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George Osborne needs a convincing Budget plan

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Man with a plan? Chancellor George Osborne

The relationship between the tenants of Number 11 Downing Street and the Old Lady of Threadneedle Street is not always an easy one.

Winston Churchill, who as chancellor in the 1920s allowed Montagu Norman to persuade him into a disastrous return to the gold standard, later said he hoped the governor would hang for it.  

That’s not the sort of language that would get past a modern spin doctor, but the tensions are still there. Eddie George got on famously with Ken Clarke but was so annoyed with Gordon Brown for snatching supervisory powers from the Bank in 1997 he almost resigned.

A frustrated Alistair Darling took swipes at Sir Mervyn King in his memoirs for appearing to back Tory policies and even implied the governor might have been responsible for leaks to George Osborne.

The reason for this little trip down memory lane is to note that, with his retirement in close sight and an eye on his legacy, King has little to lose from speaking his mind.

He is right, of course, in his outspoken observation that the Government has scored an ‘own goal’ on inflation by pushing up utility bills through its green policies, and through rising tuition fees.

He is also right to argue that while the Bank has a key role in creating the right conditions for recovery, the Government must do its job too, by providing the right ‘supply-side’ package of policies that help Britain’s ability to grow and to export.

Osborne is obviously hoping that Mark Carney will work the kind of miracle that has eluded Sir Mervyn.

Yet as King was at pains to clarify, the Bank has been already been ‘exceptionally supportive’ of output with ultra-low interest rates and £375bn of QE.

That has boosted animal spirits on the markets, where bond and share prices have been pushed up, but in terms of its impact on growth, monetary stimulus is like running up a steeper and steeper hill – it takes more and more effort to keep moving forward.

Some, including Lord Turner, an unsuccessful candidate for Carney’s new job, think the problem is the stimulus has been inadequate, and want to go further with ‘helicopter money’.

But that is ignoring the nasty question of what happens when the stimulus is finally withdrawn.  

In his Budget next month Osborne, who has so far come up only with an unconvincing ‘March of the Makers’, needs to produce much more compelling measures to promote growth including targeted tax cuts to support research and innovation. He should also heed the London School of Economics growth commission’s recommendation for an independent infrastructure strategy board.

Rapid action is also needed to resolve the nuclear impasse if we don’t want the lights to go out, with EDF’s planned investment in new reactors hanging in the balance. Cheap and easy money alone is not the recipe for real growth.

Over to you, Chancellor.

Euro check

The mood on the markets towards the single currency is remarkably positive all things considered.

For much of last year, there were genuine existential fears for the euro, but now the feeling is that politicians, aided by Mario Draghi, the European Central Bank supremo, will succeed in ensuring its survival.

Back in the real world, one wonders whether this optimism is remotely justified.

PSA Peugeot Citroen, France’s flagship car-maker, has just reported its biggest ever loss, of more than ¤5bn, largely because it is heavily dependent on sales in its home market, Spain and Italy, where people are not buying new motors.

The woes of Peugeot, which is embroiled in a bitter dispute with unions over plans to shut down a plant at Aulnay, near Paris, with the loss of thousands of jobs, are a big issue for socialist leader Francois Hollande as he presides over ‘le basket case’ economy. Tata Steel has also reported widening losses in its European operations due to the slowdown. UK exporters cannot hope for a quick recovery from our eurozone trading partners.

Barclays profit

Antony Jenkins’ moral purge at Barclays sent the bank’s shares up to a two-year high, which was especially nice for Deutsche Bank and Goldman Sachs.

The two banks had bought warrants from the Qatari investors who participated in Barclays’ controversial Middle-Eastern fund raising back in 2008, and now look to be in line for large profits by exercising them.

While Goldman and Deutsche congratulate themselves on their shrewd investment – the Qataris had already locked in an estimated £1.7bn of profit when they sold - Barclays is embroiled in a Serious Fraud Office probe over fees it paid to the Gulf statelet.

The bank’s existing long-term shareholders – still nursing losses, despite the recent bounce – were absolutely right to lambast its desperate Middle Eastern rescue.

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