It Couldn’t Happen Here

12/11/2010 at 12:21 pm

An unruly student mob marches through the capital’s streets. A few dozen hotheads storm and occupy the HQ of the ruling party and, forcing their way onto the roof, throw missiles at the seemingly powerless police lines below. Windows are broken, fires started, arrests made.

A week ago the notion that this would have been the headline story across the British press would have seemed absurd. News like this belongs in Paris, surely, or Athens perhaps – not London. After all, it was only three weeks ago that we saw a much more low key student protest in response to the Comprehensive Spending Review – a mere 2,500-3,000 marchers and a half hearted attempt to break into a government building. This week’s events, which involved twenty times the number of participants, were shocking.

So what is the significance of this news for financial markets?

Over the summer, we noted the remote but real risk of economic disruption arising from a possible reaction to the UK’s planned austerity measures:

Britain’s coalition is holding up reasonably well for the moment. But over the next few months we will be enacting austerity measures of our own. British people haven’t had a sovereign crisis and IMF intervention to convince them of these measures, and they are likely to prove unpopular. Should the coalition face Greek-style resistance to its plans, together with siren voices from the Labour opposition denying that they are necessary, might it fall apart? Or seek to preserve itself by watering down its commitment to reduce borrowing? […] What price sterling under those conditions?

Today that risk looks rather less distant. While the kind of strikes and stoppages that have become a routine feature of fiscal consolidation in parts of Europe are far harder for unions to orchestrate in this country, Wednesday’s riot reminds us that there are people who would love to take us down that road.

Lest we forget where that road leads, the sclerosis in Greece together with the accompanying fall off in tourism is expected to see its economy contract by 4% this year, followed by another 2.5-3% in 2011. This is worse than its performance over the previous two years, and worse than the government had been expecting as recently as July.

Let us hope that in future, we in the UK have no cause to rank the phrase “it couldn’t happen here” alongside “this time it’s different” in the lexicon of investment folly.

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