♠ Posted by Emmanuel in Bretton Woods Twins,Economic History,UK Elections 2010 at 4/22/2010 12:01:00 AMAs things stand, the upcoming British general elections scheduled for the sixth of May are going to result in a hung parliament or having no party with a clear majority. In that event, a coalition government will need to be formed, with the Liberal Democrats and Labour being more natural allies than the Lib Dems and the Conservatives or even a grand coalition of Labour and the Conservaties. Matters are complicated by the Liberal Democrats stating they would rather play for an outright majority than signal which other party they'd rather go into a coalition with. Now, I've expressed my strong support for the Liberal Democrats (obviously), but the chain of arguments that the Conservatives or "Tories" are putting forward now goes something like this:
- A hung parliament causes political uncertainty that unnerves markets;
- The last time Britain had a hung parliament, a Lib-Lab (Liberal Democrat/Labour coalition) government resulted;
- This Lib-Lab coalition was in place when Britain had to take a £2.3 billion loan from the IMF in 1976;
- So, if you don't want a rehash, you better vote Conservative.
"Bond markets won't wait," the shadow business secretary said of the likely City reaction to post-election backroom deals at Westminster. "Sterling will wobble. We have seen even minor flickers in the opinion polls causing problems with interest rates in the recent past...If the British don't decide to put in a government with a working majority, and the markets think that we can't tackle our debt and deficit problems, then the IMF will have to do it for us..."And so this Clarke-borne brouhaha went into the second debate among prospective finance ministers or chancellors in British-speak (see footage here). Once more, the Tory Osborne reiterated this nightmare scenario while being rebutted by both the Liberal Democrats' Vince Cable and current Chancellor Alistair Darling, he of the famous eyebrows:
Back in London Clarke livened up the election as he recalled the Lib-Lab pact that helped prop up Jim Callaghan's government from 1977, when Labour lost its majority. Clarke, who was first elected to parliament in 1970, said: "It was a farce, it was a fiasco, it didn't save us from disaster. And I would be very, very alarmed if any prospect of that occurred on this occasion."
Clarke said that the state of Britain's public finances – the fiscal deficit of £167bn is nearly double the borrowing requirement in 1976 when the IMF was called in – was so serious it needed decisive action. "This is worse than the Conservatives took over in 1970, worse than Labour took over in 1974, worse than when we took over in 1979, and it really is going to require strong, purposeful government confident of its majority to put things into place."
George Osborne, the shadow chancellor, did not go quite as far as Clarke, but he warned of the dangers of a hung parliament. "It is a statement of fact that the last time the IMF came in was when the governing party did not have a workable majority in parliament. "I don't think people should underestimate the economic consequences of political instability in this country at a time when we are running one of the largest budget deficits in the developed world, when people have questioned our credit rating and people can see there is a very serous problem with employment and business confidence. That is a very serious economic challenge. Political instability and a hung parliament – people need to be aware of the consequences of that."
If financial markets lose confidence in the U.K. government's ability to repay its debt, the International Monetary Fund would have to be called in to offer aid, opposition Conservative spokesman George Osborne said Wednesday. In a three-way debate with Chancellor of the Exchequer Alistair Darling and Liberal Democrat Treasury spokesman Vince Cable on BBC Television, Osborne said: "If markets don't feel confident that we could pay down our debt we'd have to call the IMF in, that's a statement of fact."Vince Cable makes essentially the same point, and for once, I do agree with Darling. What the Conservatives fail to disclose, though, is that Britain's fiscal woes were in evidence well before the UK headed to the well. Indeed, it was a Tory leader who already had an IMF rescue on the drawing boards in 1974:
The opposition spokesman also warned that if the U.K. election results in a hung parliament, it would raise the chances of Britain needing IMF financing. "The only time we had the IMF was when we had a hung parliament," Osborne said.
Darling said Osborne's comments were scaremongering and accused the Conservatives of making unfunded promises in their budget plan. "Its pretty desperate stuff--what really does destabilise markets is where you make promises you can't pay for," the Chancellor said. "That is what makes markets roll their eyes...this really is a ridiculous approach."
Edward Heath’s Conservative Government was preparing to take “unpleasant measures” and apply for an International Monetary Fund loan in 1974, documents unearthed from the National Archive show. The disclosure will help to blunt one of the Tories’ sharpest and most enduring political barbs of the past generation: a bankrupt Labour government being forced to go “cap in hand” to the IMF in 1976.It is a psychological fact that persons tend to have selective memories.
One document — stamped “secret” and never previously published — shows how Heath met Jeremy Thorpe, the Liberal Party leader, on March 2, 1974, to discuss terms for a coalition government after the general election three days earlier that had resulted in a hung Parliament. The two men discussed a range of issues, including the Liberals’ long-standing demands for electoral reform, before turning to the “measures required to deal with the economic crisis — which would be unpleasant but must be fair as well as effective — and to command confidence overseas...”
The minutes, drawn up by Robert Armstrong, Heath’s principal private secretary, state: “On a Privy Councillor basis the Prime Minister told Mr Thorpe that preparations had been made for a drawing on the International Monetary Fund.” While Mr Thorpe suggested that there would be all-party support for an immediate loan, Heath was less certain, saying: “The Labour Party might be critical of the terms of such a drawing.”
Discussions on a Privy Councillor basis are not normally released, even under the 30-year rule, and this document appears to have been put in the public domain by accident. Although IMF borrowing by Britain was not unprecedented and the scale proposed by Heath is unclear, the reference to Labour being wary of conditions attached suggests that the IMF would have required significant spending cuts.
The power-sharing talks with Mr Thorpe failed and Heath resigned two days after the meeting, allowing Harold Wilson to return to Downing Street with a minority Government. Seven months later Labour won an overall majority when a second general election was held in October. It was, however, an era of burgeoning economic crisis around the world, as well as industrial strife in Britain. Only days before the February 1974 election, monthly trade figures had shown a record £383 million deficit. In 1976 the Labour Government was plunged even deeper into that economic mire. Denis Healey, the Chancellor, was forced to turn back at Heathrow — where he had been due to catch a flight to Manila for talks with the IMF — to quell panic in the markets with a speech to the Labour conference.
The £2.3 billion IMF loan that he negotiated was offered in return for spending reductions imposed by German and American shareholders that foreshadowed the monetarist policies of Margaret Thatcher’s Government.