Author: johnredwood

I was asked this week in the Commons if I thought Germany was an independent country. Some were surprised when I said that of course it is not. Some people keep on confusing power with sovereignty. Germany is a powerful country, but her actions are now very circumscribed by the EU and more especially by the Euro. Germany had no wish to lend large sums of money to Greece, but has done so indirectly via the European Central Bank because she cannot win the votes and arguments on that body on some of the most important issues.

Germany and Greece are now locked together in a relationship of their making which is bigger and more powerful than either government. Mrs Merkel has to allow more and more lending to Greece whilst in public saying there will be no more loans unless Greece agrees to austerity policies to cut the deficit more. Greece has to listen to endless sermons on how to change its public spending and tax policies.In order to qualify for official loans to keep it going she has to agree to some of the advice. Previous Greek governments accepted the requirements and presided over a 25% decline in the output and incomes of their country as a result.

I have always assumed they will muddle through to a “solution”, with Greece promising a bit more by way of reform, and Germany agreeing to more loans. That would be more of the same which has sustained this difficult and precarious relationship since Greece joined the Euro. Germany has more supporters in the rest of the Euro than Greece on some of these issues, but has lost the battle over quantitative easing and a generally easier monetary policy.

The brinkmanship is now quite extensive on both sides. Germany has recently threatened Greece with the imposition of capital controls. This would mean that instead of the European Central Bank continuing to lend the Greek banks any amount of money they need to replace lost deposits, the Greek banks would instead have to tell depositors they can no longer withdraw their money, or can only withdraw it on worse terms. This is what the Euro authorities made Cyprus do, creating effectively a Cypriot Euro which was worth less than everyone else’s euro. The Syriza Greek government for its part simply refuses to cut pensions and pay, pointing out that Greece needs more demand to grow, not less.

Germany has drawn attention to the possibility of capital controls because clearly Germany is rightly alarmed by the huge build up in ECB loans to Greece, now in excess of Euro 83 billion. Sometime these two – and the other Euro members- are going to have to sit down and talk about debt cancellation. The trouble is the creditors will want more austerity policies which the Greek people and their government do not want. That’s why it is always easier to put off a settlement, just as long as the Germans have under the rules of the game to stand behind ever more lending to an unreformed Greece.

Neither side has wanted to bring the crisis to a head. If one does, then we will see the real negotiation. If Germany wants to keep the entire Euro enough she will have to allow Greece more money and more leeway. If Greece is more worried about capital controls and being excluded from the full Euro scheme then she will have to bow to more of the demands of her creditors. Agreement means Greece spending less or taxing more, and it means Germany paying or lending more to Greece. It is still not clear which side is the stronger in its resolve.

Yesterday news came that the French have blocked the border with Italy to impede the progress of illegal economic migrants. This is against the Shengen rules they signed up to. Italy demands “burden sharing”, seeking a system of quotas for all EU states to share the migrants she lets in to her country. The UK has exercised its opt out from any such measure, having in the past stood apart from Shengen common frontiers.

The problem with the burden sharing policy is it acts as an open invitation to hundreds of thousands of potential migrants to come to the EU. Is it a helpful policy  policy to offer a better life to all the brightest, best and most energetic people in poorer countries, as it will make the growth and greater prosperity of those places that much more difficult to achieve?

I heard a difficult  question recently  about  the issue of the UK’s role in the Mediterranean. Why we did not ask the navy ships to go to the ports in Libya where the people traffickers operate and offer free passage to economic migrants to spare them getting on to the dangerous boats and subsequently needing rescue? The first response someone else offered  to the question was for him not to suggest such a bad policy. The UK  after all does not welcome illegal economic migrants into the EU, so would not wish to offer them free passage in naval vessels. The person pursued his case. He said that surely it was similar to what the government is doing, but with the added advantage that the people we are trying to save from the waters of the sea out of their dangerous boats would no longer be at risk if we transported them all the way.

The question revealed the tension  at the heart of current policy. The UK is a decent country so it does not wish to stand by and watch as people drown when we and others like us can help save lives. The navy is doing good and has stopped people losing their lives. We have a great humanitarian impulse. The UK also has a policy of not encouraging illegal economic migrants. If we pick people up at sea and deliver them to the very place they wished to go illegally, we could b e offsetting  the policy of refusing illegals entry into the EU. If Italy grants these migrants EU permission to stay and work in the EU they can then travel to the UK as legal migrants.

There are many ways that the UK could bring its humanitarian instincts into line with its opposition to illegal economic migrants arriving in the EU. It could do more with the world community to stabilise and encourage a prosperous peace in the countries people are fleeing. It could do more with the local authorities in the ports where they operate and with the world community to stamp out people trafficking. It could if all else fails continue to help save people in distress at sea, but take them back to their port of departure. The ports of departure surely should be made more responsible for their fate, as those ports fail to root out the people traffickers and allow unseaworthy boats to attempt the Mediterranean crossing. They allow the cruelty of the traffickers.

I wrote this recently for Conservative Home, but would like to share it with readers here:

It is one of the ironies of life in the EU that an apparently good idea, more free trade with the USA, ends up with both left of centre and right of centre critics combining to condemn the way the EU has been doing it.

Don’t get me wrong. I think free trade creates more jobs and greater prosperity. Successive rounds of tariff reductions by GATT and the World Trade Organisation has helped power world growth and expanded exports and imports greatly in recent decades. My first criticism of the EU and TTIP is the eternal delays they have created. The idea of closer trade links was first seriously explored in 1990 at the time of the Transatlantic Declaration. 1995 saw the establishment of the Transatlantic Business Dialogue, which too wished to pursue freer trade rules bilaterally. If the UK had been free to negotiate our own trade deals instead of having to do it through the EU, I am sure we would have had a good trade deal with the USA years ago. Now some 25 years later we are still a long way off an EU/US Trade Agreement.

The EU concedes that it has been overtaken by the WTO. Half of all trade between the EU and the US is already tariff free, and the rest faces an average tariff of under 3%. It is good news the EU says it would be happy to surrender its 10% external tariff on cars. Why doesn’t it just do so? The US only charges 2.5% on cars imported from the UK or the rest of Europe, just one quarter of the high tax the EU imposes. The EU should just get on with it and remove the tariff. There are higher tariffs on some shoes and clothes that could also be cut to help consumers.

Because there are few tariffs left, the negotiations have become complex and are to do with rules and regulations more than with customs duties. The two sides are looking at ways of harmonising or co-ordinating difficult matters like Intellectual property, competition law, safety regulation of food and chemicals, public procurement and banking regulation. They are being drawn into areas of government which may limit the USA or the EU right to make their own decisions, in a way which will be all too familiar to UK voters who have considerable experience of the supranational EU intervening in our affairs.

Many on the left in the UK are alarmed by TTIP. I think they are wrong to conclude that the NHS will be damaged by it through offering rights to US health companies to compete in our monopoly health care in the public sector as this is expressly ruled out. However, they are right to ask how much power will the Agreement transfer from Parliament and government to this international agreement and the courts.? How will it affect employee rights, public procurement and other important domestic sensitivities?

The EU is busily trying to impede some areas of possible agreement. The French have already vetoed any possible agreement on audio visual industries. The EU is making heavy weather of negotiations on freer trade in agricultural produce, as the EU will not allow genetically modified product, has different views to the US on hormone treated beef and various pesticides. Some in the UK agree with the EU position on these matters. None of us wish to see risks taken with our health, and understand the caution of some EU regulators. It just means more delay and difficulty in ever reaching an Agreement which might mean something.

The TTIP for me is not an argument to stay with the EU, but another reason why I think the EU lets us down. It gives free trade a bad name with the left, by ensnaring the talks in difficult territory on health and safety, employee standards and public procurement. It means eternal delays in getting progress on tariffs and market access, areas with more positive pay offs for consumers. It means the UK cannot get on with it and shape an Agreement which we like and which suits us.

Thank heavens for the WTO. It has done most of the job for us in getting tariffs down. It’s a pity the EU cannot also do the same, and cannot find a way to further and hurry free trade that does not upset so many of us. The EU’s negotiation of the TTIP just looks like another clumsy EU power grab, allied to anti American rhetoric on sensitive topics which does not help anyone. The danger of that is the wrong kind of TTIP could strengthen the extraterritorial reach of the US legal system, the opposite aim to the claims by the EU.

I’m a romantic when it comes to Magna Carta. I understand its limitations and how it is largely a document of its time. I recognise that it took long years of struggle to control the King and establish an effective Parliament. Magna Carta was nonetheless an important step on the England’s pioneering journey. England was early to recognise and require equality under the law, fair trials, and controls on the executive power of government. Our belief in this idea of freedom, and our shared passion to ban arbitrary government, limit power and make it accountable were the envy of many around the world.

The irony is that as the 800th anniversary of these important beginnings of our long tradition arrives , we see the consequences of being less vigilant about unaccountable power in recent years in our dealings with the European Union. A country known for its assertion of rights against monarchs, has become known now for its feebleness at withstanding the transfer of powers to a continental bureaucracy. Where is the new Magna Carta to limit the power of Brussels? Where is the once mighty Parliament, famed for facing down various Kings until it controlled the kingdom?

Some will say the modern heirs to our Magana Carta tradition lie in the European Parliament and the European Convention of Human Rights. The problem with this interpretation is that to many UK citizens it does not feel like that. Magna Carta placed the power to control the Crown in the hands of those in our own country able to wield it. Later generations wisely extended the power to all adults living as citizens in our land. Can we say this has now been properly transferred to the EU institutions, or will the UK voters see that to restore the magic of the Magna Carta tradition they need to bring power back from Brussels?

Labour are reissuing their old lie that the Conservative party in Opposition backed Labour borrowing plans and advocated light touch regulation of the banks or even deregulation of the banks. They have always wished to duck responsibility for the great crash that occurred on their watch in 2007-8.

There are strong grounds to reject these allegations. I have dug out the relevant quotes of the Opposition Economic Policy review, written early in 2007 and published in the August before the banking crash. The Policy Review included Simon Wolfson, Andrew Feldman, Greg Hands and myself on its steering committee.

1. We warned that there could be a crash as Labour had allowed far too much debt to build up in the system…
P3 “…there is considerable uncertainty in world markets about how far the Fed, the ECB and the Bank of England may go in raising rates to squeeze inflation out of the system. They must know there are huge pyramids of debt throughout the system, and inflation will not be killed unless the appetite for more debt is blunted. They also know (apparently they did not!) that if they push interest rates too high for too long they could bring the debt structures crashing down, as we have seen with the sub prime mortgage collapse in the USA, leading to falling asset prices, rising unemployment and even recession”

2. We opposed in Parliament Labour’s regulatory reforms for banks at the time they put them in in 1997 and reminded people why in 2007:

P14 “We are concerned over the division of responsibility between the FSA and the Bank over banking and market regulation….We think it would be safer if the Bank of England had responsibility for solvency regulation of UK based banks, as well as having the overall responsibility to keep the system solvent. Otherwise there could be dangerous delays if a banking crisis hit, with information having to be exchanged between the regulators and there might be gaps in each regulator’s view of the banking sector at a crucial time, when early regulatory action might have spared a worse problem.”

3. We advocated better control of debts and deficit, and itemised the wider state debts which Labour did not report.

P15 said “ We believe that governments should not as a rule borrow to pay for current spending but instead should run healthy current account surpluses in the good years of an economic cycle, so that some latitude is possible in weaker years. We also believe there should be a limit on the total borrowings of the public sector as a percentage of national income……..borrowing is simply deferred taxation, which ultimately will have to repaid by taxpayers with interest.”

P14 “Under Labour there has been a rapid build up in debt, and official figures show the UK’s public sector net debt at £497.7bn (April 2007)….the true extent is almost three times this stated amount”

4. We advocated strict controls over reporting and capital adequacy for all banks, the opposite of saying we wanted to deregulate deposit taking institutions.

P59 “We agree that institutions which take clients money and place it on their own balance sheet or mix it with other funds, should have to meet capital adequacy requirements, and strict reporting requirements. “ Our deregulatory proposals were elsewhere “there is not necessarily a good reason why a regulator should have to be involved in product design and marketing for rich and sophisticated investors”

We decided to use understated language as a responsible opposition. On this site I myself used stronger language to explain how the Bank of England and government could bring on a crash if they did not change policy, and pleaded with them to take action to stop the crash.

On July 5th 2007 I wrote: “So far the general view is that the sub prime mortgage market (in the US) will continue to be in distress, but these problems will not spread. However a similar pyramid of debt has built up around company borrowing….The Central Banks can literally go for broke and hike rates substantially. They will trigger a major decline in corporate debt as well as sub prime lending. …The worst case would be that they do to the USA and the UK what the Japanese authorities did to Japan in 1990, leading to a decade of recession or little growth”

and on July 26th : “On 6 July I warned about the debt mountains built up on both sides of the Atlantic during the decade of easy money, and forecast that the central banks would carry on tightening, leading to further collapses after the sub prime crisis……. I assume the Central banks will back off quite soon. If they don’t it could be quite a collapse”

There were many other blogs along these lines explaining how to stop the crash by intelligent central banking and government intervention.

Angela Merkel is a skilful politician who has stayed at the top of German politics for a long time. This is not the same thing as a strong Germany. She inherited a tradition of making compromises for the Euro and the EU, and has made many more as the contradictions and tensions of the Euro scheme have come to the fore. Judging by what Germany has done on a whole range of “red lines”, we must conclude that Germany does give in to pressure if the cohesion of the Eurozone or the EU is under attack.

The long retreat from German principles began under Mrs Merkel’s predecessor when Germany allowed Greece and other countries that came nowhere near meeting the criteria to join the Euro to be part of the project. Under Mrs Merkel Germany has conceded over the issue of making all member states keep their budget deficits below 3%. Only recently again France has been allowed more leeway. Germany unsuccessfully opposed lending large sums to banks in trouble in the zone. Germany gave in over the huge programme of quantitative easing. Germany has been persuaded to accept a currency that regularly devalues against the dollar, yuan and sterling instead of maintaining a strong currency as Germany always argued for.

The concessions have been biggest over Greece. Germany stated strongly that Greece would not be able to borrow a Euro more unless it stuck to the loan agreements and continued with budget austerity and economic reform. Instead in recent months the European Central Bank has made available large new sums to Greece. This is money some commentators think the ECB and its main shareholders including Germany will not get back. The European authorities have also allowed Greece to borrow more through Treasury Bills to pay for the costs of government. Meanwhile Greece refuses to cut pensions more, to implement labour market reforms, and to cut the deficit as much as the European authorities want. Now there is talk of Germany relaxing the requirements for reform to allow new longer term loans to start to supplant the weekly doses of more lending from the ECB.

It appears that Germany, like the ECB, is extraordinarily flexible. It appears that the budget deficit targets, demands for economic reform, limits on borrowing and requirement for a strong currency mean little, and all can be changed if a country digs in enough. Mr Cameron should take note. It appears Germany wants to keep the UK in the EU. That means we have plenty of bargaining power, given Germany’s well known flexibility. If Germany can be flexible on printing money, on lending more to countries that have already borrowed too much, and on having a weak currency, I am sure she could also be flexible on how many EU decisions the UK just has to accept. They can carry on selling us cars whatever happens, but at risk for them is the UK’s large financial contribution to the EU.