Category: Blog

 

           I have written before that for centuries one of the main aims of UK foreign policy has been to avoid one single power dominating the continent of Europe. The question today is why has the modern Foreign Office changed its mind on this fundamental issue? Why is it now UK government policy to welcome a single country with a single currency controlling most of the continent?

          In the sixteenth and seventeenth centuries the UK fought against Spanish domination of the continent. In the seventeenth and eighteenth centuries the UK successfully opposed French domination. In the twentieth century the UK with the help of the USA successfully resisted German domination.  

          The UK used to fear that if a single country came to dominate, they could close the continent off to fair trade with the UK. There would be the ever present danger they would want to take us over as well.

          Today the UK goverment tells us encouraging the emergence of a single government for much of Europe would secure our trade and improve our relations with the continent. It is difficult to see why they believe this. All those people who for years have been telling us Europe is “going our way” and under Labour how “we have influence in EU matters” now have to explain how it is most countries in the EU are poised on the edge of substantial further economic and political integration, with the UK on the outside with no clear view of how its relationship with such a new country might work.

             There is evidence of protectionist tendencies in the bureaucracy of Brussels. It is ever ready to impose taxes and regulations on business, to create barriers to entry and to seek to control or reduce UK successes from the art market through to various financial services. The Franco-German architects of the current phase of ever closer union are no friends of the finance sector, the one which just happens to be the UK’s most successful.

             The truth is it will be more difficult for the UK to protect herself from EU rules and regulations if there is further integration and the creation of a strong inner Euro bloc within the EU. The Foreign Office should have thought more carefully about the economic dangers of more Euro integration, as outlined here yesterday. It needs to follow up that thinking with more thought about what the UK should demand and insist on to protect against the obvious dangers of a more powerful and more integrated Euro  zone emerging as the UK government claims to want.

 

         The Care Quality Commission Report yesterday was shocking.  I would be interested to hear comments on other experiences of the quality of care in hospitals, especially for the elderly. Why have there been such serious lapses in nursing standards?

The UK government – Coalition Ministers, senior officials, the Bank, the FSA and the rest – buy the argument that a collapse of the Euro would do untold damage to Euroland, and therefore to us, given the trade we do with Europe.

Their predecessors took a similar view of the Exchange Rate Mechanism. They spent and borrowed huge sums to try to peg exchange rates at levels markets thought wrong. All the time they tried to keep the impossible pegs in place they triggered inflation, recession and other extremes. The ERM first gave the UK inflation, then it gave us recession. It meant we always had the wrong amounts of money and the wrong interest rates.  They discovered that it cost large sums of money to try to buck the markets. In the end they were overwhelmed by the force of the markets against them, and abandoned their quest.

The Uk economy started recover as soon as we left the torture of the ERM. Our currency found a competitive level to help exports. The Bank and Treasury could return to following a sensible monetary policy. The country no longer had to throw good money after bad trying to keep the pound at an artificial rate and then losing large sums as a result. Interest rates came down rapidly.

Nicholas Ridley and I kept the flag flying against the ERM in government, but lost to the Treasury and Foreign Office combined. Eventually the Treasury realised the game was up and made the brave decision to tell the Prime Minister he had to abandon his policy and try something better. Our exit from the ERM ushered in a good period for the UK.

I find it difficult to grasp why so many people think the Euro is good for Greece or Portugal. They have lost their democracy over it, as they now have to be run by a committee of lenders to them. Their politics rests on the regular inspections of the bank managers. They cannot devalue to make themselves more competitive. The Euro scheme encourages some in those countries to think that the answer to their problems lies in bigger transfer payments from outside, rather than in coming up with local solutions to their problems and being responsible for their own destinies.

It is also difficult to see why Germany thinks it is such a good deal and a good idea. Of course some of her leading export companies enjoy selling goods into other parts of Euroland at advantageous exchange rates . More and more of Germany’s exports however need to go to places outside the EU given the slow growth or economic declines within the zone. Germany used to be a successful exporting country with a rising DM.

On the other side of the account Germany is about to pay a large price for her politicians’ enthusiaism for the Euro. German taxpayers will have to pay more tax to bail out other Euro countries. Germany’s own credit rating could be damaged by assuming debts on behalf of others.

The nonsense that a single market needs a single currency needs knocking on the head. The North American free trade zone does not require a currency union. Many non EU countries trade quite happily with the EU without sharing a currency. The UK still trades with the EU  whilst keeping the pound.

Others mutter in hushed tones that they have to save the Euro to save the EU banks. It is the Euro scheme and the excess sovereign debts it has allowed that has weakened the banks. Keeping the Euro does not solve these problems, but will probably make them worse. The banks need sorting. It is not easier to do if you keep the zone together, as you are not sorting out the underlying problems.

Extend and pretend cannot work. Deficits have to be curbed by spending less or raising more revenue. Weak banks have to be sorted out by raising more capital, selling assets, and making proper provision for losses.

 

The truth is that the Euro is an ERM that does more damage, that will lose its participants more money and be more painful to split up. It is not an ERM that works.

 

The news that The Slovakian Parliament has vetoed the bail out plan for the Euro has so far been taken quite well by the markets. They know how EU democracy works. If the EU authorities do not get the answer they want from a vote, they expect the vote to be taken again and again until the answer is Yes.

Proponents for the Euro say that one small country’s Parliament should not be able to hold up their project. They will deduce from this event that there will have to be changes, to stop democratic votes and wayward Parliaments from having a different view from the political core of the project.

Most sensible people would conclude from the ability of one small country to stop the policy of pretend and extend that now is said to be necessary to preserve the Euro that the whole single currency scheme had been wrongly designed in the first place. They might agree with those of us who said at the outset that you need one country with one set of political decision takers if you are to run a single currency.

Meanwhile Mr Barroso has said it would be good if the UK contributed to the bail outs. That has provided a welcome target for some UK Eurosceptics to attack. The government will say No, and will claim credit for resisting such “pressures”. The truth is the UK is contributing to this foolish policy of bail out through the IMF and directly in the case of the Irish loan. We were asked to approve more of the documents for it last night. Labour abstained and a few of us voted No.

The Euro establishment thinks the Euro 440 billion fund must go through. They know, however, it is not big enough. They also should by now realise that there is no point recapitalising the banks against sovereign loss unless they can also take action to stop all future sovereign loss. The banks and the sovereigns of Euro area are hitched together. Solving the sovereign debt crisis is crucial to success. There are still no clear commitments to do so.

Most of those involved in “saving” the euro do now think it rests on agreement between Germany and France, who will become the principal bailers of the damaged zone. The big issues are discussed in hectic meetings between the big two. The other countries are awaiting an answer to their disagreements. How much longer will the democracies of the others put up with this? When will the people and MPs of the other countries start to assert themselves and say they want to be involved in the decisions?

The Euro is still a single currency looking for a single country to love it. The leaders of the EU disagree about how far and how fast they travel towards the single state their currency needs. Even if they got to their destination, they would still need to cut spending or raise revenue to tackle their debt crisis.

 

            Tim Montgomerie on Conservative Home has pointed out that not many party members go to conference any more.  The main parties now stage big annual events for the corporate guests, lobbyists and media. They provide a platform for Ministers and Shadow Ministers to make their announcements. Leaders heave a sigh of relief if they get through the week without major rows or embarrassments.

           Tim thinks the main problem is the high cost of attending, travel, acccommodation, food and drink. He is considering setting up an alternative cheaper conference which more members might want to go to.

            I think there is another issue apart from cost. The issue is can anything useful be debated and sorted out at a conference?  I suspect people are not merely reacting badly to the expense. I think it is also a reaction to the lack of debate, passion, disagreement. Activists join political parties because they are democrats who are interested in political ideas, in practical solutions, in what government local and national does. They want to able to talk about it, learn more about it, and sometimes disagree about it.  They used to come to be convinced by leaders that they are doing the right things, or to explain to leaders what else they would rather they did.

           The Conservative conference used to have some great debates. The organisers let difficult rebels speak from the floor, to test out Ministers or Shadow Ministers. The platform had to face votes they might lose, arguments they might find uncomfortable, truths they might not recognise. It was good for them, and good for the party. We used to have a balloted motion, so the audience could choose something they wanted to talk about. I remember having to reply to one of them, and was pleased to do so.  I don’t remember the wheels coming off as a result! The platform usually won in the end, and often did persuade people they were right. The possibility that they might not win, that they had to woo their audiences, made it much more exciting and newsworthy.

          Today party conferences are organised by media experts. They want to control the message, stop dissent, control the camera angles and the story. They think that by stopping major arguments within the party from appearing in  the main conference hall they can disguise disagreements from the media and secure a good press.

            As a result the media spend most of their time trying to find disagreements in fringe meetings, in asides, in unscripted comments by the unwary, or scripted comments by the few public rebels. Sometimes the media is fed a disagreement by the spin doctors, on the grounds they would rather have one they control or suits their purpose than one they do not.  Yet if a party is split – as Labour was between Blairites and Brownites – we will be told all about it, however sanitised the main hall and “debates”.  The high spin does not ultimately work. It just adds to the distrust of politics and politicians.

             Let’s take the last Conservative conference. Mr Osborne announced an important change of policy. He said that in future the UK would not go faster than the rest of the EU in raising energy and carbon dioxide charges. He accepted that it was  neither green nor compatible with a UK industrial led recovery to price our manufacturers out of making things here.

             Why didn’t they stage a debate on the whole  question of  global warming? There are members within the party who disagree that the world is warming. There are people who think it maybe, but doubt it is brought about by man made CO2. There are those who accept the theory, but think taxing ourselves too much to stop it here merely exports industry  to competitor economies who take advantage. There are then Lawsonites, who think that even if it is all true, it is cheaper to tackle the symptoms as they arise.

              Wouldn’t we have done the nation a service to have a big debate on this, and to hear the Ministers put their case and seek to convince their party that the revised government approach is the right one? Wouldn’t that have given Mr Osborne more media interest for his important change of stance? Wouldn’t it have shown that argument within the party is worthwhile, as the government has changed its position? Would many want the government to change it more?

               It would also have been a good idea to have an open  discussion of the  Euro crisis. That was always going to be the main news story during conference week come what may. As the UK government is semi detached from the Euro problems it could have been a good opportunity to hear a wide range of views from the floor on how Euroland might fix itself, and what the UK should if anything do and say about it. Isn’t it time to nail the old Labour  lie that the Conservatives are too split on the EU to dare talk about it?  Mightn’t such a debate not have shown great interest, expertise and positive proposals for Euroland, as well as pointing the way to a new and better relationship for the UK with the emerging single economy.

             To esnure balance and to remind people that the Conservative party is a broad church, a general debate on freedom, and what more the government should to to promote it, from civil liberties to a stronger democracy would have rounded it off well. The new nature of the conference would have reinforced the point. This would be the conference of   a thoroughly modern party that thinks the old centralised top down solutions are failing.

            I suspect more would come to such a conference, especially if it took place over a week-end and offered lower prices for attending if you are a working member.

 

 

 

           The decision to nationalise Dexia, and to offer Euro 90 billion of funding guarantees to this bank, alongisde creating a bad bank, shows they have learnt nothing from the crisis so far. Meanwhile the French and German leaders decide that they delay a few more weeks before having a working plan to deal with weak banks and overborrowed sovereigns.

        The last thing we need is to perpetuate the idea that governments can afford to bail out all these banks,and that taxpayers should stand behind all their bad loans. They are now well into the vicious circle – weak banks are made by regulators to lend money to weak sovereigns, which  in turn bail out the weak banks.

         Governments need to stop forcing banks to buy government bonds, and need to let banks go into controlled administration if they get into difficulties. Governments can stand behind depositors and clearing systems, but there is no need to stand behind all the other ways banks have found to lose money. We need private sector solutions to bank problems. Taxpayers should not be dragged into the mistakes made by the banks, urged on by the governments.

 

        There has been one of those pointless and repetitious British debates about public  spending over the last fortnight concerning health spending. The government  says they will increase health spending every year in real terms. They mean by this they will ensure a cash increase in spending which goes up by a  bit more than the GDP deflator, their chosen measure of inflation. They confess that the real increase might have to be small, given the financial problems the state faces.

         Their critics say this means massive cuts. They argue that health inflation will continue to be faster than general inflation. It is true it has been in recent years, because there have been some large pay awards  which have favoured public sector workers more than private sector ones, leading to a relative increase in the cost of providing public services. There has also been an inflation in the costs of equipment and range of treatments which the NHS can offer. Productivity in the NHS has not gone up. There is also an argument that as more people live longer, so in  their final months they need more treatment because they are older and frailer than their predeccessors.

        The government has three responses to this argument. They can point out that the big relative increases in public sector pay have now been achieved. Two years of pay freeze should mean health costs rise less rapidly than general inflation. There is also a strong feeling in government circles that the NHS, like the rest of the government sector, can buy things much more cheaply than in the past, by applying better management techniques to purchasing.

        They can argue that the NHS has had a very poor productivity record in recent years. It should be possible to catch up some of the lost ground compared to the private sector, where productivity has powered ahead. That is why the Health Secretary wishes to harness more private clinics, not for profits and other health providers to offer treatment free at the point of use for the NHS, to get better value and higher quality.

          The government can also claim that whilst the very elderly do indeed impose more strains on the NHS, younger people who take care of themselves with good diets and exercise, are now demanding  much less of the service. Also under Labour more people effectively privatised themselves, going to private clinics to get things done which they found were subject to delay or difficulty in the NHS.

         If you put all these claims on both sides of the argument together, I come up with the view that if the NHS does raise its management game as the government wishes it can handle the budgets. If it carries on being run as in the last decade, it will be very short of cash. As Mr Blair used rightly to say, you need reform to go alongside more finance, to make it work.

       There is nothing new about these arguments. When I first entered the public sector as a County Councillor I was amazed at the extraordinary way the finances of a large public body were organised. It seemed designed to prevent sensible controls being placed on spending.

           I joined the Finance Committee. I was working as a finance professional  in my main job. I found the very long papers we were sent for each meeting also impossible to understand. They  used all sorts of funny numbers to prevent you working out how much cash was being spent. They changed the year base for the budgets, they used inflation adjusted numbers without explaining properly how the inflation adjustment was judged, or where the future forecasts of inflation came from. They assumed that once an item had made it into a budget it would be rolled forward and augmented every year as an inescapable commitment. Figures were in “real terms” rather than cash.

              Each year’s budget was an exercise in officer lobbying for more spending. Instead of showing you what was being spent and leaving you to decide what to delete and what to increase, they added all sorts of figures into the previous year’s budget to give you a “New base budget” for the following year. This added in sums for inflation, for “unavoidable commitments”, for “new functions required by Statute”, for “consequences of past decisions”, for “responsibility and age related pay allowances”, for “pension commitments” and the rest. By the time they has finished they normally reckoned that anything less than say a 7% increase would require “cuts”, as you were invited to assume the adjusted budget and then apply the knife at your peril if you were someone who clearly did not understand the remorseless arithmetic of more public spending. If you insisted on a lower budget they would then oblige with the parade of bleeding stumps, offering up a list of cuts that no sane person let alone a politician could possibly approve.

          I asked for  shorter cash budgets, with clear figures for the main spending heads so we could have an informed debate over what worked, what needed improving, and what could be removed. The officers called that “zero base budgets”, because we refused to accept that anything in the previous year’s budget automatically qualified for the following year. We also wanted to analyse all the so called unavoidable commitments, as these were often judgements or concealed “growth items” which otherwise appeared as a smaller different list for Councillor decision.

            All these old tricks are still be played by public sector managers. No-one runs a successful private sector outfit like that. You need transparency over the spending. You need to strive to cut costs and do things better. Too many public sector bugets are compiled on the basis that more spending, more inputs are always good, and all cuts damage services. We need Ministers and Councillors prepared to challenge this nonsense, and aim to get better value for every public pound spent. As public spending is rising in cash terms there need not be any damaging real terms cuts in valued services. If there are, it is bad management. This year total cash spending goes up another 3.8% according to the Tresury figures. With a pay freeze at the same time, this increase should more than cover public sector inflation.

 

 

 

            The media went to town on the “grenade” Mr Tyrie chucked into the Chancellor’s path with his wide ranging condemnation of current economic policy last week-end. They have largely ignored the equally explosive attack on Mr Hammond the Transport Secretary  made by no less a figure than Archie Norman.

           Mr Norman was a Conservative Shadow Cabinet member. More than that, he was the first serious moderniser of the Conservative party, bringing in new measures and  a new dress sense for William Hague’s Conservative HQ. Mr Hague regarded him very highly and adopted a lot of his advice. Mr Norman is now Chairman of ITV.

           He  chose eve of conference to publish a damning indictment of High Speed 2. He recommends scrapping the project, and spending half the amount of money it is estimated to cost on substantial improvements to the existing railway. His business sense tells him we could could get a lot more improvement for a lot less money by making this change.

          Meanwhile, Mr Hammond was busily putting himself about in the media, granting personality type interviews. He seems to be positioning himself for a possible move in next year’s reshuffle. The spinners and his own words are designed to portray him as a safe pair of hands, in a job he does not particularly relish.

                     People who want to control public spending are against him, as to them  HS2 appears to be a large vanity project with  a very large cash price attached, little suited to an age of austerity. Conservative greens are against him, as they dislike cutting a huge steel and concrete pathway through the beautiful English countryside. People who want some balance in tranport budgets are against him, as they fear this project will swallow too much of the available cash.Many business people like Mr Norman are against him, as they do not think this is the best high cost project to stimulate growth.  Even some anti CO2 greens do not think this is the best way to curb emissions. Mr Hammond has united petrol heads and countryside lovers, greens and the business lobby against him, to say nothing of most of the Conservative party.

             I suspect Mr Hammond  would like to move on to leave behind this meddlesome project. My advice to him remains that he should defer commitment until after the next election. If they have turned the public finances round by then, things might look different. They by then might also have changed their minds about the true transport priorities for our nation.

         In the meantime, if Mr Hammond does want to build some bridges with Conservatives, he needs to review the spending priorities of his department, and do more to ease road congestion. He has now accepted the proposal some of us have urged to allow more hard shoulder running on motorways, as a quick and realtively cheap way of doing something. In my area of the country this is needed, linked to noise suppression measures to improve the quality of life of those who live near the motorways.  So far his enthusiasm for hard shoulder running has not extended to the Thames Valley.

 

 Great news for people who want to soak the rich. Anyone on 52% Income Tax and NI is paying much more when you take into account  tax on their typical purchases.

       The following are the marginal rates of tax if a well paid person wants to pay for something,as well as paying the income tax –

Normal purchase of an item carrying 20% Vat:                    61.6%

Purchase of petrol or diesel                                                           84.0%

Purchase of BBC licence fee or Council car park ticket    100.0%

Payment of Council Tax                                                                100.0%

                 Indeed, arguably the marginal tax rate in the case of paying other taxes is much higher. In order to pay £1 of Council Tax the higher earner has to earn £2.08 gross to make the payment: a marginal rate of 208%.  If a higher income person has to pay £2500 a year of Council tax on their executive home,  they need a gross income of £5200 just  to pay the tax. Tax is usually by far the biggest item in any higher earner’s budget.

               A higher earner using a car might  pay £3000 in petrol tax and car tax, with perhaps another £1000 in congestion charges and state parking fees. That would be another £8300 gross income needed  to pay those taxes.

               The UK tax system makes sure the better off pay much more, by taxing and taxing again.

Letter from Herr Bahler

Office for Pan Euro solidarity

Bruxelles

 

(This appears to be to Dame Lucy Doolittle, The Director of the Unit for co-ordinating cross cutting initiatives and partnerships, Whitehall. The letter is in excellent English, but does make the colloquial mistake of sometimes  muddling England and the UK. Once again I advise journalists to check  the possible source with me  before using, as I do not find this Unit on the recent EU organogram -ed)

 

Dear Dame Lucy,

          I understand the difficulties you are experiencing with your Ministers.  I am writing to warn you that we are not going to put up with much more grandstanding from the UK.  I think you need to be firmer in your dealings with them. They have to understand the realities of the situation  they find themselves in.

          The  EU has been very patient with the wayward English for some years. We allowed you to stay out of the Euro for the time being, and allowed the UK to make slower progress to harmonisation of criminal justice, borders and social policy than other states. We even permitted some continuation of the UK rebate at a time when the richer larger countries of the Union do need to make a greater contribution in the interests of solidarity and harmony.

           I should stress it is not helpful for senior UK Ministers to make public statements setting timetables for us to “sort out” Euro and banking issues which are by nature complex. The main members of the EU are frustrated by this conduct, and have proposed a Tobin tax on banks. We are looking at various ways of imposing this, and at the legal base for its agreement. I would suggest your Ministers are asked to give it more careful thought than they have managed so far. Banks are far from popular, and it seems to us to be the least bad way to be seen to be tackling deficit problems around the Union. We would of course allow the UK to benefit more than proportionately from the tax given the Uk revenue base for it. I would have thought it would be very attractive to UK Ministers to have access to such potentially large sums of income.

          We do expect to come up with proposals for greater transfers around the Union to promote greater unity of purpose and solidarity. For this we will need agreement to a larger budget.

           We also expect to intensify EU scrutiny of banks and other financial institutions in order to prevent systemic problems in our increasingly integrated markets. We would expect the UK to co-operate fully. We do of course have the necessary powers to require more banking cash and capital if we judge them necessary, including for banks with substntial public sector shareholdings.The Uk might be well advised to co-operate with our banking capital review, in the light of theUK state exposures.

               If by any chance your Ministers do not wish to work collaboratively on financial matters, we will need to consider ways of restricting market access and ensuring that Euro business is conducted in properly regulated Euro institutions.  As you will appreciate, there is always an override of competition and single market rules when it comes to matters of prudence and fitness regulation in matters of finance.

         In summary, we expect a more cooperative approach from the UK to the pressing issues of bank regulation, a realistic pan EU budget allowing proper transfers, taxation at an EU level to curb national deficts and pay for enhanced transfers, and some relaxation of the demands for a special deal on budget contributions. The EU needs more powers and money to ensure the success of the Euro, to help countries at risk, and to shore up its banking system. It would not be in the UK’s interest to allow Euro area banks to go down or Euro area countries to default.

          We have been heartened by your Finance Minister’s comments that the future  health of the Euro matters, and by his understanding that to achieve a strong Euro in the future the EU needs more powers of supervision and budgetary control. I suggest you put to him forcefully that the Uk has an interest in participating fully in the solution  from her currently privileged position. There can be no free dinner, as I think you say in English.

            I trust you will be able to explain all this to your Minsiters. We have noticed your success with the Foreign office over the Common External Action Service, and with the Home Office over some criminal justice measures. The environmental area is also going very well. These all prove that it is so much better when the Uk is in the mainstream, and can help influence the natural course of EU development.

Yours in ever closer union

etc