Author: johnredwood

Europe has a problem. Dear energy makes European industry much less competitive, at a time when Asia is challenging and the USA has opted for cheap gas. Dear energy squeezes the budgets of individuals and families, at exactly the point where wage growth is also being cut by the rigours of the Euro and the pressures of global competition.

Politicians have assumd that most people in the EU agree with global warming theory. They have assumed that people will therefore buy into the “solution”, burning less fossil fuel. The politicians who believe that this crusade is the most important task modern humanity faces, have been altogether quieter about explaining that their policy means dear energy, which in turn means lower living standards.

Now the EU is seeing the consequences of its dearer energy policies, the political mood is turning against this approach. Far from people congratulating their politicians for the courage they have shown in pushing European energy prices up to new highs to get people to use less energy, there is now a poltical backlash. Dear energy means fewer jobs. Dearer energy means more inflation. Dearer energy means people are worse off. That is not what most voters had in mind.

The UK has got there first in wanting cheaper energy. The problem is the main forces leading to dear energy are in EU law. By EU law we have to generate more and more power from very expensive windfarms. By EU law we have to close our cheaper fossil fuel burning power stations. The battle of energy will have to become a battle within the EU. For Eurosceptics, it is one of the  best reasons alongside the need to control our own borders and have our own system of justice, to require a big change to our relationship.

         The ever vigilant Bill Cash MP raised the issue of Mr Justice Mostyn’s remarks in the Commons this  evening, as captured in the headline to this item. I supported him and added to his Point of Order.

          In  a case where the UK government won, the Judge said that a Luxembourg court judgement had overturned the Protocol to the Lisbon Treaty designed to  mean European Charter Rights are not enforceable in the UK unless they are put into UK Statute law by Parliament.  The Judge argued that the Charter is now fully operational in the UK, whatever the will of Parliament and Statute law says.

          We are pressing  for  government and Parliament to make clear we do not accept this challenge to UK Parliamentary and court authority. The Lisbon Treaty was sold to Parliament with this crucial protection which is now being undermined. As one who voted against Lisbon, we pressed at the time for the government to be even clearer in defending Parliament’s supremacy to define our human rights, and UK courts supremacy to settle these cases under Statute law. They assured us they had done so with the Protocol.

             As a keen believer in representative democracy, I all too aware of its weaknesses. I think it is the best type of government on offer, but we need to use the freedom of speech it allows to try to keep it honest.

              One of the biggest weaknesses of western democracy is it favours the “something must be done about it approach”, whether the government can and should do something or not. All too many elected Councillors and MPs will feel local or national government has to come up with an answer if a limited number of people put to them a problem.

             Many elected officials find it difficult to reply that government is not able to help or could hinder in any particular case. There is a reluctance to point out that for everyone wanting something to be done there may be three or  four not wanting anything to be done. Sometimes government blunders into fixing the perceived problem, only to find the solution for that problem creates more problems of a different nature for other people and interest groups.

            The something must be done culture is partly created by and reinforced by pressure groups. In the UK the pressure groups that want government to regulate, legislate and punish people more are stronger and more numerous than the groups that want government to do these things less. The pressure groups that want the government to collect  more in tax or borrow more to spend more are more numerous and usually better organised than the pressure groups who want the state to take less of our money in tax and do less. Occasionally a spending promise triggers a lot of protest- like HS2 or some overseas aid – but more normally the email box is full of people who  want extra spending on particular areas they favour or benefit from. Lobbyists specialise in trying to create pressure from the public, and in turn from  groups of MPs, to force the governemnt to spend more. The BBC is also a keen participant in this auction. The BBC rarely grills a Minister for presiding over wasteful or undesirable or not very important spending, but regularly takes them to task for not spending enough.

                Most elected officials agree that they would like to provide public services at less cost and to higher quality, something that should be possible. After all, it happens year after  year  in the private sector in most areas.  The basis  of debate, however, is often framed by lobbyists who regard more spending as good and less spending as bad. This simplified debate makes it  difficult to take the third way of better and cheaper provision, and squeezes out serious consideration of why some elements of public service are so expensive. As we saw yesterday, the railways are a great example of how you can spend collosal sums, because our Net work Rail  on its own admission is 20% inefficient.

           The BBC rushes to find examples of individuals who have suffered because public spending is not high enough. I have not heard an interview following the publication of the £38 billion railway plan asking why it costs so much and why it takes so long to weed out the inefficiencies they have identified. We need more voices who speak up for the taxpayers, who want there to be a sensible limit on how much they have to pay. We need more voices for freedom, who remind us there are limits to how much government can do well.

  Some of you write in to say it would be better if we had a nationalised railway. I have good news for you. Network Rail is effectively a nationalised industry, taxpayer owned and financed. East coast mainline is a nationalised company running a mainline railway. The remaining private sector franchise train companies run under strictly controlled requirements and conditions set out by the Rail Regulator, effectively a branch of government.

         Under Labour the successful privatised industry which boosted traveller numbers and freight activity was gradually renationalised by the backdoor. So much so, that the latest 5 year plan has all the wit and wisdom of the old Soviet five year tractor production plans. It weighs in with a massive 958 pages. It proposes a spend of £38.3 billion over 5 years.  Network Rail will receive only 30% of its income from its customers, the train companies, with 60% coming from government grants.

        Over the five years the borrowings of Network Rail will shoot up from £31.7bn to £49.6bn.  This will include financing for £12bn of “enhancements to Britain’s rail network to ease congestion and improve performance” (not including HS2). We are told that within this “projects totalling more than £7bn do not yet have clear delivery costs or plans.”

                 Within that programme electrification accounts for the biggest item. Why? We are asked to accept “Electrifying the railway will bring many more benefits for both  passengers and freight users, most notably the ability to run more frequent trains with shorter journey times and less environmental impact…”

               This is a curious proposition. Electricity is a secondary fuel, so the energy losses are usually greater than with a primary fuel like diesel. There are substantial energy losses in the power station, there are transmission losses, and then losses with the inefficiency of the electric engine. A diesel train only has one of these energy losses. If the underlying electricity is primarily generated from gas and coal there is no great Co2 advantage  either.

            When I last tried to use the East coast mainline, which has been electrified, the train I was booked on was unable to depart owing to break down. I was told this was quite a common problem with the electric trains on that line, and the staff knew the routine when it happened. Electric train systems are also more vulnerable to bad weather than diesel lines, as the overhead gantries and power cables are especially prone to damage in bad conditions.

           There is investment we need on our nationalised railway. We need investment on busy lines like Great Western to improve signalling and throughput of trains, to lengthen trains and some platforms, to replace dangerous level crossings with road bridges, and to increase track availability at bottlenecks and over busy sections into main cities. Surely these should be priorities over electrification, and surely these should be the ones they identify if they are going to spend another £7 bn on as yet unapproved projects.

           On a British banknote the Queen’s face looks out as a symbol that the country stands behind its currency. The Chief Cashier of the Bank of England signs a promise to “pay the bearer on demand the sum of ….”. On the other side our banknotes have pictures of well known figures from our country’s past. No-one can be in any doubt. Buy sterling, and you get a currency backed by the UK state. The state’s power to tax and to intervene in banking and currency affairs stands behind those pieces of paper.

          When they came to design the Euro they had problems. There was no shared uncontentious history on which they could draw with figures and scenes from the  past. There was no sovereign figure.  There was no named  Chief Cashier willing to sign the notes.  They came up with something different.

           On one side is a map of  Europe, including non Euro countries as well as Euro countries, and including non members of the EU. So clearly whilst they wish to give the impression that Europe stands behind this currency, the detail lets down that idea.  There are also drawings of stylised bridges. These are similar to styles of bridges in Europe, but are not meant to represent any particular place for fear of disputes about which should appear. On the other side are drawings of differing styles of European architecture, again without a specific building or place in mind.  The twelve stars symbol of the EU appears on both sides. There is no symbol of the Euro area or ECB.

            In one sense all this is relatively unimportant. In due course when they have completed their union more fully they may be able to reach agreement on popular symbols of it. They may unite around Charlemagne despite his often violent approach to human rights, or some other sufficiently distant person to be relatively uncontentious. More recent advocates of European unity prior to 1945 have gone about it in ways that still cause distress.

             In another sense the symbols or lack of them sum up the key problem of the current Euro. No-one can be sure of who or what does stand behind it. When it came to Cyprus, the answer was the rest of the EU did not stand behind the Cypriot Euro if you held it in one of the wrong banks. The Euro countries are in the process of providing a better answer to this question. We need to know who stands behind the banks of the system? Who stands behind the member states borrowings? Does a Euro note have the backing of all Euro area taxpayers in the way a sterling note has the backing of the taxable capacity of the UK state?

      The latest European Union economic  forecasts for the EU as a whole and the Euro area in particular do not make good reading.

        They reckon unemployment will be above  12% in Italy, above 11% in France, above 25% in Spain and above 17% in Portugal for the three years  2013-15. The average rate in Euroland will be around 12%. Only Germany, amongst the majors, has a more respectable rate of a bit over 5%.

        Outside the Euro the UK, Denmark  and Sweden are forecast to have unemployment  below 8% for the same time period. The non Euro countries as a whole reduce the overall rate of European unemployment compared with the bad results in the Eurozone.

         They forecast an overall fall in output and incomes of 0.4% this year for the Euro area, to be followed by growth of 1.1% in 2014 (0.7%). Germany is forecast to grow 0.5% and 1.7% (2.2%), France 0.2% and 0.9% (1.1%), Italy to fall 1.8% to be followed by growth of 0.7% ( – 1.1%), with Spain falling by 1.3% followed by growth of 0.5% (-0.8%).

          In contrast they expect better results from the non Euro countries. The UK is expected to grow by 1.3% and 2.2% (3.5%), Sweden by 1.1% and 2.8% (3.9%) and Denmark by 0.3% and 1.7%.(2%)

             So why do they think it is so much worse in the Euro than outside?  They accept that banking problems allied to balance of payments imbalances between the member states have led to poor performance. They think banking problems may continue for longer. They say “Frictions related to the reallocation of resources in the process of internal adjustment is still expected to weight on growth….” They also admit that “Bank balance sheet repair is a pre-c0ndition for the normalisation of credit growth” and  “decreasing bank lending volumes  appear to be largely explained by low credit demand, but supply is a binding constraint in some member states…”

             All this leaden prose and jargon is saying two crucial things about their currency zone. Firtly, they did not create a well regulated commercial banking union, and are now paying the price for overextended banks and credit in too many parts of their zone.  Secondly, they did not get the economies into line, so some states built up large trade deficits which they can no longer finance or afford. The result of both these errors is a recession machine. They have to cut bank credit to get balance sheets into shape. They have to slash demand to cut  imports to cut trade gaps.

              Meanwhile  Sweden, Denmark and the UK, the three higher income countries out of the Euro, can follow policies that work better for them. They have 3 years of superior growth to look forward to as a result, according to the EU itself.

         This morning on the Today programme and accompanying news bulletins the BBC suggsted that if the UK voted to leave the EU the Nissan jobs could be at risk. Yet listening to the clip of the interview, Nissan made very clear that they have a great factory in Sunderland and have no intention of closing that, whether the UK stays in or leaves the EU. Their comments were about future additional investment, not a threat to what they have.

        Of course when planning any future UK investment the UK’s relationship with wider European markets will be a relevant consideration. If the Uk leaves the EU I expect we will have decent arrangements to continue buying and selling cars to each other . The German industry will inists on this. So I expect Nissan would continue to find the UK a great place for new factories, just as it clearly likes its present investment.

            Indeed, if we negotiate a new relationship that allows us to cut some of the regulatory and other costs   of the EU rules, companies might like the Uk more, not less. Companies will also understand that they want to sell to the important UK market, where consumers are also voters and where those voters want a referendum on the EU.

          The BBC should questioning peoples’ jobs, and just report what is actually said, which was carefully nuanced and about future investment.

The USA, Greece, Portugal, Ireland and other Euro area countries have all cut their total public spending by more than the UK since the crisis struck. The USA has grown faster than the UK over the last five years, whilst much of Euroland has remained in a long recession for the same period. What can we deduce from this about austerity policies?

It is true that the spending cuts have been much larger in parts of Euroland than anywhere else. Irish total public spending is down by 15% in cash terms from the 2009 peak. Greek total spending is down by a bit more. In the USA total public spending fell marginally in cash terms in 2010 and in 2013, and was just 2.7% up in cash terms in 2013 over 2009, reflecting a real terms reduction. In comparison UK current public spending has shown real terms increases over each of those years and is up 13% in cash terms, 2013-14 compared to 2009-10. Total UK spending is up by 7.6% in cash terms, reflecting a substantial decline in capital spending resulting  from Labour’s cuts at the end of its administration.

The Irish economy has just started to grow again after five years of falling output and serious problems. The further recent reduction in public spending has not prevented a small improvement. Meanwhile, in the UK public spending control is now tighter than in the period 2010-12, but output is now expanding much more rapidly.

The poor performance of the peripheral Eurozone economies has not been helped by very large public sector cuts, reducing employment incomes and other spending in the public sector. However, the bigger impact on their output has come in the private sector. The high exchange rate for their cost base has limited their ability to export or to substitute home production for imports. The lack of independent control over money means they have not been able to stimulate demand by monetary means as the USA and UK have. As a result the sharp fall in public sector output has not been offset by rises in private sector output, but reinforced by declines in private activity. High and rising unemployment has added to the misery and subtracted from demand.

Meanwhile, the better performance of the USA with tighter controls on spending, and the better performamnce of the UK now it also has tighter controls on spending, suggests that public sector spending  controls do not prevent gr0wth. The private sectors of the USA and UK are able to expand, thanks to easy money policies. The US has also had the added advantage of early exploitation of shale gas, adding directly to output and making US industry more competitive thanks to cheap energy.