Month: December 2010

        Mr Hammond said in his defence of HS2 that the only people who disagree with the business case are people living along the line of route who have reasons to dislike the project. My reading of some of the literature tells me that is not quite true. There  are numerous people who live nowhere near the proposed route who have doubts about the value of this project, including constituents of mine. There are many criticisms of the way the demand forecasts have been constructed, the valuation placed on the wide range of benefits claimed and the assupmtions about future shifts in travel patterns. There is also the danger that improved line speeds will generate additional long range commuter demand, which is not necessarily a good thing to subsidise.

         The cost of the infrastructure to get to Brimingham is estimated at £17 billion, with another £11 billion to get to Leeds and Manchester.  You could do a lot for that kind of money, and you could raise more of it from private sources if you built a profit making rather than a loss making business on the back of it.

          To me the railways in the Uk have two major tasks that could take priority over fast long distance travel for high fare paying passengers. The first is commuter traffic into and out of our major cities, so people can get to work and back in good time and reasonable comfort. We have not done enough to ensure reliability and pleasant journeys. The second is freight traffic to take more lorries off the roads.

          If we adapted the current rail network to more efficent operation for commuters, we could run more trains on existing track through improved signalling and lighter trains, increasing frequency and reducing overcrowding.

           If we spent some money on providing branch and spur lines into the main trading and industrial parks, and the railway spent more on single waggon marshalling, they could offer a serious freight alternative to many more businesses.

             These might be better priorities than this expensive and contentious new track.

          The latest figures show imports rising more quickly than exports and state borrowing at record levels. Public spending has been growing at more than 5% in cash terms during  April to November compared to the same period last year.

          This matters more than the well justified   reduction in Dr Cable’s responsibilities following his ill judged remarks on the Murdoch businesses.  The UK needs to borrow and import less, and export and earn more. The public debate still concentrates on cuts instead of looking at the overall picture, where the UK is still running a lot of financial risk in difficult times.

           Mr Hammond the Transport Secretary has asked for advice on whether with all this global warming we are told about we should expect more regular colder winters. So far since global warming was declared proven we have had a run of colder winters and wetter and cooler summers. At the same time Mr Hammond is seeking to do his bit to curb global warming by proposing a substantial new railway line through the Chilterns to Birmingham and on to both Manchester and Leeds.

            Let me suggest some advice for Mr Hammond. No-one can tell for sure whether next winter and the winter after will be bad like the last two, or mild like winters a few years ago. The Met experts run a mile from suggesting they can predict the weather a year or two in advance, though they reckon they know the climate for the next hundred years. Given the importance of the road, rail and air network to a sophisticated trading economy like the UK, the new Transport Secretary should be working on the cheapest and best ways to keep our economy moving just in case it snows again on this government’s watch.  These ways could include:

1. Use of a fleet of hired in vehicles with snow ploughs attached to keep all motorways and trunk roads clear of snow as soon as it starts to come down. In winter there are lots of  suitable commercial vehicles available which the state could hire with drivers to do the job. Gritting  can follow the ploughs.

2. Encouragement of the same approach by Councils for the main roads under their control. They could mobilise some of  the underused tractors from  farms by hiring them.

3. Discussion with Network Rail on what more they can do to keep railway lines open, including running  trains with de-icers  and snow moving equipment on them. There may need to be a programme of improving heaters for points. Stations needs basic equipment to keep exposed platforms, paths and approach routes snow free.

4. Pressure on owners of main airports to beef up their anti snow equipment to maintain their licence. The airports should each be responsible for freeing runways and taxiways of snow and ice within a reasonable time period of a snowfall. Airlines should be responsbile for the snow and ice affecting their planes.

           Your ideas would be helpful, so I can send considered thoughts to Mr Hammond. I will talk about the new railway tomorrow.

           Today’s figures for public borrowing reinforce the need to control spending. Public sector borrowing is up from £16.79 bn last year in November to a stunning £22.774billion this November. Tax revenues are up as well.

           Professor Tim Congdon has recently pointed out that over the last year our financial service exports are down by £10 billion, or around one fifth lower. He thinks this is the price for the bank levy, the balance sheet tax and the other moves against the sector. If so, it could prove costly in  terms of lost revenues.

          The Coalition is right to want to bring the budget deficit down, and right that to do so it needs to cut Labour’s spending plans. The surprise has been that it has failed to cut some of the most obvious items that many people would like to see cut.

           Top of the list is the wish to see us out of Afghanistan. Many people are uneasy about our presence there, and wonder if we should ask our troops to make yet more heroic sacrifices. We are there to allow the Afghans time to train and prepare to take over policing responsibilities. Aren’t they ready yet, is the most common question I have to answer.

           Next comes the wish to cut out overseas aid payments to the more successful emerging nations like China and India. Many well intentioned voters think it would be good to spend more in the poorest countries in due course, but in the short term why not cut the obvious candidates and save the money so we borrow less?

        Next comes a strong desire to spend less to the EU. Mr Cameron has responded to that mood and is seeking to negotiate a freeze on spending, but other member states still want the budget to rise. At least the government’s stance will stop some of the more ridiculous increases they were proposing.

           Numerous contributors here and correspondents would like us to spend less on banks. It is high time we started to get our money back. Why  not require repayment of more of the special liquidity, if the banks now have cash available for bonuses?  Why not get the asset disposal programme underway where the state owns the equity?

          My own view is we should not be spending on refinancing and propping up the European Central Bank. That should be the responsibility of the Euro zone. Much of the Irish loan was to refinance advances made by the ECB to Irish banks, which the ECB should have carried on doing. There is then the additional Euro 700 million of subscribed capital which is contingent risk for the UK, and the £10 billion swap from the  Bank of England. It is most important that the UK government says it will not be spending any more on support for this body, directly or indirectly. It should make clear that ECB advances to say Spain are the responsibility of the Eurozone and we will not be involved in any refinancing of those.

            Some would also like to see the government spend less on renewables and go for cheaper relatively clean technologies based on gas for our power generation. Cancelling or deferring HS2, the new train track through the Chilterns, would also be popular with many in that part of the world.

            More reductions like these could be popular. That would leave more money for priorities in healthcare, for the disabled, and to put keep some planes on the aircraft carriers, whilst also reducing the borrowing more quickly. What more if anything would you like done on spending? Which of these ideas appeals to you?

           If we had bigger savings, we could think of lowering taxes more on saving and earning. We could also afford to keep the Harriers and buy some more snow clearing for our highways.  Why not offer payments to farmers and other owners of heavy duty vehicles to go out and clear more of the roads?

         I was no fan of the Irish bail out. I thought it would be bad for Ireland as well as for the rest of the EU. So far the markets have come to the same judgement.

         Last week Irish debt suffered a hefty downgrade to baa1 – a long way below AAA which sovereigns expect. The  market price for Ireland to borrow 10 year money was around 8.7%, compared to 3.1% for Germany in the same currency.  These events imply that markets are not convinved the bail out will help Ireland.

         As I sought to make clear, I did not favour leaving Ireland in the lurch. I thought it wrong of Mrs Merkel to talk down weaker bonds, and wrong of the ECB to seek a refinancing of its advances to Irish banks at such a tricky time. Of course Ireland needs to be able to borrow money,and Irish banks should be supported by the ECB all the time the EU authorities regard them as solvent, as they currently do. The words and some of the deeds of the EU in the last two months made the situation worse.

            Over the last three years Irish real GDP has fallen by 13% and nominal GDP by almost 20%. This is a huge fall. That is why Ireland finds balancing the books difficult. Tax revenues have been badly damaged by the decline, and unemployment has risen, increasing social security costs.

            The inability to devalue makes exporting more difficult. The inability to print more money makes keeping the Irish system liquid more difficult. The required cuts do not complement a growth strategy for the private sector, which Ireland badly needs. At least the Irish government defended the attractive Corporation Tax rate, which helps a bit.

           Instead of arguing about Treaty amendments and future bail out funds, the EU needs to be arguing about a growth strategy and how to resolve the problems in  Euroland banks. If they do not take sensible action to head off a Spanish banking crisis, then the full folly of the current Euroland model for crisis management will be unleashed on us all.

              The EU has been busy. Whatever they may say – and they say plenty of risky and unhelpful things as well – they are worried about further banking losses, asset write downs, and sovereign debt problems.  On 16 December they announced the establishment of the European Systemic Risk Board  to undertake “macro-prudential oversight  of the financial system within the Union”. Note it is within the Union, not the Euro area. It includes the Governor of the Bank of England as Vice Chairman. Clearly they intend to call the shots over banking activities, along with the Euro regulators. 

            On 17th December the Bank of England granted a temporary liquidity facility to the European Central Bank . The Bank of England may provide  £10 billion in exchange for Euros to the ECB. On 29th December the  subscribed capital of the ECB will go up by Euro 5 billion to Euro 10.76 billion.  At the same time the ECB will increase its provisions by the full amount of the new subscribed capital. The UK’s subscribed capital will rise from Euro 836 million to Euro 1562 million, but as a non Euro member the amount we actually have to pay up on December 29th  will be very small.

            Professor Tim Congdon has recently pointed out that the ECB has been cutting back on the amount of special assistance it offers to banks with Euroland, cutting it by around Euro 150 billion this year. However, he also points out that most recently after the Irish crisis the amount of special assistance seems to have gone up. He suspects there has been a large increase this year in the proportion of the total going to distressed banks in stretched countries.

          It was, it appears, ECB worries about the amount they were lending to Irish banks that led  to the Irish loan. The UK was engaged not in saving Ireland but in helping refinance risks the ECB had entered into. Now we learnt that’s not all we are doing to help the European Central Bank.

            The UK government needs to make clear what limits it does intend to pose on help we offer the Eurozone. After all, the Eurozone contains several large rich countries who should be capable of sorting out their own affairs. One of the benefits those of us who helped keep the UK out of the Euro thought we were winning was limiting the UK’s risk to what was obviously a very risky single currency project. We need to take sensible action to avoid getting dragged into any next phase to the crisis, be it sovereign debt led or commercial banking led.

           The Bank of England seems keen to involve us rather more in the Euro area. It says we need “a comprehensive, rather than a country -by- country solution ” and more EU stress tests for banks.  It points out that UK exposure to Spanish banks is larger than to Irish ones. They do not portray a happy new year ahead when you read about all the risks they see us running.

            The EU’s press release says the change to the Treaty of European Union is an amendment to Article 136, adding:

“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 assistance under the mechanism will be made subject to strict conditionality.”

We are told this does not change the current powers of the EU so it should not need referenda. In the Uk we are told we will not get a referendum because the amendment does not apply to the UK.

If it does not change the powers of the EU at all it is difficult to see why it is needed. If it is needed, it implies that there is insufficient legal clarity behind the current use of Clause 122 to support the exisiting stabilisation fund.

We are told it should come into effect at the beginning of 2013, giving member states two years to put it through their legislatures. This is also curious, as they could ratify it in a matter of weeks if it is as simple as the EU says and does not need a referendum anywhere.

It means that for the likely duration of the current Euro crisis any further bail outs will have to rest on the existing Treaty base. If Germany is right to be worried about possible legal challenge, there will be plenty of opportunity to do so before this comes into effect.

The EU thinks it will take them a further six months to turn the Treaty Clause as amended into a working bail out mechanism, even though it could  be based on the present one.

The EU has also pledged to press home more quickly with the five Regulations and a Directive to strengthen common economic governance.

The question of whether they should immediately enlarge the current arrangements was left over for Finance Ministers at a later meeting. There was no press release to say how they would handle the banking problems or respond to any crisis between now and 2013. That is what some of us want to know. All this looks like too little too late for the Euro area. I just hope the UK has clear language to underwrite our position well outside all these bail outs and problems.

                It’s good  news that the UK will play no part in any Euro bail out under the new system from 2013 onwards. What most of us want to know is who will bail out and how will they bail out any member state in the Euro that gets into trouble in 2011 and 2012.

                  I want to see the Heads of government agree a sensible plan to ensure  the stability of the Spanish banking system, and to ensure the continued funding of the Euro member states that have borrowed too much.  These are pressing and immediate issues, not things to resove in 2013.

                 The Uk must avoid being dragged into the financial turmoil within the Euro area. The Uk needs to continue to nurse its own damaged finances and banks back into health. We do not have the financial strength to go to the financial support of any more Euro area states and banking systems.

                 I agree with the Bank’s warning that if government bond prices fall there will be problems for some EU banks. The curious thing is why have the Bank and other EU financial regulators supported the idea that government bonds are very low risk? Why did they make them core assets for banks, if now they are so worried about them?

                  This generation of bank regulators, Central banks and pension fund advisers have kept telling us government bonds are low risk and should therefore be the pillars of our banks and pension funds. Now they tell us some governments may not pay all the interest or repay all the capital. Meanwhile, setting very low official interest rates and buying up government bonds themselves, central banks have created a bubble in government bonds that could be damaging and painful if deflated.

                    The Bank’s comments may prove all too accurate, but not helpful. The central banks and governments  which have inflated the bond bubble and told us to rely on them have a duty now to get us out of the mess they have created.