Wednesday 9 February 2011


Predictions are best made after the event so (even with the advantage of being 8% of the way through the year) I will instead highlight what I think will be the important issues of 2011.

In the UK:

The AV Vote

Although most people have given this topic little thought, the vote in May will be very relevant to the future of the coalition. And future Parliaments.

If there is a no vote, then proportional representation will be unlikely for many years. This would be a hard blow for the LibDems and would make many wonder what they have got out of the coalition (apart of course from helping to salvage the economy). Given that the coalition will be at its most unpopular the temptation for some to bail out will be high. Even if they don’t, many will be sullen and uncooperative. The opposite would be the case if there’s a yes vote: a lot of Conservatives will be fed up and see yet another (as they see it) LibDem victory. So whatever the result, the tensions on the back benches will increase. I think it’s most likely that the coalition will continue but there’ll be more discontent which will make it harder to achieve its aims.

As far as the future is concerned, it seems to be hard to predict the impact of AV – especially as there’ll be fewer and hopefully more consistent constituencies. Some think it’ll have little impact, but it’s more likely to increase the chance of coalitions. This one has worked surprisingly well so far. But it’s not obvious we need lots more.

The slight reduction in the growth of public expenditure (aka The Cuts):

The impact on the economy

The key is confidence.
Acting quickly to get the deficit under control was good. It gave investors – the people who fund our deficit – confidence in the country. It has allowed us to keep funding the deficit without paying high interest rates, the costs of which would add to the deficit. It allowed business to feel that the Government was getting a grip and that they in turn could invest to re-balance the economy to one of wealth creation rather than public waste.

Although the scale of the cuts is small, changing the trend from massive growth in public spending to a standstill or slight reduction is like turning an ocean liner. There will be unemployment, projects will stop (although infrastructure investment is continuing) and people will be nervous. As the global economy has picked up, so has inflation especially in raw materials, exaggerated in the UK by a weaker pound which complicates the reaction of the Bank of England’s monetary policy committee. Nervousness – a lack of confidence - could constrain spending and investment and therefore damage growth.

As the cuts start to come into effect this year, the interplay of these two impacts on confidence will be critical to whether we see growth returning in the UK in 2011/12.

The impact on social cohesion
Many people will be using the cuts to ferment trouble: ultimately the cuts threaten an end to all those who live off the culture of dependency, especially Labour. But the degree of change requires a broad public sympathy – not necessarily a majority agreement, but some respect that the right things is being done. Initially, that sympathy is there. Will it stay as the cuts bite?
The first sets of demonstrations, about changes to the funding of university students, were if anything beneficial to the Government. The sight of privileged youths creating a mess on the whole increased support for the proposals. And the public sector unions run major risk if they inconvenience the public too much by what are perceived to be political demonstrations.

But: if the cuts impact too much on front line staff then public sympathy could shift. There’s a growing feeling that there is total lack of joined-up thinking to the cuts, with every arm of government looking to its own interests, in particular with councils cutting charity and voluntary funding much more sharply than their own, because it preserves their empires and saves them redundancy costs. Coupled with silly things like the sale of woodland and rushed changes to the NHS, all this could change attitudes and make it impossible to implement the cuts effectively.

2011 will tell.

The Royal Wedding

This is a good news event; it’ll give a feel-good factor. The sales of commemorative tea-towels and mugs will all help boost the economy as will the influx of tourists. It’ll also be good for our national image increasing tourism on a longer term basis.
I think in fact it’ll be much more useful than the Olympics in the following year, which will probably be an expensive damp squib. The happy couple have chosen a good time to increase our national morale and – hopefully – confidence.


London is one of the two major financial centres in the world – probably the major international one. The financial services business generates substantial employment from those who support it ranging from lawyers and accountants to restaurants and builders. It is the driving force of the UK economy, one of the few businesses where we are world leaders. It is also much wider than just “banks”.

Yet popular opinion seems to despise bankers, far more than in any other country – even the US, where the devastation from the house price collapse was worse than the UK. As regular readers know, I think the banks made major mistakes in the last few years and that as a country we did not exact enough reward for bailing some of them out. However, the banks were neither wholly or primarily to blame for the “credit crisis”, and it is likely that we will make a profit on the bail outs we did make. The US investigation into the causes blames a number of factors, primarily lax Government policy; the best explanation I have seen came from Michael Geoghegan, ex-CEO of HSBC (with JP Morgan one of only two Western banks that truly did not need help; he can therefore be dispassionate):

"The financial crisis was a heady cocktail of western governments voted in on consumer agendas, and financed by banks in the western world that didn’t have domestic savers’ deposits to fund the growth in consumer lending and then relied on foreign wholesale deposits which were quickly withdrawn when doubts about the western financial system arose”.

So why do we hate bankers so much more in the UK than elsewhere? I think there are three reasons:
- Our Government was more to blame than most for the crisis in the UK (because of its uncontrolled public sector expenditure, the lax regulatory system it set up and the inadequate responsibilities of the monetary policy committee). It therefore made much more effort to blame the banks than other Governments, and in the heat of the crisis the opposition had to follow suit;
- The UK has a limited number of big banks, which most people bank with. And often have bad consumer experiences with. These banks are involved in wholesale international markets as well. In the US, the banks involved in international markets tend not to be those most people bank with and so the issues are more distant.
- The disadvantage of a vibrant press in the UK is that they rarely let facts get in the way of a good story.

But even with these reasons I don’t understand the depth of dislike. It has two bad consequences for the UK:

- If you don’t understand what went wrong, the remedies will also be wrong; we won’t put in place the right structures to minimise the risks in future. This is particularly worrying because the world has not by any means finished working its way through the debt problem.
- Over time, the negative feelings will cause international financial services to drift away. Most other countries are putting in place favourable tax and regulatory regimes to take the business away just as we are doing the opposite. Good riddance, people cry. But in ten years or so time, when our tax and employment base is much less, and the centre of international commercialism has shifted so our influence and involvement in the world economy is less, we will suffer. Not the ex-bankers by the way – they’ll be fine. The general public.

Will 2011 be a year when banker bashing becomes less emotional? I doubt it. But for the long term future of the UK I hope so.

Briefly, elsewhere:

Freedom of information

Wikileaks' publication of a mass of stolen emails from the US Government caused split views: a bold campaigner for truth and freedom of expression? Or a careless exploiter of stolen information?

The thing that worried me about Wikileaks’ supporters was their conflation between freedom of expression – and important right that people should be able to say what they think – and freedom of information, defined as the right to have all information even if it is private. Or, to repeat the point, stolen. The right to take and use what isn’t yours isn’t a good thing and labelling it as freedom of expressions does not make it so.

We live in a world where people are more and more inclined to make information about themselves public, even if they later come to regret it. This attitude will permeate society and generally this is a good thing. Transparency especially over Government activity is a good thing. But not to an unlimited extent. People have to have private discussions and thoughts before they make decisions. As we put more of our information into databases we don’t control we will lose control of our information. I don’t know the end game, but I am sure that the trend will continue in 2011 and I am nervous about the consequences. I think we’ll be more manipulated than free. And the distinction between private and public remarks will diminsh to the loss of all of us.

The Euro

Will it survive? There were many doubters last year as investors in various countries’ government debt lost confidence in their ability to repay, demanding higher interest rates and eventually causing bail-outs. Each country had different reasons for the problem, from Greece’s original unsuitability to be a member of the Euro-zone to Ireland’s decision to fully guarantee its banks. All highlighted the problems of the original Euro project: to have a common currency amongst countries with insufficient economic convergence, with no proper assessment of the extent of the convergence and no common governance process to monitor each other’s economies and to transfer money from one country to another. If things were left alone, almost certainly countries would have to leave the Euro-zone and the project would be damaged (although had the Euro originally just been a core group of about four or five countries aligned with the German economy it probably would have not come under strain).

However, it is unlikely that they will be left alone: there is a tremendous political pressure in Germany and France to keep the Euro going and the effectiveness of that pressure should never be doubted. It does seem that the two countries will force through governance changes which will solve some of the original problems, with mechanisms for transfer payments in return for tighter central controls over countries’ economies. And there may be a partial default or two. The long term result should be good for Europe’s economies.

I don’t think we should be part of this process, I think as a result we will shift to an outer tier of European harmonisation but I think that will be very healthy. We needn’t integrate as closely as others would like, but we needn’t be a drag on those who want to. We will always be a large player and therefore with influence.


Just as last year, this region is at the heart of the problem of terrorism driven by Islamic fundamentalism. Pakistan has a massive population, problems of poverty, a poor education system, corruption and a military whose paranoia over India and Kashmir has caused it (mostly indirectly) to be a prime sponsor of terrorism. It also has nuclear weapons. I don’t think anyone knows what to do: I think the only hope is that Pakistan’s educated middle class can act as a calming influence to bring aspects of the country together over time, and in the meantime there are no regional outbursts that that add to the tension.

Historic links with Saudi Arabia, which has funded most of the extremist schools, bring the problem closer to the Middle East where Israel continues to have a short term view of the situation: its oppression of the Palestinians continues to breed longer term problems.

I write this as the situation in Egypt remains uncertain; and what happens there will affect other Arab dictatorships. As well as Israel. 2011 doesn’t seem like a calm year in the Middle East.


Economically, only one country counts: China. Its economic growth, the size of its savings which are largely funding the US and the increase in average wealth of the population are the main things that will determine the world’s economy in 2011. That’s not to diminish the importance of other emerging economies, or the likely recovery in America, but China will dominate the out-turn.

It faces three broad questions: how it controls the economy without an excessive boom leading to bust (many think this is inevitable); how it balances a growing middle class and personal wealth with state control and a lack of political freedom; and how it chooses to use its influence in world politics – whether it continues to be largely impartial to world events or whether it seeks to use its influence – and if the latter, how. We will all be impacted by those questions.

To close: a quote from Warren Buffet: forecasts are a better guide to the forecaster than the future.