ECONOMICS FOR GLOBAL BUSINESS
Question (Part A)
How successful have the British Government and the Bank of England been in running the British Economy over the last 2 years?
This essay will demonstrate the measures of success that the British Government and Bank of England have delivered for the periods of 2010 and 2011. In order to achieve this outcome it was first necessary to briefly describe some background to how the Bank of England became so involved and how their input has had a direct affect on inflation and interest rates, which are two measurable indicators used in business and economics. In terms of measuring success it was also necessary to compare and contrast other European countries economic performance over the same period. This approach was chosen, as there needed to be some sort of comparison to make any comments meaningful. Measuring year on year in isolation would show and provide information but as the UK is part of the European Union it was important to measure the UK performance against other similar economies.
Control of setting interests rates became the responsibility of the Bank of England on 6th May 1997 (BBC Homepage 1997) when Prime Minister Tony Blair announced the Banks independence from political control. The governor of the Bank of England, Mr Eddie George stated at a press conference that day that he “wanted to set in place a long-term framework for economic prosperity” which would “break from the boom bust economics of previous years.” This was a very important and bold change in how the UK had managed its finance for hundreds of years, where previously the chancellor of the exchequer would meet with the Bank of England governor and both sets of advisors and agree interest rates together. The German economy had been run for some time successfully by their Bundesbank, the equivalent of the Bank of England and they had helped to make Germany an economic superpower in Europe. This was the model that was adopted by the UK.
The years 2010 and 2011
The Bank of England had two main targets to achieve after the financial collapse of 2007 and 2008. Their responsibility was to set base interest rates and also to influence the supply of money – which in the years of 2010 and 2011 actually meant the increase to the supply of money through a system known as Quantitative Easing. Quantitative Easing is the process of pumping money into the economy and according to a report in 2009 from the BBC “Lower interest rates encourage people to spend, not save. But when interest rates can go no lower, a central bank's only option is to pump money into the economy directly. That is quantitative easing (QE).” The Bank of England did this is by buying assets (over a 2 year period they spent £375b) - using money it has simply created out of thin air. The institutions selling those bonds (either commercial banks or other financial businesses such as insurance companies) will then have "new" money in their accounts, which then boosts the money supply. It was tried first by a central bank in Japan to get it out of a period of deflation following its asset bubble collapse in the 1990s. Prior to 2009, QE had never been tried before in the UK. It is important to distinguish between what the UK government are responsible for and what the bank of England could influence. Already stated that we see the Bank of England had responsibility for interest rates and money supply and this is known as Monitory Policy and the UK government had direct responsibility for what is known as Fiscal Policy. The fiscal policy controlled by government involves the setting of taxes and government spending. Together in theory if both the Bank of England and UK government can work towards the same goal – creating a stable economy, then in economics sense this should be achievable.
In terms of comparisons to other European countries the UK financial situation could...
References: 1. http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb120104.pdf
a detailed explanation of the macroeconomic policies, theories and procedures adopted by the Bank of England and other banks to attempt to avert the financial disasters from 2008 onwards. [accessed 16/03/2013]
an explanation of the concept of a discount window facility [accessed 16/03/2013]
3. www.direct.gov.uk/prod_consum_dg/groups/dg.../dg_186415.pdf published paper examining the activity by the Bank of England and UK government in their attempt to stabilise the Uk economy and plan for the future (pp 13 – 15) [accessed 18/03/2013]
4. B. Clift (2012) The UK Macroeconomic Policy Debate and the British Growth Crisis: Debt and Deficit Discourse in the Great Recession. Presented on 17 July 2012. Dr Ben Clift department of Politics and International Studies, University of Warwick
Information in summary from the CIA fact book on the economy of the UK [accessed 20/03/2013]
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