The Finance Ministries of Europe should be working this week-end


               It should by now be clear that the proposed Irish loan is not the answer to the problems of the Euro. This week-end the Finance Ministries should be humming with effort. They should see the drift to a loan package for Portugal.  All the rhetoric deployed on Greece and Ireland telling us a loan in time saves nine has not worked.

                They should recognise that the bond markets have started to take them on in Iberia. Portuguese ten year yields have soared through 7% and Spanish ones through 5%. They may discount the alarmist talk that Belgium too is at risk when they see that Belgian rates are still pretty low and Belgian debt not a huge problem. They should admit that careless talk costs loads of money.  They need to repair the damage done by all the briefing about the instability and about  the need to invent a system of default.

                The supporters of the loan have a touch of the TINAs Рthere is no alternative they say. You opponents of a UK loan , they accuse, want to see the Euro collapse .  Nothing could be further from the truth. I understand how much political capital is invested in the Euro project. I do not wish our neighbours ill, as we do trade with them. I  wish them to sustain and grow their prosperity for their own sakes and ours.

                 I have two major disagreements with the supporters of the Irish loan. I do not see why the UK should be part of it. Euroland has several large and rich countries that can borrow the money needed for it. It should be club members, and club members alone, who pay the bills of their club. I believe they will do so if the UK declines to make a contribution. The main Euro members  clearly think it is in their interests to lend the money.  One of the main points of helping keep the UK out of the Euro was to avoid us being dragged into expensive rescues, made inevitable by the faulty design of the institutional structures of the Euro. The UK is not in a strong financial position, so we should be doing all we can to avoid additional borrowings ourselves.

¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† My second argument against the loan is more altruistic. I do not think a loan¬† is the answer to Ireland’s problems. I find it odd that they agreed a large loan in outline, without agreeing what it was for or the terms¬†of the borrowing. ¬†The Euro area is lurching towards a series of bilateral agreements between EU states and individual Euro countries at financial risk. If the rest of the EU mutually guarantees too much debt for the weaker members, it becomes a money go round or chase to the bottom. There will be ¬†knock on effects to the credit rating and interest rates of the stronger countries.

                I suggest it is time instead to do some basic thinking about how  a normal single currency works, and to make the compromises between the weak and the strong which are needed to allow the zone a more stable future. This still entails the stronger paying some of the price for belonging to a zone with the weaker ones, but does so in a more orderly way.

                The truth is simple. The exchange rate, interest rates and money growth that suit Germany do not work for many other members of the zone. The markets are now differentiating sharply. All Euro zone members share the same exchange rate and the same short term interest rates fixed by the Central Bank. They now have wildly different long term government borrowing rates.

                The weaker states need a lower currency value. The states with weaker banks need more money in circulation and more money available to support their banks from the Central bank. The stronger countries are pushing for repayment of the special facilities made available to weaker banks, and are keen to keep money fairly tight to put off inflation.

             Instead of an Irish and a Portuguese and a whatever loan package the Eurozoen could take the following measures:

1. Agree that special financing continue to be made available to weak banks on demand by the ECB

2. Produce a new plan to  strengthen the weak banks, selling off assets and businesses where possible, reducing the size of distressed asset pools, writing off where appropriate, raising new capital where possible, cutting costs, finding new profitable lines of business. The markets should be reassured that as this goes on the ECB will do what it takes to keep all the main banks open and liquid.

3. Allowing the bank to print some  more Euros, and buy in some of the lower priced sovereign bonds to show that the Eurozone stands behind its members and does not countenance default on sovereign debt within the zone. It is the Eurozone, not the US or UK, which needs to prop its bond markets and show some common purpose for a change. The Eurozone will not get easily out of its debt crisis without creating more money.

4. Working with high deficit countries to produce deficit reduction plans that are credible. The aim should then be to restart proper financing of these countries through the official bond markets.

5. Coming up with policies which promote enterprise and private sector led recovery. The EU needs to abate its appetite for higher taxes and more rules, so that economies like Greece, Ireland and Portugal have more chance of competing in world markets and earning a better living.


  1. Mark Baker
    November 27, 2010

    Coming up with policies which promote enterprise and private sector led recover

    Ha ha! No chance, haven’t you noticed the EU is a socialist project run by grown ups who know best?

  2. lifelogic
    November 27, 2010

    The usual common sense that none of the powers that be can see.

    Did anyone one see Paddy Ashdown and Ken Clark on Question time. Even now they have clearly learned nothing from the ERM and the EURO problems and would go for it all again.

    What planet are these people on. Ken Clark can sound sensible on some issues why cannot they not see this. Nor can either of them provide any coherent defence of their mad stance.

    Quite funny to watch on the BBC iplayer though as they wriggle pathetically in the light of the history.

    At least Brown kept us out of the EURO – the one positive thing he did do.

    1. APL
      November 27, 2010

      Life logic: ” What planet are these people on?”

      More to worry about, which government is Ken Clarke in?

      JR: “They may discount the alarmist talk that Belgium too is at risk when they see that Belgian rates are still pretty low and Belgian debt not a huge problem.”

      Isn’t Belgium the country that has done quite well thank you without a government for the last year or so?

      What’s the betting the politicians have been drawing their salaries though?

      I can’t remember who to attribute the unkind quote, Belgium’s raison d’etre a place for Germany and France settle their disputes.

  3. Demetrius
    November 27, 2010

    Fine we were kept out of the Euro to avoid nasty entanglements. But we did not control or regulate what the banks were doing in either the high risk markets or in moving their assets around to vulnerable and uncontrolled locations. So now we have been sandbagged to prop up not the ordinary retailing banking or internal UK credit for business but all the insane gambling and racketeering of the “investment” arms of the banks.

  4. CW
    November 27, 2010

    Printing Deutche Marks.

    I wondered back in May if this was true.
    I thought it was merely a rumour.
    Now,I am not so sure.

  5. StrongholdBarricades
    November 27, 2010

    I fear that you can not control that part of the economy which all governments have allowed to be “free”. The market is one way, and everytime “they” support then the market takes the profit.

    Is now the time that those “bankers”, who all the politicians have been so rude about, will make them eat their words?

    Are we now seeing the equivalent of what the private banking system has done to all those companies who “didn’t look like trading profitably”

    Are their sufficient liquidators and people willing to buy any assets which can be “saved”?

    …and in all this mess, where is the regulation?

  6. Neil Craig
    November 27, 2010

    A falling Euro would be no more disasterous for the countries inside it than a weaker ¬£ so noticeably wasn’t for us. Governments usually go to enormous lengths to keep their currence up & find it beneficial when it falls (cf John Major)

  7. Acorn
    November 27, 2010

    In a previous post there was talk of central banks going broke. A central bank does not normally go broke in its own currency. It can go broke if it lacks reserves to bail out debts, that can’t be rolled over, owed in foreign currencies. That was why Iceland went bust. It could not cover those foreign liabilities; and, it ran out of other central banks willing to do currency swaps to help it out.

    Foreign currency debt to gdp ratios are crucial to a country and its banks solvency. This is much better explained at:- . The UK has a very high external debt problem. Yes, we have a lot of external assets to cover them. But; at a time of a global crisis, the chances of liquidating those assets to cash in a hurry, may not exist.

    1. Denis Cooper
      November 27, 2010

      I can see that excessive foreign currency debt would be an easy way for a central bank to go bust, but is it the only way?

      Money issued by a central bank is a liability on its balance sheet, and only as good as the assets the bank holds to back it up.

      So the ¬£200 billion created by the Bank of England as “quantitative easing” is backed up by the gilts it bought, in turn backed up by the tax revenues of the UK government which issued the gilts.

      But if the ECB issues enough euros to buy bonds, even euro-dominated bonds, which later become next to worthless then surely that will create doubts about its ability to keep its “promise to pay”?

      There’s an article here:

      “Can a Central Bank go Bust?”

      I can only read the abstract, but that talks about “the impairment of central bank balance sheets by the acquisition of substandard assets” and suggests that “a central bank can go bust when it has acquired liabilities of greater market value than the present value of its seigniorage revenue calculated for any steady-state inflation rate.”

    2. lola
      November 27, 2010

      Yes, quite, and …“The states with weaker banks need more money in circulation and more money available to support their banks from the Central bank” It’s not anybody’s ‘Central Bank’ – it’s the Poor Bloody Taxpayer who bails all these idiots out.

      1. APL
        November 27, 2010

        JR: “It‚Äôs the Poor Bloody Taxpayer who bails all these idiots out.”

        1. It’s not, it’s the Bloody politicians with the tax payers money that bails the idiot bankers out.
        That’s the same politicians who smooze with the bankers in the City and are always telling us they need sooo much more money because they could just hop off the politician train and jump on the City train.

        2. We need banks. We don’t need THESE banks. In a proper capitalist economy the banks would have gone bankrupt, the government would have provided ¬£10 billion and guarented the depositors funds.

        Bingo!! We would have had a solvent government and a new but solvent banking sector too.

  8. Geoff not Hoon
    November 27, 2010

    Can I reply briefly to our Chairman, GMBH. If a subsidiary is uncompetitive (I think of Italy here) what is the point of lending it money when we know, because of a fixed currency, it will be impossible to pull itself out of the mire until it can devalue and start seriously to be competitive once again. It seems to my simple logic that all we are doing with ECB and IMF loans is postponing the inevitable.

  9. Peter Stroud
    November 27, 2010

    Has there ever been a common, multi state currency that succeeded without first establishing political unity? I doubt it.

  10. Brigham
    November 27, 2010

    The EU now have a website where one can ask questions. I have written to them, asking when they are going to deal with the corruption that has caused the auditors not to sign off the accounts for many years. The site says it will answer questions within three days, unless they are complicated. What’s the betting my question is complicated enough to delay the answer for many years?

  11. Norman Dee
    November 27, 2010

    I ask again the same question, did we lend the money to Ireland to support our “friends” (forgetting Sinn feins activities in the south, American money channeled through Eire, and Libyan arms deals, & aid given to Germany through 2 world wars), or did we lend it to Europe to bail out the Euro ? . It will make a difference when we come to getting it back, From Eire we might stand a chance, from Europe ? well don’t hold your breath.
    Now the hunt is for Portugal, am I the only one who sees all the same headlines and comment s with just the name changed, and will it be the same for Spain
    Are we going to be helping Portugal out as well ? because given the choice we should help Portugal before (word left out) Eire ! We have never fought the Portugeuse, they have never sent bombers to our cities, they have helped us when we needed it even lending parts of their domain to help us in the 2nd World war and the Falklands war, not to mention the privations of their own people during the Peninsular wars. All in all they are far better friends than the Irish.

    1. norman
      November 27, 2010

      Portugal is actually our longest standing military ally.

      Just in case it comes up in your next pub quiz.

  12. John Bracewell
    November 27, 2010

    At present, the political will not to surrender the ideals of the Eurozone project is far greater than the will to put in sensible economic policies as you have outlined, Mr Redwood. The political hit the EU would take to split the Eurozone into the rich and poor countries with appropriate policies for each is too great. If the EU was to admit that one of the planks of their ‘work towards economic and political union’ ideal was flawed, it follows that the political aim would be undermined too, for the same reason, each member of the EU has different political and national aims.

  13. Denis Cooper
    November 27, 2010

    Until just over six months ago the UK government had an incontrovertible reason for refusing to participate in bail-outs of other EU member states, namely that they would be illegal under the “no bail-out” clauses deliberately inserted into the Maastricht Treaty and still part of the present EU treaties.

    A position which Angela Merkel herself took, until she gave way and agreed that the EU would break its own treaties – an issue which is still before the German federal constitutional court, although it seems unlikely that the judges will come to any final verdict while the EU remains in financial turmoil.

    Once Alistair Darling had gone along with what the French Minister for Europe subsequently described as “de facto” changes to the treaties to permit a bail-out of Greece, changes which EU political leaders are pretending to have made despite having no lawful authority to do any such thing, that irreproachable legal argument against UK participation ceased to be available to the UK government.

    My concern is that Cameron and Clegg now appear willing to give Merkel and Sarkozy their desired “de juris” treaty changes – that is, changes made by the legally valid procedures laid down in the treaties, not by ministerial fiat – without asking anything in return beyond a lower increase in next year’s EU budget.

    They could, for example, insist that the treaty amendments must include a mechanism for a country which is already in the eurozone to make an orderly withdrawal, and must also relieve countries which are not already in the eurozone of the legal obligation to join it.

    At present, only the UK and Denmark are free of that formal legal obligation to join the euro when the conditions are right, all the EU member states which joined post-Maastricht, including Sweden, having accepted it at the time of their accession.

    1. norman
      November 27, 2010

      You’re sadly mistaken, my friend. Mr Cameron, the most Eurosceptic PM we’ve ever had, is in the business of taking powers back from the EU, not giving more away.

      Just look at his record since assuming the premiership.

      We’re also going to get a vote on any further treaties, and one assumes substantial changes to any treaties, since Lisbon laid a framework for everything and rendered future treaties superfluous.

      Does anyone remember playing ‘spot the difference’ as a child? Well, this game is spot how many lies I have told. Here’s a hint, there is no truth to anything I’ve written.

  14. RC Saumarez
    November 27, 2010

    Abate its appetite for higher taxes and more rules…? Complex rules are encoded in the DNA of eurocrats. They have been able to express this particular gene for far too long and I would suggest that they are incapable of imagining a Europe that is not minutely regulated.

  15. Gary
    November 27, 2010

    The system of debt pyramiding is enslaving and impoverishing ALL of us, except the lenders. In rigid systems
    like the EURO is it just more noticeable. It systems outside the EURO they
    go bankrupt by devaluation, inside the EURO they go bankrupt by default. The problem is more subtle than just fractional
    reserve banking, although that is one large problem(the loan is available
    to both the lender and borrower and the same time). The problem is
    charging interest on the money loaned REGARDLESS if the loan performs or

    Money in itself, a priori should contain no interest. What should happen
    is money is created free, or already exists, and when it is loaned the
    loan should be repaid + (an investment gain/interest) from gains on the
    investment,if any. If the loan does not perform the lender gets pennies
    back on the principal(or the collateral), definitely no interest. If he is
    lucky and as it should be.

    If the economy grows by making productive loans then the debt free money
    supply can grow proportionately without inflation to cover the
    gains/interest on the loans, but there should never be debt on the money
    itself. If you have a fixed money supply like that of gold, then the units
    get more valuable(more demand, same supply) they can be divided
    down(split), and that way the money supply “grows”, if the economy is

    This system takes the interest regardless if the loan performs or not, and
    the money supply must grow to cover at least that interest, while the
    profit share system takes interest(gains/profits) only when the loan
    performs and the money supply is adjusted a posteriori. The dog wags the
    tail, the economy first grows/contracts then the money supply is adjusted
    upwards/downwards. You don’t end up with zillions of zombies that only
    exist to pay interest on dead enterprises. Small difference , huge

    Most people mis-understand this. They throw up straw men arguments like
    EURO vs non-EURO. We will ALWAYS be debt slaves until we abolish this immoral system, that ONLY ALWAYS benefits the lender, root and branch !

  16. Norman Dee
    November 27, 2010

    Gary, to my simple mind what you say makes obvious sense, but it is , unfortunately too late because the lenders are now in an unassailable position, and will not want to change, and as they have both the bat and the ball, plus the keys to the field they will not play.

  17. Lindsay McDougall
    November 28, 2010

    Your strategy is wrong. Firstly, the stronger Eurozone members don’t like loose monetary policy and inflation (Germany in particular has suffered hyperinflation twice and fears it greatly) Secondly, they don’t like low raxes and liberty. The one thing you can be certain of is that the drive for central fiscal control in the Eurozone will be strong, continuous and merciless.

    We in the United Kingdom should see the the Eurozone for what it is, an embryonic Federal Europe which, if it ever came to fruition, would be very much against the United Kingdom’s interest. We should be doing everything in our power to destroy the Euro, and the first step is to detach Portugal, Ireland and Greece from the Eurozone. The very first question that we should ask Ireland is “How much would it cost to reinstate the Punt?”. And the second question should be “Would you like a contribution to those costs, because the UK is going to give you no financial support if you stay in the Euro?”.

  18. Freeborn John
    November 29, 2010

    The UK did not suffer from the collapse of ERM. On the contrary 16/9/92 marked the start of the longest period of expansion in the British economy for 300 years. The same would be true for ireland if she left the euro. Therefore your entire premise for the 5 proposals you make is without foundation. You say you do not wish the Irish ill, and that you desire that they sustain and grow their propsoerity, but what you propose amounts to years of deflation and austerity to pay for the excesses of the last economic cycle, and condemns them to repeat it in each economic cycle to come. Far better they leave the euro and enjoy the same growth and prosperity that the UK experienced post-ERM.

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