M.A.D. – Mutually assured deflation – the new pact


           It is intriguing to hear how popular the draft new treaty for the 17  is proving with admirers of more EU government. They are often the kind of people who think more government spending and borrowing are a good idea. This pact recommends the opposite. It proposes big cuts in spending and big rises in taxes to get deficits down to very low levels by recent standards. If you do this whilst maintaining the rigid single currency, it will be deflationary. They probably like the tax route more than the spending cut route, which will squeeze private sector demand and encourage more businesses to go elsewhere to carry out their activities.

            The aim of the pact is to give legal force to EU control of budgets and deficits. They rightly argue that if you share a currency with your neighbours you do effectively share a bank account with them. The European  commercial banks all bank at the ECB. That means your overdraft is a matter of common interest. If one borrows too much, it reflects on the currency and the credit rating of the rest.

              Germany has been fighting to preserve her taxpayers from having to finance the overdrafts of the weaker states. The markets are making that harder and harder. The investors who can pay for these deficits are saying they want Germany and the other strong countries to underwrite the borrowings of the weak, if they are going to lend more to them.

                  Germany cannot accept this huge liability. Instead her Chancellor says that the EU must stop the weaker countries running up such large bills and borrowing so much. There has to be central control of the overdraft, to avoid Germany being drawn into bailing out the weaker areas.

                     This is all sound logical northern commonsense. It is not necessarily well thought through democratic politics. If they are going to press ahead with the new fiscal controls for the 17, Ireland may need a referendum on these new powers. After all they are fundamental. How can you say you are still a sovereign nation, if your spending, taxing and borrowing plans have to be agreed with the EU? How can you claim you are independent if  you diverge from the agreed EU plans, and face a fine or other punsihment for your trouble? What powers do your Parliament and the electorate have left, if these crucial issues are settled by technocrats in Brussels?

                     So far the EU has got away with putting technocrat governments into Greece and Italy. As EU plans will require higher taxes and lower spending, there will be a need for political salesmanship of the highest order to explain to voters why these measures are needed, and how they are going to work within the framework of the rigid Euro. If the EU has taken away too much national democratic accountability, it will make this important task that much more difficult. Elected governments will be impotent to change the policies, and will spend their time blaming the EU. The EU will stand remote, unable to engage directly with the electors it is having a big impact on.

                   The EU would be wise to grasp that the Euro crisis is not now just a currency or bond market crisis. It is not just a matter of high stakes economics. It goes to the heart of what a functioning western democracy does. The Euro scheme will come to test and stretch the limits of accountability, and sorely test the patience of voters.


  1. Kevin Ronald Lohse
    December 16, 2011

    Thanks John, A very concise resume of what is going on, brilliant in it’s simplicity. It’s the loss of hard-won democratic freedom, if you like the democratic deficit, implicit in the 17’s plan, which is the long-term worry. It is noticeable that those northern and east European states who have had to struggle to achieve and maintain sovereign status who are least able to acquiesce to the demands of the centrist 17.
    Should “greed” be .”agreed”?

    Reply Yes, thanks – correction made

    1. RDM
      December 16, 2011

      “greed” be .”agreed”

      Was it not a Freudian slip? But how true!


      Any idea when the Governments Small Business Guarantee scheme will become available within Wales, and the rest of GB?

      When will the Credit Easing, funds aimed at start-ups, etc … become available?

      Banks seem to be looking for shelter, preparing for the up coming Depression? I don’t think we can avoid a Recession (an adjustment), but a Depression will be self inflicted! We could inflate the SME sector?



  2. alan jutson
    December 16, 2011

    Your post today is spot on with regard to Sovereignty, and the power to control your own affairs being lost in the Euro Zone.

    This is at the heart of the argument over allowing continuing erosion of powers to the EU, and away from National Governments.

    I still do not see how the majority in our own Parliament, still fail to see the blindingly obvious, they are like Turkeys voting for Christmas when it comes to everything European.

    Perhaps the tide is now turning here, perhaps they are now begining to see the light, I bloody well hope so, its taken long enough to begin to sink in.

    Keep up the good work John.

    1. lifelogic
      December 16, 2011

      I still do not see how the majority in our own Parliament, still fail to see the blindingly obvious either.

      What is more they (the Shirley Williams, Huhne, Hughes, Heslteltine, Clark, Major et al) do not even try to defend their absurd positions beyond the absurd, 50% of trade and seat at the table guff. Do they actually have any real arguments to put forward it so why don’t they?

      1. Disaffected
        December 16, 2011

        It is reported this morning that protesters in Warsaw are against a Merkel takeover and that the Czechs and Hungarians are against the EU proposals. Sadly, the UK is sending experts to the EU to work on the detail with a view to a new summit in the New Year.

        Meanwhile the French are denigrating the UKs economy. I thought it was a convention not to do this to another country? Still no move on the French removing their 20 year veto on the Common Agriculture Policy (CAP), why they are so exercised and vindictive about the UK exercising its right to veto?

        Time for John and his Eurosceptic colleagues to oust Cameron before March or it could all be too late as we become part of a pan European state led by Germany.

        I appreciate Clegg fanatically wants this, despite repeatedly denigrating the UK and its culture. Clegg was thrashed at the last general election, thrashed at the last local elections, thrashed on AV. LibDems policies on budget, EU, immigration, education, defence, crime and disorder are totally out of whack to what the public wants. Clegg shows complete contempt for the UK and its population, it is about time Cameron stood up to him or stood down.

        1. lojolondon
          December 16, 2011

          Clegg gets an EU pension. One of the EU regulations about EU pensions is that you cannot criticise the EU, or you lose it.
          So Clogg would rather lose the UK, the election, his morals, respect and everything he has, rather than his EU pension.
          The only way to change that is to enforce the law regarding ‘treason demands capital punishment’.

          1. uanime5
            December 16, 2011

            “So Clogg would rather lose the UK, the election, his morals, respect and everything he has, rather than his EU pension.”

            Clegg lost his morals, respect, and everything he has when he renegaded on his No Tuition Fee Increase pledge.

  3. Mike Stallard
    December 16, 2011

    Yes – a post that is clear and right.

    The problem is how to handle it.

    PS What is all this about the Civil Service sending people to discuss the future of the Treaty which Mr Cameron so firmly rejected? It was widely and triumphantly reported on the News yesterday. Because all the meaningful proceeding of the EU are secret and held in private, my suspicions are up. Are yours?

    1. Bob
      December 16, 2011


    2. Disaffected
      December 16, 2011

      Absolutely right. Cameron is trying to spin to his Eurosceptic colleagues and the country while giving orders to the civil servants to negotiate the Treaty?? We want out of the EU now and use the money for small businesses to create jobs. The money would be far better spent and at least the taxpayer would have something in return for the money.

      As a point of principle I would not negotiate at a time when EU bullies are denigrating the UK and its economy. The mask came off for the true plan of the EU takeover when the former Greek PM suggested holding a referendum, we owe him a debt of gratitude. he knew this would unmask the real motive of the EU takeover led by Germany. We had the warning now we want our politicians to act on it.

      1. uanime5
        December 16, 2011

        Why is Germany trying to take over the worst performing economies in the EU? Wouldn’t this make Germany much weaker?

        1. Disaffected
          December 17, 2011

          It never stopped their political ideology before. Most of the recent polls in Germany and Netherlands agree with the UK and do not want a pan European state, but that is different from the politicians views.

  4. Tony E
    December 16, 2011

    What surprises me is that there is never anyone in the EU project who acknowledges the inbuilt advantage that Germany made for istself inside the Euro:

    When it joined it’s currency was deflated due to the debts of Re-Unification so very quickly it had a 20-30% advantage because it’s currency was too weak for its economy compared to the others trapped into the Euro.

    This has been a strong driver in Germany’s export boom and has also tended to ‘hollow out’ the southern states who have a currency which is far too high for them to compete with Germany.

    There will be no permanent solution which does not address this – and Germany does not want to recognise that its success is built on the back of its neighbours unfairly. It wants all the advantage but none of the cost.

    I no longer see how it is in Britain’s advantage to save the Euro – better that we see an orderly break up of the Euro so that the southern states can once again compete and strengthen and then new customers for British goods and services can be found.

    1. sjb
      December 16, 2011

      “For most of the single currency’s first decade, the ECB’s policy rate was probably too high for Germany […]

      Still digesting the enormous costs of unification, German workers saw their real wages squeezed in this period, as German companies slowly re-built their competitiveness, while the countries at the periphery had a ball.

      Now, as any German politician will happily tell you, the shoe is on the other foot. Now it’s Spain, Portugal and the others who must sacrifice short-term growth for long-term competitiveness.”

  5. Antisthenes
    December 16, 2011

    It appears China is now having problems with falling property prices and downgrading of growth forecast to 10% or less for 2012. For us 10% would be a miracle but for China it is tantamount to a recession. China has been slapping tariffs on US goods. The USA is no longer the power it once was and has a large burden of debt and is reducing spending on the military and looking no longer outward to the Atlantic but to the Pacific instead. The Arab spring does not look as it is in some cases going to replace dictatorship with democracy but change from semi-secular to full Islamic Iran type governments. Oil producers need circa 100 dollars a barrel to maintain their economic stability so falling demand may not see much reduction in price. Democracy is being assailed and eroded in the EU, the euro-zone and Russia. All is not well not only in Europe but in much of the rest of the world. This appears to be a receipt for calamitous events to unfold. Given the evidence that our leaders are not up to much as the evidence of their handing of the euro crisis demonstrates it does not bode well that they are capable of dealing with the other crisis that now appear to be waiting to manifest themselves world wide.

  6. norman
    December 16, 2011

    With Italy (as an example) paying 6.5-7% on new loans and lots to re-finance next year a dose of inflation would be just what the doctor ordered – deflation would be another nail in the coffin.

    Must be a big coffin, all the nails that have been hammered into the Eurozone this last year. I wonder how long things can be kept on life support before giving in to the inevitable and lowering it into the ground.

  7. ian wragg
    December 16, 2011

    I think this is a cunning plan to get the proles wages down to BRIICs levels and restore competitiveness.
    Of course it won’t affect the ruling classes (or the tube drivers) or indeed our policies on useless windmills.
    Interesting Clogg is lobbying business through Rudd to backtrack on the EU veto.
    Somehow I don’t think Roon will take much persuading as he’s busy filling the airwaves with his big society nonesense (and vast amounts of taxpayyers loot).

  8. GJ Wyatt
    December 16, 2011

    Brilliant acronym.

  9. Sue
    December 16, 2011

    So, we’re sitting in at the new treaty talks after all? Are we going to get the truth of what is being discussed or is Mr Cameron going to sign away more of our powers without that “referendum?”

    How about the news that even more of our money will be stolen to give to the IMF to illegally fund a currency?

    I don’t suppose even you “Eurosceptic MP’s” will be told the truth until it’s too late. Either way, we are going to get clobbered with Europe’s overdrafts.

    It’s time we cut the apron strings and opened our country to a real global trading economy. One without Europe hanging round our necks and dragging us down.

    Reply: I have been assured the government is not going back on its wise decision to veto a new treaty when I followed up on this. I voted against more money for the IMF last time and would do so again. The government has not said it will put extra money into the IMF, and has ruled out money for the IMF to back the Euro.

    1. Disaffected
      December 16, 2011

      All reports say that the government has sent experts to discuss a new treaty- who should we believe John?

      Reply: Yes, but they are n ot discussing us joining the Treaty – they are there I hope to make sure any new treaty of the 17 or 23 or 26 does not affect us.

    2. Sue
      December 16, 2011

      Thank you for your reply.

      What is going on then? If they all sign an Intergovernmental Treaty that gives them majority voting, where does that leave us? If we sign such a treaty, does that negate the referendum lock?

      After all, it’s not a treaty change is it? It’s another treaty which runs “along side” the Lisbon.

      When are we getting some powers back? Cameron only has to say one word “REFERENDUM” and they will all be having heart attacks. Why doesn’t he use it?

      There’s something fishy going on… I hate the lies.

      Reply: I doubt if the 17 or the 23 or the 26 make it a new treaty within the treaties. Several of the 9 have problems with it, and Ireland probavbly needs a referendum. Many Conservative MPs are claling for a renegotiaiton, but the Coalition does not seem ready for this.

      1. Disaffected
        December 16, 2011

        Cameron needs to go or call a snap election to get rid of the LibDems and let us see what the picture looks like then?

        Cameron, Heseltine, Clark and LibDems do not want renegotiation or a referendum. Cameron made his views clear on 23rd October when his bluff was called asking for a referendum. The speed at which the EU dictators can work to overthrow governments (Ireland, Greece and Italy) was frightening and at the same time it successfully excluded the public not alowing any time for debate or proper protest. None of the other EU governments protested either at this totally undemocratic action.

        “They are there I hope..” shows your uncertainty John, and rightly so. Cameron is not to be trusted. I hope the true Eurosceptics take further action ASAP. Interview of Warsi did not appear too convincing on the subject did she?

      2. Sue
        December 16, 2011

        “Many Conservative MPs are calling for a renegotiaiton, but the Coalition does not seem ready for this”

        The Libdems you mean … they now have such a small minority of voters in the UK, you can afford to ignore them to a certain extent. Tell me, are they all being bribed by the EU or do they just have this innate hatred of anything that is British?

        Most of us interested in protecting our rights and our country are aware of the lies we’ve been spun since the days of the EEC and I am not about to let them be trodden on by a party of fruitcakes. I want my children and grandchildren to grow up in a free Britain not a German/Franco dictatorship!

  10. Viv Evans
    December 16, 2011

    Your last paragraph hits the proverbial nail on its head:

    ” The EU would be wise to grasp that the Euro crisis is not now just a currency or bond market crisis. It is not just a matter of high stakes economics. It goes to the heart of what a functioning western democracy does. The Euro scheme will come to test and stretch the limits of accountability, and sorely test the patience of voters.”

    Already there are grumblings by the people of various EU countries – yes, even Germans – about this proposal. Of course this isn’t reported here, one’s got to look up various online MSM.

    But the main point is that the EU bureaucrats, being bureaucrats according to the French model taught by the ENA, simply do not understand how a democracy works, and see the demand for democratic accountability as an irritant. After all, they know best, whereas the populus is just an uneducated mob.

    One other point needs to be remembered, which is that governments are in the habit of raising taxes to pay for everything. They are not in the habit of cutting back on their spending, as we’ve seen even in our government, dedicated to austerity …

    1. uanime5
      December 16, 2011

      Actually our Government has been increasing their borrowing while reducing the public sector.

  11. john w
    December 16, 2011

    John,i am glad that democracy is on the agenda.I had a look at hansard to find out how the eu debate went.No sign of the lib dem s anywhere.They believe in the eu,they love it.They seem to be unable to test your position on the eu.They seem to be unwilling to have their position tested on the floor of the house.Mr Mc shane always stands up for what he believes in.I respect him for that.Mr verhofstadt upsets me on a regular basis.He also does this on the floor of the eu house and the same goes for him.I mentioned to my MP last week Peter Bones investigation into political indoctrination of children in schools.Puppet governments got a mention too.I am wondering if they want to cover things up and scare people on the telly for their own benefit.Democracy requires scrutiny of everyones views in my opinion.I prefer this to be done on the floor of the house and i reckon mr speaker would possibly agree.

  12. javelin
    December 16, 2011

    Europeans are driven by idealistic philosophy. Platonic and Kantian pure forms.

    Europeans take the view that if they get the strategy right the rest will follow. Its a tempting view. However the single currency and the economy are not a hierarchy – with the currency at the top and the details dropping out of it. The economy is a system with its own laws – full of positive and negative feedback loops.

    I’ts very easy to look back at WWII and see it from a moral or humanistic perspective, But before the War it was driven by an idealistic optimistic view. Try to forget the morality of the uber-man and think of the positivity felt at the time. Have empathy with the 70 year old mind set. I see the mind set behind the Euro driven by the same intellectual optimism. More than that I *feel* the same intellectual optimism as that behind WWII. Only the optimism today is still to create an empire to compete internationally, not by war but peace. But the optimism and the poor planning, and even poor morals is still there, and the result is another disaster. If the EU needs a philosophy king it needs to look to the UK for a large dose of empiricism and a flexible constitution.

    PS. I think France will get downgraded later today. The French Central banker complaining was because he was warned on Wednesday to prepare for it.

    1. Mark
      December 16, 2011

      China downgraded France last week from AA- to A+ with negative outlook, so we can expect the Western agencies to catch up soon.

      Meantime, it’s interesting to note the meanings of “noyer”:

      to drown
      to water down

      They all seem appropriate for a French central banker.

  13. Brian Tomkinson
    December 16, 2011

    The problem is that the political priority to amalgamate all these countries into effectively one country is being put before all else, regardless of the wishes of the people of those countries . From the outset I have regarded this “project” as doomed to failure and far from ensuring longlasting peace amongst the previously warring nations of Europe would produce the opposite result . Why do the EU leadership think that the people of the member countries want to just give up their democratic rights when around the world there are numerous examples of revolutions against autocratic control and demanding the very democratic rights that the EU wishes to remove.

    1. uanime5
      December 16, 2011

      I can’t recall any revolutions demanding that Governments should be able to borrow more than 0.5% of GDP. Most want the ability to remove a Government they don’t like.

      Reply: They may not like governments which enforce EU austerity

  14. Frank Salmon
    December 16, 2011

    Here’s the outcome. The small business becomes the new working class, impoverished and dismembered by tax, regulation and falling demand. Labour unions extort monopoly perks and wages for their members, leading to higher prices and costs. Big companies and banks thrive. Government employees become the new aristocracy. Society becomes fractured with a massive underclass thriving on permanent benefits.
    Unless these areas become the issue, all will be lost.

    1. Prodicus
      December 16, 2011

      It’s known as the Gordon Brown Plan.

    2. uanime5
      December 16, 2011

      Actually it’s possible to have higher wages without higher prices if you reduce profitability or reduce the income disparity between employees and employers.

  15. NickW
    December 16, 2011

    We have seen recently an announcement from the French that Ireland’s Corporation tax regime needs to be” harmonised”.

    France is usurping the role of the European Parliament, the European Council, and the European Presidents and dictating unilaterally to other member States what they can and cannot do.

    Since when did it become acceptable for one Country to hijack the EU, over rule every Member State and impose its policy on other member States with no discussion and no opportunity for the rest of Europe to even express an opinion?

    Unless this power grab is confronted by the European Council head on, it will become a fait accompli, and we will have another (unpleasant small man -ed) “Harmonising” Europe in the unique fashion of dictators throughout history.( but by different means and not evil as some before-ed)

    1. uanime5
      December 16, 2011

      French politicians stating what they want to do is not the same as controlling the EU.

  16. Peter van Leeuwen
    December 16, 2011

    Greece and Italy put technocratic governments in power, not the EU – as some of the more malicious eurosceptic myths want to make us believe. It should really be beneath the esteemed blog-writer to go along with this myth.
    Obviously there are serious problems with democracy in this this move towards a fiscal union. They are spotted and addressed by continental political groupings, and will have to lead to some resolution, after or probably already during the crisis (which some countries expect to last a long time). Continental political parties are better placed (equipped) for this than British ones:
    1) it is their currency, their fiscal union and their problem.
    2) The continental political systems and culture are different from the British.
    3) A number of continental EU members score better in democracy that the UK

    Reply: I seem to remember France and Germany acting with the Commission made very clear the need for new government at the time

    1. Graham C
      December 16, 2011


      If you really believe that about Greece & Italy then I think either you are very naive or being deliberately ingenuous.

    2. backofanenvelope
      December 16, 2011

      Well, Mr van Leeuwen, you are making a good case for us leaving post-haste. I am not sure which continental countries score better for democracy. Do you read the Klein Verzet blog? The Dutch seem to have the same problems as we do.

      As to the point about the French civil service made by Viv Evans. Just remember that the French know all about mod rule. 1790 and so on.

      1. Peter van Leeuwen
        December 16, 2011

        Democracy – you’re welcome to google for me a world democracy ranking in which the UK is ranked higher than the Netherlands and most of the Nordic countries. I didn’t find one.
        I just had a look at Klein Verzet: it’s quite o.k. to have such blogs, as we have at least 2 eurosceptice parties in the Netherlands on almost opposite sides on the political spectrum. I prefer to be more in the middle (in the muddle if you like). I don’t expect Dutch government to be overthrown be “democracy-riots” but the government might well be sent home if serious issues won’t be addressed within a few years.

    3. sm
      December 16, 2011

      Peter wrt your points.
      The euro area currency issue is a worldwide problem.
      Full resolution will require worldwide co-operation (perhaps with IMF) or intra EU grants or bilateral funding grants.
      Politics are different but none will stand long for autocracy. I am glad you recognize how democratic Switzerland is and others. I hope this is duly weighed when you deign to allow and respect referendums which call for a change in strategy.

    4. sjb
      December 16, 2011

      We had a Parliamentary by-election yesterday, Peter. Turnout of just 28.8%. UKIP (Britain out of the EU party) came fourth with a 5.49% share of the vote.
      Source: http://www.bbc.co.uk/news/uk-politics-16187493

      1. APL
        December 16, 2011

        sjb: “UKIP (Britain out of the EU party) came fourth with a 5.49% share of the vote.

        And the Tories (Britian in the EU – party) came second.

        Less than 30% of the electorate bothered to vote. I hardly think the winning party can draw comfort from that.

        Reply: The worrying thing about the result – on a low turnout – was how many voted for a Labour party that still backs more European government.

        1. backofanenvelope
          December 17, 2011

          I suspect that the election results reflected a widespread view that there is nothing to choose between the 3 mainstream parties.

        2. APL
          December 17, 2011

          JR: “The worrying thing about the result – on a low turnout … ”

          The worrying thing about the result was the low turnout.

          JR: “how many voted for a Labour party that still backs more European government.”

          Perhaps the other 70% of the electorate that didn’t vote are fed up with being manipulated by the politicians.

          Perhaps on job of very highly paid politicians would be to re-engage these people.

    5. Peter van Leeuwen
      December 16, 2011

      @Mr Redwood:
      If my memory serves me well:
      Greece: Papandreo, without informing his own ministers, suddenly decided to call a late (post-agreement) referendum, was dropped by his own minister of finance and lost a vote in parliament. The various comments by bailing-out countries (“no next installment before Greece is 100% in agreement” and “you’d better have a referendum about the fundamental question “in or out of the euro/EU”) were IMHO quite understandable (it’s our tax money).
      Italy: Berluscony lost the vote in parliament, after he kept back-tracking on previous promises made, and the market’s bond rates kept rising. The elected Italian president was involved in pushing Monti, but he is not the EU.
      Eurosceptics like to see the secret hand of Dragi, EU, France and Germany, to paper over that in fact the financial market and the creditors set the terms, and that the parliaments sent their governments home.

  17. startledcod
    December 16, 2011

    It (the Pact) “proposes big cuts in spending”, but there is one bit of spending that won’t be cut, in fact it will probably rise inexorably – contributions to the EU. A huge cut in the EU budget would have little or no effect unless it cut into the CAP which the French would object to.

  18. Paul H
    December 16, 2011

    “… Ireland may need a referendum …”
    As I recall, this did not previously prove to be an insurmountable obstacle to an elite determined to get what it wanted.

    1. figurewizard
      December 16, 2011

      The ‘elite’ in Ireland got what they wanted by a combination of lies (the Euro will be a good thing) and threats (not having the Euro will be a bad thing) but this time round, with the scales having fallen from their eyes it is inconceivable that as fiercely an independent people as the Irish will allow themselves to fooled next time.

      It is greatly to be hoped that their referendum is held soon so that they can set an example to the others.

      1. uanime5
        December 16, 2011

        They eventually accepted the last 2 treaties that they voted against in previous referendums. For some reason Ireland needed the support of the EU and the EU was unwilling to give money to a country that was preventing their treaties being implemented.

    2. formula57
      December 16, 2011


      There must be limits though – eventually the people will rebel.

  19. Mark
    December 16, 2011

    This paper by John Whittaker gives some insight into the arcane world of Eurozone central banking and how trade deficits and asset transfers rack up imbalances:


    With our trade deficit with the Eurozone there is perhaps little wonder the Germans don’t really want us inside it. The current true ECB position must look horrific to them – and that’s before we add in the EFSF or the ESM (or MES(s) in French). The widely reported run on Greek banks must be making things worse still. It is hard to see any other outcome than the whole shebang blowing up.

  20. Gary
    December 16, 2011

    “It proposes big cuts in spending and big rises in taxes to get deficits down to very low levels by recent standards. If you do this whilst maintaining the rigid single currency, it will be deflationary.”

    There is nothing wrong with deflation, or in other words restructuring and removing the debt that cannot be repaid in an efficient economy. In fact, it is the proper way to get rid of the credit bubble. The originating problem is the credit bubble itself. The wrong solution to a credit bubble is to print money, this maintains the bad investment and inefficiencies in the economy that the credit bubble spawned. Printing money is the the sure way to ruin further down the road.

    This notion of it being a virtue to have your own sovereign printing press so that you can debase your currency and loot the savers to maintain an inefficient economy is insanity.

    Strong economic areas ALWAYS subsidize the weaker areas in any monetary regime, even in the UK. ANY country that has a single currency is as monetary union of states/cantons/counties. The problem with the euro is not the monetary union, the problem is the political dictatorship and the non-existence of fiscal unity.

    For some critics, the actual unspoken problem of the EU, regardless of what they may profess, is the fact that there is a potential for a new reserve currency other than the US dollar. Period.

    1. sm
      December 16, 2011

      Uncontrolled deflation without automatic stabilizers that printed money supplies would be austerity indeed and outright depression.

      The question is how to do this without rewarding the powerful vested interests who have systemic importance.

      Other suggestions made have been
      1) giving money to all but ensuring any debt is paid down first and foremost.
      (Prof Steve Keen)
      2) changing private loan repayment rules to forbid interest being charged on interest to enable capital repayment. (The Conversation)
      My thoughts possibly as a quid pro-quo for banking support. If interest still cant be met then maybe a liquidation should take place.

  21. Rebecca Hanson
    December 16, 2011

    A clear and insightful post but I think it’s important to place this challenge to our traditions of western democracy in a wider context.

    Most importantly it essential we are honest with ourselves about the fact that western democracy, though it proved to be better than the other options in the 20th Century, is not actually particularly good. Having won the cold war ‘because ‘pure and good’ democracy’ beat ‘evil communism” and sold that message to the world I think it’s rather hard for us to see this objectively.

    Communication technology is changing all our established conclusions and we have only just begun to scratch the surface. Essentially countries with intelligent leadership with a long term view and which is properly accountable and connected to society are likely to thrive, no matter how it is constructed (intelligent benevolent monarchies, for example, and of course China are interesting to watch). The short term adversarial nature of western democracy creates structural weaknesses.

    So we will need governance which has a long term view, is deeply intelligent, properly understands the people it represents and is not corrupt more than we need traditional western democracy.

    The internet creates a whole new dimensions of opportunities for ways in which we can create, monitor and influence our governance wherever it is. It’s interesting to see, for example, how the Chinese are using micro-blogging (Twitter) to better understand the views and opinions of their country.

  22. Michael Read
    December 16, 2011

    It occurred to me while reading the 500 word exhumation of RBS this week, that while the EU might be a threat to our sovereignity, the big banks have already managed that feat.

    £50m is crossing the channel every day to keep Brussels a vaguely interesting place to visit on the Eurotrain but tens of billions have passed out of Threadneedle Street to Canary Wharf and we’re on the hook for hundreds of billions more to “our” global banks which you will no doubt remind me endlessly contribute 10% to our GDP.

    Sucked into the EU. Shattered by the banks. Not much of a choice.

  23. oldtimer
    December 16, 2011

    The longer this goes on, the more disorderly the breakup will be. I remain of the view that Germany will continue to refuse to bail out other, defaulting EZ countries. We can be sure that the EUligarchs will cling on as long as possible, but perhaps there is not too long to wait now before the dam bursts.

  24. BobE
    December 16, 2011

    (Reuters) – Finance Minister Francois Baroin joined a chorus of French criticism of the British economy and of credit-rating agencies Friday, exposing strained relations with London as concern grows that France’s credit rating might be cut.

    French ratings might be cut http://reut.rs/rxAXRH

  25. Ralph Musgrave
    December 16, 2011

    John Redwood asks “What powers do your Parliament and the electorate have left, if these crucial issues are settled by technocrats in Brussels?”. The answer is that the electorate still has power over what is widely regarded as the most important decision a nation can take: the proportion of GDP devoted to public spending. It would just be the DEFICIT, that is the DIFFERENCE between total collected in tax and total spent that Bruxls would decide.

    A very similar argument actually applies, potentially, to monetarily sovereign countries like the US or UK (US in particular). That is, if politicians behave like a bunch of unusually immature school children (as per US), there is much to be said for disallowing them any say in the deficit (i.e. leaving that the central bank). But leaving the decision on what proportion public spending is as a proportion of GDP with the electorate and politicians.

    Economic problems in the US largely stem from the fact that a bunch of economically illiterate politicians have a say in the deficit.

  26. outsider
    December 16, 2011

    You are right but that does not mean economic reason or democracy will prevail.

    The logical Federalist responses to the democracy problem would be a directly elected Commission president, which would lead to some interesting realignments, and EU- wide referenda, which would push in the same direction. Cannot see this happening since the powers that be know that most EU voters do not want ever more Europe.

    So far, it is surprising that there has been relatively little outrage over the transfer of Budget sovereignty to the EU. At this early stage, Finlandisation does not seem to hold great terrors even for Finland.

    Rather, Finland is up in arms over the loss of its veto on bail-outs, which was the precise purpose of ending unamimity, while Ireland (which is beholden to Brussels), Slovakia (which holds elections in March) and others are unhappy about equalising corporate taxes. So, although there will be much negotiation within the 17 over detail, there may not be deadlock over the central principle. Denmark, which might not like it, is effectively captured by being EU president from January, followed by Cyprus. Even if M Sarkozy loses in France, his successor might take the line that Mr Cameron took on the Lisbon Treaty.

    One can imagine a compromise that fudges the definition of a structural deficit (maybe to exclude debt interest), restores unanimity for bailouts, extends tax harmonisation over a very long period, and cuts more slack to the non-euro 9. But who knows, democrats and non-puritans may wake up. For instance, Finns may not wish to become less independent than their Scandinavial neighbours again.

    A harmonised corporation tax would also make it too easy for the UK to undercut all its partners, which prospect could kill that plan.

  27. BobE
    December 16, 2011

    The Associated Press
    BREAKING: Fitch considering downgrading ratings for Belgium, Spain, Slovenia, Italy, Ireland and Cyprus.

  28. Barbara Stevens
    December 16, 2011

    John, again a very interesting post which makes me understand this situation much better. I now tell people to read your blog to get some truth and honesty. However, I’m no expert on this crisis, but it appears to me, if Cameron is allowing Whitehall to negociate on this countries behalf while we are not in the euro, why? I’m worried. He’s let us down before and there’s always that element of doubt he’ll do it again. I hope he won’t let us down again. If he does it will be the end of Cameron and the Tory party will be badly damaged. The recent by election, is a Labour safe seat so nothing to worry about, but that can change if the government ignore the electorate.
    I can understand wanting the eurozone stable, but it’s behaviour from the 17, is not really favourable to the markets, which is shown in the levels they are at. I forsee the whole lot going down the pan in the new year, and sitting round a table chatting will not save a currancy which appears doomed. It as no central country which will act as banker, the Germans have said NO to that. We want to rule, tell everyone what to do, but take no responsiblity for finances, Germanay is looking after it’s self.
    I want out, and nothing less will do.

    reply: Various MPs are trying to strengthen the governemnt’s resolve when talking to the EU

  29. uanime5
    December 16, 2011

    “They probably like the tax route more than the spending cut route, which will squeeze private sector demand and encourage more businesses to go elsewhere to carry out their activities.”

    Given the employment laws of most European countries these companies won’t be able to go anywhere. It’s almost impossible to fire someone in France or Germany, let alone close down a company that isn’t bankrupt.

    “How can you say you are still a sovereign nation, if your spending, taxing and borrowing plans have to be agreed with the EU? How can you claim you are independent if you diverge from the agreed EU plans, and face a fine or other punsihment for your trouble? What powers do your Parliament and the electorate have left, if these crucial issues are settled by technocrats in Brussels?”

    This isn’t much different from how EU laws have to be implemented; the EU produces a directive and the member state had to come up with the most suitable way to implement it. The same is true of budgets; the EU sets the rules and member state comes up with the most suitable budget that complies with these rules.

    Countries also also fined if they don’t implement EU law properly, just like they will be if they can’t create a proper budget.

    “So far the EU has got away with putting technocrat governments into Greece and Italy.”

    I think you mean technocrat Prime Ministers in Greece and Italy, unless the entire executive of these countries have been replaced.

    “Elected governments will be impotent to change the policies, and will spend their time blaming the EU.”

    Even though the head of the national Government is part of the European Council?

    “The EU will stand remote, unable to engage directly with the electors it is having a big impact on.”

    If only there was some sort of European Parliament where the people of Europe could elect MEPs that would represent them. Oh wait …

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