Why the debt hysterics have got it wrong

IMF economist warns Europe against Greek-style austerity cuts.

Shortly before the election, a small band of conservative commentators, led by Niall Ferguson, made the bizarre argument that David Cameron should call in the IMF as soon as he entered Downing Street, paving the way for a programme of "austerity cuts".

Had the Prime Minister followed their counsel, I doubt the right would have got the answer it was looking for. The IMF, like most other major economic institutions, has consistently warned states of the dangers of slashing spending while still in the recovery phase.

Here's what the IMF's chief economist, Olivier Blanchard, told the French business daily La Tribune:

There is indeed a risk that, under market pressure, some countries overdo austerity. That would be a mistake.

George Osborne may have claimed that Britain faces a Greek-style meltdown unless it cuts spending now, but Blanchard elegantly demolishes this argument in just a few sentences:

Markets tend to lump a series of countries in the same basket. In fact, other European countries don't need to take the same draconian measures as Greece to reduce their budget deficits.

They are more credible to start with, with less debt, and they can afford a more gradual adjustment to limit the negative impact of consolidation on short-term growth.

Sadly Osborne (and his state-slashing sidekick David Laws) appear to be unacquainted with any of these arguments. Britain's public debt, whatever today's misleading Independent front page may claim, is, at 62 per cent of GDP, still well below the average of advanced G20 members.

For instance, prudent Germany has a public debt of 77 per cent, France has a debt of nearly 80 per cent and Japan has a public debt of 192 per cent.

In 1956, Britain's public debt stood at 146 per cent -- more than twice its current level -- but was soon reduced, not through draconian spending cuts, but through economic growth, tax rises and moderate inflation.

But will the economic right recall any of this or report on the latest IMF warning? I won't hold my breath.

Special offer: get 12 issues of the New Statesman for just £5.99 plus a free copy of "Liberty in the Age of Terror" by A C Grayling.

George Eaton is political editor of the New Statesman.

Getty
Show Hide image

What is the EU customs union and will Brexit make us leave?

International trade secretary Liam Fox's job makes more sense if we leave the customs union. 

Brexiteers and Remoaners alike have spent the winter months talking of leaving the "customs union", and how this should be weighed up against the benefits of controlling immigration. But what does it actually mean, and how is it different from the EU single market?

Imagine a medieval town, with a busy marketplace where traders are buying and selling wares. Now imagine that the town is also protected by a city wall, with guards ready to slap charges on any outside traders who want to come in. That's how the customs union works.  

In essence, a customs union is an agreement between countries not to impose tariffs on imports from within the club, and at the same time impose common tariffs on goods coming in from outsiders. In other words, the countries decide to trade collectively with each other, and bargain collectively with everyone else. 

The EU isn't the only customs union, or even the first in Europe. In the 19th century, German-speaking states organised the Zollverein, or German Customs Union, which in turn paved the way for the unification of Germany. Other customs unions today include the Eurasian Economic Union of central Asian states and Russia. The EU also has a customs union with Turkey.

What is special about the EU customs union is the level of co-operation, with member states sharing commercial policies, and the size. So how would leaving it affect the UK post-Brexit?

The EU customs union in practice

The EU, acting on behalf of the UK and other member states, has negotiated trade deals with countries around the world which take years to complete. The EU is still mired in talks to try to pull off the controversial Transatlantic Trade and Investment Partnership (TTIP) with the US, and a similar EU-Japan trade deal. These two deals alone would cover a third of all EU trade.

The point of these deals is to make it easier for the EU's exporters to sell abroad, keep imports relatively cheap and at the same time protect the member states' own businesses and consumers as much as possible. 

The rules of the customs union require member states to let the EU negotiate on their behalf, rather than trying to cut their own deals. In theory, if the UK walks away from the customs union, we walk away from all these trade deals, but we also get a chance to strike our own. 

What are the UK's options?

The UK could perhaps come to an agreement with the EU where it continues to remain inside the customs union. But some analysts believe that door has already shut. 

One of Theresa May’s first acts as Prime Minister was to appoint Liam Fox, the Brexiteer, as the secretary of state for international trade. Why would she appoint him, so the logic goes, if there were no international trade deals to talk about? And Fox can only do this if the UK is outside the customs union. 

(Conversely, former Lib Dem leader Nick Clegg argues May will realise the customs union is too valuable and Fox will be gone within two years).

Fox has himself said the UK should leave the customs union but later seemed to backtrack, saying it is "important to have continuity in trade".

If the UK does leave the customs union, it will have the freedom to negotiate, but will it fare better or worse than the EU bloc?

On the one hand, the UK, as a single voice, can make speedy decisions, whereas the EU has a lengthy consultative process (the Belgian region of Wallonia recently blocked the entire EU-Canada trade deal). Incoming US President Donald Trump has already said he will try to come to a deal quickly

On the other, the UK economy is far smaller, and trade negotiators may discover they have far less leverage acting alone. 

Unintended consequences

There is also the question of the UK’s membership of the World Trade Organisation, which is currently governed by its membership of the customs union. According to the Institute for Government: “Many countries will want to be clear about the UK’s membership of the WTO before they open negotiations.”

And then there is the question of policing trade outside of the customs union. For example, if it was significantly cheaper to import goods from China into Ireland, a customs union member, than Northern Ireland, a smuggling network might emerge.

 

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.