The problem in Euroland is not just a problem of a few countries which are no longer competitive. There is a problem of too much government debt. The same issue haunts the US, where there is a poltical war over how to get the deficit down. The UK now has a government which says its main purpose is to eliminate the deficit.

             The problem of the west rests in a series of countries that could properly be called DOGS – Democratic overspending government sovereigns. In Euroland these dogs are in trouble, as well as the Pigs.  The pressures of democracy have led politicians of many different parties and persuasions to offer both higher public spending and lower taxes than they need to cover the spending  in the pursuit of electoral success and wider popularity. They have decided they can get away with this, as they have been able to borrow large sums to cover the gap. In more recent years some have even argued that borrowing more is essential to sustain demand or to lift their economies out of the slump their boom/bust policies created.

              In Euroland countries are discovering there are distinct limits to how much markets will lend to governments. As interest rates rise, so countries become unwilling to borrow. They seek subsidised credit from elsewhere. The US and the UK during the recent deep recession turned to printing money. This was advertised as a policy to augment demand at a time of falling output, but it became a convenient way of sustaining very high public borrowings at low interest rates. The new money created was used to buy government bonds to keep the government borrowing rate down.

             Euroland is having an internal row about whether it too should extend the eternal credit approach to public budgets by printing more, or whether it just needs to get tougher to control deficits. The US and UK are pledged to cut deficits by raising more in tax and reducing the increase in spending, but meanwhile print some more money.

           When you look across the world at the rise of China and India, you see that the west does not have a sufficiently competitive model for modern conditions. Parts of western business and economic activity are still world beating, and earn their producers good incomes in the global market. The more western economies rely on state activity and subsidy, the narrower the base of competitive activity, and the more money the country needs to borrow to sustain its relatively high living standards.

          Euroland needs to worry not just about the Pigs but also about the Euroland  Dogs. German cars, French food and wine, and Italian fashion  may still be world beaters, but in too many areas now the production and the incomes are moving to the east from the west. That is why the west needs to change its model and get on top of its debts.

          Owen Paterson from within the Cabinet has given a most encouraging interview to the Spectator. He tells us that the Euro area are now attempting to create a single country. That requires the UK to have a very different relationship with it. He says h”e wants to get the power to run our country back”.

            He loyally tells us that the Prime Minister agrees that change brings opportunities, and that the PM intends to stand up for the UK’s interest. Let’s hope the Prime Minister does agree that we need to  modernise, creating a   new relationship with Euroland as it rushes to political union.

             Let us talk today about the German surplus. There it stands, enormous, giving Germany a great sense of achievement and power. No wonder so many Germans want to keep the Euro. They associate it with high levels of exports throughout  the EU, and rising cash balances as they seek payment for their goods.

              In 2010 Germany exported 179 billion Euros more than it imported. 60% of its exports were to the rest of the EU.

             It leads Germans to say to other Euro members, you can be like us. Work as hard as we do, set realistic wages, and you too can have a surplus like ours.

              The German surplus is matched by the southern states’ combined deficits. Portugal, Greece, Spain, and Italy had a combined deficit about as large as Germany’s combined surplus. They like Germany do a lot of trade within the EU.    They recognise that Germany has become more competitive than them. They want a way to pay for the goods they buy from Germany. They seek loans or grants from the surplus country to pay the bills. Germany is not keen to send them grants, and is trying to restrict the borrowing. The southern states are forced in to austerity measures, to curb their appetite for German products.

             In a normal single currency area, backed by a single country, these surpluses and deficits are financed much more easily. If one region of the UK has high unemployment, tax revenues from London and the south-east are collected and sent to pay the benefit bills. If one  or more region falls behind, the central government sends it more state  cash for local government, for education and health. If one or more region  grows slowly, there are regional policies  to locate more public sector jobs and to attract more private industry to the troubled area.  These do not always work, but the combined impact of the very large sums of money transferred makes it politically tolerable.

            If the politicians meeting later this week to “save the Euro” are to have any more success than in the many previous meetings with the same aim, they need to understand this simple characteristic of successful single currencies. Where you have parts of the union that are much more productive and successful than other parts, there needs to be very large transfers to finance the imbalances.

          The Euro fix is a proposal for a Treaty change to make Euro area countries borrow less. Apparently if they do not comply they will be fined. The fines, I assume, will be paid for out of extra loans advaced to these countries by the EU, or perhaps the IMF!

         Are they going to make Italy and Belgium get their debt to GDP ratio down to 60%, as required by the original scheme? How will they get Greece’s running deficit down to 3%? How do they get growth going in these countries without devaluation and lower tax rates?

          Meanwhile some seem disturbed by the thought the 17 might have a new Treaty together, excluding the UK. If only. If they did that none of the new crazy measures they imposed on themselves would apply to the UK.

        Yesterday was another day for backbench business in the Commons. This has been Mr Cameron’s best reform so far, enabling Parliament to be more relevant, and to have more impact upon the agenda and debates of the nation.

         The Committee decided to allow two issues to be aired. The first was a motion to require Ministers to make all their important announcements to the Commons first. If a Minister breaks the convention and leaks important information prior to the Statement, then the House wished the matter to be dealt with either by the Speaker or by the Standards and Privileges Committee. Parliament voted this motino down by 228 votes to 119.

          In recent years governments have got lax about telling the Commons first. They often prefer to tell a friendly journalist or create a story on a week-end show. This matters. Parliament is the correct forum, so the matter can be properly exposed to comment and criticism by Opposition and government backbenches alike. If Parliament is to stay relevant most of the time it needs to hear the news first, to disseminate the main announcements about government policy and actions.

          The second motion was to call upon the government to reform our extradition arrangements. Many of us think the European Arrest Warrant  is too intrusive in its impact on UK justice. We are not against extradition, but would like to see the UK retain more control over the process. Similarly, many of us thought the last government’s deal with the US was lop sided, giving too much to the US. Other countries have different arrangements which we think are preferable.

            This motion passed without opposition. This means the government has accepted it. Let us hope they now carry out the will of the House. The UK needs a better deal on extradition. Too much power has been given away by past Parliaments. It is good to see this one trying to reclaim some. I am grateful to Dominic Raab for bringing forward his motion, which I did co-sign.

I read that the government does not think the current Euro crisis is the best time to renegotiate the UK’s relationship with the EU. Sometimes we are told there is no urgent need for a new Treaty, so there is no opportunity to renegotiate. Sometimes I read there will be changes to the Treaty, but it is not right for the UK to make demands, when these changes will apply to Euro area members, not to us. We are told we should not stand in their way as they try to patch their troubled money.

I disagree. It is the German and French intention to press the Euro states into a much closer union. There will be budget controls, much more intensive surveillance of spending and taxing, more rules and regulations. The 17 will meet more often. They may develop a passion for settling things between themselves, and then pushing them through the 27 member EU where necessary. They will be able to outvote the UK and her few allies.

They may do this through Treaty changes. They might do it through a new agreement of the 17. They might simply try to do it without changing the formal powers of the Treaty, as they are in a hurry and have a phobia about referenda which some countries would need for a new Treaty or Agreement.

This requires a new relationship for the UK. We cannot be at meetings of the 17. Our interests in an open market throughout the EU are different and much more limited than their plans for common government. The UK needs guarantees or opt out facilities to protect herself from adverse law making and decisions taken by the 17 alone, or taken by the 27 on the insistence of the 17 against our wishes.

The official line is to keep more things in the 27, for fear of our exclusion from any new grouping of the 17. I would find a new organisation for the 17 liberating. We would not have to follow its rules as we would not belong. We could then at leisure negotiate about what was left for the 27 to do. The government seems to think an agreement by the 17 is a threat to us, one to be avoided at all costs. I do not think they could easily do it. It would take time to establish the new architecture and legal framework. It would presumably need referenda decisions in several Euroland countries. From the UK perspective it would leave no doubt that the costs, duties and laws surrounding the Euro are for the 17 alone, and not for us. We would need to negotiate what we can by way of protection from abuse of the law making of the 27, but we have to do that anyway in the context of a stronger Euro group within the 27.

I still think negotiate and then vote is the right UK approach. To those who say this is not the right time, I ask “If not now, when?”
To those who fear a Treaty of the 17 I say “Bring it on”. It will makes things much clearer and will highlight the need for the UK to sort out its position vis a vis the budget, taxing and law making powers of the EU.
And to those who say just withdraw, who claim the EU will not negotiate, I say let the people decide. If the EU will not give a better deal more people will vote to come out altogether.

PS: I see the English Democrats claiming a great success in coming second in a Rochford by election. They took half the Lib Dems vote. Was UKIP asleep for this one, or are the English Democrats taking over in second place elsewhere?

Many western countries have been living well beyond their means for several years. The US and the UK have been spending 10% of National Income more than they earn on public spending. Most now agree we cannot carry on like this.

The substantial overspend in the public sector follows hard on the heels of a large overspend in the private sector. The public sector is now borrowing very large additional sums to keep its spending going. In the years before the Credit Crunch many citizens in the US and UK (and in Spain, Ireland and the rest) borrowed large sums of money to buy assets or to consume more. Property prices were driven higher by excessive mortgage finance. The Credit Crunch has changed this. Property prices have fallen. New mortgage finance is difficult to obtain. Overall individuals are reining back their excess spending, and taking or nursing losses on assets.

There are three main ways in which the public sector deficits can be reined in. The favourite political way is to pursue faster growth. If the economy can increase more rapidly, more money will be paid in tax. If the growth rate of public spending is slower than the growth rate of the economy, the deficit will be brought down. Unfortunately in the Euro zone the most heavily indebted countries seem unable to grow. In the UK and US there is a bit more growth, but the rate is not fast enough to resolve the deficit problems.

The second way is to increase tax revenue. The politically popular route to curb the deficit if growth does not suffice, is to tax the rich more. Most politicians unite in agreeing to this proposal. It has two drawbacks. There are not enough super rich to pay all the extra bills. If you raise rates of tax too much on the rich, they may leave, or employ better lawyers and accountants to find a way round the rules. In the UK Mr Blair and Mr Brown, for most their tenure, thought 40% Income Tax and 18% Capital Gains Tax were the optimising rates to get most revenue out of the rich. The Coalition, accepting Labour’s last minute rise to 50% for incomes, and imposing its own 28% for CGT, may discover to its cost these rates lose the Exchequer money. There are limits to how much tax you can get out of a free society with open borders. No recent UK government has managed to collect more than 38% of GDP in tax, so there remains a very large gap between revenue and spending.

Governments following the higher tax route are thrown back on taxing most people, not just the rich. The UK Coalition has imposed higher VAT and National Insurance, as well as the higher Income Tax rate and various other increased taxes and fees. Petrol tax has gone up. This in turn has depressed real incomes, meaning less demand in the private sector. The top 10% of income earners pay £30,000 a year each on average, net of benefits and tax credits. The lowest 40% of income earners are net recipients, with benefits and tax credits exceeding all the tax they pay. These figures include VAT and indirect tax.

The third way is to cut public spending. So far the UK government has not tried this overall, though it has made various cuts in individual areas and departments. This is being tried to a greater extent in Euroland, but so far it is proving difficult there as well to curb total spending. Greece wont cut its very large army. Spain finds high and rising unemployment keeps adding to the welfare bills.

The paradox is many UK people complain of the cuts. They mean by this the cuts in their own living standards. The BBC yesterday morning provided a vox pop piece looking at various individual budgets and the way they were being cut. The commentator did not point out that much of the squeeze on these individuals came from higher taxes to pay for the growing public expenditure. People complained of fuel bills (largely tax), energy costs (regulatory and tax costs), higher shop prices and other areas where higher VAT plays its part.

We all dislike cuts in our living standards. Some depend on benefits and government services for an important part of their living standard. Most rely on income from work and savings. It is this majority group that also complains of cuts. The irony is, these cuts result directly from the need to pay for higher public spending out of increased taxation. The ultra low interest rates add to the pain for the prudent, slashing their savings incomes.

We were told it was weeks to save the Euro. That came and went. Now we have apparently another few days. Mrs Merkel seems to think there is plenty of time to sort out the problems of governance, transfer payments, and control of taxes and spending. Mr Sarkozy seems to be in more of a hurry, partly because he faces an earlier election.

I think there is still a chance that Germany will partially relent on bond buying and money printing by the ECB to buy them more time. There is also a chance that the markets will force break-up, moving faster than the pace of integration and problem solving within the zone. I put it around 50/50. It’s all in Mrs Merkel’s mind. It’s the race to change German public opinion about printing and borrowing together versus the speed of the market imperatives.

Today I invite you, the readers, to tell the world what you think the Euro’s chances of survival are. Do you think they will print and spend enough to buy them time? Do you think more austerity in Greece and Portugal, Spain and Italy, on German recommendation, can pull them through? Or do you think the relentless pressure of the bond markets will force countries out of the currency?

The tired old Foreign Office and Lib Dem line is we have to go along with what the EU wants for the trade. It bedevils the debate again about whether we can negotiate a better relationship for ourselves, or whether the UK would be better off out. We constantly hear the refrain that we have to pay the subscription to be in the trade club, you have to take some rough with the smooth, we have 3.5 million jobs dependent on EU trade.

It means we have to repeat the counter sound bites time and again.

The EU sells a lot more to us than we sell to them. They would not wish to risk that.

Whatever we do on renegotiation and membership, Germany will want to sell us her BMWs and France her wine.

If the rest of the EU did get protectionist with us, we could take them to the WTO and demand international action. Or we could propose a supertax on imported wine and imported cars here in the UK in retaliation.

They say we need to be fully in the EU to influence the rules that affect our business. The question is how much influence can we have, when we seem unable to resist a torrent of new rules which we neither asked for nor need. It feels like we take the rough with the rough, and end up worse off.

The advocates of staying in on current terms have to answer this increasingly difficult question – isn’t the single market becoming a means of lumbering us with uncompetitive costs and rules which Chinese or US or other non EU companies do not face when selling into the EU market?

If the EU moves towards more political and economic integration for the core countries, the UK will have to demand a different arrangement for us to justify our consent to the new Treaty.

If Euroland instead tries a new Treaty for just 17, they will discover all sorts of legal complexities between the 17 and the 27. It will pose all soerts of problems over use of staff, facilities, and payment of bills. We will still need a different relationship, so we still need to sit down and negotiate one either way.

The UK needs to be making this clear, now Euro integration or break up is on the agenda.

Yesterday we discovered that 192 banks are using facilities from the European Central Bank. More and more of the business that used to go through the inter-bank market now goes through the Central bank of the system. Commercial banks do not trust each other enough to lend and borrow between themselves on a big enough scale for their needs. The weekly liquidity supplied by the ECB to banks rose to Euro 265 billion.

We also were told that the bond buying programme of the ECB has now bought more than Euro 200 billion of bonds, largely sovereign debt in the weaker countries. This is meant to be bought by the ECB on the basis that it mops up the equivalent of the cash it makes available for the purchases. It should avoid printing money overall to carry out the bond buying. This week there was a modest shortfall in the amount of money deposited with the ECB to cover the bond purchases in full.

The purpose of bond buying is to try to get the prices up of the weaker country bonds, thereby lowering the borrowing costs to those countries. The aim is not meant to be printing more money to buy the bonds to make more cash available, which is why they sterilize or get the money back from the bond purchases by other means from the markets.Typically banks in the system deposit with the ECB, or lend the ECB the money.

Commentators yesterday were debating whether this marks a change of policy. Is the ECB moving towards printing money to buy bonds? There is no statement to say so, no change announced on their website. It is more likely it was difficult getting in the money needed because bank liquidity was very strained.

To underwrite this possible explanation, there was a concerted move by major Central Banks together to supply more liquidity to banks and markets later in the day. This gave a sugar rush to risky markets, with shares and commodities leaping up on the news. If the market problem is just one of liquidity it is something concerted Central Bank action can resolve.

However, the deeper seated problems remain. There is a lack of competitiveness of the south of the EU. There is a problem transferring German surplus to weaker deficit countries on trade account. There is the weak position of some banks, recently recognised by more rating downgrades. There is the vicious circle between bond prices and bank balance sheets. The Euroland politicians have to do more than just enjoy the temporary benefits of more Central Bank cash.