There is now much discussion of the immorality of the market. The latest fashion is to say that financial deregulation, dated conveniently to 1986 to place it under Margaret Thatcher, caused people to suddenly become self centred, materialistic and greedy in a way which has wrecked our finances, markets and banking ever since.

            This is bad history and sloppy politics. There was  a continuous rise in the volume and detail of financial regulation in the period 1986- 2011. Most of this period in the UK saw the country governed by a left of centre government with a large majority. They had the power to reverse any trends and deregulations they did not like. They themselves completely changed the system of financial regulation in 1997, 14 years ago. They formalised more of the regulation, and put the banks under a large new body of law designed by  the FSA.

            The truth is the last decade saw an explosion of extra regulation by both the UK and the EU. It saw substantial regulation by the global banking regulators of Basle. Collectively they made a huge error of judgement, allowing too much bank credit to be sustained on too small a banking foundation. It was a case of bad regulation, not deregulation.

           Markets were never moral. They did not enjoy a golden age of good behaviour. There were always some  greedy people and companies in them.  Markets are neither all bad nor all good. Saints buy from sinners. The moral lend to the immoral. Nasty people make things for nice people. Christians trade with atheists.  Markets are the results of the choices and actions of millions of people and companies deciding what to buy and what to sell. A market does not have a collective view or a moral outlook.

            When a market is moving rapidly in one direction then it can be a useful fiction to say “the market is optimistic because…” or the “market does not believe in Greek state finances because…” Even in these more extreme conditions every transaction needs a buyer as well as a seller. Buyers and sellers by definition usually  have different views.The attribution of an attitude or opinion to a market is an attempt to explain price movements by trying to identify the motivation of the majority of traders.

              Markets are amoral. They are a babble of voices, a mixture of the well informed, the opinionated, the frightened and the optimistic, the lost and the wrong headed. They are important ways of allowing people to change their assets, raise cash, invest and make economic decisions. They are not places to come to a single moral conclusion.

            That is why markets need regulating. That is why politicians are elected to write laws to control them, or to impose a moral view on the actions of the many. It is generally agreed in a free society that we need laws against theft and damage to other people’s property. We need a law of contract, and some law to ensure honest dealing. We need laws to stop individuals and companies gaining too much power in ways which can distort a market or can prevent other people enjoying proper access to it.

            Markets allow the moral to flourish if they wish by using the market. Investors can invest in moral ways. Entrepreneurs and charities can raise money for good purposes from the market. Large companies in recent years have pioneereed better employment practises, better products and services, and the greening of their actions. Market pressures and market money allowed them to do these things.

              Governments have to decide how to prevent abuses and immoral purposes stalking the markets. They have done so through a myriad of regulations. Some of these work and are needed. Some have failed. Some have been badly implemented and missed the targets. We do not have unbridled greed because we have insufficient financial regulation. Markets are never going to abolish all greed. Regulators have to decide what to stop and how to stop them. If the left now thinks there is too much greed, we are entitled to ask why did they do so little to stem it between 1997 and 2011?

 

                         Today the EFSF did manage to borrow another 3bn euros. It had to pay 1.77% more than German bunds for ten year money. The trillion euro geared fund now probably has 6.5 bn euros to call on, but has to make payments to existing clients.  

                          Meanwhile we learned that the European Central Bank has bought 9.5 billion of  sovereign bonds in the last week, probably including Italian ones. Despite this Italian 10 year money rose to a new high for this century, and worried the governments about how Italy could raise the money it needs to borrow.

 

          Contemporary politics and much media commentary concentrates on getting the IMF/EU packages through and into effect for Greece, Portugal, Ireland, and to discussing the need for one in  Italy. There is rejoicing when governments change, coalitions form, or even better when there is a government of national unity to close down dissent and opposition.

          All have to sign up to the packages, and anyone who disagrees is said to be  unhelpful, endangering the whole edifice.

       The problem occurs if these policies do not work. Where then is the alternative team and the alternative policy to offer hope or to get it right?  IMF programmes have worked in the past when public spending reductions have gone alongside devaluations and monetary and interest rate manipulations. Getting IMF packages to work in Euroland is altogether more difficult, as they have no control over currency and interest rates, and may find deficits rise rather than fall as economies contract.

 

            There has been argument over the Chief Secretary’s use of a £40 billion figure for the UK’s contribution to the  IMF yesterday on TV. I have been back and checked the Hansard record of the Committee I attended to hear the government’s case for an increased subscription on July 5th 2011. The Minister said:

            “The subscription is drawn in the IMF’s unit of account and currently stands at 10.74 billion SDRs which is approximately £10.7 bn at today’s exchange rate. The Order will raise the subscription to 20.16 bn SDRs, equivalent to £20.15 billion.”  It appeared we were being asked to approve an extra £9.5 billion.

            Apparently the figure including borrowing will be double the new total in this speech. Had I been told  that at the time it would have made no difference to my action, as I voted against the increase anyway when it came up for vote in the Commons  on 11 July.  Others must say if it might have affected the way they voted, where they voted to approve the Order. I thought an extra £9.5 bn was too much given the UK’s current financial position, and the possible use of these funds for Euro area rescues that may not work as intended. Double that would  in my view be worse.

PS  The Prime Minister clarified the position this afternoon. Parliament did vote to approve a couple of Orders in 2009 and 2010 to increase the UK  borrowing resouces for the IMF, so the government does have permission to make up to £40 bn available.

 

 

 

Some say it is democracy – but not as we know it. It is true the Euro is a great device for bringing down EU member states governments. Recent victims include Ireland and Portugal, with the Greek government hanging by a thread.  Electors can still change the people who are in a government, and sometimes get more opportunities to do so thanks to the rolling economic and political crises the Euro causes. The difference is they do not get to change the policies.

Electors swept aside the governments of Portugal and Ireland. They might be about to do the same to the Spanish government. The French President now has a big fight on his hands to survive. The Euro is devouring the governments which support it, only to see them replaced by more governments who support it, wanting their share of the common economic punishment.

The officials, Central Banks, IMF, EU Commission and other unelected bodies now have more power and elected governments much less. When a Euro area government falls in a member state in economic trouble, the incoming new government has to subscribe to the terms of the “recovery” plan already in place. Ireland, Portugal and Greece are on financial support schemes from the EU, Euroland and the IMF.  Their governments believe they  have no choice, and meekly follow the policy arranged by the government which they displaced. Italy is moving towards that position, accepting IMF surveillance of its economic policy and agreeing to cuts and tax rises which Euroland requires.

Democracy relies on the consent of the governed. The majority who support the government are broadly happy, because their team is in power. The minority who want a different government are usually happy with the system, because they know they will have a future opportunity to change government if the government in power disappoints more people . Coalitions complicate this position, because electors often get no chance to vote on the Coalition programme. As a result they need to work harder to gain and  keep consent to their programme.

 A healthy democracy needs a strong opposition with a different policy approach. The Opposition can lobby and campaign for the government to adopt more of its views and ideas. The government may do so if they prove to be popular, or if the government’s chosen course is not working. They can put it all to the people in a General Election, and if they win they can then have  opportunity to implement it.

Strong opposition with an alternative programme is important to national hope. Those who don’t like the government can live in hope of change. Those who don’t like individual policies of their current government live in hope that Parliamentary action  by the Opposition will force a change of policy anyway.

In crucial areas of government policy that help determine prosperity, living standards, inflation rates, returns on savings, jobs, and business success, the level of public sector spending and borrowing, the Euro scheme takes most of the decisions away from democratic debate. The individual  Euro member state can no longer call the shots and make changes in these crucial areas. The Opposition in Greece cannot offer a different view on  interest rates, borrowing, public spending and the rest because they have had to buy into the terms of the EU/IMF control of the economy.

The Euro destroys a big part of national democracy. The issue then is how do people change the policy if it is not working or they do not like it? Democratic consent relies on the ability to change policy as well as personnel and on  the hope of a better tomorrow. Euroland politicians have a big task in maintaining  that consent. Blocking the Greek referendum was a political mistake.

Euroland politicians also have a big challenge to set out a compelling vision of how this can work and why it might be better. If they do not allow sensible democratic opposition and proper consultation of the people affected by their one size fits all policy, people will find other ways of dissenting. That is how we have reached the point in Greece where many do not see the need to pay their taxes.

 

      81  Conservative MPs voted for the referendum motion. 9 more abstained, because they disagreed with the government’s stance.

        However, some of those who voted “No” to a referendum did not necessarily do so because they endorse the current approach to the EU. My neighbouring MP, the Conservative Dr. Phillip Lee has made an interesting statement this week in a local newspaper. He says  his decision to vote “No” “had nothing to do with the Goverment’s whipping operation”. He voted “No” because he feared  a three way referendum as proposed  could mean “no  mandate for withdrawal (from the EU-ed) and a cause in which I believe would have been set back for a generation”. (Wokingham Times  2 November 2011)

           I wonder how many others who voted “No” feel like that?

 

            Some people think there will be an immediate vote on IMF funds in the Commons. My understanding  is that the government has full authority from the 11 July vote to almost double our subscription to the IMF. No new enlarged numbers seem to have been agreed at Cannes.

           I attended the Committee which considered the increase in money Order  on 5 July to raise concerns along with various other Conservative colleagues. Parliament  required a vote of the whole House, despite the Committee passing the Order. This was taken on 11 July.

           The government got approval for an 88% increase in our subscription to the IMF,  to take our total commitment to around £20 billion. The vote was 274 in favour, and 246 against.  Those against  included 205 Labour MPs and  31 Conservatives.  225 Conservatives voted with the government on a 3 line whip to approve the measure, supported by 48 Lib Dems.   86% of Lib Dems voted, 84.3% of Conservatives, and 80.2% of Labour MPs.  I voted against.

 

I have received a copy of a letter from Dame Lucy Doolittle  to Dr Roy Spendlove:

 

Dear Roy,

I am writing to reassure you. I know how worried you were that the government might cut spending too fast, and might take a combative approach to the EU. I think we can now be reassured that our strategy of cautious  accommodation of Ministers is working.

On the spending front it is encouraging to see realism in the latest revision to the pensions proposals. Allowing  people within ten years of retirement to keep their original deal is progress. You and I must not of course get involved in the Union response, but this may not be the last tweak to the system.

The useful contribution made by overall public services to growth in the last quarter has passed off with little remark in the press. We must make sure Ministers understand that this is still a case of cuts, with highly visible ones in areas like Defence and welfare. Ministers seem to come to sensible moderate conclusions when we suggest taking  the raw edges away from   policies like the forest sales and the capital spending cuts. I was pleased to see this issue of cuts has come out into the open over border controls, as we need to make sure the background to all this is understood, whilst being attentive to Ministers’ wishes. The problem comes if Ministers wish contradictory policies, where we need to sort it out in advance by securing the funding needed.

The March budget relaxed the envelope by £34 billion over the four years of the Plan. I would expect sensible proposals to relax it further this autumn will be received positively. Ministers are likely to want further jobs related announcements, and a stream of “shovel ready”projects to announce, so we must be ready. They are also keen in the Treasury on Credit Easing, which may be a useful vehicle for us to use for a variety of good purposes. I would like you to take a close cross cutting interest in this matter, and to be  innovative so we can get the full benefits from any extra money it may bring in.

I do think Ministers have shown statesmanship over the difficult EU issues that now confront them. We need to keep up the pressure to be in the room, and to keep Ministers committed to involvement in the stresses and strains of the Euro area as well as the wider EU.  I think the Euro area choice to go for  more IMF involvement is inspired, and I am pleased Ministers are taking this up. The UK can now pay to play, whilst paying through a more trusted intermediary. Germany too likes this route for her own reasons, so it makes a UK-German rapprochement over certain key features that much easier. I do hope you and your team can offer good positive  back up to any Ministerial wish to stay engaged, as this is a crucial time for the relationship. We have a special duty now to nurture it.

The UK’s official position is to be in favour of a substantial move to stronger political and economic union by the Euro zone. We must help Ministers ensure that we have seamless working arrangements with the zone for the UK. I think in due course this means the UK accepting more of the common positions, but I would suggest this is not the moment to make that case. Today we must concentrate on keeping the UK there as an important EU 27 player, and accepting the need for much more integration in the zone.

It is good to see how well  Lagarde has made the   transition to a serious working official. She has handled the need to use the IMF to assist the  Eurozone well, with no sign of a backlash from poorer countries. I am also hopeful that the new Head of the European Central Bank will steer it towards a more activist policy. His interest rate cut is a useful first step, but of course much more bond buying and quantitative easing will be needed.

Yours in EU solidarity

Lucy

 

Sometimes it is best to do nothing. It was good we were spared the high flown rhetoric that they saved the Euro and the world. It was even better than no new money was committed to bail outs. The IMF subs were not quantified and remain to be worked out next year.. The US President let it be known that Euroland is rich enough to pay its own bills. The one positive change was the Chinese promise to move their currency closer to a market rate.  If they wish to save the Euro they need to balance budgets and export more. Shuffling more IOUs round is not going to solve it.

 

On 16 September 1992 the EU gave up on the narrow band Exchange Rate Mechanism. Italy was forced out of the narrow bands. Spain, Portugal  and others were also unable to hold their currencies against a strengthening DM.

The Euro is the ERM it’s more difficult to get out of. The ERM still left countries free to set their own interest rates and budgets. They had to juggle their policies to try to keep confidence going in their currencies. The failure to do so was pretty comprehensive, as the market ganged up on currency after currency. The ERM was meant to be a dry run for the single currency. Instead it set it back. When they did go ahead they simply ignored the fact that several leading players in the Euro had been unable to remain stable against the DM in the ERM days.

The ERM should have been a warning to the founders of the Euro. If markets could destroy a currency locking device, why did they think markets would leave a single currency untouched? They obviously forgot that the debt markets were still open. Investors and speculators can make their views known through the bond markets, just as they did through the currency markets for the ERM.

I find it sad that some of us have had to spend so much time and effort trying to explain why the ERM would not work, and now trying to explain why the Euro cannot work in its current form. It’s bad enough having to do it once. Having to do it twice is worrying. What part of the ERM experience did they not understand? Why do they think the debt markerts will now behave differently from the currency markets? It is after all at base the same argument. Economies have to be in line with one another for the project to work. If countries become uncompetitive against Germany – as they did and as they are again – there needs to be some way to relieve the pressure in the system.

The G20 is considering an IMF expansion. The IMF usually promotes a programme of budget deficit reduction linked to devaluation and appropriate monetary policy and interest rates, set by the sovereign government it is assisting. Euroland countries do not have the ability to devalue or to set their own money policy. This makes it difficult to see how IMF programmes can work. The IMF does not lend to California or New York, so how can it lend to Greece or Portugal?  I would prefer a Euroland fix of what is a Euroland problem.