22 May 2012

Growth, Plan B and the eurozone

George Osborne has written a thank you letter to Christine Lagarde of the IMF in today’s Evening Standard.

She called for more quantitative easing, even lower interest rates. But she applauded the Chancellor’s fundamental approach, even if she did say he should prepare a Plan B.

The government is wrestling with a package of growth measures it would like to announce before the Summer recess. There are internal battles over the scale of all this and some of the content.

The Treasury has already announced that it wants to help pension funds invest in infrastructrue projects by giving them security, covering a chunk of their risk. This could mean projects like the Thames sewer replacement get started. This sort of work, it’s hoped, could mean tens of billions of pounds being spent that would otherwise not get started.

There’s a push to get the government similarly helping to “de-risk” some social housing development. Some in government want a massive push on this. The Treasury is more nervous.

Christine Lagarde did raise the Coalition’s dreaded thought – the moment they have to reach for a hammer and smash the “break glass in case of emergency” Plan B box on the wall.

Even some admirers of George Osborne’s deficit reduction plan say that a Eurozone dive could mean he simply cannot avoid pulling on the fiscal levers and won’t be able to rely on monetary policy and retrenchment.

As well as being an economic nightmare, that would be a tough political sell as well. The government is acutely aware that it could be portrayed as having failed, u-turned, misjudged. It would say “the circumstances changed.” And a political battle royal would be joined.

Much depends on the Eurozone discussions that reconvene tomorrow in Brussels. Will Germany bend in the face of growing Eurozone pressure to sanction more European Central Bank intervention and moves towards a Eurobond? It might shift a little – but not enough to solve a crisis that is with us for as far as the eye can see.

Follow @GaryGibbonBlog on Twitter.

Tweets by @garygibbonc4