Month: June 2011

 

The Euro is now into the phase of its development where people will ask ” Where is the democratic accountability? How does the Euro scheme secure the consent of people under it?”

We have witnessed elections in Ireland and Portugal. In both cases the public threw out a government associated with economic failure. In both cases they had to elect an alternative signed up to the agreed EU/Euro policy organised by the outgoing government. The personnel of the government changed,  but the essential features of the economic policy could not. The new government was told to stick to the terms of the loans, to submit their figures to the EU and the IMF, to seek to hit all the agreed targets. The role of the government is to explain the ways of the international bodies to their people and to tell them to agree to it.

Greece is a bit further along the path of an EU/IMF recovery programme. So far there is precious little recovery on offer to the Greek people. There are riots on the streets. The politicians are having trouble putting in place a government that is stable and convincing. The rebellious people know they are not dealing with a government that has any power to change things for the better. They revolt nonetheless, making the position worse, and putting off foreign capital and investment which their country needs. Their government lacks the will or the voice to persuade them to behave otherwise. The government is unable to convince them or many of the politicians that the present plan is the right one and it is going to work.

Eurostates have too much government, with government from both the EU and the member states level. In times of crisis they do not have accountable government. The national government gets the blame, but says it does not have the powers to change things for the better. The EU has the power, but does not have the direct engagement with the electors to persuade them it is doing the right thing.

In “Just Say No” I listed ten errors in a common economic policy. They included

“You cannot have a single economic policy  without a single budget

There isn’t one exchange rate that is right for London (Athens) and Lisbon (Berlin).

There isn’t one interest rate that is right for Manchester ( Corfu) and  Marseilles.

There is no single political system to take decisions and explain them to electors”

At the time of our debates to stay outside the Euro people concentrated on the first three. In some ways the fourth was the more important.  Euroland will now pay a high price in lost jobs, angry people and possible political disarray for the failure to grasp that a single currency needs a sovereign to take the crucial decisions and explain them to people who think that sovereign has a right to govern them.

 

          The UK has 2.9 active armed services personnel per 1000 people in the country. Greece has 14.6 active service personnel per 1000 people. The Uk is busily cutting its armed service numbers to get its deficit down. Greece is seeking bail out loans from the rest of us to pay the wages of their armed forces.  Is this a sensible approach?

 

            UK governments have a weakness for bail outs which often  don’t work.

              Years ago the bail outs went to distressed nationalised industries. Regularly the great state owned companies found they could not live within the often generous totals of money the Treasury offered them. The managements became adept at working out how to force the hand of successive governments. They demanded more money and threatened unfortunate consequences if it was not forthcoming. It was usually granted. The performance of these big industries fell further and further behind the world’s best. The customers got a bad deal and the taxpayers got a bad deal. Many of the employees lost their jobs.

             In 2007-8 some of  the banks became state pensioners. Governments  in panic foolishly decided to prop up banks that were too large or which had failed business models. Instead of forcing them to sell assets, slim down, cut costs, and take other action appropriate to their errors, they were transferred in all their imperfections into taxpayer ownership. The UK government  should have protected UK depositors but not whole banks. We are still paying the price for this.

          Now in 2010-11 government is helping bail out whole countries that have made a mess of running their affairs. In some cases, like Ireland, the state needs a bail out so it in turn can afford to pay for the bail out of its banks. Governments which thought that transferring damaged assets from banks to governments would solve the problem, now find it is difficult even for the state in some cases to afford the losses. In other cases European states need bail outs because they are in the wrong currency at the wrong exchange rate. Greece cannot compete as an economy and provide all the jobs its citizens need because it is locked into the Euro at too high a rate. In  consequence it needs to pay much more out in unemployment benefit and the like. Now it wants others to lend it the money.

             The message is bail outs do not work. You need to solve the underlying problem. In the case of the nationalised industries they needed to concentrate on winning more business and raising their efficiency. They now do this in the private sector without recourse to public subsidy.  In the case of the banks they need to sell off businesses and assets they cannot afford and cut their costs. Public ownership has delayed this necessary process of adjustment, allowing them to continue with high salaries and ownership of too much. Now governments are in the queue to be let off having to make some sensible but tough decisions.

           If a country is in the Euro and is not competitive it needs to leave the Euro or cut its costs drastically. If a country is spending too much it needs to cut its spending. If a country cannot grow in the Euro it may have to leave. If a country is being placed at risk by supporting too many large banks, it needs to work on an accelerated programme of asset sales, cost cutting and reorganisation of the banks.

                  Always seek to resolve the udnerlying problem. Bails outs may buy you a few months. You end up with the same problem, and even more debt to pay off.

               This week the government announced its intention to put through a Statutory Instrument approving £9.4 billion pounds of new capital for the IMF. The draft SI is a very short document, pledging 9.416 billion SDRs. The document does not explain to MPs that one SDR is about the same value as one pound sterling. We are awaiting news of how and when this matter will be considered. The government does have to allow a debate and a vote, though it may opt to do that in committee rather than on the floor of the House.

              Doubtless when we get to the debate we will be told that this is contingent capital, that the IMF lends it and expects to get it back. We will be reminded that the UK is obliged to fulfill her international obligations as a full member of the IMF.

             I have two main worries with this proposal. The first is I object very strongly to the IMF becoming the cash machine of last resort for the failing Euro. We could easily lose substantial sums through this activity. The IMF has been lending to Euro countries at a little over 5% when the market says they should be paying twice that. Many in the markets think Greece will have to renege on its debts one way or another.

               The second is, this is not a good time to ask us for more money. The UK  government is rightly fighting the battle of the bulge on its own borrowing habits. Having to borrow more to lend to ailing Euroland economies through the IMF is not helpful to the UK programme of debt and risk reduction in the national accounts.

               Loans made to Ireland at around 5% are now worth substantially less if you marked them to market prices- at least a third off.  Money lent to Greece at 5% ish is now worth well under half the amount lent, if you wanted to sell the loan on. When governments take on markets they often lose. The danger is governments simply take the risk onto the taxpayers shoulders. The risk does not vanish.

               Our approach to demands to contribute under IMF and EU programmes should be different. I am not suggesting that we leave the IMF. I am proposing that we lobby other countries and the management, to get agreement that trying a further bail out for single currency casualties is not a good idea. The IMF was not set up to bail out rich countries that have made a major policy mistake. They should advise any such countries seeking money from them to leave the Euro or take other appropriate action to put right the source of the error. The IMF does not need so much new capital if it avoids future Euro bail outs.

            Within the EU our stance should be strong and determined. As a non Euro member we should make no contribution whatsoever to Euro bail outs. That requires renegotiating the Darling pledge – so be it. It would be a very good issue to dig in over. Euroland needs UK support to allow it to integrate as much as it has to. The price for our agreement should be less power over the Uk, and none of our money for the Eurozone.

 

               There are two answers to the cruel questions  posed to Greece by the single currency and the Euro wars. The simple and best one would be for Greece – and a few others – to leave the Euro, re-establish their own currencies, devalue and price themselves back into work.  This remains unlikely, given the huge political capital invested in the Euro scheme.

                  The second is for the Euro zone to press on with the creation of a country called Europe – the UK and other non Euro members would opt out of all the necessary new powers and preferably some of the existing ones as well . The core members of the Eurozone would then have to subsidise and underwrite the weaker areas within the new country, as any other sovereign state does for its poorer areas. Areas with low incomes and high unemployment within the sterling currency union cannot devalue, so they receive sustantial cash transfers from the more prosperous and more fully employed areas. That is what has to happen to make the Euro work.

             When I wrote two books to urge the UK not to join the Euro, I thought a Euro issued in too many EU countries would do a lot of economic damage. We had seen the dry run for the Euro in the form of the Exchange Rate Mechanism. It wasn’t just the UK that was forced out. The ERM was the single currency you could leave before the damage became permanent. The single currency is the ERM without an exit, which is why it was always going to be so damaging.

            The UK should tell both the IMF and the EU that we are not putting a penny more into the failing Euro countries. They do not need more debt. They need a resolution of the fundamental flaws of the Euro scheme. It’s double or quits time. Either German and French taxpayers accept their obligation to subsidise Greece, or Greece has to leave. It also means the EU(euro section) needs to develop its rapidly emerging control over Euro member economies even faster. If rich areas in the zone have to subsidise poorer areas, they will expect control over the budgets and borrowings they have to subsidise.

 

Letter to Dr Roy Spendlove,

Miscellaneous Projects

Dear Roy,

               I am writing to ask you to accept a revised remit and title for your Division. The Coalition government as you know is dedicated to deficit reduction and to managing the public sector better.  Ministers are worried there will not be enough special projects to keep your Unit as busy as before. I have pointed out that there are two very large computerisation programmes at the Revenue and DWP that could go wrong, and have reminded them of their wish to see large projects like Crossrail and HS2 pursued actively. They are nonetheless concerned that your Division might not add value as they wish. They do wish to abolish it.

               Ministers have agreed that we do need a Division that supervises transition to smaller and more effective government, as they put it. They see the Revenue and Welfare computer systems as part of that process as we seek to bring all private and public sector payroll and benefits under a single central system and control. I have suggested we call such a divison the Division for transition to smarter government. Ministers have provisionally  accepted my advice, and would agree  that you should head it. Whilst they wish the new Head to go through a process of identifying what staff are needed, they have not ruled out using members of your existing team. I suggest you do the best you can, and  recommend that you do not increase the total numbers in the first instance. If subsequently as I fear the workload goes up we can sort that out when we alert Ministers to the good news that we are making progress with their transition agenda but will need extra  resource to do so.

           My own Unit has successfully transformed from the Unit for coordinating cross cutting initiatives and partnerships  to the Unit for greater efficiency, quality and resource control. We have taken over a couple of quangos, so we have the extra staff we need for the very demanding workload. Your new Division will continue to report to me. I will need a Deputy or two to help me handle the extra reporting from the new people.

           In urging you to accept this change I would stress that I do understand worries about the public spending settlements and direction of travel. However, to encourage you to take the role, I would also point out that Ministers have grown into office well and are reasonable when you explain the facts of public sector life to them. The civil service has had a particularly fine week this week. We have helped the government change and tone down its health proposals. We have explained to them the force of EU law on recycling, and helped them drop expensive proposals for restoring weekly bin collections. We have reassured them of the need to support the work on bails out for Greece in the EU and IMF. They understand the UK does need to put more money into the IMF so it can help Euro area economies at risk.  I think they started to show real maturity when they dropped their forest proposals. The Archbishop has been helpful in reminding them of the alternative view to their own. The first year of the government after all the debate did see a 5.1% increase in current spending in cash terms. We will continue to urge Ministers to be more realistic about spending levels for future years. It is difficult to believe they will keep cash spending increases to below 2% in the two years prior to an election.

     As you will appreciate, this is a personal letter so I am sending it by a different route. I would appreciate it if you would treat it as such.

Yours

Lucy Doolittle

Director,

Unit for greater efficiency, quality and resource control.

 

                We hear this morning that the Chancellor intends to take action to prevent a future government bail out of banks. He will have many supporters for his aim.

                 We learn that his chosen method is to require the large banks to ring fence their UK domestic deposit taking and lending activities. The Regulators could watch their solvency and liquidity more easily, and  ask for them  to be spun off if other parts of a bank get into financial trouble. The implication is there would be no bail out for the rest, if the trading, investment banking and overseas banking got into trouble. 

                 As the one MP  who advised the last government not to bail out the large conglomerate banks I have no problem with that. I then argued that they should have forced the banks in trouble to sell off their investment and overseas banking arms, and lent sufficient cash to the smaller domestic banks against what security they could take so depositors did not lose out. It appears that we are now moving to such a solution for any such future disaster.

                   The Chancellor should also remember that the last crash reflected bad central banking and regulation. We do not need primarily to change the commercial banks, but to change the way we regulate, conmtrol and act as a lender of last resort. The last crisis resulted from being too lax in 2005-7 and being too tight in 2007-8. It flowed from wrong interest rates, wrong cash and capital ratios, and above all  from leaving money markets starved of money at a crucial time which was bound to bring certain banks down. The speech should talk to the authorities as well as to the commercial banks if it going to address the big issue.

               Public money should not be put at risk by buying shares in damaged banks. No bank should be too big to fail. In  2008 they could have insisted on asset sales, cost cutting and other means of generating cash to avoid the need to put taxpayers at risk. The Coalition government should move quickly to return the banks to the private sector, as we have discusssed before. Livinjg wills for large banks is part of the answer.  Better central banking is the other part.

              The  Chancellor could also up date us on how his growth strategy is going, and what he thinks of the squeeze the current inflation rate is causing.

 

               Many busy people only get a bin collection from their Council. They don’t have children at school, are  not around when many of the leisure facilities are open and don’t need social services. Of course we benefit from others  using these services and should be pleased that people in need and pain can get help. However, it does make the Council Tax bill even more unpalatable if the one service you have to use is only available fortnightly.

             We are now told weekly bin collections are too dear. Why is it that bit of spending that some Councils think  is over the top, the one bit that many taxpayers can see and support? Why can’t they cut out the many types of spending that annoy us – all the busy body interfering, the high overheads, the endless changes to the road space. Localism apparently requires that the government allows Councils to decide the standard of bin collections. So be it. Some of us think just a weekly collection is poor, and will be distinctly unimpressed if the weekly bin collection now heads the list of visible and unpopular cuts which recommend itself to Councils out to make a political point.

 

                   Outside central London the commercial property market is not in a happy state. Many of the High Streets I visit have too many empty shops, and too many others let out to temporary tenants on lower rents just to fill them somehow. There are numerous office properties available, with some landlords keen to put a tenant in  to pay the rates and make some kind of contribution. The Southern Cross Care Homes problem partly revolves around property values and rents. The company itself wants lower rents from its landlords to be able to live within the fees and charges it can levy on the public and private sectors for its patients. In Wokingham, typical of many market towns, the smaller traders are asking for rent or rate relief as times are tough.

The problem goes back to the credit excesses of the 2005-7 period in many cases. Commercial property values became overextended, as banks responded to the low interest rates and the lack of regulatory bite on bank balance sheets, lending ever larger  sums against ever more extended valuations. They justified it by insisting on high rents, and looked forward to upwards only rent reviews yielding more profit later. If rents fall too far, or if there are too many voids, these property values which still underpin a lot of bank lending will be forced down. As the taxpayer owns a chunk of Lloyds and most of RBS that means more losses for taxpayers.

The government says it wants business outside London to flourish. To do so we need an affordable pattern of rents and rates for business premises. Rates are a big part of the problem, now accoutning for a substantial proportion of total property costs in many cases. For landlords empty property rates are a killer. In many cases the last thing the landlord wants is an empty property, so the incentive of high rates is scarcely necessary to seeking a tenant.

High rates do act as a further incentive to cut the rent more to avoid having to pay the rates. In some ways that is a good thing, but it means even more downward pressure on the property value, which hinges crucially on the rent but not the rates. This in turn makes banks more nervous about new lending, and means larger losses for taxpayers through the banks we were made to own.

I have suggested in Wokingham where the Council and a developer are planning a redevelopment of the shopping centre that they go over to a mixture of fixed and turnover related rents. The base rent could be set at a low level to attract more tenants, and to give start up and small businesses more of a chance of getting going. The landlord could rely on the turnover related part of the rent for more of his return. This would ensure successful large multiples paid a fair rent for the pitch based on their success. As the smaller and newer shops picked up speed they too would start to contribute a sensible rent. The landlord might wish to keep the right to terminate rental agreements where after an agreed period it was clear the retailer was not going to be paying any turnover related rent. Such a split system would also give some flexibility in valuing these assets, as valuers would have to make a prudent forecast of the turnover related element.

It would be good if the state could make its contribution to the revival of High Street businesses and office park enterprises by reducing rates. It looks as if, as so often, it is the private sector which has to take the whole hit. Lower rents will speed recovery. It is taking time to achieve them, and it will have a further impact on banks and bank credit. The sooner the adjustment is made the better. It’s a pity we end up with the state taking an even bigger proportion of the tenants payments for proeprty.

 

               Understandably there is concern and even fear about the sharp rise in energy prices we are experiencing. It’s been a big enough gas price hike for a Scottish Minister to posture over the topic, and for the UK Parliamentary Opposition to start raising questions. Many of these politicians should be welcoming it, as they were the ones who told us we needed to burn less fuel and who invented policies to put prices up so we were forced to burn less.

              I was one of the small minority of MPs who did not vote for the Climate Change Bill on 2nd and 3rd Reading. The last government pushed it through to general political acclamation. I was worried about the impact the market intervention would have on fuel prices for domestic customers who need to keep warm, and on business who need energy to produce.  I did not get elected to Parliament to foster “fuel poverty” or undermine UK manufacturing. It was always going to presage dearer energy prices. That, coupled with the EU enthusiaism for renewables, was always going to threaten to export energy intensive business elsewhere. They  wanted to impose a carbon tax on the cheapest ways of generating power, and subsidise or underwrite the competition from dearer energy. The chickens are slowly coming home to roost.

                    It was interesting to see Charles Moore given the centre page of the Sunday Telegraph to raise some worries about the UK’s pursuit of dear energy. He echoed the concerns we have often discussed on this site. How can you have a policy to foster and encourage more manufacturing, at the same time as having a dearer energy policy? Do you expect to even retain your high energy using industries like glass making, cement, tiles, aluminium smelting, steel making and the rest if your energy price rises well above Asian competition? Do you think engineering and assembly companies will want to invest in extra capacity here if energy is going to much dearer? Even in these businesses energy costs may be higher than employee costs in properly automated plants.

          When we had the debate on settling the carbon price I was asked my view  by the government. I said the correct carbon price if you wanted a competitive UK open for business was zero. They settled for a compromise, saying that they would review the quite high UK  price if it threatened our competitiveness vis a vis the rest of the EU, and they would seek to keep in line in due course with other European countries. That may not be good enough, when the true competitive threat comes not from Greece and Portugal, or even from Germany and France, but from India and China.

          Fuel efficiency and self suficiency in energy are two excellent aims. I am all in favour of saving more and pursuing much more fuel efficient processes. I am not in favour of exporting energy intensive business out of the UK by settling for much higher prices here than elsewhere. That is a false greenery which does the planet no good if you believe the global warming theory  and sells the UK short when it comes to jobs and prosperity.

       I was pleased to hear today that a government adviser is thinking of proposing that  global warming is removed as part of the national curriculum.