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Johnstone's View 27th March 2009

After a week in which the financial crisis has been back in the headlines and the differences between the main political parties has become clearer, the time has probably come to look again at the mess we are in and the next steps on the road to recovery.

This week, David Cameron set out the Conservatives strategy to reform financial regulation. In a speech in London, he explained that proper regulation is essential in order to restore financial confidence and ensure there is a lasting economic recovery stressing that introducing ‘capitalism with a conscience’ was the task for the modern Conservative Party.

The Conservatives have always been recognised as the party of law and order, so it is not unreasonable that we should also be the party which people turn to when there is a need to restore law and order to the financial markets. We must never forget either, that we have also, historically, been the party of social responsibility, so we are also best qualified to bring social responsibility back to the financial markets.

We all know that some form of regulation is vital to ensure the smooth running of any system and the financial markets are no different, but it's got to be the right regulation, applied in the right way to the right situation. The approach of the next government will be to cut regulation where the problem is too much of it, like the red tape that is strangling small business, and reform it where the approach of the current government has been proved wrong, like the failed system of financial regulation.

The first priority for a new Chancellor will be to restore the Bank of England to its role in calling time on debt in the economy and this is one of the ways in which the Conservative approach differs fundamentally from that of Labour.

Cue Mervyn King, Governor of the Bank of England, who this week told the Treasury Select Committee of the House of Commons that Britain cannot afford another round of fiscal stimulus, prompting Shadow Chancellor George Osborne to hail the comment as, “a defining moment in the political argument on the recession.”

In front of the committee, Mr. King suggested that the United Kingdom is in no position to engage in another significant round of fiscal expansion. The Shadow Chancellor then pointed out that the big debate in British politics for some time now had been whether or not the country could afford a debt-funded fiscal stimulus.

Gordon Brown had claimed the Conservatives were on their own when they opposed Labour's VAT cut but the statement by Mr. King is hugely significant. It completely vindicates this big decision taken by David Cameron on the economy, and it leaves Gordon Brown's political plans for the G20 and the Budget in tatters. It is the Prime Minister who is now isolated at home and abroad.

Meanwhile, William Hague has attacked Gordon Brown for ‘leaving Britain in Europe’s slipstreams’ when it comes to dealing with our economic crisis. The Shadow Foreign Secretary pointed out that no other European Union government has followed Mr. Brown’s VAT cut, and the French President and the German finance minister have even held up Brown’s policies as an example of what not to do.

Under Gordon Brown, Britain has followed, not led, in Europe – followed on the EU Constitution and followed by giving away £7 billion of our rebate for nothing at all, just at the time when we could have done with the money too.

While he was at it, Mr Hague also accused the Prime Minister of double standards after his recent speech to the European Parliament saying, “Gordon Brown’s hypocrisy really kicks in when he preaches to the European Parliament about the ‘value of liberty’. Where was the value of liberty when he broke his election promise and denied the British people any say on the renamed EU Constitution?”

With the world’s leaders about to beat a path to our door and the eyes of the world about to be turned directly upon us, we really will find ourselves at the centre of the storm. As Gordon Brown flies around the world with a plane load of journalists, trying to persuade everyone else that he is right and they are wrong, our Prime Minister seems ever more isolated, both at home and abroad. The realities of Labour’s recession must be weighing heavily on the mind of its creator. Could the pressure be so great that it is beginning to impair his judgment? I sincerely hope not.