Leaders should not be completely market-led

Date: 20/05/1999

Within a year of winning the 1992 US presidential election for Bill Clinton on a pro-jobs/anti-poverty ticket, fiery strategist James Carville learned a painful fact of modern political life.

” I used to think that, if there was reincarnation, I wanted to come back as president or the pope,” he famously said. “But now I want to be the bond market: you can intimidate everybody.”

Carville was sore. A promised fiscal stimulus package and tax cut for the working poor had just been abandoned as the Clinton team banked everything on convincing bondholders that their investments would not be eroded by inflation or diluted by a flood of government debt.

Six years on, it is hard to argue with the unparalleled prosperity this abject surrender to the bond market brought. The incredible shrinking European employment pact - which now amounts to little more than a biannual ministerial talking-shop - is the latest evidence that euro-zone politicians have taken Carville's advice to heart.

In general, they are right. Bondholders (who include anyone with a pension or life assurance scheme) are not unusual in liking the people to whom they lend to be able to repay their debts. Extra risk has a price.

Witness recent events in the Greek markets. At any other time, the war in Kosovo would have sunk the drachma and driven up Greek interest rates. Instead, at worst, it added a mere 0.2&percent; to bond yields since investors are convinced that Athens will be a euro-area member by 2002. Euroland is acting as a protectorate.

For another outsider, the British government, the markets are driving EU policy. The so-called 'weakness' of the fledgling euro, now worth 10&percent; less against the dollar than on 4 January, is making it difficult for Charlemagne-prize-winner Tony Blair to advocate early EMU membership.

Only when the euro is seen as virile will Blair be able to follow his instincts and stop the UK becoming Europe's Canada.

This week's forecasts from the Organisation for Economic Cooperation and Development offer him some hope, since EU growth is expected to accelerate to 2.5&percent; next year while US gross domestic product will drop from 3.5&percent; this year to 2&percent; in 2000. In theory at least, short-term interest rate differentials should narrow and the euro should rise.

That such a key policy decision should hang on this guesswork is a sad indictment of modern political leadership. It is tedious to repeat it so often, but the fall of the euro against the dollar says more about the dollar than the euro and - what is more - does not matter. The inflation which could be imported by the euro's fall against the currencies of its major trading partners is miniscule. If politicians are to worship before the market altar, they should at least get it right.