ANDY KILMISTER looks at the prospects for the world economy in 1997, and the economic situation in Britain. THE LEADERS of the main capitalist economies are united in predicting steady growth and low inflation over the next year.
The rich nations' club, the Organisation for Economic Co-operation and Development (ORCD). backed up this view in its latest report in cecmock, but taere are increasing signs of a more turbulent prospect ahead than such forecasts On December 6 world stock markets suffered what the francial Times referred to as a frantic FriAlan Greenspan were taken to imply possible interest rate rises.
Markets
There were dramatic falls in European stock markets and on the Tokyo and Hong Kong exchanges Three weeks later Japanese markets fell sharply again in response to a tough government budget.
These developments are not accidental. They are a reflection of the fact that the coming year will see some difficult economic choices for the ruling classes in the industrialThe relative ecoISCO COUrS nomic stability of the last few years will become harder and harder ta maintain.
There are two main reasons for this. Firstly, in the USA and Japan the immediate past has been dominated by the impact of the recession of the carly 1990s. sary by the governments in these countries because of the unstable growth, fuelled by debr, in the preceding decade. Continuing speculative investment and borrowing was likely to threaten the stability of the financial system. The impact of the slump was to squeeze much of the debt out of the economy and to leave many productive resources stand. ing idle.
This spare capacity has allowed the US to lower interest rates substantially and janan to raise government spending and cut taxes, The nervous feelings in the markcis result from toe fact that this phase is now coming to an end. The expectation is that to carry on expanding the economy will start to push up inflation and debt levels. So the US central bank (the Federal Reserve) is set to raise interest rates and the Japanese government plans to cut spending and raise taxes.
Dilemma
But they also face the dilemma that, despite the policies of the last few years, the "recovery" in both countries is still weak and patchy. Any attempt to slow down this weak growth risks provoking another slump.
The second major development this year concerns Europe. European governments have pinned their economic hopes on the Maastricht Treaty and the single currency.
Up until now this has provided a rationale for attacking publi spending and wage demands. But this year also involves deciding on the implementation of the project. This is certain to be immensely difficult.
Ine key cconomic probiem is that no country is likely to meet all the criteria laid down in the treaty for Joining the single currency Given this, the criteria are likely to Belt-tightening proceed at all.
But this has already sparked off a fierce debate about what the new rules of the game should be, and who should be allowed to join. In particular, the Bundesbank is terrified at the prospect of giving up the German mark for a common currency which includes countries like Italy and Spain.
The first impact of these developments was the row at the Dublin Summit of the European Union. This put considerable strain on the alliance between Germany and France which has up until now been the basis of the Maastricht process.
Germany appears largely to have won the argument, and to have imposed automatic strict penalties on "excessive" government budget deficits after monetary union. But this is only the first stage of an argument which will get much more intense over the coming year.
EMU crisis
An indication of the kinds of divisions within the capitalist class over taese issucs is the icading aru cle in The Economist of December 14 . This argues strongly against the German position at Dublin, and predicts that if implemented in full it could provoke a political crisis over EMU in which "the entire structure could fold". KEN CLARKE Way The British government cannot avoid cither of these two issues. As in Japan and the USA, such growth as John Major and Kenneth Clarke have been able to claim credit for is essentially as result of conditions after the recession which Maior also neipca to creafe.
this economic phase is now ending Britain as well.
Maior and Clarke cannot avoid being involved in the debates over monetary union cither. When this project looked likely to involve only a minority of EU members they could afford to stand aloof.
But now that it seems possible that Italy, Spain and maybe even Portugal might meet revised criteTia for joining up it is much more difficult for Britain to stand outside. difficult set of economic choices for the Tories. The Bank of England and the markets expect higher interest rates, so much so that the nound has risen in value considerably due to speculation. Even revised Maastricht criteria will mean cuts in government spending or than six months away.
Clarke's response to this in his November budget was a blatant fudge. Central government taxes were cut slightly, but local council taxes are set to rise even more.
here was a very small amount of extra money for public spending this year, but projected cuts in the following two years are savage. The figures presented are based on very optimistic assumptions about both growth and inflation.
With investment still very weak and exports insufficient to maintain growth Clarke has clearly decided to risk a mini consumer boom in the run up to the clection, in the hope that no-one will notice what is in store for them afterwards.
Labour weakness
It does not seem likely that this will convince many people; howis on offer from Labour, and this remains ine fores orest davantage.
haterer the outcome of the election though, the economic problems of British capitalism remain acute. In addition the world economy is heading for increased What has been portrayed by the OECD and their fellow-thinkers as steady growth has always been much more erratic. It is more like a tightrope walk. with the constant danger of slipping either into recession on one side, or speculation and instability on the other. for even more frequent shifts in policy in response to one or other of these dangers, and for narrower options and sharper conflicts in the coming year than we have seen since the early 1990s.