Washington's lapdog across the Atlantic could not take it any longer. Things look so bad for London that it had to swallow its proverbial pride and ask Paris for some serious help. Britain and France, nations that for a thousand years have despised each other are now to share military intelligence and military hardware as a desperate measure on the part of London to cut military spending costs. Faced with a global financial crisis that is continuing to plague the Anglo-American-Zionist axis, North Sea oil reserves dwindling at a fast pace, major political setbacks in Eurasia, ongoing military entanglements in Iraq and Afghanistan and the growing power of China and Russia in global affairs - Britain is solemnly bowing out of the superpower game. In other words, Britain will, at least for a while, abandon the wet dreams it had for the post Soviet world. Interestingly, a representative of the Council on Foreign Relations and the New York Times editorial staff seem worried about London’s untimely decision (see corresponding articles at the bottom of this page). Nevertheless, as in Greece, France, Germany and elsewhere, here again we see a responsible government concerned for its future more-or-less making the painful decision to tighten its belt and reassess its political role in the world. In sharp contrast, faced with an equally severe economic and political situation, officials in the United States are firing up the printing presses to fuel stimulus spending instead; a measure which in reality will only prolonging the pain and only make the inevitable collapse much worst.
London Tuition Hike Protests Turn Violent
50,000 on streets as UK students fury descends in fire & smashed glass (RT video): http://www.youtube.com/user/RussiaToday#p/u/6/eLsozHuVWzA
London Riot: Tory HQ smashed by British students (RT video): http://www.youtube.com/user/RussiaToday#p/u/5/MmudJafnQh0
A demonstration against government proposals to cut education spending and steeply increase tuition for university students turned violent on Wednesday as protesters attempted to storm the building that houses the Conservative Party. The protesters scuffled with police officers, set off flares, burned placards, threw eggs, bottles and other projectiles and shattered windows at the building, 30 Millbank, in Westminster. A small group of demonstrators, some of whose faces were obscured by ski masks, climbed to the roof of a nearby building, waving anarchist flags and chanting “Tory scum.” The protest was dispersed about 10 p.m. Fourteen people, including seven police officers, were injured, none of them seriously, the authorities said. Thirty-five people were arrested.
An estimated 52,000 people from across the country also massed near Parliament on Wednesday to condemn the government’s education proposals, which would allow universities to charge £6,000, or $9,600, to £9,000, or $14,400, in tuition a year, up from a cap of £3,290, or $5,264. The protest was the largest street demonstration against the government’s plans, which were announced last month, to cut public spending by $130 billion by 2015. Unions and public employees have promised more demonstrations and strikes, particularly as details of the cuts become clear. Tuition is a politically sensitive subject in Britain, where universities are heavily subsidized by the government. Until the late 1990s, when the Labour government introduced tuition, students paid nothing to attend college. The current government, a coalition of Conservatives and Liberal Democrats that has ushered in an age of budget austerity, has announced plans to cut teaching grants to universities and said it had no choice but to raise tuition.
That has presented a dilemma for Liberal Democrats — the more vulnerable members of the coalition — who made abolishing university tuition a core element of their platform in the general election last spring. Joining the Conservatives in proposing tuition increases has been hard for many Liberal Democrats. Their leader, Deputy Prime Minister Nick Clegg, was taunted Wednesday in the House of Commons by members of the opposition Labour Party. “In April he said that increasing tuition fees to £7,000 a year would be a disaster,” Harriet Harman, the deputy leader of the opposition, said of Mr. Clegg. “What word would he use to describe fees of £9,000?” Accusing him of “going along with Tory plans to shove the cost of higher education onto students and their families,” Ms. Harman told Mr. Clegg that he was like a college freshman who meets “a dodgy bloke” during the first week of classes “and you do things that you regret.” “Isn’t it true he has been led astray by the Tories?” she asked. Mr. Clegg responded that he had to make compromises as part of a coalition, and because the country’s finances had been left in such poor shape by the previous government. But, he said, he had prevailed on the Conservatives to make the proposals fairer and more progressive.
Under the plan, students would borrow money from the government to pay tuition, as they do now. They would not start repaying the debt until they earned at least £21,000 a year (about $38,000 at current exchange rates), an increase from the current level of £15,000 ($24,100). They would then pay 9 percent of their income above that level to settle the debt. The debt would be wiped out after 30 years. Student leaders have made it a priority to denounce Liberal Democrats who support the higher tuition, and they said on Wednesday that they would try to recall any legislators who had broken their election promises on the issue. Some Liberal Democrats have said they would abstain from the vote to increase tuition when it comes up in Parliament. Aaron Porter, president of the National Union of Students, said the proposed increases were doubly unfair, since they were paired with cuts of about 40 percent in the money the government pays to subsidize teaching at universities. “We should be clear that the government has asked students to pay three times as much for a quality that is likely to be no better than what they are receiving now, and perhaps worse,” he said.
Officers Tie British Cuts and Risk to Falklands
A group of retired British admirals has publicly attacked the decision of Prime Minister David Cameron’s government to scrap Britain’s only aircraft carrier and its entire fleet of Harrier jump jets, saying it exposes the Falkland Islands to renewed attack by Argentina. The admirals used a platform traditionally favored by influential figures in Britain seeking to influence public policy: a letter to the newspaper The Times of London, published Wednesday. They described the scrapping of the Ark Royal, the Royal Navy’s flagship, and the fleet of 80 carrier-borne Harrier jets as “strategically and financially perverse,” and warned of a repeat of Argentina’s seizure of the Falklands. “In respect of the newly valuable Falkland Islands and their oil fields, because of these and other cuts, for the next 10 years at least, Argentina is practically invited to inflict on us a national humiliation on the scale of the loss of Singapore — one from which British prestige, let alone the administration in power at the time, might never recover,” the letter said.
The reference to Singapore summoned memories of one of Britain’s greatest 20th-century military disasters, the Japanese conquest of Singapore in February 1942, which historians have called one of the worst defeats ever suffered by Britain’s forces. The Argentine invasion of the Falklands in 1982, and the military operation that restored British control, was a major shock for the government of Prime Minister Margaret Thatcher. Over the succeeding years, Britain has reinforced its small military garrison on the islands, which are 8,000 miles from Britain, and repeatedly reaffirmed its intention to maintain control there in the face of continued Argentine claims to sovereignty. The discovery of significant reserves of oil in the chilly waters surrounding the islands has added a new edge to the dispute. Naval power, including the use of carrier-borne Harriers, was central to the recovery of the Falklands and added a new chapter to Britain’s historic reliance on the Royal Navy to project military power.
But last month when the Cameron government announced deep cuts in the $60 billion annual military budget as part of a wider austerity program aimed at cutting its growing debt burden, one of the principal casualties was the navy’s carrier force. In a choice between competing claims by the Royal Navy and the Royal Air Force, the government chose to immediately mothball the Ark Royal — which, after 25 years in service, is the only British carrier capable of launching fixed-wing jets — and to scrap all of the Harriers operated by the navy and the air force. The decision amounted to a reprieve for most but not all of the air force’s Tornado jets, which were chosen over the Harriers because, the Defense Ministry said, the Harriers alone could not have maintained the air support for Britain’s 10,000-strong military contingent in Afghanistan. The new defense configuration also involved another highly contentious move: the go-ahead for a $9 billion program to complete two new aircraft carriers already under construction in British shipyards, and to equip one of them with a new generation of aircraft, a naval version of the Joint Strike Fighter.
The decision attracted widespread criticism, in part because the government said it was cheaper to finish building the carriers than to scrap them. It has said it intends to sell one of the two carriers within three years of its entering service, and does not expect the second to be operational, with aircraft, before 2020. That left Britain with the prospect of a 10-year gap without any carrier-borne strike aircraft, a prospect that the admirals seized upon in their letter to The Times. “The last treasury-driven ‘10-year rule’ in the 1930s nearly cost us our freedom, faced with Hitler,” they said, referring to a military strategy that assumed Britain would have a decade to prepare for war with Germany, with resulting weaknesses that Hitler exploited. The officers who signed the letter included two former heads of the Royal Navy, Lord Alan West and Sir Julian Oswald, as well as Vice Adm. Sir Jeremy Blackham and Vice Adm. John McAnally. They were joined by a former army commander, Maj. Gen. Julian Thompson.
Defense Minister Liam Fox rejected the assertion that the cuts exposed the Falkland Islands to attack, telling The Times in a statement that Britain maintained four Eurofighter Typhoon warplanes on the islands, as well as a small unit of Royal Marines. “It is simply not the case that decommissioning the Harrier would impact on our ability to defend territories in the South Atlantic,” he said. “We maintain a wide range of assets, not least a well-defended airfield to ensure the defense of the Falkland Islands. We have a far greater presence than previously, able to respond to any and all threats.”
Britain Announces Severe Military Cutbacks
In a bid to streamline its armed forces and help reduce its daunting levels of national debt, the British government on Tuesday announced plans to cut its military personnel by 10 percent, scrap 40 percent of the army’s artillery and tanks, withdraw all of its troops from Germany within 10 years, and cut 25,000 civilian jobs in its Defense Ministry. In unveiling his Strategic Defense and Security Review, the first since the 9/11 attacks, Prime Minister David Cameron said the cuts were part of an effort to reconfigure a military that he called “overstretched, underequipped and ill-prepared” to meet the unconventional warfare challenges of the future. He added that Britain intended to remain a significant military power, with a military budget that would still be the fourth highest in the world, after those of the United States, China and Russia.
“Britain has punched above its weight in the world, and we should have no less ambition for our country in the decades to come,” he said. The new defense posture also calls for the immediate scrapping of the Ark Royal, Britain’s only aircraft carrier capable of launching fixed-wing jets, along with the entire fleet of Harrier jump jets operated by the Royal Navy and the Royal Air Force since the 1970s. The demise of the Ark Royal means that Britain will have a 10-year hiatus without a carrier-borne strike force until one of two new aircraft carriers is equipped with a new generation of Joint Strike Fighters in 2020. The government said that it would go ahead with plans to build both carriers at a cost of about $9.5 billion only because it would be even more costly to cancel one of them, with both already under construction. But after three years in service, one of the vessels will be either mothballed or sold off.
The decision to forgo a carrier-borne strike force caused consternation among naval veterans, military analysts and others who have joined the opposition Labour Party in accusing the Cameron government of hastening the defense review to meet the needs of its overall austerity program. Ed Miliband, the Labour leader, told Mr. Cameron in the House of Commons that the revised defense policy was “driven by short-term considerations” and that it was “simply not credible as a blueprint for our future defense needs.” Mr. Cameron came under even more pointed criticism earlier in the day at a military command center in northwest London. There he was confronted by a pilot from the navy’s Harrier force, Lt. Cmdr. Chris Ward, who said he had flown 140 combat missions over Afghanistan and now found himself facing unemployment.
Mr. Cameron also announced that the government would delay construction of a new fleet of Trident nuclear missile submarines, which now constitute Britain’s nuclear deterrent, for about five years. The first of a new class of vessels is not expected to go into service until 2028. By putting back the final decision on the new submarines until 2016, Mr. Cameron conveniently averted a clash within his coalition government over whether Britain should retain a nuclear strike force at all. Over all, the government plan will involve a staged, four-year cut of about 8 percent in real terms in Britain’s annual defense budget of about $59 billion. That was significantly less than the 10 to 20 percent cuts that were under discussion as recently as last month, when the defense minister, Liam Fox, wrote a confidential letter to Mr. Cameron — quickly leaked to Britain’s newspapers — that carried a hint that Mr. Fox might resign if the cuts were not scaled back.
The more modest scale of the military cutbacks placed extra strain on the government’s overall effort to save more than $130 billion through spending cutbacks by 2015, a commitment that will require other government departments to make cutbacks averaging 25 percent. The details of those cuts — the most severe austerity program adopted by any British government since World War II — will be announced by George Osborne, chancellor of the Exchequer, in a House of Commons statement on Wednesday. They are expected to bring months, and perhaps years, of political controversy and possible labor unrest. Mr. Fox’s pushback over the defense cuts appeared to have been helped by the concerns voiced, sometimes publicly, by senior Obama administration officials, including Defense Secretary Robert M. Gates and Secretary of State Hillary Rodham Clinton. The American officials, together with senior American military commanders, including Gen. David H. Petraeus, the top American and NATO commander in Afghanistan, were worried that the cuts could hamper Britain’s ability to help American forces in conflicts around the globe.
For Mr. Cameron, 44, who leads a potentially volatile coalition between his Conservatives and a minority bloc of Liberal Democrats, coming down on Mr. Fox’s side of the cabinet tensions over the cuts proved a bruising experience. He has said in recent days that the military cuts were “the hardest thing” he has had to do since taking office. The Cameron government’s program to bring down Britain’s deficit more rapidly than that of almost any other Western country has conflicted with the Obama administration’s appeals to its allies not to risk the sluggish economic recovery of the past 18 months by cutting government spending too fast. Perhaps because of that, as well as the American concerns about Britain’s military strength, Mr. Cameron telephoned President Obama on Tuesday, shortly before announcing the defense cuts. A Downing Street spokesman said the British leader had promised Mr. Obama that Britain would “remain a first-rate military power and a robust ally of the United States.”
The prime minister also offered assurances about Britain’s commitment in Afghanistan, where it has 10,000 troops, second only to the 100,000 troops committed by the United States. In his Commons statement, Mr. Cameron said that there would be “no cut whatsoever” in financing for the Afghan effort, and that he had “heeded” Britain’s defense chiefs every time they had warned him that a proposed reduction might hinder the war effort. He also pledged more money for new armored personnel carriers and helicopters, and a major commitment to strengthen and re-equip Britain’s special forces, which have played a major, if little-publicized combat role in Afghanistan and Iraq. All three arms of Britain’s forces will endure major personnel losses in the cuts. With an overall level of about 175,000 — roughly the size of the United States Marine Corps — the army will lose 7,000 soldiers, with the navy and the air force each losing 5,000. But Mr. Cameron said that the army would still be able to put at least 7,000 troops into combat abroad, down from the current ceiling of 10,000, with a “one-off” capability to field 30,000 troops for a “major operation” should the need arise.
Britain Plans Deepest Cuts to Spending in 60 Years
The British government on Wednesday unveiled the country’s steepest public spending cuts in more than 60 years, reducing costs in government departments by an average of 19 percent, sharply curtailing welfare benefits, raising the retirement age to 66 by 2020 and eliminating hundreds of thousands of public sector jobs in an effort to bring down the bloated budget deficit. “Today is the day when Britain steps back from the brink,” a confident George Osborne, who as chancellor of the Exchequer is Britain’s top finance minister, told the House of Commons. “To back down now and abandon our plans would be the road to economic ruin.”
Wednesday’s announcement of £83 billion, about $130 billion, in cuts by 2015 represents a big political gamble for Britain’s fledgling Conservative-led coalition government. Britain’s public deficit is one of the highest among developed economies, running at 11.5 percent of total economic output, compared with 10.7 percent for the United States and 5.4 percent for Germany. Though the Conservatives have so far made a persuasive case for the deep cuts, outmaneuvering a weakened Labour opposition, the country has yet to feel anything like the pain that is to come as the retrenchment begins to take hold. “There’s a growing acceptance and public awareness that this is necessary, that these measures are needed,” Helen Cleary, deputy political director for the Ipsos Mori polltakers, said in an interview. “But I don’t think people will really understand what it all means until the cuts start to bite.”
The coalition government is also gambling that the reductions in public outlays will stimulate the private sector and restart growth, rather than send the economy back into a tailspin, as liberal economists have warned. Britain has been bracing for the cuts for months, after Mr. Osborne announced in June the details of the so-called spending review, but Wednesday was the first time the government had set out its plans, department by department. Mr. Osborne said that 490,000 public sector jobs would be lost over the next four years, some to attrition. At the same time, payments to the long-term unemployed who fail to seek jobs will be cut, he said, saving $11 billion a year. Additionally, he said, a new 12-month limit will be imposed on long-term jobless benefits, and measures will be taken to curb benefit fraud.
Mr. Osborne said an increase in the official retirement age to 66 from 65 would start in 2020 — four years sooner than planned — saving $8 billion a year. Britain has already said it will stop paying child benefit payments to people earning more than around $70,000 a year. But while the government has sought to rein in welfare costs, Mr. Osborne announced that several politically sacred benefits for the elderly, including free eye tests, prescription drugs and bus passes, would remain. Britain has about six million public sector jobs, about one fifth of all jobs in the economy, according to the Office for National Statistics. But it was not clear what the impact of shedding 490,000 of them — about 8 percent of the total — would have on unemployment. Mr. Osborne has continually said that the private sector will take up the slack, employing more people as the economy emerges from the doldrums.
Mr. Osborne promised annual savings of 7.1 percent in the budgets of local government councils and said there would be a freeze followed by a 14 percent cut in tax money allocated to maintaining Queen Elizabeth II’s household. Public housing tenants, he said, will face higher rents closer to the market rates for private housing. Military spending will be cut by 8 percent by 2014, he said, but he promised not to reduce spending on British forces in the Afghanistan war. But, he said, the National Health Service — one of the most politically delicate institutions in Britain — will be allocated more money, rather than less. He also said the “resource money” for schools would increase “in real terms” every year.
Spending on the police will be cut by 4 percent a year, he said, but spending on intelligence and security agencies will be strengthened to guard against terrorism and protect London during the 2012 Olympic Games. He also promised to spend about $1.4 billion on measures to curb tax fraud, which cost the tax service about $11 billion a year. Mr. Osborne said Britain’s diplomatic corps — the Foreign Office — would lose 24 percent of its financing and cut the number of workers at the headquarters in London. Additionally, the BBC will take over financing the BBC World Service and several other responsibilities, saving the government about $539 million a year, while the BBC’s own mandatory license fee levied on owners of television sets will be frozen for six years.
People in the arts had been bracing themselves for deep cuts in government subsidies. But, while Mr. Osborne said that administrative costs in the Department of Culture, Media and Sport and in quasigovernmental arts organizations would be reduced by 41 percent, money for “core programs” like museums would be cut by just 15 percent. “We have had to make choices, choices in the things we support,” Mr. Osborne said. “We have taken our country back from the brink of bankruptcy.”
The average cut in the budgets of government departments, he said, will be 19 percent, not the 25 percent he had initially threatened. He said a temporary tax on bank balance sheets would be made permanent. Many Britons, like Americans, are angry with big banks for their role in the world financial crisis. Mr. Osborne said the government would seek to extract “the maximum sustainable taxes” from financial institutions. In June, Mr. Osborne also said that the value-added tax — a tax paid on most consumer goods in Britain — would increase in January, to 20 percent from 17.5 percent.
British Military Expands Links to French Allies
Britain and France signed defense agreements on Tuesday that promised cooperation far beyond anything achieved previously in 60 years of NATO cooperation, including the creation of a joint expeditionary force, shared use of aircraft carriers and combined efforts to improve the safety and effectiveness of their nuclear weapons. The agreements signed in London by Prime Minister David Cameron of Britain and President Nicolas Sarkozy of France were a landmark of another kind for two nations that spent centuries confronting each other on the battlefields of Europe. While neither leader mentioned Agincourt, Trafalgar or Waterloo, or French victories that included the Norman Conquest in 1066, both stirred a brief whiff of the troubled history of Anglo-French relations into the mood of general bonhomie.
The agreements envisaged a new combined force available for deployment at times of international crisis that is expected to involve about 5,000 service members from each nation, with land, sea and air components, and rotating French and British commanders. The pacts also foresee each nation alternating in putting a single aircraft carrier to sea, with the vessels operating as bases for French, British and American aircraft in times of need. The nuclear agreement was in some ways the most surprising, since it committed the two nations to sharing some of their most carefully kept secrets. Although the two leaders emphasized that France’s “force de frappe” and Britain’s similar, submarine-based ballistic missile force would remain separate and under the sole control of each government, they agreed to establish joint research centers, one in France and one in Britain, to further research on their stockpiles of nuclear warheads.
The cooperation pact was set to last 50 years and could transform the way the countries project force, fight wars and compete for defense contracts with the United States. One goal appeared to be to give the two militaries greater buying power to support the struggling European defense industry. Mr. Cameron, who has navigated deep hostilities to European integration and deep skepticism toward France in his Conservative Party, emphasized the budgetary benefits, saying the agreements would contribute savings of “millions of pounds” to Britain’s plan to make deep cuts in its $60 billion defense budget. Previous efforts at military cooperation between the countries have more often faltered than succeeded. In the late 1990s, Tony Blair, then Britain’s prime minister, and Jacques Chirac, then France’s president, promised deeper defense cooperation, but the understanding was undone by differences over the Iraq war. In both countries, there are significant political forces arrayed against anything that smacks of too close a military partnership with the age-old foe.
But after the Cameron government took office in May and began pushing for deep defense savings, it discovered a willing partner in Mr. Sarkozy. Britain and France have the biggest defense budgets in Europe, together accounting for more than half of all military spending in the 27-nation European Union. Both governments took care to say that their new cooperation was not intended to isolate Germany. The nuclear agreement, carrying faint echoes of Britain’s shared role with the United States in the Manhattan Project, which developed the first atomic bomb, will have the two governments setting up two joint research centers, one in France and the other in Britain.
The two countries also agreed on a shared program on spare parts, maintenance and training for the crews of the AirbusA400M military transport aircraft, a costly, overbudget project intended to challenge American domination of the market for heavy-lift transports. They promised to work together on a new generation of remotely piloted surveillance aircraft. Also on the list are shared projects to develop technologies for future nuclear submarines and military satellites, as well as countermeasures for mines and other antisubmarine weapons. The high notes struck by the leaders at their news conference were striking. “Today we open a new chapter in a long history of cooperation on defense and security between Britain and France,” Mr. Cameron said. Mr. Sarkozy said the agreements showed “a level of trust and confidence between our two nations which is unequalled in history.”
For all that, the shadows of Nelson and Napoleon, of Henry V and Joan of Arc, seemed to hang over the occasion, with both leaders feeling the need to gesture, at least obliquely, to the less generous attitudes that are common among some of their compatriots. “I would like to say, contrary to what might otherwise seem to be the case, that the clocks in France and Britain strike the same hours, precisely,” Mr. Sarkozy said. Mr. Cameron said: “It is about defending our national interest. It is about practical, hard-headed cooperation between two sovereign countries.” One concern about the new agreements that has attracted criticism among British defense experts centers on the shared use of aircraft carriers.
With both countries planning to have only one “flattop” in their fleets, having them configured for each others’ aircraft has been described by the two governments as extending their ability to deploy air power, as well saving large sums. Last month, Britain decided to have its future carrier, due for deployment in 2020, redesigned with the catapult mechanism and arresting gear necessary to accommodate French and American aircraft. But British critics have said military operations that require carrier-borne aircraft could be compromised if Britain has to rely on France’s allowing its carrier to be used. The example often cited is the 1982 Falklands war, when France opposed Britain’s reconquest of the Falkland Islands in the South Atlantic, and Argentina used French-made missiles to sink British ships.
Mr. Sarkozy described the criticism as outdated. “Can you imagine France sitting in our armed chairs and saying, ‘It is none of our business’ ?” he said. Likewise, Mr. Cameron rejected suggestions that Britain would undermine its close military relationship with Washington. Mr. Cameron said the Obama administration would welcome the new plans. “They’d like us to have the biggest bang for our buck that we possibly can,” he said. In France, Marine Le Pen, the vice president of the National Front, a far-right party, called Mr. Sarkozy the “gravedigger of General de Gaulle’s policy of independence.” She went on: “It is clear that the objective of this accord is to shift our defense to Anglo-Saxon control, and obviously everyone will understand that behind Great Britain there is, of course, the American big brother.”
In London, Mr. Cameron was chided by right-wing tabloids for trusting the French with Britain’s security, but his plans received a generally warm reception in Parliament. James Arbuthnot, a former Conservative minister who is the chairman of the House of Commons defense committee, told Mr. Cameron on Monday that he had “forgiven the French for taking off the head of my great-great-great-great grandfather at Trafalgar,” a reference to a captain who died in the great naval battle in 1805. Mr. Cameron said that was just as well, since Mr. Arbuthnot was invited to lunch with Mr. Sarkozy on Tuesday. “It might have been a little bit frosty,” he said.
Britain Grapples With Debt of Greek Proportions
Until now, that is. Suddenly, investors are asking if Britain may soon face its own sovereign debt crisis if the government fails to slash its growing budget deficits quickly enough to escape the contagious fears of financial markets. The pound fell to $1.4954 on Tuesday, its lowest level against the dollar in nearly 10 months. The yield on 10-year government bonds, known as gilts, slid as investors fretted that Parliament would be too fragmented after a crucial election in May to whip Britain’s messy finances back into shape. The slide in the pound followed a sharper decline on Monday after polls released over the weekend indicated that the opposition Conservatives had lost their clear lead in the election race.
Without a strong political majority to tackle Britain’s lumbering fiscal problems, investors could start to make it greatly more expensive for the government to raise funds, setting the stage for a potential double-dip recession, if not worse. “If you really want a fiscal problem, look at the U.K.,” said Mark Schofield, a fixed-income strategist at Citigroup. “In Europe, the average deficit is about 6 percent of G.D.P. and in the U.K. it’s 12 percent. It is only just beginning.” Since the Labour government’s intense fiscal intervention in 2008 and 2009, yields on British government debt have soared to among the highest in Europe. And on a broader scale, which includes the borrowing of households and companies, the overall level of debt in Britain is the second-largest in the world, after Japan’s, at 380 percent of the country’s gross domestic product, according to a recent report by the consulting company McKinsey. In recent weeks, the focus has been on debt scofflaws in Europe like Greece, Portugal and Spain, countries where borrowing costs have shot up in line with their growing deficits as investors demanded higher rates to compensate them for the added risk of lending the governments money.
But the recent plunge in the value of the pound below $1.50 and the gradual move upward of Britain’s benchmark 10-year borrowing rate on gilts to above 4 percent suggest that investors are now getting ready to reassess the country’s fiscal condition. Britain is not in the 16-nation euro zone and, unlike Greece and other struggling countries that use the currency, it retains control over its monetary policy. As a result, it has benefited so far from a huge bond-buying program undertaken by the Bank of England — proportionally, the largest in the world — that has kept mortgage rates and gilt yields at unusually low levels. That means the government and its citizens have been able to continue to borrow at interest rates that do not reflect their true financial situation. Indeed, the increase in private and government debt here contrasts sharply with the deleveraging that has been going on in the United States. British household debt is now 170 percent of overall annual income, compared with 130 percent in the United States. In an echo of the United States’ rush into subprime mortgages with low teaser rates, millions of homeowners in Britain have piled into variable-rate mortgages that are linked to the rock-bottom base rate.
As for the British government, it has been able to finance a budget deficit of 12.5 percent of G.D.P. — equal to Greece’s — at an interest rate more than two full percentage points lower only because the Bank of England bought the majority of the bonds it issued last year. “It’s not just ‘basket cases’ like Greece that can be considered candidates for sovereign crises,” said Simon White of Variant Perception, a research house in London that caters to hedge funds and wealthy individuals. “Gilts and sterling will continue to come under pressure as scrutiny of the U.K. fiscal situation intensifies.” Adding to this concern is the precarious condition of the British consumer. As interest rates have hit new lows, the popularity of variable-rate loans has grown. At the end of December, 40 percent of new mortgages were tracking the government’s base rate. Despite comments from Mervyn King, the governor of the Bank of England, that he might restart his quantitative easing program in light of current economic weakness, the view among investors is growing that interest rates here will rise further, along with higher inflation and Britain’s increased risk profile.
In a speech this year, Andrew Haldane, the executive director of financial stability at the Bank of England, warned about how vulnerable Britain was to a rate increase, pointing out that an increase of one percentage point would cause debt service costs relative to income to double, to 13 percent. “This is a ticking time bomb,” said Nick Hopkinson of Property Portfolio Rescue, a company that assists overleveraged homeowners. “There are over 400,000 people who are in arrears with their mortgage rates the cheapest they have ever been. When rates increase, a lot of people will be tipped over the edge.” As a result, those counting on the British consumer to take up the slack from any scaling back of government borrowing could be in for a shock. Consider Sheridan King, a sales manager who is struggling to pay off his £32,000 ($47,075) in nonmortgage debt. Far from thinking about going shopping, his first priority is keeping clear of his creditors. And even though his variable mortgage of about £100,000 carries a very low rate, interest costs are already chewing up a substantial portion of his pay, and he is deeply worried about the future. “If rates go up, it will be a very dangerous situation for me,” Mr. King said. “It might lead me to consider bankruptcy.”
For the time being, at least, the British government faces no such threat. Despite its borrowing and spending excesses, Britain still maintains a triple-A credit rating and much of its debt is long term. But with 29 percent of British bonds held by foreigners, Britain, like Greece, remains highly vulnerable to the vicissitudes of outside investors. Since early this year, foreign holdings of British bonds have fallen from 35 percent, a trend that has tracked the pound’s decline and contributed to the increase in the yield on its 10-year gilts. As to which political party he thinks is best placed to handle these challenges, Mr. King takes a skeptical view. “We are just struggling to get by with all this debt,” he said. “It’s time the government got its house in order.”
Britain Bows Out of the Security Game
Britain emerged as a world power in the years after its defeat of the Spanish Armada in 1588. By 1815, following the defeat of Napoleon, it had become the most powerful nation in the world. Then came World War I and World War II—both conflicts for which Britain was not well-prepared. It's been downhill ever since. In the three decades after 1945, Britain shed virtually all of the colonies that had taken centuries to acquire. Yet Britannia remained one of the world's leading military powers, still able to project power around the globe. In 1982 Britain carried out one of the most ambitious amphibious operations since Inchon, sending 65 warships and 7,000 Royal Marines and soldiers to evict the Argentines from the Falkland Islands, one of its few remaining colonies.
Britain was also America's most important ally in the 1991 Gulf War, the 2003 Iraq War and the 2001 Afghan War. The British sent 45,000 troops to the Gulf in 1991, including an entire armored division, and sent roughly the same number in 2003, including an armored brigade. Today they still have 9,500 troops in Afghanistan, making them the second-largest foreign contingent after the Americans. But the days of British military power appear to be ending—with the obituary written, ironically, by a Tory-dominated government supposedly dedicated to a strong defense.
The Strategic Defense and Security Review released this week by Prime Minister David Cameron is bad news for anyone who believes that a strong Britain is a vital bulwark of liberty. Granted, the news isn't as bad as it could have been. The government will cut "only" 8% from the defense budget over the next four years—not the 10% to 20% that had been rumored. Britain will continue to spend at least 2% of GDP on defense—far less than the U.S. (nearly 5%) but more than most members of the European Union. In announcing the cutbacks, Mr. Cameron promised that Britain would still "punch above its weight." His words ring hollow.
The British army, already cut a third since the end of the Cold War, will lose another 7,000 soldiers, dropping to 95,500 Tommies from 102,500, one-sixth the size of the U.S. Army. Also gone will be 40% of the British army's tanks and 35% of its artillery, thus making it very difficult to replicate the sort of armored blitzkrieg that Britain carried out against Iraq in 1991 and 2003. In the future Britain will be able to keep only one brigade of about 7,500 soldiers in the field long-term, well below the number deployed today in Afghanistan.
Both the navy and air force will also see manpower reductions, about 5,000 in each case. Only 40 new F-35 fighter aircraft will be bought, down from initial projections of 138. The navy will lose its Harrier jump jets and its flagship, the aircraft carrier Ark Royal. Britain will be left with one aircraft carrier but, ludicrously, without any carrier-strike aircraft until 2020. The Royal Navy will be allowed to finish building two new aircraft carriers, but only one will be operational; the other may be sold or mothballed. The navy's fleet of destroyers and frigates—its workhorses—will shrink to 19 from 23, the lowest number of warships since the days of the Spanish Armada. A decision about replacing Britain's aging Trident submarines, which carry its nuclear deterrent, has been postponed.
Republicans expecting to take over one or both houses of Congress may be tempted to emulate the British example to deal with our own budget woes. But while Mr. Cameron's courageous cutbacks in bloated domestic spending should inspire admiration, his scything of defense—one of the core responsibilities of government—is an example that we would do well to avoid. The fact that British defense capabilities are in steep decline means that even more of the burden of defending what used to be called the Free World will fall on our overstretched armed forces. The British can cut back secure in the knowledge that Uncle Sam will protect them if anything goes truly wrong. But who would we count on in a crunch?
Mr. Boot is a senior fellow at the Council on Foreign Relations. He is writing a history of guerrilla warfare and terrorism.
Britain’s Austerity Overdose
The National Health Service was shielded from cuts, and after a last-minute intervention by Mr. Cameron at Washington’s behest, the military budget will be cut by only 8 percent. Most military reductions will come through sensible retrenchments like delaying the replacement of Britain’s nuclear missile submarines and drawing down British forces stationed in Germany. But they will still require significant reductions in the number of British troops available for any new major NATO operations. Shielding the military and the health service, while essential, required cutting more recklessly elsewhere.
Nearly 500,000 public jobs (out of 6 million) will be eliminated. Long-term unemployment benefits will be cut off after 12 months. Public housing tenants will pay higher rents. School construction will be cut by 60 percent. Recession, bank rescues and short-term stimulus spending pushed Britain’s deficit up to 11.5 percent of total economic output, even higher than the United States’ 10.7 percent. Both countries will have to bring those numbers down over time. But otherwise healthy economies can afford to run fiscal deficits in times of weak private sector growth. In fact, they cannot afford not to. Britain’s deficits did not spawn bond market panics. Interest rates remained low. That left room for a nuanced policy that relied on a reviving economy to boost tax receipts and deferred major spending cuts until a solid recovery was under way. Unfortunately, Britain’s leaders chose posture over sound economics.
A photograph of the couple, in formal evening dress, showed them registering shock as protesters beat on the side of their armored, chauffeur-driven Rolls-Royce with sticks and bottles, smashing a side window, denting a rear panel and splashing the car with white paint. A Jaguar tailing the car and carrying a palace security detail was so battered that the police ended up using its doors as shields. Prime Minister David Cameron called the attack on the royal couple’s car “shocking and regrettable.”
Other violence across the city center continued into the night, with demonstrators trying to smash their way into the Treasury building at the heart of the Whitehall government district with makeshift rams made from steel crowd barriers, shouting “We want our money back!” The protesters set small fires and clashed with riot police officers and mounted units that formed cordons outside government buildings. BBC reporters at the scene wore helmets as the rioters threw shattered blocks of steel-reinforced concrete.
Scotland Yard said at mid-evening that at least 12 police officers were injured, six of them seriously, including one who was taken unconscious to the hospital after falling or being pulled off his horse. At that point, one large fire was still burning in front of the Palace of Westminster, seat of the House of Commons. At the height of the unrest, rioters threw snooker balls, lighted flares and fireworks at the police, and tried to topple statues in Westminster Square, across from the Commons. At least 43 were arrested.
The violence provided a disturbing backdrop to the day’s political events, which were themselves a watershed moment for the seven-month-old coalition government of Mr. Cameron. Ahead of the parliamentary vote on the college fee increase, the government confronted a difficult rupture as the Liberal Democrats, who are the coalition’s junior partners, split among themselves, raising questions over the coalition’s long-term survival.
Although half of the Liberal bloc in the House of Commons voted against the tuition fee increase, the coalition won the vote by a margin of 323 to 302 votes. The 21-vote margin was far short of the coalition’s nominal 84-vote majority, and threatened at one point to dwindle even further as Liberal leaders considered abstaining in a bid to keep their party together. In the end, the Liberal leader Nick Clegg and other Liberal ministers voted for the increase, though two Liberal ministerial aides resigned.
Without the continued backing of the Liberals, Mr. Cameron’s Conservatives would likely have to face a new election, with no certainty they could win a contest that would be sure to center on the austerity program. The Labour Party, loser in the May election, has a new leader in Ed Miliband, who replaced the former prime minister, Gordon Brown. It has focused its stand on opposition to the scale of the spending cuts, saying they hit hardest at the poor and risk pitching Britain back into recession. Recent weeks have seen other occasions when street protests have spilled over into violence, but nothing on the scale of Thursday’s unrest, which was punctuated by the unexpected and, many said, ill-advised appearance of Prince Charles and Camilla in the midst of the uproar.
A witness at the scene described the royal vehicle turning up Regent Street, one of London’s main shopping thoroughfares, and heading into a crowd of protesters massed across the street, some of them smashing shop windows and setting fires. “I thought it was mad of them to head up Regent Street, because there were thousands of protesters at the top of the street, and the car was heading straight into them,” the witness told the BBC. He said Prince Charles and the duchess remained in their vehicle throughout and ultimately relaxed after a moment when the duchess, looking terrified, slid into the footwell beside the door. “He remained absolutely calm, he was beaming, as Camilla was,” the witness said. “People were just trying to have a chat with them.”
When the car moved on to the London Palladium, where Prince Charles and his wife were the guests of honor at an annual pre-Christmas variety show, photographs showed the royal couple smiling broadly. “There’s a first time for everything,” the duchess told reporters before the couple drove off in an armored police truck after the performance. Student protests have been a vehicle for wider popular resistance to the 20 percent across-the-board cuts in government spending announced by the Cameron government in October, with tens of thousands of young people angered by a doubling, or potentially even a tripling, of government-regulated tuition fees, to a maximum of about $14,200 a year.
Under the new fees, which are to take effect in 2012, many students are expected to accumulate loans of as much as £40,000, about $63,000, during a three-year degree course. Part of what has stoked anger over the increases is that Britain’s universities traditionally charged no tuition fees, with tuition costs met out of taxpayer grants to colleges or endowment funds. The Labour government stirred its own wave of protest under Prime Minister Tony Blair, imposing a tuition fee ceiling of about $5,200. The Cameron government has cut university funding by about 80 percent, shifting the burden to the students.
The street clashes on Thursday raised concerns that the protests could be the template for even wider disturbances in the future, as the spending cuts and expected job losses begin to bite. The Liberals, with 57 parliamentary seats to the Conservatives’ 308, had promised during the May election not to support a tuition fee increase, but made a U-turn once in government, saying the size of the deficit inherited from Labour made the increases necessary. With the Conservatives, they drew up a new schedule for the repayment of government-backed student loans, saying students will not have to begin paying back the loans until they earn at least $33,100.
The Irish Domino
It seemed possible that the Irish economy, however hard it was willing to try, might actually not be able to repay its debts. This fear sparked another run on Irish banks, triggering this week's emergency loan from the European Union and the International Monetary Fund. Now, if Ireland's problem was too much debt, how can taking on more debt help? There is only one answer—the new loan must be on terms so generous, i.e., lower interest rates over a longer maturity, that it can be repaid more easily than the old debt. The EU/IMF package must also be bigger than the old debt, so that it can be used to partially repay old loans and to recapitalize the Irish banks.
For Ireland, this will mean years, maybe decades, of higher taxes. Even if the most obvious source of damage to its economy—raising its 12.5% corporate tax rate—can be avoided, there will be problems. Ireland has a well-educated work force that may well emulate earlier generations and seek new job opportunities abroad. How many skilled workers and college graduates will be left in Ireland after the bailout? Who will pay these higher taxes? Ireland's problems have not been solved. They have simply been changed into a different kind of problem. Those countries that will put up the money for the EU loan—and remember this loan has to be on very generous terms if it is to tackle even Ireland's immediate problems—may soon find their own budget situations tightening. Maybe Germany can cope. But what about Italy or even France? And what happens after Ireland? The Irish loan conditions—low in costs and long in term—will have to be offered to any other EU country that might still run out of funds.
Who will be left standing to offer such loans if more dominoes fall? If Portugal or even Spain may need a bailout, the burden on the euro zone's economic center, Germany, will increase further. How long will it be able to bear it? And how long will it be willing to do so? At some point the markets will question the stability of the whole euro project. These doubts can be addressed in one of two ways. Either the union will end (or contract to a core), or there will be sudden political and fiscal centralization. Which is more likely? I have no crystal ball, but it all comes down to two further questions: Would Germany want to remain in a union with slow-growing, fiscally irresponsible members? And would those countries in turn want to stay in a union in which they are no more than poor and subservient provinces? The answers to these questions will determine the survival of the euro.