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Here are the slides from the Euro lecture: The Future of the Euro(All Souls).

 

Today we hear that Belgian bonds have been downgraded. Another day, another problem for the architects of the Euro. They are getting to the point where investors do not wish to lend to any of the Euro area countries, because investors have grave misgivings about the longevity of the currency and the stability of the individual states seeking to borrow money.

 

I argued yesterday that orderly break up would be the least damaging way of proceeding. If each country had its own currency and Central Bank again, they could start to compete and put in place a domestic growth strategy that might work. There will be substantial  losses, but those losses are already there in the system, within the banks and bond holdings. The argument is over how quickly they should be taken, and how the pain should be distributed.

 

If they wish to carry on with their currency they have to get much faster and bolder at creating their EU state and all purpose Central Bank, to give the currency chance of life, backed by a credible sovereign capable of making the necessary decisions. That poses all sorts of difficult democratic issues.

Some of you have misread my point about top ranks in the navy and army. I do agree we have too few principal warships – that is a different argument. I was not criticisng the Navy for having too many senior officers. I was contrasting them with the army. The Navy has 422 officers of CAptain RN rank and above. The army has 2588 officers of Lieutenant Colonel rank and above. This I think is an interesting comparison.

Peter Bone MP has just circulated figures from the OBR to remind us of the large leap in the costs of our contributions to the EU. At a time when government talks about the need for budget restraints the UK faces a 116% increase in its net contributions to the EU, comparing 2010-15 with the five preceding years. Net contributions are the amount we pay in ,less the rebate, less the money we get back as EU spending.

Over the five year period gross contributions are forecast to rise by 8%, but net contributions more than double. This shows just what an expensive folly it was on the part of Mr Blair to surrender part of the UK’s very valuable rebate won by Margaret Thatcher. He did so in return for the promise that they would reform the Common Agrilcutural Policy in a way which lower its costs substantially. There is not much sign of that happening. The loss of abatement works out at around £2 billion a year of extra cost once if is fully phased in. This means they are also forecasting reduced EU spending in the UK relative to contributions.

Many of my constituents and correspondents do not feel we are getting value for the £41 billion the OBR says we will have to pay into the EU over the next five years. At a time of budget restraint people will naturally become very critical of such indulgence.

We read that Mr Barroso has told Mr Cameron he has to choose between protecting the city and having influence at the top table. That should not be the choice at all. The UK PM should simply defend the UK interest. The UK interest is not to help Euroland preside over its disaster or seek to influence their ill fated scheme, but to get us out from as much of the collateral damage as possible.

Over the last five Labour years gross expenditure was £12.4bn, £12.5 bn, £12.7bn, £14.1 bn and £9.5 bn.
The OBR forecast for 2010-11 onwards is £12.3 bn, £13.3bn, £12.8bn, £13.6bn. and £14.3 bn
The net figures for the last Labour years are £3.9bn, £4.6bn, £3.3bn, £2.5 bn, and £4.7 bn
The net forecasts are £7.6bn, £8.5 bn, £7.7bn, £8.3 bn and £ 8.9bn

There are other figures released by the ONS this week that have also attracted attention. These show that the 2010 figure shot up to £7.4 billion net and rose to £13 bn gross after abatement. If you extrapolate these figures you can up with a bigger headline than £41 billion for the five years.

It is also important to distinguish between the abatement which is a good thing because you get cash back, and the EU spending which is also taken off the gross contribution. This is far less satisfactory, as the spending may not offer good value or be on things you want to spend on. Taxpayers have to pay the gross bill, after the abatement. It still needs higher taxes to pay for the EU spending.

I have always wanted to start deficit reduction with big cuts in EU budgets. It’s a pity such a popular policy is ruled out by the undemocratic constitution of the EU.

I will be giving a lecture in the Old Library at All Souls College, High Street Oxford at 4pm on Friday 25th November.

 

          The Navy is a paragon of virtue compared to the army.  Now that there are just 31 warships  (destroyers and frigates and submarines), there is a mere one Rear Admiral per ship. Most of the ships are commanded at sea by Commanders or lower ranked officers. Very few Captains go to sea in command of a ship. We do still have 300 captains, however, to sail desks  and fire up  bureaucracies.  That’s almost ten captains per warship.  There are just two full Admirals  and  7 Vice Admirals.

         The Senior service is better equipped with Commodores, in case squadrons need to put to sea. There are  80 of those, or almost three per warship. It still gives  a lesson to the army in making do with fewer top ranks.

 

          Amidst all the spending increases of the last two years, the MOD has been the subject of cuts. We have been told these are deep and damaging. We have learned that we will have fewer tanks, ships and other military equipment. We read of redundancies for troops.

       I decided to ask a few questions to see how they were getting on. Let’s begin today with the army. This is being reduced to fewer than 100,000 personnel in uniform. I asked how many Majors were needed to command the units of such an army, expecting to hear it was around 800, with each Major commanding about 120 people. I was told the army currently has  4700 Majors, or  six times what you might expect.

       A Lieutenant Colonel typically commands a battalion of 650 people.  You would expect 150 of them in our slimmed down forces. Instead I was told we currently employ  1780, or 12 times the number you might expect. Indeed, you could form three battalions just of Lieutenant Colonels.

         An army does need some senior staff officers. You might have thought we needed around 15, given the number of brigades. Instead, I discover we employ 580 Colonels, or 38  times what one might expect.

            We are a bit shorter of Generals. There are 6 full General officers, 9 Lieutenant Generals , 43 Major Generals and 170 Brigadiers. If a brigade is around 2000 people, you might expect 50 Brigadiers. There is one senior officer for each battle tank, and around 8  Lieutenant Colonels for each tank.

           So we have a pay bill of over £400 million for top management in the army, with a diminishing number of people to command. Is this cut to the bone?

 

              The UK enjoys six months chairing the European Council which supervises the Human Rights Court and Convention.

              The UK is seeking amendment to the current system, to try to return it to the original intentions when it was set up after the Second World War.

              The idea was the member states which signed the Convention  would police it to ensure no signatory state violated crucial principles like the right to a fair trial and the need for a state to refrain from torture.

               In more recent years the ECHR has accepted a wide range of cases against member states from individual litigants seeking to change policy or push the boundaries of law in their respective countries. The UK thinks these cases should be settled under national law in national coruts, without an appeal against the domestic legal system to the European level. If, for example, the UK Parliament does not wish prisoners  to have the vote, there should be no right for the ECHR to overturn that judgement. Nor should the Court be able to decide individual migration cases against the determination of UK courts under UK law.

                The UK’s aim is to disallow individual appeals. The UK would remain a signatory of the Convention, subject to the judgement  and disapproval of the other member states should any future UK government violate the major principles of justice included in the Convention.

                This was an idea proposed in the “Future of Conservatism ” book recently published, in a chapter written by Geoffrey Cox QC MP.

        I have found there are are least 87 examples of countries leaving currency unions and establishing their own money  since 1945. In most cases establishing an independent currency allowed the country concerned to set more sensible interest  rates and exchange rate to help them grow. In every case it gave them more independence, strengthening their ability to make their own decisions free of foreign interference.

       The Euro remains under pressure.  Many in the markets and in the weaker countries are waiting for Mrs Merkel to relent. They just want her to say the ECB can buy up many more EU country bonds, and print the money to do so. She so far resolutely  refuses to do this. The Governor of the Bank of England this week in his press conference explained her reasons very well. He pointed out that a Central Bank has a role as the lender of last resort. That means it acts as  the lender who supplies cash to commercial banks in its jurisdiction if they are solvent but in need of temporary loans. They are lent money at a penalty rate to see them through. It is not the job of a Central Bank to act as lender of last resort to countries that have run out of credit and whose solvency is in doubt.
 
          Saving the Euro is ultimately a political decision for the leading countries in it. Saving it means finding a way of relieving pressure on the bond markets for the weaker countries. That in turn means the richer countries being prepared to send money to the poorer parts as transfer payments and grants. Alternatively the richer countries need to agree to use their more favourable credit rating to borrow and lend the money on to the weaker countries at subsidised rates. This in reality means the richer countries paying some of the bill for the poorer countries. German public opinion does not favour doing this, hence Mrs Merkel’s reluctance. Maybe one day she will, but so far there is no sign of it. She still thinks it can all be done by cutting spending and raising taxes, but so far this has not worked.
 
          The alternative to big transfers of money and subsidies around the union is the break up of the Euro area. The leading participants have allowed their own speculation about letting Greece out of the zone slip into the public press. There is still a feeling by many inside the governments, and by many of their faithful followers in the press, that the break up would be a financial disaster. It would perhaps be wise of them to read a little more of the history of the break up of previous currency unions. There have been plenty of examples.
 
          Within Western Europe the latin currency union led by France and the Scandinavian currency union both broke up without great calamity at the time of the First World War. Between  1945 and 2007 according to the Monetary Authority of Singapore  69 countries have left currency unions. This figure leaves out a good number, including the  break up of the rouble currency in the early 1990s. It also excludes the split of Czech and Slovak currencies in 1993. It includes the ones which  left the sterling area, like  New Zealand in 1967 and Ireland in 1979. It happened by agreement with a relatively smooth transition. Some like Bangladesh left the Indian union. Others left former colonial unions: Mozambique for example left the Portuguese area in 1977 and Algeria left the French franc area in 1969.  Again these changes caused so little disruption that most have forgotten they ever happened.
 
            It was with more sense of turmoil and crisis that the rouble area broke up in the period 1992-5. 16 members of the rouble union broke away forming their own new currencies. This includes Russia that established a new differently valued  rouble for herself.  Latvia, for example, did it in two stages. First she created a Latvian rouble, which started at a one to one exchange with the old common rouble. Then she launched a new currency, the lat, to replace the Latvian rouble. It worked and allowed her economy to develop well for the ensuing few years.
 
            The uncertainty about the end game for the Euro continues to damage markets. The battering of the bonds does make things far worse. It means banks will lose yet more money on what were meant to be safe holdings. This in turn means they will lend less, slowing growth still further. If the bond markets force more countries into default like Greece it makes recovery more difficult. Attempting to prevent his by offering large loan bail out packages for the bigger countries at risk is going to strain political and financial tolerances within the union. Mrs Merkel holds the fate of the Euro in her hands. Either she has to sanction large amounts of financial support to the poorer areas, or she has to organise an orderly restructuring of the membership of the zone. The good news is that if she with France  did finally decide to change the membership, history shows it can be done and it need not be too disruptive. It is surprisingly common for countries to leave common currencies.
 
     

 

            The UK’s foreign policy objectives are currently very muddled.  The UK wants the Euro area to adopt bond buying and quantitative easing. This would delay but not prevent the ultimate crash of the Euro. It would mean bigger debts and more unemployment by the time  Greece and other weaker members are finally driven out, or Germany decides to leave as it is all too costly. It is difficult to believe the southern states can become competitive within the zone, or that Germany will be prepared to pay all the bills to keep it going.

              The UK wishes the Eurozone to integrate more rapidly, adding political union to monetary union. This would create a strong new country on the continent, something previous generations have fought against. The UK wishes to have a “seat at the top table” despite not wishing to be part of this new political union. It is difficult to see how this could  work.  The UK does not wish to make further financial contributions directly to the poorer areas in the EU, but will do so indirectly through the IMF.

              The UK government should think again. Instead of this muddle the UK should start from the proposition of what is best for the UK, and then set about selling it to the other EU members. The UK should use every bargaining strength it has. It has two major ones. The first is Euroland needs UK consent to Treaty changes. The second is 80% of the British people do not support our current relationship, and either want to leave or want substantial powers of self government returned to us. The UK government should grasp just how frightened of referenda the EU now is, and could  threaten one.

               So what do we want out of our relationship with the rest of the EU and Euroland?  We want a peaceful friendship. We want to carry on trading on sensible terms. We need some agreements to cover detailed matters like air and sea links, matters of common environmental importance like pollution and noise, double taxation arrangements, and an extradition system. We have these type of agreements with non EU countries through bilateral negotiation and international treaties, but for the EU they are now subsumed within the acquis communitaire or common law codes. Many of us at least want our full rebate back on the budget, as the EU did not deliver the reform of agricultural spending promised as the offset. A new relationship could clarify where we are happy with shared law making, and how ti should be decided.

             On defence and foreign afairs we should continue to make NATO the cornerstone. We should politely decline  further involvement in EU based defence initiatives. Foreign policy should remain a UK matter. We might take a common stance with the rest of the EU where it suited them and us, but each matter should  be judged on its merits and subject to veto or opt out.

             On trade and commerce we should simplify. All we really need is the right to offer goods and services for sale. This does not need to be complicated by hundreds of laws laying out in detail how you make a tyre or provide an insurance policy. Given the huge accretion of law and regulation I suggest negotiating the right for the UK to disapply any EU regulation that the UK Parliament does not accept. First the UK would offer amendment or repeal to all EU members as our preferred way of tackling it, setting out our reasons. If the EU disagrees we should have the power to disapply the measure through Parliamentary process.

              The same should apply to areas like the environment, transport and energy where the EU has come to legislate and regulate substantially.

                 The EU should be given a simple choice. If it offers us such a deal then the UK government would recommend it to the British people and would  campaign to carry the vote in a referendum. If the EU refuses to give us a satisfactory deal the UK would still have a referendum, and the British people might decide to leave altogether. As a concession to the rest of the EU the UK might offer a different arrangement on the EU budget, as otherwise the UK could opt itself out on a permanent basis. In practice our budget contribution would need to be negotiated in the light of how much we stayed in. If we took ourselves out of the agriculture policy, for example, we would need a substantial reduction in fee.

 

 

 

 

           As Mrs Merkel drives Euroland towards greater EU control over budgets and economies I would like Mr Cameron to say the UK needs a different relationship with this emerging state. It is up to them how they pay for their currency and their wider union, as logn as we are not expected to contribute. The UK should only consent to the changes they need if we get protection from the legal and financial demands they increasingly wish to impose on us.  I will write more tomorrow about this.