There is a big battle going on over the future of the Euro. If the easy money people win, the issue is will Germany stand behind all those bonds the ECB buys up? Will German taxpayers after all be expected to stand behind Greek and Spanish banks if they get into trouble? Will the Euro architects find a way of allowing newly created Euros to find their way, if indirectly – into financing the deficits of less fiscally prudent countries within the zone?

Indeed, the question is how can Germany avoid being dragged in to Quantitative easing if the zone as a whole decides on that route? By virtue of being the largest shareholder in the ECB, Germany will become the proud part owner of a wide range of government bonds from other countries in the zone as the ECB seeks to do what the Fed, Bank of Japan and the Bank of England have already done. If those bonds subsequently lose money, Germany surely loses as well.

Some say they have found a way round this dilemma. Why not, they say, empower the individual national central banks of the zone to simply buy up their own government debt, and to take the losses if losses there subsequently are. However, the individual central banks do not have the power to create euros. So presumably they will have to borrow the euros from the ECB to buy these bonds. What if they get into trouble? How do they repay the ECB? Surely there has to be recourse by the national central banks to the ECB, so in the end Germany will be pushed into supporting the whole edifice.

There is also the little problem of the Swiss franc. When the Swiss authorities wisely decided to quit their link to the Euro, their currency shot up. Markets revealed just how depressed the Swiss unit was by its forced association with the Euro. Imagine what the value of the DM would now be against the Euro if Germany had done what Switzerland did, and declined to actually join the Euro.

The Swiss event and the agony of QE reveal the continuing strains of the Euro project. If it is to work in the longer term Germany has to put her tax revenue and banking system behind it. She is still reluctant to do so. It is a bit like London refusing to stand behind the rest of the UK – an absurd idea which would damage the pound greatly if anyone tried it.

750 years ago today England made an important democratic advance. The so called De Montfort Parliament met at Westminster. It was not the first Parliament, and it was the idea of a rebel government that had outmanoeuvred the King. They invited two knights from each shire and two burgesses from each important town, as well as nobles.

This was far from the first time powerful people in the land had instituted formal discussions with the King, the executive government. After all, on June 15th we will celebrate 800 years since Magna Carta. That too was a negotiation between Crown and powerful forces in the country. That established the idea of more meetings between Crown and barons to keep the King honest and to ensure follow up to promises. Subsequently Parliaments of varying composition had been called.

The central underpinning of this proto democracy was a simple one. Those who paid tax and offered allegiance to the King, should be able to seek redress of their grievances before granting more money. They should look to the Crown to offer impartial and fair justice for all, so disputes could be sorted out and criminal conduct dealt with in an independent and acceptable way.

Parliament grew from these origins. There was a strand of work gradually widening the franchise, until all adults came to enjoy the vote. There was another strand of political action, tightening the grip of Parliament over taxation, so monarchs first had to deal with Parliament to get supply, and then became figureheads as Parliament took over the administration of the executive and its budgets.

This impressive story of the growth of democracy was interrupted by our membership of the European Economic Community. It is still causing troubles, as there is no proper redress of our grievances with the EU before they take our tax revenue. There is no easy way of removing the EU government if it no longer pleases us the voters. That is why we need to have a constitutional debate about our relationship with the EU, and need to sort it out. This year of anniversaries reminds us of how precious our early development of freedom under the law, habeas corpus and Parliamentary representation was. It also reminds us how it has been damaged by EU administration and jurisprudence.

Labour’s attempt to make a crisis out of the modest slippage in the English NHS seeks to ignore the far worse performance on waiting times in the Welsh NHS which they run.

Labour of course do not describe the fact that nearly one in five people in Wales have to wait for more than the target four hours for attention in A and E as a crisis. However they do think that if one in ten have to wait more than four hours in England that constitutes a crisis. This language is designed to politicise the NHS, and makes running the English NHS a bit more difficult.

Politically it is a weird strategy. Labour wish to go through a whole UK General Election talking about the English NHS. That means they have no message for Scottish or Welsh voters at all, as they hope to avoid talking about NHS Wales which they run, and of course the SNP and the Edinburgh Parliament run NHS Scotland. They wish to highlight anything that is going wrong, inviting comparison with Wales, and with their record of running NHS England in the previous decade. It reminds us of the disasters at some hospitals, with major lapses in care standards.

A more honest approach would be to confess they have problems and a worse A and E performance in Wales, and set out how they will remedy this. It might also be wise to talk about some of the topics in the General Election which apply to all of the UK, and not just England. It is an irony that Labour do not understand their own devolution settlement and what it means for General Elections.

The more I think about the halving of the oil price, the more significant it seems. The scale of the change makes it difficult for commentators and forecasters to think it all through and understand the magnitude of what has happened so far. There is reluctance to simply assume that in future oil revenues will be under half the levels of last year. Prices might go up again. Some of the oil is under long term contract or special arrangements which may limit the price damage a bit. Some of the industry’s commitments to put in new investments and sustain programmes of maintenance and development cannot be easily cancelled in the short term.

However, until the price rises again the safe assumption to make is that oil revenues will be well down. This means the cancellation of a large number of new projects to find and exploit oil in places where it is dear to find it and get it out. It makes the development of shale gas provinces in Europe a less immediate prospect. It means delays and cancellations to new projects in the USA. It means bankruptcies or refinancings of projects recently completed in high cost areas. It means a gradual reduction in future output to bring the market back into balance, barring some crisis to the output of one or more of the major oil producing countries or areas. Banks may need some of their new reserves to deal with extraordinary losses on oil financings.

It also means sharp contraction in state oil revenues. This will be most marked in Venezuela, already struggling with debt problems, and in Russia where oil dependence by the state is high. It also changes the once easy budget positions of various Middle Eastern countries, who have started to spend up to the revenues that oil at over $100 a barrel gave them. It will cut the oil based revenues in the UK more rapidly than the decline in output was already doing. Do not expect any PRT revenue now, and expect a big fall in oil based corporation tax receipts in a year or so. Scotland’s contribtion to UK revenues has just taken a large knock, just a few weeks after the SNP assured the people of Scotland that Scottish oil could buy them a better future.

The bad news for the few is offset for the world by the good news for the many. This level of price fall is a big boost to the large consumers like China, Japan, India and the Euro area. It takes the inflation pressure off as well, allowing easier money for longer. In the UK it is good news for the government. Although the government cannot claim it brought about the price fall by its actions, government gets blamed for anything that goes wrong on its watch and gets some benefit from what goes right, even where it is not the cause. Labour’s cost of living campaign does not look on the money now real wages are rising. Petrol at a little over £1 a litre- maybe soon at below £1 a litre – is a great refutation of Labour’s crisis talk. The banks may lose more on energy accounts, but some of their other loans may now be easier to service and refinance as many companies benefit from lower energy prices.

Overall this is good news for the world economy and good news for the real incomes of many.However, if these prices persist we should not underestimate the possible damage to the energy sector. They face, at least temporarily, the prospect of income cuts, job losses, and refinancings as they struggle to rebalance their busiensses at very different price levels.It will also change the balance between nations, putting Russia under more severe financial pressure and reducing the incomes of the Middle East.

I am proud of western values. These for me include the idea that every person matters, and we should all enjoy the right to certain freedoms. We do not think some people are of greater worth than others by dint of birth or acquired status – all must be equal under the law. We think that all who face allegations of criminal conduct deserve to be told of the accusations and have a fair trial to assess the validity of those claims. The basic freedoms in Magna Carta, topical this year, should unite the transatlantic brothers, as they are part of our shared heritage. If people are thought to be immediately dangerous our system allows for their detention pending trial with charges known.

It would be good to think that the two leading ancient western democracies, the UK and the USA, can now do some soul searching on how we preserve and enhance our system and our beliefs in an age of terrorism, asymmetric warfare and fundamentalist revolts. Mr Cameron did have to raise again the issue of Guantanamo Bay. It was no great advert for western freedoms and liberties. The argument that if people are bad enough they deserve to be locked up without trial does not fit neatly into our belief that the accused should stand trial to establish his guilt, and only if established then face an appropriate punishment. To those who say it is naïve to give to violent thugs the same rights as to other citizens, I say no-one said it was easy defending freedom, but who is to say who should be locked up without trial? And what if they locked up the wrong people?

It would also be good to think that instead of considering how best to pursue further military conflict in Iraq and maybe other places, the two great democracies also paused to consider what good has been achieved by recent past Middle Eastern military interventions. What can be learned from the collapse of law and order in Libya and the absence of effective government, once a nasty autocrat was successfully removed by force? What has been learned from the long and difficult campaigns in Afghanistan? And what effects have drone attacks across the borders into Pakistan had on those the allies wish to defeat? Can Iraq survive and prosper as a united nation, now Sunni,Shia and Kurds wish to fight each other for control of parts of their country?

The west was rightly horrified by the deaths in Paris at the hands of terrorists’ guns, and went on a peace march to show solidarity against the evil ones. The west continues to be appalled by the barbaric actions of ISIL in Iraq and Syria, and offers limited military help to local forces fighting ISIL on the ground, seeking targets to bomb from the air. The west condemns the even greater brutality of Boko Haram in Nigeria( as measured by numbers of reported deaths in recent attacks) but does not intervene militarily there, giving limited advice and training to Nigerian forces when requested. Which of these responses is the best? Why are they so different?

If a young thug travels from the UK to Iraq to join ISIL our treatment of him changes. All the time he is plotting murder and mayhem in the UK we proceed by collecting evidence with a view to arrest and trial. If he reaches Iraq and plans murder there, he may be blown up by a smart bomb sent to his address or attacking a vehicle he might be using. Again we need to think through our varied responses in these difficult times.

This week has seen two important developments in the evolution of the Euro. Senior European lawyers have given guidance which many see as indicating the ECB does have the power to create new money to buy up government bonds in the zone, despite heavy German opposition. The Swiss franc, which was linked to the Euro in a desperate effort to stop people fleeing the Euro to buy the Swiss franc has given up the struggle and is now being revalued against the weakening European currency. It rose by 13% on its first day of freedom, despite imposing a negative interest rate of 0.75% on deposits, such is the enthusiasm for people to switch out of the Euro.

The lawyers were not as clear as some in the press would have you believe. Whilst deciding that the ECB did need considerable autonomy in the field of monetary policy, and implying this could stretch to bond buying programmes on a scale to the Bank’s choice, they struggled more with the clear Treaty requirement that the Bank should not simply print money for European governments to spend.

Their convoluted argument accepted that the Treaty does ban lending money directly to governments in the zone. They then said two conditions had to be met to allow something like it. The first is the ECB cannot be involved in conditions and negotiations over new borrowings. The second is that the Bank cannot buy new bonds issued by a government to cover new spending, but can buy bonds already issued from someone else. This is a nice distinction which can easily break down in practice. If Government A is selling new bonds of ten years duration, and the Bank is buying old bonds also of ten years duration at the same time, there could easily be a simply swap by an intermediary from the older bond to the new one, so the Bank is very close to simply creating money to finance Government A’s expenditure. The lawyers said there had to be some timing differences and there had to be clear price formation on the new bonds before the Bank bought them up, but this still leaves some doubt on the wider issue.

However qualified the judgement may be, the spin is clear. The mood is shifting away from Germany towards allowing quantitative easing, which is an indirect way of printing money to pay for excess public spending over tax revenue by making it much cheaper and easier for government to borrow to spend more.

The loss of Switzerland from the wider area is no surprise. It is good that Switzerland still has the freedom to run its own currency, though unfortunate that it is so attractive to investors that it suffers from runs into it from the Euro with the danger that it drives up the value of the Swiss unit too much. The Swiss can’t win, either by staying within the wider Euro ambit or by leaving, but just as with the ERM the pressures within a managed European system become too great to handle.
A much bigger game is afoot. Germany may be being drawn into a lower value Euro kept going by money printing. Whilst single country currency areas have managed this process, within the Euro area it implies dragging Germany more into the role of paymaster, standing behind more of the debts of the zone. It is not what Germany had in mind. Meanwhile the delay in loosening money and the refusal to break up the zone and have economic policies which work better is dragging Euroland back into low growth and recession, and is generating mass unemployment.

These two simple ideas still seem to cause trouble for some politicians and political commentators. Let’s have another go at explaining where we are.

The UK has a large state debt. This is the accumulated borrowings taken out by successive governments to spend more than they collected in taxes over many years. These borrowings do not suddenly have to be repaid. They are regularly refinanced or rolled over, as bonds issued become due for repayment. The UK tends to have longer term borrowings than many other countries, and can currently borrow very long at low interest rates.

The rate of increase in these borrowings has been very fast in the last two Parliaments. Labour doubled the debt, and the Coalition has increased it by around 50%. This is a matter of concern. Whilst so far it has been easy to raise the money, the amount it costs to pay the interest on the debt builds up to unacceptable levels if a state simply carries on borrowing at an excessive rate. This government has benefited from interest rates going lower and staying lower for longer, but even so, the interest costs are rising. Most people in the debate – including Labour – believe there has to be some limit on the rise in interest costs. One day interest rates will go up again, and then the progressive impact on the public finances will be uncomfortable as new debt is issued at ever higher rates.

The deficit is the annual increase in the amount borrowed. It is the amount of extra spending being undertaken each year which we cannot afford out of tax revenues. State borrowing is deferred taxation. Every year a government borrows it is saying to current taxpayers we will let you enjoy higher public spending than you are paying for. However, those same taxpayers and their children will have to pay the interest on the borrowings on top of regular spending in future years, and may at some point have to pay off some of the debt.

All the main parties in the election now accept the need to reduce the deficit. Labour says we only need to eliminate the deficit for current spending, and can carry on borrowing lesser amounts for investment or capital spending. The Conservatives say the whole deficit has to be eliminated in view of the debt mountain already incurred.

To do either of these feats requires a lower level of public spending and or higher tax revenues. Conservatives say that cutting public spending by 1% a year for the next three years will do the job. There is no need for tax rises. As the economy grows so more revenue comes in. Labour so far has not specified how much it wishes to achieve by tax rises, and how much by spending cuts.

This Parliament the deficit has been brought down by one third in cash terms or one half as a proportion of the economy, by moderating the rate of growth of public spending and by the VAT rise. Other tax rises like the CGT increase and the 50p Income Tax rate actually lost the Treasury revenue. This experience shows there will be no return to the 1930s, no hacking away at the NHS or other crucial services, to achieve the elimination of the deficit.

RECENT DEFICITS;

2008-9 £102.6bn
2009-10 £162.7bn
2010-11 £143.1BN
2011-12 £123.7bn
2012-13 £125,8bn
2013-14 £102.3bn

Current level of state debt (excluding pension liabilities) £1.5 trillion.

Mr Miliband is getting what he asked for. He wanted an energy price freeze for heating and lighting our homes. This is now happening.
In the meantime wholesale energy prices on world markets have been falling, as the price of oil falls. Mr Miliband now wants to see price cuts. The problem is, his former policy is getting in the way of the full price cuts we would all like to see.
Energy companies were persuaded to buy more energy forwards in response to Mr Miliband’s announcement, in case he won the General Election. Many of them locked themselves into relatively dear energy to avoid future rises, before energy prices started to tumble. Others are reluctant to cut prices yet, in case he wins in May and forces his price freeze on them. You can only buy forward easily for part of the two years, so have to worry about possible rises towards the end of the period.
It’s a good illustration of how well intended political intervention can make things worse. We now have energy companies locked into buying dear energy for longer, at a time of falling prices.
The long term answer to our dear energy problem lies in harnessing the various sources of cheaper power, moving away from expensive wind energy. The short term answer is for politicians to interfere less and allow the market to bring prices down, as is happening for petrol and diesel for our vehicles.

If you look at the total burden of debt in any given country you need to look at the borrowings of the state, of private individuals and of private sector companies. Inspection of total debt figures reveals that Euroland is considerably more indebted as a proportion of its income than the USA.(450% versus 300%). Japan is more indebted than either (600%). Ireland leads the list of highly indebted countries. (1000% GDP). Smaller countries with large banking sectors like Switzerland also tend to have apparently high leverage, as the bank balance sheets have a big impact on the national figures. The UK is more in line with Euroland, but has a better growth rate and a larger financial sector to assist paying and to explain the figures.

Household debt in the UK is below the levels (relative to size) of Denmark, the Netherlands, Switzerland, Ireland and Portugal, but higher than other European countries. Overall private sector debt in 2011 according to OECD figures in the UK was similar to that in the US at around 200% of GDP, well below the levels of the Netherlands, Japan, Portugal, Belgium, Ireland and Spain.

Japan emerges as a highly borrowed country in both its public and private sectors. However, it has very little external debt which is always more problematic to service and repay than local debt. It also now owns a great deal of its own state debt following endless QE programmes, which makes it even easier to service, and enjoys very low interest rates. It means its high indebtedness has not been a problem and seems unlikely to become one anytime soon.

The high debt levels in some Euro countries is more of an issue. Under the rules of the Euro so far they cannot print money to buy back their own state debts. Tougher ECB control of their commercial banks also means they have to rein in private borrowing through the banking system. It is interesting that neither of these rules has resulted in a more lightly borrowed Euro area than the USA, for example. It shows how a lack of growth makes stabilising and reducing debt so much more difficult.

There is a new fear abroad. There is the fear of deflation gripping the world economy in its icy hands. So is deflation terrible? And is it likely? I suggest the fears are being overdone.

Deflation means a general fall in the price level of a country or currency zone, not a fall in some prices like energy whilst others may rise. Falling prices can then react to encdourage falling wages, which in turn can generate falling output. As prices fall so people hold off buying the inessentials, knowing they will be cheaper later. This in turn can induce further price falls as stocks hang heavy on producers which they need to discount to sell.

This is not currently happening in any major economy in the world. The world’s two largest economies, the USA and China, are both growing at satisfactory speeds, and both have low levels of inflation, not falling prices. The same is true of the UK. Latin America’s largest economy, Brazil, has the opposite problem. Inflation and currency weakness have been too pronounced, so Brazil has hiked interest rates and is forcing down the growth rate to try to get inflation down. India has quite high inflation and good growth. Russia has high inflation following a currency collapse. Even Japan, a country which had no inflation to speak of for over 20 years, now has some inflation mainly thanks to a tax hike, and a monetary policy designed to get price rises up to 2% per annum.

So the worry comes down to Euroland. There inflation is now very low, and may dip further into negative territory this year. Growth is very sluggish, and parts of the zone including Italy are back in recession. The fear of deflation is being used by the doves at the European Central Bank to encourage moves towards creating more money to ease the squeeze on the distressed parts of the zone.

Deflation is to be feared if a substantial fall in the price level is part of a general slump in incomes and output, as in the early 1930s. Even the Euro area is not on the threshold of such a development, barring a sudden whirlwind Euro crisis and collapse which is unlikely at the moment. Sharp falls in some prices like energy can provide a stimulus, especially for countries which import a lot of it. Price stability or even a small fall in the general price level need not mean recession or worse, as Japan, Switzerland and some others have demonstrated in recent decades. Deflation only gets serious when it is spurred by banking collapse or consolidation, leaving an economy short of credit for worthwhile new ventures.