The World

In the hands of the 'gods’

JOHN ELLISON December 13 1976
The World

In the hands of the 'gods’

JOHN ELLISON December 13 1976

In the hands of the 'gods’

THE U.K.

They booked into anonymous hotels under assumed names. With one exception, their identities were as unknown as their faces. Government officials parried questions about their activities as they burrowed through economic files deep behind the sombre facade of the grey-stoned Treasury building in Whitehall. Yet in the past month the faceless men from Washington have become the most notorious visitors to Britain. On their findings will hang the country’s chances of pulling through an economic crisis now so severe that it has become the greatest test of national survival since the worst days of 1940; on their recommendations may well depend the future of Prime Minister James Callaghan’s Labor government.

The secretive visitors are experts from the International Monetary Fund who are about to become Britain’s new bank managers. After a meticulous examination of the shattered economy they will advise on what new steps the government may have to take to qualify for a $3.9 billion loan from the IMF. In early December the British cabinet was examining their findings amid waves of informed speculation hinting at fresh economic horrors to come. The price Britain may have to pay for its huge infusion of international aid—which many see as only a first step in a much wider international financial operation if sterling is to be saved as a major world currency— will only be known later this month when the Chancellor of the Exchequer, Denis Healey, confronts the nation with what promises to be a pre-Christmas austerity budget. But three essentially unpleasant lessons were emerging well before the final contents of the package were made public. The first was that the austerity-dogged British public, whose living standards are already the lowest in the European Community, were in for another dose of nasty medicine, the second that the essential de-

cision-making process that will decide Britain’s future economic path is slipping inexorably out of the control of the British government and into the hands of Britain’s international creditors. And the third and most horrendous is the overriding possibility that the medicine prescribed by the IMF doctors might be so unacceptable to the powerful trade unions and left-wing elements in the party that Britain will be faced with a national revolt that could tear apart the political and economic structure of the nation.

While the cabinet tried to totter down this frightening high wire, Professor Milton Friedman, the American economist and Nobel Prize winner, warned that Britain is in danger of following Chile down

the road to economic disaster and political dictatorship.

Britain must have the IMF loan if it is to meet the short-term demands of international creditors and halt the steady slide of sterling on world markets by demonstrating that London still enjoys the confidence of the world’s monetary community. When Healey, provoked by sterling’s biggest one-day fall in history, called in the IMF in late September he assured the Labor Party rank and file that Britain would raise the money “on the basis of our existing policies.” Early this month, in another bid to stem the rising tide of national alarm, Healey told the Commons that severe deflation had been ruled out as a condition of the loan. But there were few who shared his optimism.

The men from the IMF unearthed some alarming symptoms of what is known throughout Europe as “the British disease”: an inflation rate still running at 14%,

far above all European competitors, a plunging pound, falling reserves, nearly 1.5 million unemployed and a profligate welfare state bureaucracy that has led the government into a mammoth public spending deficit of nearly $20 billion. Investment in industry, essential if Britain’s ailing productivity is ever to improve, is hamstrung by a national interest rate running at 15%—a rate dictated by the government in an attempt to fund its own enormous debt. Incentive is stifled by crippling tax rates. Executives rank among the poorest paid in the Western world.

In the overwhelming view of commentators, there is one step the British government must take if the nation is to be dragged back from the brink of insolvency: government spending on the welfare state must be drastically trimmed to limits the nation can afford. Many in Britain itself hoped the IMF would impose upon the government solutions that until now have been ruled out as politically unacceptable. But late in November, when Healey proposed to the cabinet that government expenditures be trimmed by roughly $3.3 million, the reaction from the left was savage. As many as eight of Callaghan’s ministers were said to be ready to resign. Len Murray, the general secretary of the powerful Trades Union Congress, warned the IMF men to their faces that any such step would force the unions to review the social contract—the voluntary pay restraint policy with the government which is the cornerstone of all Britain’s economic policies. Said one Treasury man, “Every time we put forward viable alternatives we are told none of them is politically expedient.”

There was some comfort for Britain from Germany’s Chancellor Helmut Schmidt, who reassured Callaghan at a meeting of Europe’s heads of state at The Hague that if IMF conditions prove too draconian to be politically acceptable Germany would be ready to offer bilateral financial help. Neither Europe nor the financial world is anxious to precipitate a final economic and political disaster in Britain.

Meanwhile, a demoralized but still cash-happy British public is indulging in a pre-Christmas spending spree—convinced that among the new measures would be an increase in taxes on consumer goods as well as new duties on wine, spirits, tobacco and gasoline. But the big spenders were the visitors from Britain’s continental neighbors. The low-cost pound and the modest prices in Britain turned the country into the bargain basement of Europe with hundreds of thousands of visitors jamming cross-channel planes and ferries each weekend, filling their suitcases with everything from food parcels to luxury clothes. It all added to a new feeling of national humiliation.

Commented The Daily Mirror. “If there is one thing the British are fed up with—it’s being ashamed.”

JOHN ELLISON