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Hannan's view

The debt we’re racking up will hold back growth for decades, says Daniel Hannan

Three cheers for the Germans. Angela Merkel alone is standing out against the asinine desire by every leader to be seen to be active. 

“Doing nothing is not an option,” say politicians. Has there ever been an instance where this is true? Two years from now, Gordon Brown will have borrowed more than Winston Churchill borrowed to win World War II. 

To grasp the consequences of this level of debt, look at what happened last time. In 1945, Britain had a debt equivalent to 350% of GNP. Although few realised it at the time, the country was far worse off than the continental states that had suffered more during the fighting. During the 1960s and 70s, British commentators and politicians gawped wonderingly at the success of their European neighbours, variously attributing it to Social Democracy, Rhineland Capitalism, collaborative trade unions or proportional representation. But there was a far simpler explanation: these countries had started with a clean slate. 

This explanation was not obvious to contemporary British voters. They saw, as it were, two neighbouring houses, one apparently sturdy, the other with a partially collapsed roof. They watched uncomprehendingly as the comfortable house fell into disrepair, while the damaged one was renovated. What no one had explained to them was that the undamaged house was in negative equity to the tune of 350%, while the dilapidated one was owned with no mortgage. 

What’s the alternative? How about this: nothing at all. When New Zealand withdrew subsidies from its agricultural sector 20 years ago, land values fell, and many farmers found themselves in negative equity. The bankers approached the government to demand a bail-out. The government declined to involve itself. The bankers tried again, insisting that, if the state didn’t step in, there would be a financial collapse. Ministers politely told them that this was their problem. 

Result? The bankers realised that it was their problem. Well aware that the last thing they needed was a series of repossessions and auctions, they allowed farmers to reschedule their mortgage payments. The crisis was averted and, sooner than expected, land prices recovered. It’s what economists call ‘spontaneous order’. Had ministers given in to the Something Must Be Done brigade, they would almost certainly have caused the collapse they aimed to prevent. 

In Europe, only Mrs Merkel seems to have learned that lesson. The truth is that there is almost no crisis so severe that it cannot be made worse by state intervention. 

Daniel Hannan is the Conservative MEP for South-East England 