Leading Article: A firmer base for optimism

THERE was a time when the determined optimism of No 10 Downing Street and the Treasury about economic recovery seemed to serve as a counter-indicator: the more confident John Major and Norman Lamont were about those 'green shoots', the less imminent the recovery seemed likely to be. But conditions have now changed. The confidence expressed by the Prime Minister in his interview yesterday no longer sounded like whistling in the wind.

The credibility problem derives from the Government's inept handling of the crises of last year, notably sterling's undignified exit from the exchange rate mechanism and the pit closures announcement. The success of the Edinburgh meeting of European Community heads of government repaired some of the damage. Mercifully for politicians, memories are short. A 'sound, steady and stable' recovery, with a virtuous cycle of confidence, job-creating investment and increased spending, as hoped for yesterday, would do much to restore Mr Major's reputation. It helps that his manifestly human qualities make people want to like him, if circumstances give them a chance. The same could not be said of his predecessor.

His professional optimism now rings truer because it is based on favourable external factors. Inflation is very low. Interest rates are the lowest in the EC, but not so low that a further cut would not help to tip the balance towards recovery. A devalued pound is helping exporters. The conditions for recovery are there. The flurry of spending in the post-Christmas sales and brisker activity in the housing market in December have quickened hopes.

The bad news is that unemployment will go on rising, even if probably less quickly than of late; and that as Britain shows signs of moving out of recession, some of our best continental customers, notably the Germans, are being stricken by the blight. Sentiment could be badly affected if the Gatt talks on the further liberalisation of world trade were finally to break down, precipitating a trade war between the US and the EC.

Attempting to avert that disaster will be a priority for both sides. The EC's reputation, already severely damaged by wrangling over the Maastricht treaty and failure to agree on the Yugoslav conflict, suffered a further blow from its divisions over the cuts in farm subsidies negotiated within Gatt. The trade issue will be one of Bill Clinton's first tests following his inauguration as President on 20 January. Caught in a crossfire between protectionists and free traders within his own party, he will have to decide where he stands.

For the moment, and despite some uninspiring appointments to his Cabinet, Mr Clinton remains a figure of hope, bent on tackling the social problems of the US and armed with a very American level of energy and enthusiasm. The speed of the US's burgeoning recovery from recession will probably owe little to his decisions. But unless and until he is judged by the business community to be making serious errors, his advent should have at least a mildly tonic effect.

On the conflict in Bosnia, he is expected to take a more hawkish line than President George Bush. Mr Major spoke yesterday of the dangers of a wider Balkan war. Fears that Serbian aggression may provoke heavy bloodshed in Kosovo and/or Yugoslav Macedonia, drawing in other, larger neighbouring countries, overhang the new year. They are rapidly becoming a stronger influence on European and US policy over Bosnia.

If Western powers decide on military intervention, the sympathy of some Russians for Serbs as fellow Slavs could pose fresh dangers. Much will depend on Boris Yeltsin's success in staving off his conservative and nationalist critics, who accuse him of excessive deference to Western interests. Should he fail, the nationalists are also likely to press for a more vigorous defence of ethnic Russians in other former Soviet republics, such as the Baltic states, Moldova and Ukraine. That could add to the number of small-scale civil wars raging within the former Soviet Union.

It is not only ethnic tensions that the end of the Cold War has released. Deprived of their Communist adversaries, Western democracies find it harder to define what they stand for. One result has been a creeping loss of authority. Most of the older parliamentary democracies now suffer from weak governments and unpopular governing classes. Yet compared with the new democracies of Eastern Europe, their problems are small. A good new year's resolution for all in the West would be to count our blessings and do more to help those bravely throwing off the effects of four decades of Communism.