Smashing the cone of silence

THE long-simmering angst within Australian manufacturing has reached boiling point, with the Gillard government facing more intense job losses and Australian Workers Union chief Paul Howes declaring manufacturing has entered "a major crisis".

Howes has smashed the cone of official silence on this issue. By calling for a new "holistic" policy response from Labor, he is forcing a debate filled with risks for governments, business and unions.

The dilemma facing Julia Gillard and Wayne Swan is obvious; while doing nothing is no longer an option, it is uncertain what can be done.

Howes, in fact, has only just caught up with the gravity of the situation preoccupying many corporates and the Australian Industry Group under Heather Ridout for the past several months.

The problem lies in the resources boom and the high dollar. While Howes has called for Australia to back the US campaign to force China to appreciate its exchange rate, this will have no immediate impact, despite its intellectual validity.

The risk for the Prime Minister and the Treasurer is being driven by political pressures into bad policy responses.

The core demand coming from industry and unions is that Labor abandon the passive stance of its economic advisers that manufacturing and other sectors merely contract to allow the investment surge into resources. It is noteworthy that Howes dumped on Treasury thinking in his Australian Agenda interview yesterday.

Tony Abbott has seen this crisis coming and will give Labor no respite. Abbott has declared himself a believer in an Australia that "makes things" and repudiates the notion that the terms of trade boom means we become "just a big mine, a big hotel and a big tertiary institution".

Gillard and Swan will need to accommodate this manufacturing stress by reframing the issue, responding to the cost pressures on industry but holding the line on populist policy demands sure to grow in intensity and fanned by Abbott, who enjoys such a high profile with manufacturing workers.

The dilemmas of the two-speed economy are going to erupt in a series of debates about innovation, cost containment, China's mercantilist mindset and the right settings for monetary policy where Australia faces the terrible dilemma of needing both interest rates cuts and increases.