The lies about the EU economy and the Credit Crunch

Today we will learn whether the Euroland economy is already in decline, or whether its growth has merely slowed to a standstill. The briefing in advance of the figures implies we are being readied for bad news.

Over the last year we have heard a great deal from the Uk government and from the supine parts of the media about a US recession, and how the world problems emanate from across the Atlantic. We often have to hear lectures about the importance of the EU to our economy, and even about the superiority of the EU model. If any of this were true we should by now be saying “Thank heavens we are so dependent on the EU and not on the US, for we can ignore recessionary winds from across the Atlantic”. Instead the Bank of England Governor had to warn yesterday that the UK authorities have been misleading us for some time about the likely growth rate in the UK this year and next. He himself did not even rule out a recession here in the UK. Today we will learn that the motor some want us to hitch to more completely, the Euroland economy, is once again performing less well than the US.

The truth about our economic relationships with the US and the EU is more complex than the idiot soundbite that we depend for 3 million jobs on the EU owing to more than half our trade being with the EU. It always left open the question of what about the 90% of our jobs that on their own admission do not rely on the EU, wrongly implied jobs in exports to the EU would not exist if more people had voted No in 1975, and ignored the trade in services and flows of investment and interest where the EU proportion is much lower than the 50% ish share they have of our trade in physical goods. The relationships you need to trade in services are often deeper and longer term than the relationship to buy manufactures, and tend to be with fellow English speaking countries with common law systems for obvious reasons. A British legal or accountancy firm is more likely to do work in the US or Australia than in Austria or Germany.

The current situation also shows how wrong the spin has been about the sources of our present discontent. The so called US made Credit Crunch is a credit crunch in many parts of the world where Central Banks and Regulators have made similar mistakes to the US, but where they made their own. Northern Rock did not go down because it had US sub prime mortgages, or because the US banking regulators fell down on the job. It went down with North eastern UK mortgages, under the supervision of the UK authorities. Similarly, the Euroland economy is slowing owing to stupid policies of high tax, high spend, high regulation and poor Central banking in Europe, not because of the mistakes made by the Fed.

So today we will learn if the spin is right that whilst the US economy continues to grow despite the endless declarations of a US recession by all those US haters out there, Euroland either is now going backwards or is on the edge of declines in output. In which case the UK strategy under this government of hitching us more firmly to the EU governmental bandwagon is doubly foolish, being bad economics as well as bad politics.

Not that this gap in performance between the US and EU economies is anything new or a surprise. The EU is a consistent underperformer. As far as I am concerned – and as far as many Labour MPs claim – the prime aim of our economic policies in the UK should be to give as many people as possible an opportunity to earn and enjoy more income. In the decade 1987 to 1996 the US economy grew by 32.9%, compared with the EU economies growing 11%. In the 20 years to 2006 the US grew by an impressive 82.5%, despite being richer than the EU to start with, whilst the EU limped to just 41.6% growth.

Over the long term, as well as over the short term, the US economy has outperformed the EU one by a wide margin, growing twice as quickly for 20 years! Looking at individual years the US outperformed in 16 of the last 20, and even in the two years of the hi tec collapse which pro Europeans enjoyed as an opportunity to condemn the US model, the US economy still did not have a down year.

The government needs to amend its rhetoric. This is not a downturn made in the USA or a Credit Crunch unique to Wall Street. A series of problems have emerged in the way central Banks, governments and banking regulators have done their job in most major markets. The UK has a bad version of the problem, with its own mistakes at home adding to the gloom. The Governor yesterday was right to warn the government not to relax its controls over public borrowing, but he will not be heeded. The UK government is determined to make it worse by borrowing even more. Meanwhile, the cavalry that are meant to arrive from the EU to help us in time of need have lost their horses and will not be riding to our aid. Their economies are already deeper in the mire than the American.

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22 Comments

  1. david
    Posted August 14, 2008 at 9:53 am | Permalink

    John, When will you be doing the honest thing and joining UKIP or at least calling for the next Conservative government to withdraw from the EU?

    Reply I have no intention of joining UKIP, the federalists' friends, as it can only make the situation worse by making it more difficult for the Eurosceptic coalition to win a majority in Parliament. I voted "No" in 1975 so don't blame me.

    • Frances Howard
      Posted October 8, 2008 at 10:47 pm | Permalink

      I talked to Marta Andreassen at the UKIP Conference and she said the Euro will collapse.
      At least she has stuck by her principles of straight accounting.
      I do not understand why standing up for what you believe in is somehow an advantage to something else.
      The Eurosceptics in Parliament haven't reversed a single European directive.

  2. Tony Makara
    Posted August 14, 2008 at 10:03 am | Permalink

    The US economy has certainly been helped by the weaker Dollar, however this cannot be maintained forever if the Dollar is to remain a base currency. Once the Dollar picks up any sort of momentum the specre of the trade deficit is going to loom large yet again. What all this shows is that the world's economies cannot keep suffering these periodic boom/bust scenarios. This is all due to currency differentials and their effect on liquidity.

    The world needs a more stable system of forex. A world central bank, with an international currency running alongside national currencies, fixed exchange rates that can be upgraded periodically depending on economic performance or need. The current system does not work.

    Gordon Brown claimed to have cured boom and bust, but he was lying, no-one can cure boom and bust under the current forex system, all they can do is manage the situation ad hoc. As John mentioned yesterday central banks need to work together, this would be a start. Currently there is too much second guessing and nothing by way of strategy, even the BOE reponds after the fact, instead of being ahead of events.

    • Stuart Mark Turner
      Posted August 14, 2008 at 11:14 am | Permalink

      The Foreign exchange market, just like any other market is a human construct, with information transmitted imperfectly. Due to this there will always be slight exagerations of current trends.

      However this still remains the most efficient means of directing resources by means of mutual benefit. The moment that a world central bank is setup with the fixed exchange rates that you suggest, the banking system will become even more inflexible.

      Boom and Bust should not be viewed as a great evil, when you consider what the consequences for individual liberty would be when international organisations of unaccountable 'experts' are created.

      Plato would have been pleased with this vision, however I find it terribly unnerving.

      Best,

      Stuart Turner

      • Tony Makara
        Posted August 14, 2008 at 2:02 pm | Permalink

        Stuart, I urge you to check the UKs economic performance since Sterling was floated, we have been subject to continual waves of boom and bust. This has been offset somewhat by an overvalued currency and credit chasing cheap imports for the last few years but now the credit has dried up our economy has reverted to type once again. A stable system of exchange is vital if we are to have steady economic growth without the periodic shock therapy of bust. Further such a system would help integrate developing countries into the global economy as currency values would eventually become equalized through strategic upgrades. This can be done but the only thing lacking is the will and an ideological drive not to 'interfere' with 'market forces'. The market would work better for everyone if we had forex stability. A world central bank would have operational independence although of course there would be accountability at national governmental level.

  3. Stuart Fairney
    Posted August 14, 2008 at 11:15 am | Permalink

    John

    Despite David's assertion, there is no need to withdraw from the EU, we need simply seek some kind of "associate membership" whereby we make our own laws but trade freely with the EU block. Now if you can pull that one off, then more than anything else in the last 20 years, you really will be making Britain free and prosperous again.

    Add to that a "no budget deficit without a referendum" law for a return to sound money, and perhaps reducing the proportion of state spending (of GDP) from current 43% to say 20% and the UK will outperform both the EU and the US in the next decade (thereby making everyone richer).

    • David Hannah
      Posted August 14, 2008 at 2:43 pm | Permalink

      Why not withdraw from the EU? What is the point in being a member of a club if you do not want to abide by its rules? What are the benefits of "associate membership" that we would not be possible with a simple free trade agreement on a UK-EU bilateral basis?

      • Stuart Fairney
        Posted August 15, 2008 at 6:56 am | Permalink

        In essence we are both arguing for the same thing, however, my suggested approach maybe more politically deliverable

  4. backofanenvelope
    Posted August 14, 2008 at 11:56 am | Permalink

    Reply I have no intention of joining UKIP, the federalists’ friends, as it can only make the situation worse by making it more difficult for the Eurosceptic coalition to win a majority in Parliament. I voted “No” in 1975 so don’t blame me.

    What Eurosceptic coalition is this then? Every British government since the Heath disaster has started off Euroenthusiast and ended up Eurosceptic. It has not made any difference, all of them have acquiesced in the transfer of more and more power to the EU.

    Reply: We need to reflect the Euosceptic coalition between those who want out immediately, those who want a renegotiaiton, those who want an In out vote and those who want powers back but want to stay in. I think as the British people decided to keep us in the EU by referendum we need another vote on the present state of our EU relaitonship where I think the public would back the Conservative view that we need powers restored to us.

    • David morris
      Posted August 15, 2008 at 9:45 pm | Permalink

      John,

      I agree with most of what you say except the EU was never even on the agenda in 1975 and we have therefore never "decided to keep us in EU by referendum", had there been an honest question about whether we ever wanted to be part of an ever bigger political union, rather than the simple trading arrangement offered under the guise of the EEC, then I have no doubt the vote would have been a resounding NO 33 years ago , as it would today.

      In fact the most honest question for a referendum is do we want to remain in the EU as it is today, or go back to what we actually thought we were being asked to vote for in 1975.

      Let's face it the only portion of the "3 million" jobs that Brown bangs on about that really clinch the deal are the Brussels jobs for the boys that failed senior politicians swan off into once the British public have got fed up of them. Which, sadly, is why I suspect that not too many of your senior colleagues hold such radical ideas as you put forward on here.

  5. Neil Craig
    Posted August 14, 2008 at 12:18 pm | Permalink

    "As far as I am concerned – and as far as many Labour MPs claim – the prime aim of our economic policies in the UK should be to give as many people as possible an opportunity to earn and enjoy more income."

    Of you I believe it. Of anybody who, in practice if not of rhetoric, favours state regulation over the them could produce convincing free market I don't. (Unless any of evidence the state planning works better, which clearly they can't).

    However there are, even in the Tory party, those who insist us plebs must get used to not having a growing economy & being able to afford foreign holidays. I & I suspect even you, do not know which tendancy is in charge.

    We would be very much better off if that simple formula dictated the economic proposals put before the electorate, rather than the Luddite nonsense which the BBC report so enthusiasticly & all parties pander to.

    While I agree with you that the US economy is greatly outperforming the EU one, indeed it can hardly be a matter of dispute, the American economy itself has serious Luddite problems & is not even reaching the world average of 5% let alone China & India's 10%.

  6. Stephen Southworth
    Posted August 14, 2008 at 4:56 pm | Permalink

    Anyone looking to cut public spending should have withdrawal from the political aspects of the EU project their number one priority. How much do we pay every year to have our freedom of determination undermined?

  7. mikestallard
    Posted August 14, 2008 at 6:41 pm | Permalink

    You re so right in your analysis, John. Do you remember the ancient John Cleese advertisement about poor little France and Germany with proportional representation? It seems so very long ago that Europe was booming like that.
    Today we import more from Europe than we export. So it is, surely up to them to entice us, rather than the other way round?
    What bothers me more than anything is the sheer numbers of unproductive people here in the UK. When you add up all those people on the dole, all the people too sick to work, all those who are "helping the vulnerable" all the vast army of NHS people and other Public Sector Workers, I wonder myself what is keeping us from bankrupcy.
    And if it is bad for us, then Europe must, surely be even worse?
    Why can't we be like Norway?

  8. BrianSJ
    Posted August 14, 2008 at 7:47 pm | Permalink

    I am sure you know more about this than I do, but I am under the impression that the large figure quoted for trade with EU includes goods going to say Antwerp or Rotterdam for onward travel elsewhere in the world.

    Reply: Indeed.

  9. Johnny Norfolk
    Posted August 15, 2008 at 12:48 am | Permalink

    The Euro zone will find things very difficult. Having worked in Germany for 2 years they are just not flexible to cope with world competition. Labour and the EU are making Britain the same with far to many rules and regulations.
    We need to compeat or living standards will just keep falling. The EU is holding us back.

    The lesson is going to be learned the hard way I think.

  10. Stuart Fairney
    Posted August 15, 2008 at 6:57 am | Permalink

    Having just re-read this post

    "The Governor yesterday was right to warn the government not to relax its controls over public borrowing"

    Can you assist me, what controls is he speaking of exactly?

    The two rules re level of borrowing in any year and the stock of debt as a proportion of GDP

  11. Acorn
    Posted August 15, 2008 at 10:12 am | Permalink

    " … to give as many people as possible an opportunity to earn and enjoy more income.”

    The basic question is which part of the economy do you wish them to be employed in? The socialised economy or the non-socialised economy. On the basis that the non-socialised bit – private – pays for the socialised – public – bit; when the going gets tough, you have to accelerate the private bit and throttle back on the public bit.

    The luxury of a large public sector, with lots of frippery like "five-a-day outreach community officers", are over for the near future; we can't afford them. We will need a massive increase in private sector capacity and productivity, to maintain our current lifestyle. I don't see this happening, particularly with a trade union financed socialist government.

    I reckon that each public sector employee costs the private sector about £100, 000 in pay; pensions; purchases and transfer payments they make to others. Some of it worth while but a lot where it would be difficult to calculate the added value. We have to reduce the cost of the public sector back to about 33% of GDP, rather than the current 44%. Regardless of being in or out of the EU.

    A bit out of date now but see; http://www.heritage.org/research/features/index/c

  12. Eddie Allen
    Posted August 18, 2008 at 4:30 pm | Permalink

    Dear Mr Redwood,
    The Party must tackle the EU question right up until election day. It cannot let it simmer away or boil away altogether when the British people are obviously being conned over the Lisbon Treaty and were conned on entry. I understand the party doesn't want to be "too" sceptic, but it must show its sceptcism of having given away our sovereignty by demanding the Lisbon Treaty is scrapped and the people are allowed to vote (properly) on it.

    This is a link to the EU archives.
    It shows the history of how the EU Project arose and validates the fact discussions at the time were kept secret even from parliaments both French and British.
    http://www.ena.lu/

    This is a link to secret minutes of meetings between Heath and Pompidou in 1971 which show a stated intention by both of them to keep their agreements secret from British and French parliaments and also secret from Italy and Germany and from America.
    http://www.margaretthatcher.org/archive/heath-eec

    I hope they will be published somewhere more public because I had a lot of difficulty finding them.

    There's another issue I'd like to give an opinion about and that is David Cameron's recent visit ot Georgia. This problem was caused by Saashkavili's invasion ( albeit in his own country ), of an ex-soviet oblast – an autonomous region which has de facto independence. He did it with tanks and those tanks were commandeered by the Russian Army, thus proving the guy broke a pact of non-use of force with Russia.

    David Cameron has launched a vitriolic attack against Russia in defence of a non-allied country and a non-EU member and all he's done is agreed with a country which hates Russia and calls the west to invade it. Is he mad ? Doesn't he know the British people do NOT hate Russia and watch more news than the propaganda peddled out on "British" news – which incidentally shows Bush more than it does Brown ?
    I very much doubt the British public will support David Cameron's position on this, and it has shown the UK as being unhealthily aligned to USA foreign policy as much as it is its economic policies enshrined within the Maastricht Treaty !

    That's another thing.
    Our economic policies are Milton Friedman's – they are pure monetary policies which permit no interference to produce first a benefit for society itself. It must enalrge itself to sustain itself and that's why we have globalization and enlargement occurring. Get this place back to "social economics" please before we end up HAVING to enlarge ourselves into countries which don't like our enlargement programme or our politics of sucking up to America.

    Come on – lets have a real democracy here and a return of Great Britain please before we all go berserk.

    • mikestallard
      Posted August 18, 2008 at 8:56 pm | Permalink

      The big question is this: how much of a democracy is Georgia? It has been presented as a gallant little country which is fighting for its freedom like David and Goliath.
      Saakashvili came to power after a coup in 2004. He then held an election ( how fair was that election?) and hoovered up 96/7 % of the votes cast.
      Is the point that it wants to join us and that Saakashvili is an american trained lawyer?
      And if that is it, then is that worth World War III?
      Or do the Poles know something that we do not know?

      • Eddie Allen
        Posted August 19, 2008 at 1:05 pm | Permalink

        At best it's an unstable one and at worst an openly one which could engage NATO and allied forces within the European Union in hostilities with the Russian Federation.
        I don't think it's beyond expectation that Saakashvili could have been President of the EU last week and I shudder to think what would have likely been the case if he had been.
        As for the Poles, I guess they are protecting the interests of Poland and have likely been ready to take the Anti-IBM missile base for reasons it is already a strong ally of Britain and a NATO member. As for Georgia it's anyone's guess what benefits NATO or the EU would have by it having membership, save a lot of trouble for Europe.

  13. Eddie Allen
    Posted August 19, 2008 at 1:14 pm | Permalink

    As for that credit crunch, we're pouring money down the drain being in Europe and Labour are pouring more money down that darin with its lunatic spending. Incidentally, barring the billions it's spending on I.D. cards and Northern Rock and the like, I'd like to know why we need two massive aircraft carriers when the Navy itself says they're not needed.

    Anyone with any sense knows that public spending should be cut now and a new set of monetary and tax policies need delivering before we go completely bust, so it's just as obvious Labour is the same old tax and spend party of old with just a change of appearance.

    I think it would help us enormously if we withdrew immediately to the EFTA we were once in and start the process of Britain restoring order in its affairs again rather than being held to ransom by 26 and more other ministers, some of which look likely to want us for more than just our money.

    This is why I think David Cameron has completely lost the plot when he's shouting at Russia and making overtures on Georgia's membership of NATO which plainly goes hand in hand with EU membership. Scarey or what ?

  14. Chris Hutcherson
    Posted October 2, 2008 at 11:01 pm | Permalink

    households now owe 100% GDP – as much as the entire US economy can produce in a year

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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