G20 – will it be dear to talk?

 

                The US announced its quantitative easing just before the G20. This was a provocative act to many of the other G20 leaders, showing that the US was willing to lower the dollar come what may.

                The US action has ensured that the main issue thrust onto the table will be the extent to which countries intend to follow beggar their neighbour devaluation policies. The successful exporting countries like China, Germany and Japan will be saying that the deficit countries need to work harder and to make more products they wish to buy. The deficit countries will be hoping that the big exporters will agree to revalue their currencies and to stimulate their domestic markets, making it easier for the deficit countries to sell to them. The surplus countries will object strongly to deficit countries undermining their own currencies by creating too many electronic  banknotes, especially as the surplus countries now own substantial amounts of deficit country IOUs. The deficit countries will object to the way some surplus countries restrict trade in their currencies or otherwise manipulate their exchange rates, delaying the inevitable adjustments.

            The best we can hope for from the leaders is emollient language, followed in due course by a greater williingness on both sides to resist interference with  the markets seeking sensible values for the currencies. If the President takes back home the anger about US QE II he might just let it be known to the Fed that this will  be the last time he does it. If China grasps the strength of western feeling about the current level of its currency, it might just allow more upward drift after the meeting.

              The markets have also arranged their little  economic question for the G20 party. Is there any level of borrowing costs for Ireland, Greece and the other stressed members of the Eurozone that might get the European countries to firm up their offers of financial help to them? The Europeans would be best advised to avoid too much talking about their problems, as the more exposure they are given in the media the more people are likely to worry about the situation.

             The EU is rapdily trying to put in place the kind of economic government  and controls you need if you are to run a successful single currency. In Euroland the centre does need to control how much each region and country within the zone can borrow, and does need to ensure common economic policies to facilitate adjustment within the zone to offset the shock of the common external currency rate. The failure to do this at the beginning has left a very lop sided zone, with some countries uncompetitive and running up huge bills.

               In the UK where one area becomes very uncompetitive at our common exchange rate, with high unemployment, the rest of the UK automatically pays the bills. Germany is reluctant, as the main  paymaster of the Eurozone, to do this for the most uncompetitive areas. The very public arguments over how much grant, loan and other financial assistance might be available to Greece or  Ireland is bound to be destabilising. If Germany now wants  bondholders of Greek and Irish debt to accept a cut in what they are owed, rather than helping with guaranteeing those loans, then it has to ready itself for German banks also taking a subtantial hit. Germany is about to discover things are already more integrated than they might like. A single currency is not just for Christmas. A single currency is not just a guarantee of no devaluations by your trading partners to give you good access to their markets. It is also a solemn commitment to them, to  have and to hold, for richer, for poorer.

             As I have always said, having a joint bank account with the neighbours may not be such a good idea.

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18 Comments

  1. lifelogic
    Posted November 12, 2010 at 7:37 am | Permalink

    Can you remind Cameron & Clegg that they only have 3-4 years to sort out Brown’s huge mess to be in with a chance of winning the nest election. You and every one sensible knows we need deregulation, easy hire and fire, lower taxes to maximise revenues, sound money, banks that lend, no rigged energy market and a state sector that is about 20% of the economy maximum.

    So far Cameron are not even making the right noises let alone doing anything. If I have to listen to any more nonsense about green energy jobs (actually job destroying) I will scream. Have these Leberals and Cameron done some basic sums on the economic nonsense they represent.

  2. alan jutson
    Posted November 12, 2010 at 8:18 am | Permalink

    John

    Completely off topic, but did you view Britains Trillion Pond Horror Story shown on Channel 4 last night ?.

    At last a programme which showed:
    The true extent of our Debt.
    The extent of the Deficit which adds to our Debt each year.
    The fact that Government spending is increasing for at least the next five years.
    That Government cuts are not real cuts, but cuts to the increased rate of spending.
    That the Government has no money of its own.
    That all Public Sector workers are paid for by the tax paid by the Private sector.
    That Higher taxe rates equate to less Tax Revenue.
    That increased Public Spending just increases poverty.
    Sound money is the key, and printing money destroys sound money.
    That the Public Sector is now larger than the Private Sector which pays for it.
    Etc, Etc.

    Interviews with a number of past Chancellors who agree its all gone pear shaped.
    Interviews with MPs who did not have a clue as to the actual size of the debt, and some who thought the Deficit was the Debt.

    The solution offered, take the low paid out of tax altogether, reduce income tax, abolish VAT, Inheritance Tax and Capital Gains Tax, and give incentive to wealth creators. The example given, Hong Kong which was under our control for many years, and is operating in many ways as our Country did 100 years ago when we were the powerhouse of the World and Small Government was just a 10% cost of GDP.

    Thought for a moment you may have been involved in this production, were you ?.

    Simple graphics, simple language, excellent examples, interesting interviews.

    Many of us bloggers suggested and urged the Conservative Party to make some sort of simple chart type presentation of the facts before the Election, but it never happened.

    This should be compulsary viewing for all MPs and Public Service Employees.

    Reply: Yes I did watch it and was pleased to see it take a similar view to the debt and spending as I have been taking on this site for many months.

    • waramess
      Posted November 14, 2010 at 11:20 am | Permalink

      Remember also that the high taxes we now have to pay are a statment that Conservative policies have failed to reverse and often added to the profligacy of the socialists

  3. Tim Yates
    Posted November 12, 2010 at 9:27 am | Permalink

    Why do politicians think that they can run economies when they are quite clearly so bad at it? Go back to sound money, no government intervention, ultra low taxes and a tiny state. Every country that does that improves it’s economy. Every country that doesn’t ends up like the UK, going from a world leader to a has been in just a few years and then living on past glories and illusions.

  4. A.Sedgwick
    Posted November 12, 2010 at 9:39 am | Permalink

    The EU and the Euro as we know them are ultimately doomed. At best the Euro will effectively become the super deutsche mark and the EU Greater Germany, then both can function politically, geographically and economically.
    The far flung members will exit by default, necessity or we can hope by the ballot box.

    • Bob Eldridge
      Posted November 12, 2010 at 5:14 pm | Permalink

      And Germany finally wins the European (argument? ed)

  5. Johnny Zero
    Posted November 12, 2010 at 10:36 am | Permalink

    “Having a joint bank account with your neighbors may not be such a good idea”

    What a colouful and clear way of demonstrating the lunacy of any long term future for the Euro. It is going to fail sometime. There is no way that Germany will want to dilute their own economic stability by supporting weak Greece and particularly Ireland, yet they may have no choice. The German Banks are up to their armpits in bad loans in may regional areas of the EU and could easily fail if a Bank or Sovereign default occurs in these distressed Countries.

  6. waramess
    Posted November 12, 2010 at 10:46 am | Permalink

    How crazy can it all get? The Chinese deprive their workers of the rewards for their labour by keping fifty percent of their GDP in reserves. The USA over-reward their citizens by running up a huge deficit which they are now intent on defaulting on by printing more and more dollars.
    How will it all change? Will the Chinese decide to reward their workers fairly? Will the USA decide to bring austerity to their workers in the form of lower rewards for their labour? Not likely.
    Back at the ranch the Europeans, having fraudulently insisted that at the outset all members of the Euro had converged economies find now that was incorrect but are unwilling to make reperation to the poorer nations (who were obliged to borrow in order that their economies would not implode from the high valuation of the Euro) by way of supporting the said debt.
    And then, dear god we have the UK. Slowly over five decades or so declining in underlying prosperity but kept afloat by North Sea oil wonders why the regions are becoming less and less able to compete and why viable companies converge on the more naturally prosperous South East.
    All of this shows good cause for dumping the convoluted views of economists and politicians and getting back to a bit of good old common sense

  7. Stuart Fairney
    Posted November 12, 2010 at 10:56 am | Permalink

    Maybe I am getting old, but it is hard to know how Mr Obama can on the one hand, authorise QE2 in the states and then on the other, complain about competitive devaluations.

    I am also very concerned about this talk of exchange controls, I barely recall them from the 1970’s ~ no details yet, but this can’t be good.

  8. StrongholdBarricades
    Posted November 12, 2010 at 10:59 am | Permalink

    I agree with your assessment, but am surprised that you venture little in the way of solutions.

    Whilst pontificating about the eurozone, despite the fact that we have stayed out of the euro, the fallout from the effects you mention must surely impact upon the UK

  9. Neil Craig
    Posted November 12, 2010 at 11:15 am | Permalink

    Everything has its up & down sides. The downside of keeping your currency low is that it is artificially easy for foreigners to but your assets. That is why there has been recent fear that the Chinese would launch a takeover of BP. If China decided to change their loans to the US to share purchases of silicon valley, Boeing etc there is little the US could do.

  10. Steve Cox
    Posted November 12, 2010 at 12:19 pm | Permalink

    The EU single currency can never work properly while there are such massive cultural and linguistic differences between the various areas of the continent. These generally prevent labour mobility, except for the best professionals or transient labour (remember Auf Wiedersehen Pet?). Huge variations in property prices add to the problem. This is a macroscopic version of many of our own problems here in Britain. Why don’t all those unemployed Geordies, Jocks and Scousers make a beeline straight for central London? Silly question, isn’t it! We “manage” this problem in the UK by HUGE monetary transfers between the regions, and that is exactly how the EU will end up keeping the Eurozone on its feet, much to the anger of prudent Germans. I rather suspect that we will also end up contributing to these transfers, under what guise I do not know, but if history is any guide we will continue to be milked for every last cent by the impecunious scoundrels in Brussels. Perhaps if the EU was to decide that there was to be just one language taught in all EU schools, say English, then in a generation ro two we might, like the Americans, have a much more mobile labour force, but for now it’s just a cruel joke to impose the yoke a single currency on countries as diverse as Germany and Greece.

  11. JimF
    Posted November 12, 2010 at 12:31 pm | Permalink

    Question 1: Which of the following is true?

    A. So taking just one German export, say Mercedes cars- they’re now developing markets in China, etc, which makes their need for Irish and Greek markets fairly irrelevant.

    or

    B. So taking just one European export, say Mercedes cars- they’re now developing markets in China, etc, which means that they can support growth and economic development in the less prosperous parts of Europe?

  12. Martin
    Posted November 12, 2010 at 12:58 pm | Permalink

    Ireland is an odd one because while their public sector finances are poor, they have a good external trade situation.

    Indeed if their government went bust and was closed down and the keys thrown away could Ireland live on happily as a 100% private economy? I suspect one Airline boss would be happy to give it a try.

  13. Steve S
    Posted November 12, 2010 at 1:16 pm | Permalink

    Sometimes it is better to recognise the benefits of divorce, rather than letting things go on and on hoping things will right themselves, while all the time matters worsen, ending up with an acrimonious parting of the ways and a refusal to even talk to each other. The Euro will fail one way or another.

    • Bob Eldridge
      Posted November 12, 2010 at 5:20 pm | Permalink

      The world uses the dollar to manage most global transactions. If that was to change to the Euro then all those Dollars would flood back to the USA to be exchanged. This would bankrupt the US. The reason for the Iraq war was because Saddam was going to switch to the Euro for oil trades. The US will go to war before allowing that.

      reply: I do not think that was the reason for the war

  14. lifelogic
    Posted November 12, 2010 at 2:53 pm | Permalink

    The one thing the Government could do very quickly is inspire confidence, in investors businesses and the finance industry before they all go. They need to show that the government has a working compass and is heading in the right direction to rebalance the economy, encourage real investment and win the next election. So far nothing 50% tax rates, a daft energy policy, inflation, a week pound, subservience to the EU, and no reductions in regulations save (in part only) the mad HIP packs.

    Do they actually want just one term in power? Just trying to sound fair “progressive” and caring will not work. Now the election has gone it is no longer about PR it is about what will actually work and work in time for the next election.

  15. Norman Dee
    Posted November 12, 2010 at 4:29 pm | Permalink

    Extending your neighbourly bank account euphimism, if the rest of your neighbours have gone ahead with this system, and suddenly asked to see your bank book, you would quite rightly tell them to sod off, so why are we even discussing this possibility?

  • 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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