trade body for... well, you can probably guess that, too – has pointed out that, if we do, there are no historic rules to fall back on: there’s no aviation equivalent of the WTO.

The claim that flights are going to just stop is definitely a worst case scenario: in practice, we can probably negotiate a bunch of new agreements. But we’re already negotiating a lot of other things, and we’re on a deadline, so we’re tight for time.

In fact, we’re really tight for time. Airlines for America has also argued that – because so many tickets are sold a year or more in advance – airlines really need a new deal in place by March 2018, if they’re to have faith they can keep flying. So it’s asking for aviation to be prioritised in negotiations.

The only problem is, we can’t negotiate anything else until the EU decides we’ve made enough progress on the divorce bill and the rights of EU nationals. And the clock’s ticking.

This is just remoaning. Brexit will set us free.

A little bit, maybe. CAA’s Haines has also said he believes “talk of significant retrenchment is very much over-stated, and Brexit offers potential opportunities in other areas”. Falling out of Europe means falling out of European ownership rules, so itcould bring foreign capital into the UK aviation industry (assuming anyone still wants to invest, of course). It would also mean more flexibility on “slot rules”, by which airports have to hand out landing times, and which are I gather a source of some contention at the moment.

But Haines also pointed out that the UK has been one of the most influential contributors to European aviation regulations: leaving the European system will mean we lose that influence. And let’s not forget that it was European law that gave passengers the right to redress when things go wrong: if you’ve ever had a refund after long delays, you’ve got the EU to thank.

So: the planes may not stop flying. But the UK will have less influence over the future of aviation; passengers might have fewer consumer rights; and while it’s not clear that Brexit will mean vastly fewer flights, it’s hard to see how it will mean more, so between that and the slide in sterling, prices are likely to rise, too.

It’s not that Brexit is inevitably going to mean disaster. It’s just that it’ll take a lot of effort for very little obvious reward. Which is becoming something of a theme.

Still, we’ll be free of those bureaucrats at the ECJ, won’t be?

This’ll be a great comfort when we’re all holidaying in Grimsby.

Jonn Elledge edits the New Statesman's sister site CityMetric, and writes for the NS about subjects including politics, history and Brexit. You can find him on Twitter or Facebook.