We read of a row between Vince Cable and George Osborne over the ideas in the Beecroft Report. Yesterday the government at last published the document, and told us they are getting on with implementing 17 of the 23 proposals, and are consulting on the  others.   The Department putting them into place and consulting on the rest is of course the Business Department led by Dr Cable.

                 Labour had their way with an Urgent  Question, so urgent that no-one in the House had yet seen the full report. The Opposition just bashed away against something they called “fire at will”.  They seemed to think the government was about to introduce that for all employees,  destroying in one simple blow all employee protections.

                    The Minister answering tried to explain that the Beecroft proposals in this area would only apply to firms with under 10 employees, and  did not amount to fire at will anyway. Much employee protection law is supported by the government, and much is mandated by EU law, making it impossible for Parliament to change it without a new relationship with the EU being established first.

                    Labour pointed out that employees and Unions had been most co-operative at Ellesmere Port to secure the new Vauxhall investment recently announced. They said it showed there was plenty of flexibility already. The government replied that they agreed, but  it was still a good idea to look at what it is that puts a lonely entrepreneur off employing their first employee. Perhaps too much employment law and too big a penalty if you get the hiring wrong  does keep more people on the dole and mean more businesses never grow beyond sole traders.

                            Sensible Labour contributors agreed that to be competitive the UK needs a flexible workforce, and claimed that the last Labour government had recognised that. Sensible Coalition MPs said that employees need rights: the aim should not be to return to all powerful employers who can fire on whim or  exercise unfair discrimination.

                            There is plenty of scope to reach some agreement on how to make the employment of new workers by small companies more attractive to employers. It would be helpful in promoting recovery.

                                    I asked how much extra GDP we might get from the full Beecroft. The government said it did not know. I suspect it would be mildly positive, but  it is unlikely to be the game changer that tips us into fast growth on its own. That still requires action on issues like banks, credit and energy prices.

 

           BBC’s Analysis revisted the issue of Greece leaving the Euro zone last night. It was a topical and sensible decision to make such a programme. It is just a pity it was so poorly researched, offering so much time to people who think the exit of Greece is both illegal and likely to prove disastrous.

           The BBC implied that leaving currency unions has been very rare. Why haven’t they studied the 70 plus exits since 1945? Why didn’t they just revisit their archives and discover how common it has been? Why did they say they could only think of the split of the Czech Republic from Slovakia where they also split currencies? Why didn’t they remember the break up of  the 20 member rouble zone? Why not the successful departure of Ireland from the sterling area? Why not the general break up of the sterling and French franc areas?

          The BBC made out that it would very complicated to switch money and contracts from one currency to another. If they had studied the large number of exits from currency unions they might have thought differently. If they had  remembered that all the same complications existed when the 17 member states currencies were scrapped on entry into the Euro, yet this happened easily. I do not recall them issuing such warnings when Germany scrapped the DM and France the franc.

             They gave great air time to the notion that it would be illegal to leave the Euro. This, they argued would mean Greece would have to leave the EU, and then would find it more difficult to trade with the EU. Why should either of those two things happen? Presumably the rest of the EU would still want Greece to buy their products.  Greece and the rest of the EU would still be bound by international trading rules.

                     Why would they seek to evict Greece from the EU if all agreed she just needed to withdraw from the Euro and did not also wish to leave the Union? Why didn’t the BBC consider the proposal I have published for Greece to become an “applicant” to rejoin the Euro, but only if and when she met all the requirements in terms of state debt, inflation, currency variation and budget deficit? There are 10 EU members who are not Euro members – most are so called applicants to join. This gives plenty of legal cover. When did France and Germany last worry about the legality of mechanisms to fix the Euro? What was the legal base of the first EU bail out fund?

               The BBC’s journalists made heavy weather of the relatively straightforward idea that Greece should have her own currency back. They did cite the view that maybe Greece would export more from outside the Euro, but gave this little voice and made it sound silly because they went so heavy handed on the legalities and complexities. Time to think again, BBC. The UK public does not share your EU enthusiasms, so it is time to be more careful in your reporting – especially over the facts which you mangled last night on the break up of currency unions.

 

              In any relatively free society some people will earn more than others, some will save and invest more and more wisely than others, some will be richer than others. The system only works if a way is found to use the surplus the rich generate for themselves to assist those who are not so lucky or successful. There are many ways this happens without most people noticing.

                  Some socialists think the only way to do this properly is to tax the excess away from the rich and give it to the poor through the tax and benefit system. A lot of this happens in all advanced democracies.

                   An even more important way in many countries can be  through the banking system. Rich people deposit their surplus in the banks. The banks use these deposits or savings portfolios to lend money to others who need loans to grow their businesses or to meet their living and running costs.

                                  Rich people recycle a lot of their income by spending more. This creates jobs and opportunities for others, who in turn may become rich on the back of those flows of income to them.

                    So it has to be with countries in a currency union. When  you have a rich country like Germany, sharing a currency with a poorer country like Greece or Portugal, ways need to be found to send the surpluses from the rich to finance the poor.

                       One of the main problems for the Euro area is the failure of these mechanisms to work sufficiently or at all. Conversely, in longer established currency unions like the dollar or pound areas backed by single countries, there are well honed mechanisms to recycle the cash.

                         Most currency unions have ways of taxing the richer parts more, to send extra cash to the poorer parts. In the UK poorer areas receive large cash infusions to pay  nationally established welfare payments, to fund their health, education and other public services at higher levels per head than the richer areas, to direct regional grants and loans, and to send substantial transfers through local authority finance.  There is very little in comparison within the Euro area. EU regional policies transfer a small fraction of the sums transferred in mature currency unions by central state action.

                      Currency unions also have integrated banking systems. People in the richer areas deposit more money. People and businesses  in the poorer areas may draw more out proportionately, if they meet the tests. The banks can acts a means of recycling from richer to poorer, or more accurately from surplus to deficit companies and individuals who can meet mortgage and loan requirements.

                        Labour mobility is a crucial element in a successful currency union. People can move from the areas with fewer jobs or with lower paid jobs, into areas with higher pay and more opportunity. Labour mobility in the Euro area is much more limited owing to language and other barriers.

                          The danger in many of the ideas proposed to solve the EU’s problems is that they might just encourage still more labour mobility of the talented and successful to destinations outside the EU altogether. The Germans meanwhile complain that their bank surpluses are being sent to the poorer areas via the European Central Bank. They resist any use of a common credit status to allow the poorer areas to borrow more. They block attempts to tax Germany more to pay the bills in the poorer countries. As a result there is insufficient transfer of funds to make the currency area work, and insufficient mobility of labour owing to linguistic and cultural barriers.

 

 

          Let us assume Mrs Merkel is telling us the truth. She probably did say on her Greek phone call that the Greek General Election was in effect a referendum on the Euro, not that she wanted them to have a referendum on the Euro as well as a General Election.

             It is still quite a change from her position last year, when she with France helped push a Greek Prime Minister out of office for daring to propose a referendum on European matters. These advocates of greater European integration have usually been against referenda, or have demanded re-runs when they get the “wrong” result.

                  The change of stance is presumably to try to force the Greek people to vote for a pro Euro pro EU loan package government. Mrs Merkel thinks the Greek people will do the right thing and vote the way she wishes if they understand that to do otherwise would mean their early exit from the Euro.

                 She might find meddling in other people’s elections from afar has unforeseen consequences. Greece may be wrong to think they can vote for the Euro and against ther loan package to sustain it. If they persist in this anti Merkel stance, there will have to be a face down between a new Greek government and an old German government over this very point. It is by no means clear who will win. Germany has in the past always backed down over more money and laxer rules.

 

                  In all this Euro and EU confusion, democracy is the loser.

                   Governments need legitimacy in a relatively free society. Governments need to gain and hold the consent of the governed.  In mature western democracies the act of winning an election usually gives a government legitimacy. The government can hold and strengthen that if it governs wisely. It gradually loses it if it governs badly, but normally retains sufficient consent to govern until the following election.

                A really bad elected government can reach the point where popular protest makes its task difficult. Losses of support amongst its own MPs as some of them come to  represent the popular antipathy to the government can stop it doing things it wishes to do. A vigorous opposition can come to have more credibility than a tired government, with the public seeking influence with the “government in waiting”.

                 In Euroland the act of winning an election may now not buy that same legitimacy that used to pass on victory to the victor. Indeed, in Greece recently, the established parties all lost votes as the people no longer have confidence in the system. Any responsible Greek government had to to reflect the popular will that they stay in the Euro, but that means accepting conditions the Greek people do not accept. Any responsible Greek opposition should have said the only way out of the policy restrictions the Greek people dislike  was exit from the Euro, and offered that package. Instead, the EU has generated dishonest politics, with oppositions proposing improvements within the EU framework that they are probably powerless to achieve if granted office. Governments still often pretend to be in charge, when many of their decisions are determined in Brussels.

                     The threat the Euro posed to democracy and accountability was always obvious, but was ignored by its proponents. I wrote in ” Our Currency Our Country” (1997)

“Member states wouldn be severely constrained in their  budgetary policies…Ministers would be left defending spending cuts and tax increases which they had not wanted and probably disagreed with. The strikes and protests in France in 1995 are a sign of things to come.”

and in “Just Say No” (2001)

“The single economic policy of the Treaty is incomplete. It is all about exchange rates,money and inflation.It ignores jobs, incomes and output. If pursued to its conclusion, it could easily alientate the voters of Europe who think jobs and incomes are more important than financial matters”

The unpopularity of “austerity” is not surprising. The truth unfortunately is that in the troubled countries of the EU state spending is far too high and state borrowing unsupportable. There is no choice but to cut the excess spending of the state, whether they stay inside or outside the Euro. There is no quick fix by borrowing more to “stimulate growth” – excess state borrowing and state spending has been tried to years and has now induced recession.  They do need private sector led recoveries, which will need realistic tax rates, sensible regulation, and a banking system that can finance new projects.

 

            If Greece leaves, many pro Euro spinners will claim they were a victim of the markets. The markets are only doing what they are doing because  of the way people in the Euro area  are acting.

            Every Greek or Spaniard who transfers their money out of a Euro bank account in their country to a safe haven or into a foreign currency  is helping undermine the Euro. If no-one did that, there would be no market worry about a run on the banks, no reduction in bank deposits.

            Every Greek who decides to trade in cash to   evade Greek taxes is helping undermine Greek state finances. Every Greek public sector worker who understandably resists cuts in spending makes it more difficult for the Greek state to live within its means. If Greeks generally paid more tax and demanded less public service there would no state debt and deficit problem.

               Every German who says this is not our problem, who says they  have no wish to pay any more, is behaving understandably but is thwarting the security and understanding of the weaker economies. They were expecting German support and rescue.

               Many of the people will claim they were a victim of the politicians. That is always a popular explanation. In one important sense they are. It was the political class who drove them into the Euro, and the political class who told them it would work just fine. In another sense they are victims of their neighbours.  If you vote for the vision of the Euro, you have to live with its many problems and imperfections, and do your bit to help offset them. That means paying the high taxes the scheme needs, accepting financial obligations to all parts of the zone and keeping your money in your  home banks whatever the rumours.

 

            Yesterday David Cameron made a speech on the economy. In it he pointed to two new departures. He has “asked the Treasury to examine what more we can do to boost credit for business, housing and infrastructure”. He also said that more reform was needed in energy: “It means recognising the risks to the recovery from rising and volatile energy prices and working together to ensure energy security”.

              We have often discussed how to establish competitive banks with money to lend for good projects. Today perhaps we should consider how we might have a more plentiful supply of attractively priced energy. That would be good for business, and good to tackle what Labour called “fuel poverty”. All too many individuals and businesses have experienced a big squeeze in recent years from the ever rising energy bills they have faced. High inflation, with energy an important  part of it, has squeezed family budgets and cut demand for goods and services as a result.

                 The US industrial recovery is better than the European. There are two magic ingredients.One is more working banks with money to lend. The other is cheap energy. US gas prices are around one third of the European levels. The US has moved quickly to exploit shale gas. It has found a lot of it, and is pressing on with development of the resource. Cheap energy turns more factories. It boosts heavy energy using indistries like steel and chemcials,glass and ceramics.

                The UK should recognise that pursuing a single country approach to limiting carbon dioxide emissions may not help the planet as greens intend, but it can certainly hinder UK industry. If we succeed in shutting down or preventing new energy using industries here by charging too much, we will import the products from overseas where the energy will still be burnt.

                  The UK has good reserves of gas, shale gas, coal, and oil. The government needs to set tax rates and a licensing regime which allows expansion of output at affordable prices. It started to move in this direction with tax changes in the most recent budget.  Mr Cameron reflects the mood of the country when he says he wants to cut our dependence on imported hydrocarbons.  As more is discovered in the UK, and more produced, so gas prices should come down.

                  The Energy Department is also well aware of the need to prompt more electricity generation capacity. The cheapest is combined cycle gas production. They have licensed more capacity, but need to investigate the build rate. The current regulatory framework seems to be delaying or deterring the build of these much needed plants. The relative cost analyses suggest that nuclear is much dearer than gas, unless you assume large future increases in the gas price. They also show that many renewables are also expensive. These statements are based on figures prior to putting in penalties for carbon dioxide emissions.

                The Energy Department has started to cut the subsidies for some renewable technologies. There is a good argument for doing so. The cost of installations for solar, wind, and others is coming down as the volume of these methods grows. At the very least the subsdies should be cut to avoid super profits as the capital costs fall. The subsidies are paid for by the consumers.

                 In a very competitive world a country wishing to power an industrial revival needs to keep its power costs down, as they are such an important element in total costs. We also need to do something about domestic fuel prices, as they are one of the main reasons why inflation has stayed high and why real incomes have been falling.  Energy is a very managed market. The government needs to provide the licences, the planning permissions and the pricing and subsidy regime that helps the consumer more.

 

 

             The usually reticent eminence grise of the Conservative party, the 1922 Committee, just cannot keep itself out of the news at the moment.

               Yesterday was election day, when Conservative backbenchers could choose the people they wish to represent them on the 1922’s Executive Committee. The committee meets weekly, and meets the Prime Minister regularly to update him with backbench opinion. It might have to lobby for more time for backbench debates, or warn that a chosen Coalition measure might not get the full Conservative support it needs. They might need to arrange meetings for Cabinet members to consult colleagues before doing something, or for Ministers   to convince colleagues about something they have announced. It is not a policy making body or cabinet. The committee allows backbench Conservatives to let off steam about aspects of government, without their comments making headlines.

               Individual MPs usually put up for election. They might write a personal letter saying what they wish to do in the job to each elector. They might talk to a few colleagues to ensure a reasonable level of support. Various MP dining clubs might discuss which of the various candidates would be best. That was as exciting as it got.

              This time there were  letters from a slate of candidiates saying they were all part of the 301 Group. I was also able to read a lot about them and their platform in the press, as they decided to brief the newspapers, which is why I mention it here.

               The agenda is apparently to secure the election of 301 Conservative MPs in 2015. 301 is the magic number, because they assume the Commons will be down to 600 MPs in total by then, following the current  boundary review. It’s an aim  that no Conservative MP would disagree with, unless to say that maybe the party should aim for a more ambitious number to be safe. Their preferred method is to up the attack on  Labour, and to use the official soundbites more regulary and loudly.

                There are dangers increating a campaign group with a press arm. This time it has not led to anyone running an alternative public  slate on an alternative manifesto. Some of the 301 ers have been elected, mainly because they are interesting people and it is a good idea to have some of the 2010 intake on the executive now they have been in the Commons for a couple of years.  All the Executive members now need to show tact and discretion, whilst speaking truth to power in private as often as it needs doing. As we have discussed here before, to win an election a government needs to demonstrate   success in its policies and actions, as well as speaking convincingly about the dangers of  the alternative.

 

           The French President’s plane was struck by lightening en route to meet Mrs Merkel. Was it some music of the spheres, some intervention of chance or the gods, to herald the crisis Euroland now faces?

             They needed all the time together they could get, to mend fences, and work out how to respond to the failure of the Greek politicians to form a government.  They needed time to discuss how the EU should handle the forthcoming Greek election. Should it be made a referendum on belonging to the Euro, with the public told the conditions that are attached? Or should the EU keep out, and let all parties pretend there can be a renegotiation of sorts, that the terms of membership and of the loans are flexible?

                    Recent Euroland elections have underlined how little power  old and the new governments have within the semi  disciplined framework of the Euro. Government A is thrown out for playing by the rules, only to be replaced with Government B  who also has to play by the same rules and offer the same policy. Membership of the Euro has been lethal for incumbent governments in recent months. Now Mrs Merkel herself faces voting meltdown, as Germans too grow weary of the current system.

                    Meanwhile, in the real world of the technocrats, Central banks and bureaucracies of Europe, there are grave nagging doubts and fears. Germany is worried that so much of her money has been deposited by commercial banks with the European Central Bank. The ECB has lent this  on to the struggling banks elsewhere in the Union. The ECB now makes the interbank market for many, as the markets themselves are too apprehensive to work well. Technocrats worry where the next government will come from in some countries to carry on approving and passing the necessary measures to comply with the plan.

              German taxpayers are worried about the potential liabilities under the various bail out funds, and many dislike the idea that the southern states will now flex the German credit card more. Meanwhile southern resentment and disappointment mounts, as their economies fall.

               The new leadership of Merkel as modified by Hollande, will probably talk more about growth – which is much needed. They will probably offer a few extra spending programmes from the European Investment Bank and some under raided EU budget headings. Meanwhile, the true battle of the gods will be the battle over the banks. Can the ECB keep on providing enough money to the banks in the weaker areas? Will the weak banks hold on to enough deposits? Will the rescuers have enough money to pay for past losses? It all gets much dearer and scarier if the southern economies continue to decline. That will mean lower asset values and more exposed banks. If the Greeks act irresponsibly in Euro terms they threaten the structure without willing the answer, their own exit from the currency.

                  The latest phase of the Euro crisis is the battle of the banks. Mrs Merkel and Mr Hollande have to be more than passive bystanders arguing over a  Growth Pact.

 

 

            Yesterday I joined in the Queen’s Speech debate on the economy. I wanted to draw attention to the gathering storms over the Euro. Time was limited, so let me add a few points.

             Yesterday  it seemed unlikely that Greece can form a government. New elections are likely to produce a government even more strongly against the current EU/IMF loan package and austerity requirements. If a government can be cobbled together at the last minute from the present Parliament, it will have to go to Brussels to request a change of policy.

              There are three possible outcomes following the formation of a new Greek government demanding a change of tack. One is that the EU/IMF say they can give no more. They have twice negotiated this package, and have accepted one large write down of Greek state debt owned by banks and other private sector individuals, companies and funds. They could take the perfectly sensible view that allowing another lapse in conditions of the loan would simply lead to other countries demanding the same treatment. It would undermine the discipline the zone needs, and would send a signal to all that there is no need to meet solemn requirements entered into. Either Greece has to back down and try to do implement the agreement, or they need to move  quickly to arrange an exit from the Euro on this option.

               The second possibility is we have another temporary fix. The EU/IMF would heave a sigh and give Greece some formula to relax the demands a bit. Maybe more debt could be written off. Maybe the timetable for meeting the requirements for reform and budget deficit cuts could be extended.  The ECB might issue yet more money to other worried banking systems to support other states in trouble. Just enough cash would be released for Greece to pay the basic bills and stave off full bankruptcy.  It would remian a matter of time before we had the same crisis again.

              The third possibility is the Euro area moves more swiftly to fiscal union, with the richer areas accepting their responsibility to send much more money by way of transfer payments to the poorer parts like Greece. It is difficult to believe Germany would be willing to do this. Mrs Merkel has just suffered a bad regional election defeat and is unlikely to want to have to tell her electors in the run up to the German General Election next year that they are going to have to pay a lot more tax to subsidise the weak parts of the Euro zone.

              There is a paralysis in decision making at the heart of the zone. Just as this phase of the crisis blows up France is undergoing a major change at the top. The new central partnership of Merkel/Hollande is still  to be developed. Mr Hollande will be pressing his domestic demands, fresh from the French election trail, at exactly the moment both need to concentrate on Greece.  More people are now saying Greece has to leave the Euro, but there is still no clear sign that that has become the prevailing view of the main players. To do it they will need speed, confidentiality and united purpose. They will also need a Greek government to deliver the Greek end of it.

               It seems most likely we are in for another round of brinkmanship and temporary expedients. The worry some commentators are now expressing is that talk of Greek exit could lead to yet more money being shifted out of Greek  bank accounts. The more the political leadership of the problem drifts, the more damage the markets can do. The drain on Greek bank deposits so far has represented a further tightening of cash and credit for the Greek private sector, at a time when that sector needs more money to grow to start to ease the pain.