Then the next object of attention and focus for hope will be the Bundesbank and the date when it will decide the German economy has suffered enough and it can start to reduce rates. On current indications that could easily be six months away, and cuts are likely to be moderate. They will be on nothing like the scale of interest-rate cuts made in the United States, where short-term rates are 3 per cent and falling. Yet those cuts have failed so far to stimulate the debt-laden US economy.
Britain's situation is, on the face of it, worse than that of the US. Our households similarly geared up by borrowing in the 1980s, but they invested the money mainly in houses that have been losing their value, reducing the private sector's net worth. Americans invested more in financial and other assets that have held value. Moreover, unlike Britain, the US has an undervalued currency now, making its goods competitive. If America can't grow with interest rates at 3 per cent, why should Britain be able to do so even when the Bundesbank permits our rates to fall to, say, 8 1/2 per cent?
No wonder some people are looking to the French referendum. Perhaps they hope a no vote will splinter the exchange rate mechanism. It is a faint hope. The UK can opt in or out but it is vain to expect the system to disappear to suit us.
Clearly, none of the Government's underlying policy dilemmas will be resolved either by the result of the French referendum or by the Bundesbank. Essentially, the Government has three things it is worrying about or would like to control: it wants to hold the exchange rate in the interests of forcing inflation down to the European rate; it wants to see a recovery in economic activity, and it wants to control the public sector borrowing requirement.
The trouble is it has two instruments in monetary and fiscal policy, and there is an old theorem in economics that says you can hit only as many targets as you have instruments at your disposal - if you are skilful and lucky, that is. If you have more targets than instruments, some objective has to be compromised in the interests of hitting the others. So the Government can move only two of its three objectives in the way that it wants. At present it is using monetary policy to hold the exchange rate and says it will direct fiscal policy to controlling the budget deficit. It therefore has no means left to influence the real economy - except prayer.
Meanwhile, the housing market continues to founder, repossessions mount, and doubts about financial institutions grow. The current policy implies a fall in GDP this year and growth below trend next year, with steadily rising unemployment.
There are two coherent alternatives but each involves sacrificing one of the other objectives of current policy. The Goverment could withdraw sterling from the ERM and cut interest rates by several percentage points. That should promote recovery, but the pound could fall by 20 per cent, adding two or three percentage points to the price level over a year or two. Inflation, instead of falling below 3 per cent next year, would stick around 4.5 per cent. Many would think that a 'price worth paying' but the implication is that the UK would not achieve inflation convergence with Europe.
If we can't do that now, after a monstrous recession, when can we? The markets would reasonably assume the answer was never, and Britain would not be able to maintain a truly fixed exchange rate. The political implications are adverse; the UK would be marginalised in future discussions on European union.
The Government has set its face against this way out. It was the approach followed by the Thatcher administrations, with devaluations (downward floats) in 1981 and 1985/6. The falling pound triggered booms ('miracles') all right but the Government was unable to control or calibrate them and an inflationary stop-go cycle was generated.
The second alternative is the Japanese approach: forget about containing the PSBR; indeed, resign oneself to a large expansion of the government debt stock. The Government would continue to hold the exchange rate with high interest rates but would announce a large programme of public works to boost demand in the construction sector. Some industrialists and MPs have already begun to suggest something along these lines without quite facing up to the implications. They have suggested a public-sector pay freeze and cuts in government recurrent spending to finance a big boost in public investment. That might be sensible in itself, but to kick-start the economy one must do more than take money out of one pocket to put it in another. It is necessary to state frankly that the boost to public investment is an addition to government spending and to the deficit.
An increased deficit could be financed, with only small rises in long- term interest rates, as long as the commitment to a fixed exchange rate was seen to be firm. Moreover, given that public works projects would be employing people and resources who would otherwise be unemployed, the real rate of return on such projects would be high - well above the 10 per cent financing cost. The deficit would expand, but less than proportionately because there would be reductions in unemployment pay and extra tax receipts. Nevertheless, the course could easily result in a government debt-to-GNP ratio above the Maastricht guideline of 60 per cent (it is currently around 40 per cent). The Government is already running a deficit of about 4.5 per cent of GNP and it will not take too many years to get debt to the Maastricht threshhold even at that rate. However, a public investment programme is a finite thing; when the projects are completed the extra expenditure stops. And when the economy gets into a period of above- trend growth - which won't happen for a year or two on anyone's projections - it will be time enough to run budget surpluses and try to get the debt back down. In the 1970s, Britain ran higher deficits than the current ones and as recently as the 1960s our government debt-to- GNP ratio was around 80 per cent. Such ratios are not desirable in themselves, but there is little international evidence they have seriously deleterious effects. Meanwhile the country would have an improved housing stock, a Channel rail link, and other benefits at a lower price than it would otherwise pay.
The point is that at present the economy is burdened by more net private-sector debt than the sector wants to hold. People try to increase saving but by Keynes's 'paradox of thrift' the attempted saving by some reduces demand and puts others out of work, reducing their saving. The Government can keep them in work and allow them to save by borrowing and spending itself. That way, the private sector succeeds in saving, and reducing its net indebtedness, because the Government borrows - in effect, taking over the debt.
Rational though that strategem appears, I am not hopeful that the Government will adopt it. A government that has made such a virtue of privatising state assets is unlikely to recognise the advantages of nationalising private liabilities. Indeed, European governments appear to be competing in fiscal rectitude, all promising budgetary economies in the midst of economic slowdown.
Having misapplied the doctrines of Lord Keynes in the 1970s, when the inflationary circumstances made them inappropriate, governments will now shun those doctrines in the 1990s when the time is right.
Mr Holtham is executive director of Lehman Bros and an Economics Fellow of Magdalen College, Oxford.
Christopher Huhne is on holiday.