Archive for October, 2011

Euro: China Will Change The Game

Friday, October 28th, 2011

The head of the Euro bail out fund is in China with his begging bowl. If China says yes, it will set conditions. More important than that, China will thereafter have to be consulted over all sorts of fiscal and monetary issues. If China agrees it will significantly advance its influence as a world power, though it may not make absolute financial sense. So far none of the trumpeted agreement from the middle of the night before last, deals with any of the major issues and the future of the euro remains uncertain.

It is not just the money which is the problem. There is no finance ministry, no treasury, no common economic policy and no certainty that such things can be organised, as they depend on treaty changes and voters saying yes to the surrender of sovereignty. China will want to see progress on these issues. To that extent it will do the Europeans a favour. No longer will it be possible to govern with five presidents and substitute agreements and declarations for concrete action.

All of this is likely to create mounting political problems for the Tories and possibly the Coalition. The European Union now developing within the Eurozone, is a very long way from the concept of the Common Market. It is impossible in future for the euro members not to take decisions which favour their currency, especially if they are in debt supporting those of their members who are technically bust, whatever Cameron may say. A solution may be a European Union for all those wishing to pool their sovereignty and take their orders from Germany and China and a  European Common Market to include those with their own national currencies. There is no need to be flustered about two tiers. It may be the best answer to have them.

Euro Crisis: Good But Not Good Enough

Thursday, October 27th, 2011

At last the discussions faced up to the facts of this crisis; A currency without a finance ministry, Greece bust, shaky banks, Spain, Portugal and Ireland in difficulty and Italy tottering. This spectacular combination has spooked not only the Euro economy, but most of the Western world, where growth is stalled or stalling.

So the umpteenth meeting is called, dinner is served and yet another agreement is reached in the middle of the night. Everybody, including the market, seems pleased with themselves. Why? The bail out fund is set at E1trillion when it should be at least E2trillion. The banks have been told to find E100billion. They need more. Greece is to have 50% of its debt written off, down from the 60% trailed, when reality demands 75%. As for the new arrangements for fiscal governance, these are barely coherent. Another President, making five in total, in a confection of institutions none of which is democratically elected, save one, the European parliament and that is fiscally powerless. The others have some power of the wrong sort which has little effect when the crunch comes.

The reason at this moment that markets are happier is that for the first time Euroland has an agenda of the issues which have to be resolved. That it at least something, because it means a disorderly meltdown is less likely. Nevertheless the scale of government debt will act as a brake on growth for years to come because some governments, many corporations, lots of individuals and far too many banks have borrowed so much money that servicing it will take ever increasing proportions of income and reducing it will become increasingly impossible. This is why there must be more debt write downs right across the piece. For the moment such thoughts are too much to contemplate.

As for the extension of monetary union to fiscal union, so essential for the survival of the single currency, when the quagmire of Presidents, Working Groups, Councils and Committees are elbowed aside to make way for the simple structure of a Finance Minister, Treasury, Common Economic Policy, Central Budget and beefed up Central Bank and European Monetary Fund, all of it will be built to a German specification, because without Germany the whole thing crashes to ruins.

There is a very long way to go before all this is sorted out.

European Union : Britain In Or Out?

Monday, October 24th, 2011

This Blog has a traditional position of pro-EU and pro federal governance for the economies of the Euro. This remains the case. What is changing is a feeling that, whilst a successful euro zone is very much in British interests overall, its own membership of the EU may not be.

There are several reasons for this, none of them overwhelming, but in combination significant. First it must be stated that European unity is one of the great prizes of history when set against the carnage and suffering of centuries of conflict. The epicentre of all these upheavals have mainly focused, especially in the last two hundred years, on Germany or previously the German states, France and the countries of eastern Europe. Most, but not all, of these are now in the euro, but three members dominate; Germany, France and Italy. Of these, Germany is the biggest and most economically disciplined as well as the richest. For this reason it is Germany which will dominate the other two and the three together will dominate the rest. This has a positive and negative side. If they are collectively doing well everyone is uplifted, but if they have problems, the rest are dragged down. But however you slice it, put it, write it or argue it, Germany is the leading power.

Next comes the nature of government. Europe was slower in general than Britain to get to democracy as the preferred method of government. Germany, Italy and France all have post war constitutions and institutions; the first two because of they embraced Fascist dictatorship and lost the war and France because its post war Fourth republic collapsed in chaos and was rebuilt as its Fifth by De Gaulle.  Europeans have always favoured regulation and enjoy a multiplicity of councils and other competing organs which ensures on the one hand that everything runs smoothly in the hands of bureaucrats and on the other it is difficult for politicians to interfere to change things. Witness the current crisis which is much more about political decisiveness than economic failure.

It is not necessary to list the ways in which much of this is a cultural jar to the British, with their preference for decisive government, individual responsibility and minimal regulation. What began as a Common Market is now something much more. What it is, is very good indeed for the nations on the European Continent, who should be applauded and encouraged to unify still further. For the people of the British Isles, this is, while right for Europe, not the path which instinctively the island people wish to follow. Sooner or later the United Kingdom will have to face up to that. This Blog suspects that a majority of its people already has.

Libya: Now For The Future

Saturday, October 22nd, 2011

By comparison to Iraq and Afghanistan, Libya has been a triumph of arms and politics, especially for France and Britain, who led the calls for intervention. The difference between the hot headed, ill thought out and destructive adventures of Bush and Blair could not be more obvious.

The universal jubilation in Libya at the death of Gaddafi is extraordinary. It provides eloquent testimony to the covert hatred in which this dictator’s subjects held him, in spite of his declarations of their love for him. It is testimony also to the cruelty and suppression of the Gaddafi years, with the murders, torture and beatings. There is controversy over the apparent summary execution of a pleading Gaddafi by a seething mob of freedom fighters and this disturbs all those in the world who hoped for formal justice and retribution. What happened is similar to the end for Mussolini, whose rigid corpse was strung from a lamp post after execution by partisans. Italians shed few tears at this barbarity. What matters to Libyans, indeed all that matters, is that their tormentor is dead. How he died is beside the point, if it was cruel he deserved it.

The NTC has tried to put a gloss of cross-fire to explain. This kind of public relations cannot work in the age of the smart phone. In any case the NTC has no real control over the fighters who caught him and killed him. This is the nub of everything.

Whether Libya will be remembered by history as a triumph or a disaster, depends on what happens from now on. Can this enthusiastic and likable people, who formed themselves into one of the most ill disciplined military forces in history, equipped with the oddest mixture of home-made weapons ever seen, yet who relentlessly attacked and defeated well equipped government forces and wiped them out, make that leap from revolution to democracy without chaos and bloodshed in between?

The answer is yes they can. But not alone. Just as their victory was dependent on the West using its military assets to support them, so their reconstruction into a modern and inclusive democracy will require the support of the whole of the West’s structure of governance and institutional expertise to create the framework in which the goal can be made real. It is over for the uniforms, but time for the suits. If they help the Libyan people to do it their own way, just as the military did, the future for all Libyans could be golden.

Euro Summits: Can The Cracks Hold?

Saturday, October 22nd, 2011

It is now accepted worldwide that there is a political as well as financial crisis facing the Euro zone. This crisis has global potential. At the heart of it is an acceptance of Germany’s economic authority by France. Once these two agree, the rest will fall into line. But to work, to have effect, to be seen to have effect and to set the euro on the path to recovery, France must concede to Germany. The world is beginning to wonder whether this will happen.

Germany’s economic power in Europe is overwhelming. It contributes half of its bailout funds. Its political view, supported by the mass inclination of its voters, is for a model of financial rectitude based upon hard work, thrift and sound money. This jars with the less austere and more permissive financial regime which France has always preferred, favoured too by Italy and taken to extremes by others, notably Greece.

Germany did not get here in one easy bound. Its history is the most brutal and tormented in Europe. It has unleashed destruction upon others and itself been destroyed. He has known hyper-inflation when a loaf cost trillions of a currency which had been made worthless. It has had military, political, economic and social baptisms of unprecedented fire. Yet though it all it has emerged as Europe’s foremost economic power. It will not surrender what it has gained at such cost to pay the debts of economic playboys.

Europe had the option, long since gone, to set up structures which would create a democratic framework for unified economic governance within the euro zone. Now Greece is going bust, a sixty per cent write off is being canvassed, the banks are in peril and nobody can agree. It was thought that the spendthrift might have to leave and the northern countries would make a go of it together. But this cannot happen if France and Germany are not in accord. There are now two possibilities for an outcome of the multiple summits now in progress. Once is a fudge of committees and fiddles which will avert calamity now, but make it certain later. The other is to do it Germany’s way.

There is a third prospect, looming like an ogre in the shadows. No agreement of any kind. This means calamity now. Mayhem by next weekend.

Inflation: Is No Action Right?

Wednesday, October 19th, 2011

The Bank of England Governor remains confident that inflation will fall. If he is right, well and good. Most economists agree with him, as do his colleagues on the MPC.  Generally this group has been more concerned with growth than inflation, hence the reluctance to raise interest rates last year.

This Blog is inclined towards those who believe inflation and slow growth are linked and that rock bottom interest rates may hinder, not help. At the moment savers, in other words the huge contingent of retired consumers, are receiving so little income on their capital that they have curtailed their considerable spending power. That inhibits growth. As inflation is running well ahead of wage increases, the spending power of those working is also reduced. The huge rise in the cost of petrol, gas and oil is having a major braking effect on growth. Add to that, the euro crisis and weakness in the American economy and you wonder if we will not have to get used to the idea of getting our financial house in order without much growth over the next few years.

The coalition government is not doing as well as it did at the beginning. Its deficit reduction programme is right, and the government is right to stick to it. But its policies on growth either are not there or not impacting where they should. As has already been said, the concentration on the critical issue of economic reform has been unbalanced by whimsical ideological tinkering, Libya, mishandling of phone hacking and a hesitant response to Fox, leading to a much more extended drama than need have been the case. This creates the impression on a hard pressed population that there is no hope in sight and of a government not focused on things that matter.

The facts that people see are headline inflation and unemployment at record levels for recent times, growth stalled and the utility companies in the energy sector imposing punitive price increases in a rigged market which they control. Over the latter issue a much trumpeted energy summit led by the Prime Minister achieved nothing which could be understood, seen, measured or felt. Just as the de-regulated universal banks are now seen as the epicentre of the financial calamity which overtook the West, so the privatised utility companies with their reckless price hikes are impeding any attempt at recovery in the UK.

Some of these issues are capable of improvement, if not solution, by government. The Coalition must not just show that it is listening. It must now demonstrate with more conviction that also it knows what to do.

Sack Fox And Appoint Redwood

Thursday, October 13th, 2011

This blog does not care if the defence secretary is gay or not. We are not interested in the ministerial code, having taken the position that ministers are supposed to know how to behave without one. We have read the interim report from the Defence Ministry, which misses the point and is little more than a list of buearcratic procedures. These are the issues.

In our democracy there are two complimenting arms of government. The Civil Service to implement policy and the democratically elected Governemt to make policy. The civil service is charged with providing continuity, expertise and experience; the politicians provide the link with the democratic will. In more recent times it has become common for ministers to have addtional advisers, paid for by taxpayers if their advice is technical and by the party, if the advice is both political and partisan. There can be conflicts of interest with this third arm of advice, so rules are set down.

If the reports are correct, in Dr Fox’s case we find ourselves in new territory, hitherto undreamed of. According to the latest disclosures, we have a personal friend whose officially unauthorised trips to virtually everywhere the defence secretary goes, are paid for by a mysterious group of ‘rich backers’ via retainer fees and who then acts on their behalf to encourage Dr Fox and the people he meets, including heads of state, generals and defence contractors, to follow a line which favours Israel and the US but is anti EU.

This is as dumbfounding as it is preposterous. It is an affront to the very concept of open democracy and a corruption of decent political ideals. How can it be that a country which allows itself to champion democracy in every nook and cranny of the globe, can at the same time allow a system in which policy can be covertly bought and influenced by the rich, without the voters knowing such a thing is going on?

It flouts any notion of a democratic constitution, whether written or not. It reveals a wholly unacceptable practice and strikes at the integrity of Cameron’s government. Fox must go. If he will not resign because in his view he has done nothing wrong, an assertion which itself beggars belief, he should be sacked.

The balance of the Cabinet would be maintained by appointing John Redwood in his place. One of the sharpest minds in the Commons, he understands the economic crisis and its numbers far better than most. He would have a grip on the runaway finances of the MOD, but he is passionate about a strong defence for our country. He has the bottle to face up the the brass who believe this is achieved by demanding every military toy in the shop. He is a staunch right winger whose political opinions are similar to the aspirations presently being scandalously financed by unnamed rich backers and pedalled across the world by Werritty whispering in Fox’s ear. Redwood is open, frank and candid. We all know where he stands. This is what democracy is about. That is what democracy is.

Liam Fox and His Friend

Tuesday, October 11th, 2011

This is a most peculiar affair.

This blog is not much exercised by the Ministerial Code. It is our view that ministers ought to know how to behave properly and if they do not know this instinctively, they should not be ministers. Setting up enquires to find out what they are up to wastes further money at a time when some of the voters who pay for all this are very short of cash. Cameron and the Cabinet Secretary should send for Dr Fox and his friend and ask them both to explain what is going on. At the end of it it would be clear whether the minister was fit for office and the PM could then back him or, if he failed the test, sack him.

Nobody can fathom who pays for this man to travel the world in the minister’s shadow, why he goes or what he does. Ministers are not expected to take friends around with them for fun, nor engage them in meetings with heads of state, ambassadors and generals. All the more so if the minister heads up one of the most sensitive and critical departments, that of defence.

The Prime Minister has to get a grip of this more quickly than the week after next. Otherwise the question will not be about Dr. Fox’s judgement, but David Cameron’s. That would be especially unfortunate in the wake of Coulson.

Eurozone: More Delay

Monday, October 10th, 2011

The British Prime Minister, along with almost all the rest of the world, is losing patience with the Euro leaders. Yesterday Merkel and Sarkozy met, once again, and once again agreed that something must be done, this time to save tottering European banks. But once again they could not agree on what. Those are the facts behind the waffle that said they were in complete agreement, without telling us what, exactly, had been agreed.

Either there is a secret master plan in Europe, which will suddenly slide into position, put things right and everyone will go Wow!  Or there is no plan, no agreement and everything is going to be left until the situation is desperate. What has to happen is that the banks have to be strengthened against Greek and other defaults, larger funds have to be set up to support Euro governments or banks, structures have to be organised within existing treaties to manage the economies of the Euro area and the Euro leaders have got to show some determination to stop talking and start acting.

None of this appears to be resolving. Meanwhile the point has to be driven home that this is a debt crisis. Solving it by borrowing more money will only make it worse by shifting the difficulties from banks to governments and from weak economies to strong ones. The outcome will be that the strong become weak and the weak will get weaker.

Bank Of England Acts

Friday, October 7th, 2011

Increasing the money supply when the supply shrinks sufficiently to inhibit economic activity, if properly controlled, is a good deal better than borrowing more. The Bank has done the right thing, given that we are where we are. If the Treasury comes up with a workable programme of credit easing, this will be good also. Both these measures allow the deficit cutting programme to proceed as planned, while providing an economic boost without increasing government expenditure.

This all raises the question of whether all is as it seems. This Blog believes that too little account is being taken of the huge rises in energy costs, petrol, gas and electricity and their impact on other basics such as food as well as the squeeze they apply to household budgets. Add to that general inflation approaching 5% and you have significant downward pressure on growth, even before you take account of the euro crisis and American slowdown.

Regular followers will know this Blog has argued for a rise in interest rates long ago. If these had been eased up at the first tranche of quantitative easing to the approximate level of the ECB at 1.5%, this would have had little effect at that time as such rates are historically low. What it would have allowed for is a lower inflation rate and the ability to reduce them somewhat now in order to boost the economy. As it is, we are stuck with the inflation with no reserve to counter it. Moreover QE and CE might make inflation worse. It is as important to have an interest rate reserve as it is to have one in cash.

The Government and the Bank have done the right thing to set their sails against increases in expenditure and more government borrowing. The right tools are being used, but maybe not in the right order. This might lead to a less than ideal outcome. We will have to wait and see. Meanwhile Moody’s have downgraded the banks. In present conditions, that is to state the obvious.