Malcolm Blair Robinson

As this blog has said repeatedly, you cannot have a currency without a government. The Eurozone thought you could. There are in history few more spectacular examples of wrong thinking. Retaining sovereignty while giving it up to fiscal governance by some federal structure is on one level impossible and on another inefficient. All of this is clear in Euroland.

What is also clear is that if a government is not de-facto in existence in a currency union, one emerges, usually the strongest and richest power. Germany now controls budgetary policy and interest rates in all of the Eurozone. Various committees and councils, as well as the European Central Bank, have their say but it is Merkel and the Bundesbank who decide. Greece, Spain,Portugal, Italy and Ireland know  what this means. Greece feels itself raped and has lost its self respect. All are suffering in order to meet German standards. Ireland has done best but Italy has stagnated as the Euro is over valued in relation to the lire and undervalued in relation to the deutschmark.

It is on the currency question on which the case made for independence by the Scottish Nationalists is seriously flawed. Even if England agreed to share the pound, and they may not, England would determine all aspects of economic policy. This would be no kind of independence worth having. Moreover Scotland as a country has always been orientated to the political left. The Scot Nats are left wing, Labour is the predominant alternative for Edinburgh and the overwhelming choice for Westminster in Scotland.The Tories are nowhere north of the border.

But if Scotland broke away and fifty Labour seats in Scotland no longer counted in the House of Commons, the prospect of England electing a right leaning Conservative majority government, perhaps propped up by UKIP, would be much more likely. Thus Scotland could find itself financially in thrall to the policies of a small government, low tax, cuts wielding right wing administration in London. What kind of independence would that be? Ask the Greeks. And suppose England leaves the EU? What then?

If Alex Salmond is serious about Scottish independence he must forget about some new Sterling Area and have the courage to set up a Scottish central bank to back a Scottish pound. Otherwise he is offering a pig in a poke. That is not worth voting for.

Yesterday I posted a warning about the nature of the economic recovery in the UK. Today it is worth looking at the issue at the heart of the failure, since the end of WWII, to establish sustained economic renewal not characterised by boom, bust and most recently, crash. It is the over valuation by markets, working to a tradition rooted in the British Empire and the Sterling Area, which still treats the pound as the world’s largest currency unit.  It is always how many to the pound and never how many pounds to something else.

There may have been a wealth base for such a tradition in the past, but in the era of printed and electronic money, the wealth base of the UK does not justify such a valuation. Money is a measure and it is there to measure output and wealth. Broadly speaking if you go to America and spend $10 you will get about as much as you would expect to pay £10 in the UK. Likewise with the euro. Yet the pound now stands at$1.66 and euro1.22. This means that British goods exported are expensive and foreign goods imported are cheap. To the extent that manufactured goods depend on imported raw materials, it can be argued that the outcome of a strong pound is more neutral than at first it appears. The problem is that completed foreign consumer goods are also cheap to import and this has eventually led to the imbalance; no longer is the economy founded on industry but on consumption. Most of what is consumed is imported.

The wealth and jobs created by manufacture has gone overseas and with it the foreign exchange earnings. The UK economy is driven by debt and deficit and the finance industry, which once served, now dominates. The rich grow richer and the gap between rich and poor grows wider. Worse, the rich grow rich at the expense of the poor. Even where there should be universal benefit for the less well off from the high pound, from cheap imported energy and oil, there is none because energy is a major taxation platform for successive governments, making high energy costs one of the major drivers of poverty. Meanwhile the basic rate of income tax is the lowest in seventy years. Even Thatcher had a basic rate of 25%.

The solution is to engineer a steady devaluation of sterling until it reaches parity with the dollar. Exports would become cheap and imports expensive. Tax would have to shift away from energy and back to income. Huge opportunities for home produced goods and food would boost the economy and create new wealth, rather than re-cycled debt. Trade deficits would become surpluses. Foreign exchange would again be earned. Employment opportunities from new local industries would increase. The economy would start to grow not from consumption, but from wealth creation. The UK would become, once more, a surplus country.

How could this come about?  The Government needs to stop borrowing and start printing, not through the Bank of England, but direct from the Treasury. Watch this space.

Politically the Coalition can take justified comfort in the strong performance, relative to weakness elsewhere, of the UK economy and if this can be sustained it will place the Coalition parties in pole position for the general election next year. Unfortunately it is not a simple as that. There are other political issues and they are questions about the durability of the recovery.

First the political issues. The Tories are badly split over Europe and there is no way of bridging the divide between pro and anti Europe wings. Split parties never do well and especially not with an active predator syphoning off votes; in this case UKIP. Labour lacks a credible economic policy to challenge the Coalition and although it makes impact with its cost of living crisis theme, this will be out gunned by the fact of a growing economy, if that is sustained. The Liberal Democrats have made themselves a laughing stock over Rennard, and moreover and more damaging, now appear misogynistic and anti-women. In other words each political party has an Achilles heal and none of the three main parties heads into the election with a reliable following wind. The fourth party not only has a following wind, but increasingly will make the weather; the outcome in 2015 will depend largely on the performance of UKIP.

The economic questions are more fundamental and harder to call. The economy is now recovering strongly, but it is not a substantially re-structured and reconfigured model as promised in 2010; it is a modified and improved version of the old. It will work better than before because welfare has been overhauled, the State has been reduced and the deficit is coming down. Manufacturing is up and exports are strong. Unemployment is falling fast. All this means that what we can call the old economy is alive and back on track.

The new economy, founded on production rather than consumption, investment rather than borrowing, exports rather than imports and trade and budget surpluses rather than deficits is nowhere in sight, nor is it ever likely to be on the road now chosen. Once again we have a consumer led recovery funded by debt secured on above inflation house price rises. This path is well trodden. We all know where it goes. It goes only one way. First to boom and then to bust.

The boom will likely survive until after the general election. It will then turn sour. Whoever wins, therefore, will drink from a poisoned chalice.

If a novelist set out to write a story about a political party cutting its own throat, the writer would be hard pressed to invent a more astonishing chain of events than that which now transfixes Westminster. The Lib Dems, having built a reputation as a sensible party with level headed, if not exciting people in it, who were pretty solid and reliable, have managed to somehow behave in a way so undisciplined and irrational that it is doubtful whether it can recover its electoral position. Yes there was the Huhne scandal, but the party weathered that and held the vacated seat, to everybody’s surprise.

What is now unfolding is a spectacle of a number of aggrieved women who feel at the very least that their personal space has been invaded, a report which suggests that while nothing criminal happened an apology is due, and a number of men trumpeting even that would be out of order as the accused has done nothing for which even good manners requires some considerate response.

The details and the ramifications are all consuming to those engaged, but wholly irrelevant to the political crisis now engulfing the Liberal Democrats. The impression in the wider world outside Westminster is that this is a men’s  party in which women are not taken seriously, nor even treated with decency.

Unless something is done fast to end this disgraceful saga, the electoral consequences will be calamitous. And rightly so.

There is something deeply troubling about the disclosure in the newly released papers from the Thatcher government era showing that the claim by the N.U.M. that there was a hit list of seventy odd pits, ridiculed at the time by officials at the very highest level, was true. Government in a democracy must be based on truth and honesty and time and again on issue after issue it is proved that government of the United Kingdom is not.

There is an inbuilt culture among the political establishment, including both civil servants and politicians, which says if you have to hide the truth or lie in the public interest, it is in order to do so. At any time this is insulting to the governed, but in the modern day and age it will be found out.

Politicians have some lessons to learn. Their untrustworthiness has made them among the least respected in the wider community and their party memberships are falling fast. While the political class has destroyed its credibility, the voting class has up rated its ability to find out the truth. This is the era of  viral communication and trends in which the whistle blower holds the cards and becomes the hero.

Whitehall needs to think about this. Thatcher had a reputation for honesty and integrity. She was thought to have beaten Scargill in a fair fight. To discover that even she cheated comes as a shock.

The Nationwide building society has reported that the average house price rose by 8.4% in the last year. This news is catastrophic, since it demonstrates that the economic recovery is debt led and founded on inflating assets. Not only are we back to the old idea of boom and bust, but the impact on housing costs, which are among the highest in the industrial world as a percentage of income, will further fuel borrowing and ultimately make the cost of everything we make increase.

Worse, these rising coats are not a reflection of increasing wealth, since no new wealth is created. If new wealth were being created, people would be buying houses with mostly their own money, but, as usual in the boom and bust cycle, they are buying houses with debt. And remember the United Kingdom owes more money collectively than an other country on earth save for the US at 1xGDP, whereas the UK is at a juicy 4xGDP.

Of course this comes as no surprise. Every single Tory led recovery since 1963 has relied on a housing boom and every single one has led to a bust. In recent times Labour fares no better; their bust was the biggest in history. This morning I heard a very distinguished economist say that ‘at the moment’ house prices were not a problem. No, the problem is economists who think this way.