Beware the EU’s Energy Union

O n 25th February the Commission issued a Communication entitled ” A framework strategy for a resilient energy union with a forward looking climate change policy.” It is remarkable for the scope of its ambition, allied to the absence of detail on where the huge sums of money will come from to pay for all the investments and research the EU wishes to see.

The Energy Union has five main characteristics.

The first is “Security, solidarity and trust”, which is the EU’s way of presenting its intention to take over the strategic direction of energy policy in each member state, and to integrate each state’s energy and energy policy into an EU wide system under their control. The EU wishes to take over negotiating supplies of energy from outside the EU. “Particular attention will be paid to updating the strategic partnership on energy with Ukraine”. They wish to cut dependence on Russian gas (crucial for 6 member states at the moment) by saving energy, by switching more to non fossil fuels, and by importing more US gas and worldwide LNG.

The second is a fully integrated internal energy market. They wish to establish EU regulatory control over electricity, and ensure at least 10% of a country’s power is governed by interconnector arrangements to other EU states. They wish to integrate the transmission and computer systems.

The third is energy efficiency improvements to cut demand. They wish to “promote the use of road charging schemes” to cut private road transport and wish to electrify both trains and cars.They wish to decarbonise energy as their fourth aim, with a target of a 40% reduction in CO2 by 2030 compared to 1990. They wish to increase renewables further, and biofuels.

They fifthly want a union for research and innovation. Co-ordination and working together is designed to produce smart grids, demand reducing consumers, better homes, and electric transport.

Nowhere does this document give us any figures on how the mighty costs of this programme will be financed. There is mention of a large investment programme which they hope the private sector will undertake. There is little mention of the current very high costs of EU energy, other than to tell us EU gas prices are more than twice those in the US. There is just the hope that we will get better at renewables so they will become cheaper. There is no comment on how the massive Euro 120bn of current subsidies to energy will be eliminated.

The EU’s energy policy is its second worst EU disaster after the Euro. It is hostile to business, it is deindustralising much of the EU, and unfriendly to consumers. This document will make it worse.

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Why did the IMF lend so much to Greece?

In 2010 the IMF lent Euro 30 billion to Greece as part of a much larger package to support the ailing economy. The IMF explained at the time that it had lent 3200% of quota, well over its normal limits for a country in difficulty. It gave Greece “exceptional access to IMF resources”. The IMF cited the need to prevent the crisis spreading to other parts of the EU and to defend the Euro.

It is an extraordinary tale of bad decisions and policy that a first world country with many advantages in the world should end up a pensioner of the IMF, and should need such unusual treatment, getting far more in loans than very poor countries that are more normal recipients of IMF money and policy advice. The IMF recognised that Greece had both a severe fiscal problem (spending too much) and a competitiveness problem (not selling enough abroad to pay the bills). The IMF opined that in the Euro Greece needed to cut wage costs to tackle the latter and needed to cut spending. The IMF did not think a debt write down was needed, as it thought the running deficit was the main issue. It looked forward to a recovery in the Greek economy from 2012, after the cuts had depressed the economy in 2010-11.

In 2012 the IMF decided to lend Greece a new Euro 28bn as part of a replacement loan package. It drew attention this time to a “significant large competitiveness gap” (stronger language than 2010) and to a high level of public debt. This time it agreed with a major write down of privately held Greek public sector debt ( (75% written off) and required cuts in the Minimum wage as part of its measures to improve competitiveness. Once again Greece received special treatment with a large loan. I queried why the IMF would do this for a country which is no longer sovereign in monetary and economic matters, as its status with the Euro prevents a normal IMF recovery package.

So what will the IMF do and say now that Greece once again has asked for help? Why is Greece still locked into a competitiveness problem and a fiscal deficit problem? Why hasn’t the economy grown as the IMF once predicted? Why hasn’t Greece been able to see her way out of the trap the IMF identified in 2010 by following IMF policies?

It looks as if IMF programmes need a state to be able to keep its own banking system liquid by creating money, and need it to be able to devalue as part of the changes to offset the public spending cuts. Greece is unable to do this. It seems that the IMF was dragged into lending to a Eurozone member for political reasons, when it should have stayed out. The IMF would not lend to a UK County or to a state in the USA if they were in need of loans. The IMF would tell that government to seek cash from the domestic authorities. So why then does the IMF lend to Greece, when it is not a sovereign state and needs to look to the rest of the Eurozone and to the ECB for help? How will the IMF now get its money back? When will it explain the failure of its recovery policy for Greece?

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Why austerity policies may not work in the Eurozone

The Eurozone’s disciplines have been nicknamed the politics of austerity for good reason. Each state is meant to keep its budget deficit down to 3% of GDP – way below the large cyclical deficits the UK, US and other single currency areas allowed themselves in the great recession. Each state is meant to keep its total amount of borrowing to below 60%, though most of them have given up on that idea. No individual state can print more money, make its economy more liquid or devalue to provide a private sector stimulus. As a result when a Eurozone state cuts public spending it is likely to lead to a fall in GDP which the private sector struggles to offset or does not offset at all.

We have seen that cutting the growth rate of public spending substantially in the UK after 2010, and in the US cutting national defence spending and State level spending, did not lead to a fall in GDP. The private sector responded well to extra money being put into the system, to the gradual rebuilding of the banks and the spread of some more private credit, and to the available spare resources caused by the great recession. Both countries experienced a recovery despite or because of the action taken to control public sector budgets. Both benefitted from the continued low interest rates, made possible in part by growing control of state borrowing. In the UK real public spending did edge up a little as well. I was criticised recently for quoting deficit reduction as a percentage of GDP rather than in cash terms. As I have often pointed out, the fall was bigger as a percentage of GDP, smaller in cash terms. I used this version on Thursday because I was dealing with those who said budget cuts would lead to another recession, and they always use the figures which show the biggest “cuts”

In contrast, the much harsher budget cuts in Greece have added to the collapse in GDP in that country. Greece today has a national income and output 22% below its peak in 2007. It is amazing that the policies which have created this disaster have been allowed to continue for so long. Even now the Greeks have voted in a government which rightly points out how damaging the policies have been, there cannot be much change as that same government bizarrely wishes to stay in the Euro, the origin of much of their trouble.

The enormous Greek recession has gravely reduced tax revenues. As a result there have to be most severe cuts in public spending to try to get the deficit down to the tough target levels – in Greece’s case even tougher owing to the debt covenants. The private sector so far has been unable to pick up the very considerable slack. owing to weak banks. Greece has no power to create more money, no power to lower its own interest rates further, no power to devalue to price itself back into more world markets. As a result they have experienced the misery of sliding from public sector cuts to less private sector demand, and from less tax revenue to more public sector cuts.

If you wish to see a true austerity policy then look at Greece. They have had major cuts in public spending, major cash reductions in wages and salaries, major job losses, and mass unemployment. Many businesses have closed. Any sensible person is against the kind of austerity policy inflicted on the Greek people. Unfortunately it just seems to go with being in the Euro.

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Clever politics may be bad government on student loans

It was inevitable that this very political Labour party would want to expose the student loan issue to offer maximum embarrassment to the Liberal democrats in the run up to the election. Sure enough on cue and probably on schedule- after leaks alleging delays – Labour yesterday launched its price cut for university courses, cutting the student payment from £9000 a year to £6000 a year from September 2016.
The prime aim of the launch seemed to be to remind left of centre voters that Lib Dems had promised to get rid of tuition fees, a prominent and oft repeated pledge before the election in 2010, only for a Lib Dem Secretary of State to dream up and push through a scheme which did the opposite. I am told it is called punching the bruise in modern political strategist and spin doctor circles.

What matters to most people is not what it does to the relative votes for the Lib Dems and Labour, but what it would do for our country, our students and taxpayers, in the years ahead were Labour to be given the power to do it. The first in the frame to express doubts are the universities. They like the certainty of getting the payments from the students. They will immediately lose a third of their UK student revenue. They will have to rely on government grant to make up the shortfall, and are worried in case that gets squeezed in later years.

The second group to complain will be those who have to pay the extra bills. Labour will need to spell out more of the detail of how it gets £3bn extra tax out of people saving for their retirement. Whilst they claim it will only hit people on high incomes, it may be they do not get anything like as much extra tax out of that group as they hope. Will they then spread the pensions tax lower down the income scale? Are they happy to be deterring people from pensions saving?

The third group who find the new policy does not help them very much are the groups Labour says it wishes to help – students from low income backgrounds and students who obtain lower income jobs after graduating. The first group is already helped by various scholarship and bursary schemes. The second group do not have to start paying interest or making repayments on their loans until their income is high enough to allow that.

Labour’s left wing critics point out that the winners from the scheme are the graduates who do get into better paid jobs, who will have to repay less capital and pay less interest on their debts as a result of cut. Some are already dubbing it a policy to help future hedge fund managers and City high fliers. The Labour response is they do wish to raise the interest rate people have to pay on their loans if they earn more than £42,000. That sounds complicated. To make such people worse off or no better off they will need to raise the interest rate on the loans by at least 50% to avoid the richer and more successful graduates benefitting.

Will it be worth all that hassle? Can we really believe Labour’s figures on all that extra tax from a few highly paid pension savers? Is this really the best use of the money? To me it looks like clever politics makes bad government.

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Austerity policies

Yesterday I gave a lecture at Reading University. I asked the question, does austerity work as an economic policy? Why do the IMF and the Euro area favour austerity programmes for countries in trouble? Do they succeed in rescuing countries by these means?

Austerity is a wide ranging word, not a precise term of economics. It has come to mean in recent debates the idea that a country in debt with a large deficit should cut spending and raise taxes in order to reduce its deficit. This has led to passionate debates about the wisdom and the impact of such a course of action.

In the UK between 2009 and 2013 the main parties all agreed the deficit was too large and needed to be brought down. All agreed if left unchecked the deficit could lead to crisis interest rates, an unaffordable cost of interest on a burgeoning public debt, and an eventual squeeze as the debt grew out of control. We could see the damage unchecked deficits caused in countries like Greece or Venezuela. There was nonetheless a tough argument with Labour saying the coalition wished to cut the deficit too far and too fast, whilst the coalition said it needed to speed up the pace of deficit reduction it had inherited as the financial situation was grave.

We now know the outcome of these policies. Labour’s prediction of rising unemployment, a dip into a new recession, and more personal misery as a result proved to be untrue. Instead the UK economy has grown over the four years of deficit reduction so far, employment has grown rapidly and unemployment has fallen. The deficit has been cut, though not by as much as planned as tax revenues have fallen short of budget.

Labour never answered my questions of 2010 and 2011 as to how the US economy was recovering so well when the US was cutting its deficit more rapidly than the UK. Since the worst year at the end of the last decade the USA has brought its deficit down from over 10% to 2.5% of GDP. This deficit reduction has included some big cuts in states spending and defence spending. The US economy has grown well every year this decade, contrary to predictions that austerity policies stop growth.The UK deficit has been brought down from a peak of over 11% of GDP to 5% of GDP, a bit less than the USA.

The economic records of the USA and UK in recent years show us that bringing deficits down does not necessarily stop growth. Indeed, some of the deficit reduction occurs thanks to growth, which raises revenues. Growth however, does not automatically follow from cuts to public spending. There need to be other policies towards banks, money and private investment to ensure success with a strong private sector led recovery. In a future posting I will look at some of the harder cases of extreme austerity in the Euro area, where damage has been done by the policies pursued.

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Devolution

Yesterday I joined a debate at Local Government House on devolution, with the Greens, Lib Dems and Labour.

I explained how the grant of powers to the Scottish Parliament, promised for early in the next Parliament, necessitates justice for England. I reminded them that if Scotland is to settle her own income tax, there is no way England would accept a higher rate of income tax voted through with the help of Scottish MP votes at Westminster.

I argued that the artificial regions of England which some wish to create as governing units are unloved and unsuitable to be elected administrations. There is no great sense of South Eastern belonging nor any big outbreak of East Midlands feelings . England is a country of Counties and Boroughs, of ancient areas of local government that do not require Sunderland to accept government from Newcastle, Liverpool to be governed by Manchester or Plymouth to be governed by Exeter.

Governing areas need to be ones that command support and loyalty. People need to feel they belong to an area or place for it to have a government people will obey, shape and accept.

I drew attention to the idea that some Northern Councils working together should have influence over their local NHS budget. There have always been difficulties with issues that lie on the borders of NHS and Council jurisdiction. There are problems in some places finding sufficient Council places for care to allow people to leave hospital in good time. More common decision making between the NHS and Council social services could help.

How far would you go in offering devolved powers and budgets to local government? For it to work central government has to grant more power to Councils, and Councils have to show maturity in making decisions and accepting responsibility for what they decide.

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Greece says enough – for the time being

It was little surprise that Greece’s late response to the demand for details of how they will run their budget was accepted yesterday by the Euro group.

The Greek state government committed itself to change tax codes to raise more money from the better off, and to find ways to improve tax collection and enforcement. They have offered to make many changes to different parts of revenue collection, with more inspections, more audits and more and better staff to do the collecting.

They have also pledged to improve their controls over public spending, concentrating on non wage expenditure which accounts for 56% of the total. They also wish to improve the provision and quality of medical services, with universal access. They are going to consolidate pension funds and seek to reduce early retirements to cut pension spending.

It will cut the number of government Ministries from 16 to 10, cut fringe benefits to MPs, Ministers and top officials, improve public sector tenders and keep wage costs down.

The government has had to accept much of the privatisation programme it inherited and disliked. It now says it will not roll back privatisations already committed. It will rejig future ones with “the emphasis on long leases,joint ventures…and contracts that maximise not only government revenues but also prospective levels of private investment”

The pledge to pay a higher Minimum wage has become “the ambition to streamline and over time raise minimum wages in a manner which safeguards competitiveness and employment prospects. The scope and timing of changes to the minimum wage will be made in consultation with social partners and the European and international institutions…..” taking into account whether changes are in line with productivity developments and competitiveness.

As expected, both sides have had to sacrifice a lot. The Euro area has agreed to lending Greece more money, and to giving more time to trying to negotiate a longer term solution later this year. In the meantime the ECB has now lent more money to Greece. The rest of the zone has to accept promises, which rely heavily on the ability of the new government to raise much more in taxation than previous governments have managed. For its part, Syriza has to accept privatisation of state assets, accept a delay in raising the Minimum Wage, accept Eurozone surveillance of its budget and loan programme, and recognise there is not going to be a large planned fiscal stimulus for the economy.

In summary, the Greeks have not slain the dragon of austerity as they see it, and the Eurozone has not weaned Greece off more loans and assistance. If revenue does not respond quickly to new treatment, the issue of how to pay for the Greek budget will intensify.

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Fairness between the generations

Some commentators wish to stir a battle between the generations.

The young have their advocates, telling us the baby boomers now reaching retirement have done too well at the expense of others. They point to high house prices making it difficult for first time buyers, and high rents sometimes paid to buy to let landlords who may themselves be baby boomers.

Pensioner savers have their supporters, saying that they have been hard done by with ultra low interest rates and poor annuity rates on retirement thanks to quantitative easing and the low rates in the aftermath of the banking crash.

The truth is more mixed. Both generations have their advantages and their challenges in the current situation, and both have policy interventions designed to help them.

The younger generation has the benefit of much lower interest rates when they can find a house and a mortgage than their parents faced. They also now have the benefit of very low inflation, compared to the rates we were used to in the 1970s and early 1980s. The government has added its Help to Buy scheme, and is pressing ahead with ways of securing more new homes.

The older generation of savers have made money from the rise in asset values brought on by quantitative easing and the general economic policy. Those savers who bought property or shares or certain kinds of savings bond are likely to have decent capital gains today on what they bought in past years. The government has now added the National Savings Bonds with higher interest rates for those who do not want to risk their capital but need a better return than the 0.5% base rate.

There is another truth which the generation warriors ignore. Within most families one generation helps another. Much of the wealth of the baby boomers will be passed on to their children and grandchildren on death. Some of it is being passed on before death, as parents help children with home deposits or other large ticket items in their budgets. Just as some grandparents help with the household chores and childcare of their children, so some help with gifts of cash. The money which is not passed on will be taken in tax by the state. That money can then be spent on those most in need.

Conservatives have announced they will keep Pensioner bus passes, free tv licences for the over 75s,and winter heating allowances. Do you agree?

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The death of democracy in Greece?

It is one of those ironies of history that democracy should be under such pressure in the European country commonly claimed to be its birthplace.

The most recent Greek election and the battles over Greek policy within the Euro have been about whether national democracy is compatible with the single currency. It appears it is not.

The Greek people made their views known all too clearly in January. They said No to more austerity, No to the Euro area requirements to cut their debts and deficits, No to various reforms of their economy that the rest of Europe wishes to visit upon them. Their newly elected government took that message volubly to Brussels.

The Greek government soon had to back down. It backed down over its refusal to deal with the troika. It backed down over the need to extend the old loan agreement. It backed down over the principle of having to negotiate its budget and future economic policies with the rest of the Euro area. It was left with a fig leaf of choice, as the Euro area said there might be some flexibility on how Greece achieved the austerity targets which had to remain in place.

The Greek government has been using rhetoric about national self determination and democratic government. It has discovered that if it wishes to stay in the Eurozone it has to play by the general rules of that zone. It is also the case it has learned an older and more basic truth. If you want to borrow more money from certain institutions, you may need to honour the terms of the loans you already have from them.

I find it fascinating that Syriza saw the confrontation as one of national democracy against the Eurozone, not just as a debtor having to deal with its creditors. As a result of hyping the rhetoric in that way the Greek government has made its possible defeat into a defeat for democracy in Greece.

In that sense Syriza has done us all a service. They have highlighted how in the Euro a country cannot have an independent economic policy. As economic policy is one of the main things electorates wish to influence and change, the loss of those freedoms is a major blow to a national democracy. Many of us in the UK find there are too many constraints on our national democracy from membership of the EU outside the Euro. It is many times worse for those in the single currency.

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Germany and Greece both lose

As expected, Germany blinked and Homer nodded. The Germans had to agree to more money being lent to Greece whilst they have the proper argument about what the future should hold. The European Central Bank continues to bail out Greece via emergency assistance to its banking system. There is a delay in implementing all the requirements of the last loan package, whilst Greece tables new proposals. Germany’s promise to enforce all the old loan agreements and to offer no new money has been broken. The message to other countries strapped for cash and disliking the conditions of loans is to cause trouble.

Greece had to swallow much of their bold rhetoric. Greece has had to apply to extend the old loan agreement which it said it intended to tear up. Greece does have to deal with the troika, though perhaps under a different name, when she said she would not do so. Greece will have to table austerity proposals next week to substitute for any of the current austerity requirements in the loan agreement which she does not like.

Meanwhile, in the real world, Greece will spend and borrow more, with likely overruns on the permitted deficit (called a primary surplus by being struck before interest charges). The European institutions will continue to finance Greece. It is more extend and pretend. The Euro has decided to be a bit more flexible to avoid a Greek exit, despite their fine strong words that a Greek exit would now be a minor matter for all but Greece.

Is this just kicking the can down the road for a couple of days? Or for a few weeks? Or will it result in a longer term fix? Time will tell. It appears that Germany is allowed to make the weather with the words, trying to spin the outcome as a tough settlement, a victory for austerity. Meanwhile the officials and the institutions which increasingly drive Euro policy are working behind the scenes on flexible language to cloak the truth, which is the zone so far has decided to extend more credit and pretend Greece can meet her obligations.

It’s no way to run a serious major world currency. If they carry on like this their economies will continue to malfunction, unemployment in parts of the zone will stay far too high, political protest will grow, and from time to time there will be alarms in the markets and in the weaker national banking systems. Cyprus shows us one way out of a financial mess for a state in the Euro – capital controls. Another way is for the rest of the zone to write off more of the offending state debts. They still have to arm wrestle electorates and some political parties as they seek to impose stricter controls on future spending and borrowing by states that cannot pay their way. Greece does not today suddenly become a paradigm of German virtues meeting all her loan conditions as some German comment would have you believe.

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  • About John Redwood

    John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.
    Published and promoted by Thomas Puddy for John Redwood, both of 30 Rose Street Wokingham RG40 1XU
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