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THIS week Europe hovered on the brink with its debt crisis threatening more nations in the eurozone, America was mired in gridlock over its huge debt burden and Australia declared its confidence in the domestic and world economies by moving to price carbon.

The juxtaposition is staggering. In the advanced economies there are 45 million jobless. Public debt as a portion of gross domestic product is 145 per cent in Greece, 120 per cent in Italy and about 100 per cent in the US. This constitutes a crisis of governance in the West and an intellectual crossroads for economic policy with competing needs to boost activity yet reduce debt.

Never has Australia’s political divorce from the rest of the West seemed more stunning. Never have the policy priorities between Australia and the rest of the world seemed so stark. The contrast was in-your-face blatant yet almost unremarked.

The legacy of Australia’s sailing through the post-2008 global financial crisis is the ability of our political system this year to legislate an economy-wide carbon price presented by Julia Gillard this week as Labor’s “biggest reform yet” and an economic transformation comparable with the 1983 float of the dollar.

The week saw a repeat of the lesson from the last year: the North Atlantic zone remains locked in the consequences from the GFC. Excess liquidity has saved the world from a deeper recession but the collective private, public and sovereign debt crisis is the No 1 issue today within industrialised nations. But not Australia.

Australia under Gillard is either being brilliantly clever in exploiting its escape from the GFC or engaged in an act of strategic folly by putting lead in the saddle bags of its comparative advantage of cheap energy.

The first question, therefore, is whether Labor has misread the global trend. It is whether the Gillard government is locked into an insulated political fantasy as the rest of the world sinks into the financial mire.

The second question, however, is whether Labor has misread the domestic economy and is pricing carbon at the exact time when much of the non-resources sector is alarmed at stagnant conditions. Labor should be alerted by the reaction last Sunday of the three main industry groups, the Business Council of Australia, the Australian Industry Group and the Chamber of Commerce and Industry, expressing deep worry at carbon pricing now. It is no good just dismissing them as rent-seekers.

Westpac chief economist Bill Evans, in a report issued yesterday, predicts a dramatic change of sentiment and a new cycle of interest rate cuts triggered by the renewed global crisis, subdued domestic conditions and, wait for it, rising unemployment through 2012, the year the carbon price begins.

Evans says, “The turning point in the labour market may have already been reached.” If true, this means a new set of horrors for Gillard Labor — rising unemployment as well as rising cost-of-living pressures in tandem with carbon pricing.

Admitting his forecasts are on the pessimistic side, Evans says “fear within the financial system in Europe” looks set to “intensify”. He forecasts unemployment heading next year towards 5.5 per cent to 5.7 per cent. He believes the economic cycle for the rest of this year and next year will be set by “falling consumer confidence and global financial turmoil spilling over to business confidence”. The weakest sectors are expected to be retail, manufacturing and non-mining construction, and carbon tax concerns “have contributed to the recent slide in consumer confidence”.

There is now a critical rift between the views of the official forecasters and sections of the private sector. Gillard and Wayne Swan have expressed their confidence about the strength of the economy. If unemployment does rise the carbon price scheme is not to blame. But it will be invested with blame by Tony Abbott.

This raises a pivotal issue for Gillard’s future: has Labor misread the domestic currents into which it will launch the great carbon event?

Rarely has any prime minister aimed higher than Gillard this week. Yet there is a profound egoism in Gillard’s policy and rhetoric given the narrowness of her political base, the polarisation within the nation, the precarious condition of the global economy and the longevity of the policy’s cycle running out to 2050.

Memories are short. This was not Gillard’s plan in the 2010 campaign (and this is not a reference to the carbon tax). In the campaign Gillard backed the principle of carbon pricing but she said wanted a political consensus before acting. How wise, in retrospect. Indeed, this was the advice Gillard gave Kevin Rudd earlier in the year asking him to back off his own scheme. She was consistent in the campaign but changed her mind post-election.

Why?

The answer lies in the September 1, 2010, formal alliance between Labor and the Greens, with paragraph 6.1 (a) saying Australia must price carbon and that a multi-party committee be established and resourced as a cabinet committee to pursue this goal.

That is, the price for Gillard being a minority PM with a working majority was to press ahead with her carbon scheme. Once the multi-party committee got cracking (the agreement required that its structure, membership and work plan be finalised by the end of September) it became obvious this committee and not the so-called consensus-seeking Citizens Assembly would drive the process.

This led directly to Gillard’s policy last Sunday with its joint ownership of Labor, Greens and independents.

The answer, therefore, is that Australia has this policy because it was essential to meet Labor’s political needs to form a viable minority government. The irony is that the policy that gave life to Gillard’s government might be the policy that extinguishes it.

This complex but elemental motivation for Gillard’s position is now a crucial factor in its own right. Despite her invoking idealism, too much of this policy arises from Gillard’s own needs rather than the nation’s immediate needs. Her change of mind (symbolised by the carbon tax) has been recruited by Abbott to destroy public trust in the PM. Once lost, it is hard to recover.

No leader has ever tried to mount such a reform with a primary vote at 27 per cent, with an opposition so strong in the parliament and so hostile to the idea and with public opinion so alienated. The fact this is a joint Labor-Greens policy, while essential to win the votes in parliament, will become a further negative for Labor in the nation.

The mood this week was ominous. Gillard is the architect of her own problems yet some of the attack she faced was personal, nasty and ignorant. It came from sections of the media that prefer to play the woman rather than the issue. Yet Gillard’s effort to inject emotion into her persona and presentation at the National Press Club was not a success — she was too defensive in trying to explain herself and suddenly looked too vulnerable.

The eruption over the media, with the Greens seizing on events in Britain to demand an inquiry into media ownership, regulation and standards littered with repeated criticism of the Murdoch group is unlikely to help Labor. Greens backers and ABC loyalists will cheer Bob Brown but the public is not so dumb as to miss the obvious: this looks like an opportunistic push from the pro-carbon tax political wing to nail some anti-carbon media outlets. Gillard, frankly, needs to be careful here. With emotions running high inside Labor on this issue she should cool, not inflame, them.

As she confronts the long sell, the PM aspires to the mantle of strong leadership that keeps eluding her. Comparing her policy with the float, she says it is “the big enabling decision, the big change which sets the ball rolling for all the others, the big call for the future” that, once made, nobody would seek to undo. Seizing the clean energy position, Gillard talks of “tidal in Western Australia, solar in Queensland, wind in NSW, geothermal in South Australia, clean coal in Victoria and co-generation in Tasmania” but asserts the key to such progress is pricing carbon.

Pricing power will work eventually, big time. The Treasury projects a 2050 carbon price in real terms of $131 a tonne. At that point the policy envisages a $100 billion renewable industry providing 40 per cent of energy needs and conventional coal (separate from carbon capture and storage) falling from 70 per cent to 10 per cent of the energy mix.

It is a far-reaching change in Australia’s society. The scientists and economists behind Gillard reflect an “insider” faith convinced of its wisdom. Abbott says he will follow the people, not economists or scientists, a symbol of the different politics he represents that Labor has been unable to counter.

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