Mending the Euro and Treaty change

 

                 Yesterday in the Commons Conservative Eurosceptics were not happy about the EU’s approach to the Euro crisis. Everyone wants to see Ireland treated well, and wishes our neighbours success in getting out of the economic difficulties which have been largely created by membership of the Euro, by the European Central Bank’s decision to run down support and by poor regulation of Irish banks within the EU system. The questions at issue were “Who should pay to help Ireland at a time of difficulty?” and “What policies should Ireland be made to follow by the EU and IMF to help her out of the crisis?”

                 Today these same questi0ns need to be asked about any Euro member state in difficulties as the EU  Heads of government turn their attention to what to do to mend the Euro. The UK government has the full support of Eurosceptics when it argues the  case that future financial support for Euro members should come from Euroland states and not from EU countries outside the Euro. It also has full support in saying any Treaty change to allow and pay for  bail outs of Euro members  should very clearly and expressly not apply to the UK.

                 The EU and Euroland needs to answer the following questions.

1. Should Euroland countries assist each other when in financial difficulty?  Of course if you belong to a single currency area you have to accept obligations to help neighbours in the same currency. There has to be stronger central economic government for the zone, transfers of money from rich to poor areas, common banking regulation, and controls over the total levels of debt and bank debt in the system.  All this requires further transfers of power to the emerging  Euroland sovereign government, Treaty change and more regulation. It will anyway be the natural response of the EU in difficulties. If you shared a bank account with the neighbours, you would want to be reassured that they cannot overuse the overdraft at your expense. They will want to be reassured that you will help them keep the account solvent, as you are jointly liable.

2. How should the money be made available to countries in distress? All banks within the Euroland area should be subject to effective common regulation of cash and capital. They should all be eligible for as much financial support as they need from the European Central Bank all the time they are solvent, and subject to orderly run down if they are not. All countries should be subject to strong deficit and debt controls. If they observe them they should be eligible for as much financial support as they need, financed from common Euroland bond issues. If they start to break the rules there needs to be a process to bring them back into line, which is far from easy all the time they appear to be independent democracies with views different from Euroland views on spending or taxing.

3. What should happen to non Euro members?  If they are intending to join, then they could be part of the creation of the Euro sovereign and join the economic management arrangements as part of their preparation. If a country very clearly does not intend to join, like the UK, it needs to be exempted from  the panoply of economic controls and management. The creation of stronger economic controls which is now underway should be the opportunity for the UK to redefine its arrangements as well, as we do not need nor wish to be under the degree of Brussels control that a Euro member has to accept. People in the UK will want to know what we are getting in return for allowing the Euroland members to press ahead with Treaty change.

4. Will the austerity programmes imposed by the EU on overborrowed Euro members work?  Normally an IMF programme of spending cuts is augmented by devaluation to allow a shift of resources into exports, and by easier money to allow a general private sector led expansion. Belonging to the Euro makes these two routes difficult, making it much more difficult to see how a Euro member in crisis will generate the faster growth it needs to pay the interest and get out of difficulties. There is no easy  answer to this. Some of us went hoarse explaining that Euroland was not a natural single currency area, and pointing out the architects of the Euro had not brought the different economies closer enough together to make it a success.

It was clear in the run up to the Euro that Greece, Portugal, Spain and Italy failed to meet the EU criteria for membership by a wide margin. They did not get their debt levels down to the specified amount, their deficits were too high, their inflation rates were too high and their long term interest rates were too high. I argued then that these four countries could not get their performance into line to enable them to make a success of Euro membership: “their economies are simply too different and diverge too far from the French and German economies to make it feasible”.

It would be good to hear from the proponents of this scheme what their answer is now. I forecast the Euro scheme would end up with higher taxes to pay for bail outs, and higher unemployment as the economic policy failed to offer growth and prosperity.

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39 Comments

  1. norman
    Posted December 16, 2010 at 8:11 am | Permalink

    I’ll look at point 3. Should we bail out further EU countries?

    Let’s take the governments policy to it’s logical conclusion. We have helped bail Ireland out as, as well as making a £440 million profit on the loan (ha ha ha), we need Ireland’s economy to remain strong as we do a lot of trade with Ireland.

    Ireland remains a member of the Euro.

    The rest of the PIIGS need financial aid, or more financial aid. Do their economies affect the Euro? Of course. Does the strength of the Euro affect Ireland’s economy? Of course. If we are asked to help the PIIGS, why is this different from Ireland, as all these economies are so interlinked that the rationale we used for helping Ireland must, if we are governing logically, be extended to all Euro members.

    Unless the Ireland bail out was an ill thought out piece of nonsense. We’ll find out when the begging bowl is held out next. My bet is that we’ll contribute, albeit to a slightly lesser degree than we did with Ireland but I have no doubt we’ll borrow money to bail out other countries.

    If you submitted this as a script for a farce it would be rejected as too far removed from reality.

    • Sally C.
      Posted December 16, 2010 at 9:15 am | Permalink

      Does this explain George Osborne’s quick commitment to support Ireland – from his wikipedia biography – ‘ Osborne is part of the old Anglo-Irish aristocracy, known in Ireland as the Ascendancy. He is the heir to the Osborne baronetcy (of Ballentaylor, in County Tipperary, and Ballylemon, in County Waterford).’

  2. Mick Anderson
    Posted December 16, 2010 at 8:15 am | Permalink

    A clear and concise explanation of the situation.

    It’s a shame that we can’t tust Mr Cameron or Mr Osborne to see sense and do the right thing for the country in keeping clear of all the Euro bail-outs.

  3. lifelogic
    Posted December 16, 2010 at 8:33 am | Permalink

    Good summary of the position so far.

    I have no confidence that Cameron and Osborne have the ability or even the inclination to negotiate a sensible position for the UK out of this EU created mess – let alone repatriate any substantial powers to the UK as promised by cast iron Dave.

    Someone need to force them into doing the right think but how?

    • lifelogic
      Posted December 16, 2010 at 9:01 am | Permalink

      Typical soft BBC interview to fellow green believer with Chris Hulme this morning on the today program on his mad and hugely expensive, economy destroying “green” energy policy.

      There in no point investing in vastly expensive “green” energy and the carbon tax unless you accept each and all of the following:

      You believe that higher CO2 is going to cause serious & significantly dangerous warming. (highly debatable)

      That significant warming would be a very bad thing. and not actually make things better overall. (highly debatable)

      That all the other countries will take the same action to reduce C02 emissions. (they clearly won’t)

      That no other better ways of cooling the earth exist than reducing C02 (they clearly do)

      That the higher energy prices caused will not be more damaging than the warming you think it may prevent. (very debatable indeed)

      Even if you do believe all the above the only thing worth building with current technology and costings is nuclear power.

      Please put a decent honest physicists and engineers in charge of the policy direction not another high priest of global warming student of French and Oxford PPE graduate.

      • lifelogic
        Posted December 16, 2010 at 10:18 am | Permalink

        Also that the vast amount of money spent on “green energy” could not do far more good spent inoculations, malaria prevention and treatments, clean water, better sewerage systems, better health care, medical and genetic research and similar over the world.

        • Richard
          Posted December 16, 2010 at 2:59 pm | Permalink

          I completely agree with you both.
          My irritation at Chris Hulme’s failure to realise just how much the UK’s uncompetitively priced energy will affect our economy in the future, is nothing compared to my frustration at the billions being squandered on global warming which could be spent so much more wisely in the areas you so correctly have mentioned.

      • fairweather
        Posted December 16, 2010 at 6:11 pm | Permalink

        I’m afraid sea levels have been rising over a number of years and if they continue to rise at the same rate for the next 50 years a quarter of the world will be un-inhabitable. What do you say to your grandchildren if we have not tried to do anything about it?

        • edgeplate
          Posted December 16, 2010 at 10:36 pm | Permalink

          Yes, “A number of years” being since the end of the last Ice Age, during which they have risen at an average of a metre per century with occasional jumps. The rate tailed off sharply about 8000 years ago.

          The trend since 1994 seems to have flattened off a little

          http://sealevel.colorado.edu/

          What would you say to your grandchildren if you’d saddled then with enormous debts on the basis of a passing scare story? Furthermore what would you say to them were it to turn out that the UK was one of the few places to pay other than lip service to the foolishness, as seems likely? We were leading the way on climate change? To which they might ask why you couldn’t lead the way on something sensible and useful, in this and other areas.

          The theme of saddling future generations with impossible debts, through pursuing currently fashionable folly, is on topic for the thread.

        • VIVID
          Posted December 16, 2010 at 10:46 pm | Permalink

          I will tell them the story of King Cnut.
          -Vivid

        • lifelogic
          Posted December 17, 2010 at 3:07 am | Permalink

          I will tell them that sea level do vary and always have and have been much higher in the past even before CO2 increases. That they are not rising very much at the moment best predictions are for about 10cm over the next hundred years. Anyway for the reasons given above a war against man made CO2 would not make any real difference anyway and the money was far better spent on other more sensible things.

          See for example – The Swedish geologist and physicist Nils-Axel Mörner, formerly chairman of the INQUA International Commission on Sea Level Change on You tube etc.

          • lifelogic
            Posted December 17, 2010 at 5:17 am | Permalink

            And not to believe all you are told at school particularly if it involves a film with patently silly claims and computer graphics by Al Gore or someone similar.

        • Stuart Fairney
          Posted December 17, 2010 at 5:30 am | Permalink

          I hear this a lot but the facts don’t seem to support the claim (I note your claim is not referenced), but let’s try anyway.

          1. At what rate are sea levels rising?
          2. Why would it not be possible to build costal defences even if the claims are true?
          3. If sea levels are rising, what evidence is there that human activity is the cause?
          4. What do you say to your grandchildren if you have taxed the UK in to poverty, seen random powercuts because we don’t have sufficient consistent power supply and seen our economy damaged (and thus unable to pay tax which pays for all manner of wish-list stuff) because of expensive power?

  4. alan jutson
    Posted December 16, 2010 at 8:42 am | Permalink

    John

    Reported in the Telegraph this morning by Bruce Waterfield.

    British Taxpayers could be liable to pay up to £16billion for future Euro bailouts after David Cameron failed to win a guarantee that an emergency fund meant for natural disasters would not be used to rescue Countries in financial crisis.
    Europe’s leaders meet in Brussels today to agree a change to the EU treaty rules to create a long term fund for helping euro Countries with debt problems.

    Looks like another change of the rules is perhaps on the cards.

    We may be stuck with making a contribution after all.

  5. English Pensioner
    Posted December 16, 2010 at 10:20 am | Permalink

    As this country has a huge deficit and is having to borrow money to fund its own needs, where is it going to find the money to lend Ireland? Presumably we will need to borrow even more, but where is it coming from? The whole thing sounds like a huge Ponzi scheme, with one country borrowing from another to pay its debts to a third who pays back the money it owes to the first. Or perhaps a sort of “Pass the parcel”, with someone ending up with all the debt when the music stops!

    Reply: Yes, we borrow the money for Ireland and lend it on at a higher interest rate. All the money for the Euro rescue is borrowed, as even Germany is a net borrower.

    • Acorn
      Posted December 16, 2010 at 12:08 pm | Permalink

      EP; if you have time, have a look at the latest BIS Quarterly Review.
      http://www.bis.org/publ/qtrpdf/r_qt1012.pdf

      Particularly page 17 of the document. This gives an indication of where the parcels are at the moment in the pass the debt parcel game. A smart **** has just told me that you can turn this chart into a “snakes and ladders” game. Thirty six snakes and no ladders so far.

      Since there is no mark to market accounting any more, we have no idea just how broke EU banks are. Their balance sheets are pure fiction. You will see that little Ireland has the equivalent of $747 billion of exposure; about four times its GDP. I can’t see the Paddies sticking around to even pay the interest on that sum, let alone the principal.

    • NickW
      Posted December 16, 2010 at 12:54 pm | Permalink

      But if everybody, (Banks and Countries), is borrowing money off everybody else; where is the money coming from?

      • BobE
        Posted December 16, 2010 at 2:51 pm | Permalink

        Middle Eastern Oil states.

        • James Matthews
          Posted December 16, 2010 at 5:51 pm | Permalink

          And China?

      • alan jutson
        Posted December 16, 2010 at 4:22 pm | Permalink

        Nick

        Your Question reminds me of an “e” mail doing the rounds

        Bailing out the Irish is simple

        Rainy day in a small Irish Town
        Rich German drives into Town, stops at a hotel, Puts 100 E uro note on the counter, and says he would like to view some rooms with a view to staying the night.
        Hotelier gives him some room keys and as German tourist goes upstares to inspect the rooms, the Hotelier takes the 100 Euro Note, and goes next door to the Butcher to pay his bill.
        The Butcher immediately goes down the street with the same note to pay the farmer.
        The Farmer immediately goes to the Market man and pays his bill with the same note.
        The Market man goes to the Publican and pays his credit bill with the same note,
        The Publican slips the money to the local prostitute drinking at the bar as she is facing hard times.
        The Prostitute immediately goes to the Hotelier to pay her bill for rented rooms which she has had on credit.
        The Hotelier puts the 100 Euro note back on the Counter just in time before the rich Gernman tourist returns to say, no rooms are suitable and he will not be staying after all.
        The German picks up his 100 Euro note and drives off.

        No one has produced anything, no one earned anything, no one provided any sort of service, but the whole Towns folk are now out of debt.

        Simples Really !!!!!

        • English Pensioner
          Posted December 16, 2010 at 8:47 pm | Permalink

          I like it!
          I haven’t seen that one before.

      • Sean O'Hare
        Posted December 16, 2010 at 4:22 pm | Permalink

        The printing presses, where else.

  6. NickW
    Posted December 16, 2010 at 10:28 am | Permalink

    Two points;

    It is time that Europe stopped leaning on Germany to provide a bottomless well of support for the Euro.
    The war finished a long time ago, Greece had its Junta, Italy had Mussolini, Spain had Franco; the past is over and trying to use emotional blackmail to get the German people to pay for the rest of Europe forever is clearly wrong.

    We saw with the sub prime crisis that risk is not mitigated by spreading it, it is multiplied. A little bit (rather a lot in fact), of poison in the well taints everything.

    Eurobonds will drag the whole of Europe down to the level of the lowest common denominator. They will become the problem, not the solution.

  7. Rob Hay
    Posted December 16, 2010 at 11:22 am | Permalink

    I forecast the Euro scheme would end up with higher taxes and more regulation for the UK, as usual, due to the comprehensive and systematic failure of UK governments to protect our interests for the last 40 years. No sign of the coalition being any different.

  8. waramess
    Posted December 16, 2010 at 11:55 am | Permalink

    What seemed such a simple solution to the non-problem of floating exchange rates is now set to engulf and devour each and every one of them.

    Maybe the EU had something else in mind when introducing the Euro just as Wilson promised us that the pound in our pockets would not be devalued. If they did we can be certain their motives were not dissimilar to those of Wilson.

    Well Here we are with absolutely no obvious benefit having been detected but the greatest muddle since one can remember.

    Fixed exchange rates do not work, whether it is the dollar and sterling or the Irish economy and the Euro, or even gold and the dollar, and yet those who would rule over us have not yet learnt the lesson. They will in time but at our expense

    • BobE
      Posted December 16, 2010 at 3:00 pm | Permalink

      Europe is a long term political ideaology with no regard for the individual countries. It is designed by the builderburgers and is a move towards a one world government. It is interesting that if oil was to be traded in Euros and not Dollars then the USA would go completely bust. Cameron like Blair just sees a chance to be the president of the EUSSR and so will comply with everything demanded of him by the eurocrats..

  9. Eoin Clarke
    Posted December 16, 2010 at 12:10 pm | Permalink

    The plight of the baby countires in the Eurozone is being dictated by German and to a lesser extent France. Ireland’s GDP figures for Q3 [out today] show that the economy grew 0.5% last quarter. Ireland’s tax take depends much less on domestic consumption, than other countries since it enjoys a good export sector [agri-foods, and high tech industries]. If Ireland, who was already taking tough fiscal tightening measures, can be bullied into accepting a bailout, then what is to stop Germany continuing this practice? The only saving grace for Ireland is that it retained its low corporation tax. Unlike the UK, corp tax is not a left v right issue, since all the parties support a low corp tax, which is of course essential to attracting inward investment.

  10. StrongholdBarricades
    Posted December 16, 2010 at 2:19 pm | Permalink

    I think that you miss the main points, which is whether or not the conditions “imposed” on Ireland can actually be afforded by the Irish state, and what will happen to this bail out if a new government comes in and asks for it to be renegoitiated or simply takes the Icelandic way out.

  11. Ken
    Posted December 16, 2010 at 2:46 pm | Permalink

    John,

    I agree that the Eurozone can only succeed if members of it are persuaded to yield to a central command. The commission and the European ‘parliament’ want to move towards Euro bonds and more central control. However, they do not bear the weight of democracy, whether this weight is felt through surgeries, internet forums or street demonstrations.

    Call me sad, but yesterday I listened to most of the debate on this issue from the European ‘parliament’ – all 2 hours of it. Whereas in the House of Commons, references to constituents’ views are regular, not one contributor referred to any constituents in any shape or form. Apart from two exceptions (the Conservatives and Nigel Farage’s group) the talk was all about how to persuade the council and those stubborn national governments to fall into line.

    Apart from the fact that, with the two exceptions above, the speeches were full of ignorance and incompetence about financial matters, they didn’t appreciate that real politicians have elections to win.

    For that reason, I can only see this ending in tears: you are dead right in your analysis of what needs to happen to make the Eurozone work. However, for this to happen national politicians will be running the gauntlet of their electorate to the point where democracy itself will be further and dangerously eroded as the electorate are ignored and unrest will increase to the point where things start to become dangerous. That is surely why the council of ministers will be dragging their feet on this. Those countries with high levels of debt face increasing popular resentment as living standards are squeezed whereas the people in richer countries resent footing the bill.

    It’s just not going to work.

    I am sorry that I agree with you. It’s a bit sterile to have a blog where everyone agrees. I know it would be more interesting to have a blog with some good thrusting debate. However, you – and most sane people – are so obviously right about this that a decent counter argument is hard to come by.

  12. Johnny Zero
    Posted December 16, 2010 at 4:09 pm | Permalink

    It is interesting to note that whilst our British Sovereign Debt Rating remains fair to good, we are allowed to then lend again to Euro based Countries, such as Ireland. In other words as the Bond Markets smell a “Sovereign weak State” they up their Bond Rates. Spain presently is paying some 5.6% on its Bonds and rising. it should be noted that when Ireland went higher than 6% 0r 6.5% the **** hit the fan and they were forced by the European Union to take on huge further debt and austerity measures. I believe that Spain will be forced to concede next to the EU and within 30-60 days time. If we as UK join yet another EU Bailout our Sovereign Debt ratings in the bond Market may suffer accordingly. If then Ireland or Spain default on that Sovereign Loan which the Uk has made, the UK Taxpayers are again stuck with the risk and the repayments plus interest.

    This crazy merry go round of accelerating Sovereign Risk is taking us all to potential major default and Bank Failures, yet we see no debate in Parliament?

    John , Surely a Tory back bencher, such as your good self, can raise this question of increasing UK Sovereign Risk being taken out of our control? Their seems to be no democratic legitimacy for what the Government is doing here. Ireland is one step, but Spain and Portugal plus possibly Itlay are three steps too far…

    Reply: I pressed the Chancellor to rule out the Uk lending money to any other Euro member yesterday. He implied he agreed with me but he did not expressly rule it out.

  13. Alte Fritz
    Posted December 16, 2010 at 5:23 pm | Permalink

    Mr Redwood must find this a very frustrating subject. He cannot fail to comment, given the subject’s importance. Yet all roads lead to the question of what is the form and purpose of the EU. Once that question is asked, reason breaks down since supporters of ‘the Project’ are impervious to reason. At least it seems that way to a Eurosceptic.

    There is a chart, I remember it from my far off school days, which purports to show the centre of Europe’s prosperity centred on the Ruhr/Rhine/Netherlands area. Contours then radiate to illustrate lines of prosperity. The place of Co Donegal or Cape St Vincent in this needs no explanation. South East England or the Isle de France seem alright.

    The point is that as much as the contours on this chart of prosperity waver around, and cross borders, there are whole nations well away from the centre of prosperity. Add to that the peculiarities of different nations, and you have to say that if you wanted to design a single currency, you would not choose to start it in Europe.

    Looking at the United States, my recollection is that the $ was formally established as the official currency of the USA a few years after its emergeance from the American revolution. Thus, at that point, for all the tensions between north and south, a common currency followed a country which was homogenous in many important respects, not least in the adption of a federal governement.

    The proponents of the Euro have sought to turn history on its head, and the current crisis, not too strong a word, is the result. Is the Project so valuable and worthwhile to be worth the damage cased and risk posed by the very existence of the Euro?
    Replky: Remember I voted No in 1975 and have written a book on why I think European union will ultimately fail.

  14. Alte Fritz
    Posted December 16, 2010 at 9:30 pm | Permalink

    Radio 4 just broadcast an interesting ‘In Business’ which took the form of a panel discussion on the Euro’s difficulties and possible solutions. Most panelists claimed to have been against it from the outset. A Belgian enthusiast claimed that the crisis was a banking crisis which could be solved by better Commission driven regulation. A German contributor had been pro and was now anti. He pointed, as did Mr R, that countries were admitted which cold never meet the criteria. Quite so, but I wonder what the point was if it was not inclusive.

    ‘Best’ of all, a British sceptic harrumphed very loudly against the thought that withdrawal from the Euro or EU would work for anyone.

    I too voted no in 1975, argued for years, was roundly abused for my pains and now keep my head down. Your perserverance is something to respect.

    • The Old Man
      Posted December 17, 2010 at 11:19 am | Permalink

      I also voted ‘no’ in 1975. At the time I was in the RAF and attending a higher-level English Literature course tutored by a RAF senior education officer who tasked us with writing an essay on the pros and cons of the UK joining the EEC. When it came to marking and then discussing the essays I, and a few others were roundly criticised for our narrowness of view and were accused of living in the past and being unable to see the ‘bigger picture’.
      Fast forward to the Euro being rolled out and I was working in a small company with people from Holland, France and Belgium. My work colleagues were enthusiastic about the Euro, but when I predicted that it would at some point probably lead to economic warfare, though too polite to say so they all obviously thought that I was a quite mad ‘Little Englander’.
      If we apply a common-sense reality check on the EU it fails all reasonable tests of democracy. It is a benign dictatorship, not a democracy and I have always believed that the Euro was designed as an economic weapon which could only succeed with the removal of all national currencies from the equation and, ultimately, the removal of named nations from the map. A start was made by the undemocratic regionalisation of England and it removal as a country from the map of the EU. Nothing was said by the leaders of our nation at the time, but when shortly afterwards Wales was ‘accidentally’ also removed from the EU map, the outraged screams of politicians and others soon had it restored as a named country. Happily, the EU dictatorship seems unable to move further forward in this area (though Belgium seems a likely candidate for another ‘accidental’ disappearance). Note also that with the issue of the new ‘EU Diary’ any reference to Christmas or Christianity has also been ‘accidentally’ removed. I now conclude that I am quite mad to even think about such things; none of our elected politicians (other than JR) seem to and remain blithely unconcerned, seemingly bent only on ensuring that, no matter what the cost, the artificial EU construct and its currency remains in place. I shall now join Alte Fritz, keep my head down and keep on taking the pills….

  15. Lindsay McDougall
    Posted December 17, 2010 at 1:55 am | Permalink

    Germany is resisting any increase in transfers from rich Euroland member states to poor ones. Bail outs are loans to be paid back at agreed interest rates. Portugal and Spain are on notice that their bail out cash will be limited. It is now official German policy that bond holders in distressed countries should expect ‘haircuts’ on their holdings. The ‘haircut’ imposed by Irish banks on holders of junior debt has been 80%. That is not a haircut; it is being sawn off at the kneees. It is now the official policy of Ireland’s Fine Gael party – the opposition party that is likely to be in power after January – that holders of the Irish banks’ senior debt should also be subject to ‘haircuts’. To spell it out, that would mean a partial default on money owed to UK institutions.

    The solution to Euroland’s problems is positively screaming at us. All the Euro zone member states in distress must leave the Euro zone and reinstate their national currencies. That should be the price of any UK bilateral loan. If we don’t get our way then we should simply paralyse the whole of the EU. There are many mechanisms available, provided we are prepared to have a ‘big bust up’ if need be.

    As and when member states leave the Euro, expect reduction of their fiscal deficits to be accompanied by loose money, devaluation and inflation. They will repay their debts in clipped coinage but at least they will repay them.

  16. Denis Cooper
    Posted December 17, 2010 at 2:12 am | Permalink

    http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/118572.pdf

    “Press remarks by Herman VAN ROMPUY President of the European Council following the first session of the European Council”

    “Tonight, we have done three important things.

    Firstly, we decided on the limited Treaty amendment required for Member States to establish a permanent mechanism to safeguard the financial stability of the Eurozone as a whole.

    Secondly, we have confirmed the general features of that permanent mechanism.

    Thirdly, we have outlined the follow-up of the overall economic strategy which the European Council has been pursuing since the start of the year.

    First, regarding the Treaty amendment required for a permanent crisis mechanism. Since our October meeting, I consulted the members of the European Council about it. Tonight we agreed on a draft decision. This includes the text of the Treaty amendment itself. It consists of two sentences, to be added to article 136 of the Treaty:

    “The Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality.”

    We agreed on this text after one hour and a half of discussion.

    This amendment will not increase the competence of the Union and only affect the members of the Eurozone themselves. That’s why everybody agreed to use a simplified revision procedure.

    After an opinion of the European Parliament, the European Commission and the Central Bank, the European Council will turn the draft decision of today into a full decision, by March 2011 at the latest. Then the amendment will have to be approved in each member state.

    The aim is for the amendment to enter into force on 1 January 2013 at the latest, so that the permanent mechanism itself can be in place in June 2013.”

    So Cameron has agreed to give them what they want – a treaty amendment which effectively neutralises the “no bail-out” clauses deliberately inserted into the Maastricht Treaty and carried over to the present treaties, so that what are at present illegal bail-outs will in the future be legal – but without getting anything in exchange.

    As far as UK approval of this treaty amendment is concerned, if the European Union Bill passes into law then Section 3 will apply:

    http://www.publications.parliament.uk/pa/cm201011/cmbills/106/11106.1-7.html#j128

    “3 Amendment of TFEU under simplified revision procedure

    (1) Where the European Council has adopted an Article 48(6) decision subject to its approval by the member States, a Minister of the Crown may not confirm the approval of the decision by the United Kingdom unless —

    (a) a statement relating to the decision was laid before Parliament in accordance with section 5,

    (b) the decision is approved by Act of Parliament, and

    (c) the referendum condition, the exemption condition or the significance condition is met.

    (2) The referendum condition is that … ”

    Helpful Explanatory Notes for the Bill are here:

    http://www.publications.parliament.uk/pa/cm201011/cmbills/106/en/2011106en.htm

    Obviously there will be no problem getting this amendment approved by an Act of Parliament, as the bulk of the Tory MPs are abject slaves of their party and only a small minority will rebel, while the LibDem MPs will vote for it anyway, and if necessary Labour will quietly supply enough of its own “rebels” to vote with the government and ensure that it passes.

  17. Alan
    Posted December 17, 2010 at 8:36 am | Permalink

    “It would be good to hear from the proponents of this scheme what their answer is now.”

    The answer is that there is not meant to be an easy way out. The euro is a currency for countries that run their economies well. It is meant to be painful and difficult for those who run their economies badly.

    That was a reason why the UK should have joined the euro; then we would not have our politicians congratulating themselves on running a currency whose value has declined by 20% in the last three years. Their failures would be very apparent and the consequences would encourage future politicians to run our economy with more care. The people could not be deceived by devaluation.

    The Eurozone countries are struggling to avoid the fate that the UK has suffered; a loss in the value of their currency. So far, if you had put your money in a Greek bank (in euros) you are richer than if you have kept your money in a UK bank. If you are paid in euros you are richer than if you are paid in sterling.

    • Mark
      Posted December 17, 2010 at 9:48 am | Permalink

      The Euro is no paragon of currency virtue:
      =W

      The point about the pound is that we have the flexibility to allow the exchange rate to act as an adjustment mechanism. You could have made your point by suggesting payment in gold, but if you had demanded that in the 1990s your income would have fallen into the Brown bottom. However, the gold standard (and within the Eurozone, the Euro) allows no flexibility of exchange rate adjustment. When states empty their central bank vaults to pay foreign creditors with gold or hard currency, the consequence is a domestic currency that no longer has adequate backing. The realisation that this is the case is often sudden, provoking monetary and economic collapse. See for example Weimar Germany.

      • Alan
        Posted December 17, 2010 at 12:34 pm | Permalink

        My point was that, if you wish a currency to be something in which you can hold savings, the euro is closer to being a paragon of currency virtue than sterling.

        Of course if you don’t want to encourage saving and want governments to be able to manipulate the value of currency so as to make their failures less apparent to the population, then you will prefer sterling.

        • Tom
          Posted December 17, 2010 at 2:50 pm | Permalink

          But devaluation can provide the oxygen for recovery. The calibre of politicians and business leaders varies all the time, as do economic opportunities and problems. It is a bit myopic to think that somewhere there is a race of super competent, far sighted leaders who have discovered the secrets of full employment, growing production and exports, honest government and satisfactory tax revenues who never would like to be able to change their own interest and exchange rates.

          There is more to prosperity than fixed exchange rates.

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    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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