WASHINGTON, Feb. 25 (UPI) -- British Prime Minister Tony Blair has led a charmed life since his accession to power May 1, 1997. He won re-election last year easily, has presided over an economy that, while it slowed in 2001, still posted the best performance in the G7 top world economies, and, by being an unexpectedly staunch U.S. ally, has managed foreign policy successes in both Kosovo in 1999 and Afghanistan in 2001.
As all good Bears know, it's impossible to stay lucky forever, and Blair's luck may be about to run out.
Let's get the non-economic factors out of the way first. Labor won the 1997 election very largely by exploiting the electorate's distaste for the "sleaze" of the 1990-97 Conservative government of John Major. Even before Blair's second victory last June, this issue was wearing a bit thin; after all Blair had been forced to fire the same Cabinet minister, "Tony's crony" Peter Mandelson, not once but twice for financial impropriety. Labor billionaire Bernie Ecclestone, owner of Formula One racing, was also found to have benefited unduly by Department of Trade and Industry decisions made after his large donations to Labor's 1997 election campaign.
However, Mandelson and Ecclestone were at least British born and bred. The xenophobic British electorate is much more disturbed by signs of undue Whitehall influence by billionaire foreigners. Roland "Tiny" Rowland contributed greatly to his reputation as Prime Minister Edward Heath's "unacceptable face of capitalism" by being the German born son of a former Nazi. Robert Maxwell, known in Britain as "the bouncing Czech" was deeply disliked even before he committed suicide after embezzling 400 million pounds ($560 million) from the Mirror Group pension fund. Asil Nadir, personal friend of Lady Thatcher, added substantially to the public perception, if not necessarily the reality, of Tory sleaze when he escaped from DTI inspectors to Turkish Cyprus, a country -- the source of much of his fortune -- that has never been granted diplomatic recognition outside Turkey.
Blair's latest scandal, for those who don't follow British minutiae, involves a letter written by Blair for Lakshmi Mittal to assist him in obtaining control of a Romanian steel company, Sidex. Mittal, who gave $180,000 to Blair's 2001 campaign (more than Enron gave to the 2000 Bush campaign) has national origins even more confusing than most. Born and brought up in India, he lives (some of the time) in London's elegant Hampstead suburb. His fortune, however is controlled by a company domiciled in the Netherlands Antilles, with major operations based in India, Indonesia and now Romania, and only 1 percent of the group's $5 billion turnover coming from British operations. It is thus unclear to the British electorate what benefit Britain might get from Mittal's success in Romania -- other than, of course, further occupation of 10 Downing Street by Blair.
On the foreign policy front, Blair's successes may also be coming to an end. The second phase of the Bush war against terrorism, whatever it is, is likely to be highly unpopular in continental Europe, so Blair may soon have to choose between his devotions to the European ideal and to the Atlantic alliance. At that point, it is likely that Europe will win, however attractive it is to neutralize Tory foreign policy opposition by linking with their natural allies, the U.S. Republicans. Even a pro-Europe foreign policy, however, is likely to be difficult to carry off over the next couple of years, because of the European constitutional convention, chaired by former French President Valery Giscard d'Estaing, due to meet for the first time in March.
As one would naturally expect, the convention has been hijacked by the Euro-federalists, who include both of Giscard's vice presidential deputies and, it is said, all but about three or four of the 66 delegates from the EU member states. It is thus a stone cold certainty that the document produced by the convention, to go into effect in 2004, will on close reading make the concept of "subsidiarity," which is supposed to preserve national autonomy, as dead as was the U.S. Tenth Amendment under the Warren Supreme Court. After all the U.S. Constitutional Convention of 1787 had almost a majority of anti-federalists, including Thomas Jefferson, and that produced a constitution that resulted, when states wanted to leave the federation, in an immensely destructive Civil War. The document produced by the EU's convention will thus be lovingly examined by the British Euroskeptics, who will dwell in spine-chilling detail on the prospects of a Fort Sumter on the Thames, a Gettysburg in the Cotswolds, or a March through Georgia down the M1 motorway -- both sides, of course, being helpfully armed with nuclear weapons.
Blair will at that point, therefore, have the option of repudiating the document, and destroying his pro-Europe foreign policy, or signing it, and destroying his chances of re-election. It is to be hoped that, in this case at least, he chooses domestic political expediency.
Compared with the constitutional Convention, the euro is only a secondary danger to Blair, but it remains a difficulty. Given the currency's apparent success, he has little option but to arrange a referendum on its adoption, and to campaign vigorously for a "Yes" vote. Here, however, he is likely to run into an arithmetical difficulty. With British opinion currently remaining strongly opposed to the euro (and opposition possibly increased by referendum time by the accession of a tainted Frenchman, Jean-Claude Trichet, to the presidency of the European Central Bank) Blair can at best squeeze out a marginal victory. In that case, however, the losers are likely to be alienated and, though a minority of the British electorate, they would be dangerously concentrated. The Liberal Democrat Party (18 percent of the vote in the 2001 election) is almost unanimously in favor of the euro, as is the Scottish National Party (5 percent of the British vote.) Hence, if say 51 percent of voters end in supporting the Euro and 49 against, then the Tories, as opponents of the euro, would be likely to get 45 percent or more of the electorate's support at an election fought on the issue, including many voters who were at the core of Blair's 2001 41 percent, while Labor, squeezed by the Liberals and nationalists, would drop to around 25 percent. The euro is thus more or less a no-win issue for Blair, although by the time of the next election, due in 2005, it may have greatly reduced in importance.
Economically, Blair is both a victim and a perpetrator. As a victim, he was not responsible for the world stock market bubble of the late 1990s that is in the long slow process of deflation, nor even greatly for Britain house price bubble of the last five years, that will also in due course deflate. Monetary policy is, after all, set by the Bank of England, and if that august body doesn't take house price moments into account when determining the level of interest rates, it is perhaps hard to expect politicians to do so instead. Rising house prices in London's Islington, Blair's old stamping ground, are after all beneficial to those owning houses in Islington, and the discontent of those who find themselves unable to afford a house in Islington is both inchoate and poorly expressed through the media who, as with the stock market, tend to treat rising house prices as an unalloyed good.
However, with scruffy little 19th century terraced houses in socially marginal neighborhoods now selling for more than $1 million, the London housing market is as overvalued as was the NASDAQ stock index at 5,000 -- after all, prices at the top end of the market are up around 150 percent since what seemed an unrepeatable bubble peak in 1988, in a period when the retail price index is only up about 60 percent. As was NASDAQ, the top end of the London housing market is in a state of speculative excess that does not represent the market as a whole; nevertheless, also like NASDAQ, its collapse will have a huge knock-on effect on economic activity, if only because of the jumbo mortgages that have been assumed in order to buy such houses or, worse, have been "cashed out" of the houses to support an unsustainable lifestyle.
The next several years are thus likely to be ones of economic ebb tide in Britain, similar to the mid 1970s and very early 1990s (albeit without the high inflation of those years) in which economic growth struggles to attain a positive figure, and both press anecdotes and the experience of British voters reinforce a feeling of economic decline and government failure. If, as seems likely, taxes are increased at the same time, the feeling of decay and failure is likely to be still stronger. That has to be good news for the Tories.
Blair is however a perpetrator of economic misfortune as well as a victim, primarily in the area of British public spending. Here, his early years were successful. For the first two years after his election, he and Chancellor of the Exchequer Gordon Brown made a fetish of following the outgoing Tories' (fairly generous) public spending plans, then, from 1999, they increased spending moderately while promising much greater increases after the 2001 election. This strategy worked, in that it got Blair re-elected, but if Blair's promises of better public services are to be met, the cost must now be paid in terms of considerably higher public spending.
In one respect of course the upward pressure on spending is inevitable. By greatly reducing over the long-term British old age pensions as a percentage of average earnings, the 1980s Thatcher government defused for pension purposes the demographic time-bomb of an aging population, that is likely to make EU countries such as Germany and Italy more or less ungovernable in a generation's time. However, the Thatcher reforms did not address the corresponding time-bomb in the National Health Service, which is also actuarially unfunded and which also faces the problem of rapidly increasing demands on resources from an aging population while the economically active population that can support the cost stagnates in numbers and income. Healthcare costs begin to escalate earlier in life than pensions, as health problems begin to accrue in serious numbers, particularly to the "chip-butty-and-ciggies" working classes, from about the age of 50. Hence as the "baby boom" born after World War II enters its 50s, the costs of the National Health Service begin correspondingly to escalate.
Add to the actuarial problem the increasing costs of modern medicine and the natural desire of doctors and nurses to enjoy lifestyles that are enriched alongside their neighbors (thus causing wage costs to escalate at least as fast as wages in the economy as a whole) and you have a triple-fueled cost increase problem that would be difficult for any government to solve. A Labor government in particular, dependent for its electoral support on the social groups that save least and suffer from the most mid-life health problems is particularly vulnerable in this respect.
The Pre-Budget Report of November 2001 demonstrates the effect of this. For a start, it makes the generous assumption that gross domestic product will increase at an annual rate of 2-¼ percent in real terms between April 2001 and March 2007. Given the likely "ebb tide" in the British economy, and the top-of-the-cycle position in April 2001, this is surely over-optimistic -- it compares closely to the equally optimistic 3-¼ percent growth assumed in the U.S. budget, since U.S. population increases about 1 percent per annum faster than British. Under these optimistic assumptions, total spending, current plus capital, increases from 38.1 percent of GDP in 2001 to 39.2 percent of GDP in the year to April 2006. On a more realistic assumption of 1 percent per annum GDP growth, ignoring the increased spending directly resulting from a cyclical downturn, "full employment" spending would increase from 38.1 percent of GDP to 41.2 percent of GDP, giving a "full employment" net borrowing requirement in 2005-06 of 3.2 percent of GDP. Add in the drop in revenues and increase in expenditure caused by lower growth, let alone the cost of any increases in NHS costs (inevitable) or indeed military expenditure, and the net borrowing requirement quickly escalates to 6 percent-7 percent of GDP, or say 80 billion pounds ($115 billion) in 2005-06, the likely election year.
That's not impossible to finance, but apart from being far above the EU's "Maastricht Criteria" level of 3 percent of GDP it would most probably require a substantial tax increase in the two years before the election. To avoid electoral disaster, this would most probably be imposed on the higher wage earners. My guess would be, an abolition of the ceiling on employee National Insurance payments (effectively raising the top marginal rate of tax to 50 percent), together with a modest capital levy. These, together with the increase in public spending, which would suck resources from the private sector, would make the economy in general even more anemic and the housing and stock markets in particular even more depressed.
Not an election-winning formula, in other words. For British Tories, it's a question of "survive till '05" - the next election, at least looks hopeful indeed.
(The Bear's Lair is a weekly column which is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the past 10 years, the proportion of "sell" recommendations put out by Wall Street houses has declined from 9 percent of all research reports to 1 percent. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)