Bedtime, Tories? Or Just A Wake Up Call?

Recession-bashed Brits will take a hard look at Major in April elections

For troubled Britain, a general election ought to offer a golden opportunity for a new start. But when Prime Minister John Major stood in front of 10 Downing St. on Mar. 11 and called one for Apr. 9, the financial markets didn't see it that way. The London stock market fell 2% in one day.

Investors and executives have plenty of reasons to worry about Britain -- and the election itself is one of them. The economy remains mired in its longest postwar recession. Rows of boarded-up shops blight the once prosperous towns along the River Thames. With house prices still falling, 19% of London's office space vacant, and unemployment at 9.2%, pollsters give the Labor Party its first real shot at unseating the Tories since Margaret Thatcher began her reign in 1979. But they also say that a hung Parliament -- one with no party winning a clear majority -- is the most likely outcome.

The prospect of political turmoil is what Britain needs least right now. The recession has exposed deep structural weaknesses that Thatcherism failed to solve. At the same time, Britain faces even more restructuring and pain as Europe becomes a single market. The fast-expanding relationship with its European neighbors could be just the tonic for beleaguered Britain. But if the British fail to produce leadership that can play the game smartly, they could find themselves buried in Europe's second tier.

LONG GONE. The voters will have a clear choice in the election. The Conservatives are repackaging Thatcherism, albeit with some softer tones. Major is hitting the hustings with a program of low taxes and continued faith in market forces to spark investment. In a budget unveiled on Mar. 10, Major proposed a new round of modest tax cuts aimed at getting the votes of lower paid workers.

Labor, meanwhile, is far more interventionist. Standard bearer Neil Kinnock wants to use higher taxes on the rich to finance a program to revive industry. It would range from training programs to tax incentives for new investment. A key challenge for the former Welsh schoolteacher is simply to build confidence that a Labor Party out of power for 13 years is capable of governing.

A Labor victory is one thing, but investors and executives fear a muddled outcome even more. That would lead to coalitions with minor parties, especially Paddy Ashdown's Liberal Democrats. The fear is that economic policy would drift while a weak government spent its time bickering.

The political crisis reflects the failure of Thatcherism. This has opened the door for Kinnock's retooled Labor Party. He has allayed some fears of a return to Labor's tax-and-spend days of the 1970s and now talks of a grand business-government initiative to rebuild the economy. Many voters, including some industrialists, find Kinnock's pitch more appealing than Major's. "We want a partnership between government and industry, like you find in other countries," says one Labor supporter, Simon Haskel, chairman of textile maker Perrotts Group PLC.

Still, there are concerns that a majority win for Labor could rock business confidence. These center on Kinnock's pledge to raise the top tax rate from 40% to 59% and introduce a minimum wage, and on the party's ties with trade unions, its traditional paymasters. "A blow to confidence could delay the recovery by up to 12 months," says Keith Skeoch, chief economist at James Capel & Co.

In recent years, most voters have preferred the Tory approach to economic questions, but the mood is shifting rapidly. In the nasty three-week campaign, the Conservatives will be hard-pressed to maintain the coalition of wealthy, middle-class, and semiskilled workers who flocked to Thatcher but have been hammered by the recession. "The economy is a mess," grouses John Romijn, 40, a longtime Conservative supporter who is about to lose his job as a truck driver. "Reducing taxes won't get me to vote for them again."

There are some bright spots. Now, both parties are at least chanting the mantras of improved education and training. And recession is forcing the traditionally insular British to focus on Europe. For the first time, all three party leaders profess to be committed to European unity.

SHODDY GOODS. To profit from the new unity, British industry, heavily dependent on low-skilled and low-paying jobs, will have to go upscale. If Britain fails to shake off its reputation for low-quality products and poorly trained workers, investments from Americans, Japanese, and Germans may go elsewhere in Europe. "We must get our plants in Britain close to the level of those on the Continent," says Bruce Blythe, Ford of Europe Inc.'s chief strategist. The British plants, one-third less productive, "won't be kept open otherwise," he warns.

Economists say that the tough European financial constraints that are designed to drive down budget deficits by the mid-1990s to prepare for a single currency should help Britain. "The potential payoff is lower inflation, lower interest rates, and stability," says Richard Freeman, chief economist of Imperial Chemical Industries PLC. But Major's campaign-kickoff budget with its soaring $48 billion deficit was a step backward. Expect more of the same unless voters give someone a strong mandate.