Category: Blog

Just as I feared and forecast, the second phase of the Euro crisis has hit us.  The first phase saw Greece at the centre of the storm. It ended with the announcement of a bail out for Greece, and the provision of general facilities in case any other country got into difficulties. The authorities told us that would end the crisis. Up to a trillion euros were available as loans, guarantees and cash so that would take care of any member state getting into more trouble.
 
         So why didn’t the bail outs work last time? The Greek bond market was not very impressed. Investors wanted to see evidence that the Greek budget deficit was coming down. They seek honest figures showing progress. They wished to see how the Greek economy would recover and grow, as some growth is essential to getting the deficit down more rapidly. Disappointment soon set in, and Greek bond yields have remained very high.
 
         Ireland was  making progress in cutting spending to cut its government deficit. Meanwhile the European Central Bank was quietly making facilities available to various EU banks, including Irish ones, as a Central Bank should at times of difficulty. The German Chancellor decided to float the idea that bondholders who had lent money to Euroland economies under pressure should have to share some of  the costs of sorting out the problem.  She mused that “haircuts” or reductions in interest and capital repayments might be an appropriate way to share the pain of adjustment. This was bound to force up the price of borrowing for the Irish government  and force down Irish government bond prices. Later a partial retraction was issued, saying the haircuts might only apply to future bonds and not to money already lent.
 
        The EU let it be known that they thought Ireland should borrow money under one or more of the facilities on offer given the high cost of direct borrowing and the large borrowing needs. The official Irish position said they did not need to. It was then slipped into the media that the European Central Bank might wish to reduce its support for EU banks, at a time when   Irish banks  might   lose deposits and be in need of extra liquidity. Finally on Thursday it emerged  the Irish government would accept financial help for its banks.
 
           All of the public briefing and comment made the problem worse. Days of negotiation, proposal and denial led to a further loss of confidence in Ireland and its banking system. A Central Bank is  the lender of last resort to ensure sufficient liquidity so no-one need worry about getting their cash back from any bank in the system. The European Central Bank has been performing that role and should continue to do so. The banks should be regulated strongly to ensure they are solvent at all times, that their  total assets exceeed their liabilities. If they have a sudden large withdrawal of money the Central Bank supplies the cash so they can meet it. The bank then should sell as many assets as needed to repay the Central Bank to an agreed timetable which is best kept private.
 
           The European Central Bank appears to want unnamed Irish banks to raise more capital or have access to facilities outside the ECB. This of course involves the Irish Central Bank and government. The sooner they work out their respective responsibilities, the sums involved and issue a detailed package to the markets the better. They have talked themselves into a serious problem, and now need to dig themselves out by their deeds. 
 
          Will this second bail out work, when the first did not last for long? That will depend on what they do and say next.   Now  we want to see the colour of the money, to find out who is paying the bills, and to assess whether it will then work. The truth is arranging facilities is only part of the answer. The Irish government has to continue its work of cutting spending and boosting revenues to cut its own borrowing needs. The Irish banks have to continue selling assets, finding more profitable business and restricting their risks and balance sheet size in the meanwhile. The markets will judge them by results.

 

         On June 22nd 2010 the new government rightly said they needed to take faster and stronger action to cut the deficit. They proposed  additional state  borrowing to  a total of £461 billion in the five years 2010-2015. This, believe it or not, was a substantial  reduction in the old plans. This was still more than total government borrowing in 1997.

          The spending review of October added £ 8.6 billion to this figure, by increasing capital spending above the June levels, and above the levels inherited from the previous government. If the government now adds another £7 billion of spending to assist Ireland, that means it has added £15.6 billion to spending and borrowing  for the five years within just five months.

           The government needs to observe rigorous spending control in relation to the totals it published last June. The public will find it difficult to understand why certain items are being cut that matter to them, if at the same time the money being spent on EU contributions and  Euro support keeps soaring.

          The argument for the Irish bail out comes from the EU, not from Ireland. Ireland has neither asked the EU nor the UK for a loan. The talks now underway are to persuade the Irish government that it needs to borrow more to deal with the “crisis” in the bond markets which foolish talk by some has created in recent days.

           Two arguments are used. The first is the Irish governemnt will need to borrow more to sustain its own finances. Now that the markets say it will have to pay more than 8% for ten year money, the EU argues  it needs to borrow some money at a lower rate from the rest of the EU/UK to avoid its interest bill getting too high. It is also thought for some unknown reason that borrowing more from the EU will restore bond market confidence. They thought the same about Greece when Greece did apply for EU help, but there is little sign this theory proved correct in that case, as Greek bond yields have remained very high. Indeed, Greece still has to pay the markets more interest for each new  Euro borrowed than Ireland does.

            The truth is each country has to reduce its own deficit in its own best way. Ireland has been bravely trying various methods to do so, and is planning  a new budget. Sensible people from the EU would encourage Ireland to produce a convincing new budget. If Ireland wishes EU officials would be working with Ireland in private to ensure the new budget does the job. Markets will be impressed by seeing the deficit figures coming down in a convincing way. That  will lower rates.

               The second is the argument  that Ireland’s banks need recapitalising, and the EU/UK should help do that. This is strange. The ECB, the EU Regulators and the Irish authorities have been happy with the capital and cash arrangements of the Irish banks and have allowed them to carry on trading. If the Irish banks need extra liquidity that is the job of their Central Bank, the ECB,  to supply it. There is no need or  hurry to run down the general special financial facilities  the ECB has made available for EU banks if that is going to cause new strains. If the Regulators want the Irish banks to have more capital relative to their loan books, then they can work away in private with those banks. Some combination of selling off loans, selling other assets, cutting costs, writing more profitable business and selling companies and businesses from within the banking groups could cut the risks and raise the ratios.

           It is the height of folly to encourage so much speculation about the state of these banks, and to suggest in public that the financing arrangements have to be changed. That is destabilising conduct of the kind that turned a serious problem into a crisis during the peak of the Credit Crunch.If the authorities by public comment trigger withdrawal of too many deposits the ECB simply has to supply more cash to meet the depositor demands, and then has to help with a more rapid run down of the banks’ balance sheets than would otherwise be necessary. Why do modern regulators want to do so much in public, in a way which can  damage confidence in the institutions they are meant to be regulating?

        The fact that RBS and other UK banks have substantial loan books in Ireland is no reason to force UK taxpayers into helping recapitalise Irish banks. The Irish loans of the UK banks will continue regardless, and doubtless they have already made provision against possible losses on this portfolio. If they think they need to make further provision then this will come off the profits they are making elsewhere and should be manageable.

           I see no reason why EU governments  should suddenly buy shares or inject capital into Irish banks.  If the Irish state thinks it needs to inject more capital then it has to provide that from within its own budgets.

          When you are recovering from a serious bout of borrowing too much, borrowing more does not help. Ireland, like many western countries and banking systems, needs a work out or earn out, not a bail out.

            If you are worried about “contagion”, the possibility that other states may also be forced to pay more to borrow, the last thing you should do is to ask those other states to find more public money to bail out a weaker state. The more the stronger states have to borrow, the weaker they become in turn.

PS: We now learn from the Irish Central Bank that their Governor does want to arrange a large facility, as he is concerned about the way deposits have been withdrawn from Irish banks. You can make a crisis out of a problem, and the more you talk down an economy and its banks the more likely that is.

 

             The last week has seen a gripping struggle for power between the EU and one of the smaller member states. It began when Frau Merkel, probably for German political reasons, undermined confidence in Greek and Irish bonds by saying that Euroland “sovereigns” might have to cut the interest or capital they owed to bondholders. It continued with strenuous efforts by the EUauthorities and leading member states to get Ireland to discuss a refinancing package for the country. Ireland protested loudly and in public that it did not need any money, and had its finance arranged through to the middle of next year.  Despite this the EU continued with its deliberations, leaks and press statements in a way which was bound to destabilise markets further pending an outcome. Now we learn that Ireland is being persuaded that it  needs money from the EU to help it to recapitalise its banks more rapidly.

Why would members of Euroland want to do this, as all the public debate about crisis and the need for emergency  responses is bound in the short term to make things worse.? All the talk of contagion just puts the idea into the market that the problems might not end with Ireland.  Either the Euro powers that be are incompetent, and do not understand how they can induce falling markets by saying too much and doing too much, or they are out to ensnare Ireland into new controls and conditions, to strengthen the EU’s hand in economic governance. The EU has never liked Ireland’s attractive low Corporation Tax rate, and would dearly love to be able to force that up.

The UK should make it clear that we are not part of any Euroland rescue or facility. We should say we do not think they can use EU disaster relief provisions to offer Ireland more cash. If Ireland does not wish to take any EU money, the UK should be Ireland’s ally. The stated Irish wish to see their own way through their own deficit problem is wholly admirable. Let us hope the EU does not make it unrealistic, by their market destabilising statements.

You do not make a currency area stronger  by taking money from the heavily borrowed to give to the overborrowed. The heavily borrowed have to borrow more themselves to prop up the overborrowed.  If done on a large scale,  that migth weaken them dangerously. You do instead need to bring deficits and in due course the debt down. You do not do that by borrowing more collectively.

The EU spin suggests Ireland is being selfish by refusing the money. They argue that if Ireland does a deal soon it will remove the risk of the problem spreading to other Euroland states. This argument ignores the fact they told us that when Greece accepted a deal. Markets sometimes take a hint – if pushing hard produces a subsidy or favourable borrowings for one country, why not push on another weaker country and do the same all over again?

 

              There is no perfect answer. In practice, in any democracy, independent arrangements only last for as long as they have broad politcal and public support. If the independent bodies  do the wrong things or if the public loses confidence, then the elected authorities will change them.

              I do not favour relying on the chance that the electoral and political party system may just happen to put in the right senior office someone who understands the intricacies of monetary policy and is capable of making good judgements. The senior elected official can at any time override or make the important calls. Mr Darling, after all, seemed to take a very leading  role in cutting interest rates and loosening policy at the height of the banking crisis, when there was concerted action by the leading Finance Ministries of the world. It would be better to find a system where good official advice and delegated powers  can usually be operated without detailed reference to the senior elected official.

              In system with fiat currencies and single Central Banks it makes sense to delegate substantial power to the Governor and senior executives of such a Bank. Under the older UK system the Governor held regular talks with PM and with Chancellor. Differences could be ironed out in private, and a common view reached between the Bank and the government over correct interest rate and monetary policies in the light of the government’s tax and spending policies. Under the newer system the Bank has more authority to settle interest rates on its own, and to conduct more of the dialogue with government in public, by publishing forecasts and warnings about economic developments in the light of the government’s published decisions on tax and spend. The newer system does not, however, preclude private discussion about  the intersection of fiscal and monetary policy.

               What the public wants is for Bank and Treasury to follow policies which promote low inflation and good rates of growth. Within reason they do not much mind how that is done. The record shows that no  political party has avoided some boom/bust cycles. The record also shows that the two worst boom/bust cycles of recent years came about under regimes based on so called independent action designed to avoid political interference in key decisions.

                The truth is that an independent Central Bank is only a good idea if it is led by people with great judgement about the cycle. In 1989 we needed Central bankers to withdraw their enthusiasm for the ERM on the obvious grounds that the pound was going up and trying to keep it down would damage monetary and anti inflation policy. We needed a Bank which in 2005-6 made sensible adjustments to avoid excessive credit expansion, and a Bank who from the middle of 2007 made enough money available to markets and cut interest rates fast enough to avoid a run on banks. The fact that we did not get this shows that finding good Central Bank leadership is not easy, and the task itself is not easy for those charged with it.

                  In many other walks of life democratic government  is based on the theory that the generalist, the Minister answerable to the public, takes decisions based on best professional advice, but has the last word in cases of disagreement or difficulty. It is, after all, the politican who has to defend the decisions to the public, and who keeps or loses his job based on the success or failure of the decisions.

                          Some element of this needs to be included again in our approach to the newly strengthened Bank of England which will emerge from the latest reforms. I welcome the return of bank regulatory powers to the Bank of England. They need to understand bank balance sheets day by day and be able to control them to control the money supply. They should also act in the markets to raise money for the government. Armed with these substantial powers, they need from time to time to  confirm they have the support of the government. This could be done through a formal and public process, or through an informal one as used to happen. The senior elected official has to keep his confidence in the Governor, and satisfy himself that Governors in future are more likely to read cycles well than has happened in recent years.

                  In the end it comes down to people. The Chancellor has to carry the can and make any final or difficult decison. He is best equipped to do this if he has chosen a good Central Bank Governor with judgement and knowledge of the markets. He can then trust him and interfere little if at all.  If he has a Governor who is not good at judging he has to find ways of bringing better advice to bear on the problem, or he needs to change the Governor.

 

                    Angela Merkel started the latest phase of the rolling Euro crisis. She warned that Europe’s taxpayers could not be expected to carry the whole burden of bailing out countries that had borrowed too much. She felt that the bondholders, people and institutions who had lent money to the likes of Greece and Ireland, should lose some of their money. She favoured the heavily borrowed countries scaling back the interest and or capital they repay to their lenders. She also wished to clarify and settle more of the details of the bail out funds, announced in haste during the first phase of the crisis.

                          This may have been popular with German taxpayers who are very nervous about how much they might have to contribute, but it did not go down well in the bond markets. Irish bond prices fell sharply, forcing up the interest rate Ireland will have to pay for new debt and replacement debt  when it wishes to borrow again. Other senior people in the EU realised this was hastening the crisis they were trying to avoid, and eventually put out a statement saying any reneging on the terms of debt would only apply to new debt. It would not apply to debt people,funds and banks already owned

            That was a curious way of “reassuring” people. Why would savers want to buy Irish or Greek debt in the future if it no longer has an effective  sovereign guarantee that you will be paid all your interest pr0mptly and will get your capital back on the due date? How is it reassuring to current investors to know that when Ireland or Greece comes to borrow again to repay you, they may have to offer much higher interest rate coupons because people will fear the “haircuts” in the interest and  capital to come?  You can reach the point where the interest rate they need to pay to renew their borrowings is simply not sustainable from their tax revenues.

             To many readers the idea that the bondholders should take a hit may seem attractive. After all, they could have worked out what the rest of us worked out, that some Euro area sovereign debt is high risk.   There is a simple answer to Mrs Merkel and her theory of bond cuts. If the Euro sovereign renege on their debts people’s pension funds, saving funds, and the banks will lose this money. The Euro sovereign bonds are not all owned by rich people who could afford the losses. The UK taxpayer will be one of the bigger losers, thanks to the Irish holdings in RBS, the state owned bank.

               It’s in all our interests that they find a way of avoiding reneging on debt. It is also in our interest for our government to make sure UK taxpayers do not have to subsidise Euro area governments that have borrowed too much. The answer is of course stronger economic growth and a lower proportion of GDP being borrowed by the state. The problem is, to achieve that they probably need a lower Euro as well, something Germany is none too keen on. Maybe if Mrs Merkel makes some more unfortunate remarks it will lower the Euro anyway.

          After the failure of the Exchange Rate Mechanism we had an interlude of successful economic policy. From 1992 onwards the economy recovered well. Labour continued the fiscal  policy of the outgoing Conservative government for the first couple of years. By 2000 the UK economy was in good shape and the public finances were recovering strongly from the ERM disaster. There were still many in the Establishment who cast envious glances to Germany. If we could not import German discipline by hitching  our currency to theirs, they reasoned, why not adopt a German style independent Bank to enforce our own teutonic controls?

            Labour doubted it could command respect for an independent monetary and economic policy, so it was vulnerable to these siren  voices. It offered two reassurances. It would follow Conservative spending plans for a bit, and would not raise Income  Tax rates. Once in office it added the decision to “make the Bank of England independent”. As always in an age of spin  it was important to look at what they did rather than what they said. They stripped the Bank of its bank regulating powers, and took away its job of raising money for the government in the money markets. Far from making the Bank overall more independent they all but demolished it, making it less in tune with how money and debt markets were moving. They created a so called independent Monetary Policy Committee. Their task was to set interest rates with a view to keeping price inflation close to a stated low target for RPI increases.

                    Every person on the MPC was a direct appointment chosen by the Chancellor, or was chosen by someone chosen by the Chancellor in the case of Bank employees. Some found their tenures renewed, others served just one term. There was no transparency over how you got selected or re selected. Treasury Ministers sometimes seemed alert to  likely future interest rate changes.  During the second Labour Parliament the Chancellor changed the target from RPI to CPI in  a way likely to result in looser monetary policy, as he did not fully allow for the lower historic  rate of increase in CPI compared to RPI. In more recent times  Chancellors have become intimately involved again in monetary policy, as their  consent is required for quantitative easing.

               A body with a single aim should be judged by their results. For  most  of the last 60 months inflation has been higher than the permitted level. In their most recent report the Bank and the MPC have stated they do not have much idea of what will happen next in the economy. They stand ready to fight deflation and to fight inflation. They have had once again to revise  their forecast for the inflation rate upwards. This has all happened against the background of depressed western world demand and very low price inflation in the US, Euroland, Japan  and the other main advanced countries.

               The apologists for the Bank claim that it was not the Bank’s fauilt that the UK economy lurched from a credit soaked boom in 2007 to the deepest recession since the 1930s in 2008-9. They argue that international factors were to blame. Alternatively they say it was the fault of  the banking crisis where the FSA was the prime regulator. They still have to explain why it should be that against such a background the MPC was not even able to control price increases when practically everywhere else in the advanced world inflation had ceased to be a problem. They also need to explain why the Bank of England did not take its duty to avoid systemic collapses in the banking market more seriously at an earleir stage of the crisis.

                 The truth is the Bank of England lurched from money which was too easy and interest rates which were too low, to money which was too tight and rates which were too high in 2007-8. Their policy allowed or fuelled the bubble, and their policy helped burst it. They did an extreme version of what the ERM had done to the UK economy a couple of decades earlier. Many people and two Opposition parties warned that credit and mortgages were too easily available  prior to 2007. We called for tighter policy. A few of us urged the Bank and government to loosen in the summer of 2007 to avoid the run on the Rock, but our well intentioned advice fell on deaf ears. There were even fewer of us offering an alternative to bank nationalisation, once the monetary tightening threatened to overwhelm bigger banks in 2008.

                   The Bank now accept that current inflation in the UK is partly the result of a major devaluation of the pound which the Bank allowed and facilitated during  the crisis. If they wish to uphold the value of the currency they need to take actions designed to retain its external value as well as its internal value, as the two do have an intimate relationship. The combination of money printing and low interest rates  has undermined the external value of sterling. In an open economy like ours where we import so much it has directly slashed our living standards. This site has been warning against excessive devaluation and inflation for many months, but the Bank seemed unable to see it when it mattered. As a result we have ended up with a stunningly high 5% RPI inflation at worst , and a 25% devaluation.

               Meanwhile, what became of the bold German model for these two schemes?  Germany gave up on the Exchange Rate Mechanism and moved rapidly into the Euro so other countries could no longer  devalue against her. Her Central Bank remains, but no longer has a currency or an interest rate structure to operate. In the dying years of German monetary independence even Germany showed that her Central Bank was not and could not be truly independent in a democracy. On the two main questions of the day the politicians overruled the Bank. They ordered a badly chosen  swap of ostmarks for DM on the reunification of Germany against Bank advice. Their chosen rate of one ostmark to one DM was boudn to cause economic problems.  They ordered the abolition of the DM, the currency the German Central Bank had to maintain and defend as its main purpose in life.

               Tomorrow we will look at what would be a better system for curbing wanton politicians and for curing Central Banks with bad judgement. Meanwhile both major parties, Conservative and Labour, should reflect sorrowfully on how their experiments with auto pilot monetary policy  resulted in boom and bust, leading in both cases to bad election defeats. The  autopilot  model, whether exercised through exchange rate linkage or through an independent Central Bank, has both times done damage to the Uk economy and to the political parties in office at the time.

 

               The political classes in the UK have for most of my active life in politics been gripped by a destructive  wish to find an “independent” discipline to run the economy to take it out of the hands of politicians. Some will say this shows a great wisdom and a certain humility about their own skills in this area. I wish to make an alternative case.

               In a democracy the ultimate power rests with the people. They can pressurise and lobby their elected government, or they can remove it if it fails to deliver what enough people want.  Mortgage and savings rates, the number of jobs and the advance or retreat of prosperity are often the dominant preoccupations. Whether economic policy has been subcontracted or not the voters will hold the elected government responsible for the outturn. The buck rests with the PM and Chancellor, whatever the details may say about who controls banks, money and interest rates.

                  In the last 30 years there have been two experiments with delegating the crucial powers. The first was the Establishment decision to join the Exchange Rate Mechanism. A Conservative government did it and carried the can for it, but all major political parties and the principal lobby groups all wanted it.  The second was the Labour idea of a so called “independent” Bank of England. This was also widely welcomed by the other political parties and by the main interest groups.  Both these approaches resulted in wild swings from boom to bust. We need to ask why.

                 Both policy approaches have been heavily influenced by Germany. The UK establishment was impressed by the long period of post war low inflation and growth achieved in Germany in the period from 1950 to 1980. The decision to tie the UK’s fortunes to the DM by putting the pound into the Exchange Rate Mechanism was designed to import Germany’s excellence at controlling inflation. If the DM was a low inflation currency, surely they argued we could hitch a ride to low inflation by linking our fortunes to it?

               I remember how lonely it was opposing this view in the later 1980s. A handful of us did so. I even took the large company I was chairing out of CBI membership partly  in protest at their support for joining the ERM.  I published a pamphlet in April 1989, before we entered the ERM, explaining how it would be destabilising. I argued that  in the short term, because the markets wanted to push the pound up, it would be inflationary. The Bank of England would create more pounds to sell across the exchanges to try to keep the rate down. This would become high powered money in the banking system leading to a surge of credit.

               The Uk joined and this was exactly what happened. A credit boom was unleashed by the bizarre monetary policy forced on the Bank by the need to keep the pound down. This in turn drove up prices. In  due course the reverse happened. Foreigners wanted to sell sterling. The Bank had to buy up pounds to try to keep the rate up. The credit bubble was burst by the  monetary contraction and by the need for much higher interest rates to try to keep the hot money in the UK. The UK lurched from a bad inflationary bubble created by excess money and credit, to an even worse recession, caused by too little money and credit. Both were the direct result of the independent system which all its supporters had said would lead to greater price stability and underpin smooth growth.

                        Few now would defend the ERM or are even prepared to remember their misplaced enthusiasm for it. The British Establishment has moved on, and has told itself the Conservatives lost in 1997 for other reasons. In truth the Conservatives lost in 1997 because the public were sore at the ultra high interest rates and the plunging activity levels created by ERM membership. A domestic policy could have been smoother and better for the UK.

                      Tomorrow I will look at the experiment with a so called independent Bank of England.

 

            I spent some of yesterday with a group of Conservative members and activists. Their views on the government’s progress to date were interesting.

             They are all pleased to see the end of Gordon Brown’s regime. They wanted an end to reckless spending and borrowing, and to the rash of political correctness and non jobs that characterised the dying months of the Labour government. They wish this new government well.

              They refer to it as “them” not “us”. They have a number of messages for the leadership. The most common word they used to describe their reactions to events so far was “disappointed”.

               I asked them why. Were they not pleased that the government has promised to tackle the deficit and to curb  public spending? Yes, they welcomed that but they were critical that spending is going up on overseas aid and the European budget. They think  more could be done more quickly to rein in excess and waste.

                 Were they not pleased that the government has said it will reform welfare? Yes, they were strongly in favour of that. They especially welcomed the decision to provide some high cap or limit on the amount of Housing benefit that can be claimed. Their concern was why it was taking so long to bring it in. Some expressed worries that the government might amend the proposals  or back down.

                 Some were unhappy about the defence cuts. They would rather we pulled out of Afghanistan as soon as possible, to save the money on that venture, in order to preserve more of the procurement programmes. Many  wanted the Harriers to be kept on for the carriers, and at least  one wanted new early warning aircraft.

                Many were unhappy about the recent decisions on EU matters. They wanted a referendum on  the extra duties and spending of the EU, disliking the expanded diplomatic service. The one Lib Dem policy they liked, a referendum on the whole matter of the EU, is the one Lib Dem  policy they notice  that has not made it to the Coalition table.

                All want to know from the leadership what distinctive Conservative programme will be developed for by elections and the next General Election.  Fresh from their experiences earlier this year of making the case against Lib Dem candidates in local elections and the General Election, they need reassurance that there will be a distinctive set of policies to sell that show some difference from what a Coalition government can do.

 

                The US announced its quantitative easing just before the G20. This was a provocative act to many of the other G20 leaders, showing that the US was willing to lower the dollar come what may.

                The US action has ensured that the main issue thrust onto the table will be the extent to which countries intend to follow beggar their neighbour devaluation policies. The successful exporting countries like China, Germany and Japan will be saying that the deficit countries need to work harder and to make more products they wish to buy. The deficit countries will be hoping that the big exporters will agree to revalue their currencies and to stimulate their domestic markets, making it easier for the deficit countries to sell to them. The surplus countries will object strongly to deficit countries undermining their own currencies by creating too many electronic  banknotes, especially as the surplus countries now own substantial amounts of deficit country IOUs. The deficit countries will object to the way some surplus countries restrict trade in their currencies or otherwise manipulate their exchange rates, delaying the inevitable adjustments.

            The best we can hope for from the leaders is emollient language, followed in due course by a greater williingness on both sides to resist interference with  the markets seeking sensible values for the currencies. If the President takes back home the anger about US QE II he might just let it be known to the Fed that this will  be the last time he does it. If China grasps the strength of western feeling about the current level of its currency, it might just allow more upward drift after the meeting.

              The markets have also arranged their little  economic question for the G20 party. Is there any level of borrowing costs for Ireland, Greece and the other stressed members of the Eurozone that might get the European countries to firm up their offers of financial help to them? The Europeans would be best advised to avoid too much talking about their problems, as the more exposure they are given in the media the more people are likely to worry about the situation.

             The EU is rapdily trying to put in place the kind of economic government  and controls you need if you are to run a successful single currency. In Euroland the centre does need to control how much each region and country within the zone can borrow, and does need to ensure common economic policies to facilitate adjustment within the zone to offset the shock of the common external currency rate. The failure to do this at the beginning has left a very lop sided zone, with some countries uncompetitive and running up huge bills.

               In the UK where one area becomes very uncompetitive at our common exchange rate, with high unemployment, the rest of the UK automatically pays the bills. Germany is reluctant, as the main  paymaster of the Eurozone, to do this for the most uncompetitive areas. The very public arguments over how much grant, loan and other financial assistance might be available to Greece or  Ireland is bound to be destabilising. If Germany now wants  bondholders of Greek and Irish debt to accept a cut in what they are owed, rather than helping with guaranteeing those loans, then it has to ready itself for German banks also taking a subtantial hit. Germany is about to discover things are already more integrated than they might like. A single currency is not just for Christmas. A single currency is not just a guarantee of no devaluations by your trading partners to give you good access to their markets. It is also a solemn commitment to them, to  have and to hold, for richer, for poorer.

             As I have always said, having a joint bank account with the neighbours may not be such a good idea.

 

                  Today we have the debate on how to secure faster and more consistent economic growth in the UK.  I will be proposing a five point plan for the government.

                  HONEST MONEY   The Bank should be told no more quantitative easing  and reminded its sole aim is to get inflation back to target. Neither the public nor the private sectors can afford inflation of nearly 5% on the RPI.

                  LOWER TAXES  The government needs to raise an extra £176 billion a year in tax by 2014-15 to deliver its plan. If it cut Capital Gains Tax and Income tax rates it would be easier to deliver, as lower rates lead to higher revenues and more growth.

                  MORE AND BETTER BANKS  The policy to make the UK banking market more competitive needs to be brought forward. The Regulators should agree that the main UK banks now have  enough cash and capital  to be secure, allowing them to lend more to business and for major infrastructure projects.

                  LESS AND BETTER REGULATION  The government needs to revive its promised deregulation bill. Deregulation is the tax cut for business that does not cost the Treasury revenue. Sensible deregulation saves the government money as well.

                 MORE PRIVATELY FINANCED INFRASTRUCTURE   The government needs to make prompt decisions on the regulatory frameworks and planning position to allow the construction of a new generation  of power stations and  to permit more privately fiannced transport provision. It needs to crack on with its plans for faster and better broadband throughout the UK.