Hamish McRae: Take the long view from the mountain

The point of a summit like Davos is to make people focus on the long term
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The Independent Online

Gordon Brown will be there, David Cameron will be there, and, of course, Tony Blair will be there. It is Davos time again, and the world's business and political leaders are already gathering in the Swiss ski resort, the setting for Thomas Mann's Magic Mountain, his novel of the period up to the First World War.

Mercifully, we are not yet facing any such global catastrophe but this year the Davos magic will be more thinly spread. A year ago, the world economy was still growing quite strongly, with the UK economy generating new jobs and the peak in output yet to come. People were twitchy because they could see worse was ahead, but the scale of the economic disaster was unclear.

Now, Davos will reflect the shift both of perspective and power that has taken place. There will be fewer parties thrown by the business community – Goldman Sachs has just cancelled its event – but there will be twice as many government leaders and heads of state as last year. Power has moved from business and finance and towards government.

The forum always raises two questions. Is it worth it? And what might it achieve? The first is easy to answer. It is worth it because it is efficient. Why, in these tough times, should taxpayers pay for politicians to go to Davos, or shareholders pay for their directors to do so? Because it enables them to set up strings of face-to-face meetings without having to travel to each others' countries. You have to meet people in person and it is often helpful to be able to do so in informal, neutral settings. The event is nice, of course (I should disclose an interest because I am attending as a spouse) but you cannot justify a junket on other people's money. The justification can only be that it saves time.

The second is harder and more interesting. For business leaders, the purpose is meeting your customers, suppliers and bankers. For political leaders, the purpose is less clear. There are no voters there and you can make a speech anywhere. You need to work with the global business community but at the moment it is business leaders who are coming to you, cap in hand. So do you need to meet each other?

Well, this year the answer may be yes. The great question facing every government is what to do about the downturn. And the particular issue is whether, by co-operating more closely, governments are more likely to be effective than they would by acting independently, and whether some groundwork can be laid in Davos.

In theory, co-operation should be better than competition. If each government manages to lift its own economy a bit, that must help all the others. Anything that can be done to make the Group of 20 economic summit in London in April more effective must be good. But there are surely two grave concerns. One is that expectations have been artificially increased; the other is that governments are close to the limit of what can effectively be done and are in danger of starting to make matters worse.

From a British perspective, one of the depressing things at present is the apparent partial failure of our economic stimulus package. The cut in VAT, in particular, seems to have been a waste of money. Tax revenues are now coming in well below the level of the previous year and borrowing is likely to reach 9 per cent of GDP, the highest ever reached in peacetime. As a result, there is a grave danger that this level of public borrowing will crowd out private borrowers. Why lend to a company, however secure it might seem, when you can lend with complete safely to the Government? There is a further danger that VAT will have to go back up while the economy is still in recession.

It would be wrong to write off the Government's efforts entirely, for the banking measures should eventually get credit moving again. Yesterday's moves to help the motor industry are probably helpful too. But governments should be aware of the Hippocratic oath "first, do no harm". There will soon be a large US fiscal stimulus and since Barack Obama has come to office with extraordinary support worldwide, his economic policies will give cover to other countries, such as our own, that have followed broadly similar lines. But there is no universal consensus that trying to pump up an economy in this way will bring lasting benefits. Yesterday, the German cabinet approved Chancellor Angela Merkel's €50bn stimulus programme, and business confidence lifted a little as a result.

But Germany is able to do this because it has a strong fiscal position, unlike the US and UK, and in any case its economy is forecast to shrink by 2.5 per cent this year. Ms Merkel, who will be at Davos later this week, asserted yesterday: "We will not let the goal of a balanced budget get out of sight."

That seems to me to be the message that could most usefully come out of these meetings: that there is a strong case for increasing budget deficits at this stage of the economic cycle, just as there is a strong case for monetary expansion too. But governments have to try to build long-term confidence, and that can only be done by making it clear they will follow more sustainable policies in future.

This all feels rather like the 1970s and 1980s, the two most serious post-war recessions. The enemy then was inflation, the result of monetary ill-discipline, rather than the present fiscal ill-discipline, but the consequences were similar: a loss of confidence in both the financial system and in governments' ability to fix it. Bursts of hyperactivity by governments, the "initiative a day" approach, are not credible. What we need is a sense that governments are aiming to create order in the medium term. If there is to be a doubling of the British national debt, which is almost inevitable, there has to be a programme for bringing it back under control and for making sure we don't get into this mess again.

The point of a meeting like the one at Davos is to make people focus on the long term. We need our politicians to be calm and measured. We need them to listen to each other and learn. I would like David Cameron to sit at the feet of Angela Merkel for a bit and not let the vision of a balanced budget out of his sight, too. Indeed, if our politicians don't use this moment in the mountains to reflect a bit, they are wasting their time – and our money too.

h.mcrae@independent.co.uk

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