Dr Liam Fox: Key Risks to the UK Economy in 2015


The following was delivered as a speech by The Rt.Hon Dr Liam Fox at a Parliament Street event held at Kings College London.

Britain’s economic transformation

It is difficult to remember today, what 2010 felt like.  The last general election was fought against the backdrop of Labour’s deep recession, volatility in the financial markets and fear for the value of sterling.  Not only were the public finances in a dire state, but huge personal sector debt compounded the problem and the extent of Gordon Brown’s “off the balance sheet” PFI financing  was a worryingly unknown quantity.

The coalition was formed, partly out of fear of what could happen in the markets or to the currency if political instability were to persist – done in the national interest.

How different things appear today and how much international sentiment has changed towards the United Kingdom’s economy.  The new government could simply have done what previous governments had done and stimulated a consumer led boom by increasing wages, especially those in the public sector under government control.

But this is not what we chose to do.  The mission of the Government was to get people off the dole queues and out of welfare dependency and into the world of work.  We have been spectacularly successful in doing this.  Indeed, the 1.85 million jobs created in this country over the past five years is the envy of most Western economies and something that our European partners can only dream of.  It is an achievement of truly historic proportions.  It is unprecedented in its scale since WW2, but it has not come without some political cost. 

There are, I believe, two reasons for this.  The first is that many of the jobs that people have obtained are, initially, relatively low paid and so it is likely to take some time before they feel the full benefits of our economic growth.

Secondly, and partly as a consequence of this, the generation of Treasury receipts has been lower than we might have liked, and so the deficit has come down slower than might have been anticipated despite the level of public expenditure cuts.  We may now be seeing a change in both of these trends.

Wages are now rising above inflation and generating real increases in the standard of living.  At the same time, last week’s figures showing much healthier tax receipts for January are a welcome sign.  Politically, the Prime Minister has skilfully steered his coalition government away from some of the worst interventionist instincts of the Liberal Democrats and the Chancellor has successfully overseen the first part of a necessary readjustment in public spending, which has created the space for the dramatic expansion of private sector employment.  Iain Duncan Smith’s welfare reforms have been not only radical but, generally, popular.  These are no small achievements, especially when seen against the sclerotic state of affairs across the Channel with most of our European partners.  Tax cuts, deficit reduction and job creation are now synonymous with the British economy in a way that would have seemed almost impossible only five years ago.


While we have every right to be proud of our achievements in the last five years in our economic achievements, there remain a number of clouds on the horizon.  There are a number of risks out there that could yet derail our economic success – some of them global in nature, some of them of European origin and some of them home-grown.  Some of them we can do nothing about, except create as much resilience in our economy as we can.  But some we can do something about – and here we have a duty to act.


In the bigger picture, the greatest risk to the UK economy comes from what now appears to be a very clear global slowdown.  The IMF had predicted world trade volume to be up 3.8% in 2015, but this has now been downgraded to 2.7%.  This is at least in part due to a reduction in the Chinese rate of growth.  It is worth noting that a 1% drop in the Chinese growth rate now results in a half percent drop in global growth.  With Western economies beset by high debt burdens and recovering from the 2008 banking crisis, China has been the engine of economic growth in the recent past.  But China is now slowing to its lowest level of growth in more than 20 years, with the IMF, cutting 4% off its growth forecast since 2010.  Why has this happened?  At least in part, it can be explained by the fact that growth in China had previously been fuelled by credit and exports, but both are now diminishing.  There is limited room to stimulate growth by further lending with banks suffering from the constraints imposed by China’s shrinking current-account, worsened by the fact that some Western countries are choosing to bring their manufacturing base back home.  The World Bank has been urging China to have a managed slowdown with reduced public spending and a diminution of non-bank financial sector exposure.

Minimum wages, rising at 15% a year, are one of the factors adding to the country’s declining competitiveness.  And all of this in a country which is responsible for a quarter of all the lending of the world – $26 trillion of loans.  Add to this the weaker than expected rebound from recession in Japan, following the worse than anticipated effect of the rise in sales tax, and it is easy to see why some predict that the global recession is coming, especially when the difficulties of many of the so-called emerging economies are added to the mix.

In my book, “Rising Tides”, I set out how global financial linkages and imbalances can be part of a threat pattern that can manifest itself in many different ways.  This brings me to the second type of risk.


All of these global economic problems might even be manageable, were it not for the fact that there is, simultaneously, a growing worry over global security.  The destabilising effect of the rise of ISIS in Syria and Iraq, and the threat of further destabilisation of the world’s most important oil producing region is probably priced in to most global market assumptions.

What is much more worrying, however, is the behaviour of Russia.  The economic sanctions, triggered by Russia’s annexation of Crimea by force and its continued incursions into Ukrainian sovereign territory, show how intricately linked economics and have become, particularly in the era of globalisation.

I have long argued that debt is strategic issue for nations that are unable to control it, as it will ultimately weaken their ability to fund adequate defences.  By the same token, economic weakness can produce a lack of resilience that makes responses to security challenges more difficult.

While Britain has understood that sanctions against Russia can have some unwelcome domestic consequences, we now have sufficient resilience to be able to take the decisions necessary for our security concerns, knowing that we are able to tolerate the economic costs.  For many of our European partners, however, this is not the case.  For some, the potential effects on Russian behaviour that the sanctions might bring, will be outweighed by the domestic economic pain that they may endure.  I’m afraid that it is simply a fact of life that economic weakness ultimately brings weakness in security.  Some of our European partners, who have been serial economic self-harmers in recent years are discovering this to their great cost.  Money and security cannot be separated.

Defence capability needs to be supported by the financial means to provide it.  Economic resilience is a necessary part of the ability to face down external aggression.


This takes us to the next of the risks to the British economy, those generated in the Eurozone.  Let’s just briefly recap about this project, this folly, this confidence trick being perpetrated on the peoples of Europe, called the euro.

I believe that the euro is now the single biggest threat to global financial stability. 

The euro was always a flawed project.  Intellectually, it was never clear whether it was a political or economic entity.  In its execution, rules were regularly ignored building new fault lines into its already inherently flawed architecture.  Such was the rush to entry that no exit was planned with the consequence that no one has any idea how to get out in a crisis, as Greece is so clearly demonstrating.

There were two intellectually defensible models for the euro.  The first was to say that this was such an important element of ever closer union that everything possible would have to be done to make it succeed.  Some saw this as analogous to the United States after the civil war.

Then, with the abolition of the Confederate currency, there was a consolidation of state debt into the federal debt for the first time and the ability to have free fiscal transfers between the federal and state governments if required.  This is not happen in Europe because of the huge disparity between debt levels and the unwillingness of sovereign states to bail out other sovereign states.

The second possible model was a purely economic one.  Currency union was to be for those economically similar nations who could meet strict criteria for entry and maintain sufficient fiscal discipline to be allowed a say in the central bank.

In the end, neither model was followed by instead an unstable and unworkable hybrid.  Not only were countries who failed to meet the convergence criteria allowed to join the euro but a lack of fiscal discipline subsequently meant that many countries, including at times France and Germany, broke through the barriers that were supposed to keep the currency on the rails.  Little wonder that some countries, like Greece, operated in the apparent belief that whatever they did a financial solution would be found for them from outside.

Germany more than any other country must decide whether this contaminated hybrid will be allowed to continue or not.  In effect it says that the euro is an indispensable landmark on the road to ever closer union but that Germany will not make the fiscal transfers necessary to make it happen.  Worse, the view from Berlin has been interpreted to mean that Germany is willing to tolerate any level of austerity in any other country apart from Germany in order to make the project succeed.  This is a recipe for instability and the rise of nationalist sentiment in Europe. It potentially makes the stability pact a suicide pact.  The idea of austerity being forced upon smaller nations by Berlin has too much historical resonance to succeed without fostering potentially dangerous political backlashes on both left and right.

Being outside the Eurozone, we have been bystanders at the latest cycle of the great Greek euro tragedy.  While it is not entirely certain how it will play out, it seems increasingly likely that the new Greek government will have to capitulate over the terms of its loan agreements, if it is to remain inside the euro.  While other members may see this as merely the application of the rules, and the Germans may see it as a means of preventing others following the same behaviour, there is another interpretation to recent events.

The Greek people sent a very clear message that they wanted an end to the policies of austerity that had been imposed from outside.  They elected a new government with a clear mandate.  It now appears increasingly clear that what any domestic electorate wants is a marginal consideration compared with the demands of the Eurozone collectively, or more precisely, the German government.  While it is economic madness on behalf of the Greek government to believe that they can defy economic gravity, the democratic implications of the “Syriza affair” are clear.

Of course it is true that the euro did not create the deficits and debt that so bedevil the economies of Europe – we can see how many countries outside the system have the same difficulties – but the fact remains that certain fiscal and economic policies were permitted which widened rather than narrowed the gaps between the member states, ensuring that an unstable structure became even more unsafe.  Locked into what is effectively German monetary policy and without the ability to devalue, southern European countries, in particular, are economic sitting ducks.


In the end rationality will have to prevail. With unemployment among young people soaring – in Spain it is 58 per cent – it must be hoped that this will be sooner rather than later, if the hopes and dreams of a generation of young Europeans are not to be sacrificed on the altar of the single currency.  If the euro is not de-risked, it will provide a potentially deadly source of contagion inside the global economy.  How could such a process be carried out?  I think there are broadly four options.  The first is to abandon the euro and return to individual national currencies.  This will not happen as it would be a complete abandonment of the concept of ever closer union and is as close to a capital offence, and unforgivable heresy, as exists in the corridors of Brussels.

The second option would be for the economic outliers, particularly those in southern Europe, to leave.  This would, however, simply lead to the markets testing the next most vulnerable country – the economic equivalent of “you are the weakest link – goodbye”.

The third option would be for the single biggest outlier, Germany, to leave, but this would deprive Germany of the euro, a hugely undervalued currency in relation to the state of the German economy, and thus, a hugely valuable economic tool.  This won’t happen either.

The last option on the de-risking menu is for those countries in the Eurozone who wish to proceed with the euro to move towards the full political, monetary and economic union, the inevitable destination of ever closer union.  When I spoke to a senior European official recently he told me that “your analysis is precisely correct, but none of the four options will be taken”.  I have no problem believing what he told me, as being in denial of the economic and human consequences of the entire toxic euro experiment is an essential part of the mindset of the European bureaucrat, but unless action is taken, not only will much of Europe remain economically becalmed, the global economy will be carrying a huge risk.


But let us not get depressed about these risks to our economy that we can do nothing, or at least little, about.

There is one huge risk still facing our economy that is entirely within our ability to prevent – that is the election of a Labour Government led by Ed Miliband.  Most Labour parties have the wit to be vague, if not downright dishonest, about their economic intentions.

Not this one.

Just as he was stupid enough to talk about “weaponising the NHS” and damage his credibility in one of his key political battlegrounds, so the Labour leader has been clear about his unashamedly socialist economic plans.

Miliband has made it clear that Labour intends to tax investment more, tax enterprise more, tax income more, tax property more – in fact, tax everything more.  To be more precise, they are proposing a bank payroll tax, restricting pension tax relief, higher corporation tax, and abolishing marriage tax allowance, just for starters.

They have also made clear that they intend to spend more, especially on extending the welfare state and the tentacles of welfare addiction that the Coalition Government has valiantly tried to cut back.  This time there is no pretence, as there was with Gordon Brown, that we were getting investment, not spending, on public programmes.  This time, no euphemisms.

And just as they intend to tax more and spend more, they intend to borrow more.  In particular, they will borrow from the next generation to help buy their way into office.

They will spend all our tomorrows to fund their consumption today.  They will party and the next-generation will get the hangover.  That is what a Labour victory would mean.

We are already paying almost £60 billion a year in debt interest which has a knock-on effect on other spending programmes and which makes it more difficult to bring down our deficit.

We do not need more tax.

We do not need more spending.

We do not need more borrowing, adding to our national debt.

We do not need more socialism.

We do not need Labour.  And we must do everything possible to make sure it doesn’t happen.

Our economy, like everything else in life, faces a range of risks.  This is especially true in the globalised era, where our interdependence is greater than ever before.

There are some risks that we cannot affect.  For these we require understanding of their nature, vigilance and resilience.  These will include the factors that can lead to a global slowdown, often occurring on the other side of the world.

Some, we can partially influence and here we must all the tools at our disposal – financial, political and diplomatic.  The continuing chronic crisis of the euro falls into this category and, although we are not part of the Eurozone, we still have considerable influence within the EU where we can bring our views to bear.

Some risks still lie within our control and we must deal with them decisively.

The election of a high taxing, high spending and high borrowing, Socialist Labour Government would undo all the hard work and sacrifices of the last five years and set us back on the path to unsustainable debt that would fall on the shoulders of the next generation.

It is an unthinkable error.

A potential national tragedy.

A risk too far.


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