The Syrian war

Why has the west failed to resolve the Syrian crisis? I am no apologist or supporter of the Russian actions, but it is clear today that Russia has placed herself in a much stronger position than the USA to influence and shape events in that worn torn and distressed country.
The main reason is the West’s indecision about who to support and who to oppose in this complex, long and devastating civil war. First the West was inclined to side with the forces against Assad, seeing the end of his regime as being a step to a better Syria. Then, with the emergence of ISIL, the West decided ISIL was even worse than Assad, and switched its attention to trying to defeat ISIL. This is difficult to do without committing ground forces, and without having strong local ground forces in alliance. As the West certainly did not want to side with Assad, the main opponent of ISIL on the ground, it made it complicated to intervene. Russia decided early on to side with Assad as the lesser of the evils, and to accept or live with the brutal methods that Assad was using to try to quell the revolts in his country.
Western policy tried to support and create a third force in the maelstrom, a force of so called moderates or democrats who would be able to see off ISIL on the one hand, and to deal with Assad on the other. Given the extreme methods of ISIL and the large forces of Assad using the armed services of the Syrian state, this was always going to be unlikely. It is difficult to recruit and train enough united genuine moderates who will show common purpose and military ability against such dreadful forces set against them on both sides. In a Sunni/Shia civil war there is no obvious third way. In ISIL controlled Syria ISIL is the main enemy, and in government controlled Syria Assad is the main enemy. All too often weapons sent in to help moderates fell into the wrong hands. All too often the so called moderate forces disappointed in one way or another. The Kurds, with one of the biggest contributions to the third force have their own agenda of self government and territorial division, and are opposed by Turkey, a NATO ally of the West.
The West under President Obama in the dying days of his administration is trying to broker a peace. Diplomacy is important. In the end if the various combatants cannot force a complete victory and realise they cannot, they have to talk. They need to give politics a chance. The problem is with Russian support and with the US and NATO effectively out of the military activities, Assad probably thinks he can win or can make considerably more progress against his various enemies. He does not seem to mind destroying the physical buildings and facilities of his homeland or killing many people who ought to be his citizens.
Like many people who look at Syria from afar and grieve over the pictures and reports, I have no obvious answer. Many of us in the west would like there to be answer we could influence or deliver, but it is difficult to see one. Those who say the West should be prepared to use more force to balance things up have to answer how would more bombs and more deaths help? How could the west defeat both ISIL and Assad, whilst leaving a country and people who could then pick themselves up and create peaceful government? To those of us who say give diplomacy and persuasion more of a chance, it is a fair riposte that it seems even now the warring sides are still not yet ready to try to find a political solution.
Sometimes the best the West can do is to do no more harm.

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The state of the Union

Mr Juncker’s State of the Union address this year was downbeat and worried. He said the Union needs a vision. He offered to supply one drawn up by the Commission. It will only be available next spring. The urgency of his words about the need to pull the union together does not seem matched by the laid back timetable for the basic words. Surely the Union needs a vision now?

Mr Juncker’s speech combined the very general and wide ranging, with the specific and detailed. In his general remarks he complained that there was now a yawning gap between what many voters and member state governments want, and what the EU is serving up. He condemned populist politics, as if the voters expressing a view different to that of the Commission is some crime or ill considered liberty. The Commission still does not get democracy, or prefers administration of the elite by the elite for the elite of big government and big business.

In a way I am glad he did not go on about Brexit, yet a speech on the future of the EU without any substantive comment on the departure of one of its largest members over the issue of too much EU power seems curious. Nor did he sketch out how with the departure of the one major country that always had grave reservations about creating a political union with military capability it might enable the remaining states to make more rapid progress towards their goal.

He did reflect on how his role as President of the EU differs from that of the President of the United States, without pausing to mention the obvious difference that one is elected and has a popular mandate and the other is not. He seems rueful that the EU still does not mirror the powers of the federal government in the USA, yet is aware of the strong forces seeking to divide the 27 members of the present Union.

The extraordinary thing about the speech was the absence of any proposed ways of sending more money from rich to poor, of beefing up spending programmes to foster public sector led growth, or fixing the banks more quickly to foster private sector led increases in employment and output. Nor did he have a way forward over the vexed questions of the borders and migration.

The speech seemed to be delivered into a vacuum. The voters of EU states cannot engage, and the national Parliamentarians cannot engage. The rules of the European parliament seem to conspire against holding Mr Juncker properly and daily to account. Organising a procedure which lets a President’s speech go out unchallenged, may just create a sense that the President’s speech does not matter. It is the endless noise and criticism of Prime Ministers and Finance Ministers in lively democracies that amplifies their message, acts as a check on their actions, and forces them to have answers to main criticisms. Mr Juncker’s speech in contrast seemed to pass most people by.

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How much longer are we going to help pay for the EU?

Since April the UK state has borrowed another £33.8bn. We sent £3.6bn of this as net contribution to the EU, an increase of 8% on the amount we sent them for the same time period in 2015. It is time we sent them the letter,repealed the Act and cancelled the subscription. It is the easiest spending cut to make, and will immediately strengthen the balance of payments.

The overall borrowing figures showed some reduction on the previous year. This once again was owing to a big increase in tax. In August Corporation tax was up by 15%, Stamp duty by 14%, Income Tax up by 12% and National Insurance up by 8%. The UK knows how to tax enterprise and effort and wants to tax all who work and venture more. Over the period April to August the growth in tax was less, with National Insurance still up by 8%, Stamp Duty up by 10%, Corporation Tax up by 5% and Income Tax up by 4%. They are large increases when inflation is close to zero.

State debt stood at £1621 bn. More realistically it is around £1200 bn when you take off the large amounts of debt the state now has bought up, and the planned increased purchases over the next few months. The interest cost is still large, despite the ultra low rates that now apply. Total spending in August was up by 4.3%, though by a smaller amount over the five months.

The pattern this year is likely to be more of the same. The aggressive Stamp duty rates will not prevent increases in revenue. The modest abatements at lower house prices should mean there will be more action in much of the market offsetting the much reduced volumes at the high priced end. More people are in work and more people will earn more, fuelling higher receipts from NI and Income Tax.

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The Bank of England’s forecasts

The Governor mainly seeks to forecast the Bank’s future actions on interest rates. He decided as Governor that his unique contribution to the role would be public forward guidance of what the Monetary Policy Committee might do, so we would have a better understanding of what might happen next. We were told we would have fewer pleasant or unpleasant surprises.

We learned that rates may rise once unemployment fell below 7%. It duly fell below 7% and rates stayed unchanged. It then fell to 4.9%, so they cut rates.

We learned that rates might have to go up once real wages started to rise. Real wages soon after started to go up, but again rates stayed the same and were later cut, against a backdrop of continuing rises in real wages.

We heard that they might have to increase rates around the turn of 2016. Here we are nine months into that fateful year, and rates are now lower, not higher.

They told us there could be a recession or sharp slowdown immediately after a vote to leave the EU. The Bank has now put up its forecast for Q3 after the vote to show some growth after all.

Far from being unreliable, the Bank is remarkably reliable. It is a contrary indicator of what might happen next.

The question we might ask, is why is the Bank so often wrong in its guidance or forecasts?

There are two possible explanations. One is the institution is just bad at it. They made honest stabs at prediction, but lack the Mystic Meg touch.

The other is they got too close to the Treasury and the government’s Project Fear.

It would be good if the Bank would tell us which it was. We are I think due some explanation of the erratic progress of the forecasts. The only way to start getting forecasts right is to admit when you get them wrong and understand why.

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The Autumn Statement

We now know the Autumn Statement will come in late November. It will bring us new forecasts from the OBR of how the UK economy may pan out for the last couple of months of 2016 and throughout 2017. These forecasts will have a substantial impact on how much money the estimators think the government will have to spend and how much it will collect in taxes. If they take too pessimistic a view of next year’s growth then the Chancellor will be told he faces higher borrowing than he might like.

My first advice to him is if the forecasts are for slow or no growth next year in line with the pessimism of the Bank of England and some private sector forecasters, he should be very suspicious of the numbers. He certainly need not raise more taxes or cut spending to try to get the alleged deficit back under control, as in all probability this will be a bogus problem brought on by inaccurate forecasts.

I was going to advise him instead to spend or provide tax cuts to the tune of £10bn a year of extra spending and less revenue, the very annual sum we will save each year as soon as we are out of the EU. This will provide a welcome boost, and the deficit will contract again as soon as we cancel the contributions. It would be a spur for the Treasury to be one of those who push for an early exit. You do not have to take 2 years from sending a letter to get out. If you reach an agreement earlier or get to breakdown in talks earlier then you can cancel the contributions earlier.

I think I am still of that view. I would like to see more spent on the NHS and on immediate road, housing and energy schemes as we are short of capacity in those areas. I want to see him scrap VAT on domestic fuel, tampons and green products, though Parliament will have to date the end of these taxes to the exit date from the EU. He needs to cut Stamp duty further, as the last Chancellor’s large hikes have done damage to the housing market and stand in the way of more supply coming on from people who might otherwise like to downsize or change their accommodation.

However, I am also worried by the size of the recent monetary stimulus. Money and credit growth were accelerating before the recent fall in the pound, which in itself is another stimulus. This was then followed by a grave misjudgement by the Bank of England in cutting rates and making available up to £170 bn of created money on top of the money expansion underway. If the money figures remain as fast and alarming as the most recent in the run up to the Autummn Statement then a net fiscal stimulus would not be a good idea. The government should consider removing HS2 from the spending side, as this is a poor value project which could be replaced by better transport investments for the North at lower costs.

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Should the government drop its H es? Heathrow, Hinkley and HS2.

Yesterday the Sun on Sunday published an article from me on this topic. I reproduce the blog on it I wrote before the Sun was involved but delayed publishing owing to their interest. This is similar to the article they printed.

I expect the new government to want to increase capital investment throughout the economy. They will be right to order more roads, railway capacity, more power stations, more water supply, more airport capacity and faster  broadband. All these are needed for industrial revival, for better lives, and to keep pace with the big expansion of population that has occurred in recent years.

I would expect this to be done with a judicious mixture of public and private sector money, and with an eye to value for money and to future returns on the investments. Transport, Energy and Business, Culture, Environment and other departments of state will be asked to lift the quality, reduce the price and increase the capacity of the utilities they supervise or own. That is the easy bit.

Before they can get far with any of this, there remain three large legacy projects from the Coalition government which they need to determine. All are contentious, all are very expensive, and all still rest to be finally decided. It is a sign of their difficulty and the state of UK government managing large projects that none of them have been signed off despite ten years or more of study and debate.

Each one is at a different stage of development. In the case of the proposed expansion of Heathrow, it falls to the new government to decide finally if extra southern airport capacity is needed, is desirable, and if so where it should be. I cannot offer a conclusion on this, as we still have not read the long and detailed report and evaluation the Coalition  government commissioned. As a constituency MP I wish to see a better response from NATs and Heathrow to the growing complaints from residents in my area following changes to routes which were not consulted on.

Hinkley Point is a difficult case.
However, the new government had every right to review, and the contract was not signed when they took over. The power pledged is at a very high price, which makes an industrial revival more difficult as cheap energy is crucial to modern industry. Nor does it help bring down fuel poverty. The technology is unproven, and could be subject to delay and cost escalation. There are security issues.

The government’s decision to proceed is understandable, but a costly long term decision for the Uk. The next power stations ordered must offer much cheaper power if we are to have any cha ce of an industrial revival, as this need cheap energy.

HS2 never made any financial sense. There are many better and quicker schemes to improve rail capacity across the country that could be brought forward. This project is the most advanced of the three, but probably the worst value for money of the lot.

It would be a very brave government that swept away all these. It would need to have ready a good list of other projects that could be smarter and yield better returns, with realistic and quicker deadlines for undertaking them.

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Wokingham’s CAB

On Friday I attended the CAB event which followed their AGM in St Paul’s Parish rooms. I talked to the Chief Executive and some of the volunteers who provide such good help and assistance to those in need in our community.
Over the last year the biggest demand has been for help with benefits and tax credits, followed by debt, employment and housing. The friendly and wise advice that the CAB can provide is often important in helping people manage the problems in their daily lives, whether it be about money or disputes, jobs or homes. I am grateful to all of them for what they do.

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Sir Michael Fallon is too late to veto the European army

I found Sir Michael’s statement that he will continue to veto a European army all the time the UK remains in the EU perplexing. Now we are leaving I do not see it is any business of ours to veto what they are going to do when we leave. It just annoys the very countries we wish to be friends with as we depart.
I do wish we would just get on and leave and stop paying our contributions. If we rightly do not go to conferences like Bratislava why do we help pay the bills?
Nor do I understand how Sir Michael can veto something that already exists and the UK has accepted. The EU has established eighteen battle groups, each at battalion strength, with a rota so that any two of them can be deployed at any time by the European Council. As the EU’s own website sets out “The battlegroup concept provides the EU with a specific tool in the range of rapid response capabilities.”
The UK has played its part on the multinational rota to provide forces. None are currently deployed but they could be.
There is also already a Eurocorps, mainly French and German, stationed in Strasbourg with 1000 soldiers.
In parallel the EU does have naval forces in theatre today. Again the UK is signed up to this. Two of the 7 ships on Operation Sophia in the Mediterranean are UK vessels according to the EU website. There is a also a 4-6 vessel force off Somalia in Operation Atalanta which receives UK assistance.
Just as many of us pointed out in the referendum campaign, there is a European military capability and they do wish to grow a bigger and more active army. Some Remain spokesmen told us this was all nonsense. The conversation at Bratislava reminds us that there are already EU forces and they do wish to strengthen them and make them more active.
The UK should leave well alone and ask itself whether it wishes to carry on contributing after it has left. 4 non EU countries are involved in these forces at the moment. Perhaps our defence Secretary could give us some guidance on this more interesting issue, which will be his call along with the PM.

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A vision for the EU?

As the 27 meet at Bratislava I thought I should offer the opportunity to all EU lovers to write in with what they would like the 27 to agree as their new “vision” for the EU. All the main players going to the meeting tell us they will pause for serious and honest reflection about the growing gulf between popular wishes and what the EU elites are serving up. It is also a chance for those of us who decided to leave to offer friendly advice to our former partners if we wish.

I must say I much prefer writing about the EU now I know it is no longer going to be our problem or partly our fault. I have long believed that as a good European the best contribution the UK can make is to depart from the monetary and political union. We never wanted either. We have been lied to by some in the UK debate that that is not the EU’s preferred destination. You feel the clearing of the air now the 27 can sit down and discuss the pace and scale of their integration without the UK trying to slow them down or pretending it is not happening.

Mrs Merkel has expressly called for some speeding up of integration. Germany of course wants quota systems for others to help to take the refugees, and more integrated approaches to economic policy so the other states accept more readily firm economic disciplines. France wants to re establish its influence over Germany and to be the main force behind more military union, working on the common EU forces they already have to make them larger and more effective. The Commission as always sees Brexit like all other democratic checks to the EU as a chance to increase Commission power and the range of matters it controls. Mr Tusk makes the most sombre and realistic assessment, as he has to deal with elected officials and the national Parliaments. He wants answers to the growing popularity of Eurosceptic challenger parties of right and left.

My advice to them is to understand that the Euro is the centrepiece of their union, the main achievement of their pressure to integrate so far. The main actions they take must be ones that make the Euro more like a national currency in a major country. These actions are required to tackle mass unemployment in the south and west of the zone. to strengthen weak banks across the zone, and to provide the free movement of capital labour and people that a currency zone needs. Trying to do this without a single official language is always going to be difficult.

To make the Euro more secure and the project more popular, the first need is to set up proper transfer systems so the richer areas can help the poorer areas on a much bigger scale than today. Regional transfers in the UK or US are many times the level of such transfers in the Eurozone, taking place through national benefit rates and schemes, through local authority financing and through large scale regional and sectoral programmes. German, Dutch, Austrian and other richer country taxpayers have to be persuaded that poverty in Greece and unemployment in Spain is their problem too, and they need to make a financial contribution to alleviating it.

The second task is to put in a comprehensive system of bank deposit guarantees that operate across frontiers, and to have a scheme for getting all major banks up to satisfactory levels of capital adequacy more quickly. The EU sovereign and the ECB must jointly stand behind all major banks in the system and be seen to do so. In practice member states customers and investors are on risk, but so also the taxpayers ultimately have to be on risk or be prepared to bridge or prop the parts of major banks that are essential to keep the cash points open. Of course I favour the investors being more at risk than in 2008, with better protection of the taxpayers interests than we then enjoyed. The EU itself needs a broader tax base.

The third task is promote an EU budget large enough and helpful to growth and enterprise. The extreme austerity visited on Greece and some other problem countries in the zone has been a social and economic failure. This needs to be sensibly reformed. Now the ECB has bought up large quantities of member states debts, the overall net borrowing position of many member states is more acceptable.

If the single currency cannot be managed in a way which gets down high unemployment, and spreads better paid jobs more widely around the union, it will be increasingly difficult to get political support for the project. If the richer countries and reigons are not prepared to pay more for the union then it would be best to abolish the Euro.

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The Bank edges its economic forecast up! Hinkley goes ahead

Just as I predicted, the Bank of England has to admit it has been too pessimistic. Yesterday the small increase in the Q3 forecast was the bare minimum they had to do, as many of the numbers for Q3 are now in and their forecast was looking silly. Retail sales were up a thumping 6.2% in August 2016 compared to a year earlier, giving the lie to the idea of a sharp post vote recession which the Bank implied in May and got into headlines from their news conference.

Meanwhile the government has reflected and decided to press on with Hinkley nuclear power station. Their renegotiation or pause produced some control over EDF selling the investment on and a statement that other measures will be taken over national security for future investments. There was no change to the very high strike price for the power built into the contracts, and no change to the fact that foreign interests will finance it and will therefore take all the spare cashflows as interest and dividends once the station is producing.

When I asked about this the Minister rightly stated that the £18bn inward investment is a positive balance of payments flow during build. He stressed that all the construction risk – risk of cost and time overruns – rests with the French and Chinese investors. I was making a different point. I want the government to find ways for any future power station investment to get them financed in the UK with UK capital. It should be possible for a power station like Hinkley to find UK investors who would put up bond capital, where they did not take any construction and project risk, but would get decent interest payments and eventual repayment of capital when the plant is running. It might also be the case that some UK investors would want riskier capital investments where they did take some project and construction risk in return for higher possible rewards.

The danger of the Hinkley model is a weak balance of payments position for many years to come once the plant is producing revenues. Overseas investors will expect a decent reward in the form of interest and dividends. It’s but a step away from importing our power through the interconnectors, where the whole cost of the power is negative on the balance of payments. With Hinkley a proportion of the very large revenues it generates will flow abroad. We need to put in place some UK power where the plant is here and the investors are here. When the government can borrow at 1.5% for 50 years we could even consider putting some state cash to work for say 3.0% on a low risk priority capital basis and make a turn on the money, though I prefer private sector investment and think it is available for the right bond instruments.

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  • About John Redwood

    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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