Last week’s series of comparative statements were obviously co-ordinated. What I find intriguing about them is their sheer desperation. The French economic policy elite no longer understand the world. They genuinely believe that they are doing better than the British. The French private sector is in much better shape. The country is committed to the righteous path of fiscal austerity. So why should the rating agencies be downgrading France and not Britain? It is just not fair. Or is it?
There is an obvious gap between the economic narratives. Eurozone leaders believe they have solved the crisis by agreeing a fiscal compact. It was a definitive decision, taken at the European summit of just over a week ago. There will be no fiscal union, no eurobonds, no European Central Bank bail-out. The adjustment will happen through austerity alone – and it will go on and on. A rule to allow a maximum deficit of 0.5 per cent of gross domestic product will in the long run eliminate most public sector debt. The world’s second-largest economy wants to repay all its debts.
The UK government has been conducting a programme of quite extreme pro-cyclical fiscal austerity as well. But there are two differences. The first is a flexible exchange rate – though this offers diminishing marginal returns when everyone pursues the same policy. The second, and most important, is that Britain has its own central bank. The Bank of England has been conducting a much more aggressive monetary policy than the ECB.