Losing money in Europe

 

               The government has three main arguments for supporting Euroland countries with bail out money. The first is the EU market and banking systems are important to UK prosperity. The second is the UK does not have to put up new cash, as the IMF, the European Financial Mechanism and the European Central Bank already have money to lend. The third is the money is only loans, which will be repaid.

                 There are problems with all these arguments. Of course it is in our interest that Euroland prospers, avoiding a banking crash. Sensible critics of the government do not wish the Euroland economy harm or want to see a banking collapse. The question in dispute is can lending more money to overborrowed countries solve their problem of overborrowing?  Why didn’t the first Greek bail out, or the revised bail out work?  Can the weaker members get out of their difficulties without leaving the Euro and devaluing? If they and their weakest banks  need to reduce the amount of interest and capital they repay on past debts, wouldn’t it be better to agree that now instead of lending them more money to pay the interest on what they cannot afford? The UK also needs to remember that it imports a lot more than it exports to the EU, and the trade is subject to global as well as EU rules to prevent protective measures against us.

                  The three main mechanisms for lending these countries more money through international institutions could end up with those institutions needing more capital from the sponsor states including the UK if they lend and lose too much. It is  true that the UK has not subscribed much capital to the ECB and is not meant to be liable for losses or to benefit from profits. The UK should make it clear that it has no intention of subscribing any more capital to the ECB, which owns too many loans to countries at risk and to banks in difficulty. It should also press for less of the new lending to come from the EU fund and more from the Euroland fund. It should be questioning why the IMF thinks it a good idea to lend money to countries that share a currency which does not work for some of its members,, when it would be better for them to recreate their own currencies and follow their own policies subject to market disciplines on their borrowing.

             Finally, it is  important to heed the message of the markets, that there could be serious realised losses in due course on some Euroland sovereign debt and banking paper. A country seeking to strengthen its own financial position by moving towards better control on its own deficit should be wary of having to stand behind too many possible losses. If we had to mark to market – take the true current value – of these loans to Euroland in trouble, we would already have lost substantial sums through the various mechanisms and on the direct loan. The market thinks Greece should pay 23% for 2 year money – that’s a long way from the 5% or so Greece is being charged for the bail out.

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32 Comments

  1. Ian
    Posted June 5, 2011 at 6:31 am | Permalink

    I can only hope that Cameron is playing the long game, hoping that muscular liberalism and the LibDems will collapse, so that he can implement sound Conservative policy, as espoused by John Redwood, Dan Hannan and others. But perhaps I am expecting too much of a *former* PR man.

    • Eanam
      Posted June 5, 2011 at 2:04 pm | Permalink

      Ian – you hit the nail on the head with the phrase ‘PR man’. DC still is just that and little else.

      Europe is drifting into mediocrity and seems destined to be part of the new ‘Third World’.

    • lifelogic
      Posted June 5, 2011 at 3:47 pm | Permalink

      A triumph of hope over experience surely.

    • Mike Stallard
      Posted June 5, 2011 at 4:24 pm | Permalink

      According to Charles Moore, the PM is deliberately surrounding himself with nice safe faceless people who are stopping his reforming programme dead in its tracks. This seems to be particularly true in Education where, unless you are directly involved, it all looks utterly radical and successful.
      Then it doesn’t.

  2. lifelogic
    Posted June 5, 2011 at 7:40 am | Permalink

    All three arguments are clear blatant lies and (transparently poor) government spin. It cost money directly now pushing up our borrowing costs, it won’t work anyway and we won’t get all the money back at true commercial rates of interest.

    I am amazed that with sound UK business starved of funds by the non lending banks Cameron thinks this is a wise way to give money away. But then he does not seem to think he just seems to obey the EU orders from on high.

    • lifelogic
      Posted June 5, 2011 at 12:18 pm | Permalink

      Indeed with cast rubber David (Cameron-Heath) turning out to be such a deception, (so big tax, big government central planned economy, “mad green” and pro EU). I now tend to think that we might as well have lost the election (or the sensible wing might as well force an election now).

      Labour could be little worse and at least then we would have a chance of some sense in 2015.

  3. Mike Stallard
    Posted June 5, 2011 at 7:59 am | Permalink

    Thank you for a very clear and readable analysis of our big problem.
    I am getting a lot out of the book on the first World War and how it was financed. In the East – Russia, Austria and Turkey – there wren’t that many well off people so pretty quickly the governments had to turn to the Banks to get money for armaments. Guess what? The Banks provided the money – by printing it.
    Sound familiar?
    The inflation was massive and at the end of the war, Austria, Turkey and Russia had all fallen to bits completely. Why? Well, a good part of the reason was that the governments simply had run out of money.

  4. Peter van Leeuwen
    Posted June 5, 2011 at 8:00 am | Permalink

    Continental skeptics are far more powerful than in Britain, due to the proportional democracies. IMHO this will lead into several changes:
    – In time a restructuring of Greek debts in which e.g. the German and French banks will be strong enough to take the losses.
    – Popular pressure to take back some power from the financial markets, to which European countries are now enslaved, starting with a tobin tax to dampen the huge speculative money movements.
    – A different (more severe) treatment of Greece compared to Ireland and Portugal. The perception about the Greek way of running an economy is not very favorable.

    What is missing so far is good investment programs in the weaker countries to help them boost their economies. It might be far easier to drum up popular support for (European) investments in the indebted countries, provided that these programs attract private investments, than to expect e.g. northern EU populations to allow much more money lending when no solutions are in sight.

  5. alan jutson
    Posted June 5, 2011 at 9:50 am | Permalink

    A couple of phrases spring to mind.

    When in a hole stop digging.

    Do not throw good money after bad.

  6. Boudicca
    Posted June 5, 2011 at 9:51 am | Permalink

    The bailouts are ILLEGAL. They are expressly forbidden in the Maastrict Treaty.
    Using a clause which allows assistance in the case of natural disasters is a gross distortion of its purpose: this was to allow assistance in the event of, say, Vesuvius blowing its top, not country borrowing excessively and getting massively into debt.

    Our Government is knowingly participating in an illegal act. It should be challenged in the Courts.

    • lifelogic
      Posted June 5, 2011 at 2:08 pm | Permalink

      Which court exactly would be remotely likely to rule against them?

    • Mike Stallard
      Posted June 5, 2011 at 4:28 pm | Permalink

      OK Read this week’s Christopher Booker about what judges think of the law and Human Rights. When it suits them, of course, they preach about it. In family courts, it is simply ignored.

    • Martyn
      Posted June 5, 2011 at 6:30 pm | Permalink

      Please do not confuse the issue with facts! Like much of what the unaccountable EU hierarchy does, all that is required is a slight change of approach. If challenged (most unlikely) the EU could argue that mankind is demonstrably an inseparable part of nature and since mankind brought about the Greece situation, it can be classified as a natural disaster within the terms of the Maastricht Treaty. Q.E.D.

  7. waramess
    Posted June 5, 2011 at 10:00 am | Permalink

    Maybe it is that a [creditor] banking crisis will require individual sovereign states and their respective taxpayers to organise the bailout whilst bailing out the debtor nations can be foisted on all members and be made to look like a different problem

  8. David John Wilson
    Posted June 5, 2011 at 10:41 am | Permalink

    Surely Britain should be talking about withdrawing all capital which it has lent to the ECB. The ECB is the responsibility of the Eurozone countries and we have no democratic control over what it does with its money. Do we have any drawing rights on the ECB? How can we be involved with an organisation whose sole interest is the Euro?
    I support your view that the IMF should be dealing with currency zones and not supporting individual countries within those zones.

    • Denis Cooper
      Posted June 5, 2011 at 3:30 pm | Permalink

      As far as subscribed capital is concerned the position is complicated, as described here on the ECB website:

      http://www.ecb.int/ecb/orga/capital/html/index.en.html

      The starting point is:

      “The capital of the ECB comes from the national central banks (NCBs) of all EU Member States.”

      It now amounts to nearly €11 billion, having been doubled on December 29th 2010, although the additional €5 billion is to be paid in three instalments.

      “The NCBs’ shares in this capital are calculated using a key which reflects the respective country’s share in the total population and gross domestic product of the EU – in equal weightings.”

      However:

      “The EU’s 10 non-euro area NCBs are required to contribute to the operational costs incurred by the ECB in relation to their participation in the European System of Central Banks (ESCB) by paying up a minimal percentage of their subscribed capital. Since 29 December 2010 these contributions represent 3.75% of their subscribed capital, amounting to a total of €121,176,379.25 as follows”.

      For the UK the paid-up capital is only about €58 million, small compared to say Germany’s €1407 million.

      The other aspect of this split between the euro and non-euro states is that:

      “Net profits and losses of the ECB are allocated among the euro-area NCBs according to Article 33 of the Statute”,

      while:

      “The non-euro area NCBs are not entitled to receive any share of the distributable profits of the ECB, nor are they liable to fund any losses of the ECB.”

  9. Caterpillar
    Posted June 5, 2011 at 10:47 am | Permalink

    JR, would you be able to outline the mechanism for the struggling euro countries “to recreate their own currencies”, and how this can be handled?

    Thnaks.

  10. Span Ows
    Posted June 5, 2011 at 10:47 am | Permalink

    Does anyone think that the UK would receive bail-out money if it were in the same position to Greece/Ireland/Portugal etc?

    • Derek Buxton
      Posted June 5, 2011 at 12:41 pm | Permalink

      Not a hope, as much chance as a snowball in hell.

    • Jose
      Posted June 5, 2011 at 2:22 pm | Permalink

      In all probability we would receive no help from any of the EU institutions but rather via the IMF although this basically a US/EU plaything that has had mainly French chief execs!
      When it comes down to it, each country is looking after numero uno and sod the rest! We have allowed ourselves to be coerced into additional help of the EU debtor nations such as Greece when in reality it should have been through the IMF and then the eruoland countries picking up the rest of the tab should they wish.
      Pathetic leadership within the UK by both Labour and coalition leaders.

  11. forthurst
    Posted June 5, 2011 at 11:39 am | Permalink

    Does not a severe conflict of interest occur when the IMF is headed by a French personwith future political ambitions within their own countries belonging to a political party commited to the Euro and the European project? How will they be dispassionate in their treatment of those indebted countries with an urgent need to leave the Euro asap?

  12. Damien
    Posted June 5, 2011 at 12:36 pm | Permalink

    Under the European Financial Stability Mechanism (EFSM) that Alister Darling signed us up for we have to pay 13.5% with another 4.5% exposure to any money provided by the IMF in the EFSM. Only if the EFSM loans are not repaid in full would the UK lose out, which some would say is 50/50 in the case of Greece debt.

    Obviously if the contagion spread to Spain then the situation for the UK worsens because of our £80 billion exposure to Spanish banks. Remember that Spanish banks also have considerable exposure to the UK banking sector, and as yet there is no firewall (as proposed in the Vickers report).

    The UK is not part of the larger $750 billion European Finance Stability Mechanism that commences in July 2013.

    Counter intuitively the Euro has strengthened against the pound by just under 10% in the past year making exports cheaper and imports more expensive, giving a small boost to manufacturing but this has been tampered with persistently high oil prices (Brent Crude $115). Knight Frank report overseas buyers are taking advantage of the favorable rate and falling house prices to purchase property in London which is a safe haven given the political and economic turmoil abroad.

    In the past three weeks the US stock markets have had the longest falling trend seen in three years and unemployment is rising to 9.5% because of the effect of high oil prices at the pump. The Chancellor addressed this potential hazard to the UK economy with timely measures in the recent budget but the problem persists.

    The ‘Arab awakening’ means that Saudi Arabia will need high oil prices to afford provide support to strategic neighbors like Bahrain and Yemen as well as tens of billions for its internal stability measures. The Saudi contributions to Yemen are unlimited as Yemen slides toward economic meltdown ( its oil reserves are all but depleted). While the west is providing military support to the Arab awakening it is also paying for higher oil. Meanwhile China is actually now the biggest importer of oil from Saudi Arabia and has skillfully avoided committing itself to any supporting role.

    All these are exogenous factors that should not detract from the plans laid out in the budget and if anything strengthen the argument for more haste contrary to the open letter by the economists this weekend.

  13. Terry
    Posted June 5, 2011 at 1:03 pm | Permalink

    That is the trouble with you, John. You are too smart. Too smart to be in Cabinet, as you would put those dumbos to shame AND THAT WILL NEVER DO.

  14. BobE
    Posted June 5, 2011 at 1:36 pm | Permalink

    Actually this is the strongest hope of saving my country from the EU dictatorship. If the finance system colapses then with luck the entire truck will see all of the wheels fall off and I can see my country free again.

  15. A.Sedgwick
    Posted June 5, 2011 at 1:54 pm | Permalink

    Peter Oborne says it all in today’s Telegraph.

  16. Martin
    Posted June 5, 2011 at 2:29 pm | Permalink

    What you omit to mention is that any potential losses would be less if the supreme masters of world economics – the Bank of England – set a sensible interest rate and got the Pound Euro exchange rate off rock bottom and stopped importing inflation.

    It continues to amaze me that Tory Euro sceptics seem so happy with a weak Pound.

  17. Alan Redford
    Posted June 5, 2011 at 3:20 pm | Permalink

    As Daniel Hanna has pointed out, the main purpose of the EU project is to provide rich careers for the elite members. The same purpose has spread to all of politics, and pervades every party whose members are more interested in maintaining the pretence of fantasy economics and personal enrichment than serving their country. The idea of public duty, leadership and truth entirely vanished some time ago. Why else would Prescott, Kinnock and their ilk have seats in the Lords? Why else did every party renege of the promised Referendum? They are all engaged and mutually co-operating in a gigantic swindle against ordinary people.

  18. Denis Cooper
    Posted June 5, 2011 at 4:15 pm | Permalink

    While I don’t wish any harm on our neighbours the reality is that the continued existence and expansion of the eurozone is a deadly threat to our longterm national interests, and rather than helping to Save The Euro we should be doing everything we possibly can to destroy it, or failing that to at least contain it.

    It was an act of monumental folly on the part of John Major to agree that the EU could start to issue its own currency: he should have used his veto to prevent that happening.

    Now there has been another act of monumental folly on the part of David Cameron, who has agreed to a radical treaty amendment to legalise eurozone bailouts and so strengthen the eurozone, without demanding any quid pro quo in terms of other treaty amendments to protect our national interests.

    Contrary to an erroneous statement by Peter Oborne in a Sunday Telegraph article today, this is not something which is expected for the coming months – it has already happened, at the March 24/25 meeting of the European Council.

    As stated as item 16 on page 7 of the official Conclusions from that meeting, here:

    http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/120296.pdf

    “Recalling the importance of ensuring financial stability in the euro area, the European Council adopted the decision amending the TFEU with regard to the setting up of the European Stability Mechanism. It calls for the rapid launch of national approval procedures with a view to its entry into force on 1 January 2013.”

    Moreover both peers and MPs pre-authorised Cameron to support that treaty amendment without demanding any quid pro quo.

    In particular, Cameron should have insisted that if there’s going to a treaty amendment to strengthen the eurozone, and other measures to intensify EU economic control, then there must also be a treaty amendment establishing a formal mechanism for a country which has already adopted the euro to make an orderly withdrawal if it so chooses, and another treaty amendment to relieve EU member states which are still outside the eurozone of the legal obligation to join it as soon as conditions are deemed to be correct.

    At present only the UK and Denmark are free of the treaty obligation to join the euro; one by one the other EU member states, present and future, will be pushed or pulled into the eurozone, and none will ever be able to leave once it has joined, so where will that leave the UK?

    The answer is that the eurozone will not only survive but continue to expand, until eventually it swallows us up.

  19. Stuart Fairney
    Posted June 5, 2011 at 4:24 pm | Permalink

    “Of course it is in our interest that Euroland prospers, avoiding a banking crash”

    Is it? I wouldn’t care two hoots if Greece* crumbled and with it the Euro and a lot of European and come to that British** banks. And if the Euro does go down an awful lot of hot money looking for a European base might pile in to London thus recapitalising some banks.

    The sad choice facing the European government and the ECB is let Greece fail or print. Neither solution is acceptable to them, so watch out for the second.

    * with my comparatively strong Sterling there would be some lovely fire-sale assets to be had in Greece, ditto Spain, Portugal and Ireland.
    ** what ever that means, but please, please no more bailouts, let ’em die and liquidate the assets.

  20. Stephen Almond
    Posted June 5, 2011 at 5:18 pm | Permalink

    John,

    You’ve got me convinced. Have you convinced Cameron?

  21. Kawasakifreak
    Posted June 5, 2011 at 5:28 pm | Permalink

    The Eurozone dellusion continues to be played-out.
    French & German Banks have significant interests in ensuring ClubMed countries remain in the Eurozone at (almost) any cost. Together with a political elite with over 30 years ‘investment’ in the ideal of a single European state – any thought of retrenchment is unthinkable.

    This protracted & costly fudge to save Greece’s forced exit from the Eurozone will continue with (I hope) limited involvement from the UK.

    The Greek Govt is a mix of Socialist & Communist members – no surprise then that this Country has a long history of defaulting on previous national debt & generally living well beyond it’s means – aswell as being found to have lied about the state of it’s public finances in order to be accepted into the Eurozone !

    No country with Greece’s systemic fiscal problems should be allowed to survive within the Eurozone – Greece can’t even afford the interest on it’s debt anymore !

    This whole process will continue to make a mockery of the founding principles of probity & transparency in Govt finances on which the concept of a ‘hard’ Euro currency was based.

  22. BobE
    Posted June 6, 2011 at 8:22 am | Permalink

    The 5 year tractor plan continues apace.

  • 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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