IF IT ISN'T hurting, it isn't working. Well it's hurting. Why isn'tit working? Why is the British economy failing to come out of recession?
There are two immediate reasons. First, the massive build up of private and company debt in the late 1980s. Second the effects of joining the Exchange Rate Mechanism (ERM).
In 1990, iritish companies net borrowing was E27 billion the highest ever, up from £21 billion in 1989. This compares with eight years of surplus before 1988. The build up of debt by households during this period, particularly mortgage debt, is also well known. In these circumstances high interest rates in 1990 and 1991 were bound to ead to a slump Joining the ERM was always meant to be a deflationary inthe France's participation in the scheme was followed by eral years of rising unemployment and Spain now seems to be undergoing a similar proWith the pound loosely fixed against the German mark, any attempt to expand the British economy faster than the German economy will lead to a rapid growth in the balance of payments deficit as imports exwill have to be kept high to avoid people selling sterling.
The ERM ties the other European economies to expanding domestic demand at roughly the same rate as the Germans. This is a very slow rate indeed.
It does not lead to such high unemployment in Germany, least in the West, because of the ability of German firms to export their goods. But for weak economies in the ERM, such as Britain, which do not have such great export demand, high unemployment becomes the rule.
All this is understood very well by the government and by business leaders. They want to use the ERM as a means of disciplining workers; the threat of unemployment is meant to encourage low wage demands and deliver high productivity. But this means short term problems in terms of generating any pre-clection boom.
Paradox
Debt and the ERM provide the immediate reasons for the slump. but why is the economy still refusing to grow even though interest rates have been cut? Part of the reason is the fear of unemployment growing Another reason, paradoxically, As prices rise more slowly, the value companies' and individuals' debts and miteress Payaient rise in real terms, spending. Bourgeois economiste such as the Financial Times have begun to talk a lot about this anism of recession.
but there are atoper reasons. The Tories' economic policies since 1979 have been designed achieve two main things. First, a major increase in potential profitability, through lower wage rises and higher productivity.
Second, enough economic stability to ensure the realisation of that profitability. The current recession is the outcome of their failure in both Real wages have not been cut since 1979 , unlike the experience of the late 1970s. So any increase in profitability has depended on there was much talk Thatcher's 'productivity miracle.
This now appears largely to have been a 'productivity mirFace to face with failure: Major and Bush age'. The rate of growth of labour productivity fell from 3.1 ercent in 1987 to 1.9 percent in 1989 and 0.2 percent in 1990 Demand Even if profits can be made in the productive process, they have to be realised by selling goods. Here investment demand is crucial. In 1991, UK investment fell by 11 percent. Manufacturing investment in 1991 was about 6.5 percent lower than in 1979.
Other sources of demand are limited. Exports are weak be cause of e recession else where in Europe. Even if the government wanted to expand Its own expenditure, it is limited by forecast government borrowing requirement of 619 billion year may be too small.
All this means that Cent in real term 190 bility is falling, by about 11 But companies have ments as well as cutting back sheir borrowing. that there is less and less money available for new investment, and it is no surprise that the slump continues.
The current recession shows that the last thirteen years of Tory government have solved none of the underiying problems of British capitalism. In the short run, recent reductions in interest rates will have an effect.
Any attempt to reflate the economy above a certain level will lead to renewed inflation and balance of payments difficulties. Worse, f Germany quence of the recent pay conces. sions to avert a steelworkers' strike or because investment in the East begins to boom, then the recession may only be be ginning•