Bail and cut – the EU’s policy to save the Euro

 

                    The EU officials who are planning how to save the Euro are following a kind of economic sado-masochism as their  strategy. They can enjoy watching member states struggle as they pile on the controls and requirements for them to cut spending and raise taxes.  They themselves put up their own budgets and salaries and send the bill to the Union members. The states in difficulty have to enjoy the results of the strategy,  saying thank you for the bail outs and cuts which represent the policy.

                      There are four elements to the approach. The first is to offer loans on quite expensive terms to any state that needs financing. Greece and Ireland have been through the process. The Union is able to use the loan negotiations as a means to exerting more control over the budget of the state concerned. There might be more such bail outs. The cost of Portuguese, Spanish and Italian borrowing is rising despite the Irish bail out “to stop contagion.”

                           The second is to tighten discipline over the budgets of all member states. The weaker ones are meant to take heed of what is happening to the states going through bail out, and cut enough off spending or put taxes up sufficiently  to avoid a similar fate.

                            The third is to take new powers for the Union to control budgets more strictly in future, limiting the amount any state can borrow in the common currency. States will  be fined or made to lodge special deposits with the centre if they are errant. This way the Union hopes to avoid a repeat of the current debt crisis.

                           The fourth is to impose new rules on how states borrow after 2013. They will require states to put a clause in any loan agreement to say that if the state gets into difficulties it may reduce the amount of interest or the amount of capital it repays. This would replace the current de facto decision of the Union to bail out member states so they can repay existing borrowings.

                            This is a compromise policy which is unlikely to work. If they succeed in controlling budget deficits after 2013 the warning to the bond markets is needless. In the meantime it is spooking markets and making it more difficult for states to raise money. Preventing a future problem does not solve the current one.

                                 Markets are unimpressed by the bail outs, because they fail to address the underlying problem, the lack of growth in the struggling states. Wiithout growth,cutting the deficits and paying the interest is going to be very difficult if not impossible. The EU’s policy has led it to forecast no growth for Greece and Portugal next year.

                              Later this week I will set out some of the other options the EU has to save the Euro which would work better.

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29 Comments

  1. lifelogic
    Posted December 1, 2010 at 9:21 am | Permalink

    Does not look likely to work to me.

    What is the EU’s real plan for the end game do you think?

    • lifelogic
      Posted December 1, 2010 at 7:42 pm | Permalink

      Did anyone see two Jags Lord Prescott on the daily politics today. Very funny and worth viewing on iplayer – was he going to punch Andrew Neil for his rather sensible question.

      Rather depressing though too, can anyone explain why someone such as Prescott has any role in government at all let alone in relation to the great global warming exaggeration/religion /scam as you wish. Which his actions would clearly indicate he has no true belief in.

    • Stuart Fairney
      Posted December 1, 2010 at 8:56 pm | Permalink

      I saw some Euro stooge on TV tonight talking about the need for ‘fiscal commonality’

      We don’t need the ‘newspeak’ dictionary for that one!

  2. Richard
    Posted December 1, 2010 at 9:21 am | Permalink

    Your article make me wonder if the EU is using this debt crisis to achieve two of its long term objectives.
    One is to develop more centralised power over member states and the other is to make member states more equal by impoverising the richer member nations.

    This is an time of great opportunity for the centralist and socialist minded EU leaders not a threat to their ambitions.

    Having just read my own words I am starting to feel a little depressed !

    • Geoff not Hoon
      Posted December 1, 2010 at 12:36 pm | Permalink

      Richard, Agree 100% but I was already depressed at the scale of it all. Mr. Redwood may disagree but with QE and the size of possible other loans being talked about for the PIGS I fear inflation will eventually let rip. If economies slow as a result it will merely move to stagflation and we are already in the thick of it. I thought the Wikileak about Mervyn King commenting on Cameron and Osborne was actually a sick joke as King as sure as God made little green apples has some responsibility for the mess and not in small part. Time he went IMHO.

    • Simon
      Posted December 1, 2010 at 2:33 pm | Permalink

      The EU monster will have you questioning your own sanity . It may even drive you clinically mad , which is not funny , but even that doesn’t mean you imagined it .

      The legislature and judiciary of a police state are already in place . It’s just a matter for the rest of the apparatus being completed and activated .

      – EU Police force and arrest warrant
      – telling Ireland to delay a general election until after a budget . Plus very suspect vote counting practices in their second referendum .
      – EU intelligence gathering
      – EU court to enforce EU laws

      Sovereignty of UK parliament already disputed by the EU . National and euro elections are little more than a pretence to keep things looking normal .

      There is likely to be a rush for the exit akin to the exodus from Hannoy .
      Think twice before putting more money where you cannot access it in a hurry , eg pensions (the EU proved in Ireland they can appropriate those) .

      Anyone think Britain will still exist in 10 years time in any sense other than Poland existed under Soviet rule ?

      • EJT
        Posted December 1, 2010 at 4:48 pm | Permalink

        (exodos) Saigon ?

        • Simon
          Posted December 3, 2010 at 12:50 pm | Permalink

          Yep , thanks for correcting me !

      • Stuart Fairney
        Posted December 1, 2010 at 8:58 pm | Permalink

        All good points, whilst we maintain the pound we have a chance, but the ultimate choice is all the way in or all the way out. This is now obvious.

      • Boudicca
        Posted December 1, 2010 at 10:42 pm | Permalink

        Sadly, I think not. Our political elite (or most of them) appear to be owned lock, stock and barrel by the EU. They will happily sign away our independence and sovereignty if there is something in it for them.

        We will have to galvanise public opinion here as best we can, using the internet to avoid the pro-EU mainstream media (esp. the BBC). The Daily Express has come out in favour of leaving the EU and is running a cross-party campaign. Support it. Buy the paper – you don’t have to read it – leave it where others’ might eg. dentists, doctors, cafes. Comment on their website to increase their advertising revenue.

        I pray we will find a strong British leader in the Churchill or Thatcher mould who will pull the UK out of the EU and restore our freedom and ancient rights. The current bunch of Conservative Ministers are useless and Cameron is proving to be more the son of Heath than Thatcher, capitulating to the EU every time they snap their fingers.

        I think the only way we will wake up the Conservative Party Leadership is for Eurosceptic Conservatives to vote UKIP in large numbers. UKIP is the only Party which wants the UK to leave the EU and guarantees a Referendum.

  3. Martin
    Posted December 1, 2010 at 9:27 am | Permalink

    I can’t help but feel that much of the Euro sceptic thinking is based on the idea that a banking mess won’t happen here. Ireland and Spain gave themselves a double dose of trouble with excess public spending and a property price bubble. Countries can do this outside of the Euro as well!

    The whole notion that if the property market goes silly that a national central bank should give the rest of economy a does of influenza with high interests rates I find odd. Why not tax property gains or up stamp duties to cure the property markets when they are in a frothy mode?

    We have a property market that is near the top of a bubble. Luckily to date it has deflated very slowly. Nevertheless the UK banks must be holding a lot of potential property red ink on their books. The government must be praying that this property bubble does not collapse before the next election.

    As for those who blame all Britain’s ills on the Eurozone’s interest rates – any pressure group wanting a different interest rate will always look at another country e.g. USA Japan etc.

  4. English Pensioner
    Posted December 1, 2010 at 9:33 am | Permalink

    Of course, all this begs the question of what happens if a country actually says “No”!
    What does the centre actually do if a county elects a government which fails to do what it is told; what happens if the Irish elect a government which repudiates the deal, and even worse refuses to pay the money back? What would happen if our own government decided not to pay any extra contribution to the EU?
    Surely, short of sending in troops to enforce their will, the only thing they can do is to threaten to throw a country out of the Euro or the EU, which is a risky strategy as, sooner or later, a government might say the equivalent of “Hey, that’s not a bad idea, let’s go for it“.

    • Johnny Zero
      Posted December 1, 2010 at 2:19 pm | Permalink

      This can be a very considered strategy in politics at any stage. Massive Passive Resistance forces the EU to come out with whatever sanction it may have in its arsenal. Then we should continue to resist and not pay any of their fines. Then we should not pay their VAT etc etc

      Our Politicians are Representatives of the People, we always retain our Sovereignty and no one, including the Euro People can take that away from us. Resist and Ignore will always defeat Bureaucrats.

    • Simon
      Posted December 1, 2010 at 2:41 pm | Permalink

      Wish they would throw us out .

      Pretty unlikely that any Govt would ever defy Brussels . It’s got to the stage where I don’t even trust election counts anymore .

    • Boudicca
      Posted December 1, 2010 at 10:37 pm | Permalink

      If Ireland goes ahead and holds a General Election in the New Year, there is a distinct possibility that Sinn Fein will attract a high vote. They are not in favour of accepting the bailout and the ECB controlling the Irish economy. Things then could get very interesting.

  5. waramess
    Posted December 1, 2010 at 9:47 am | Permalink

    How can we persuade you not to give advice on how to save the Euro?

    Better to pour a glass of something and celebrate what the EU has managed to achieve so far.

    Here’s hoping it all goes pear shaped in a hurry and we can all get back to the job of wrecking our own economy.

  6. Lindsay McDougall
    Posted December 1, 2010 at 10:14 am | Permalink

    Mr Redwood, would you please answer one simple question. Why do you want to save the Euro?

    Reply: I wish to avoid too much economic damage from the Euro. How they run their banks and their economies will have an impact on us. All this comes well behind my wish to keep us well out of it all – which also helps them. My commentaries are on what they need to do to pursue their aims, which are not the same as my aims.

  7. Bill
    Posted December 1, 2010 at 10:27 am | Permalink

    Completely agree with this comment. One of the great features of the present age has been the rise in bureaucracy. There have always been bureaucratic machines but what is different this time is that technology has facilitated the entire process. Whereas previously armies of clerks with quill pens laboured their ledgers, what we have now is all the apparatus of shared internet-based calendars, tracking options for Word processed documents and the capacity to move huge documents around all over the world in a moment. This has the effect of allowing bureaucracy to centralise more strongly as edicts can be sent out effortless by those at the top of the pyramid to the many thousands at the bottom.

  8. ferdinand
    Posted December 1, 2010 at 10:29 am | Permalink

    One essential point is that the whole process is incestuous. They will all fail and with a bit of luck topple the whole edifice, but it may be quite a time. We can watch in awe and wonderment is silly people practice silly games.

  9. NickW
    Posted December 1, 2010 at 10:44 am | Permalink

    There is an elephant trap quietly waiting for the European Nations.

    The European Government wants central control of tax and expenditure across all of Europe; but has shown itself incapable of controlling or auditing its own expenditure.

    What awaits us in the future is the coordinated Sovereign collapse of the whole of Europe.

    Whatever else we do, we must avoid ceding financial control to a profligate spendthrift incapable of managing its own budget.

    • Boudicca
      Posted December 1, 2010 at 10:45 pm | Permalink

      Absolutely. Mind you, I think the prospect of the EU levying direct taxes in the UK might be the one thing that will galvanise the generally apathetic British electorate. Taxes aren’t popular and the EU is even less popular – so rather a toxic mix.

    • Hugh
      Posted December 2, 2010 at 10:27 am | Permalink

      We have just escaped from one profligate spendthrift, perhaps it will remind us of the dangers and help us avoid falling into the hands of another.

  10. The ESSEX GIRLS
    Posted December 1, 2010 at 10:57 am | Permalink

    These were interesting comments below from one of the political sites yesterday. We maintain that the true numbers are regularly distorted by Europhiles. As we commented last week we doubt that the one-eighth of our EU trade apparently going to the Republic of Ireland would readily vanish should we cease to be EU partners.
    COMMENT
    The figure of 55% of ‘external trade’ with the EU is often quoted, but should be analysed. Does that include imports?
    If it does, most products can be sourced from outside the EU.
    Exports allegedly to the EU would seem to include large shipments via northern European ports to other destinations, and should not be counted as EU trade.
    RESPONSE
    Indeed ! These figures are often quoted in order to portray the view that we cannot trade with anyone but the EU! Much EU trade goes through the port of Rotterdam before being distributed (and is then classed as EU trade – this would happen whether we belonged to the EU or not.

    We still would like to see an Action Plan for the day we announce our new terms of trade with the EU to show how surprisingly easily this could, with will, be achieved.

    • Mark
      Posted December 2, 2010 at 1:03 pm | Permalink

      The readily available ONS data aren’t very helpful: you can’t get a disaggregation by country and industry to see how much we spend on German cars, or how much gas we export to Belgium. However, energy imports are now mainly from outside the EU (primarily Norway), while our energy exports are mainly to the EU: a pattern that is dictated by available supply and transportation optimisation. Similarly, Ford will continue to shuffle engines and transmissions to assembly plants, and EADS will also move aircraft components around Europe regardless. It is not in EU interest to obstruct such trade, because like Soviet industry the whole thing would collapse if they did.

  11. A.Sedgwick
    Posted December 1, 2010 at 12:39 pm | Permalink

    I read a comment yesterday about EU income and expenditure – there are three main contributors, Britain, Germany and France but the French take as much back again leaving ourselves and the Germans paying the bills for the rest and the public in both countries are increasingly against the EU. We are not alone – maybe the German people will lead the way for us.

    • Kenneth
      Posted December 1, 2010 at 5:14 pm | Permalink

      I believe that is the long term wish of many in the eu experiment, that is, to take from the rich and give to the poor (apart, as you say, from France, of course). A single currency would, in theory, have sped up this process

      Trouble is, this was idealism without realism.

      The realism is the wishes of the People and the mathematics of the money markets.

  12. Johnny Zero
    Posted December 1, 2010 at 5:50 pm | Permalink

    I am coming to the conclusion that the EU Plutocracy cannot even contemplate the failure of the Euro then the demise of the EU Project. All their planning, thinking then actions are one sided with never a “Plan B ” in plain sight. After being in business for many years, a decade running a small company, we tried always to consider every option including ” Do Nothing”. I predict that the Euro will fail in its present form, within three years at a max, with the Countries of Europe finally resuming their own Sovereignty, albeit poorer for the experience. We must be able to vote people out of Office, which is impossible imn the EU, where their accounts have been unaudited for over a decade, indicating how rife corruption is still with this wide group of people, unelected by any of us.

  13. Iain Gill
    Posted December 1, 2010 at 9:13 pm | Permalink

    views on the EU trade deal with India which seems poised to allow even more Indian nationals to work in this country?

  14. edgeplate
    Posted December 2, 2010 at 8:32 pm | Permalink

    For the Euro to exist long term there needs to be an EU treasury dictating monetary and fiscal policy for the whole of the EU – issuing bonds at one rate, etc. Regional (national) governments would largely have their hands tied and there would need to be regional policy and re-distribution of revenues, as happens in nation states and their regions today.

    I can see minor variations on this theme, e.g. things are done differently in the USA and Australia, but nothing like the half-way house of nominal autonomy which we see now.

    The present situation is unstable and has gotten the PIIGS into the mess they are in and really can’t expect to get themselves out of whilst remaining in the Euro and EU as pseudo autonomous states.

    It really comes down to being in the Euro and EU and having national governments which are a step up from County Councils, working within a framework where everything important is centrally imposed, or not being part of the EU and having national determination of these things in accordance with national tastes and wishes.

    The UK is in the even more peculiar half-way house position of not being in the Euro but financing the bailouts, which anyway, appear to be against the treaties.

    I can see some point in stabilising the Euro as the disorder created by a catastrophic collapse would be huge, but only if the ultimate goal is disassembling it in an orderly way. The intention is clearly not to dismantle the Euro, it is to use this crisis, which I believe was foreseen , as a lever to force political changes which could not be done by normal, transparent political processes, because no one would want them.

    Given a choice of two evils, seeing the Euro survive and the political project continue to be foisted at a gathering pace, or seeing it collapse with all the misery that would cause, I’d rather see it collapse. That’s with the belief that being out of the Euro would save the UK only a little of the pain.

  • 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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