It is suddenly fashionable on the continent to talk of a banking Union. The EU assures us this is one way that they can advance their goal of “deeper economic integration”. They see this as necessary to help save the Euro.

Reading the EU’s document on what a banking union would look like, the first thing that emerges is they are well on the way to having one for all 27 member states of the EU anyway. There has been huge change in recent years, bringing into play the European Banking Authority, the European Securities and Markets Authority, and the European Insurance and Occupational pensions Authority. These bodies at the moment co-ordinate and supervise the national regulators. The wish now is for them to do more, regulating the larger institutions in the EU directly, and becoming more detailed in how they tackle the national regulators. There will be more pressure for harmonised standards and approaches. They are floating the idea of one pan Euroepan bank deposit guarantee scheme, for example. The EU did intervene in the ways EU governments aided their banks during the crisis, and did impose some state aid rules on the subsidies.

The UK should have a problem with all this. If the Euro area wants a centralised approach to regulating its banks, that is one thing. If they wish to use the institutions of the 27, and impose the results on the UK, that should be another thing. The safest way for the UK to approach it is to insist that the Euro area has its own rules and institutions, but that would duplicate the institutions the 27 have already set up. The least bad way would be to give the new banking tasks to the European Central Bank, writing firmly into the rules that the powers only relate to Euro member states. If the EU 27 common institutions are to be used, the UK has to exempt itself from the application of their rules to us if it wishes to keep control over how it regulates its important financial service industry.

There are also problems for Euroland. The EU thinking seems to be in favour of higher capital and cash requirements. Whilst these would have been eminently sensible 7-10 years ago, to stop the bubble, today they may well delay the recovery. So far there has been little evidence of the restructuring , writing off and closing down the EU says it favours. The system is thriving on massive bail outs of damaged institutions. This does not provide a sure basis for growth. When linked to strict controls on the stronger banks, it produces a toxic cocktail of anti growth policies. Some in Germany are also now trying to limit the damage of this proposal, as they do not fancy Germany having to help guarantee the bloated balance sheets of weak banks all round the Euro area.

It was interesting to hear the retiring Head of the FSA effectively blaming the government and the Bank of England for the collapse of Northern Rock this morning. Apparently the FSA recommended helping Lloyds to buy Northern Rock before the run on it. At the time I recommended the Bank simply made more loans available to Northern Rock, on good security, to replace the wholesale money that had dried up. That would have been cheaper and easier than the route they followed. Allowing Lloyds to buy it reflects the regulatory support for mega merger banks, which was part of the problem of that era.

The UK’s exports of goods to the rest of the EU is a little under 10% of our total output. That means that if, for example, there is an EU recession and we lose 10% of that business as a result, the UK economy will lose just 1% of output. At a time of little or no growth that is not helpful. It compares with the government forecasts of Uk growth averaging over 2% per annum.

However, at the same time the emerging market economies are likely to grow at a decent pace. The UK sells too little there at the moment. Exploiting the growth in those economies, and building up our low market share, we could offset a possible 10% fall in EU exports by a compensatory increase in non EU exports. The government is rightly seeking to help companies export to these faster growing markets. This will be an urgent priority not just for the next year but for the next decade, as the Euro scheme and banking problems in Western Europe damage its prospects.

There is also considerable scope to replace imports with home manufactures and services. That too could offset any loss of output from Euroland contraction. All these routes would be helped by the actions to promote UK growth we have often discussed here.

Sometimes trying to fix a problem can make it worse. Confidence is a precious flower. Pulling it up by the roots to see if it is healthy, or watering it too often, may not be wise.

It looks as if other member states and some EU officials wanted to organise a Spanish banking bail out before the Greek problems reappear following the Greek election. Spain’s government seemed to want to delay, and issued denials, before agreeing to a hastily compiled press statement last week-end confirming a future bail out of the banks using EU money.

It has led to a series of questions that do not necessarily have good answers for the Euro.

1. When will the new bail out fund itself be able to borrow the money to fund the Spanish banks? All bail out funds from other Euro members will need to be raised from markets,as all the main Euro countries are borrowers.
2. Will the EU loans, effectively made to the Spanish state to pass on to the banks, have priority over other Spanish government debt? If so, that reduces the credit worthiness of other Spanish state loans.
3. Even if the new debt does not have priority, Spain’s own credit rating is damaged, because the state now has more debt to assist weak banks.
4. How does Italy in particular afford her share of the Spanish bail out? Does it make sense for Italy to have to borrow more to help Spain, when Italy hersef has refinancing stresses ahead?

The model of big bank bail outs instead of controlled administration for the weakest is always problematic. It is especially problematic when large sums have to be found to prop the banks by states whose own credit rating is already on the slide and whose cost of capital is rising to high levels. The bail out has put both Spain and Italy’s borrowing costs once again under the market’s cosh.

           Some have pointed to a paradox in what I argue. I both agree with the government that you cannot get out of a state borrowing crisis by borrowing more, and propose that more credit in the private sector would be a good thing to get the economy moving. These statements need not be contradictory.

            It is true that some individuals and  companies overdid the private sector borrowing in the heady years of 2004-7. Some banks clearly went too far, building huge portfolios of risky debt and other financial instruments.  I am not advocating that these individuals or companies shoulod borrow more. They are having to cut their borrowings and sell off some of their assets to repay debts. That is a necessary process to get over the inflation of assets and asset prices of the pre Crash period. The banks have now slimmed down their balance sheets considerably, and are in a position to expand a bit if only the regulators would let them.

           The private sector, however, remains larger than the public sector and includes a large number of credit worthy individuals, families and companies who could take on more debt for sensible projects and purposes. The aggregate level of private sector debt got too high by 2007. It has come down a bit since then. The totals allow scope for the unborrowed and those with little gearing to borrow some more.

            That is where the role of the banks needs changing. Today credit worthy smaller businesses cannot get credit at all, or only at a very high price. Larger companies are put off epxanding, partly because they are concerned about demand, and partly because even they may be worried about working capital facilities needed if they do expand. If people cannot get mortgages for new homes, housebuilding suffers. If people cannot get mortgages for second hand homes, all sorts of activity related to home improvement and buying and selling suffers. If people cannot get loans to buy new cars, the motor industry suffers.

            Some say that too much credit in the past has greatly extended house prices, and these should now be allowed to fall further. It is true that mortgage banks lent far too much prior to 2007, extending higher multiples of joint incomes and allowing a fast appreciation in home prices. There has been quite a big adjustment outside London since 2007. Central London has stayed high owing to strong foreign demand, often based on cash not mortgage money.

            Whilst I agree that home prices are still high relative to income, I am also conscious that falling house prices puts people off making other purchases and makes them less adventurous with their other capital where they have some. We need to establish a sensible clearing price in the market for homes soon to foster recovery. It may not be as low as some would like, but allowing further large falls with a very restricted supply of credit will undermine banks further, leave homeowners feeling bruised and lacking confidence, and may not even in the short term help the first time buyers. They may, after all, delay as they see prices falling.

     Mr Miliband has plunged into the politics of identity, by telling us he is proud to be English. He has also apologised for Labour’s past, which he tells us was not good at cherishing or promoting England’s identity.

        The amusing thing about his foray was the Channel Four interview with him.  It was a great interview. It stuck entirely to Mr Miliband’s chosen topic. It asked a series of simple and good questions. The more he was asked, the less Mr Miliband said. The interviewer had no need to do what they usually do, and go off after some different topic or embarrassment. At the heart of Mr Miliband’s case was no heart, no lungs,  no soul for England. There was certainly no policy for England, no wish to tell the EU that England has a right to a life.

           He was  unable to identify a single English characteristic that could not be said to be a British characteristic as well. His definition of Englishness, a stoicism in the face of adversity, is surely a British characteristic if it is anything. He rules out an English Parliament. He  has still not come round to the better answer, twin hatted English and UK MPs at Westminster with English votes for English issues. He has still not renounced his and the EU’s wish to balkanise England with false regionalism. Labour did its best in office to eclipse England and to set up as much English regional government as possible, to try to distort and twist our sense of identity.

           I would be interested to hear your thoughts on the special characteristics of England. As Mr Miliband had in mind the contrast with Scotland, some of our different culture and characteristics you would have thought were obvious.

             He seemed as tone deaf to Englishness as the BBC were to the mood of the UK as a whole  during the Jubilee. Maybe the BBC were put off by a sea of Union flags, and by the enthusiaism for monarchy. Their chosen presenters were in the main ignorant of our history, ill informed about the pageant, incapable of providing informed commentary and always wishing to take things down to the lowest common denominator. The BBC is usually tone deaf to England, and with their friends in the EU do their best to deny it voice or existence. Over the Jubilee water pageant  they extended the insouciance to the wider nation.

              I am particularly angry with the BBC after hearing Sunday’s interview on the World at One about the Euro’s problems. Three senior people who have constantly urged more European integration, have backed the Euro and in the case of Mr David Miliband thrown away some of the UK’s powers of self government in support of this cause, were allowed long periods to say what they wished in a kind of extended pro EU party political broadcast. They were not asked a single  difficult question. At no point did the BBC think to ask them why the Euro scheme had gone so badly, or to suggest they might be partly responsible for the unemployment, the broken banks, the collapsing economies and all the other disasters the Euro is now bringing. Surely Mr Sutherland, a former Irish EU Commissioner, should have been asked if he now thought the Euro had worked out well  for Ireland?

       For many days the markets have known that Spain needs a loan to help bail out her banks. It makes the decision of Spanish Ministers to spend last week denying it all the more bizarre. It is yet another example of the poor EU/member states spin in handling this rolling crisis.

      Spain apparently will receive money for her banks on softer terms than Ireland, yet Ireland also needed to borrow money because of the state of her banking system.  It’s all borrowed money, reflecting past government mistakes in handling state finances. There will be resentment about the different standards applied and the difffering demands.

       A better answer than  more state debts and more collective loans would be to sort out the poor state of some Spanish banks. Future regulatory standards are to be based on living wills. That means selling off the bits of the banks that work and closing down the bits that are overburdened with debt and cannot trade successfully in the future. Those who have financed the banks take the hit. Why don’t they start it now? If it makes sense for a future crisis to do that, why not try it out in the current large banking crisis enveloping Europe today?

The UK and the US navies both have eighteenth century wooden sailing ships still in commission. HMS Victory in dry dock at Portsmouth is the icon of the British fleet, a constant reminder of Trafalgar and the glory days of Nelson. USS Constitution, refurbished and afloat in Boston harbour, is the frigate that the British navy could not sink or capture, affectionately known as  “old Ironsides”. She  had  a distinguished career as one of the USA’s first group of six powerful  naval vessels.

The stories of both, paradoxically, are the story of freedom in their own countries. Victory is the most recognised symbol of Britain’s resistance to Napoleon. Britain fought for the small nations and independent peoples of Europe against the French dictator who wished to place all under his rule and continental system. Victory guided by Nelson led one of the two lines of British warships into battle against the more heavily armed and formidable allied fleet of France and Spain off Cape Trafalgar. They achieved the most stunning victory in a battleship encounter from the age of sail. Britain truly ruled the waves. She confirmed her pre-eminence at sea, by showing her ability to defeat two great powers  at the same time. The victory meant Napoleon could not invade Britain with the Grand Army and complete his eclipse of independence and self determination  in Europe.

The USS Constitution claimed to be a frigate. Her keel length, however, was almost the same as that of Victory. Her beam was narrower. Quoted as a 44 gun ship, compared to Victory’s 104, there are other references to her carrying 55 guns on some missions. Victory was 50% heavier than Constitution,but Constitution had sides as thick as 24 inches at the waterline. More importantly, some of her timbers were in American live oak, which is stronger at resisting cannon fire than English oak. As a result, when in wartime exchanges with British ships, the cannon balls fired against her either bounced off or lodged in the sides of the ship, refusing to penetrate fully.

Constitution successfully fought and captured two British frigates, both less powerful than herself, in separate ship actions. She also defeated two smaller English warships  together. She was finally retired with a perfect record of engagements with the enemy. She helped secure the American revolution. She showed that  even at the time of Britain’s maritime supremacy that the USA  had at least one warship which could evade Britain’s most powerful ships, and defeat any British ship smaller than her. This was news to the British navy, which was used to winning against the odds in actions they willingly undertook. The British did succeed in capturing the smaller Chesapeake in 1813, and the powerful but damaged President in 1815, two of Constitution’s five  sister naval vessels of the first US navy.

The  new Republic was to demonstrate a great capacity to wage war and fight for freedom. USS Constitution gave the fledgeling republic a sense of power and capability. The sailors and gunners of Constitution showed huge skill and bravery. They posed a challenge to the crews of British warships far greater than the typical French or Spanish vessel. These defenders of freedom practised sailing and gunnery more, and were good at both.  President was damaged before the final action by sailing error.

 Similarly, the heavily outgunned British fleet at Trafalgar never doubted its ability to win. The British only had 27 battleships with 2318 guns, to the Allies 33 battleships and 2872 guns. The British just believed that their skill at sailing and gunnery would win the day, as it did.

            Voters are fed up with austerity. The government is worried about the lack of growth.

            The government’s original plan was to cut public spending whilst expanding the private sector. The acceleration of growth would produce a large increase in tax revenues, which in turn would limit the need to cut public spending to bring the deficit down.

            As readers of this site will know, the fine words of the government ‘s strategy were never reflected in the subsequent  figures. Over the last two years the government has had to scale down its estimates of private sector growth. It has also revealed that it has increased, not cut overall public spending. Despite or because of this, the economy has slipped back into a  second mild recession.

             So what does the goverment need to do to trigger the private sector led growth they promised? Why isn’t the private sector in general, and manufacturing in particular, accelerating as planned?

             The private sector has been hit by three main forces. The first is an absence of bank credit for worthwhile projects and businesses. The second is the high rate of inflation the Bank has presided over, squeezing real incomes and so cutting consumption or demand. The third is a series of tax rises which have harmed enterprise and actually cut rather than increased revenues.

             So what should be done to change this? 

              First, the bank regulators should be told they have done quite enough to give the banks stronger balance sheets. The regulatory controls on cash and capital, which were far too lax in 2004-7, are now far too tight. They should be temporarily relaxed to allow more lending.

              Second, the Bank of England should announce no more quantitative easing, and should start to move interest rates up to closer to the private sector rates already working in the marketplace to normalise monetary policy. The Bank should make clear it will in future be more hawkish about inflation.

              Third, the government should revise tax rates to set optimum rates for raising revenue. Several rates are now above the level to maximise income to the state and need to be cut.

             It would also be helpful if the government did more to cut the costs of regulation on business. They could also stimulate much more private sector infrastructure investment through their licensing and planning decisions on energy, transport and housing.

          The mood seems to be changing a little in the two main party leaderships since we held the Parliamentary vote last year to require a referendum on the EU. Then they were both adamant that it was a bad idea. The Conservative leadership said they would provide a referendum should any future powers be conceded to the EU, to be defined by themselves. Labour stuck to its position in government that referendums were undesirable and not needed. They after all gave away massive powers of self government at Nice, Amsterdam and Lisbon, but never thought a referendum necessary.

          Now we read that both leaderships are gingerly considering offering a referendum on the EU. In Labour’s case the aim is probably to offer an In/Out referendum in the hope and expectation that they would win it to keep the UK in. Labour as a party would of course campaign for a Yes vote to staying in on current terms, as these are the terms they signed us up to.  They would hope to split the Conservative party in the process, with many Conservatives campaigning to leave the EU whilst the leadership might be in two minds with some wanting to vote to stay in on current terms if it was that or out completely.

          The strategy is of course risky for Labour, which is why they have not rushed to offer a referendum. There is the risk from their point of view that they could lose the referendum. The British people might vote to come out. There is the near certainty that either way, whatever the result, Labour would be on the less popular side of the argument and would simply end up reminding people just how much power they gave away whilst in office. Labour could win the referendum, but  make themselves unpopular in the process. Some people might vote to stay in through gritted teeth, believing they had to, but not feel good about it.

          The Conservatives also have to think very carefully about this issue. If there is serious talk of offering a referendum on Lords reform- and I am told there is – they need to understand that many people will be amazed that we can have a vote on that, following the vote on how to elect MPs, but still no vote on the big topic that really matters.

                The leadership’s view on the EU is that they want to get powers back from the EU, but are currently blocked from trying by the Coalition agreement. They  concede that the current relationship is not working for the UK, but they probably want to negotiate a less intrusive  relationship that keeps the UK in the EU but outside the Euro core. A premature In/Out referendum makes this a difficult strategy, as the UK electorate will either say pull out or say stay in on current terms before they can renegotiate. Meanwhile many in the Conservative party would welcome an In/Out referendum and will vote to come out.

           The Conservative leadership could offer a twin referendum strategy. It could offer a referendum asking the UK people if they want the government to negotiate a better deal with less intrusive Brussels controls immediately. Labour and Lib Dems would find that difficult to oppose and the UK people are likely to vote Yes in large numbers. That could then give the Coalition government the mandate to demand a new relationship from Brussels, and might be easier to achieve within the Coalition than an In/Out vote. The Conservatives could offer a referendum on whether to accept the revised terms or to leave, once the negotiations had been completed.  That way the Conservative leadership could be on the popular side in the first referendum, and keep its options open on whether to stay in or leave, depending on the terms they obtained in the negotiation. That would provide maximum leverage to get a better deal.

         Those who think an early In/Out referendum is the best answer for Eurosceptics need to be careful. We want to avoid a re-run of 1975, where all three main political parties, the CBI, the TUC and most other main institutions lined up to tell us the EEC would be good for our economy and essential to our trade, leading to a large majority in favour of membership.