Incisive and topical campaigns and commentary on today's issues and tomorrow's problems

         The revised GDP figures have attracted headlines because the downturn was slightly worse than the first calculation. There has been far less reporting of the fact that government spending added a positive  1.6% to the figures, an annualised 1.8%, reinforcing the view set out here that real public spending in total has been growing. Indeed, the rate of growth accelerated in Quarter One.  This, of course, did not prevent an overall downturn, as the private sector is still struggling with a shortage of money, tightly regulated banks and the tax rises.

              Reluctantly and later than the other main participants the Bank of England has agreed to a review of its conduct during the recent banking crisis, Credit Crunch and recession. There is plenty of material for it to sift through, and plenty of issues for it to handle.

                I will be setting out some of the questions, and looking at some of the answers over the next few days. I see the Boom-bust cycle of the last few years as primarily a crisis in Central Banking. It was a crisis brought on by regulators who allowed excess credit and money in the system up to 2007. It was a crisis made far worse by the sudden lurch to very restrictive money and credit policies in 2007-8. It is a recession that has taken a long time to reverse thanks to tough pro cyclical banking policies after the  crash.

                The official enquiry will want to know why the Bank’s Monetary Policy Committee proved so bad at forecasting inflation, let alone at controlling it. It will want to know to what extent the Bank thinks it has some wider role in maintaining output and activity, and why it was unable to do this in 2008.  I hope it will examine the popular view that the whole crash was the fault of the commercial banks, aided by “light touch” regulation.  It should go on to ask why the economy is not now performing well given that presumably we now have “heavy touch” regulation. It will need to review the impact of taking away powers to regulate banks from the Bank of England in 1997, and how the tripartite system of Chancellor, FSA and Bank tried to work together during the crisis.

                The UK was not alone in putting its economy through a boom/bust cycle of unusual  violence. The US and the Euro areas authorities also did something similar, though there were important differences in how they responded to the worst of the crisis, and how they handled the problem of banking weakness in their jurisidictions.

          The latest wet drought has highlighted the imperfections of our water industry, with its heavy regulations and government protected regional near monopolies. It takes some kind of genius to be short of water in an island famed for its heavy rainfall in many parts.  It shows a lack of self awareness to be enforcing drought orders in the middle of one of the wettest springs on record.

            I have long put the case for water competition. Why can’t we have a choice of water provider? Why do we have plenty of bread, but run out of water? Isn’t the main difference that competing farms grow the grain and competing bakeries bake the bread, whilst regional monopolies decide rationing is easier than supplying enough to meet demand for water?

              The good news is the Coalition government has decided to introduce competition for all water supply to business. It is keen to allow water companies to buy and sell water across water company boundaries.

              At present little of this happens. Under the complex regulatory system in place companies feel they are better rewarded for putting in new water gathering capacity of their own, than buying water from another part of the country where it is more plentiful and cheaper. They can offset the capital expense against the profits under the formula used for price calculations.

                  The government might also considering a Green Deal type scheme for water customers to invest in water gathering and supply facilities at their own home so they could supply some or all of their own water for grey water purposes. Customers taking such an option would be lent the money to put in the equipment, and be put onto water meters for their company supply which would cut their bills considerably as they used their own water for gardens, car washing and other  low grade water activities. They would repay the loan for the water equipment over time, probably  with their bills and loan repayments  being lower  than the old bills with full supply from the water company.

    I have been asking questions of departments to see how they are getting on with their plans to cut the government overhead.

     So far I have only had two replies. The Overseas Aid Department tells me they have increased their staff from 2357 in 2010 to 2512 now, a net increase of 155. They have recruited 327 new people to replace leavers as well as grow the staff numbers. The Climate Change Department has also boosted its staff from 1036 in 2010 to 1286 today, a net gain of 250. They have recruited 435 people.

     I will keep you posted when I find out how the bigger departments are getting on with the cuts.

     Meanwhile, yesterday’s figures for tax revenues, spending and borrowing confirmed the analysis of this site that tax revenues are suffering badly from tax saturation. Taxes on income and wealth fell 3% this April compared with April 2011.  Total tax rose just 1%. Current spending continued to rise in cash and real terms, as in the Red Book. It was running 3.8% higher in cash terms in April 2012 compared to April 2011.

STOP PRESS

        The Home Office staff numbers are down by 16.4%, Treasury by 13.5%, Health by 11.3%, Justice by 10.3% and Transport by 8.5%.  Culture etc is up by 3.5% to cater for the Olympics. These are two year figures for the changes.

               After fifteen years of dithering about nuclear energy policy we learned yesterday that the UK can carry on running its existing fleet of nuclear power stations for longer. The safety case will be examined reactor by reactor, but the mood is to lengthen their lives yet again. It’s certainly a cheap and immediate answer to the short term problem of  how to keep the lights on.

               We also learned that the government has found a way of paying investors and operators more to generate power from future new nuclear stations that does not fall foul of EU subsidy rules. The consumer will have to pay more, but we are told this will be a bargain if as the planners assume fossil fuel prices soar later this century. The present dear prices of nuclear and renewable energy will look cheap, they argue,  as the UK benefits from its low or no fuel cost for much of its power generation.

                Nuclear and renewables have two big advantages. Not only do they have low or no fuel costs in the future, but they are built on UK territory so they help to provide us with greater security of supply. Perpetual renewables like hydro and wave power offer much more security than interruptible renewables like wind power, where the UK will need substantial fossil fuel back up capacity for when the wind does not blow.

                  On the back of the government’s decision it is still not clear what mix of power generation the UK will enjoy in ten years time. It is one thing to offer suitable contracts to woo the nuclear generators, it is another to get them to commit to building very large investments on the promise of a stable and profitable price regime for forty or fifty years ahead  in such a political area.  The government has wisely licensed a large amount of new gas capacity, but so far the industry has been reluctant to commit to construction. Gas remains the cheapest way of generating power, and the UK may well have much more gas available as shale gas is added to the North Sea natural gas deposits.

                 Let us hope that on the back of the latest statements of intent from the government some building work is started. I hope the industry will go  for cheaper power by committing more to gas stations, and recommend getting more of the gas out of the ground as part of our industrial revival. I also would like to see more of the renewable element coming from perpetual renewables.

             We read of a row between Vince Cable and George Osborne over the ideas in the Beecroft Report. Yesterday the government at last published the document, and told us they are getting on with implementing 17 of the 23 proposals, and are consulting on the  others.   The Department putting them into place and consulting on the rest is of course the Business Department led by Dr Cable.

                 Labour had their way with an Urgent  Question, so urgent that no-one in the House had yet seen the full report. The Opposition just bashed away against something they called “fire at will”.  They seemed to think the government was about to introduce that for all employees,  destroying in one simple blow all employee protections.

                    The Minister answering tried to explain that the Beecroft proposals in this area would only apply to firms with under 10 employees, and  did not amount to fire at will anyway. Much employee protection law is supported by the government, and much is mandated by EU law, making it impossible for Parliament to change it without a new relationship with the EU being established first.

                    Labour pointed out that employees and Unions had been most co-operative at Ellesmere Port to secure the new Vauxhall investment recently announced. They said it showed there was plenty of flexibility already. The government replied that they agreed, but  it was still a good idea to look at what it is that puts a lonely entrepreneur off employing their first employee. Perhaps too much employment law and too big a penalty if you get the hiring wrong  does keep more people on the dole and mean more businesses never grow beyond sole traders.

                            Sensible Labour contributors agreed that to be competitive the UK needs a flexible workforce, and claimed that the last Labour government had recognised that. Sensible Coalition MPs said that employees need rights: the aim should not be to return to all powerful employers who can fire on whim or  exercise unfair discrimination.

                            There is plenty of scope to reach some agreement on how to make the employment of new workers by small companies more attractive to employers. It would be helpful in promoting recovery.

                                    I asked how much extra GDP we might get from the full Beecroft. The government said it did not know. I suspect it would be mildly positive, but  it is unlikely to be the game changer that tips us into fast growth on its own. That still requires action on issues like banks, credit and energy prices.

           BBC’s Analysis revisted the issue of Greece leaving the Euro zone last night. It was a topical and sensible decision to make such a programme. It is just a pity it was so poorly researched, offering so much time to people who think the exit of Greece is both illegal and likely to prove disastrous.

           The BBC implied that leaving currency unions has been very rare. Why haven’t they studied the 70 plus exits since 1945? Why didn’t they just revisit their archives and discover how common it has been? Why did they say they could only think of the split of the Czech Republic from Slovakia where they also split currencies? Why didn’t they remember the break up of  the 20 member rouble zone? Why not the successful departure of Ireland from the sterling area? Why not the general break up of the sterling and French franc areas?

          The BBC made out that it would very complicated to switch money and contracts from one currency to another. If they had studied the large number of exits from currency unions they might have thought differently. If they had  remembered that all the same complications existed when the 17 member states currencies were scrapped on entry into the Euro, yet this happened easily. I do not recall them issuing such warnings when Germany scrapped the DM and France the franc.

             They gave great air time to the notion that it would be illegal to leave the Euro. This, they argued would mean Greece would have to leave the EU, and then would find it more difficult to trade with the EU. Why should either of those two things happen? Presumably the rest of the EU would still want Greece to buy their products.  Greece and the rest of the EU would still be bound by international trading rules.

                     Why would they seek to evict Greece from the EU if all agreed she just needed to withdraw from the Euro and did not also wish to leave the Union? Why didn’t the BBC consider the proposal I have published for Greece to become an “applicant” to rejoin the Euro, but only if and when she met all the requirements in terms of state debt, inflation, currency variation and budget deficit? There are 10 EU members who are not Euro members – most are so called applicants to join. This gives plenty of legal cover. When did France and Germany last worry about the legality of mechanisms to fix the Euro? What was the legal base of the first EU bail out fund?

               The BBC’s journalists made heavy weather of the relatively straightforward idea that Greece should have her own currency back. They did cite the view that maybe Greece would export more from outside the Euro, but gave this little voice and made it sound silly because they went so heavy handed on the legalities and complexities. Time to think again, BBC. The UK public does not share your EU enthusiasms, so it is time to be more careful in your reporting – especially over the facts which you mangled last night on the break up of currency unions.

              In any relatively free society some people will earn more than others, some will save and invest more and more wisely than others, some will be richer than others. The system only works if a way is found to use the surplus the rich generate for themselves to assist those who are not so lucky or successful. There are many ways this happens without most people noticing.

                  Some socialists think the only way to do this properly is to tax the excess away from the rich and give it to the poor through the tax and benefit system. A lot of this happens in all advanced democracies.

                   An even more important way in many countries can be  through the banking system. Rich people deposit their surplus in the banks. The banks use these deposits or savings portfolios to lend money to others who need loans to grow their businesses or to meet their living and running costs.

                                  Rich people recycle a lot of their income by spending more. This creates jobs and opportunities for others, who in turn may become rich on the back of those flows of income to them.

                    So it has to be with countries in a currency union. When  you have a rich country like Germany, sharing a currency with a poorer country like Greece or Portugal, ways need to be found to send the surpluses from the rich to finance the poor.

                       One of the main problems for the Euro area is the failure of these mechanisms to work sufficiently or at all. Conversely, in longer established currency unions like the dollar or pound areas backed by single countries, there are well honed mechanisms to recycle the cash.

                         Most currency unions have ways of taxing the richer parts more, to send extra cash to the poorer parts. In the UK poorer areas receive large cash infusions to pay  nationally established welfare payments, to fund their health, education and other public services at higher levels per head than the richer areas, to direct regional grants and loans, and to send substantial transfers through local authority finance.  There is very little in comparison within the Euro area. EU regional policies transfer a small fraction of the sums transferred in mature currency unions by central state action.

                      Currency unions also have integrated banking systems. People in the richer areas deposit more money. People and businesses  in the poorer areas may draw more out proportionately, if they meet the tests. The banks can acts a means of recycling from richer to poorer, or more accurately from surplus to deficit companies and individuals who can meet mortgage and loan requirements.

                        Labour mobility is a crucial element in a successful currency union. People can move from the areas with fewer jobs or with lower paid jobs, into areas with higher pay and more opportunity. Labour mobility in the Euro area is much more limited owing to language and other barriers.

                          The danger in many of the ideas proposed to solve the EU’s problems is that they might just encourage still more labour mobility of the talented and successful to destinations outside the EU altogether. The Germans meanwhile complain that their bank surpluses are being sent to the poorer areas via the European Central Bank. They resist any use of a common credit status to allow the poorer areas to borrow more. They block attempts to tax Germany more to pay the bills in the poorer countries. As a result there is insufficient transfer of funds to make the currency area work, and insufficient mobility of labour owing to linguistic and cultural barriers.

          Let us assume Mrs Merkel is telling us the truth. She probably did say on her Greek phone call that the Greek General Election was in effect a referendum on the Euro, not that she wanted them to have a referendum on the Euro as well as a General Election.

             It is still quite a change from her position last year, when she with France helped push a Greek Prime Minister out of office for daring to propose a referendum on European matters. These advocates of greater European integration have usually been against referenda, or have demanded re-runs when they get the “wrong” result.

                  The change of stance is presumably to try to force the Greek people to vote for a pro Euro pro EU loan package government. Mrs Merkel thinks the Greek people will do the right thing and vote the way she wishes if they understand that to do otherwise would mean their early exit from the Euro.

                 She might find meddling in other people’s elections from afar has unforeseen consequences. Greece may be wrong to think they can vote for the Euro and against ther loan package to sustain it. If they persist in this anti Merkel stance, there will have to be a face down between a new Greek government and an old German government over this very point. It is by no means clear who will win. Germany has in the past always backed down over more money and laxer rules.

                  In all this Euro and EU confusion, democracy is the loser.

                   Governments need legitimacy in a relatively free society. Governments need to gain and hold the consent of the governed.  In mature western democracies the act of winning an election usually gives a government legitimacy. The government can hold and strengthen that if it governs wisely. It gradually loses it if it governs badly, but normally retains sufficient consent to govern until the following election.

                A really bad elected government can reach the point where popular protest makes its task difficult. Losses of support amongst its own MPs as some of them come to  represent the popular antipathy to the government can stop it doing things it wishes to do. A vigorous opposition can come to have more credibility than a tired government, with the public seeking influence with the “government in waiting”.

                 In Euroland the act of winning an election may now not buy that same legitimacy that used to pass on victory to the victor. Indeed, in Greece recently, the established parties all lost votes as the people no longer have confidence in the system. Any responsible Greek government had to to reflect the popular will that they stay in the Euro, but that means accepting conditions the Greek people do not accept. Any responsible Greek opposition should have said the only way out of the policy restrictions the Greek people dislike  was exit from the Euro, and offered that package. Instead, the EU has generated dishonest politics, with oppositions proposing improvements within the EU framework that they are probably powerless to achieve if granted office. Governments still often pretend to be in charge, when many of their decisions are determined in Brussels.

                     The threat the Euro posed to democracy and accountability was always obvious, but was ignored by its proponents. I wrote in “ Our Currency Our Country” (1997)

“Member states wouldn be severely constrained in their  budgetary policies…Ministers would be left defending spending cuts and tax increases which they had not wanted and probably disagreed with. The strikes and protests in France in 1995 are a sign of things to come.”

and in “Just Say No” (2001)

“The single economic policy of the Treaty is incomplete. It is all about exchange rates,money and inflation.It ignores jobs, incomes and output. If pursued to its conclusion, it could easily alientate the voters of Europe who think jobs and incomes are more important than financial matters”

The unpopularity of “austerity” is not surprising. The truth unfortunately is that in the troubled countries of the EU state spending is far too high and state borrowing unsupportable. There is no choice but to cut the excess spending of the state, whether they stay inside or outside the Euro. There is no quick fix by borrowing more to “stimulate growth” – excess state borrowing and state spending has been tried to years and has now induced recession.  They do need private sector led recoveries, which will need realistic tax rates, sensible regulation, and a banking system that can finance new projects.