World economy needs a trade war like a hole in the head

Last weekend, our newspapers and airwaves were full of predictions that the UK was set for “imminent recovery”. Reality has since punched through.

The OECD, the Western world’s economic think tank, has just issued new forecasts suggesting the global economy will emerge from its worst slump since the Second World War faster than previously thought.

Three months ago, the G7 economies combined were on course to shrink by 4.1pc during 2009. Now, says the OECD, they’ll contract 3.7pc – still extremely painful, but better.

The UK, though, is unique in that our economic outlook has deteriorated in recent months. In June, the OECD predicted British GDP would fall by 4.3pc this year. Now it says our output will collapse even faster - by 4.7pc.

It’s not just the OECD. The IMF is about to publish fresh forecasts making exactly the same point. The rest of the Western world is recovering more quickly than expected three months ago, with the exception of the UK.

None of this matters to our great leader, of course. Gordon Brown yesterday delivered a hectoring lecture to the G20 summit of Finance Ministers in London. Doing what he does best, the Prime Minister warned against the very “complacency and over-confidence” which have been the hallmark of his time in office and driven him to wreck this country’s public finances.

The world’s currency dealers smell British blood, but Brown ploughs on, impervious to advice, urging the rest of the world to borrow and spend even more, insisting he will do so regardless – despite the ever growing warning signs from global creditors that unless the UK starts living within its means, dire consequences are in store.

Some British policy-makers are still capable of talking sense. Adair Turner’s pre-summit call for big, systemically important banks to be forced to draw-up “living wills” was timely and exactly right. The Chairman of the Financial Services Authority says such banks should be compelled to simplify their legal structures and maintain detailed wind-down plans to be used in the event of their failure, allowing even large banks to be quickly dismantled, restructured and absorbed by their competitors.

This isn’t popular with the big banks, of course. Simplification makes it harder for them to dodge tax. Their business models also deliberate encourage complexity and inter-connectedness so that politicians quake at the notion of a large bank going under. That allows the money-men more easily to extract state-provided “bail-out” cash.

Turner has raised the kind of coherent and much-needed policy proposal which should be at the heart of this London summit. Instead, proceedings revolve around a squalid dispute over bonuses – an issue that will no doubt also dominate the G20 Leaders’ summit in Pittsburgh later this month.

The Western world is screaming out for leadership, for the creation of a new regulatory regime that will prevent another sub-prime type fiasco. Yet our so-called leaders spend their time squabbling over measures they all know will never be enforced to rein in executive pay. Future historians will wince.

One thing the assembled high-ups in London could do is draft a joint statement insisting on the agreement of a new world trade “round” by the end of this week, then send that statement to Delhi.

Trade ministers from around the world are in the Indian capital, trying to kick-start stalled negotiations on a new global free-trade pact that, if agreed, would act as the world’s insurance policy against growing protectionism.

The “Doha round”, launched in the Qatari capital in the aftermath of 9/11, has been gridlocked for a staggering eight years. So fixated are they by parochial domestic interests that G20 leaders agreed during April’s London summit only to “prepare for a conclusion to the Doha round”.

Such woolly language simply isn’t good enough. A new over-arching global trade deal – involving the reciprocal lowering of barriers to international commerce - would boost investment and growth across the world. We’re no in grave danger, though, of seeing the first outright failure of a multi-lateral trade negotiation since the 1930s.

World trade volumes have recently shown some growth – a sign the global economy is starting to recover. But the increase in trade flows has been heavily centered on large emerging markets such as China and Brazil. The G7 remains in trouble – with exports from trade powerhouses like Germany and Japan down more than 30pc during the first six months of this year.

Pascal Lamy, the wily boss of the World Trade Organisation, has rightly warned that growing unemployment, particularly in the Western world, will fuel protectionist pressures “for years to come”.

Raising trade barriers causes trade wars, hinders growth and is the best way to stop the global recovery in its tracks. The warnings from history couldn’t be clearer. But that matters little if those warnings are ignored.

NAME OF KEYNES IS BEING USED TO JUSTIFY DAMAGING FISCAL BOOSTS

Last week, with some trepidation, I faced Professor Lord Skidelsky on BBC2’s Newsnight.

Skidelsky ranks among the UK’s most respected intellectuals. We were debating John Maynard Keynes – and given his towering three-part biography of the British inter-war economist, Skidelsky is a world authority.

On top of all that, Skidelsky is my former university tutor and one of my closest friends. Yet under the glare of the studio lights, I found myself disagreeing with him.

In his latest book - “Keynes: the Return of the Master” – Skidelsky argues that, in tackling the credit crunch, Western governments have been right to implement “Keynesian” policies. “Had we not followed Keynes’ advice,” he says, “we’d be in another Great Depression”.

I disagree. In my view, Keynes’ work is being used, as it was in the 1960s and 70s, to justify wildly expansionary fiscal and monetary boosts which will prove to be counter-productive.

Back in 1976, then Labour Prime Minister Jim Callaghan told his own party conference: “We used to think you could spend your way out of recession … I tell you now in all candour that option no longer exists … In so far as it ever existed, it worked only to inject larger doses of inflation into the economy, followed by higher unemployment as the next step”.

Those words marked the end of “Keynesian” economics. Now it’s back. As before, it’s being used to pander to powerful vested interests, propping up lame ducks while broader society bears the cost.

Forty years ago, it was deeply inefficient, heavily-unionized industries that needed “saving”. Today, dodgy banks have bamboozled our leaders – and the media - into thinking that unless they’re all bailed-out, the human race will cease.

Our current Keynesian adventure will end like all the others – in inflation and crippling government debt. Today, though, the boost has been bigger, the debt burden is much heavier and the world is no longer minded to keep lending to the UK.

I admire much of Skidelsky’s new book. His description of the deregulation mania that preceded the credit-crunch is masterful. I share his conviction that Keynes’ writings offer massive insights into how societies should be run.

The problem is that Keynes’ name is being used for short-term political ends to which, in my humble opinion, the man himself would object. Because Keynes wasn’t, in fact, a “Keynesian”. It sounds crazy, but it’s true.

Liam Halligan is Chief Economist at Prosperity Capital Management