Hamish McRae: The special relationship that is shaping Britain's future

We are inexorably drawn towards an American-style economy ­ should we be worried?
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The Independent Online

Mid-Atlantic or heart of Europe? When George W Bush got a roughish ride in Gothenburg on Thursday from his European counterparts over the US refusal to ratify the Kyoto accord on carbon dioxide emissions, it was Tony Blair who sought to act as honest broker between the US and Europe. We are in our usual role of go-between.

But which way are we really heading? On the environment we are firmly European. Politically, we sometimes seem to be heading towards the Continent rather than the States. Increasingly, too, our regulations are framed by Brussels. But our economy seems to be moving in the other direction. Go back 30 years and we were a pretty typical European economy. Now we are a long way towards becoming an American one.

You can see the superficial aspects of this every day ­ the Starbucks coffee shops, Gap fashion, McDonald's of course. These American companies are also well established on the Continent, but they come here first and they have, in general, been more successful.

This is just the froth. The Americanisation of the British economy is much more deep-rooted. It is not just a question of how we spend our money, the fact that we are buying more US-style goods and services, although that seems to be happening. The bigger change is in the way we earn our money: the jobs we do, the way we do them and the extent to which we spend or save our earnings.

Take a simple measure: the proportion of GDP going in public spending. In France it is 50 per cent, in Germany 45 per cent, and in the US 29 per cent. We are currently 38 per cent ­ some way towards the US end of the scale. But 25 years ago our spending was 47 per cent of GDP, actually higher at the time than France or Germany and way above the States.

The structure of our economy has also changed to become more like the US. In 1975 services accounted for 63 per cent of US output; in Britain and France it was 56 per cent and in Germany just over 50 per cent. Now the US still has the highest proportion of services, at just over 70 per cent, but we are close at just under 70 per cent. Meanwhile, France and Germany have only about 63 per cent of their economy in services. We have transformed our economy, out of manufacturing and into services, to match that of the States.

What do we do with our money? Like Americans, we enjoy spending it. Private consumption in US is 68 per cent of GDP and here it is 65 per cent; but the French spend only 54 per cent and Germans 57 per cent. Unlike that of Britain, the share of consumption is falling in France and Germany. As a result the real take-home pay for British full-time workers in manufacturing is now higher than in France or Germany (although lower than in the US). Like Americans, though, we want more. American household savings are now negative: they spend more than they earn. We do save a bit ­ 4 per cent of our income ­ but the Germans save 10 per cent and the French a whopping 16 per cent.

Now, as with all statistics, you have to aim off a bit. One of the reasons why both Americans and Brits appear to save so little is because we also save by buying our houses and through funded pension schemes. You could also select other stats ­ the length of our holidays, for example ­ that show that we are more like Europeans than Americans. Thank heavens for that: few of us would like to go back to two weeks holiday a year, three if we were lucky.

But the big point stands. Whether you look at the British economy in national terms ­ its overall structure ­ or in human terms ­ the way we work and play ­ we seem to be leaning inexorably towards being more American and less European. So is that good or bad?

We will all have our own different cultural reactions to this proposition. A bit may depend on whether you are temperamentally a Brownie or a Blairite: people like Gordon Brown (who spent his honeymoon last summer on Cape Cod) would probably rather welcome the leaning; but if, like Tony Blair, you prefer to holiday in the Tuscan hills, becoming more American would be a touch discomforting.

But from an economic perspective, becoming more American seems to me to carry both opportunities and risks. The opportunity is that we will continue to get richer faster. That is by no means certain, but it seems likely that the adaptable, service-driven model of the US economy will continue to deliver more growth and to create more jobs than the less flexible Continental version.

If that is right we might carry on with an economy that grows at something closer to US rates rather than Continental ones, as we managed to some extent to do during the 1990s. We did not grow as fast as the US over the decade, but we grew faster than France and Germany. Having higher living standards is not the only thing that matters in life, but most people enjoy the fruits of economic growth.

More than this, decent growth is a prerequisite for decent public services, as our government keeps reminding us.

There are advantages in the short term too. The great thing driving the British economy at the moment is the willingness of our consumers to go on spending. Just this week we had evidence of very strong consumer spending in Britain with retail sales up more than 6 per cent a year. With the world economy slowing fast, retail therapy has become almost a civic duty. We don't want to be like the Japanese, where consumers' reluctance to spend has plunged the economy into recession. If America avoids recession, it will be due to enthusiastic consumers, too.

But there are risks. One is that we will overspend and face a nasty adjustment. The US is running a current account deficit of 4 per cent of GDP, which cannot be sustained for ever. The UK deficit is only half that, but will at some stage have to come down.

Another more nebulous risk is that we will become tired of the social costs associated with a more American-style economy. These are often overstated by Continental Europeans who dislike American society: what social cost could be higher than eurozone levels of unemployment, still on average well over 8 per cent? But a US-style economy does involve an acceptance of rapid change, a willingness to take a different job, and move to a different part of the country ­ all things that make many Britons uneasy.

If we stop wanting to behave more like Americans we may still find it hard to change the momentum of the economy, particularly since similar global forces are pushing the Continental European economies towards the US model too. So we had better learn to like the US model and shape, nudge and modify the bits we don't like.

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