The state of Europe’s banks

Banks in the EU area have Euro 360 billion of bad debts, according to recent figures. The European Central Bank is telling the worst banks to write off more of their losses on difficult loans, and to raise more capital from shareholders or retained profits to improve their balance sheets.

Euro area bank shares have generally been badly hit this year, with renewed worries about their bad loans and capital needs. Their regulator, The European Central Bank, along with its master, the EU, are looking for private sector solutions. Under recently agreed EU rules there should be no state capital or subsidy going into these banks. Where there are large losses, they have to be met out of shareholder funds and through the bail in of bondholders. People and institutions who have lent banks money may find their bond is converted into shares, or they may have to take a cut in the terms on which the money was advanced.

The Italian banking system is the current eye of the storm. Markets are worried about Monti dei Paschi di Siena, which is in the process of cutting its bad debts. The Italian state has encouraged the establishment of the Atlante fund which bought Popolare di Vicenza. There is discussion of a further Euro3-5 billion bank assistance fund. The EU has discouraged the Italian government idea of state aid as a temporary measure, but has allowed the provision of liquidity assistance.

There are problems with banks in Portugal and Spain as well. The Eurozone’s hatred of subsidies and reluctance to share the surpluses from the northern rich countries with the deficit countries of the south and west remain major problems in the way of successful economic and social outcomes.

The weakness of the Euro commercial banking system, the lack if transfer payments fromrich areas to poor, and the rigour of the bank assistance regime are all reasons why the Eurozone will continue to struggle.

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60 Comments

  1. Anonymous
    Posted July 8, 2016 at 5:26 am | Permalink

    The Remainers omit to tell us that much of the EU is bust and that the next phase of the EU includes fiscal union and redistributive taxation.

    • Al
      Posted July 8, 2016 at 7:46 am | Permalink

      Sadly it is remarkably difficult to get any articles critical of the EU’s dealings into the mainstream press, particularly at the moment. It seems some facts don’t fit the line the press have decided to take.

      Without limiting the surplus in the north, the EU is in no position to deal with the weakness in the south, but they can’t constantly keep bailing out banks in one region just to support a surplus in another. If they do nothing and banks in the south (Portugal, Span, and Italy) collapse, pulling in their loans and taking down smaller companies, how much worse is the unemployment situation going to get and how much more support will those countries need? It is a vicious circle.

    • Mike Stallard
      Posted July 8, 2016 at 7:48 am | Permalink

      It has simply got to do this. There is no alternative. Everyone, including the 5 Presidents of the EU, knows it is true.
      The problem for us is this: if we do nothing, we will form part of a permanent minority in the Parliament and, more important, the Council and Commission outside the clique of the eurozone members. Permanently outvoted, who knows what we will be directed to do?
      Money will certainly be involved.
      We need to join EFTA and remain in the EEA. That, too, will cure the immigration threat. (EUReferendum blog)

    • Jerry
      Posted July 8, 2016 at 10:46 am | Permalink

      @Anonymous; A bit like in some parts of the USA then, in fact a bit like our own “Four Nation” political union.

      Something the Brexiteers forget to mention…

      • Richard1
        Posted July 9, 2016 at 7:37 am | Permalink

        That’s exactly the point isn’t it? The EU is heading in the direction of political and fiscal union, as it must if the euro is to survive. Just like the US and the UK as you point out. But this was denied by the Remain side. It was a poor campaign on both sides and there was a lot of rubbish from Leave (£350m pw for the NHS eg), But the Remain side never addressed this question of whether they accept that the EU is heading for political and fiscal union and whether that’s desirable.

        • Jerry
          Posted July 10, 2016 at 9:21 am | Permalink

          @Riachard1; Denied or just not mentioned by Remain, just like the Leave side did not mention the down sides of leaving. Also was the EU’s wish for ever deeper political union really an issue here in the UK, don’t (didn’t) we have an opt-out from both that and the Euro, hence all the talk at one time of a “two speed EU”, the effect of which would have made our own membership far more like that of Norway and Switzerland anyway even without Brexit.

      • A different Simon
        Posted July 9, 2016 at 10:02 am | Permalink

        Not at all .

        Currency union and political union require redistribution .

        It’s the remainers and pro-EU camp who have tried to hide the need for constant and ongoing redistribution within the EU .

        The German public will eventually cease to wear it . They don’t seem to understand that intraEU trade cannot be unidirectional .

        • Jerry
          Posted July 9, 2016 at 8:44 pm | Permalink

          @ADS; What you describe is political union, Dallas TX helps to pays for the debts of Detroit MI, here in the UK the great wealth created and taxed in the City of London and Docklands etc. pays for redevelopment etc. in the rest of the UK, helps pays for the Barnett formula etc, not just England [1], not just London.

          [1] which is its self a political union

          If there had been no political union to created the USA, meaning that there were 48 independent states in the land area between Canada and Mexico, the wealth of Texas would not help pay for debts in Michigan, if there was no UK, rather just the four independent nations then London would not help fund Scotland via the Barnett formula etc.

          I also think you under estimate the intelligence of many who those who vote, sure there will have been people on the remain side who did not understand what they were voting for but the same was also true of those who voted for Brexit.

  2. CHRISTOPHER HOUSTON
    Posted July 8, 2016 at 5:30 am | Permalink

    Last paragraph: “…the lack if transfer payments from rich areas to poor,…”

    Emerging post Leave vote, Germany and other EU nation states have affirmed their commitment to increased monetary union. All are aware of the dangers of economic disequilibrium.
    On Sunday Latvia , through one agency, stated it was afraid, for it receives a quarter of its revenue from the EU and that the UK provides 10% of the EU budget: 16.5 Billion Euro per year.

    One wishes that the Remainers who still do not abide by democracy and will not accept the referendum vote would go talk to the Latvian government and set up a Direct Debit payment , perhaps 5% of their salary payable to the Latvian Treasury. But they must not injure themselves on their safety-pin brooches, or they may have to wait until Latvian nurses and doctors return from the UK for a two week holiday to their folks..if, they’re willing to go private and the doctors and nurses have time…it’ll, be a triple-time healthcare payment as they’ll be working in their holiday period.

  3. Antisthenes
    Posted July 8, 2016 at 5:43 am | Permalink

    The EU sometimes gets things right and in this case forbidding subsidies for failing companies is one of the few of them. However the EU is then guilty of the cardinal sin that all other nations are guilty of and that is having an interventionist central bank. Markets should always decide the fate of interest rates and money supply. For the very simple reason that predicting the future near or far is impossible and predicting what peoples needs are is not possible by a few so called experts. Only all of the people know that and it changes from moment to moment. Hence why we have markets because that is where people make their decisions whether to buy or sell. So it is in real time and accurate.

    We never appear to learn from out mistakes we continually allow central planning to decide and we always end up being hurt in some way by it. The results are booms and busts magnified, hampered economies, taxes to pay for the mistakes of the experts, crony capitalism, unsustainable public services, incompetent government agencies, the list is long. Life goes on yes but not because of it but despite of it and without the experts but for the few exceptiuons it would be considerably better.

    • Mike Stallard
      Posted July 8, 2016 at 7:53 am | Permalink

      Well now.
      The Eurozone is in such a mess that just letting the bankrupt banks close their doors will mean a ghastly increase in the poverty of the Italians who have placed their life savings – or left their life savings – in the said banks.
      How would you like to lose your life savings and maybe your own pension too? It might mean, literally, begging on the street or even sending the kids out to the local rubbish tip. I am not joking. Look at Greece.

      • Antisthenes
        Posted July 9, 2016 at 7:42 am | Permalink

        QE it appears is coming back to bite us in the bum. The too big to fail was a myth too far. No bail outs then would have been very painful but not doing so has meant that caused another asset bubble that has created the same monster again and the too big to fail are failing again. Liquidity once again the problem. If the crash comes it will of course be blamed on Brexit which may be true but not as will be thought. Brexit contribution will be the straw that broke the system because the system was ready to fall over anyway it was just awaiting the right nudge. If it is not Brexit then something else will come along to do it. Most likely another euro crisis Italian banks are in deep trouble.

        Political answers are not the answer to economic problems there is no social justice there. It is not possible for everyone to be winners all of the time and sometimes the few have to suffer for the many. Politicians are there not to shield us from the consequences of our actions but to help us help ourselves to deal with it. You believe that we are all responsible for our neighbours actions and we should contribute our hard earned money to bail them out when their actions get them into debt. I do not I would contribute a little to help them get themselves on their feet afterwards if I thought they merited that contribution.

    • Mitchel
      Posted July 8, 2016 at 1:53 pm | Permalink

      Interesting to note that the unlamented Manuel Barroso has just joined Goldman Sachs.

      • zorro
        Posted July 9, 2016 at 6:25 pm | Permalink

        Interesting in a ghoulish, conspiratorial, ex hard left wing Portuguese joins corporatist, unaccountable globalist bank type of way…..

        zorro

  4. Mark B
    Posted July 8, 2016 at 5:56 am | Permalink

    Good morning.

    I hear ‘rumors’ concerning (named bank ed) that it too has very large debts that could further cripple the Eurozone. The reason I mention this, is because a lot of German Banks were encouraged to invest in shipping, and when the recession of 2008 hit, they were left with a large number of bad debts. If this is true, then the Eurozones strongest economy, and the one that underpins the Euro, could very well be in big trouble.

    I would like our kind host to comment on the fact that, the UK, as a shareholder in the ECB, will not be liable for any debts incurred by all the Eurozone countries. I think it is important that the UK is sheltered from what seems to be another gathering storm.

    I noticed that my post from yesterday was not put up. I appreciate that our kind host is busy. I admit that it was perhaps longer than most, but nothing defamatory, untrue or inappropriate was said.

    I mention this in this post because, as I alluded to in my previous post, people go to where there are jobs. And if the only country that is doing well is the UK, then it is too the UK they will head. It is therefore in all our interest that the Eurozone addresses the multitude of issues facing it. One being, the progress to EVER CLOSER UNION.

    Now that the people of the UK have decided that they no longer wish to be part of EVER CLOSER UNION and thereby the EU, it is important to stress that the EU complete the project so that movement of monies form richer to poorer Eurozone states happens.

    I find it ironic, and a little bit insulting, that all other 27 member countries demand that the UK respect the right of freedom of movement for people for EEA member countries citizens yet, cannot seem to accept the freedom of movement of money (another one of the four freedoms) when it comes to just between 28 EU / EEA members ? Curious.

    Whatever the plans of the political elites, it will come down in the end to, as someone once said; “Events dear boy, events !”

    Reply The UK has a tiny shareholding in the ECB. We have not paid up our full Euro member notional holding because we have not joined the Euro. We will presumably get rid of our small share on exit.

    • Mike Stallard
      Posted July 8, 2016 at 7:55 am | Permalink

      On immigration:
      See today’s EUReferendum blog.

      • Mark B
        Posted July 9, 2016 at 9:56 am | Permalink

        No !

    • Chris
      Posted July 8, 2016 at 8:02 am | Permalink

      Reply to Mr Redwood:
      We do pay in regularly to the ECB, on the basis that we are a Member State of the EU:
      https://www.ecb.europa.eu/ecb/orga/capital/html/index.en.html

      Capital subscription
      Last updated on 1 January 2015
      The capital of the ECB comes from the national central banks (NCBs) of all EU Member States and amounts to €10,825,007,069.61.

      The NCBs’ shares in this capital are calculated using a key which reflects the respective country’s share in the total population and gross domestic product of the EU. These two determinants have equal weighting. The ECB adjusts the shares every five years and whenever a new country joins the EU. The adjustment is made on the basis of data provided by the European Commission….”

      Reply the UK has an opt out from the Euro and therefore has not paid up most of its possible stake

    • acorn
      Posted July 8, 2016 at 10:21 am | Permalink

      Some will remember that the international central banking system was hardly effected by World War 2. German banks had no problem clearing with Swiss banks. The Swiss banking system was about three times richer at the end of WW2, than it was at the start. So don’t expect Brexit to change anything either.

      Anyway, all the bail-out money that has been put into Greece, basically bounces straight out again into insolvent French and German commercial banks. The Greek people get practically none of it.

      That’s the snag of German banks lending there surpluses to club-med to buy BMW’s. Nobody stopped to think how club-med was going to pay back the loans, which they haven’t.

      If Greece jumps ship and/or Italy defaults, there isn’t enough money in the Eurozone to bail out the banks that will fail. Will Wolfgang Schauble allow the ECB to turbo charge the Euro printing press, and dump plane loads of “liquidity” on those banks? (Just like the US and the UK did in 2008.)

  5. Caterpillar
    Posted July 8, 2016 at 6:04 am | Permalink

    Can we expect more bank shocks feeding through to the reduction of investment of Italian firms as (apparently) happened post 2007?

    Just a slight aside, somewhere I was reading recently that though Koo’s arguments about balance sheet recessions were (past tense) interesting, they are no longer relevant, and the private sector is out of a debt reduction focus. I am guessing this isn’t the case with some European banks then?

  6. CHRISTOPHER HOUSTON
    Posted July 8, 2016 at 6:06 am | Permalink

    Brussels is attempting to hand out fines willy-nilly to rebel nations including Spain and Portugal but also other fines and sanctions not related to banking but to migrant policy— to the Czech Republic, Slovak Republic, Hungary and Poland. Not to mention threats of fines and sanctions to Romania and Bulgaria for wishing to complete the southern part of a Russian oil pipeline which bypasses Ukraine.

    One could parallel it to say Westminster giving the whole of Yorkshire and Lancashire a fine for creating a Cooperative Bank or placing fines upon Surrey, Kent, Norfolk and Essex for a failure of its Social Services to find accommodation for asylum seekers on the grounds they haven’t any empty houses.
    As I write, with the passing literary thought of my belov-ed Yorkshire being fined by Westminster I am digging my pen into paper like a dagger scrawling the blue and white flag of my County…so, one can imagine just what the nation states of the EU make of Brussels, and the “war” that is imminent in Euroland.

  7. Ian B
    Posted July 8, 2016 at 6:14 am | Permalink

    The problem is that the current banking system is broken. Inflationism has run out of road, hit the buffers, etc. We need to get away from this “engine room of the economy” idea which verges on a kind of finance physiocratic economics and recognise that financial services are just that, a service to the rest of the productive economy. Creating more and more money just creates problems, not growth in economic production. Major reform is required.

    • McBryde
      Posted July 8, 2016 at 8:48 am | Permalink

      Would a better system be to do a debt-to-private equity swap? That would create the opportunity to fund small businesses.
      Monetising debt just leaves the debt intact and a rise in interest rates will just increase budgets – leading to higher taxes.
      Also something like 70% of national budget is accumulative interest expenditures.

    • StevenL
      Posted July 8, 2016 at 12:17 pm | Permalink

      Run out of road? You’re kidding aren’t you? There’s plenty more ammo in the box. If it worst comes to the worst, they can just go back to fixed exchange rates. Then they could mandate interest only mortgages at rates of 0.01% or 0.001% and house prices of £billions or £trillions even.

      If they give up now, and allow ‘deflationism’ to set in, we’ll just have a massive depression and they’ll all be worried about being strung up by the baying mob (metaphorically strung up of course).

      It’s too late to turn back now, even without international agreement on fixed exchange rates we could always opt to be like Spain or Italy used to be, with the budget deficit financed by the central bank and big, growing numbers of the banknotes.

    • Lifelogic
      Posted July 8, 2016 at 12:52 pm | Permalink

      The banking system certainly is dysfunctional and lacking competition. Deposit your money (unsecured) with the bank at 1/2% interest but if you want to borrow some back they might charge you 7-70 times as much, and they want good security too. Yet you are quite likely a better security risk than they are.

      The bank are about as much use as a chocolate teapot – less actually as you can eat the teapot.

    • Iain Gill
      Posted July 8, 2016 at 6:36 pm | Permalink

      the only answer any of them have to any problem is printing more money and lowering interest rates, its hardly a sign of brilliance in our ruling classes

  8. Richard1
    Posted July 8, 2016 at 6:43 am | Permalink

    The Eurozone certainly needs political and fiscal Union to go with monetary union. But I find the ECBs attitude to the Italian banking crisis very sensible – it’s what JR proposed should have happened in the case of the UK rather than the Brown bailout isn’t it?

  9. Nig l
    Posted July 8, 2016 at 7:07 am | Permalink

    Interesting, looking for private sector solutions when it is the hammer fist of central intervention and control that has contributed so mush to the problem. I can see no political appetite for Germany and certainly France and Holland to constantly give hand outs to the less well off nations. The ex eastern bloc countries need the subsidies plus repatriation payments from their workers in places like the uk and cannot devalue to be competitive because of the euro.

    Brussels is Germany is not going to flex their view, after all if you subsidise the Banks, you subsidise everything. Is their a political will in Italy to give share and bond holders a hair cut, I doubt it and what will happen if the banks are holding each other’s Paper, which I suspect ther are. Two cliches, a house of cards built on sand.

    I suspect the only answer is, and this will be accelerated when they see the success we make of Brexit, is to leave the Zone. Maybe this is not as fanciful as it once was.

  10. Ian Wragg
    Posted July 8, 2016 at 7:13 am | Permalink

    With a major German bank on life support and one of the major power companies almost bankrupt.
    Add insolvency in Spain,Italy, Portugal, Greece and many East Europeans. Remind me again how many people of the supposed 500 million market can actually afford to trade with us.
    The big wide world beckons. Come on Andrea.

  11. Lifelogic
    Posted July 8, 2016 at 7:16 am | Permalink

    Indeed the sooner we get out the better. Not that I am convinced we will get out given the make up of the Tories and the commons, especially if May gets elected. Here in the UK the RBS bank is selling off it old good loans to third parties I see. So they are clearly still struggling. They are still not lending sensibly and are still treating good customers very poorly indeed.

    • Lifelogic
      Posted July 8, 2016 at 7:22 am | Permalink

      Not much doubt over who the BBC and Channel four support for the Tory leadership. They are even more biased on their coverage of thisthan they were on pushing for remain and against Brexit.

      The BBC and channel 4, distorts the whole political debate in the UK causing huge damage to the UK.

  12. Gary C
    Posted July 8, 2016 at 7:32 am | Permalink

    Morning John,

    What on earth is going on with the media ? They are now going on about a drop in consumer confidence, this is crazy talk and far too early to be making assumptions of this kind.

    The BBC are doing a great deal of harm to the UK.

  13. Gary
    Posted July 8, 2016 at 7:50 am | Permalink

    Let’s not gloat over EU banks. ALL the banks have this problem. Fractional Reserve banking anywhere in the world cannot deal with deflation. The model is built on constantly increasing the loan book and create new money. This is at least to cover interest payments on previous loans, the money for the interest payments on the loan is not created at the time of the loan. If borrowing dries up and the velocity of money falls this system goes belly up. That’s where we are now. And the more the banks try and create inflation with QE the more deflation they reap because they destroy capital and funnel all the money into bond bubbles. Negative rates won’t work either. The global economy is being destroyed by these fraudulent institutions. Brexit is neither here nor there in the scheme of things, everyone is tut-tutting over Brexit while behind them the entire global financial structure collapses. The global banking crisis transcends economic blocs. Nothing will change until we reform the entire banking system. Crypto-currencies may do it for them if they are reluctant to do it themselves. We can only hope.

  14. McBryde
    Posted July 8, 2016 at 7:59 am | Permalink

    The pound will, I think, start to pass the euro in popularity. Along with the USD and the Swiss Franc currencies, the GBP should become a safe haven when the euro gets into trouble.

  15. Chris
    Posted July 8, 2016 at 8:17 am | Permalink

    A 45 billion euro headache for Italy

    A perfect storm is brewing for Italian prime minister Matteo Renzi. The once golden boy of European politics is now facing the strongest political and economic headwinds since coming to power two and a half years ago. The most pressing concern are Italian banks, and more specifically the €360 billion of bad loans weighing on their books.

    They are mostly a legacy of Italy’s record double-dip recession between 2008 and 2014, and they have limited lenders’ capacity to offer new loans to businesses and households, throttling Italy’s timid economic recovery.

    On the back of these concerns are Italian bank sector share prices which have been falling strongly since the start of the year. In the wake of Britain’s vote to leave the European Union, this has turned into panic selling, focusing especially on the world’s oldest lender, the 500-year-old Monte dei Paschi di Siena (MPS).

    In the two weeks since the 23 June Brexit referendum, MPS shares have lost 50 percent of their value, and are now worth less than €0.27, their lowest level ever. The fact that a little more than two years ago, stock in the Siena-based lender was worth almost €9 gives a measure of its spectacular fall from market grace….”

    • Chris
      Posted July 9, 2016 at 11:32 am | Permalink

      Reply from Chris to Mr Redwood, with regard to the above comment. The above is a quote from an article, on the EU observer website, for which I gave the link, but it has been removed apparently. I do not wish to get into trouble by looking as though I pass this off as my own/not acknowledging my source. It is not my own comment, and I made this clear in my original comment.

  16. turboterrier
    Posted July 8, 2016 at 8:29 am | Permalink

    Thank you John for today’s post.

    At last the money problems over there are being highlighted. It is totally unsustainable and as I often tell remainer’s, the EU as it is, it days are numbered. Nobody from that side wants to discuss let alone mention what is really going on. All of them ready to put us down, new and old politicians that have had their day should retire to their gardens, cannot stop having a pop at the country. Trust them at your peril.

    Whatever happens we need totally dedicated leavers in all the critical positions and I just hope that the party realise the importance of that fact when casting their vote for the Prime Minister and leader of the party. Never been a great believer in born again anything they all have a habit of returning to their roots. With all this negativity is it any wonder that the money markets are hesitant. Do these people ever stop and think for one nano second what signals they are sending out to the world?

    Andrea cannot do it alone but with the right team around her I am totally convinced that together they can achieve and exceed the country’s expectations.

  17. Brexit Facts4EU.org
    Posted July 8, 2016 at 8:37 am | Permalink

    JR, very good points on the situation with European banks.
    May we go off-topic?
    Yesterday the Foreign Secretary and his Civil Servants were questioned by the Foreign Affairs Committee, where it was confirmed officially by the Foreign Secretary and his officials that neither the Government nor the Civil Service had contingency plans in place in the event of a Leave vote, save for immediate announcements by the Treasury and/or Bank of England.
    Are we the only people to be appalled by this? As ever, we’ve presented the facts on our news page, with quotes from the testimonies given.
    Best wishes, the Facts4EU.org team
    http://facts4eu.org/news.shtml

  18. Bert Young
    Posted July 8, 2016 at 9:30 am | Permalink

    The EU banking system is defunct ; it could never achieve anything near an integrated approach due to the vast differences of economic performance that exists and the reluctance – as John points out , to share surpluses . The IMF has provided an unrealistic level of support to the EU on the premise that it can put itself in order and has a long term future ; this action demonstrates poor judgement and extreme bias . If Lagarde was not there directing influence the Euro would not exist bringing to an end the entire sham .

    Other countries in the pipe line to become members of the EU have extremely weak economies and will only add to the burden of control ; any investor looking in from the outside would not risk investing in such a shaky condition . It is time to pull the plug out and face reality – exchanging debt for worthless paper will not convince anyone .

    • Spinflight
      Posted July 9, 2016 at 12:22 pm | Permalink

      Hence why China has circumvented the IMF..

  19. Roy Grainger
    Posted July 8, 2016 at 9:37 am | Permalink

    It will be interesting to see what happens in Italy, the EU/ECB will not be able to bully them in the same way they did for Greece because their economy is much larger. Just by the way I was speaking to an Italian colleague today who is politically very moderate and he said he was delighted UK had voted to leave the EU and hoped eventually Italy would too.

  20. a-tracy
    Posted July 8, 2016 at 9:38 am | Permalink

    The decision of who is the new PM is now in the hands of the Conservative Party members.

    The other MPs must now put that on one side and decide who has the skills required to set up sales trips and promote the UK all over the world now that we our pound has dropped, making our manufactured goods more attractive. No more naval gazing, get moving, I was pleased to see Sajid Javid starts round the world trade tour to secure British deals Telegraph.co.uk‎ – 10 hours ago Javid should put action where his mouth is and prove his worth to any new incoming PM. Whilst we’re still in the EU we should be using savings from borrowing rates to promote our UK made goods all over Europe for short term gains. Our trade figures were appalling for May. The public needs to hear about these positive actions instead of just BAD BAD DOOM DOOM news, there is just no opportunity news being spread or advice for small businesses on how to sell in Europe now our £ is so low.

    On a side note I saw a comparison of May -v- Leadsom, Leadsom’s past experiences and schooling was discussed in detail and is about to be forensically investigated, the members must have the same amount of detail on both candidates ie what public and private schools did May go to? What did she do at the Bank of England and for how long? The Conservatives must sell the positive attributes of both clients otherwise you will damage the party and not try to run one another down, this is often the reason there is a glass ceiling for women, people like Ken Clarke make sexist comments and still get away with it.

  21. Lifelogic
    Posted July 8, 2016 at 9:47 am | Permalink

    Excellent piece by Allister Heath yesterday – Chilcot’s lesson applies to Brexit: our government does not work well.

    Indeed the government does not work at all really, and certainly not in the interests of the voters very often.

    http://www.telegraph.co.uk/business/2016/07/06/britain-is-living-through-the-best-of-times-and-the-worst-of-tim/

    also

    http://www.telegraph.co.uk/business/2016/07/07/my-10-point-plan-to-kick-start-the-economy-after-the-referendum/

    • Lifelogic
      Posted July 8, 2016 at 10:06 am | Permalink

      Front of the telegraph today it says:

      “If you want something said ask a man, if you want something done ask a women.”

      Well fine, but certainly not Theresa May please, she did nothing to even try to keep to the “no if no buts to the tens of thousand promise” and further falsely assured the nation that we had control of our border in the EU – in order to trick voters into voting remain. She just pretended she was doing something while knowing full well that, within the EU, she could not. Hardly an honourable or honest position.

      Lady Thatchers view is rather sexist, but I suppose that under the absurd “BBC think” sexism only goes one way “anti female” otherwise is does not count.

      Perhaps I know very different sorts of women and men to the average, but I find they talk far more than the men and do rather less (certainly in value terms). Sensibly tending to prefer different work/life/family balances.

      What is very clear is that far, far more tend to study languages and art subjects rather than science, maths, physics, engineering and practical subject than men do, which tends perhaps to suggest the reverse is perhaps the case?

      • Lifelogic
        Posted July 8, 2016 at 1:05 pm | Permalink

        The difference between May and Thatcher is the former wants to work against the views of voters and party members. Thatcher and Leadsom wanted to work with them.

        Leadsom should remember how popular Osborne’s promise on inheritance tax was (not that he kept it). She should abolish IHT and point out they she unlike Osborne will keep promises. Also cancel the absurd HS2 to help pay for it.

        She should also remember how lower tax rates can raise more in tax and boost confidence hugely as we saw under Thatcher.

        The choice is simple a high tax, BBC think, tedious, remainer like Theresa May (someone who could not even control non EU migration, as Home Secretary) or A low tax, high growth, much smaller government, far less red tape, out of the EU, half priced energy, Andrea Leadsom.

        Let us hope she is getting a good prospectus drawn up to appeal to the typical Conservative Members and not the tax borrow and piss down the drain modernisers.

  22. Christopher Hudson
    Posted July 8, 2016 at 10:18 am | Permalink

    The Remainers coming out for Theresa May are displaying the same safety first, low risk-low reward mindset that lost them the Brexit vote. What I think the Brexit vote shows is that the public are ready for a bold, fresh approach. And they call Leavers little Englanders!

  23. ian wragg
    Posted July 8, 2016 at 10:35 am | Permalink

    Congratulations John on Andrea Leadsom getting into the final. The politicians got it wrong over Brexit and I hope they are wrong. I hope she uses you in government and I certainly think Nigel Farage should be on the negotiating team.
    I am absolutely dumbfounded that the election of leader is being delayed so Dave and his silly mate can attend the G20 meeting on September 4th.
    Absolutely scandalous.

  24. Peter Stroud
    Posted July 8, 2016 at 11:35 am | Permalink

    What a strange organisation is the current EU. It wishes to become a United States of Europe, rather like the USA, yet it has no idea what should be ‘federally’ controlled, and what should be left to the individual states. Surely the UK could never easily fit in to such an organisation.

  25. Denis Cooper
    Posted July 8, 2016 at 11:59 am | Permalink

    Rather than the state of European banks we should be joining the Telegraph in worrying about the ongoing calamitous collapse in the value of the pound, with the sterling trade weighted index barely scraping a 0.3% rise yesterday to 77.9311.

    http://www.bankofengland.co.uk/boeapps/iadb/fromshowcolumns.asp?Travel=NIxIRxSUx&FromSeries=1&ToSeries=50&DAT=RNG&FD=1&FM=Jan&FY=1963&TD=8&TM=Jul&TY=2016&VFD=Y&html.x=16&html.y=16&CSVF=TT&C=IIN&Filter=N

    This is really scary because the last time it was this low was March 12th 2013.

    I hope all those who voted for Brexit are happy with the devastation they have brought to our economy … if only the voting age had been reduced to 6 this catastrophe could have been averted, assuming that they had got around to voting.

  26. lojolondon
    Posted July 8, 2016 at 12:28 pm | Permalink

    Good point, John, but I see you have focused on mediterranean financials and chosen not to mention the biggest European bank in the strongest European economy – Deutsche Bank –

  27. JamesG
    Posted July 8, 2016 at 3:03 pm | Permalink

    Bankers don’t seem to be very good businessmen in the main (unless they are cheating the system) but it doesn’t seem to stop them loftily preaching to the rest of us at every opportunity.

  28. Denis Cooper
    Posted July 8, 2016 at 4:40 pm | Permalink

    Off-topic, hot off the press:

    http://www.theguardian.com/politics/2016/jul/08/legal-attempt-prevent-brexit-preliminary-hearing-article-50

    “First legal attempt to prevent Brexit set for preliminary hearing”

    “A high court judge, Mr Justice Cranston, has set 19 July for a preliminary hearing of the judicial review challenge brought on behalf of the British citizen Deir Dos Santos.”

  29. Javelin
    Posted July 8, 2016 at 4:41 pm | Permalink

    How refreshing to read about the problems of the EU from an outside perspective.

    Eventually the EU banking problems will have to be dealt with, but there doesn’t seem to be a reasonable way out for them within the EU as it currently stands.

  30. Lindsay McDougall
    Posted July 8, 2016 at 4:51 pm | Permalink

    Why not just allow loss making banks to crash and burn. This is a tried and tested system, Mr Redwood. It’s called capitalism, a system that works and supports evolution because the freedom to fail is every bit as important as the freedom to succeed.

  31. Chris
    Posted July 8, 2016 at 4:59 pm | Permalink

    Slightly O/T, but some useful advice from The Guardian(!) on how Andrea Leadsom could win:
    http://www.theguardian.com/politics/2016/jul/07/how-andrea-leadsom-can-beat-theresa-may
    I think they are right.

  32. Monty
    Posted July 8, 2016 at 10:07 pm | Permalink

    Surely, if push comes to shove, the ECB can pressurize the struggling banks to bail-in the saving accounts of their depositors, plus the contents of their safe deposit boxes? Like they did to the Cypriots?

  33. Chris S
    Posted July 8, 2016 at 10:58 pm | Permalink

    The hapless Euro has had a respite in the last few weeks. Everyone has been looking at Sterling and failing to notice that the Euro to has gone down in value against the dollar.

    It is certainly the case that without truly massive fiscal transfers from the richer countries, principally Germany, and the ClubMed lot, the Euro will undoubtedly founder. It might be useful to point out why at this point.

    Normally, where two countries trading together see one of them building up a trade surplus with the other, the problem is largely self correcting : the exchange rate moves and the goods from the surplus country get more expensive and the products of the country in deficit grow cheaper. To a large extent, the problem resolves itself.

    In the decade of the Euro we have seen truly massive surpluses built up by Germany with the purchases by ClubMed fueled largely by ever increasing Euro debt. There is no provision for any exchange rate movement to correct the problem so how can it be solved ?

    Simple answer, it can’t.

    German taxpayers are never going to agree to the fiscal transfers needed so :
    They’ve tried shutting down the money supply ( austerity ) = 50% youth unemployment
    They’ve tried being creative with government debt = gigantic (Greek) public sector debt that’s unrepayable ( but don’t tell the German taxpayer that ).
    They’ve tried fiddling the ECB rules which even the German Constitutional Court backed down from ruling illegal, yet what they are doing most definitely is.

    Where will it end ?

    One country will, sooner or later come crashing out of the single currency. Greece might be first but one like Italy or France that’s too big to bail out will surely follow.

    Then there’s the German and Italian banks. It won’t take much to push one of them over the edge. Then all bets will be off. What will they do then ?

    The sooner we are gone and increasing our trade with the rest of the world, the better protected we will be when the inevitable happens.

    PS
    As for the pound against the Euro, today it ended trading just 7% below the average for the last 10 years. If you average across the two weeks since the referendum it is down by not much more than 4% against that long term average. Bit more concern about the pound/dollar but it’s early days.

    All it will take to restart confidence will be a couple of good trade deals……..

    Juncker can shout and bluster all he likes but he can’t stop us talking to our friends around the world so what are we waiting for ?

  34. Jack
    Posted July 9, 2016 at 12:10 am | Permalink

    The EU considers any funds to help the banks from the Italian government to be additions to the public debt, and the EU thinks increasing public debt is “bad”. Of course, government debt is just the net financial assets of the private sector and nothing to worry about, in fact there’s not enough of it across all of Europe (including here in Britain).

    If only the EU would allow countries to run much larger budget deficits, then people’s incomes would be that much higher and able to service their private loans. This coming banking crisis is just a failure of the Fiscal Compact and (In)Stability and Growth Pact. and shows the dangers of keeping govt budget deficits too small, as they are now.

    Our own government deficit is tragically small and we could be in for similar problems in the future unless we get a government ASAP that will cut taxes massively precisely to get our deficit up to something beneficial like 8 to 10% of GDP as a start, and then adjust from there. Otherwise we’re stuck with laughable annual GDP growth rates.

  35. Spinflight
    Posted July 9, 2016 at 4:18 am | Permalink

    I think we have to be careful that the EU doesn’t try to use our remaining time of membership to hit us with the costs of bail ins, outs or shake it all abouts.

    I’m not convinced that we don’t pay for their mistakes at present even if we don’t actually hand money over directly. The financial markets are a wonderfully devious way of ensuring that a loss here is paid for by a gain somewhere else. Whether through increased insurance premiums, paying more for our food or even rents and the like..

    I’ll be rather glad if Andrea Leadsom wins the leadership contest. As I understand it she is a one the right side of many issues I believe in.

    Take HS2 for instance. With an eye to geopolitics this has always infuriated me. The Chinese strategy of exporting deflation to the West in order to prevent us from inflating away our debts to them has seen many recent examples, Port Talbot being a big one at present. Add in their One Belt, One Road strategy whereby they seek to link up their Western hinterland to Asia and Europe through massive infrastructure projects and HS2 looked rather like an extension to the line that we were going to pay for entirely rather than with huge Chinese funding!

    Whether this strategy ( OBOR) prevails is likely down to India and which way it jumps. They are being pulled in all directions, military cooperation with the US, considering economic ties with China through OBOR yet still very much part of the Russian sphere of influence.

    The one thing that India really covets is a permanent place on the UN Security council. The second thing being technology, particularly military. We could effectively provide both and add a counterweight to China’s influence, opening up a market of over a billion people in the process.

    One does hope that the Stockholm complex we seem to suffer with with regard to the EU is abandoned in favour of a more rational approach. The EU doesn’t want to deal and even thinks we should be punished by such a deal. The commonwealth on the other hand is knocking our door down, with New Zealand even offering us negotiators.

    If we deal with our friends first, with an eye to a geopolitical environment which is unlikely to change any time soon, then we will negotiate with the declining EU from a position of strength. There is no reason why the EU should be given precedence.

    If we are going to reposition ourselves then lets do so for the future rather than the past.

  36. Steve Buckel
    Posted July 9, 2016 at 2:52 pm | Permalink

    The following are all sources of Moral Hazard:

    * State rescue of a bank, any bank.
    * Approaching 0% interest rates, or even lower.
    * The lack of 100% provision for non-performing debt of over 6 months.
    * The existence of exposure to derivatives for amounts which exceed the bank’s capital base (that, in essence, means all of them.)

    The entire world monetary system is effectively a busted flush. But I was told I was ‘old-fashioned’ for saying this, back in 2000.

  • About John Redwood


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

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