British economy. A cut above

Britain's economy is weakening. But it still holds lessons for the rest of Europe

HOW many other European governments would have entertained the possibility? In April, halfway through an election campaign, Britain's Labour government allowed the country's last volume car maker to go bankrupt with the loss of some 4,000 jobs. Remarkably, apart from a few grumbles, most of the nation seemed to think that was just fine.

A prominent manufacturing collapse might seem an odd measure of economic success, but the popular consensus that workers at MG Rover and its suppliers could find jobs elsewhere was a vote of supreme self-confidence. London's victory this week in the race with Paris and other cities to host the 2012 Olympic Games will no doubt add to that confidence. The facts, though, are less cheering: the British economy has rapidly lost steam, with a sharp downward revision in GDP growth, fears that consumers are deserting the high street, a shaky housing market and fragile manufacturing. On Thursday the wise heads on the Bank of England's monetary policy committee, charged with setting interest rates, left them unchanged at 4.75% despite noisy demands from the head of the CBI, Britain's employers' federation, for an immediate cut. All the same, it looks only a matter of time before they make a cut - the first in two years.

This slowdown - it is still far from being a recession - comes at an awkward moment for the economy's ultimate guardians, Tony Blair and Gordon Brown. In their calls for structural reform in the European Union, the prime minister and his chancellor have derived much of their authority from the economy's success in generating jobs and wealth. Yet, as things stand, France could be growing faster than Britain by next year. The risk is that, as the cycle turns against Britain, the enduring lessons of its economy begin to fade.

Credit, where it's due

The recent weakness comes after a decade and more in which Britons have had plenty to celebrate. In that time, the country has enjoyed unbroken growth, low inflation and, latterly, joblessness at a 30-year low of 4.7%. By contrast, the eurozone has struggled to slough off slow growth and, in France and Germany, unemployment of roughly 10%. The country that 20 years ago was the sick man of Europe has seen GDP per person surpass that in France, Germany and Italy.

But pride can easily sour into smugness. Much of Britain's growth over the past six years has come not from some national miracle, but from a one-off boost that has raised government spending by five percentage points to an almost continental European 42% of GDP and a splurge in consumer spending on the back of a housing boom that, mercifully, now seems to be abating. A gentle slowing in the economy today is the best way of avoiding a more violent slowing later.

That is one lesson: if Britain's growth is to be rapid and lasting, the country needs to raise its productivity faster. This remains low partly for the admirable reason that the country employs more unskilled workers than, say, France, where they remain out of work. But only partly. Next to its European counterparts, British business is less innovative, employs less capital and draws on a less competent workforce. The ever-larger public sector is even more impervious to efficiency gains. Mr Brown, who has made productivity his thing, has tinkered with grants and education and incentives, but has little to show for it except even more complication for British companies that already complain of overregulation.

Britain has also gained from a sensible monetary policy. This week's decision by the Bank of England was preceded by much speculation of a cut: the markets believe it has the independence and policy framework to safeguard the economy. Compare that with the European Central Bank, also independent, but which has been constrained by the need to set interest rates for a group of divergent economies and is under attack from politicians who accuse it of keeping money dear in an attempt to force structural reform upon them.

But Britain's greatest example comes from the labour market, which still bears the mark of long-past Conservative reform. The changes in union law, the privatisations and the curbing of unemployment benefits seemed harsh at the time. The country at first suffered civil strife, unemployment and strikes - the antithesis of the “social Europe” so many continental leaders cling to. Britain's reforms took time, but they endured and created the conditions for the economy's most striking feature: a capacity to sustain high employment without inflation. There's nothing unsocial about that.

Editorial says that the British economy is weakening, but that it still holds lessons for the rest of Europe.

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