Author: johnredwood

Mrs Merkel seems to be at war with herself. Euro Merkel knows she has to do what it takes to keep the Euro together, and to advance her European dream of a German led united Euro area – or EU as she would prefer. German Merkel knows that more and more of her fellow countrymen and women, and members of her own party, have lost patience with Greece and do not want a Euro more of Germany’s money to be lent, given or pledged to Greece.

Mrs Merkel also probably has enough self knowledge of both Germany’s considerable power in the EU, and the constraints on being seen to use that power too openly. Were Germany to lead a public ousting of Greece from the Euro, there would be bad press about brutal Germany cutting loose weaker countries because Germany had no sympathy with poorer countries nor any wish to share burdens and riches within the Eurozone. Were Germany to give ground and lead yet another bail out of Greece, but insist on austerity policies, there would be those who spoke and wrote about an authoritarian and dogmatic Germany forcing others to do as Germany instructed. Neither is a welcome thought capable of uniting a happy Eurozone.

So Mrs Merkel dithers. She tells us all where there is a will there is a way. If only Greece can behave better they might be accommodated. This is rather like saying if Greece had elected a CDU government there would not be a problem. At the same time she seeks to reassure her restive German friends and Parliament that this time there will be no easy terms bail out for a Greece which has failed to conform to past loan terms and to work properly through agreed programmes.

The tragedy for the Euro area is no-one around the table seems capable of leading the zone to a decision. That is why we have had weeks of damaging bad press for the zone, weeks of lending Greece more money from the ECB who assisted whilst the politicians delayed, and now two weeks of banks closed, no additional liquidity, and an air of great crisis. The ECB was made to carry the Euro from January and has now lent a total of Euro 89 billion to Greek banks, only to see them close and be unable to pay out people’s money when requested.

The preparatory work for Sunday’s meeting can run over once again all the old detail about what Greece might cut from its state budgets and which tax revenue it might be able to raise, but this is now looking very dated. The economic have deteriorated markedly thanks to the dithering of this year. Greece is starved of cash. Tax revenues have fallen. Output has suffered from the lack of confidence and now from the bank closures. Agreeing a modest three year loan and some changes to the state budget is not about to trigger a decent recovery and set Greece on the path to financial independence within the Eurozone. It might kick the can down the road one more time, only to create a bigger and more expensive problem some months later.

The first fix the assembled leaders need to arrange whether Greece leaves or stays within the zone is a fix for the banks. That will now be costly, given the damage inflicted on them. The banks may well need extra capital, as well as substantial additional liquidity. They remain the responsibility of the ECB and the wider Eurozone unless and until Greece leaves the Euro and has her own independent Central Bank. We are probably talking tens of billions here.

The second fix is for the Greek economy. Whilst I do not agree with all of Syriza’s policies, they are right to say the EU/IMF package has failed so far to get Greece growing, but growth has to be the priority. How do you get cash to flow and sensible new credit to be extended in a part of a currency zone that is as damaged and stressed by its single currency’s rules and massive German surplus?

The third and largest requirement is to fix the politics. The Euro bosses decided to take on the Greek government, aiming either to change their policies or to change the government. Instead the Greek people backed their government. What is the Euro area’s answer to a democratic government that simply does not accept Euro area rules? Lecturing them on their duties as borrowers has not worked. Either the Euro area has to have the full powers it needs to overrule a member state’s government, or it has to sit down and talk to whoever is elected and try to accommodate them. The last few weeks have seen a largely impotent Euroland clumsily interfering in Greek politics and losing. On Sunday they have to show they have learned from this bitter experience and can find a way to improve the position. If they decide they cannot lose face and lend Greece more, they need to help Greece organise an orderly transition to the drachma. That has to start with the ECB standing behind the Greek banks so they can open again.

Yesterday’s budget papers confirmed that real public current spending has been rising. On page 65 of the OBR Report they confirm that real government consumption increased by 1% per annum 2010-14. This is interesting as when I argued that there would be real rises in current spending on the cash figures most said that was wrong and the official forecasts talked of cuts.

2015-20 is forecast to show further real growth in government consumption. General government consumption is to grow in real terms every year between now and 2010, as is real government capital spending apart from minus 0.1% in 2016.

The OBR Report summarises the impact of the budget well. It says that departmental government spending will be £83 billion higher than in the March plan. The tax rises in the budget will increase revenues by £47 billion over the Parliament (dividend tax, insurance tax, pension tax and vehicle excise duty), to be offset by cuts in Income Tax and Corporation tax worth £24.6bn. Borrowing will be higher in 2016-17 to 2018-19 by £16.7bn.

The Budget reshapes the financial story of the 2015-20 Parliament. Instead of planning a £60 billion a year increase in cash spending by 2019-20 the Budget lifts this to an extra £69 billion, similar to the increase over the last Parliament. Instead of keeping current public spending under very strict control in the middle years, this Budget increases 2016-17 spending by £15 billion and 2017-18 current spending by £25 billion compared to the March plans. The detail of which departments benefit will be given in the autumn.

So how is this all paid for? Revenues are now more buoyant, and the latest forecasts think this will continue. With no further increases in the main taxes the aim is to raise £168 billion more in tax in 2019-20 than the government collected in 2014-15. That is £11 billion more than forecast in March. The government still eliminates the deficit by 2019-20 on these estimates. The following year, 2020-21 is also shown for the first time. The plan is to have £40 billion of extra spending that year, paid for by a rise in tax receipts of £42 billion.

These augmented figures for spending mean the NHS and schools can receive the extra money they need, and the Defence budget is now offered increases to meet the NATO 2% of GDP commitment. The economic forecasts point to satisfactory growth for the next few years, with inflation and interest rates trending up a little but staying relatively low. Productivity is also shown rising.

The budget measures include more road investment, more apprenticeships, better education and training, a new national living wage, lower corporation tax rates and a new system of taxing dividends.

They told us if the Greek people voted against the final proposals of the Euro area they would have to leave the Euro.

The Greeks voted No, so they were invited to new talks to stay in.

We read they would have one last go at sorting it out at a special meeting yesterday.

That failed.

So now the Greeks have been invited to table more proposals by Friday, with a meeting for the heads of government of the whole EU scheduled for Sunday to endorse a deal or agree to no deal and its unspecified consequences for Greece’s Euro and EU membership.

Meanwhile the unpleasant threats to Greece continue, with no proper support for Greek  banks and with  talk of bankruptcy and Euro exit.

This is not a sensible, friendly or effective way to run a single currency. Those who want the Euro need to support all parts of the zone and have confidence in its member states and banks. To its critics the Euro is now doing obvious economic damage to Greece and more widely, and is causing major tensions between European countries.

This December the UN seeks again to reach a global agreement to cut carbon dioxide output. The new agreement will take the form of a legally enforceable protocol and legal instrument attached to past agreements. It will come into force in 2020. The advocates wish to limit the earth to a 2 degree temperature rise, and believe that if the world cuts human generated carbon dioxide emissions by enough this precision in temperature control can be achieved. There is little comment on the other variables which might have an impact on the weather and climate in 2050 and 2100.

We now know the offers of the three main players. China, the world’s largest source of human CO2 emissions (25% of world total) has indicated that it should reach peak output of carbon dioxide by 2030. In the meantime it will build up renewable electricity generating capacity to limit the rise in carbon output it plans.  The USA (11% of world total) under Mr Obama wishes to make a   contribution, and has offered to cut its emissions by 28% in 2025 compared to a 2005 base level.  The EU (9% of world total) acting on behalf of all member states is enthusiastic about the process. It has offered a “binding, economy wide, domestic greenhouse gas emissions reduction target of at least 40% by 2030”. This is compared to a 1990 base.

The fact that China’s emissions will grow mean that advocates of this policy will be disappointed by the offers so far made collectively by the main creators of greenhouse gases. Once again the response of the world is asymmetric, with the EU offering the biggest cuts. This will continue to expose the EU to the need to substitute dearer energy for cheaper energy, and will limit EU competitiveness. Whilst markets are understandably concentrating on the tribulations of the Euro, the EU’s climate policy is also going to have quite an impact on EU costs, and divert  more industry out of the EU altogether. At least this process will cut the EU’s carbon footprint but it will also  boost the footprint of those places that sell us the industrial products that become displaced.