April 23, 2007	Monday	Rabi-us-Sani 05, 1428

LONDON: My good friend Gordon Brown has broad shoulders and needs them. The man who has wanted to lead his party and his country for so long faces formidable tasks, not least in the sphere that was unavoidably, but fatefully, allocated to Tony Blair in the infamous ‘Granita Accord’ (the agreement named after the London restaurant where Brown and Blair agreed on the leadership of the Labour party) -- namely foreign policy.

It matters not that the opposition Conservative leader David Cameron was as in favour of the invasion of Iraq as Blair. The historic mistake — nay, catastrophe — took place on Labour’s watch. The Labour Party was up to its neck in support of membership of the exchange rate mechanism in the 1990s, but it was the Tory (Conservative) government, with Lord Lamont as Chancellor, that was (rightly) punished.

Everywhere I go I find that people have still not forgiven this government for misleading them about weapons of mass destruction. Brown will not be forgiven unless he reshapes British policy toward the Bush administration. It is as simple as that.

On the economic and social fronts Brown also faces tricky problems. He staked his reputation on fiscal and monetary rectitude, and had an amazingly good run. But there are storm clouds on the horizon, and the recent run of economic statistics makes it begin to feel quite like old times.

First, however, we must note that the Conservatives, who are way ahead in the polls, have received a shock. The Cameronites admire Blair and have been looking forward to taking on Brown. They may not have realised it, but Brown, for his part, has been straining at the leash to take them on. Last week, parliamentary sketchwriters, who are not an easy bunch to impress, were almost as bowled over as Cameron and shadow Chancellor George Osborne by the savagery of Brown’s assault. Brown as Prime Minister may evoke memories of Harold Wilson at his parliamentary best.

But let us return to the economy. The economic problems facing this country may not be quite so daunting as they were in previous decades, but economic policy is certainly becoming more interesting than it has been during the ten golden years of Brown’s Chancellorship and the accompanying widespread adulation for the Bank of England’s monetary policy committee.

When the MPC was set up in 1997, I was one of the few to express concern. One’s worries were partly about the principle of handing such important reins of economic policy over to central bankers, and partly about the ambitious nature of the inflation target. The target figure of 2.5 per cent (as it then was) had been ‘achieved’ on only a handful of occasions since the Second World War. There also had to be a question — notwithstanding the prevailing assumption that central banks possessed divine powers — about their ability to hit targets affected by matters beyond their control.

The governor of the Bank, Mervyn King, is required to write a public letter of explanation to the Chancellor if the inflation figure strays beyond the range of plus or minus one per cent around the target (which is now two per cent). It is truly remarkable, but not entirely reassuring, that last week was the first occasion in almost ten years that a governor has had to send such a letter.

The good news (or view) in the letter was that the inflation figures should come down once they reflect the reduction in energy prices. The bad news, from the inflation point of view, was that, thanks to the buoyancy of the economy, businesses are rebuilding profit margins and passing on price increases. Moreover, there are fewer ‘disinflationary’ influences from China.

As has been pointed out many times, an excessively strong and seemingly virile exchange rate is bad for the competitiveness of British industry, and misleading as to the economy’s underlying strength. But you can see from the reaction of the financial markets last week that investors are rubbing their hands in glee and pouring ‘hot’ money into London to take advantage of our relatively high rates — rates that are generally expected to be raised further. The markets sense the chance to make something from nothing.

It may turn out that inflation has indeed peaked and will soon head back towards the comfortable ranges of the past ten years. But there is a danger it will not.

Gordon Brown’s favourite joke, now a cliché, was that ‘there are two kinds of Chancellor (finance minister): those who fail and those who get out in time’. But there is an added twist if you go on to become Prime Minister. Ask Sir John Major, who handed the Treasury over to Norman Lamont, but still had to live with the consequences of his policies.—Dawn/The Guardian News Service