Playing the eurozone blame game shows the extent of Osborne's failure

The longer the coalition remains in denial, the longer it will take for Britain to recover from its economic depression.

One of the first lessons a new government learns is how to blame their predecessors. Labour spent years blaming the ills of the country on "18 years of Conservative misrule". Two years after taking office the coalition has not missed a trick in turning the blame game into an art form. The promised deep public spending cuts were all Gordon Brown's fault and lower than expected economic growth was blamed on everything from the weather to the Royal Wedding.

The current chief culprit for the coalition's failings is the eurozone. I'm sure I'm not the only one who felt a distinct feeling of déja vu when the government responded to this week's dreadful Q2 figures by blaming the euro.

Of course, given that the eurozone is our main trading partner its problems, to put it mildly, do not help British exports. More than two years into the crisis it is still unclear whether Europe's leaders have the political will and nous to break the link between heavily indebted banks and sovereigns and restore calm to the markets.

But the reality is that even while the eurozone faces an existential crisis, with a handful of its 17 countries needing emergency support because they can't access the bond market, Britain is still faring worse. A chart by ABD Investment shows that, since the financial crisis began at the end of 2007, Britain has been comfortably outperformed by the US, Japan, Germany and France.

This year Britain's output is estimated to be 93.5 compared to the baseline figure of 100 in 2008. To put this in context, Germany is one of the few countries where output has now overtaken pre-crisis levels at 104.2 compared to a eurozone average at 97.5. The Spanish economy, which is serious danger of needing a €300 billion bail-out as it struggles to cope with crippling borrowing rates of over 7 per cent and scarily high unemployment, is only fractionally lower than Britain's at 91.9, with Italy at 90.9. France, which lost its triple-A credit rating at the start of the year, is at 97.7.

After three quarters in a row reporting a decline in output, the bald truth is that economic output is now lower than it was when the Coalition took office. There can certainly be little doubt that were Britain a member of the eurozone, we would have needed a massive bail-out, possibly larger than Spain, Greece, Ireland, Portugal and Cyprus put together. Our triple-A credit rating would have gone months ago, perhaps even last year.

By any yardstick, George Osborne and Danny Alexander have failed on an impressive scale and should be waiting for their P45s.

But, whisper it, Britain should actually be profiting from the eurozone crisis. As investors in the European bond market panic, sending borrowing rates sky-high for Spain, Italy and others, the UK is one of the main beneficiaries from the flight of capital. Despite the weaknesses in the British economy, like the US, traders are so desperate to buy our bonds that they will pay for the privilege. Earlier this week interest rates on 10 year gilts fell to 1.4 per cent, well below the 2.4 per cent inflation level, and fully 6 per cent lower than Spain. It is frightening to imagine the extra debt we would have had without the eurozone crisis.

The Coalition should be using the massive advantage of such historically low borrowing costs to fund targeted stimulus measures. The best place to start would be to bring forward badly needed public infrastructure projects. The National Infrastructure plan states that Britain needs to invest £400 billion in infrastructure between now and 2020 if we are to remain competitive, and there is no better time to start. While penal borrowing costs, particularly for the southern Mediterranean nations, are effectively forcing eurozone countries to drastically scale back public spending, Britain is in an almost unique position to launch a series of supply-side measures to boost demand and generate growth.

At some point, people will tire of the coalition's protestations that the double dip recession is all the fault of Gordon Brown and those incompetent foreigners in the eurozone. Labour, too, have to be honest enough to admit that Britain's comatose economy is of our own making and, regardless of what does or doesn't happen in the eurozone, requires resolution at home.

The longer Cameron and Osborne et al remain in denial, absolving themselves of responsibility while persisting with the idea that Britain can operate like a north European version of the Cayman Islands, the longer it will take for Britain to recover from its economic depression. The stark reality is that even with a solid Olympics-driven bump, 2012 will be a year of recession. Of more concern to ministers is that barring a heroic recovery over the next three years, the Tories and Lib Dems will go to the country on the basis of economic output that is comfortably lower than it was in 2007. Barring an implosion by the Labour Party, that would probably cost them their jobs.


Photograph: Getty Images
Photo: Getty Images
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How can the left make the case for immigration?

All too often, we drift into telling people we want to convince that they just don't get it.

We don’t give the public enough credit. You’ll often hear their views dismissed with sighs in intellectual circles. In fact on most issues the public are broadly sensible, most are these days supportive of cutting the deficit and dubious about political giveaways, but in favor of protecting spending on the NHS and education. Yet there is one issue where most, “knowledgeable” folks will tell you the public are well out of step: immigration. 

With [today’s] net migration figures showing yet another record high, it is an ever more salient issue. On a lot of measures ‘too much immigration’ ranks highest as the number one concern (see Ipossmori). The ongoing rise of right wing political parties across Europe demonstrates that simply enough. But concerns about immigration don’t just sit with those with more extreme views, they’re also shared across the mainstream of public opinion. Yet unlike thinking on cutting the deficit or funding the NHS the public consensus that immigration is bad for Britain, flies flat in the face of the intellectual consensus, and by that I mean the economics. 

Given the intense public debate many a study has tried to spell out the economic impact of immigration, most find that it is positive. Immigration boosts the nation’s GDP. As the theory goes this is because immigrants bring with them entrepreneurialism and new ideas to the economy. This means firstly that they help start new ventures that in turn create more wealth and jobs for natives. They also help the supply chains to keep ticking. A example being British agriculture, where seasonal workers are are needed, for example, to pick the strawberries which help keeps the farms, the truckers and the sellers in business. 

Most studies also find little evidence of British jobs being lost (or displaced) due to immigrants, certainly when the economy is growing. Indeed economists refer to such “ “they’re” taking our jobs” arguments as the “lump of labour fallacy’. On top of all that the average migrant is younger than the native population and less likely to rely on welfare, so their net contribution to the state coffers are more likely to be positive than natives as they don’t draw as much state spending from pensions or the NHS. 

So why haven't the public cottoned on? Many progressive types dismiss such views as racist or xenophobic. But it turns out this is to misunderstand the public just as much as the public ‘misunderstand’ immigration. When you study people’s views on immigration more closely it becomes clear why. Far from being racist most people asked by focus groups cite practical concerns with immigration. Indeed if you go by the British Social Attitudes Survey a much smaller number of people express racist view than say they are concerned about migration.  

The think tank British Future broadly set out that while a quarter of people are opposed to immigration in principle and another quarter are positive about it the majority are concerned for practical reasons - concerns about whether the NHS can cope, whether there are enough social houses, whether our border controls are up to scratch and whether we know how many people are coming here in the first place (we don’t since exit checks were scrapped, they only came back a few months ago). But more than anything else they also have very little confidence that government can or wants to do anything about it. 

This truth, which is to often ignored, begets two things. Firstly, we go about making the argument in the wrong way. Telling someone “you don’t understand immigration is good for our economy etc etc” is going to get a reaction which says “this person just doesn't get my concerns”. Despite the moans of progressives, this is precisely why you won't hear left leaning politicians with any nous ‘preaching’ the the unconditional benefits of immigration.

More importantly, the economic arguments miss the central issue that those concerned with immigration have, that the benefits and effects of it are not shared fairly. Firstly migrants don’t settle homogeneously across the country, some areas have heavy influxes other have very little. So while the net effect of immigration may be positive on the national tax take that doesn't mean that public services in certain areas don’t loose out. Now there isn't clear evidence of this being the case, but that could just as well be because we don’t record the usage of public services by citizenship status. 

The effects are also not equal on the income scale, because while those of us with higher incomes scale tend to benefit from cheep labour in construction, care or agriculture (where many lower skilled migrants go) the lower paid British minority who work in those sectors do see small downward pressure on their wages. 

It’s these senses of unfairness of how migration has been managed (or not) that leads to the sense of concern and resentment. And any arguments about the benefit to the UK economy fail to answer the question of what about my local economy or my bit of the labour market. 

Its worth saying that most of these concerns are over-egged and misused by opponents of immigration. Its only a small factor in stagnating wages, and few local areas are really overrun. But the narrative is all important, if you want to win this argument you have to understand the concerns of the people you are trying to convince. That means the right way to make the argument about immigration is to start by acknowledging your opponents concerns - we do need better border controls and to manage demands on public services. Then persuade them that if we did pull up the drawbridge there is much we’d loose in smart entrepreneurs and in cultural diversity. 

Just whatever you do, don’t call them racist, they’re probably not.

Steve O'Neill was deputy head of policy for the Liberal Democrats until the election.