UK Jobs Picture Deteriorates - UK? EU? EMU? All Connected

In the financial crisis, the number of UK jobless claimants ran up; the number then went into steady decline. But now, the number is back on the rise, and is rising rather sharply. The BOE MPCs (Spencer Dale and Martin Weale) who once were calling for rate hikes have pulled their heads back into their shells. Dale and Weale, who once were calling for rate hikes are now solidly in the ranks of the majority and there is now uniformity at the BOE calling for rates to be unchanged. The UK MPC members voted unanimously to hold the BOE’s key rate at 0.5%. One member, Adan Posen, continues to push for an expansion in the BOE bond purchase program by 50billion pounds. He has consistently been alone in this request. Posen is drawing on his experience from being a student of Japan’s failed response to its extended downturn. In its statement the BOE left open the possibility of further bond purchases by the central bank.

The UK economy is strongly linked to the European mainland where a series of debt crisis have been battering government bond markets and hammering growth expectations lower. Its Q2 growth rate slowed to 0.2% after posting 0.5% in Q1. The EMU economy to which the UK is linked also slowed sharply in Q2.

The meeting of German Chancellor Merkel and French President Sarkozy, concluded yesterday, did not produce much in the way of action or even moral support. The two called for countries to obey fiscal rules in the Zone and refrained from any further financial action, calling the current bail-out fund sufficient (EFSF). They did endorse a plan to tax financial transactions. European stocks at first reacted badly to the announced plan on Tuesday and look to be closing lower on Wednesday as well.

Banks, have been dismissive of this Franco-German plan to tax financial transactions. This sort of plan has been mooted and booted in the past. The Association for Financial Markets in Europe (AFME), which represents top banks, claims that the tax would raise borrowing costs and hurt growth. Still Austria, Spain and Italy jumped on board to support the plan. Any plan to make this an EU-wide scheme would greatly impact London which is one of the world’s most precious financial centers. Even if there were not drastic impacts to lending institutions and if costs were passed on this sort of tax could crimp growth in The City and send more financial transactions offshore or to other financial centers. The British Bankers Association has weighed in saying it is not as issue for the e-Zone or the EU but globally. That group would not go along unless such a tax were implemented globally. ECB President Jean-Claude Trichet has echoed that same sentiment. Good luck with that. It seems that Sarkozy and Merkel can only agree on things that cannot possibly come to pass.

On balance we see policymakers striving to do something in a world where we seem to be helpless. Markets are looking for leadership, but the problem in the Zone is that those strong enough to help won’t. And those who need to be contrite for their economic sins refuse the prescribed penance. Hence we have impasse. Cultural differences and fundamentally different views on the size and role of the public sector and of individual responsibility - even in a welfare state- hamper any efforts to get a deal.

The rich countries do not want to throw a band-aide on the surface of something that is still hemorrhaging. While the clearest resolution surely is in European fiscal unity the biggest stumbling block is how fiscal unity would work. The Germans, ever more mindful of their AAA rating since the US was downgraded see it as a fool’s game to give other less highly rates EMU members access to German funding while Germans would have no access to their tax revenues. They see that as the first step along the road to a German downgrade. It’s hard to argue with that.

And with that dire assessment, the UK will continue to be weighed down by its own stubborn inflation, ongoing austerity program and economic weakness as well as because of its strong trade ties to a still beleaguered and directionless Europe. At least the pound sterling still exists as a separate currency. That gives the UK some added policy flexibility.