Letter from London: The challenged chancellor

LONDON, UK — The British establishment loves its traditions. Once a year, the Chancellor of the Exchequer puts on his tuxedo and goes for dinner and to give a speech at the Mansion House, the official residence of the City of London's Mayor (as opposed to the Mayor of London — like I said, they love their traditions here and somehow the City,  the financial district, has kept its traditional status of independence from the rest of the metropolitan area).

Thursday night, the current Chancellor, George Osborne, made the journey to the Mansion House and addressed the assembled captains of finance. It was a chance for the bankers and fund managers to hear new government plans for their industry and it was a chance for Osborne to get out from under a rough couple of months of bad news.

The headline initiatives:

1. A plan to protect the retail side of big bank operations from the speculative side — a kind of Glass-Steagall light. 

2. A stimulus program, with the Bank of England to make up to £140 billion ($217 billion) in cheap money available to banks, but only if the funds are loaned immediately to small and medium-sized businesses.

But the biggest news may have been what wasn't announced. Osborne's austerity program remains in place. Too much direct stimulus of the British economy would only raise debt without net benefit, he told the bankers, because "much, if not all, of any gain from more deficit-financed spending would" be  "lost through higher imports and tighter monetary conditions."

Without commenting further, Osborne had put his finger on the great structural problem of the British economy.  Not its deficit, but the fact that the economy is overwhelmingly based now on credit driven consumption of goods manufactured elsewhere.

The Mansion House speech offered the best chance for Osborne to get out from under a rough couple of months of bad news. His budget, presented in April, has been hugely unpopular.

It called for the top rate of income tax to be cut from 50 percent to 45 percent while at the same time increasing taxes on pensions.  Fat cats get a break while grannies get a tax increase — that’s how the move played in the press. 

At around the same time, it became official that Britain was back in recession.  As the overseer of economic policy, it's the chancellor who gets the blame when that happens. 

More from GlobalPost: Austerity in the UK: Where's the rage music?

Then there is the lingering fall-out from the phone-hacking scandal.  It was Osborne who pushed Prime Minister David Cameron to hire the former editor of the Murdoch-owned News of the World, Andy Coulson, to run his media operations despite the fact that Coulson had resigned over phone-hacking.  When the scandal blew up last year and Coulson had to quit his job with Cameron some of the blowback hit Osborne.

This has led to a dramatic decline in Osborne's political fortunes. A year ago, the Financial Times ran a hugely admiring profile of the Chancellor, with coded hints that he was a potential Prime Minister.

But 58 percent are dissatisfied with his approval ratings, up from 23 percent when he presented his first budget in 2010.

Despite his best efforts, Osborne is now the lightning rod of Britain's coalition government.  It is a government characterized by its extreme youth. None of its senior members is older than 45.  None have done any job other than politics except for very brief stints in journalism or public relations.  Almost all were privately educated at the most elite of Britain's "public schools."

Osborne is their pluperfect exemplar – only younger.  He became Chancellor at the age of 39. He is not overburdened by life experience but weighted down with the certainties of being born into the elite.

He was christened Gideon Oliver Osborne. The Chancellor added the name George because, according to the FT, he couldn't see anyone with the first name Gideon becoming prime minister and that was his career goal.  Despite his rebellion against his unusual first name he called his daughter Liberty, so perhaps he doesn't want a political career for her, maybe he would prefer that she grow up to become head of a neo-conservative think tank.

As the name Gideon implies he is posh, very posh. He will inherit the Osborne baronetcy, a title created nearly 400 years ago for an English land owner in Ireland (probably purchased by Osborne's ancestor – you could buy titles more openly in those days.)

His father Sir Peter, runs a wall paper firm that caters to people of their class, but spends most of his time enjoying the good life. Sir Peter confessed to the Financial Times' How to Spend It weekend magazine recently that among the luxuries he prefers, beyond the obvious Savile Row suits, Turnbull & Asser shirts, and holidays on Mustique, he likes to moisturize and soak in fine bath oils.

What makes him fascinating, rather than just an over-promoted rich kid, is he possesses undoubted political/economic smarts.  In his Mansion House speech he had this to say about the euro zone crisis,"Many people such as me had doubts about the original euro project but we should all be clear that it is strongly in Britain’s interests for our biggest trading partners to succeed; the risks for our economy of a disorderly collapse of the euro are huge.

That means it’s not in our interests to stand in the way of the further integration amongst the eurozone countries that any successful solution will require."

Many in his own party fear the creation of a two-speed European Union, clearly Osborne does not.  His prescription for closer euro zone union is utterly pragmatic.

More from GlobalPost: Euro crisis: Leader debate the F-word

But his keen political/economic intelligence is hemmed in by dogmatic thinking.  Osborne's dogma is that of Margaret Thatcher and her acolytes safely ring-fenced from the real world at think-tanks like the Heritage Foundation and American Enterprise Institute.

Osborne has used the economic crisis to take a machete to Britain's structural deficit but it is clear that shrinking the state is the real goal because the only way to reduce the deficit as quickly as he wants to is reduce the public payroll.

The size and speed of the cuts has led Britain into its double-dip recession.  A less dogmatic person, especially one with Osborne's undoubted political chops, would have moderated course by now.  Instead Osborne blames the eurozone crisis for Britain's economic problems.

The Chancellor seems to have Thatcher's words, uttered as she presided over a recession in the early 1980's similarly created to reduce debt,  tattooed on his soul, "You turn if you want to, the Lady's not for turning."

The difference between then and now, is that the British economy is one small part of a globalized system of trade unknown and unimaginable to Lady Thatcher in 1981. Looking backwards for solutions will not help Osborne guide Britain out of recession and restore it to a path of steady growth.

Although, if you need a small loan to start a mom & pop kind of consultancy business, Britain could be the place to score it – if Osborne follows through on his Mansion House speech.