George Osborne: An increasingly lonely poster boy for austerity

As the IMF distances itself from unbalanced fiscal consolidation, Osborne is running out of allies — and time

It has always been the case that the Coalition would be judged on the effectiveness of their economic policies. The salvation of the economy from the phantom menace of "becoming Greece" has, after all, been the explicitly stated reason for this Faustian pact.

It is, therefore, particularly bad news that on Wednesday a paper from the top economists at the IMF was published suggesting what many already knew: that a path of unbalanced, overly zealous austerity has a much more disastrous effect on economic growth than originally envisaged.

Olivier Blanchard, the IMF's Economic Counsellor, and its chief research economist Daniel Leigh, have confirmed, complete with scatter diagrams, what was trailed in October's World Economic Outlook report. Specifically, that a cut of government spending results in, not, as previously thought, an equivalent loss in economic output, but triple that.

Oops! We got our multipliers radically wrong, folks. Sorry, Greece. Sorry, Europe. Sorry, World. Everyone makes mistakes, you may say.

But this was not an error of scientific judgment. It was an error of ideology, policy and presentation. The Coalition was caught in a pincer movement. The rhetoric of doom and gloom was essential to defeating any opposition to a programme of ideologically driven cuts – and making everyone who argued against it look like a debt denier. Its unfortunate, but completely foreseeable side-effect however, was to scare the private sector stiff. The slack that was being created at a phenomenal rate, was not being picked up by private enterprise.

In other words, if you want someone else to take over the wheel, it really doesn't help to be running around screaming "we're all going to die". The net result has been to terrify the private sector into reserve hoarding and balance sheet retrenchment. The blame for that lays entirely with the Coalition and any other government that chose to speak the grand guignol language of fear.

"Forecasters significantly underestimated the increase in unemployment and the decline in domestic demand associated with fiscal consolidation", Blanchard and Leigh conclude, causing one commentator to describe the paper as "a mea culpa submerged in a deep pool of calculus and regression analysis".

Increasingly, then, our Chancellor refusing to admit error and put into effect a "plan B", cuts an isolated figure. This will only encourage the dissenting voices in Opposition – whose catchphrase "too far, too fast" could have been the title of this latest IMF paper. It will also encourage dissenting voices within his own party, who have shown open resentment for the coalition deal.

And increasingly, the hollow excuses of too much rain/too much sun/not enough sun/three flakes of snow more than expected/the Royal Jubilee/the Olympics/the dog ate my homework, will start to sound like precisely that: hollow excuses.

If, as some predict, we slide into a triple dip recession, the wider public will begin to perceive that, far from "healing", the economy is choking with an occasional gasp for breath. And George Osborne will look increasingly incompetent and devoid of allies, under a PM who showed through the Mitchell affair that loyalty in not a favourite currency.

Osborne's peculiar brand of neoliberal auto-erotic asphyxiation has limits. The safe word for stopping it is "reshuffle".

Osborne in 2009. Photograph: Getty Images

Greek-born, Alex Andreou has a background in law and economics. He runs the Sturdy Beggars Theatre Company and blogs here You can find him on twitter @sturdyalex

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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.