It is partly Maastricht. It is partly Yugoslavia. But most of all it is the economy, or rather the apparently endless recession, which is frightening MPs. One element of the post-election euphoria was the widely held conviction that the unexpected Tory victory would prove to be the catalyst for a recovery in consumer demand. Industrial production figures for April showed a healthy rise and business and consumer confidence surveys suggested that something had changed for the better. It was even rumoured that somebody in the South-east had bought a house.
Now it all seems a mirage. Retail sales have stayed flat and many shops are reporting that business in the past few weeks has been worse than ever. In the housing market transactions are at a 20- year low, new mortgage commitments in May were 21 per cent below the depressed levels of a year earlier and, despite an easing in the number of repossessions, house prices dropped a further 0.5 per cent in June. There is a possibility that the recovery in manufacturing output, which should have stimulated confidence and recovery in other sectors, will now fall back in the face of dead-in-the-water consumer demand.
There is a whiff of fear among many of the Government's supporters. They are wondering aloud whether this recession may be fundamentally different from anything they have experienced - whether the combination of high levels of personal debt, a housing market without a prices floor and the rigours of the Exchange Rate Mechanism might not add up to an economic Molotov cocktail. They no longer have the slightest confidence in Treasury forecasts. They are horrified that the Government appears to have nothing up its sleeve if there are no signs of things getting better by the autumn, and they have run out of reassuring things to tell their worried constituents. Some hope that a couple more half-point cuts in interest rates might get things moving, while others say that the Government will eventually have no choice other than to devalue massively or leave the ERM (it amounts to virtually the same thing).
The problem for those who rest their hopes on modest interest-rate reductions is that the United States and Australia are experiencing only uncertain recoveries despite short-term rates of 3 per cent and 6.5 per cent respectively. If Americans won't borrow when the Federal Reserve is practically giving the stuff away on street corners, it is not easy to believe that even if we could get our rate down to 9 per cent it would make much difference. As for the devaluers, they have a problem of a different kind - the iron commitment of the Prime Minister to the ERM.
It is hard to exaggerate Mr Major's determination to make the once-and-for- all breakthrough to an economy based on stable prices. In a speech a few days ago to the Tory Reform Group the Financial Secretary to the Treasury, Stephen Dorrell, used words which could have been taken from the Prime Minister's own mouth. It is worth recording what he said at some length because it leaves no doubt as to the Government's intentions:
'More words have been spoken about the need to maintain the value of money than about any other subject in economics. And yet only since we joined the ERM have we had the courage to commit ourselves irrevocably to turning fine words into real deeds.
'No one should doubt either the deepness of the commitment or the importance of the task. No single feature of our performance over the last quarter of a century has done more to undermine social cohesion or economic success than our failure to control inflation. Inflation is a tax which redistributes wealth to the sophisticated from the unsophisticated. Borrowers gain at the expense of savers. It is Robin Hood in reverse. It is inflationary monetary policies which have caused the damaging gyrations between boom and bust which have plagued our economy for so long. Inflationary credit booms distort decision-making and lead to gigantic sums of money being lent without any realistic prospect of repayment. In other words, thrown away.
'The provision of a sound monetary framework is the most basic economic function of government. We shall resist the clarion call of the easy cop-out. We are determined to match our standards of monetary discipline to the best in Europe because if we don't, we shall continue indefinitely to impose a needless handicap on the process of wealth creation in Britain.'
That is not so much a statement of economic policy, more the calling of a moral crusade. There is greater faith at No 10 than on the back benches that everything will turn out all right. The economy is reckoned to be adjusting quite swiftly to the realities of the ERM. Manufacturing industry has rapidly improved its competitiveness and when the headline rate of inflation begins to fall again, the rest of the labour market, including services and the public sector, will follow. The possibility that the recession might just carry on is not even being considered. Eyes are firmly fixed on the prize of stable prices. Everything else is secondary.
Given the alternatives, there is a lot to be said for such single-mindedness. A modest devaluation in the ERM would probably result in higher interest rates, while leaving the ERM and floating the pound is unthinkable for Mr Major, both in terms of surrendering to inflation and ripping apart the Government's European policy. Rattled Tories should resign themselves to the long haul and try to acquire for themselves a little of the Prime Minister's anti-inflationary zeal.Reuse content