Germany attacks UK spending plan

[orieleye]

Germany's finance minister has launched an outspoken attack on Britain's spending to tackle the economic crisis, claiming it will take the country a generation to pay off.

Peer Steinbruck called Gordon Brown's monetary policy, including the decision to cut VAT by 2.5% to 15%, both "crass" and "depressing".

"Are you really going to buy a DVD player because it now costs £39.10 instead of £39.90?" said Steinbruck in an interview with Newsweek magazine.

"All this will do is raise Britain's debt to a level that will take a whole generation to work off. The same people who would never touch deficit spending are now tossing around billions."

UK government borrowing will rise to £78bn this year and £118bn next year, according to Chancellor Alistair Darling, who unveiled £20bn of extra spending in last month's pre-budget report.

Steinbruck's comments come as European leaders meet in Brussels for a two-day summit to discuss how best to recover from the recession.

They will talk over plans for a €200bn Europe-wide stimulus package it is hoped will soften the blow of the economic downturn.

The European Commission's plan amounts to 1.5% of GDP across the European Union, with 1.2% made up of funds from member states and 0.3% from sources including the European Investment Bank.

But Social Democrat Steinbruck is unconvinced. "The speed at which proposals are put together under pressure that do not even pass an economic test is breathtaking and depressing," he said.

"The switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking. When I ask about the origins of the crisis, economists I respect tell me it is the credit-financed growth of recent years and decades. Isn't this the same mistake everyone is suddenly making again, under all the public pressure?"

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(The new price would be 39.04 if I'm not mistaken)

[hermeticist]

In the FT:

This week’s outspoken attack on Mr Brown’s strategy by Peer Steinbrück, the German finance minister, was as potentially damaging as it was undiplomatic. The pound, after all, has lately been sliding fast on foreign exchange markets. It is worth nearly a quarter less against the euro than a year or so ago. Some predict it is heading for parity.

The pound is headed for parity with the euro. Commentators have been saying this for over a year. And an economy must be in pretty sorry shape if any individual's comments can seriously hurt it.

Worse, even the truly dire forecasts for public borrowing produced by the Treasury only last month are beginning to seem over-optimistic. The recession looks to be deeper than predicted. The last thing Mr Brown’s government needs is a further weakening of confidence in sterling assets among international investors. It scarcely helps to have Germany’s finance minister declare that Britain’s strategy amounts to “crass Keynesianism”.

What's wrong with calling a spade a spade? That's exactly what the Brits are doing. Who do they think they'll fool by not calling it Keynesianism? And of course British public finances -- already in sorry shape -- are going to be in even more dismal shape in the next few years. Now was it just a few months ago that Gordon Brown was boasting of the highest growth rates in 300 years? What an insubstantial house of cards the "modern" British finance- and service-based economy has turned out to be.

[Matilda]

Gordon Brown had 10 years to screw up the economy as chancellor, now he's PM the lunatic really is running the asylum.....but he thinks he's saving the world

[hermeticist]

In The Independent:

Britain worse credit risk than McDonald's

Britain has become a worse credit risk than McDonald's and a host of other large companies, figures produced for The Independent reveal.

The collapse in Britain's credit rating has taken place over the past two and a half months, since the Government underwrote the banking system and decided to spend its way out of recession. Investing in UK government debt is now almost twice as risky as buying McDonald's corporate bonds, according to the market in credit default swaps (CDS), which provides insurance for the buyers of such debt.

The extraordinary movements in the CDS market also reflect market concerns about the highly leveraged British economy, which is sliding into a recession that the International Monetary Fund has predicted may be worse than the slowdown in the US.


The cost of insuring for a year against default on £10m of five-year UK debt has jumped from less than £30,000 to £120,000, compared with the current price of £77,000 to protect against a similar McDonald's default.

But analysts said the dramatic change in the risk rating of the UK's debt still represents a major swing in investor sentiment towards the British economy. The cost of insuring against German default on equivalent terms is below the UK at £51,000, with France costing £61,000. Britain is deemed to be safer than Italy, at £191,000, and Russia, whose CDSs cost £784,000.

Sean Corrigan, the chief investment strategist at Diapason Commodities Management in Switzerland, said: "For the UK to have this default rating is in some ways ludicrous but the market is using these instruments to express a view about the relative standing of certain countries. This has taken off as the domestic financial situation has got worse and the steps taken by the fiscal and monetary authorities have become more irresponsible."