Economic Policy in a Global Economy

Abstract

Domestic economic policy is made in the context of an increasingly interdependent and integrated global economy. Events elsewhere in the world over which the UK government has no control can quickly make an impact on the British economy. Supposing, for example, that there was a serious earthquake in California which smashed the water aqueducts on which the state depends. There would be an immediate sharp fall on the New York stock exchange which would reverberate around the world. The dollar would weaken, affecting the competitiveness of British exports, but also increasing uncertainty in the foreign exchange markets. A large part of the bill for the damage caused by the earthquake would affect the London insurance market. If the British economy was in recession at the time of the earthquake, the recession would be prolonged and deepened. The British Government would be able to do very little to control the economic consequences of these events, although, it is quite possible, as after the 1987 stock market crash, that political pressure might lead ministers to take policy decisions that amplified the effects of the disturbance. The turmoil in the international financial markets in September 1992 which led to Britain’s withdrawal from the ERM initially left ministers without a clear economic policy to guide their decisions.