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          This was the most difficult question I was asked on Thursday following my lecture in Oxford.

          My reply reminded the audience that so far the EU elite had been proved wrong about the economics. Their plan to bring the economies together through the Exchange Rate Mechanism was shattered by the markets. Instead of proving the economies of western Europe were converging, the ERM reminded all but the most ardent federalist that the economies of western Europe are very different. They had different growth rates, inflation rates, and public debts. In consequence their currencies fluctuated and changed when allowed to do so, and burst out of a scheme designed to restrict them. They thought the ERM  would bring together inflation, debt, performance. The opposite happened.

           Instead of accepting the warning, the EU decided to leave out the necessary long period of encouraging convergence of performance and move directly to a single currency. They reasoned that this was the ERM countries could not be forced out of. If the problem with the ERM was the market ability to sell currency A and buy currency B against the wishes of the EU, then if they removed those currencies the new scheme would be market proof.

          Some of us warned them that the new pressures were bound to arise elsewhere. Some of the pressures would be painful in the real economy. Some areas would have very high unemployment. Others would have high inflation and hyper activity or bubbles. So it proved. We also warned that if they did not keep to their promised debt disciplines there could be similar pressures in the debt markets to the ones which had destroyed the ERM in the currency markets. So it proved. We are now living through just such a crisis. There are unwanted new built homes in Ireland and Spain, huge debts throughout the southern countries, and the aftermath of a bank and property bubble in several countries.       So my answer as to whether  they can  be right was simple. No, they were not right in the past, and they are clearly not right today.

                So why then do so many powerful and intelligent people, officials and governments want to be wrong? Why do they revel in being wrong? Why do they specialise in ridiculing and belittling their critics, who have been proved comprehensively right so far on the economics of their various schemes for merger?

               The answer lies in the politics. There are many who strongly want a united Europe. They decided the trade, financial and monetary route was the best way of doing it. They did not fancy their chances of holding  a series of referenda in members states to gain approval to the establishment of a new country called Europe. They decided on a crab like sideways approach to union. They still want it. They plan to use the crisis of the Euro not to break up the EU but to have more EU. They see it as an opportunity, a chance to persuade the cowed and frightened peoples of Europe that more EU is the only option. 

                There is now the immense power of vested interest. The EU commands substantial resources. It makes many grand sounding and well paid appointments. Many in the political elite exchange jobs with those in the administrative EU elite. Why would they want to damage that? That’s why when the EU says all member states must cut their own budgets, they put the EU budget up. That’s why, when the markets say no-one should go on lending to some of these countries, the EU belatedly decides to lend, having secured control of the member state’s economy first. That’s why , when countries vote “No” in a referendum they are told to vote again. That’s why now the EU favours unelected governments, and moves rapidly to deny any referendum.

             The Parliamentary debate about the Autumn Statement is likely to be about the small numbers that have little impact on the scale of the problem. Labour will probably call again for a £2 billion a year bankers’ bonus tax, and think of ways of spending it a few times over on well intentioned schemes. The truth is spending an extra £2 billion or even an extra £10 billion does not make much difference in a £1500 billion economy.

             The Coalition government will rightly say that they need to have a credible path to cut the deficit, or else they could lose market confidence just as Euroland has lost market confidence. A country which has to face soaring interest costs can get into a vicious spiral like Greece and Portugal, where the extra cost of  borrowing forces them to cut other more worthwhile expenditures. This in turn can cut output more, and reduce tax revenues further. They then need to borrow yet more, but the interest cost is always against them.

             Labour do not deny this worry. They say their modest spending ideas can be paid for from extra tax on unpopular people. They now complain that the deficit under the Coalition is coming out at higher levels than planned. We are all deficit cutters now. Labour, after all, enacted law to require a halving of the deficit.

           So the issue is how do you cut the deficit?  Coalition plans to “limit” extra borrowing to £451 billion this Parliament were revised up to £485 billion in March. Few in the mainstream media noticed this. On Tuesday the OBR/government is likely to increase this extra borrowing to well above £500 billion for the 5 years. People will notice this. The mood has changed and the markets are circling other countries with debt problems.

           In order to preserve the confidence of lenders to the UK it is vital the government shows a credible path from here to cut the deficit, assuming lower growth than past plans. We have to live with a weak Euroland economy for the forseeable future. Privately financed infrastructure, and sensible measures to lend more to well based private sector business plans will help.

             Best of all would be a determined effort to shift most of the £1.2 trillion gross  liability of the state owned banks into private sector hands. RBS must be broken up, and three new banks that are strong enough to lend and trade without taxpayers support are needed. If they could inject say £30-50 billion of well based new lending into the economy from their private sector sources, that could generate some growth. They could help pay for the reservoirs,broadband links, toll roads, airport capacity and other things we need. They need to lend to good profitable schemes, not bubble lending like 2007.

              On the government’s own figures the UK state has outstanding liabilities of £3.5 tn. Shedding most of the banking risk would greatly improve the UK’s true credit standing. The government also needs to show it has new ideas to curb the growth of public spending, and has a will to achieve an affordable public sector pensions settlement. Then it can truly say it is tackling all three main areas of debt and worry. It needs to show strikers on Wednesday that there is a serious problem of pension affordability, and show it intends to grapple with it sensibly and fairly.

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.