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The Globe and Mail

Britain faces a triple whammy of debt, EU and Scots

Britons will learn about their government's budget on Wednesday, a day before Canadians learn about theirs.

The British budget will not be pretty, but then neither is the British economy. The country is mired in a prolonged economic slump, with fiscal austerity beckoning for the rest of this decade.

Worse, the British have plunged into yet another long bout of soul-searching about membership in the European Union that could culminate in an in-or-out referendum in 2017. If a weak economy and another spasm of energy-sapping introspection about Europe are not debilitating enough, the exact date in the autumn of 2014 for a referendum on Scottish secession is supposed to be unveiled in Edinburgh on Thursday.

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Economic doldrums, breakup with Europe, breakup of the country – an ugly triple whammy not to be wished on any country. Did Bank of Canada Governor Mark Carney fully appreciate what he was getting into when he decided to bolt Canada for the top job at the Bank of England?

Mr. Carney had worn out his welcome with the Harper Conservatives, who resented his high profile, glowing press reviews and foolish dalliance with the Liberal Party. Presumably, Mr. Carney understands the challenges facing Britain, and will have some role in meeting them. But these challenges are much deeper than any central bank governor can overcome.

Last month, Britain lost its AAA credit rating from Moody's, despite the Conservative-Liberal Democrat government's having insisted Britain would not suffer a downgrade.

For most of the past five years, inflation has been above the government's 2-per-cent target. Unemployment is close to 8 per cent. So is the government's budgetary deficit (compared with 5.8 per cent in the United States). The combination of pathetic growth and inflation means living standards have been steadily falling.

The GDP is 3 per cent smaller than on the eve of the 2008 recession and is unlikely to get back to the 2008 level until 2015. The government raised taxes and cut massively in 2010, and intends to keep cutting. As Prime Minister David Cameron said recently, the government intends to move "further and faster on reducing the deficit," meaning even less chance for spurring economic growth. Indeed, the government has warned of austerity lasting until 2018.

The country's debt as a share of GDP has soared from 35 per cent before the recession to almost 80 per cent today. All of the government's hopeful predictions about things turning around have been dashed. With the European Union's growth prospects so dim – the EU being Britain's biggest market – the chances of an export-led recovery in Britain are nil.

Britain's attitudes toward Europe have been ambivalent and sometimes contradictory for decades (some might even say centuries). Today, the political trouble resides inside the Conservative Party, where opposition to Europe is rampant. Worse for the Conservatives, the U.K. Independence Party that wants Britain out of the EU is scoring well in the polls and finished ahead of the Tories in a recent by-election.

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Scarcely any Conservatives have a kind word to say about Europe. The tabloid press and the predictably Tory "quality" newspapers are ferociously anti-Europe. With this braying now dominating what passes for debate, Mr. Cameron has promised that, if re-elected in 2015, he will seek to renegotiate the European treaty to make it more efficient and less intrusive in the lives and economies of member countries. He pledges an in-or-out referendum by 2017 after these renegotiations.

He wants the clause about member countries seeking an "ever-closer union" stricken from the treaty – a demand that will never be accepted by Germany and France. There, the British ambition for loosening the EU is completely unacceptable.

Meantime, Britain will be trying to keep itself together in the Scottish referendum. The question to be asked Scots will be: "Should Scotland be an independent country?" Polls show a solid majority for the No side, but, as Canadians twice discovered, referendum campaigns are highly volatile.

Count on the Brits to be consumed (like the Canadian media) with the name of the forthcoming royal baby. It's easier to think about that trivia than the economy, Europe or Scotland.

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