STUPID Britain: The UK mustn't be STUPID. The PIGS (Portugal, Italy, Greece and Spain) are old hat. The new acronym on trading floors for possible dominoes if Greece should fall is STUPID (Spain, Turkey, UK, Portugal, Italy, Dubai). This should worry the UK. It's not one of the PIGS but is considered STUPID. Given the way such acronyms can become contagious, the UK needs to distance itself from the others. Here's how.
First, politicians must avoid any comparison between the UK and Greece. David Cameron, the leader of the opposition Conservative party, is making a grave error in underlining the similarities. It may, at the margin, help him win the election, which will probably take place in May. But the more Greece and the UK are associated in the mind of the markets, the worse.
Second, the government needs to produce a credible budget, probably in March. Ideally this would include enough fiscal tightening to show that the UK, with a 2010 budget deficit forecast at 13 percent of GDP, is on the path to responsibility, while not slamming on the brakes so hard that the country is tipped back into recession.
Unfortunately, the gap between the Scylla of irresponsibility and the Charybdis of renewed recession is narrow. In an election budget, the temptation will be to steer closer to the former. But that is the more dangerous course.
Finally, the government should comprehensively identify all the major ways in which the crisis could spread to the UK and draw up associated contingency plans.
One risk is that the UK is unable to fund new borrowing while also refinancing the rollover of its existing mountain of government debt. Then there is the possibility that a crisis erupts in the middle of the election campaign, when politicians are away from their desks.
Appropriate Plan Bs might include putting in place contingency financing arrangements, and identifying an economic war cabinet that could meet even in the heat of electoral battle.
For the UK not to protect itself in these ways would be truly STUPID.
