In any relatively free society some people will earn more than others, some will save and invest more and more wisely than others, some will be richer than others. The system only works if a way is found to use the surplus the rich generate for themselves to assist those who are not so lucky or successful. There are many ways this happens without most people noticing.
Some socialists think the only way to do this properly is to tax the excess away from the rich and give it to the poor through the tax and benefit system. A lot of this happens in all advanced democracies.
An even more important way in many countries can be through the banking system. Rich people deposit their surplus in the banks. The banks use these deposits or savings portfolios to lend money to others who need loans to grow their businesses or to meet their living and running costs.
Rich people recycle a lot of their income by spending more. This creates jobs and opportunities for others, who in turn may become rich on the back of those flows of income to them.
So it has to be with countries in a currency union. When you have a rich country like Germany, sharing a currency with a poorer country like Greece or Portugal, ways need to be found to send the surpluses from the rich to finance the poor.
One of the main problems for the Euro area is the failure of these mechanisms to work sufficiently or at all. Conversely, in longer established currency unions like the dollar or pound areas backed by single countries, there are well honed mechanisms to recycle the cash.
Most currency unions have ways of taxing the richer parts more, to send extra cash to the poorer parts. In the UK poorer areas receive large cash infusions to pay nationally established welfare payments, to fund their health, education and other public services at higher levels per head than the richer areas, to direct regional grants and loans, and to send substantial transfers through local authority finance. There is very little in comparison within the Euro area. EU regional policies transfer a small fraction of the sums transferred in mature currency unions by central state action.
Currency unions also have integrated banking systems. People in the richer areas deposit more money. People and businesses in the poorer areas may draw more out proportionately, if they meet the tests. The banks can acts a means of recycling from richer to poorer, or more accurately from surplus to deficit companies and individuals who can meet mortgage and loan requirements.
Labour mobility is a crucial element in a successful currency union. People can move from the areas with fewer jobs or with lower paid jobs, into areas with higher pay and more opportunity. Labour mobility in the Euro area is much more limited owing to language and other barriers.
The danger in many of the ideas proposed to solve the EU’s problems is that they might just encourage still more labour mobility of the talented and successful to destinations outside the EU altogether. The Germans meanwhile complain that their bank surpluses are being sent to the poorer areas via the European Central Bank. They resist any use of a common credit status to allow the poorer areas to borrow more. They block attempts to tax Germany more to pay the bills in the poorer countries. As a result there is insufficient transfer of funds to make the currency area work, and insufficient mobility of labour owing to linguistic and cultural barriers.
May 20, 2012
Even in the sterling ‘single currency area’ there are a great many of us who are not keen on our taxes being recycled into the social security system.
As anyone with eyes to look must now surely concede, this achieves nothing more than the creation of a vast poverty trap which blights the lives of millions whilst coercively impoverishing tax payers.
Look at any dump or ‘depressed area’ Can anyone find even a single example that welfare payments helped lift out of dependence? Indeed they are probably worse now than they were 20 years ago. Lots on shiny new buildings and rich politicians yes, but the people on the ground are still trapped.
This policy is a total failure and a malevolent one at that. Even Blair (sic) got this in 1997 but then lacked the courage to do anything about when he booted Frank Field.
May 20, 2012
Too right!
Tad
May 21, 2012
Indeed it has the reverse effect in general – just reinforcing dependence.
May 21, 2012
So what’s you solution? Scrap benefits and have the unemployed turn to crime?
May 20, 2012
The rich will always recycle their money. They cannot take it with them after all. Anyway the tax system, in the UK, with income tax of 50%/45%, 40% IHT, 28% Capital gains and inflation will ensure that it is nearly all taken off you fairly quickly. This even if you invest it well.
You can only do a few things with money anyway – spend it on consumption, invest it, or put it in the bank and watch it decline in real terms with tax and inflation, or give it away. Even if you burn it you are just giving it to the state in effect.
There are of course very good reason to leave some money with the rich. They have usually shown themselves to be good at managing and investing it well (that is why they probably have the money in the first place).
Governments, as we see every day, usually waste it, incubating the feckless, on daft political EURO constructs, on PC lunacy, on over regulation of everything, on happiness indexes, parent training lessons, incubating more feckless, pointless admin jobs, quangos for mates, voter indoctrination, buying votes, the green religion and all the rest of the madness.
May 20, 2012
I see that a group of 100 wind energy companies have written to Cameron promising to invest £50Bn if he extends the subsidy scheme.
Clearly with the subsidy scheme it is largely the tax payer “investing” not the companies. His reply should be short, sweet and to the point.
Something like this government has decided not to p*** any more tax payers money down the drain on this expensive, intermittent, environmentally damaging, non ecological, ugly, noisy nonsense. Please go and find something more productive to do with your money that does not require the tax payer to fund and take most of the risks for you. Go and get fracking perhaps, coal mining and go nuclear.
May 20, 2012
Well, even the Independent on Sunsay recognises the truth now:
“Almost one in three people who voted Conservative at the last election are ready to back the UK Independence Party, or have switched already, according to a devastating new opinion poll revealing the danger posed to David Cameron by a growing anti-Europe sentiment across Britain.
Mr Farage said: “The only people who can possibly be surprised by this poll are the Tory leadership, whose head has been in the sand for such a long time, both on the growth of Ukip and the party’s absolute dissatisfaction at their own leadership on this massive issue.”
May 20, 2012
If the one in three who voted Tory in the 2010 General Election are “ready to back UKIP”, don’t you find it odd that they chose not to do so in the elections earlier this month?
Assuming UKIP kept the loyalty of the 3% who voted for them in 2010, then with a third of the Tories 36% share of the vote in the 2010 election wouldn’t you expect UKIP to be polling around 15%?
Yet the article you quoted from refers to a recent opinion poll showing UKIP support at just 7%.
May 21, 2012
Where UKIP stood they did get about forteen percent overall.
Reply: In my area they got fewer votes than in the comparable Council elections in 2008. The Greens were the big risers.
May 20, 2012
“As a result there is insufficient transfer of funds to make the currency area work, and insufficient mobility of labour owing to linguistic and cultural barriers.”
John, this diagnosis is almost certainly correct.
I am currently readin “Brussels Laid Bare” by Marta Andreasan: anybody familiar with this story knows that she was Chief Accountant responsible for the whole of the EU budget and tries to expose the massive fraud and waste at the “rotten heart of Brussels”.
And this is why the EU cannot work. They have been exposed time and again and they do not have the trust of the electorates.
Is there anyone who seriously doubts this?
May 20, 2012
It’s a pity that access to our welfare system isn’t limited by linguistic barriers.
In fact our Government produces pamphlets in a range of languages to enable people to use it.
May 20, 2012
As a natural Conservative, I assume that most very rich people are fairly good eggs. Admittedly I do not get asked to a lot of their banquets and hunts, but I let them get on with it like I do the Masons, the Muslims and the We Frees.
(words left out-ed) I have bumped into two really nasty very rich self made men. You had to watch out the whole time in case they swindled you. Both would have watched you die in the gutter.
I think a lot of Labour people think the rich are just like that. And lots of them actually are.
May 20, 2012
This is an excellent article and cuts through the complexity to the core of the problem.
Surely, it’s time for Germany to change their policy?
May 20, 2012
Why?
May 20, 2012
And sooner or later people will come to realise that green policies are simple another mechanism designed to enable rich countries to recycle their money. Only in this instance, there has been a new development which may yet turn out to be interesting:
“The Compliance Committee of the United Nations Economic Commission for Europe (UNECE), which enforces the Aarhus Convention to which the EU is a party, has issued draft findings and recommendations which criticize the European Commission for failing to abide by the terms of the Convention with regards to the determination of its renewable energy policy.
The Compliance Committee found that the EU did not comply with the provisions of the Convention in connection with its programme “20% renewable energy by 2020”, and its implementation throughout the 27 Member States by National Renewable Energy Action Plans (NREAP). In particular, the Committee opines that the EU did not ensure that the public had been provided with the necessary information within a transparent and fair framework, allowing sufficient time for citizens to become informed and to participate effectively in the decision process.
The Aarhus Convention requires that public participation occur when all options are still open, not when policies are already set in stone. Furthermore, the authorities have to ensure and document that in the resulting decision, due account is taken of the outcome of public participation.”
http://wattsupwiththat.com/2012/05/19/eu-violates-aarhus-convention-in-20-renewable-energy-by-2020-program/#more-63928
“A can of worms has been opened …”
May 20, 2012
Without in any way trying to diminish what Pat Swords has achieved here, the reality is that even if the EU’s Court of Justice gave a hearing to a case about this it would not give what most of us would consider a fair hearing.
Its decisions are invariably weighted towards furthering the process of “ever closer union” mandated in the first line of the treaties; and in this instance it would no doubt refer to Article 191 of the Treaty on the Functioning of the European Union, which commits the EU member states to:
“… promoting measures at international level to deal with regional or worldwide environmental problems, and in particular combating climate change.”
On page 132 here:
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2010:083:0047:0200:EN:PDF
That last phrase, “and in particular combating climate change”, was deliberately introduced as part of the package of treaty amendments in the Lisbon Treaty, and indeed quite a lot was made of it when drumming up support for that treaty during the campaign of the second Irish referendum in the autumn of 2009.
As just one example of many, from the Irish Times of July 15th 2009:
http://www.irishtimes.com/newspaper/opinion/2009/0715/1224250692873.html
“Lisbon Yes will make EU fit for global challenges”
“If we want the European Union to respond effectively to international financial, energy and climate change crises we must empower it to do so”
“Energy solidarity and the tackling of climate change are included as treaty objectives.”
“In the early stages of the 21st century catastrophic climate change confronts humanity unless global warming is tackled at an international level.”
May 20, 2012
Yes, but how do we hold them to account?
Tad
May 20, 2012
You are very careful, in your last paragraph, to stay on the side of just describing what Germany, standing in for ‘the rich’, is and isn’t doing. This leads to the inference that Germany ought not to “complain that their bank surpluses are being sent to the poorer areas via the European Central Bank.” They should not “resist any use of a common credit status to allow the poorer areas to borrow more.” And quite obviously, they must not “block attempts to tax Germany more to pay the bills in the poorer countries.” After all, this is what journalists and economists have been saying in the various papers, on TV and radio.
Let’s do a little thought experiment. Let’s replace ‘Germany’ with ‘the UK’, and let’s ask if we would be happy to have all described above applied to us. Or let’s ask if Londoners would be happy to be taxed more so that ‘the poor’ in e.g. the North can pay their bills …
Happy about that? Think this is fair?
So why should the Germans be happy to pay more taxes, especially as their contribution to the EU is the largest of all EU and € zone countries?
Would we be happy about being asked to ‘lend’ the saved money in the knowledge that it will never be paid back?
Why not simply let the government/the EU and the ECB confiscate all ‘savings portfolios’ and give it away?
If we think doing this is ridiculous and damaging when applied to our country, why is it not ridiculous and damaging when applied at the level of the EU and € Zone?
Reply: I have long argued for the UK to be out of this system because I do not want UK taxpayers paying for it. I do accept that London owes money to the rest of the UK as we are one country. If Germany does not want to pay the bills she should leave the Euro.
May 20, 2012
Good comment, Colliemum. And a rather captious reply from the good Mr Redwood.
May 20, 2012
Or as Boris apparently said, (in fluent ancient Greek) if Germany wants to continue selling her washing machines to Greece she will have to keep sending money to Greece.
May 20, 2012
It wouldn’t be the first time (Germany-ed) have (intervened-ed) in Greece.
May 21, 2012
Just to clarify that I meant no insult to the Germans. I was talking of their washing machines, of course.
BOSCH appliances have CLEANED UP in Greece. It’s a matter of fact. Who can deny that ?
May 21, 2012
Yup. I’m E-K too.
May 21, 2012
collimum
Germany has done very well out of being in the Euro. I doubt if they would want to return to the Deutsche Mark because it would rocket in value and make Germany uncompetitive. If the Germans want to remain in a currency union they will have to be prepared to share their wealth with the less well off Countries. All Unions of this nature work this way.
A better example would be the UK I suppose. There was a banking crisis the Scottish RBS was a very large bank and got into trouble. Had Scotland been independent the liability for this would have fallen on them because of its Scottish headquarters. However because the UK is a currency union and has integration between the Countries of the Union the liability falls on the taxpayers in the whole of the UK. This is how a currency Union should work. Therefore if Germany wants and needs the Eurozone to succeed it must share its wealth in good times and bad.
May 21, 2012
The Euro and the captive market are of great benefit to Germany’s export led economy. I think that Germany realises this in the long run, but they will demand Greek collateral for further support.
Zorro
May 20, 2012
Socialists, (French ones in particular), need to work out for themselves how many jobs in the economy depend on having rich people who spend money.
In the UK, without the rich, most or all of the jobs at Rolls Royce, Aston Martin, Lotus, Jaguar- Landrover, Luxury Hotels, Clubs, Jewellers, fashion houses, Financial Services, Wines and spirits, yacht builders, Marinas, Travel and Hospitality—all these jobs and more would go.
Take money from the rich and you take jobs from the poor in huge numbers.
In Socialist societies the rich are the politicians, who have to spend their money in secret in case the mugs who support them find out they’ve been conned. (The average Union Leader is a good example of this).
May 21, 2012
Given that all these companies will have to switch to making more affordable products it the rich leave to avoid going bankrupt there will be minimal loss of jobs.
You also forgot about foreign markets which may be willing to purchase these high cost products, especially if a large number of rich people suddenly come to these countries.
May 20, 2012
What you miss is that Germany does recycle its money – into up to date products and factories. It then sells things to the world and recycles the profits.
Other countries choose nimby planning systems, housing market bubbles and inflated public sector pay bills. Germany isn’t perfect but it does less bad borrowing than others.
Re workers moving to Germany – don’t forget that Germany has a large pool in the ex East Germany (which remains less well off than the ex West). Countries like Poland and the Czech republic are better placed than Greece to benefit due to proximity (like Eire and UK).
Maybe all these events are teaching us something – what is the better investment – banks shares, government bonds or shares in a factory?
May 20, 2012
I am beginning to realise we have a fundamental problem with financing the world.
We have globalisation which has radically changed the game. Old fashioned economics no longer work. Our personal wish to live a financially responsible life does not help the world’s flawed system. The mechanics of balancing the finances of the world don’t work.
There doesn’t seem to be enough free ‘money’ in the world system to accommodate normal transactions. Certainly the increased price of oil has sucked money out of much of world economy.
Can anyone expand on my thoughts?
May 20, 2012
In economics nothing ever changes.
So I don’t see where you are coming from.
Of course there is enough money to finance things. There always has been and there always will be. Sometimes there is too much money as when the Spanish discovered America. In wars, it is true, countries do run out of money, like all the European powers did in the two world wars, for instance. Then they just borrow or print it.
The problem at the moment is that there are too many people living unproductive lives so countries are seriously out of their depths. USA is fourteen trillion dollars in debt, for example. The UK has just passed the one trillion mark.
Meanwhile, more and more money is spent by governments on pet projects (Olympics?) which do nothing for the economy and a lot for the masses of government employees.
England once ruled and controlled the money supply for most of the world and it worked well – until 1914. Spain once did the same – until bankruptcy set in again over wars at the end of the 16th century.
I hope that helps. I am not sure exactly what you are asking though.
May 20, 2012
Nothing wrong with being rich. Much wrong with getting rich from practices that may be fraudulent committed by questionable monopolies protected by the govt .
May 21, 2012
Indeed and EU/government regulations that are clearly designed to do nothing other than create pointless, artificial, industries in response to pressure group lobbying.
May 20, 2012
The EU was constructed purely to allow the political elites who run it to live like kleptocratic dictators. That is why the issue of how it worked in practice for national economies was always irrelevant, and is still being ignored today.
May 20, 2012
“There are two basic ideas behind the formation of the [European Community]; first, that having nearly destroyed themselves by two great European civil wars, the European nations should make a similar war impossible in future; and, secondly, that only through unity could the Western European nations recover control over their destiny – a control which they had lost after two wars, the division of Europe and the rise of the United States and the Soviet Union. ”
Source: Conservative Party Manifesto, October 1974
May 20, 2012
It would never be necessary to find ways to transfer money around if we had free markets. The imbalances would never build to a point where they caused problems. ALL the current financial trouble is caused by the socialist political system that we have been brainwashed into accepting. Every politician- even you Mr Redwood- continually argue for tweaking this rule or that regulation, a new tax or subsidy or some other far fetched idea when it is the fact that these rules and taxes exist at all that causes the disruption and mis allocation of capital.
A truly free market would liberate everyone from the burden of government and benefit every person on the planet except the legions of public sector employees who would have to find proper jobs before reaping the same benefits.
May 20, 2012
Or, to sum it up, the EU/Euro doesn’t work.
May 20, 2012
Indeed.
Another way the rich recycle their money is to give some of it away to charity. The choice of charity provides the giver the means of deciding which category will benefit while leaving it to the charity as to who (or what) shall benefit within that category. If the charity can claim back the tax then they are that much better off, and government income correspondingly less.
I guess for some wealthy donors they would rather see a charity spending their money than the government. Perhaps that way they think their money is being spent more wisely.
The Chancellor may well have other ideas. A jealous and envious Chancellor may well take affront that others are getting what rightfully is his for the taking, and the further thought that others may be judged more effective at spending it simply rubs salt into the wound.
May 20, 2012
I agree that there is a form of monetary sclerosis in the EZ. The bypass mechanisms are not up to the job of securing a free flow around the system.
In many respects current German attitudes are understandable. Many older Germans have a well justified fear of inflation. The bold, post war Erhard reforms gave free enterprise the chance to rebuild a shattered economy. West Germans worked extremely hard to rebuild it. Furthermore they encouraged, and did not destroy their Mittelstand businesses, which have been a bedrock for success – unlike the UK. From my own experience it is clear that the Buy German mentality is well entrenched – it is an extremely tough market to export to against established German competition. West Germany has also paid through the nose for unification. In the circumstances it is difficult to see how Merkel, or any other German politician, will get away with the level of transfer payments required to resolve the EZ crisis. When the German public begins to understand how much they have already commited via the ECB it will get worse for her. Furthermore, is there not a real doubt that even Germany can afford to do so?
May 20, 2012
All very sensible, but if I was a 63 year old worker in Germany wondering if I’ve enough squirreled away to see me through and am watching 25% of the Greek work force retire between 50-55 on 80% salary (not sure if those numbers are accurate or not but it’s the impression I get so no doubt Franz may think the same) I doubt I could be persuaded to see the logic in it.
It’s not that these countries are poor, by any standard all are very wealthy whose cirtizens enjoy the best lifestyles the world can offer, but that they are living wildly beyond their means.
May 20, 2012
Norman, I couldn’t have put that better myself!
It understandably irks hardworking people to see their taxes go towards supporting the feckless. The whole EU project is fundamentally and fatally flawed. It’s all very well wanting to see everyone’s living standards improve, but the EU has delivered, and will continue to deliver, misery on a huge scale – the very opposite of what it’s supporters said it would do!
After 40 years of failure, anyone might now reasonably expect them to give up.
The best test for insanity is to do the same thing over and over again, but expect different results, so we must ask ourselves the question, what is their ultimate aim?
I suspect they won’t admit the plain, unpalatable truth.
Tad
May 21, 2012
I don’t think it’s fair to call these Greeks feckless though. I have no doubt most worked hard, did a good job, and all that was asked of them. That their government offered such good deals is where the fault lies. N
ot with the Greek who is now retired at 58 after having worked hard for 35 years and done all that was asked of him, very few of us whould refuse such an offer, let’s be honest, and having planeed his retirement around his expectations is now told his pension is going to half.
I doubt whether he could see logic in Germany not helping Greece out of it’s problems.
May 21, 2012
Or worse, that in order to harmonise retirement ages he won’t be entitled to anything but unemployment benefit until 65 and now won’t be able to find another job, so these types of problems (and they are intractable) makes it unlikely bailouts can continue indefinitely.
And the French President recently announced retirement ages there dropping, how does that make everyone feel, we’re not in Europe but we’re being raised to manage the problem.
And I’ve nothing against pensioners, I hope to be one someday and for a long time, just using any one of a number of examples.
People won’t put up with this forever. It’s time policians realised that. It’s time to offer an alternative before societies fracture even more.
May 21, 2012
Not in Euro, not Europe, obviously.
May 20, 2012
When I visited Athens and Pellopenesia last year I had the impression that most Greeks had better housing, better roads, great food and climate and the shops were full of luxury goods. Perhaps things have changed for some, but I don’t see why northerners should be asked to subsidise the South. In Spain too, the standard of housing, urban development and transport seem to be higher than in the UK.
May 20, 2012
JOHN
Yes I agree money needs to be used and go round and around, otherwise it has no value.
One problem.
Every time money is spent 20% of it goes to the government, so after a few rounds of recycling/spending, virtually nothing is left to recycle.
Thus the Government now has it all to spend how they would like.
The higher the tax rate, the fewer times the Citizens of this Country can use it and recycle it.
The lower the tax rate the more times it could be recycled.
Now the most important question.
Who would you trust to spend the money more wisely?
The people who have to earn it in the first place, or a government who just takes it ?
May 20, 2012
It may be off topic, but do we have to recycle our money back to the BBC when the BBC’s Panorama programme ambushes Engelbert Humperdinck while he was working for another BBC programme?
http://www.telegraph.co.uk/culture/tvandradio/eurovision/9276789/Engelbert-Humperdinck-ambushed-in-BBC-stunt.html
May 20, 2012
So it’s all Germany’s fault and they have got to cough up, have they? If a German citizen were to ask you what advantage there was to Germany in being in the Eurozone, as opposed to reinstating the Deutschmark, what answer would you give?
Repl: My advice has consistently been to break the whole zone up. Many Germans point to the huge trade surpluses they have been able to build up through being very competitive at the Euro’s current rate, instead of facing a less competitive DM rate.
May 20, 2012
As Hilaire Belloc put it, referring to an actual event:
“Lord Finchley tried to mend the Electric Light
Himself. It struck him dead: And serve him right!
It is the business of the wealthy man
To give employment to the artisan.”
May 20, 2012
John, it is a pleasure to read your thoughts. As you a say a functional single currency requires both the transfer of structural funds and labour mobility. As I mentioned yesterday, my view is that Britain should contribute to the additional structural funds now required in the eurozone in return for a negotiated carve out of the political side of the European Project.
This is also true for the sterling area. But our problems are different. Unrestrained socialism has created areas of entrenched regional structural unemployment. We need to now sensitively and urgently deal with this. All of us if unemployed, still heavily supported by benefits, must in the future be prepared to move around the UK as and when required for work.
We must also remember that the only reason our country survived the Economic Terror of the Blair/Brown years was because millions of immigrants came to our country and were prepared to work hard often for very little. We should celebrate the fact that mass migration averted the complete economic ruin of our country.
We need to explain to our supporters that the priority is to sensitively and urgently deal with the areas of UK structural regional unemployment. And only when we have a flexible national labour market should we then start to seriously discuss migration control with our EU partners. When appropriate, I would suggest negotiating a balanced migration policy with the wider EU (one in one out) in the interests of balancing our free and open society with population density concerns.
Finally, it is us on the Tory Right that must debate and progress these important issues. I am afraid that, in my opinion, the reality is that UKIP is a narrow and negative vision for our island home.
May 20, 2012
On the Tory right you say?
I would have halted immigration from other EU countries and forced our indigenous people to take the jobs instead. That would have brought in tax revenue AND cut welfare spending.
Tad
May 21, 2012
Quite agree…..where is the evidence that ‘mass migration averted the economic ruin of the country’……Many studies have shown that there was a negligible effect on GDP per capita. Cheap immigration impeded the employment of native workers. It is not cheap if you have to pay benefits and tax credits to pay the unemployed or top up wages.
zorro
May 21, 2012
The EU do not negotiate; it is the ‘Ever Closer Union’
Remember the repeated referenda?
At least some countries had them.
May 20, 2012
Why aren’t we distancing ourselves from this Euro mess?
May 21, 2012
A large amount of the UK’s exports go to countries that use the euro or will be affected if the euro fails.
May 20, 2012
Redistribution of wealth is a clear non-starter and it should never have been considered in the UK. The Europeans had many many years in which to foster a common language in schools and it failed miserably.
The answer should have been mobility of labour but, as you say, without a common language it is not possible.
What is the answer then? Disband the Eureo as a flawed idea that was doomed to failure the moment it was launched.
No ifs and no buts, the Euro in its present form will consign poorer countries to relative degrees of high unemployment and there will be no other option in the short and medium term. Any other solution proposed is no more than emotional nonsense and is doomed to failure
May 20, 2012
Mr Redwood, I agree that Europe is too centralised and should be broken up, but I cannot understand how your arguments could possibly improve things. You do not seem to understand basic economics or even, How Banks Work, despite having worked for one in the Past.
” The system only works if a way is found to use the surplus the rich generate for themselves to assist those who are not so lucky or successful.”
– In many instances, the Rich do not generate a surplus – they socialise their losses through Taxation, taking money away from the productive economy. If the genuingly productive Rich are taxed too much, they move their profits Offshore increasing the Tax Burden on the rest of us.
“Some socialists think the only way to do this properly is to tax the excess away from the rich and give it to the poor through the tax and benefit system.”
– this is a complete non-starter as it encourages benefit cheats and subsidises bubbles such as the Housing Market. Both Labour and the Conservatives have directed Tax Money at Housing which has done the reverse of what they said it would do, and has helped inflate Housing Costs.
“An even more important way in many countries can be through the banking system. Rich people deposit their surplus in the banks. The banks use these deposits or savings portfolios to lend money to others who need loans to grow their businesses or to meet their living and running costs.”
– I am afraid this is a Fairy Tale. Only 8% of Bank Lending goes into productive enterprises that generate new Jobs. You seem to imply that Banks are intermediaries, taking in Deposits and then Lending only those Deposits while maintaining the orginal Deposit. They do not. The other point about this is that this Lending is targeted at the Housing Market which puts an upward pressure on wage claims. This also increase Council Taxes as Councils are reluctant to revise their property banding levels so that more Households have to pay higher taxes despite not having a better quality House.
“Labour mobility is a crucial element in a successful currency union.”
– I don’t believe Labour Mobility is the issue. London has attracted many Businesses and therefore, many Jobs. This has attracted people to move to London and it’s suburbs as employment opportunities are more concentrated. This puts an upward pressure on the infrastructure and draws capital and skills away from poorer areas. Some of Londons Wealth has been accumulated by drawing money away from the rest of the Country, so we have a more unbalanced economy. Surely you mean the problem is that money should redirected back to the poorer areas to redress the balance and encourage production in a decentralised economy. Your attitude seems almost communist, ie. We should have large Centralised areas where people congrugate to (like London, or Frankfurt in Germany) and money should be directed at these areas making people move – forgeting about Family stability in smaller communities and children’s education. Are you in favour of breaking up the Family unit?
“Rich people recycle a lot of their income by spending more. This creates jobs and opportunities for others, who in turn may become rich on the back of those flows of income to them.”
– Trickle down economics is another system that doesn’t work and only benefits those who have the advantage of receiving the money first. The Rich tend to buy foreign goods and contribute to inflated Housing Market. Is your plan to increase more tax revenues towards the Rich in the hope that a few crumbs will drop to the floor for the rest of us? Banks received £375 billion of money created by the Bank of England that could have been spent directly into the economy but was sucked up by a Banking System that threatens us with a chronic shortage of credit money. Many of the Rich are still paying themselves massive bonuses solely due to the enormous subsidies that the British Tax Payer has been duped into providing them. Their private bonuse are paid for with public money, and they do not even have the decency to lend to productive enterprises. Look at the Bank of England Report for 2012 -Chart relating to Lending to SMEs, if you don’t believe me.
May 20, 2012
You blur transfers of cash and wealth. Lending cash (by say Barclays Northumberland, said cash having just been taken on deposit by Barclays Kent) is no big deal because of course Barclays will want its lending repaid so no direct transfer of wealth takes place. For a transfer of wealth we are talking gifts (by way of tax or otherwise) and it continues to be the case that Germany would, and in massive amounts, have to give rather than lend to Greece for the Euro to be saved. Why Germans would want to do this when the Greeks and Germans despise each other with very little interbreeding, have long memories, speak differently-based languages and have different cultures and climates, with one making BMW’s and the other growing olives is, except in the world of obsessed fantasists and the likes of Lord and Lady Kinnock making fortunes achieving nothing or worse in Brussels, I have no idea. Brava Angela.
May 20, 2012
Sorry, should have said different religions as well.
May 20, 2012
Germany, as we all know, has done incredibly well out of the Euro and I have seen it said that their surplus would pay off all of the EZ deficits.
But Germany has its own problems, now. Its third largest aluminium smelter has just filed for bankruptcy as a direct result of the increase in the cost of electricity imposed by the Greens in Germany. Germany is fast making its own industrial base uncompetitive and the de-industrialisation the Greens so badly want has started.
May 21, 2012
Another success for the Greens then!
Bring it on!
May we all be fairly sharing the fruits of economic growth of de-industrialisation between higher taxes and weakened public services. ::)
May 20, 2012
Although money is circulated in the UK from richer to poorer areas this is done seemlessly, particular without the rich in a particular area feeling that they are being picked on.
In the EU a similar feeling neeeds to be generated. This means that instead of loans being given to the areas in trouble, or perhaps as well as, EU spending needs to be directed towards the areas of high unemployment.
Thus as an example heritage grants for regenerating historic sites could be usefully redirected to Greece and Spain etc. There are many similar examples where if they were withdrawn from places like Germany and the UK for a few years and concentrated where employment is most needed, then not only short term employment but also to a lesser extent long term employment would be improved.
May 20, 2012
In the US and in the UK the central authority was imposed by force. The Southern states in the US were not permitted to cecede. In the UK look at the bloody history in Ireland, and arguably after the 1745 insurrection in highland Scotland.
The Germans were not welcome when they tried that route the last time.
May 20, 2012
Quite apart from the understandable reluctance of German taxpayers to perpetually subsidise people in other countries such as Greece, there may be constitutional barriers to the German government agreeing to any such system.
A case has already been laid before the German constitutional court, raising objections to both the ESM and the “fiscal pact”:
http://www.currentconcerns.ch/index.php?id=1743
Of course that court has formed a habit of saying in effect:
“Well, what the government wants to do would be just about within the bounds of the constitution, provided they made sure of that by taking this precautionary measure, but if they wanted to go any further then we’d certainly have to think very hard about whether that was permissible”
and then saying much the same thing on the next occasion.
But one day the court might stop prevaricating, and simply say:
“No, not unless there’s a referendum to change the constitution”
and that must be a constant fear at the back of Merkel’s mind.
May 20, 2012
But Germans have recycled their savings through the banking system and lent them to the PIIGS so they can import more German goods. The music has just stopped.
Typically for a modern politician, JR has forgotten about the balance of trade. Trade imbalances, going either way, can cause bubbles and financial crises.
May 20, 2012
A professor of economics on the news this very day, says the best thing to move forward is for Germany to remove it’s self from the euro. I agree. They will not be the eurozone bankers therefore who else is there, as I see it no one. Some countries like Greece, refuse to discipline themselves and accept what they have to do to survive. Spain and Portugal will find themselves in the same boat. We can be thankful we are not in the euro and G Brown we can thank for that. I cannot see anything changing with this economic crisis at all, Merkal as left the summit and not moved one inch, and still insists on austerity as the answer. Its plainly obvious Cameron is standing alone on economic policy. We do need growth, on that they all agreed, but how and where it comes from is a mystery to all.
Greece will have no choice but to leave the euro, or is it, that Germany wants it to go quickly, is that why they remain unmoveable? You cannot lead Europe, keep dictating policy and not meet the responsiblity that goes with it. Germany needs to make up its mind, to fund Europe southern states or not, or leave the euro and begin again. Its a failed system with unelected boffins, who spend money like smarties, time for national governments and nations to say NO more.
May 20, 2012
I saw that same interview Barbara, and thought how accurate and sensible the man was. That shot a few down in flames, I can tell you!
Tad
May 20, 2012
There is surely a wry smile behind this and other posts on the theme that Eurp zone members ought to be in this together! If they believe so much in the Project, it must indeed surely be for better and for worse, for richer and for poorer. I’ll omit the last bit.
May 20, 2012
Compensatory transfer payments from high added value areas to low added value areas: why is this a good idea? In the UK, it is done in order to reward the old industrial regions for continuing to vote Labour and for continuing to be indigent. Where is the corresponding payback in the Eurozone? When regions are rewarded en masse for generating low added value, is there not a tendency for them to fall further behind regions which are constantly striving to become better at adding value? Even if a region on the periphery of Europe conducted its affairs with probity, still might it not tend to fall progressively further behind an economy like Germany because of the inate ability of the Germans for organising themselves and making stuff people want and therefore experience a continuous downward pressure on its wages which, of course, cannot be relieved by currency debasement in the EZ?
For the UK, the best approach would be to provide incentives to businesses to establish in low added value areas by reducing the relative direct and indirect costs of their operations. Furthermore, for the government to award benefits and pay in the public sector at a uniform level throughout inhibits the creation of a strong private sector in areas especially needing growth.
May 21, 2012
Your claims that the public sector somehow inhibits the private sector by paying higher salaries is false. Firstly many business areas have no public sector equivalent, so they are not competing with the public sector. Secondly salary levels aren’t the only factor that effects a person’s create choices.
It is entirely possible to a well paid public and private sector. Trying to drag the public sector to the low levels of the private sector benefits no one.
May 22, 2012
When public sector wages and benefits in areas are higher than those that can economically be paid by private industry, private sector recruitment and retention is damaged. The fact that private industry and the public service do not compete directly (mostly) in their ‘outputs’ is irrelevent since what we are talking about is overlap in skills.
May 20, 2012
Since Tax is under discussion, should we review our view of “Gift Aid”.
What is the annual loss in Taxes to the Government (ie ultimately you and I) from Gift Aid. There is no such thing as free money..
Surely we (you and I) end up paying more in Taxes to give the Govt. the same income in order to carry out its programmes. We could of course argue about the desirability of these programmes separately.
Why should’t we scrap the “Gift Aid” concession.
May 20, 2012
The euro is a political construct set up to forward the aims of the politicians who favour a political union. Countries like Greece were welcomed into it because they were prepared to accept the political objective it represented. Numbers were fudged and blind eyes turned to economic issues and the need for convergence.
Now the economic price is apparent and the public are finding it to high. Politicians who want to stay in power cannot ignor the public forever. This is why German politicians cannot accept the transfers to Greece to pay for the past failures of monitary union. If they do they will be out of power for a generation.
May 20, 2012
A-ha A-ha the old supply side “trickle down” theory. I thought we had decided that it never actually works; due to the rich only ever spending a little bit of their wealth?
Anyway the G8 has saved the Eurosystem; not. These western liberal politicians, they really know how to “talk the talk”. Absolutely no idea how to ” walk the walk”.
May 20, 2012
Its interesting to compare the various views on the likely outcome for the EU. Nigel Lawson see the Eurozone as unsustainable see http://www.dailymail.co.uk/money/news/article-2147096/NIGEL-LAWSON-The-Prime-Minister-wants-stable-eurozone–complete-nonsense.html. This is also the majority view of some experts http://www.independent.co.uk/news/world/europe/the-experts-view-on-the-euros-future-it-doesnt-have-one-6298180.html
In contrast the historian Ben Laurance thinks the costs of breakup are so high that the result will be continuation of the EZ in a Federal Europe headed up by Germany (Sunday Times so no link).
The Federal Europe solution means a loss of democratic accountability but he thinks that Europeans are so dissolutioned with their own governments that this will be seen as the best solution by the EU public.
The UK public has never been in love with the project even though most UK politicians are, so who knows where this would leave the UK?
May 20, 2012
Thanks for the links. I read Nigel Lawson’s piece, and I think I prefer to believe him. Not because he is of a similar persuasion to myself, but because the other argument doesn’t stack up.
Tad
May 20, 2012
You can only become rich by spending less than you earn and investing the surplus.
Meanwhile politicians are doing the opposite making people poor.
7,000 bn of debt, not the 1,050 bn they claim.
That is the action of a fraudster rather than someone out to help.
May 20, 2012
There is no reason at all why, in a currency union, the rich parts need to subsidise the poorer parts. They may chose to do so, but they do not have to. Most of the world used to be in a currency union – the gold standard – and the rich parts did not subsidise the poor parts. The poor parts mostly, but not always, just stayed poor.
Whilst I am in de-bunking mode: the crisis in Greece is not caused by it being in the euro, and will not be solved merely by it leaving the euro. The world financial crisis was not caused by socialism (a system I dislike), it was caused by capitalism (a system I wholeheartedly support). Countries outside the Eurozone are subject to the crisis as well as countries inside it. Some inside the Eurozone are recovering better than some outside it.
Well, I am entitled to the occasional rant as well.
May 20, 2012
It began to go wrong when Bill Clinton interfered in capitalism, for reasons of political correctness, ordering the banks to lend when they oughtn’t to have done.
May 21, 2012
It really went wrong when the banks tried to turn bad loans into good loans so they could sell them to investors for more money.
May 20, 2012
Dr JR , todays blog was a particularly good one . Of course every German knows that much of their wealth and success is due to the Euro . The products manufactured there are under-valued because of the Euro and can be sold more easily ; it is in their interest to keep it going . It wouldn’t be so bad if all the EZ countries were in a position to pay a reasonable rate of return on the monies they borrow with acceptible security ; trouble is Greece can not meet this criteria now and is unlikely to do so in the future .
May 21, 2012
Not every German, I suggest. Most of them would be better off if they left the euro because their currency would rise in value. That would make their savings and their wages worth more.
Similarly, most of us (people who live in the UK) would, in my view, be better off if we had joined the euro, since sterling was devalued and our savings and wages are worth less.
May 20, 2012
The rich may have to recycle their money as they have to much. Lesser people and the poor have to spend and thus contribute to the economy much more. Lets face it you can only have so many houses, Yachts , cars and visit so many restaurants so what do you do with the rest. You launder it..It’s funny that mobility does not benefit the lower strata and often leads to a race to the bottom with wealth moving towards those who need it the least. Ram it.
May 20, 2012
If my memory serves me correctly it was the Conservative government, in the 80s, that first started taxing the savers like me that had struggled to put aside a little cash. It does not pay to save because the government will steal it. e.g. Brown and the pension theft. My solution: buy assets that can be hidden from the politicians.
May 21, 2012
Assets such as?
May 20, 2012
“EU regional policies transfer a small fraction of the sums transferred in mature currency unions by central state action.”
I would question this – for example the road system in Spain pre eu membership and post is chalk and cheese – who paid for it? One of my objections to the eu is that the tax payers of the net contributors did!
May 21, 2012
The advantage of taxing the wealth is that the money actually goes towards helping the poor, rather than the inferior alternatives which only help those who know how to run a businesses or those who offer a service to the wealthy.
Due to the cost of housing the UK has a very low labour mobility.
May 22, 2012
It takes you round in circles to the same end – if you want to be in a single currency then you must be in a single economy with one banking sector, one financial management institution, end of.
The Germans were the biggest driver for the Euro so they have to accept that with it comes the responsibility of subsidizing the poorer parts of the EU.