Author: johnredwood

Mrs Merkel is a clever politician. In Berlin she speaks German, and in Brussels she talks European. She wants the Euro area to reform in a Germanic way, but she wants Germany to stay within the wayward zone and gradually to assume the responsibilities of leadership for the currency.

Her German electors were never keen on the Euro. I remember when senior Germans came to London to persuade me and others of the joys of the Euro which they categorically said the UK would join, they had to admit 70% of the German people wanted to keep the DM.  How wise the people were. Their leaders’ predictions that the UK would lose its City business and find trade difficult outside the currency were less well judged.

Now Germany is in the Euro there is relentless pressure on her to put the German trade surplus and strong tax revenues at the disposal of states with weak finances,  to assist Euro  countries with trade imbalances, and to guarantee commercial banks with weak balance sheets. Just as the UK government, taxpayers and Central Bank stands behind the cities and parts of our country that are in trade and budget deficit, and behind all the main UK banks, so many think Germany should now stand behind  the Greek state and Spanish banks, to name but two problem areas.

Mrs Merkel knows she cannot openly back major subsidies or guarantees from German taxpayers to the problems of the zone . She needs to play brinkmanship with the troubles, only in the end agreeing expensive compromises and even then trying to avoid any direct German payment.  This is why Germany does not want to see the UK leave the EU.

Accepting that the UK has stayed out of the Euro – something the German establishment would not accept  before and shortly after the formation of the Euro –  the UK has a couple of important uses for Germany. The first is the UK can normally be relied on to be more fierce against expansion of EU budgets, subsidies and taxes than Germany, providing good cover for the German position. Second, the UK is a useful unpopular large member of the club making Germany look more mainstream and acceptable. I doubt  Mrs Merkel is stupid enough to think they need to keep the UK in in order to be able to carry on exporting  so much to us, and her Ministers have said sensibly that if the UK left the EU they would want a free trade agreement so they could sell to us and we to them.

Mrs Merkel now has another reason to be nice to the UK. The adverse reaction of many UK voters to the scale of European migration, and to the required favourable benefit treatment of migrants from within the EU, is mirrored by some of the reactions in Germany. Mrs Merkel is wise enough to heed the warning, and needs to take some action to show German opinion that there have to be some limits to generosity to recently arrived individuals, and some understanding of worries about the pace of change in once settled communities.

She and Mr Cameron may well be able to agree some reforms to the EU rules on these matters that are mutually beneficial. She also needs to understand on this visit, however, that the “British problem” is not going to be fixed by a few modest changes to benefit rules. The British problem is an advanced version of the German one. The UK stayed out of the Euro. We did so because UK taxpayers do not wish to stand behind the Greek state, or Cypriot banks or any other country’s trade deficit. Our worry is the whole Treaty architecture is now designed for the Euro area and not for us. That is why we need a new relationship.

When the UK joined the EEC I opposed it for two main reasons.  The first was the likely long term erosion of our sovereignty. The Treaty of Rome made clear it was much more than a free trade area or more accurately a custom union that  they had in mind. The second was the economic damage high UK contributions and the asymmetric approach to trade was likely to do to our economy.

Which brings me back to the UK balance of payments. The UK is not uncompetitive. We have a healthy trade surplus on a regular basis with our number one trading partner, the USA. We regularly sell more to Australia and Switzerland  than they sell to us, two other important trade partners.  When it comes to the rest of the EU it is always the other way round. We have usually suffered bad deficits.

In the early years of our membership the whole approach was to ease duties and restrictions on trade in goods where Germany had the advantage, and to restrict or fail to liberalise trade in services where the UK had an advantage. That worked very well for the rest of the EU who ran big surpluses at our expense.

In more recent years the EU has dangled the carrot of a better trade in services for the UK as a means  to gain more and more control over our service areas by endless regulation. Whilst some of the new rules have helped build pan European business opportunities, more of the rules have driven up costs and damaged the UK’s worldwide competitiveness in services.

The official Pink Book for 2013 shows the UK running a massive deficit of £88bn on the current account with the rest of the EU, led by Germany at minus £35bn.  In all years since 1997 the UK has run a current account surplus with the Americas, Australasia and Oceania.  We have been large importers from China, but the German deficit has far exceeded our Chinese deficit. Trade with India is well matched.

The UK’s surplus on services is heavily dependent on insurance, pensions and financial business, which recorded a £58bn surplus in 2013.  Our travel account is in heavy deficit, as we travel more and spend more than foreigners do when visiting the UK.

When conducting domestic policy we need to remember just how this country earns its living. When conducting foreign policy, we need to remember just what a bonus the rest of the EU gets from its current relationship with the UK. £14.8bn of our current account deficit in 12013 was our  net payments to the rest of the EU, for the privilege of them selling us goods! They would want to keep their access to our market, whatever other sensible political arrangements we might insist on.

2015 should bring more economic growth to the UK. The banking system is now able to finance more of a recovery. Many individual consumers will get a boost as wages are now on average rising faster than prices. The new year will bring further falls in petrol and diesel prices. This will relieve family budgets directly, as vehicle fuel is  a large cost, and help lower other prices as delivery costs to shops and to customers decline.  The food retail sector remains intensely competitive, with lower prices resulting from that and from some falls in commodity prices.

Voters will naturally wish to see per capita growth, which should happen. They will more importantly wish to see their own living standards rising. The government will have to push on with its p0licy of cutting the rate of inward migration by a variety of means, and make early progress on benefit entitlement issues for recently arrived people. It will be popular if more and more of the new jobs the economy is generating are taken by people already settled here legally, cutting unemployment and related welfare costs.  All this is possible.

The government will also need to do more to tackle the problem of housing. House prices are now very high in some parts of the country, particularly in the areas with the most new jobs available. Limiting new arrivals will help. There will need to be more actions to ensure a decent supply of new housing in locations where people wish to live and where there is employment opportunity. The best place to start is London, where the building rate is rising but more needs to be built within the urban area.  Much of this can be done by redeveloping brownfields and previously developed sites, and by changing uses intelligently.

The mortgage market needs to be sufficiently responsive to give people a decent chance of climbing the property ladder. Of course it is right to avoid excessive lending with no deposits and very high multiples of income that make it difficult to repay. It is important not to lurch too far the other way and  make it too difficult for buyers, especially first time  buyers, to get started.

I have found it extraordinary to read some of the commentary on the liberalisation of the City in the 1980s, written by people who now have access to state papers under the 30 years rule. They wish to see in our debates and discussions the  causes of the banking crash which happened 23 years later from quite unrelated causes. Such is the power of Labour’s spin.

The banking and broking system moved smoothly from the cartelised and small City of the early 1980s to the global market of the later 1990s without accident. When the Conservatives left office in 1997 we had a decade of success with the larger City under our belts. The commercial banks were bigger and did more, but they still had sensibly controlled balance sheets thanks to the continuity of banking regulation under the Bank of England. There were  no more scandals then than in the years prior to Big Bang.

Gordon Brown decided to tear up our regulatory settlement, take most of the bank regulation responsibilities away from the Bank of England, and give them to a new Statutory body, the FSA. It was that fateful decision, not our decision to liberalise the City, which caused the banking crash. Mr Brown’s new regulator allowed a massive expansion of bank balance sheets and credit, well beyond anything we would have allowed, and then in 2007-8 they decided to bring the system crashing down by forcing change too rapidly on  a bloated banking industry with higher interest rates and demands for more capital.

Big Bang transformed the City for the better, as I hoped at the time. It broke up the cosy cartel of the old stockbrokers and jobbers, introduced competition into commissions which made share buying and selling so much cheaper, allowed in many foreign banks and brokers with extra capital, new business and job opportunities, and allowed UK institutions to raise serious amounts of new money to operate on a world scale.

It built one of the dominant financial service and banking sectors of the world. The City expanded from the narrow Square Mile around the Bank of England, to encompass Aldgate, Liverpool Street, the Finsbury area , parts of Mayfair , St Paul’s and parts of docklands. Today we earn £60 billion from our financial and business service exports, and have a  group of companies and service industries that the world envies. Without Big Bang none of that would have  happened, and the UK would be a lot poorer. Instead of blaming Big Bang for financial scandals, people should remember there were scandals before Big Bang, and remember above all that it was Mr Brown’s regulators who  helped bring on the crash they were meant to prevent.

Apparently when Mr Osborne says he has halved the deficit as a percentage of the economy, he is according to Labour wrong to mention that true figure. He should concentrate on the cash figures, which show the deficit down by one third.

So why then does Labour bang on about the Conservative spending plans for the next Parliament, and claim wicked cuts to get it down to 35% of GDP?  Applying their own latest logic, they should accept that Mr Osborne’s plans for cash public spending show further gr0wth of £40bn a year by the end of  the next five years. Fair’s fair. If it’s cash we are using, then Conservatives plan rising spending next Parliament.

The UK has a long and difficult history in its relationship with the rest of Europe. For much of the last millennium UK policy was based on the proposition that we had to prevent a single power dominating the continent, as they were likely to be hostile to us and opposed to free trade. Our need to preserve our right to choose our own political and religious views led us into war against Spain, the European hegemon of the sixteenth and early seventeenth centuries. Our wish to preserve our independence and trade led us to fight many wars against France, culminating in the epic struggle for our own survival and the future of our continent in the long Napoleonic wars. In the twentieth century it was a necessity to stand up to German aggression and dominance. Spain, France and Germany all attempted invasions, and all failed. The Dutch pulled off an invasion by agreement with a substantial part of the British establishment.

If our neighbours had been less keen on fighting for control, or if at times we had been better at diplomacy, we would saved ourselves a lot of blood and treasure. The long and damaging European wars held us  back as well as the continent, destroying wealth and diverting effort.

Since the 1960s the UK has decided on a different European diplomatic strategy.The UK establishment, with some notable exceptions, has decided to allow and actively promote a new European hegemon to emerge called the European Union. This is against the whole run of our past policy and experience, and is a very dangerous experiment. I have no wish to go back to a policy of continuous wars between nation states,  but fortunately the main European countries are now peace loving and respectful of each other’s borders.  I do  worry that this so called cure for these wars   is not the right way to extend and preserve the peace. It is not in the UK’s national interest, and is bizarre as France and Germany would have no intention of invading us if we were outside the EU.  There is danger in the EU developing an aggressive state personality of its own, and an obvious threat to our hard won liberties from placing ourselves under EU control.

Indeed, I think there is clear opportunity for the UK to be independent, and free of wars against major continental countries. The fact that all the major countries of western Europe have at last decided they do not want to fight more wars, and no longer assert rights over each other’s territory means we have that opportunity for peace which does not depend on accepting ever greater political union with the continent. We should seize the moment, and welcome the conversion of our neighbours to the paths of peace. It is far better they beat ploughshares than swords. That peace will be more prosperous and extend for longer if it respects the independent minded nature of the UK. We do not wish the UK to become some forgotten fields controlled  on the edge of  a new European empire.