European banks have a new business model

Sometimes truth is stranger than fiction. Who would have thought that a German led Euro area would decide to print Euro 80 billion a month to buy up corporate as well as government bonds from around the Eurozone? And who would have predicted that same German led Euro area would offer free money to commercial banks to lend on, or even offer banks a payment for borrowing money to lend to others? All those words about prudence, all that commentary about the need for a well run and disciplined currency have gone out of the window. The Euro authorities try to offer some hope to the many unemployed of the zone, and the Central Bank struggles almost alone to salvage some growth after years of recession and disappointing performance.

As strange is the wish to have some inflation. The zone has been more than successful at getting inflation down and keeping it down, something it shares with the rest of the advanced world. We have low inflation in most places today as a result of three mighty trends. The first is the large migrations, bring willing people from low wage and no wage societies to richer countries where they are prepared to take relatively low wages by the standards of their host country. The second is the creative destruction of the internet, slashing the costs of various business activities and giving so many more people cheap and easy access to the world market through a webpage. The third is the result of massive investment in commodity and energy capacity in past years, which has produced a state of oversupply in the main energy and commodity markets. China for example produces too much steel with knock on effects to the rest of the world’s steel industry. These pressures are being fought with monetary means. There is a desperate rush to the bottom as major currencies are deliberately expanded to try to devalue more than the next one. Each tries to steal a competitive edge and to trigger some domestic inflation from higher import prices.

There is of course an irony or contradiction in EU policy towards inflation and growth. The authorities are demanding each commercial bank holds more cash and capital for their current level of loans. That slows down loan and credit growth. The zone limits each country to borrowing no more than 3% extra of its GDP in any given year. This rules out further fiscal stimulus from the state making payments and investing money which it could currently borrow at very attractive rates. Yesterday the ECB hinted that it would like member states to spend and borrow more, but said this should only be done by those within the current targets. Germany is the country with most scope to expand her spending. Traditionally Germany is reluctant to do so, though she will need to spend a bit more on the migrants now arriving. It also said that member states at or near the 3% limit should nonetheless rejig their spending and borrowing to provide a better direct stimulus to growth from the spending they do do. The ECB wants an infrastructure led recovery.

The ECB should study Japan. Japan has had several phases of state led stimulus through extra spending and borrowing, with many large infrastructure programmes. Japan has gone through more phases of money creation and bond buying than the rest of the world, and has negative interest rates. Japan did succeed in devaluing the yen in recent years, but has now encountered upwards pressure on its currency despite the unorthodox monetary policy. The change of approach by the Chinese authorities to their currency, the yuan, and revised estimates of delays in increasing US interest rates have at least temporarily pushed the yen up. Japan’s monetary stimulus and fiscal stimulus combined have not been sufficient to push the Japanese economy into decent sustainable growth. The falling population makes this more difficult, and the numbers do look better on a per head basis. Much of the Euro area has the same problem of a falling population reducing demand directly, and an ageing population often leading to a more savings oriented culture. Japan has ended up with the biggest state debt relative to its output of any advanced country but without the growth that was meant to bring. It is only possible to sustain such a colossal debt by buying it up with newly created money, and keeping interest rates low or negative.

The ECB has done what it can. Its measures yesterday exceeded most people’s expectations. Any sensible person wishes them well, as the world would be a better place if the Euro area could grow at a decent pace and make bigger inroads into the high levels of unemployment. The problems remain that many people and businesses do not want to borrow, even at low rates, and banks still have balance sheet constraints limiting how much use they can make of this very generous offer of free money to lend to others. Some people and businesses already have debts enough, but others do not. They lack confidence or the income to be willing to borrow to invest or spend.Meanwhile the European dream is a nightmare for the younger people of the currency zone, with too many out of work and without hope of owning a home of their own. The older savers are not best pleased either.

This entry was posted in Uncategorized. Bookmark the permalink. Both comments and trackbacks are currently closed.

63 Comments

  1. The Active Citizen
    Posted March 12, 2016 at 6:04 am | Permalink

    Like most people I’m not qualified to comment on most of your interesting article.

    I just wish I shared your overall optimism that the Eurozone will reach agreements on banking and fiscal union, because it’s in our interests that they succeed. However I tend to the view of the former Governor of the BoE, Lord King: “In the euro area they were deeply reluctant to own up to losses because it would reveal how short of capital they were. All they have done is prolong the agony.”

    I’d add one thing which is currently ignored by everyone. Talking of Germany you say “she will need to spend a bit more on the migrants now arriving.” Make that a lot more. A few months ago Germany was officially talking of costs of €10 billion. This week they said it would be €20 billion. (Sorry, don’t have time to find the sources right now.)

    In fact I believe it will be several magnitudes higher than this – enough to impact their economy significantly. My reasons have to do with immigrants’ actual educational standards, language difficulties, social factors, generous social support systems designed primarily for indigenous populations, security and defence, policing and justice, housing and school costs, and much more.

    For the EU as a whole the net cost will be many, many hundreds of billions in my opinion and will have a serious effect on the EU’s prospects. I’m happy to be judged on this claim in 3 years’ time. I just wish more people were doing serious research into this important topic.

    • Hope
      Posted March 12, 2016 at 9:26 am | Permalink

      I prefer Lord King’s assessment, the Euro is affectivelty doomed, which is the least damaging way to end it. The Euro has brought tensions between nations, immigration has brought further strain on relations between friendly countries. Either the EU goes back to a friendly but trading block with no money or political union or it will continue to cause destitution, mass unemployment, mass immigration and extreme tensions between countries. Sweden taking Germany to court over immigration, Greece loathing of Germany’ punishment austerity for daring to vote out, Italy dislikes Germany even more. Both Greece and Italy had EU coups to get rid of democratically elected governments- ask Cameron to justify why there should not be democratic self government and why he supports EU imposed governments.

      Cameron is essentially a follower who enjoys the kudos of the position without the ability to perform the role. He has shown his traitorous behaviour when he stood by Hollander while he made threats to our nation. There is no excuse or justification he should be sacked. His actions demonstrate he does not have the nation’s interest at heart, he does not want democratic self government he wants a foreign power to rule our country.

    • Antisthenes
      Posted March 12, 2016 at 9:40 am | Permalink

      An interesting observation glad you have brought it to our attention. I do not know if you are correct in your belief that the financial cost of the current immigration debacle is going to be unsustainably enormous but it is plausible that it is. We knew this current influx was going to be considerably destabilising but if what you say is true it is going to be cataclysmic.

    • Posted March 12, 2016 at 8:46 pm | Permalink

      I fear you are half right.

      It is true that it would cost billions to assimilate Syrian migrants into Europe but that is not in the best interest or their country or themselves.

      The alternative, if the war in Syria can be brought to an end, would be a far more satisfactory solution but will be even more expensive for the EU and Germany in particular.

      If the war can be ended, a truly biblical amount of cash will be needed to provide materials and jobs to rebuild Syria and attract all those fit young men to return home and carry out the work. If these young men are allowed to stay in Europe and turn their backs on their homeland, the vast majority of Syrians who have stayed in the region ( including most of the women and children ) will never be able to return home.

      Male Syrian refugees need to be told in no uncertain terms that they will not be able to stay in Europe in the long term but must return to rebuild their homeland.

      Whatever the outcome, it is going to prove very expensive for Frau Merkel.

  2. Posted March 12, 2016 at 6:56 am | Permalink

    All that this kind of QE can do is lower interest rates. This may encourage extra borrowing and spending but it may not. Especially if they are near to zero in any case.

    It is only extra spending which can stimulate the euro economies. If the PTB in the EZ can’t persuade the non government sector to borrow and spend more then it has to be down to the government sector to borrow and spend more.

    Of course it could still try tax cuts to encourage the spending to be done by the private sector.

    • Antisthenes
      Posted March 12, 2016 at 9:33 am | Permalink

      So governments having damagingly interfered with the supply side now decide to damagingly interfere with the demand side. Is that anyway to run an insane asylum. I suppose it is when the inmates have put some of their own in charge.

    • Lifelogic
      Posted March 12, 2016 at 10:32 am | Permalink

      The best thing to stimulate economies is extra spending but spending on sensible things not just extra spending on anything. The state sectors so often low extra spending on complete and utter nonsense. In the UK examples are HS2, Swansea “lagoons”, Hinckley Point C, a dysfunctional, rapidly deteriorating NHS and appallingly organised NHS, open door immigration, endless grants for bonkers intermittent and over priced wind and PV energy, the EU, CAP, counter productive wars like Libya & Iraq – the list is endless.

      Spending by individuals and companies will in general be far more sensible than spending by governments – unless of course governments distort this too with their bonkers green grants or similar.

      • Lifelogic
        Posted March 12, 2016 at 11:31 am | Permalink

        Sorry – so often “love” extra spending …

  3. Mike Stallard
    Posted March 12, 2016 at 7:24 am | Permalink

    “creative destruction”
    Congratulations on reading the excellent “Why Nations Fail”.
    A great read – and true. I have been pondering: is the EU extractive or inclusive…

  4. Antisthenes
    Posted March 12, 2016 at 7:25 am | Permalink

    The world has gone mad. All this slight of hand and jiggery pokery to stimulate economic growth by using monetary and credit expansion to solve national economic ills. All that does is give the illusion of prosperity. It does not address the underlying causes some of which you outline in your article. It in fact in the end makes them considerably worse in the form of boom and busts because all QE does is motivate investors to put their money into riskier things. However not productive riskier things even though that is the eventual purpose. Usually in asset purchases causing bubbles that eventually overheat and burst.

    Government intervention caused the problem in the first place so they are hardly the right people to correct it. In China where that government is very interventionist can be seen the dangers of centralised government planning. Malinvestment there has been considerable and now they are paying the price as asset prices in China have fallen the knock on effect is that other asset prices world wide have been driven down because of it.

    The euro was the EU’s nemesis, not the only one, another economic credit and monetary expansion scheme that caused a boom and bust which now the unemployed have to live with. We said the euro crises will come back to haunt us well it has. It must be very bad if the ECB has to throw that much money at the problem. I suspect that a lot of banks especially Italian ones are not in very good health and that is one major factor in this new stimulus. Of course the other major factors are the ones you outline. Will it work? Probably but I do not believe it will produce the results as intended. We could be seeing the beginning of the end of the EU as it certainly know how to cause crises but does not have a clue how to solve them.

  5. Lifelogic
    Posted March 12, 2016 at 7:28 am | Permalink

    Much of the problem is caused by the banks. There is a real lack of competition, they are still able to get away with charge huge margins and fees even on very low risk lending. The regulations and slotting rules tie their hands and they are often absurdly slow at making lending decisions.

    Above all we need the bloated and largely incompetent state sectors to contract and release the productive sector to invest and expand. We tend to have the reverse currently due to the endless over taxation, inconveniencing and huge over regulation of the productive, wealthy and hard working.

    Doubtless IHT ratter, tax complexity increasing, pensions, landlord & tenant thief Osborne will make this even worse in his budget this week, as is his habit. Still he will hopefully be gone in June, when we finally escape from the EU disaster area and cut ourselves free.

    • Lifelogic
      Posted March 12, 2016 at 7:36 am | Permalink

      Is (finger up the bottom and rather likes it, let have a grown up debate) Anna Soubry really the best the remain side can find to advance their cause? On Any Questions yesterday she had, as usual, not a single sensible argument to put and just endlessly interrupted everyone.

      Anna, no one is saying there will be no immigration post Brexit and no one sensible thinks there will be huge trade barriers between the EU and the UK post Brexit. Please do grow up a little. It is no good calling for “a grown up debate” when you do the complete opposite at every turn.

  6. The Active Citizen
    Posted March 12, 2016 at 7:36 am | Permalink

    JR, off-topic, but what’s your view on the whole subject of negotiations post-Brexit vote?

    The Remainders and the PM are constantly telling us how hard it will be to negotiate new arrangements. It’s worrying for many of us that these things are not being countered by the Leave campaigns and are gaining currency with the electorate. If the Leave campaigns are countering them, the message isn’t getting through.

    What’s your opinion on this? With your permission I’ll put my thoughts in the next post.

  7. The Active Citizen
    Posted March 12, 2016 at 7:41 am | Permalink

    EU Summaries For Normal People
    No. 13 – How To Negotiate – Time For A Reality Check

    A new deal for the UK doesn’t have to take 5, 7, or 10 years, as the Remainders tell us. You just need the right teams doing the negotiating.

    Trade Team UK
    Led by a Pro-UK Brexit-voting Chancellor and with a Foreign Secretary in the same mould, the teams will be filled with experienced and commercially-savvy people. Preferably some entrepreneurs of SMEs in the latter part of their careers who have a sense of public duty, plus the likes of Digby-Jones, Cruddas, Mills, Moynihan, Wheeler, Mellon, Banks, Tice, Seymour-Williams, Dyson, for their big business experience. Purchasing types, civil servants, and some FCO mandarins can be in the support teams, but they’re not the ones who should lead in any way.

    Yes, we’ll pay these guys appropriately well. Maybe some will get peerages. The whole exercise will be self-funding for the UK, with the excellent deals that will be achieved.

    What Type of Deals? – Keep It Simple
    We’re not starting from scratch. The UK already has deals in place with the EU and with other countries. Some of these just need amendment to take into account our new circumstances.

    What’s all this nonsense from the PM about what type of country deal we’ll do with the EU? Is our country named Norway, Switzerland or Canada? So why go on about those deals? We’re far bigger and we’ll have our own, thank you very much. One which suits our circumstances and needs.

    Our starting point with the EU is full access to the single market, no payments, no free movement. Impossible? Why should it be? The EU sells £89 billion per year more to us than we do to them, and we have to start somewhere. I’m sure we’ll soon get to a basic deal if the right people are involved.

    As far as the rest of the World is concerned, we’ll be the exciting new kid on the block. Free from our EU shackles, finally they can negotiate free trade deals with us and we with them. The UK is still highly-regarded around the World and they’ll be keen to tango.

    Finally our trade negotiators will be negotiating in the UK’s interests. Much simpler than for 28 nations.

    Politics
    Yes, a fair amount of this will be political. We’ll need a strong pro-UK Government and changes will need to be made. Chancellor and Foreign Secretary will be a key positions, as will certain other government departments like BIS; Justice; DEFRA; Energy & Climate Change; Work & Pensions.

    The World’s Our Oyster
    On 24th June, our existing deals won’t change. We have time to negotiate new ones over time, and with the right approach, the UK will thrive in our renewed freedom to trade globally.

  8. eeyore
    Posted March 12, 2016 at 8:12 am | Permalink

    Another masterly analysis. We are all in Mr Redwood’s debt.

    Hanging over all, as he warns, is youth unemployment in the south of Europe – anywhere between 20 and 50%. This is revolution material. European countries have trodden that via dolorosa many times before; it is an established part of their polity.

    What a way to run a continent.

  9. alan jutson
    Posted March 12, 2016 at 8:20 am | Permalink

    Surely the more you encourage Banks to lend with Government incentives, the more they are likely to lend to people and businesses which are at the higher risk end of the scale.

    Thus the more the Banks will then be at risk.

    Me thinks yet more Government involvement will make the situation worse, as the Banks will be too big to fail yet again.

    • Lifelogic
      Posted March 12, 2016 at 5:22 pm | Permalink

      They should cut the banks out and get money directly to the sound businesses and individuals in the form of tax cuts instead. Meanwhile get some new banks and competition in banking.

  10. Ian Wragg
    Posted March 12, 2016 at 8:35 am | Permalink

    Traveling fairly frequently to Spain, Italy and various other places in Europe I have been amazed how quiet the place is
    Some years ago we drove across the Po valley in Northern Italy and it was an industrial powerhouse
    Last year on the same run it was like the American rust belt. I would estimate 75% of the industry was boarded up.
    In Spain there are gangs of (well behaved) u employed youngsters loitering.
    The whole place seems in desperate straights which is why they all want a slice of Britain.
    I see Lin Homer is hiding immigration figures to assist Camerons project fear.
    The mans a traitor surely the heir to Bliar.

  11. Anonymous
    Posted March 12, 2016 at 8:36 am | Permalink

    “The older savers are not best pleased either.”

    They may not be getting much interest on their savings but they are seeing unprecedented gains in their asset values.

    They need to adapt to the new normal, whatever their instincts tell them. Spend it before the state steals it from you !

  12. Denis Cooper
    Posted March 12, 2016 at 8:37 am | Permalink

    Clearly our Prime Minister in his wisdom accepts a different and much more optimistic analysis of the prospects for the eurozone, otherwise he wouldn’t be telling us that the EU could just shrug off the loss of 5 million jobs when the UK leaves and to spite us they issue a new version of the Berlin Decree barring our exports from the EU market.

    https://en.wikipedia.org/wiki/Berlin_Decree

    After all, we are being told, because they are bigger than us they could easily take those 5 million job losses, those newly unemployed people would just be added on to the existing 20-odd million, while the 3 million jobs that we lost here would be devastating, taking our rate of unemployment up to a similar level to theirs.

  13. Richard1
    Posted March 12, 2016 at 8:37 am | Permalink

    There’s something rather strange about the working of the eurozone. There is a great shortage of labour, even unskilled, in Germany, and terrible youth unemployment in the weaker eurozone economies such as Spain. Mrs Merkel opened the door to unlimited immigration probably in reality to solve Germany’s labour shortage. Why is it we arnt seeing large scale (maybe temporary) migration of young people from Spain, Greece, southern Italy etc to Germany? Isn’t this the idea of freedom of movement within a single market?

    • ian wragg
      Posted March 12, 2016 at 5:30 pm | Permalink

      Richard. The youngsters in Southern Europe don’t have the requisite skills for the technical German economy.
      I asked my colleague who lives in Belfort, France why his unemployed son (who speaks and writes 3 languages,) doesn’t move with his wife and 2 children elsewhere in Europe.
      He quite candidly admitted that he has no transportable skills and is unwilling to take on any menial task as th4 wages would be less than the benefits in France and of course, living with M & D.
      Another thing is , it doesn’t fit in with Angelas displacement activities.

  14. agricola
    Posted March 12, 2016 at 9:06 am | Permalink

    Not being in the least qualified to contribute to today’s entry, I will content myself with saying that most of us have spent our lives coping with the results. A selection course devised by manic experts whose own results suggest they are not so expert. Your subject being one I can have no impact on I will revert to one on which I can.

    Since the re-negotiation Cameron has talked of a reformed EU. As the EU has no intention of reforming we know it is just a PR word bubble. This fox has been shot.

    Cameron is now on a different tack, emphasising the uncertainties that lie ahead should we leave the EU. As a general statement I would say that life is full of uncertainties, it is the nature of the beast. Might get boring were it not so. His Lie is in inferring that certainty and tranquillity would result from remaining in the EU.
    1.
    His whole re-negotiation is shot with uncertainties. Will all 27 nations, the EU parliament, and the ECJ accept it or pick it to pieces.
    2.
    Will it solve all the problems of unfettered immigration on our social structure.
    3.
    Will the implications of an open door to Turkey have a devastating impact on our national identity, such that it becomes irretrievable. What will it do to the identity of all other European nations and in particular Germany.
    4.
    What ongoing financial impact will an ever expanding sclerotic EU have on the UK’s ever increasing contributions. Unknown , but not less than we pay today.
    5.
    How competitive can UK industry remain in the World when it is subject to EU inspired energy costs.
    6.
    What impact will a consolidated Euro Zone have on our financial industry. The EU is already snapping at it’s heels.
    7.
    The uncertainties involved in belonging to a totally undemocratic institution such as the EU, with no opportunity for electoral influence. Enjoying taxation without representation. We are their second largest net contributor and could even become their largest when you consider the way they are heading.
    8.
    What are we gaining by setting aside Magna Carta, Habeas Corpus, and our own rule of law controlled by a parliament we elect every five years. Abandon this and you have ultimate uncertainty. A runaway bus with poor brakes and a driver on skunk.

    If all the above is Cameron’s idea of a certain stable future in the EU then he is deluded. This fox should be shot between the eyes.

  15. Colin Hart
    Posted March 12, 2016 at 9:21 am | Permalink

    Once upon a time I thought I had grasped the essentials of economics.

    Now I feel like a certain Spanish waiter ‘he know nothing’.

    All I can conclude that those supposedly in charge are no longer in control and do not have a clue what to do.

    Perhaps it always been like this. You just need to reach a certain age before you realise it.

    • Mark B
      Posted March 12, 2016 at 8:54 pm | Permalink

      You’re right, they are not in control.

      While we are in the EU we have to agree to what is known as; “The Common Position.” ie A position that is agreed between ALL 28 Member Countries. This is the root cause of all the past, current and future problems with the EU. The only solution, surprise, surprise is MORE EUROPE. This means a greater centralising of power too the Commission who will make all the decisions for ALL 28 Member Countries.

      So until either a ‘Common Position’ or a decision from the Commission is reached, nothing can be done by any of the 28 Member Countries, and that includes the UK.

      Our UK Parliament has straight-jacketed us to this and it is this that will be the end of all of us unless we get OUT !!!!

  16. Shieldsman
    Posted March 12, 2016 at 9:32 am | Permalink

    And David Cameron wants to keep us in this shambolic empire looking after vested interests, does he have no honour.
    His knocking all options for withdrawing from the Lisbon Treaty only illustrates his uselessness as a negotiator and inability to face up to the task.
    He has pulled the wool over the Conservative Party members, he led them to believe that he would negotiate meaningful changes (all on record) to our membership, and if not to leave the EU.
    What did we get, a charade with a meaningless deal. He must go.

  17. A different Simon
    Posted March 12, 2016 at 9:36 am | Permalink

    They have surely passed the point of diminishing returns for cheap money .

    I can’t see them getting much economic bang for the stimulation buck .

    If cheap money stimulates consumption , it might be expected to become inflationary .

    However , this is not what has happened so far . Cheap money has stimulated supply instead .

    Good companies are suffering because they have to compete with over-geared zombies and marginal producers .

    It’s clear that less people are needed and that Western European individuals own policy of lower than replacement birth rates was correct .

    Their/our leaders desire for growing populations will prove catastrophic .

    What cheap money does is facilitate the transfer of wealth from the masses to the few and produce asset bubbles . That is probably the real reason why they are so keen on it .

  18. JJE
    Posted March 12, 2016 at 9:39 am | Permalink

    Mr. Draghi’s measures crucially underpin the European banking system with massive liquidity in a way that still allows them to turn a profit. We should all be grateful to him for that.
    A lesson I take from the Japanese lost decade is that the banks must be fixed for the economy to recover. Europe has been papering over the cracks for way too long. This gives them a further opportunity. Whether they take it is up to them.

    Meanwhile this old saver has a few more European non financial corporate bond ETFs in his SIPP than he did at the start of the week. Of course that may backfire if they succeed in driving the Euro down.

  19. acorn
    Posted March 12, 2016 at 9:52 am | Permalink

    The problem with the Japanese people is they save far too much. Every time the government spends new money into existence, the Japanese households save it and don’t spend it. The 230% debt to GDP is of no worry, as the vast majority of it is held domestically. The Japanese government should stop issuing its equivalent of Gilts. Replacing the outstanding Gilts with the cash (the previous government spending, that bought the Gilts in the first instance); might encourage them to spend a bit more. The future value of cash declines by a percent or so each year, without having idiotic negative interest rates on commercial bank “reserves”, which they can’t lend anyway.

    QE is supposed to boost asset prices, to boost collateral values, for cheaper, easier to get, corporate loans for “supply side” investment. The Conservative “supply side” mantra, that investment creates demand, is actually a myth (sorry JR).

    Corporates don’t invest when they have spare capacity and no customers. Consumer demand is what drives the economy. Lack of wages, as stashing profits take more of national income, means less spending; “aggregate demand” is too small. When the government sector is reducing its spending at the same time as the private sector, the only way is down. Particularly if you are a net importer like the UK.

    Remember that QE also takes spending power out of the economy. Replacing a Gilt with reserves, means the interest payments don’t get paid into the private sector, but back to the Treasury, via its own central bank.

    The Eurozone is a hopeless case. The simplest and most effective thing that could happen is, the ECB buys up ALL the outstanding and new Eurozone Treasury bonds from all nineteen Eurozone national Treasuries. That is it “monetises” the debt directly; the same as the Canadians do. Governor Carney can tell them all about that.

    That way, the nineteen national Treasuries can spend “reserves” (cash), like the UK and the US; instead of spending Gilts into a secondary, parasitic, spiv bond market, at stupid artificial interest rates. If the ECB won’t play, then the nineteen Eurozone governments should, as one, nationalise their own central banks, and threaten the ECB with nineteen separate Euro currencies; that’ll **** ’em.

    Reply In both Japan and the UK government has continued to increase cash and real terms spending

  20. Bert Young
    Posted March 12, 2016 at 10:37 am | Permalink

    Germany has a problem a) it has a huge surplus and a basically conservative attitude to borrowing b) it needs consumers in the EU to buy its products c) it disapproves of the ECB’s QE and has always sought to protect itself from it and c) it doesn’t want the value of the Euro to handicap the price of its products . So , what can it do ? . Well it must have more control of the money markets of Europe ; it must maintain its access to reasonably cheap labour costs ; it must produce an alternative to the power and influence of the City of London ; it must show to the world that it has turned a corner and will no longer be a threat .

    Germany is well on the way to achieving these aims and to becoming a force of real influence in world affairs . Obama has recognised this and has signalled his acceptance bit by bit at the expense of this country . We have to decide whether to accept this change and development ( by staying in a Germany influenced EU ) or , to steer a path of independence as the best way for our future . One thing on our doorstep is the take-over bid the Germans are making for our Stock Exchange – I see this as a retrograde possibility . Another thing is our presence in the EU – this gives Germany disproportionate power and something we should not continue to promulgate. Germany has much to atone for and , if we are wise , we will encourage its stability but not encourage its international power seeking goals .

  21. Atlas
    Posted March 12, 2016 at 10:49 am | Permalink

    Oh dear, the problem of fiat money. The Romans went bust as well, so there is form on these tactics.

    So what is Osborne going to magic up this Budget to keep his leadership hopes up? Will it be another sleight of hand like the 2% council tax rise to fund social services? Or the way the free TV licence has been palmed off onto the BBC licence payers? Or another way the cost of gas and electricity are pushed up to fund those who can’t pay for it? The man is truly the heir to G. Brown…

  22. Lifelogic
    Posted March 12, 2016 at 11:04 am | Permalink

    So dental charges are to rise again, yet other HNS health services still have to be free at the point of rationing, delay and non delivery. Why the difference? It is hugely harmful to delivering quality health care and having a health system that actually responds to demand and treats “customers” properly.

    http://www.dailymail.co.uk/news/article-3486852/NHS-performance-hits-record-low-51-000-E-trolleys-24-000-cancer-case-delays-targets-missed-board.html

    Was the NHS not someone’s priority in the letters many moons ago?

  23. oldtimer
    Posted March 12, 2016 at 11:23 am | Permalink

    The predicament of the EZ, which you describe above, is compounded by the fact that not all members are equal. Germany is, I believe, running a surplus on its national finances and is thus well able to fund measures to support the massive influx of refugees encouraged by Merkel last year. It also runs a huge trade surplus in its dealings with other EZ members (as it does with the UK). This financial clout, reinforced by the fact that it is the biggest contributor to the EU budget, gives it its political clout.

    The UK, outside the EZ, with a net contribution of £10 billion comes next. It has next to no influence because it is outside the EZ and has opted out of political and monetary union. The UK is like a goose trapped in a cage, laying £10 billion egg each year, with the expectation, indeed the demand by the EU, that it should be an even bigger egg in each succeeding year. There are only two sensible courses for the UK. Either the UK opts in fully to the EU project or it opts out of it all together. The current half in, half out position makes no sense at all. The UK will simply remain a caged goose, laying eggs for the rest of Europe. That is what this referendum is really about.

    The Remain campaign, Mr Cameron and the government should come clean about this reality. As matters stand they are keeping quiet about it, just as the governments of the day did when the UK first joined, when the earlier referendum was held and all subsequent occasions when treaty changes have loomed. The Leave campaign should hold Mr Cameron to account on this issue, to challenge him to come clean about his true intent and that of his backers. I think the EU and EZ projects are deeply flawed and that the UK should have no part in them. The UK is certainly incapable of having any practical influence on them as Mr Cameron’s recent attempted negotiations have revealed. So why is he backing Remain? We should be told the real reason – and it is not about jobs as he claims.

    A footnote on Japan from my recollection of the country from a few years ago. Domestic savings ratios were high and consumer credit levels were low relative to say the USA and the UK. IIRC, credit cards were virtually unknown; it was very much a cash economy. There thus seemed relatively fewer opportunities, or channels, to stimulate consumer spending than exist in a country like the UK or the USA. A strong yen encouraged Japanese businesses to invest abroad, which they did with great success for many years (not so much now). That left the Japanese government as the only party able to provide significant domestic stimulus.

  24. Lifelogic
    Posted March 12, 2016 at 11:29 am | Permalink

    Osborne faces £18bn black hole despite all his massive tax grabs in the last budget. When will he finally learn that higher tax rates and increased complexity just does massive damage and raises less tax too. He needs to cut the size of the bloated and largely inept state sector for a change.

    • ian wragg
      Posted March 12, 2016 at 5:34 pm | Permalink

      Ll. Today I was talking to a lady from the local hardware chain. She told me that from April weekend work and overtime will be paid at standard time.
      All staff are losing 4 hours weekly and the net result is they all will be £5 per week worse off.
      This is to compensate for the idiotic living wage.
      There are 22 staff on the shop floor so this means the wage bill reduces £110 per week and the tax & N.I. take reduces approx. £40 per week.
      This is one shop out of millions.

    • acorn
      Posted March 13, 2016 at 5:45 pm | Permalink

      Osborne is up his own, Conservative, neo-liberal, ideological S*** Creek. The more he cuts back government spending, the slower the economy will go. You say LL, “… needs to cut the size of the bloated and largely inept state sector for a change.” The reality, is that the more he does that, the less spending power will enter the economy, and be used in many transactions, before Osborne gets it ALL back as taxes.

      Public sector employees spend their wages in the same businesses as you do LL. Those businesses don’t give a toss if you get income from the government sector or the non-government sector, they just want customers, with spending money, to buy their products. The economy grows by people, and governments, spending money, earned or, if households have the confidence in their future, borrowing some money.

      There is little confidence in the future at the moment. This IS the time for the government to step up its spending of its own currency, while there is little fear of inflation hitting 5+ %.

      On a very broad average, a government employee, will spend about £33,000 each, buying goods and services for the government sector, to “transfer” to the families of the UK, including yours LL. Education; Health; local government services, etc etc. The smaller the government sector employment man-hours available, the less goods and services, that can be cost effectively and efficiently bought for transfer to the citizens that need them.

      OSBORNE IS A BIGGER DANGER TO THE UK ECONOMY THAN BREXIT. Professor David Hendry said (on YouTube), … this isn’t only the “most stupid government in his lifetime …”, it is also going to turn out to be one of the most economically destructive in our history.

      The largest skills shortage in Britain, is the shortage of brains among our politicians on both sides of the aisle.

      Reply Mr Osborne has been increasing public spending just as you wish.

  25. Jagman84
    Posted March 12, 2016 at 11:33 am | Permalink

    Their actions are akin to a drowning man about to go down for the last time. They refuse all help and advice as they cannot imagine ever being wrong. The ‘project’ must be saved at all costs. Regardless of enormous damage caused to the European economies, there is no ‘Plan B’ for these control freaks. Maybe , one day, they will make a movie about all of this. Possibly a working title of ‘Downfall’?

  26. hefner
    Posted March 12, 2016 at 11:37 am | Permalink

    Something, potentially more important than Brexit: what is JR’s view on the upcoming Investigatory Powers Bill (to be discussed by MPs on Tuesday 15 March)? Will he vote it? Will he want to amend it?

  27. ian
    Posted March 12, 2016 at 11:59 am | Permalink

    As I said on this blog quit a while ago, It will be death by a thousand cuts.

  28. David Edwards
    Posted March 12, 2016 at 12:03 pm | Permalink

    That the ECB has gone to such extraordinary lengths to boost the Eurozone economy does rather pour cold water on the PM’s argument that rEU would not wish to continue to trade on favorable terms with the UK after Brexit. Particularly if it is considered that rEU trades as much with the UK as it does with the US.

  29. ian
    Posted March 12, 2016 at 12:54 pm | Permalink

    The oil age is over and will not be coming back, it has gone the way all other ages have gone, there is still a case for gas but not as big as they think.
    New houses today need very little heating and big industry will become more low cost as old plants shutdown and new tec will come in.

    • Lifelogic
      Posted March 12, 2016 at 3:39 pm | Permalink

      New houses may need less heating, but they still need a fair amount. Energy is also needed for food production, building these houses, factories and offices, making almost anything, refrigeration and much else. Oil, gas and coal have some way to go yet especially as they are perhaps about 1/3 of the price of the alternatives. New tech is rather energy hungry too.

      • Lifelogic
        Posted March 12, 2016 at 5:26 pm | Permalink

        Three cheers for Angus MacNeil MP (Energy and Climate Change Select Committee) for calling for a review of the absurdly expensive Hinkley Point C project. Why contract to pay three times the going rate for energy for many years to come? There are far better, cheaper and safer nuclear and indeed other solutions.

        • hefner
          Posted March 13, 2016 at 7:59 am | Permalink

          such as?
          It is not that I want a French-Chinese consortium to build Hinckley Point C, but some details on your proposal would be welcome.

          By the way, a very good book on the question could be “The fall and rise of nuclear power in Britain: a history” by Simon Taylor.

  30. Posted March 12, 2016 at 1:02 pm | Permalink

    This morning I went to a meeting organised by Business for Britain in Southampton where the speaker was Michael Gove.

    The meeting was covered by the BBC and within minutes of getting back in the car a clip from Mr Gove’s speech was on the 11am Radio 4 news.

    The meeting room was full with people standing at the back and Mr Gove was on good form. However three points :

    This was a business for Britain event and judging by the applause he was overwhelmingly preaching to the converted. Yet there was no business emphasis in the speech and no call to arms urging the audience to join local campaign. In fact there was minimal introduction and nothing from the organisers after Mr Gove finished. Certainly there was nobody from any local campaign group in the hall looking for assistance. A missed opportunity, surely ? The invitation said the event would last 90 minutes but it was all over in less than an hour.

    It was disappointing to hear Mr Gove trot out the well rehearsed but exaggerated claim that membership costs us £360m a week. It doesn’t, that’s the gross figure we nominally pay to Brussels. The correct figure our host gave us on the 2nd March is actually £189m a week net of receipts.

    We have a very strong case and should be adopting the moral high ground. We do not need to follow the Remain campaign down their chosen route of outright lies and dodgy statistics. The real membership fee of £189m a week is surely enough to win the argument.

    Finally when asked from the floor what should happen after we win the referendum, Mr Gove was very clear that CMD should stay and it should be the current PM that leads the Brexit negotiations. Even I was surprised at just how badly this was received by the audience.

    Mr Gove must have gone away in no doubt that those supporting Brexit have no appetite whatsoever to see his best mate Dave have anything to do with our exit negotiations. Hopefully this will be taken on board and immediately after we win, No 10 will be visited by the men in dark suits.

    • Lifelogic
      Posted March 12, 2016 at 5:33 pm | Permalink

      The EU cost far more than £360m a week when the additional costs of the endless misguided UK regulations are taken into account. The endless legal costs and inconvenience caused by the legal red tape, fines and the huge opportunity losses caused. Not to mention the huge additional costs and loss of jobs & competitivity caused by the expensive & unreliable energy drivel.

    • Jerry
      Posted March 12, 2016 at 7:06 pm | Permalink

      @ChrisS; If Cameron does go post a Brexit decision then there would be calls for a GE (like during Browns time as PM) as there would be claims that the PM is unelected, all whilst s/he has one of the most important of all democratic tasks, since perhaps WW2, to carry out on behalf of the whole electorate.

      Not sure what the answer is, perhaps we just need the best people carrying out the Brexit negotiations whilst Cameron carries on as PM, running the rest of the ‘show’. What I do know is that calls (probably from the left and certainly from europhiles) for a GE will likely divert people from getting the best from our Brexit, whilst the worst thing that could happen is for there to be a GE because that could become referenda on the referenda…

    • Posted March 12, 2016 at 8:21 pm | Permalink

      Led, of course by :

      Boris
      M. Gove
      J. Redwood.
      W. Cash
      B. Jenkins
      With MEPs represented by D. Hannan.

      • stred
        Posted March 13, 2016 at 7:40 am | Permalink

        Leave have two ex Treasury bosses and JR, who would have been the best if Mrs T had not chosen to put a dunce in charge. Surely, they could get together and spell out how the money would be distributed to universities, scientists, farmers and others, who are being scared into remaining. They have to make people rejoice in the prospect of getting rid of Cameron and his dreadful collaborators. If Gove and other chickens tell the public that he will still be ‘negotiating’ on their behalf then many will frightened into voting for an end to parliamentary democracy.

  31. ian
    Posted March 12, 2016 at 2:05 pm | Permalink

    Been reading about driveless lorries in the news, This is coming out for fracking to try to reduce costs to make it pay, thousand of lorries going up and down motorways and country lanes destroying the road tarmac and making country lane unusable, the protests will be out in force blocking routes and coming on to motorways and shutting down villages all so the government can get in some employment tax to try to make out everything is great because they will not be getting in any companies tax from it, Of cos these companies have no money it will come from the markets and banks and the only profit that will be made will be in boardroom of companies and reemployment of north sea oil workers.

    When the whole thing goes pop after buying thousand of truck from more than likely overseas companies the whole sector will need a bail-out from the taxpayers to the tune billions of pounds.

    • Lifelogic
      Posted March 12, 2016 at 3:44 pm | Permalink

      Will you be able to stop driverless vehicles just by standing in front of them? Should make them fairly easy to rob. I supposes endless cameras and security tracking will be needed. I suppose there will be lots of children and drunks playing chicken with them.

    • A different Simon
      Posted March 13, 2016 at 12:14 pm | Permalink

      Ian ,

      Oil and Gas exploration and production companies go out of their way to use local contractors and local people whenever they can .

      Haulage companies and HGV drivers would be amongst the biggest winners of a ramp up in onshore E&P .

      Shale gas is not low cost but it beats LNG and pipeline gas on several counts :-
      – LNG and pipeline gas is 99.9% methane . Much of UK shale gas is wet gas containing longer chain hydrocarbons like ethane , propane and butane which are essential raw materials if we want to retain a chemical industry .

      – Liquefaction , shipping and regasification adds approximately $3 per million btu . The difference between U.S. Henry Hub and UK national balancing point gas prices is likely to be under $3 . Domestic shale gas should be cheaper than LNG .

      What makes you think there is a connection between driverless trucks and hydraulic fracturing of hydrocarbon wells ?

  32. ian
    Posted March 12, 2016 at 2:16 pm | Permalink

    This will cost your local council a pretty penny and your local tax will go up for policing, roads and so on, all at a time when gas is getting cheaper and bid uses are shutting down and overseas country who have gas will be trying to give it away.

    • A different Simon
      Posted March 13, 2016 at 12:16 pm | Permalink

      Driverless trucks is unrelated to hydraulic fracturing .

      You or the author of the document you have read has got the wrong end of the stick .

  33. Dennis
    Posted March 12, 2016 at 3:09 pm | Permalink

    Spend more, stimulate the economy, increase the population – sounds like the ‘bleeding the environment’ obvious.

  34. Lifelogic
    Posted March 12, 2016 at 3:13 pm | Permalink

    The solution very simple, cut out the banks/middle men, get the money back to tax payers directly through tax cuts, restore incentives to work and save. Reduce incentives not to work and get rid of the 50% plus of the state sector that does nothing of any value or worse still holds the productive back.

    Deregulate employment and nearly everything else and get some cheap energy. Just get the government to release the hand cuffs from the productive instead of pushing them overseas.

    Win win for everyone (but the people doing non jobs) who are mainly in the largely unproductive state sector.

    Even they will surely be happier with a real job to do.

    • Anonymous
      Posted March 12, 2016 at 5:45 pm | Permalink

      Lifelogic – You miss the point entirely. The name of the game is dependency on the state.

  35. ian
    Posted March 12, 2016 at 3:37 pm | Permalink

    The BATTLE for Britain and the city of London is on. Wet & mad the king of black holes, 29 billion in assets sold last year and not much ammunition left, debt out of control, Britain & the city of London last stand if the vote goes for staying in, the best part is the boardrooms of the city are for staying in and if that is the case the city of London will go down as EU & EBC move to take it over.

    Here we go loopy loo
    here we go loopy li
    here we go loopy loo
    all on a Saturday night.

    Here we go way down low
    here we go way up high
    here we go way down low
    we really know how to fly

    Here we go round and round
    here go fast and slow
    here we go round and round
    oh what a great way to go

    Here we go up and down
    here we sit side by side
    here we go up and down
    oh what a wonderful ride.

    Here we go loopy loo
    here we go loopy li
    here we go loopy loo
    all on a Saturday night.

  36. Lindsay McDougall
    Posted March 12, 2016 at 4:41 pm | Permalink

    Because of the ECB’s monetary policy and the transfers from rich EU nations to poor EU nations that will result, and because of Germany’s immigration policy, Frau Merkel is increasingly unpopular in her own country.

    I trust that evrybody knows that the ECB is effectively buying junk bonds.

  37. Gary
    Posted March 12, 2016 at 6:29 pm | Permalink

    The rapacious debt money monster is reaching the end game. Banks with monopoly powers create fresh money(the principle) out of thin air when every new loan is made but they don’t create the money with which to pay the interest on the loan. So they have to create more money out of thin air with new loans, or ensure that the velocity of money is sufficient to cover the interest payments on previous loans. Both situations are synonyms for inflation. ie. the system requires constant inflation to service the debt, deflation rapidly stresses the system to eventual collapse. And this is where we find ourselves, a debt swamped system that brought decades of production earnings forward, that squandered resources, misallocated investments, destroyed capital and is now exhausted. The desperate central banks have one option left, the nuclear option, eliminate cash and charge you for “saving” in the hope that you go on a consumption rampage that will stoke that precious inflation that will save their rogue system.

    Too late. We’re at the natural conclusion. It’s game over.

  38. Stephen Berry
    Posted March 12, 2016 at 7:30 pm | Permalink

    “Much of the Euro area has the same problem of a falling population reducing demand directly, and an ageing population often leading to a more savings oriented culture.” JR.

    We were told that the big problem of the second half of the 20th century was a rapidly rising population. As birth rates fall below replacement rate in many countries, I can see that the next ‘big’ problem is going to be a falling population. Like climate, it seems that the only good population is one that barely varies.

    Frankly, as far as the economics of the matter goes, I believe a declining population is nothing to be afraid of. As John says, it’s true that a falling population may reduce total demand but, by the same token, it would also reduce the number of jobs to be filled and mouths to be fed. Countries with small populations are no more deficient in demand than large countries.

    Indeed, I have heard it argued that smaller countries have certain economic advantages of larger ones. Certainly, when I looked on the internet, virtually all the countries at the top of the world per capita GDP table have small populations (Qatar, Luxembourg, Singapore, Brunei, Kuwait, Norway, UAE, San Marino, Switzerland, Hong Kong appear before we finally reach the U.S.) In this respect at least, small might be good.

  39. Posted March 12, 2016 at 8:53 pm | Permalink

    I’m with Mervyn King.

    The Euro will certainly fail, it is only a matter of time. There is no appetite among the citizens of the Eurozone to give up the level of sovereignty and make the fiscla transfers necessary to integrate the zone and make it work effectively. In the meantime it will lurch from one crisis to another.

    We need to put as much distance between us and the EZ before the inevitable serious impact with the fan. That means Brexit.

  40. Thatfatguy
    Posted March 12, 2016 at 10:09 pm | Permalink

    L/logic – couldn’t agree more!

    Classic lefty dumb-think, we can pass a law banning anyone being poor, on Monday the poor will be no more…

    More laws, more regs & taxes – do NOT create wealth only dark ages!

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

  • John’s Books

  • Email Alerts

    You can sign up to receive John's blog posts by e-mail by entering your e-mail address in the box below.

    Enter your email address:

    Delivered by FeedBurner

    The e-mail service is powered by Google's FeedBurner service. Your information is not shared.

  • Map of Visitors

    Locations of visitors to this page