Viewing cable 10LONDON364, BANK OF ENGLAND GOVERNOR: CONCERN ABOUT RECOVERY,
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VZCZCXRO5961
PP RUEHAG RUEHROV RUEHSL RUEHSR
DE RUEHLO #0364/01 0481718
ZNY CCCCC ZZH
P 171718Z FEB 10
FM AMEMBASSY LONDON
TO RUEHC/SECSTATE WASHDC PRIORITY 4989
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 02 LONDON 000364
SIPDIS
NOFORN
EO 12958 DECL: 02/16/2020
TAGS ECON, EINV, PGOV, UK
SUBJECT: BANK OF ENGLAND GOVERNOR: CONCERN ABOUT RECOVERY,
CONSERVATIVES’ READINESS, AND THE UK IN THE EU
Classified By: Ambassador Louis B. Susman for reasons 1.4 b and d.
¶1. (C/NF) Summary. Reining in the UK’s debt will be the greatest challenge
facing the party that wins the expected May 6 general election, Bank of
England Governor Mervyn King told the Ambassador in a February 16 meeting.
While neither party has adequately detailed plans to reduce the deficit,
King expressed great concern about Conservative leaders’ lack of experience
and opined that Party leader David Cameron and Shadow Chancellor George
Osborne have not fully grasped the pressures they will face from different
groups when attempting to cut spending. King also raised concerns about the
global economic recovery, arguing that global growth in 2010 would be anemic
and a double-dip recession remained a possibility. Greece’s profound economic
troubles will trigger a further consolidation in power within the euro-zone,
with Germany and France likely to impose the right to scrutinize if not
exercise some control over Greek government accounts in return for an
implicit or explicit guarantee, he predicted. The UK has been on the
sidelines in the debate over Greece and could have less influence in the
EU, as Germany and France will seek greater political cohesion in the
euro-zone in the aftermath of the Greek crisis, he stated. End Summary
Bleak UK and Global Economic Picture
------------------------------------
¶2. (C/NF) For the next ten months, the UK faces the challenge of adopting
deficit-reduction measures, controlling inflation and addressing rising
unemployment. The deficit is expected to reach 12.6 percent of GDP in 2010.
Inflation for the twelve-month period, December 2009 to December 2010,
reached 3.5 percent, primarily a result of the return of the VAT rate to
17.5 percent and higher energy prices. King predicted that inflation would
drop to two percent this year, since energy prices are expected to stabilize,
with oil price per barrel remaining at or near USD 70. The UK also likely
faces rising unemployment. Businesses will cut jobs faster this year and
eliminate many part-time positions, as employers realize that economic
recovery will be a long, drawn-out process, said King. The U.S. already
has gone through this pain of rising unemployment, and saw in the last
quarter of 2009, a rise in productivity. The UK - and Europe in general
- has not gone through this restructuring, and productivity fell
throughout 2009.
¶3. (C/NF) The global picture was also worrisome, commented King. At the
February 6 G7 meeting in Iqualit, Canada, the German and Japanese Finance
Ministers, raised concerns about weak domestic consumption and the slow
recovery of export trade, King stated. While China’s domestic spending,
primarily on its large infrastructure projects, helped ameliorate the
worst of the global economic crisis, there has been no noticeable change
in domestic consumption. China’s consumers will not lead economic growth,
he said. Given these factors, as well as the high U.S. unemployment and
Europe’s expected rising unemployment, it was hard to be optimistic about
recovery in 2010, King argued, and noted a double-dip recession was still
a possibility.
Conservatives - Not Prepared
----------------------------
¶4. (C/NF) Conservative leaders David Cameron and George Osborne do not
fully grasp the pressures they will face when attempting to cut back on
spending, when “hundreds of government officials will make pleas of why
their budgets should not be reduced,” stated King. In recent meetings
with them, he has pressed for details about how they plan to tackle the
debt, but received only generalities in return. Both Cameron and Osborne
have a tendency to think about issues only in terms of politics, and how
they might affect Tory electorability. King also raised concerns that
Osborne’s dual roles as Shadow Chancellor of the Exchequer but also as
the Party’s general election coordinator could create potential problems
in the approach on economic issues.
¶5. (C/NF) King also expressed concern about the Tory party’s lack of depth.
Cameron and Osborne have only a few advisors, and seemed resistant to
reaching out beyond their small inner circle. The Cameron/Osborne partnership
was not unlike the Tony Blair/Gordon Brown team of New Labour’s early years,
when both worked well together when part of the opposition party, but
fissures developed - for many reasons - once Labour was in power. Similar
tensions could arise if Cameron and Osborne disagreed on how to handle the
deficit, and the lack of depth in their inner circle, would aggravate the
situation.
LONDON 00000364 002 OF 002
Greece’s Problems Will Re-Define Euro-Zone
------------------------------------------
¶6. (C/NF) Germany and France will ultimately have no choice but to offer
explicit guarantees of Greek debt, argued King. The euro-zone could not
risk a Greek default and euro devaluation would not be an acceptable
political option for Germany or France. Germany and France will likely,
as a condition of any guarantee, require the ability to scrutinize if not
exercise some control over the Greek budget. Longer-term, the drive for
greater political cohesion will accelerate. The EU’s one single success was
the monetary union, and now that success has been undermined. Leaders in
Germany and France have recognized that allowing monetary union to happen
without corresponding political cohesion was a mistake and one that needed
to be rectified, King opined.
¶7. (C/NF) The euro-zone’s move to greater political cohesion could poise
some disadvantages for the UK, King speculated. During the February 16
ECOFIN meeting, euro-zone governments politely listened to Chancellor
Darling when he commented on the situation in Greece, but he was not
invited to attend internal discussions since the UK is not part of the
euro-zone. It would be incumbent for the UK to demonstrate that it has
something meaningful to say and to be constructively engaged in the EU,
should this greater political cohesion among the euro-zone governments
occur, commented King.
Visit London’s Classified Website: http://www.intelink.sgov.gov/wiki/
Portal:Unit ed_Kingdom
SUSMAN
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