That was the week that was

 

            Sometimes truth is stranger than fiction. Who would have thought the Euro authorities would by their words undermine their own creature, the Euro? It has been a bad week for advocates of the single currency.

            As it is a political project, this will not worry its supporters unduly. They see this as a useful opportunity to press for more political powers over the economies of Euroland. They may have started the Euro by placing the cart of monetary union before the horse of political union, but they are now in the market for a suitable animal to take the project on.

             We should keep our eye on the European Central Bank. It seems to have been growing Eurobank worries which led to the pressure on Ireland to do more about its banks. In recent months the Bank has been allowed to buy in member states bonds, but there is still an argument about whether it should print money to do so.

            Some will want the ECB to behave more like the Fed and the Bank of England, and will be pleased if in future it buys in more bonds and allows the single currency to drift down against other major trading currencies to ease the adjustment of peripheral Euroland. Others will want the Bank to remain tough, and require more EU  powers over member states budgets so the countries need to borrow less and the Euro stays strong.

             It would be wise if the ECB and the EU regulators made sure of the strength of Portuguese and Spanish banks before markets start to test out those two countries more. The EU, Euroland and the IMF may be able to afford Greek and Irish bail outs, but Spain is a much larger country. We do not need a phase three of the Euro crisis. Just putting together a package for Ireland does not guarantee peace thereafter. Every member state and all major banks within Euroland have to pass muster and be seen to do so. You could reach the point where the sums the stronger countries have to find to help the weaker are too great for the stronger members as well. In the end a debt crisis can only be overcome by working through the debts, minimising the bad ones, and writing them off against profits or new capital.

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25 Comments

  1. lifelogic
    Posted November 20, 2010 at 7:01 am | Permalink

    The Euro machine will continue to use and even fan the EURO problems just to squeeze out as much democracy as it can while grabbing control to the centre wherever it can.

    As it is totally undemocratic and it can now make of break governments it has little interest in the system working for the people. It is there to serve the bureaucrats – as which it is doing very well. Bureaucrats are always just as happy building pointless, non working, giant white elephant as they would be a pointless purple panther. So long as they keep getting more powers and are well paid what do they care.

    • Alan
      Posted November 20, 2010 at 11:13 am | Permalink

      Totally undemocratic? It has a parliament that is elected on a more democratic system than the UK one. It doesn’t have an unelected House of Lords. It has a Council which consists of politicians elected in their own countries and representing their countries’ interests.

      I agree there is a lot wrong with the way the EU is run, and it does grab power and money, but you can’t complain about its democracy.

      • lifelogic
        Posted November 20, 2010 at 1:13 pm | Permalink

        It has a democratic veneer of a parliament of MEP’s but they have no real power this rest with the unelected functionaries. Furthermore since the UK only send a small % of MEP’s so if something adversely affects just the UK even very severely nothing can be done by the UK electorate anyway. And this proposal (e.g. like closing UK finance industry) might well suite other MEP’s rather well.

      • edgeplate
        Posted November 20, 2010 at 6:56 pm | Permalink

        As Enoch Powell pointed out long ago and others such as Daniel Hannan have pointed out since, the word “democracy” has its roots in two Greek words, “Demos” – people, and “Kratos” – power or control. There is no European people identifying with the EU and with a shared outlook and values, and therefore there can be no EU democracy. That leaves us only with “Kratos” – control.

        We do see a bravura attempt at pretending there is an EU democracy. Totally undemocratic? In Eastern Europe then had what they liked to call ‘Guided Democracy’.

        Further evidence of the EU’s democratic pedigree can be observed in the various referendums. Generally, there has been every attempt to avoid them and when they have been held, evade their results if they were unwelcome and carry on regardless. In the case of Ireland the interesting technique of asking the same question until the Irish got the answer right was used.

      • Freeborn John
        Posted November 21, 2010 at 1:26 pm | Permalink

        Alan: The EU is undemocratic for the following reasons:

        1. The people of Britain (and many others in Europe) never consented to the current powers of the EU, and certainly would have rejected Brussels having those powers. If you are denied a say on the powers of the EU institutions and only allowed a vote on the members of one of those institutions, the powers of the institution remain illegitimate.
        2. The EU Commission is clearly an undemocratic institution. No-one voting in any election can have any idea of what effect their vote will have on the composition of the EU Commission or the impact their vote might have on the EU legislative proposals. Yet the EU Commission has the monopoly on all such legislative proposals for all new and changed EU law, a law superior to any other for 500 million people. Once such EU law is on the statue-books no voter in any country can do anything to repeal or alter that law, which remains binding on them in perpetuity so long as their country remains in the EU. That is an obscene power for an undemocratic body like the Commission to wield. All experience shows that the EU Commission abuses this monopoly power to support its own institutional self-interest in ‘ever closer union’, an interest not shared by voters.
        3. Majoritorian institutions (e.g. EU Parliament) are not democratic outside the context of a national ‘demos’ that agree to live under their majority opinion. The 50-year history of the Stormont parliament prior to 1972 shows that when the governed consist of multiple communities, who do not agree to live under their united majority, a parliament can become the instrument by which the larger community dominates the smaller. (Only 1 bill introduce by the minority Catholic community, concerning wildlife, was ever passed in the 50 years of Stormont). The Good Friday Agreement that resurrected Stormont introduced community veto rights to prevent such abuse, but there are no such veto rights in the EU Parliament. Democracy at the international level means decision-making by unanimity to prevent individual nations being forced to do things which the majority of their national demos disagrees with. The EU began to move away from decision-making by unanimity in politically-salient issues when it began to introduce QMV beginning with Maastricht in 1992. Since then it has suffered a collapse if democratic legitimacy.
        4. The members of the EU parliament are not elected representatives, but rather picked from party lists. You vote for the party, and when a member resigns or dies there is no by-election to replace that individual. The next candidate down on the party list is used as substitute, showing clearly that he/she is no representative of the people, but really appointed by the party machine. That is not “a more democratic system than the UK one”. Furthermore, elections for the EU Parliament are conducted as ‘2nd order elections’ on the basis of how voters feel their national government is doing. And they are not fought on the basis of any manifesto commitments since the EU Commission defines the work-load of the EU Parliament anyway.
        5. The European Court of Justice is able to use its power of judicial review to reinterpret EU treaties and law in a more federalist way than the treaty signatories could ever have imagined, and there is no ability to repeal the decisions of these politicians in red robes at the Luxembourg Court. Their word is final and (like the EU Commission) they are able to use this power to promote their own institutional self-interest in a one-way expansion of EU law that increases their own power, but disenfranchise voters.

        • Alan
          Posted November 23, 2010 at 8:27 am | Permalink

          Thank you for taking the trouble to reply in detail. It’s a pleasure to see the arguments spelled out.

          I won’t go into the same detail; I suspect you know what I will say, so I won’t weary you by saying it at length. So, briefly, in answer to your points –

          1. The elected representatives of the UK people did consent.
          2. The Commission is an executive body, not a legislative one. Proposing the laws is not the same as passing them. The laws can be repealed and altered. I agree a stronger Parliament that could more effectively balance the Commission would be good – but it was Eurosceptics who argued against the Lisbon Treaty that strengthened the Parliament.
          3. A good point, but one that separates those who want a single country and those who want a union of separate countries, not an argument against the EU.
          4. A good point, but it is still more democratic than the UK system with its safe seats and different numbers of votes needed to elected MPs from different parties.
          5. A fair argument, but a court is necessary. Maybe our MPs should try to get more of a say in how the judges are picked.

  2. Alan
    Posted November 20, 2010 at 8:32 am | Permalink

    I don’t think the current phase of the crisis has much to do with the euro. It was caused by the Irish government guaranteeing the debts of the Irish banks. That would have caused problems whatever currency Ireland used, since the Irish banks had loaned money on the security of houses that are now worth little, no matter what currency you use to measure their worth.

    Of course politicians will try to make use of the crisis to push their own point of view; it is an axiom of politics that you must never waste a good crisis because people can then be persuaded of things that with cooler thought they would reject. So those who advocate a closer integration of EU finances will press for that, whilst those who oppose it will imply that the problems are the result of what integration there has been so far. In the Eurozone the advocates of closer integration seem to be more successful; in the UK the advocates of less integration seem to be more successful.

    Opponents of the euro seem to be working hard at the moment to convince people that the crisis was caused or made worse by the euro, but the extent to which that is true is debatable. As a currency the euro remains more successful so far than sterling; if you had put €100 in a Greek bank before the crisis began in 2007 you would have more money now than if you had converted it to sterling and put it into a British bank. I don’t know how this will all end, but it is too early to say that the euro is a failure.

    Yes it has been a bad week for those who advocate the euro, but that is because opponents of the euro are exploiting the current part of the crisis to press their point of view. It won’t matter in the long run: a week is a short time in politics (misquoting Harold Wilson).

    Reply: Ireland’s membership of the Euro has given it an uncompetetitive exchange rate which greatly increases her adjustment problem. The fact she cannot print money to pay back some of her debts also adds to her troubles. The US and Uk show that countries with independent currencies have more flexibility.

    • Alan
      Posted November 20, 2010 at 11:09 am | Permalink

      Agreed, but I’m not that happy with printing money (or devaluation) as a solution to problems – and I suspect you are not either.

      • Richard Calhoun
        Posted November 20, 2010 at 4:52 pm | Permalink

        Devaluation, and the possibility of using it as a weapon, is the one of the points of having your own currency when things go wrong.

        Who could have expected Labour to cock up as badly as they did??

        Without devaluation we would be in a similar position to Ireland.

        • Alan
          Posted November 21, 2010 at 10:54 am | Permalink

          I will confess that when I was supporting the UK joining the euro (which I still do) I was not giving enough attention to the possibility of the financial system getting into a mess on the scale that it has done. I thought that people nowadays had a sufficiently good understanding of economics and finance to avoid making any major errors, and I was clearly wrong in that.

          So I can understand your view that devaluation is a useful capability to get us out of a situation that I never imagined we would get into in the first place. It is a powerful capability, but it is also a very unfair one. With devaluation everyone holding the currency loses, including those who have saved, those who are retired and cannot earn more, those who have loaned money to the UK. That is not right. These people are not directly responsible for the failures that caused the crisis. You can argue this is a national emergency and we must overcome our repugnance and do it, and I guess I would accept that, but I still don’t like it.

          I think the right interpretation of the current phase of the crisis is that the Eurozone is still in the process of working out how it will deal with this type of critical financial problem. The Germans seem to want a solution that penalises those who made the mistakes, and I rather favour that. The problem could be that those who made the mistakes – the bankers and those who borrowed excessively from them – are too powerful. They seem to hope to pass the costs on to those who are less powerful – the (mainly German) taxpayers, the true last resort of those who cannot get money any other way. When, or if, the Eurozone resolves how it deals with the problem will be the time to assess whether their way is better than ours. I may then return to my advocacy of the UK joining the euro, or I may have to give it up; no doubt to the relief of the many Eurosceptic readers of this blog.

          • alan jutson
            Posted November 21, 2010 at 1:37 pm | Permalink

            Alan

            The sad fact is that very few Politicians appear to have any economic commonsense or indeed track record (our host exculed).

            Why do you therefore expect them to be able to have a better understanding of how to spend your money, than you.

            Most politicians seek power and control, and if they can mix with a likewise group (the EU as an example) its what gives them a buzz, the sad fact is they only ever get slapped down (voted out) when they really do overstep the mark in a big way, unfortuately the time span between mistake and being able to vote them out is too long and in the later years they attempt to bribe you with your own money.

            The problem we have is that now there are so few politicians who you can really trust, very nearly all trust in politicians has been lost.

  3. English Pensioner
    Posted November 20, 2010 at 10:05 am | Permalink

    I’m not sure that everybody wants them to copy the Fed.
    This cartoon, on your colleague Steve Baker’s site says it all
    http://www.stevebaker.info/2010/11/central-banking-and-the-economic-consensus-condemned/

    • Sally C.
      Posted November 22, 2010 at 10:50 am | Permalink

      Thank you for the link to that fantastic video.

  4. Alte Fritz
    Posted November 20, 2010 at 10:25 am | Permalink

    Mr Rumpuy made it quite clear this week that the failure of the Euro would mean the failure of “the project”. The Euro has never been a purely economic project; how could any sngle currency be whether the Euro or the Dollar on the foundation of the United States?

    No one has ever given a convincing answer to the question which has been posed from the outset: How do you apply a single currency to many very different economies? The budgetary restraints which were supposed to be part of the answer t that question were always honoured in the breach.

    As far as Ireland is concerned, if the Germans, sitting on Europe’s economic fulcrum, bully the Irish into giving up a tax policy which they need to level the playing field, then anyone can see what happens to a country which steps out of line.

    • alan jutson
      Posted November 20, 2010 at 2:20 pm | Permalink

      Alte Fritz

      “How do you apply a single currency to many different economies”

      Simple, you make them eventually all work under the same rules, regulations and taxation system.

      It is slowly happening as they seek more and more central control every year.

      This Irish crisis is the ideal opportunity for the EU to get some control over the Irish economy. They are being told to raise their Corporation Tax Rates if you want some help, when we all know that raising tax rates produces less income in total, and thus will put Ireland into even deeper debt as it will have less money to pay back the interest on its loans/guarantees.

      Companies who moved there for a low tax policy, will eventually move elsewhere.

      The reason Ireland are being asked to increase CTR is not to help them pay back the interest they will need to fund, but so that Germany, France and others can keep their CTR rates high.

      Once the EU start to write Budgets and have a say in a Tax collection policy of any Country, you know they are not far away from their goal of a large Federal State.

      As said earlier this week: “Slowly slowly catchy monkey”

      The problem is, will the monkey be dead or on life support by the time they have control.

  5. Javelin
    Posted November 20, 2010 at 11:04 am | Permalink

    I think his comment should have said “You’ll never have had it so good [because it’s down hill from here]”.

    We’ve over borrowed and under competed and judgement day will be upon us when interest rates rise.

  6. Freeborn John
    Posted November 20, 2010 at 12:02 pm | Permalink

    Congratluations on skewering the former advocate of British euro membership, on Radio 4 just now.

    I am surprised though that you say a centralised fiscal policy run from Brussels/Frankfurt could fix the eurozone. The current problem of the monetary policy is the interest rate that is too high for ‘savings countries’ in Germany and her
    Immediate neighbours and too low for the borrowing countries in the periphery. That one monetary policy restrains growth in the savings countries during an upswing and underpins it in a downturn (I.e. Is counter-cycular) but is pro-cycle in the periphery where it leads to Celtic Tiger to Bust cycles in Ireland, Spain, etc. I am wondering what possible centralised fiscal policy could counteract that monetary policy? It would suggest taxes need to be higher in the eurozone periphery to counter their prospensity for borrowing during the upturns. But higher taxes combined with inappropriate monetary policy seem likely to compound their problems.

    You would probably say that the periphery can be allowed their too low interest rates and borrowing binges if the ‘savings countries’ would transfer resources to the periphery by bailing them out during every downturn. But that means higher taxes for Germany, Netherlands, and the other savings countries. However Germany was already (thanks to euro interest rates that were too high for it) one of the slowest growing countries in the world during the Celtic Tiger boom years. And indeed is already highly taxed. So it does not strike me these slow growing countries can afford an additional tax burden. Bailing out the periphery indefinitely would likely leave them economically stagnant. And it would only get worse if/when more countries in Eastern Europe adopt the euro.

    In short I can see no centralised EU fiscal policy likely to counteract the imbalances introduced by the one-size-fits-all monetary policy. So I wonder why you propose that euroland needs a centralised fiscal policy? What could that policy be when euroland consists of countries with such deep cultural differences as to the merits of saving versus borrowing to the max to buy a house?

    Reply: No, of course a centralised policy does not immediately fix it all. There follows a painful period when economies that have not yet converged are forced to converge more. There also has to be many more trasnfers of cash from rich to poor areas.

    • Alan
      Posted November 20, 2010 at 3:10 pm | Permalink

      I’m not clear why Freeborn John thinks that everyone in the Eurozone can borrow at the same rate of interest. It is quite common to offer different interest rates based on people’s solvency, what they want the money for, etc, etc. If the banks making the loans know that they will lose their money if the people they lend to do not repay, they (the banks) will be more careful over who they lend to. The Mastricht treaty actually said that one country would not pay another’s debts and one reason why the banks are in difficulties is because they ignored that.

      Different interest rates, and more careful selection of borrowers, would make it less likely that people in less productive countries could borrow for non-productive projects. Central banks don’t in practice set the rates for the majority of borrowers.

      In short I can’t see why one fiscal policy is necessary. Prudent banking should achieve the results wanted. … Or maybe you think ‘prudent banking’ is an oxymoron.

      • Freeborn John
        Posted November 21, 2010 at 12:52 pm | Permalink

        Alan: The ECB sets the base rate for the entire eurozone.
        http://www.ecb.int/stats/monetary/rates/html/index.en.html
        It is a matter of fact that interest rates were lower in Ireland during the Celtic Tiger years than in the preceding years of the Punt, and that these too low rates fuelled the property price bubble. Without any ability to adjust interest or exchange rates, or use quantitative easing, Irish property prices are now down 50% (compared to less than 10% in UK) from the peak, and the extensive negative equity in the prime cause of the NAMA ‘bad bank’ problem which tipped Ireland into bankruptcy.

        • Alan
          Posted November 23, 2010 at 8:40 am | Permalink

          The ECB sets the base rate, just as the Bank of England sets our base rate. But neither you nor I, nor any business, can borrow at these rates.

          Yes, I would agree that the rates in Ireland (and in the UK) for those borrowing to buy houses were too low. But I don’t think there was much to prevent them being set higher and with the advantage of hindsight it is clear that governments in these countries and in others should have acted to prevent the house bubble growing.

          I think different interest rates for different countries are very likely from now on, the bankers having at last realised what the rest of us knew from the start – that you are taking a risk if you lend to Greece on the assumption that the Germans will guarantee the loan (especially as the Germans have expressly said they will not).

  7. Mark
    Posted November 20, 2010 at 1:40 pm | Permalink

    Some data from the BIS for external gross debt measured in US$ as at end Q2, 2010

    Ireland 2.13 trillion (per head $475,000 approx)
    Spain 2.17 trillion (per head $48,000 approx)
    Portugal 0.5 trillion (per head $41,000 approx)
    Greece 0.53 trillion (per head $ 44,000 approx)
    Italy 2.22 trillion (per head $ 111,000 approx)
    UK 8.98 trillion (per head $144,000 approx)
    US 13.98 trillion (per head $45,000 approx)
    Germany 4.71 trillion (approx 57,000 per head)

    Of course, some debt finances foreign assets, so the figures do not equate to the level at which each domestic economy has been mortgaged. Some of the foreign assets are in turn money re-lent to the original economy in question. This mille feuille confection will collapse when withdrawn from the oven. It should be clear why Ireland has risen to the top of the table for attention, even if the Greek numbers are probably understated due to accounting tricks that the ECB only recently rumbled.

  8. Iain Gill
    Posted November 20, 2010 at 10:05 pm | Permalink

    not there for the immigration debate?

    what would you have said if you had been there?

  9. Lindsay McDougall
    Posted November 21, 2010 at 4:27 am | Permalink

    This piece of writing and the other comments you have made recently concerning the EU and the Euro lead inevitably to one conclusion: the European policy in the next Conservative manifesto is going to be crucial. We must commit ourselves to a two ring Europe, only the inner core being Federal. We must be in the outer ring, which means that having the right to repeal the Maastricht, Nice, Amsterdam and Lisbon treaties. Nothing less will do.

  10. The ESSEX GIRLS
    Posted November 21, 2010 at 11:13 am | Permalink

    It’s been an interesting as well as a pleasant fortnight on the cosmopolitan Red Sea rubbing shoulders with ordinary holidaymakers from countries across Europe.
    With so much of the Euro in the news the conversation at dinner, and way beyond, often turned to the common and topical concern.
    Germans, Swedes, Dutch, Austrians, Irish and English were more or less agreed that the EU experiment has served its initial purpose of keeping war at bay whilst setting a base for post-1945 international trading but that the concept is outmoded and is being propped up only by the will of those who benefit most – the Brussels Bureaurocracy – and certainly not by the will of the people. Most gave it 3 – 7 years to unwind completely and the many Germans we spoke to certainly do not relish the very heavy lifting they forsee in propping up the euro.

    There was surprise amongst us at the lack of a cross border opposition as nearly all EU countries contain a strong scepticism to the EU project as shown by referenda in France, Holland & Ireland and all UK research. A united voice on behalf of ordinary nationalistic Europeans is long overdue.

    • edgeplate
      Posted November 21, 2010 at 3:29 pm | Permalink

      The EU is run and perpetuated by the self-serving for the self-serving. Whether it works or is of general benefit to the peoples of the EU is a secondary consideration. If the UK (or any other country) were to leave, think of all the jobs and pensions which would disappear – and these are the jobs and pensions of those in a position to do anything about it.

      I see two fundamental issues in politics:

      The EU. I don’t believe it can be reformed and it’s taking us to a form of government with no proper democratic control, which is being foisted. I don’t see any attempt to reform it either, although the Conservatives talk about it airily in opposition.

      The ‘tackling climate change’ nonsense. This is a massive sea anchor for the economy based on at best, a speculative theory which looks increasingly unlikely and is going to do enormous damage for no reason. We’re already paying enormous amounts through feed in tariffs concealed in energy bills to subsidise wind and solar power very heavily.
      We’ve seen business forced offshore because of ‘carbon’ – actually increasing ‘carbon’ in the big picture. It’s likely we’ll be seeing power cuts in the next few years. Most of this is reinforced by the EU.

      In both cases the costs are absolutely staggering and largely concealed. This when we’ve just had a GE where the major parties were jousting over a few billion in cuts.

      The three major parties seem determined to go ahead with both these things. The minor parties are well, the minor parties. It leaves “ordinary Nationalistic Europeans” at something of a loss.

  • 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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