Britain’s Chancellor of the Exchequer George Osborne says recovery from the global financial crisis “will take longer and be harder than had been hoped,” but that the flight to British treasury securities amid this week’s market havoc is a vindication of the country’s economic policies.
In a major address to the House of Commons on Thursday, Osborne acknowledged the market meltdown that has seen shares plummeting over the past month (through Wednesday) by more than 14% in the U.S., 23% in France, 24% in Germany and 16% in the U.K.
“However,” he said, “while our stock market has fallen like others, there has been one striking difference from many of our European neighbors. The market for our government bonds has benefited from the global flight to safety: U.K. gilt yields have come down to around 2.5% – the lowest interest rates in over 100 years.”
Osborne concluded his speech with a dig at the United States and a call for developed economies to adopt a new growth model based on Britain’s recent success.
“Those who spent the last year telling us to follow the American example with yet more fiscal stimulus need to answer this simple question: Why has the U.S. economy grown more slowly than the U.K.’s so far this year?” he said. “More spending now, paid for by more government borrowing and higher debt, would lead directly to rising interest rates and falling international confidence that would kill off the recovery not support it.”
Also in his speech the British minister, noting that the country’s credit default swap spread is now lower than Germany’s, provided an analysis of the global financial crisis, its causes and proposed solutions, highlighting why Britain is recovering while prescribing a course for the rest of the world’s economies.
Citing weak U.S. economic data and “the historic downgrade of that country’s credit rating” and the spread of Eurozone contagion fears to Italy and Spain, Osborne said the root cause of the trouble was “a massive overhang of debt from a decade-long boom when economic growth was based on unsustainable household borrowing, unrealistic house prices, dangerously high banking leverage and a failure of governments to put their public finances in order.”
“Unfortunately,” he added, “the U.K. was perhaps the most eager participant in this boom, with the most indebted households, the biggest housing bubble, the most over-leveraged banks and the largest budget deficit of them all.”
The minister outlined steps the coalition government has taken to put its financial house in order, including in-year cuts and an emergency budget, that have led investors to seek safety in British gilts, suggesting his government’s leadership has trumped the gridlock undermining other economies.
He then chided the United States, continuing, “And the very same rating agency that downgraded the United States has taken Britain off the negative watch that we inherited and reaffirmed our AAA status.”
Osborne called on other countries to deal with their deficits, improve competitiveness and strengthen their banking systems, and applauded the European Central Bank’s bond buying program aimed at stabilizing Italian and Spanish debt. He said the crisis in Europe has vindicated Britain’s decision to not join the euro, but added that euro members must now accept some sort of fiscal integration that monetary union has long implied.
But Osborne did not reject stimulus altogether – he just redefined it. Referring to the current round of World Trade Organization free-trade negotiations, he said the world’s economies have the greatest stimulus of all sitting on the table in the form of the Doha round, and a renewed commitment to free trade across the world, that should be taken up now.
Osborne’s speech echoed some of the ideas currently on the table in the U.S. congressional super-committee discussions to pare another $1.5 trillion from the U.S. deficit, including cutting U.S. corporate taxes as a means of restoring competitiveness. Also sounding familiar to U.S. voters was his demand that the House of Commons “confront the vested [i.e., special] interests.” Said Osborne: “They are the forces of stagnation that stand in the way of growth.”