Month: November 2011

 

Some say it is democracy – but not as we know it. It is true the Euro is a great device for bringing down EU member states governments. Recent victims include Ireland and Portugal, with the Greek government hanging by a thread.  Electors can still change the people who are in a government, and sometimes get more opportunities to do so thanks to the rolling economic and political crises the Euro causes. The difference is they do not get to change the policies.

Electors swept aside the governments of Portugal and Ireland. They might be about to do the same to the Spanish government. The French President now has a big fight on his hands to survive. The Euro is devouring the governments which support it, only to see them replaced by more governments who support it, wanting their share of the common economic punishment.

The officials, Central Banks, IMF, EU Commission and other unelected bodies now have more power and elected governments much less. When a Euro area government falls in a member state in economic trouble, the incoming new government has to subscribe to the terms of the “recovery” plan already in place. Ireland, Portugal and Greece are on financial support schemes from the EU, Euroland and the IMF.  Their governments believe they  have no choice, and meekly follow the policy arranged by the government which they displaced. Italy is moving towards that position, accepting IMF surveillance of its economic policy and agreeing to cuts and tax rises which Euroland requires.

Democracy relies on the consent of the governed. The majority who support the government are broadly happy, because their team is in power. The minority who want a different government are usually happy with the system, because they know they will have a future opportunity to change government if the government in power disappoints more people . Coalitions complicate this position, because electors often get no chance to vote on the Coalition programme. As a result they need to work harder to gain and  keep consent to their programme.

 A healthy democracy needs a strong opposition with a different policy approach. The Opposition can lobby and campaign for the government to adopt more of its views and ideas. The government may do so if they prove to be popular, or if the government’s chosen course is not working. They can put it all to the people in a General Election, and if they win they can then have  opportunity to implement it.

Strong opposition with an alternative programme is important to national hope. Those who don’t like the government can live in hope of change. Those who don’t like individual policies of their current government live in hope that Parliamentary action  by the Opposition will force a change of policy anyway.

In crucial areas of government policy that help determine prosperity, living standards, inflation rates, returns on savings, jobs, and business success, the level of public sector spending and borrowing, the Euro scheme takes most of the decisions away from democratic debate. The individual  Euro member state can no longer call the shots and make changes in these crucial areas. The Opposition in Greece cannot offer a different view on  interest rates, borrowing, public spending and the rest because they have had to buy into the terms of the EU/IMF control of the economy.

The Euro destroys a big part of national democracy. The issue then is how do people change the policy if it is not working or they do not like it? Democratic consent relies on the ability to change policy as well as personnel and on  the hope of a better tomorrow. Euroland politicians have a big task in maintaining  that consent. Blocking the Greek referendum was a political mistake.

Euroland politicians also have a big challenge to set out a compelling vision of how this can work and why it might be better. If they do not allow sensible democratic opposition and proper consultation of the people affected by their one size fits all policy, people will find other ways of dissenting. That is how we have reached the point in Greece where many do not see the need to pay their taxes.

 

      81  Conservative MPs voted for the referendum motion. 9 more abstained, because they disagreed with the government’s stance.

        However, some of those who voted “No” to a referendum did not necessarily do so because they endorse the current approach to the EU. My neighbouring MP, the Conservative Dr. Phillip Lee has made an interesting statement this week in a local newspaper. He says  his decision to vote “No” “had nothing to do with the Goverment’s whipping operation”. He voted “No” because he feared  a three way referendum as proposed  could mean “no  mandate for withdrawal (from the EU-ed) and a cause in which I believe would have been set back for a generation”. (Wokingham Times  2 November 2011)

           I wonder how many others who voted “No” feel like that?

 

            Some people think there will be an immediate vote on IMF funds in the Commons. My understanding  is that the government has full authority from the 11 July vote to almost double our subscription to the IMF. No new enlarged numbers seem to have been agreed at Cannes.

           I attended the Committee which considered the increase in money Order  on 5 July to raise concerns along with various other Conservative colleagues. Parliament  required a vote of the whole House, despite the Committee passing the Order. This was taken on 11 July.

           The government got approval for an 88% increase in our subscription to the IMF,  to take our total commitment to around £20 billion. The vote was 274 in favour, and 246 against.  Those against  included 205 Labour MPs and  31 Conservatives.  225 Conservatives voted with the government on a 3 line whip to approve the measure, supported by 48 Lib Dems.   86% of Lib Dems voted, 84.3% of Conservatives, and 80.2% of Labour MPs.  I voted against.

 

I have received a copy of a letter from Dame Lucy Doolittle  to Dr Roy Spendlove:

 

Dear Roy,

I am writing to reassure you. I know how worried you were that the government might cut spending too fast, and might take a combative approach to the EU. I think we can now be reassured that our strategy of cautious  accommodation of Ministers is working.

On the spending front it is encouraging to see realism in the latest revision to the pensions proposals. Allowing  people within ten years of retirement to keep their original deal is progress. You and I must not of course get involved in the Union response, but this may not be the last tweak to the system.

The useful contribution made by overall public services to growth in the last quarter has passed off with little remark in the press. We must make sure Ministers understand that this is still a case of cuts, with highly visible ones in areas like Defence and welfare. Ministers seem to come to sensible moderate conclusions when we suggest taking  the raw edges away from   policies like the forest sales and the capital spending cuts. I was pleased to see this issue of cuts has come out into the open over border controls, as we need to make sure the background to all this is understood, whilst being attentive to Ministers’ wishes. The problem comes if Ministers wish contradictory policies, where we need to sort it out in advance by securing the funding needed.

The March budget relaxed the envelope by £34 billion over the four years of the Plan. I would expect sensible proposals to relax it further this autumn will be received positively. Ministers are likely to want further jobs related announcements, and a stream of “shovel ready”projects to announce, so we must be ready. They are also keen in the Treasury on Credit Easing, which may be a useful vehicle for us to use for a variety of good purposes. I would like you to take a close cross cutting interest in this matter, and to be  innovative so we can get the full benefits from any extra money it may bring in.

I do think Ministers have shown statesmanship over the difficult EU issues that now confront them. We need to keep up the pressure to be in the room, and to keep Ministers committed to involvement in the stresses and strains of the Euro area as well as the wider EU.  I think the Euro area choice to go for  more IMF involvement is inspired, and I am pleased Ministers are taking this up. The UK can now pay to play, whilst paying through a more trusted intermediary. Germany too likes this route for her own reasons, so it makes a UK-German rapprochement over certain key features that much easier. I do hope you and your team can offer good positive  back up to any Ministerial wish to stay engaged, as this is a crucial time for the relationship. We have a special duty now to nurture it.

The UK’s official position is to be in favour of a substantial move to stronger political and economic union by the Euro zone. We must help Ministers ensure that we have seamless working arrangements with the zone for the UK. I think in due course this means the UK accepting more of the common positions, but I would suggest this is not the moment to make that case. Today we must concentrate on keeping the UK there as an important EU 27 player, and accepting the need for much more integration in the zone.

It is good to see how well  Lagarde has made the   transition to a serious working official. She has handled the need to use the IMF to assist the  Eurozone well, with no sign of a backlash from poorer countries. I am also hopeful that the new Head of the European Central Bank will steer it towards a more activist policy. His interest rate cut is a useful first step, but of course much more bond buying and quantitative easing will be needed.

Yours in EU solidarity

Lucy

 

Sometimes it is best to do nothing. It was good we were spared the high flown rhetoric that they saved the Euro and the world. It was even better than no new money was committed to bail outs. The IMF subs were not quantified and remain to be worked out next year.. The US President let it be known that Euroland is rich enough to pay its own bills. The one positive change was the Chinese promise to move their currency closer to a market rate.  If they wish to save the Euro they need to balance budgets and export more. Shuffling more IOUs round is not going to solve it.

 

On 16 September 1992 the EU gave up on the narrow band Exchange Rate Mechanism. Italy was forced out of the narrow bands. Spain, Portugal  and others were also unable to hold their currencies against a strengthening DM.

The Euro is the ERM it’s more difficult to get out of. The ERM still left countries free to set their own interest rates and budgets. They had to juggle their policies to try to keep confidence going in their currencies. The failure to do so was pretty comprehensive, as the market ganged up on currency after currency. The ERM was meant to be a dry run for the single currency. Instead it set it back. When they did go ahead they simply ignored the fact that several leading players in the Euro had been unable to remain stable against the DM in the ERM days.

The ERM should have been a warning to the founders of the Euro. If markets could destroy a currency locking device, why did they think markets would leave a single currency untouched? They obviously forgot that the debt markets were still open. Investors and speculators can make their views known through the bond markets, just as they did through the currency markets for the ERM.

I find it sad that some of us have had to spend so much time and effort trying to explain why the ERM would not work, and now trying to explain why the Euro cannot work in its current form. It’s bad enough having to do it once. Having to do it twice is worrying. What part of the ERM experience did they not understand? Why do they think the debt markerts will now behave differently from the currency markets? It is after all at base the same argument. Economies have to be in line with one another for the project to work. If countries become uncompetitive against Germany – as they did and as they are again – there needs to be some way to relieve the pressure in the system.

The G20 is considering an IMF expansion. The IMF usually promotes a programme of budget deficit reduction linked to devaluation and appropriate monetary policy and interest rates, set by the sovereign government it is assisting. Euroland countries do not have the ability to devalue or to set their own money policy. This makes it difficult to see how IMF programmes can work. The IMF does not lend to California or New York, so how can it lend to Greece or Portugal?  I would prefer a Euroland fix of what is a Euroland problem.

 

 

 

             The untimely intrusion of democracy into the best laid plans of Euroland may have left some leaders thinking today you can have too many summits. This was meant to be the summit where Euroland told the world it had solved its problems, if only the Chinese and some of the others agreed to lend very large sums to complete the fix. Instead this may be the summit where the rest of the world in private turns critical of the way Euroland is running its affairs.

             I would like to hear an apology from the leaders of the single currency. It is now doing visible damage, not just to some Euro area countries, but also to the wider global economy.

             I would like them to say sorry for setting up a single currency long before they had brought their various economies into line. They broke their own  sensible rules, allowing countries in who were miles off qualifying.

            I would like them to say sorry for letting members of the zone borrow much larger sums than the rules allowed, imposing no discipline on debt addicted governments.

            I would like them to say sorry for thinking that much poorer countries than their own would get out the cheque book and pay for their excess spending, through the IMF and by direct loans from China and elsewhere.

             I would like them to say sorry for running a monetary policy which created large property bubbles in countries like Ireland and Spain, weakening the banking systrem.

           I would like them to say sorry for failing to demand sufficient cash and capital in the banks, and for publishing favourable stress tests which turned out to be wrong. 

               I would like them to say sorry for pretending they have a 1 trillion Euro fund to fix it, when all they have is a Luxembourg company with the right to borrow money on behalf of Euro governments.

                 There can be no fix to the underlying problems until the leading governments recognise their mistakes.

                 The sad truth is you need to borrow less if you want to get out of debt crisis. Euroland still does not know how to do this. Yesterday the EFSF decided to withdraw a bond issue because it did not like the look of the market reaction.

 

              The interview I was offered on Monday to give on Tuesday after the publication of the GDP figures was cancelled. Clearly the figures were too good to make it interesting. Growth came in at 0.5%, instead of the 0.3%  forecast. The story of a double dip or a falling economy was ruled out, or postponed as the government’s critics might say, on these  numbers.

             The year’s performance is still slow. Over the last twelve months  manufacturing is down. Construction took a tumble in the third quarter of 2011. Business  services and transport were strong.

              The most interesting thing that might surprise all those commentators and media specialists who have been talking about the public spending cuts is the continued buoyancy of  public spending. Government services boosted growth in the third quarter. They are up by 1.4% for the last year in real terms.

            Meanwhile over at the Treasury I welcome the arrival of Sajid Javid MP as the Chancellor’s Parliamentary Private Secretary.  Just before getting the job he published his thoughts on the Euro. He wrote ”  the euro is an idea built on economic and political dishonesty…. there is no hope that fiscal union would save the eruo…..It would be massively undemocratic… Why should the Greeks willingly become a German vassal state?….If European leaders would only accept that their grand economic experiment has failed, the impact would be more predictable and more manageable….”

               That sounds like good straight honest advice.