In the classic 1940s film The Third Man, Orson Welles observed: “In Italy for 30 years under the Borgias they had warfare, terror, murder and bloodshed – but they produced Michelangelo, Leonardo da Vinci and the Renaissance. In Switzerland they had brotherly love – 500 years of democracy and peace – and what did that produce? The cuckoo clock.”
Placed in a modern economic context, Welles seems to be suggesting (without diminishing the significance of the cuckoo clock) that stability is overrated and that negative market reaction to political uncertainty is exaggerated. Although David Cameron shows few signs of imitating Cesare Borgia, perhaps the unlikely (or uneasy) coalition of Conservatives and Liberal Democrats will surprise markets and bring greater benefits to the economy than 13 years of Labour governments with substantial majorities.
Relatively recent historical experience suggests a rather mixed picture.
What is undoubtedly true is that the weakest government in modern times left the economy in an even worse condition than it is today. When five years of Labour government ended in 1979, having been kept in office for much of the time by a pact with the Liberals which stopped short of coalition, all the key indicators – inflation, interest rates, unemployment and fiscal deficits – were moving in the wrong direction at the same time.
In fairness to Harold Wilson, he inherited an economy in 1974 that was already on the slide and which had just been hit by the external shock of the first oil price hike. But the obvious weakness that came with the lack of a working majority in Parliament prevented his government taking the decisive action required. Interest groups (including the electorate) had to be appeased as the prospect of an election was never far away. Markets, less global and influential then than now, recognised the authorities’ unwillingness to take tough action. Sterling fell below $2 for the first time in these years, while the Financial Times Non-Financial Share Index was very volatile.
Paradoxically, it is also true that governments with large majorities have failed to deliver. Wilson’s Labour government of 1966-70 had a three-figure majority, but saw a period of missed opportunities. Only when Roy Jenkins took over at the Treasury after the humiliation of the currency devaluation in November 1967 did the government start to get a grip on the economy. Similarly, Margaret Thatcher won a 102-seat majority in 1987, but a series of policy errors led to an unsustainable boom, interest rates doubling from 7.5 percent to 15 percent and the exchange rate mechanism entry. The stability implied by large majorities has little to commend it, anymore than the vacillation that comes with small majorities.
A small working majority can be the most effective. The Major government, whose small majority diminished over the life of the Parliament, got it right in the end, as did the third of the recent Labour governments, with the smallest of its three majorities. The policy errors that contributed to the recession were made in the 2001-05 parliament, while the subsequent administration dealt speedily and – probably – effectively with the downturn and the global financial crisis.
Few economists would argue with the proposition that businesses prefer economic stability, the confidence of knowing inflation will stay low, interest rates will be stable and the exchange rate will not jump around. In this environment, they can plan for the medium term, focusing on their business and not trying to guess the next move in government policy.
The key question is what political background is most likely to create this stability. The UK evidence suggests that governments with a big majority are no more likely than those with small or no majority to do so. It is more about having leadership with a clear vision and the will to implement that policy, as with the 1979-83 Thatcher government. Perhaps the Borgias (Lucrezia?) had a point.
Dennis Turner is chief economist at HSBC
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