Two arguments are constantly recited by the defenders of our current EU entanglement. Today I wish to deal with the more serious, the proposition that the EU is necessary to prevent wars in Europe.

This argument looks to some  at first to be attractive and well based. After all, say its proponents, Europe was torn apart by two long and damaging wars in the first half of the twentieth century. Who wouldn’t want to avoid that again? They go on, emboldened by the general agreement that European wars are a bad thing, to point out there has been no recurrence of major European war since the EEC and the EU were formed.

This is rather like arguing that we need to belong to the EU to keep horses and carts off our streets. In the nineteenth and early twentieth century our streets teemed with them, but since joining the EU they have disappeared.  The obvious rejoinder to both arguments is that membership of the EU has nothing to do with much of Europe being at peace, nor with how many horses and carts there are.

After 1945 the European world was radically changed in many important ways. West Germany was created as a democracy and decided to become a peace loving country with no aggressive military machine. Occupying forces also remained in Germany for the first 45 years after the  Second World War  to make sure the new Germany was a peace loving state with no means to invade others. The US army above all else acted as the new guarantor of European borders. It was also there in case any other country  decided against peaceful co-existence with Germany.

Gradually the major western countries all became democracies. They wished to pursue policies of peace and trade with the neighbours. They also had to live in a  world where the UN and the US acted as policemen for agreed borders drawn up after 1945. Plucky Belgium was never likely to invade France nor did the Netherlands have military ambitions in Germany.

With the UN, the US presence, NATO, and peace loving western governments, there was no danger of war in western Europe. The UK has not had territorial ambitions on the continent of Europe for more than a century. The UK did not need to join the EEC to remain peace loving nor to ensure it was free from invasion threat. Its membership of NATO and the UN gave it additional security, though this  was not needed against the members of the EEC.

I would turn the argument about the EU and war around and say there is more danger of a European war with the EU than without it. If the EU is about a peaceful Europe, why then does it wish to arm itself? What need has it of an army, unless it envisages military action? How could we be sure this force would only be for interventions outside Europe’s borders? After all, the EU has already attempted through member states to intervene in Balkan wars, and has expressed strong views on how the Balkans should be settled. Some would say EU interventions in  the Balkans did not always assist the peace.

I would be more willing to accept the argument that the EU is a force for peace if the EU stopped preparing for war.  I would find it less absurd as an argument if the EU refrained from wanting a military machine, and if it kept out of sensitive European political issues which stir up tensions over belonging and nationhood. It needs to  soothe them down, not stoke them up by injecting more division and another layer of split loyalties . Inserting a new and clumsy power into the old cauldron of  identity politics on the continent is far from helpful for the peace.  We see how the Euro, one of the drivers of more integration, is becoming a force for disharmony and tension between the member states.

Like many I will be celebrating the Queen’s Diamond Jubilee this week-end. She is  an important source of stability and continuity in a ceaselessly changing world. She has many well wishers. She commands respect by staying above the political debate. As a constitutional monarch in a democracy she leaves  her Ministers to govern as they  wish.  She acts as a focus for state occasions, sounds a voice for unity and  acts as a very distinguished   and regal  representative of the United Kingdom at home and abroad. She is the UK’s greatest Ambassador.

Many of us wish to show our appreciation of her public service. These royal occasions allow us to come together to show our love of country. It gives us a sense of belonging to a country with a great past and a future full of opportunity.

                         We still call our Heads of State “sovereign”. Their “sovereign” powers have long been stripped away by Parliaments keen to take over the power of commanding  taxation, armies, public services and lawmaking.  Governments still make laws, sign Treaties and undertake deeds in the name of  Her Majesty.  The Queen would not dream of interfering in how they use these powers.

              Sometimes people write to me to say the Queen should intervene and demand back many of these “sovereign” powers that are now exercised by the EU. They sometimes  say they are writing to the Queen to insist on her upholding her Coronation Oath. They think she has some magical power to enforce Magna Carta, as if this ancient law has primacy or more relevance than the modern Statute law including the European Communities Act which commands us. Sometimes they demand the Queen requires  the repatriation of powers from the EU  which they wish had stayed here at home.

            A constitional monarch in an elected democracy has no such power. Parliament is the new sovereign, acting in the name of the people and dismissable by the people.  Parliament gave away important powers by first enacting the European Communities Act 1972, and then by subsequent enlargement of the areas of competence of the EU by ratifying and enacting subsequent Treaty changes. The powers were no longer the monarch’s to give away, and the monarch played no active part in doing so.

           Parliament consulted the people in a referendum in 1975 under the then Labour government about the transfer of sovereignty. Many now say fairly they were not around for such a vote. Some who were then voters  say that if they had read and understood the Treaty of Rome at the time, instead of relying on reassurances offered by various politicians, they might have voted against. The fact remains that the UK did vote to stay in the EEC. At no election since our joining has a pull out party won.  In the last decade the official Opposition, the Conservatives, opposed the major transfers of power at Nice, Amsterdam and Lisbon. They spoke against them and voted against them in the Commons.  This made no favourable difference to General Election outcomes for the Conservatives.  They finally did better in an election in 2010 without offering repeal of the Treaties they had rightly voted against in the preceeding Parliaments, though individual Conservative candidates and MPs did wish to repeal these measures.

               Over the next few days I wish to explore more the damage done to our sovereignty, and the options we have for redeeming it.

 Eurostat has produced an interesting document comparing the tax policies of the various EU countries. It begins with the stark conclusion:

          ” The European Union is, taken as a whole, a high tax area”

   It points out that in Japan and the USA taxes are 40% lower as a proportion of GDP. Tax levels in the rest of the advanced world and in the developing world are usually lower than the EU by a considerable margin.

           The UK is in the middle of the EU pack for overall taxation, at 38% of GDP. Where the UK is at the dear end within the overall high tax area is the taxation of income and capital.

            The UK is the second highest when it comes to the share of income  taxes in the total tax take. The UK gets 44% of all its revenue by taxing earnings and enterprise, where France gets just 26%and Germany 29%. There are only five countries with a higher top rate of Income Tax  than  the UK’s. The UK also has the third highest implicit tax rate on capital, at 37%.

          So all those why say the UK is too Anglo Saxon, and would do better if it had tax rates of a more egalitarian kind as on the continent, should rejoice. The UK is already leading the pack of high tax EU countries when it comes to the proportion of tax revenue that comes from  taxing income and capital, and is near the top when it comes to tax rates on the rich and successful.

          The problem for the EU as a whole is the high cost large government model is not delivering the same faster growth and rising living standards that lower tax and smaller government models are delivering elsewhere.

The latest figures for manufacturing show more weakness expected in orders and output.

It’s not just from exports but also from weak domestic demand.

It is a reminder that the tax and inflation squeeze on incomes is hitting demand for manufactured products.

Speculation from the Treasury that they might raise taxes on cars is far from helpful if you wish to stimulate the purchase of new vehicles made in the UK.

Everyone agrees the main aim of Labour’s Bank of England was to get inflation down to 2% and keep it there. Most also agree that the Bank has been singularly unsuccessful at doing so.

Inflation as measured by the last government’s second choice of target, the CPI, surged to 5% in 2008. It has been above 2% for most of the last three years, often by a significant margin. Throughout that period the Bank has published fan charts showing inflation coming down quite quickly to the 2% level or below. The Bank has usually argued that the prospect is finely balanced between an overshoot and an undershoot. So far it has always overshot.

The Bank has argued that much of the inflation has been “imported” and so not so susceptible to control by changes in domestic interest rates. However, the period is characterised by a major devaluation of the pound.  By the end of 2008 the pound was around one quarter below its 2007 highest  levels.  The surge in world commodity prices at the end of the last decade did not  induce the same big increases in inflation in Euro and US markets that it helped induce in the UK. Subsequent falls in many commodity prices did not get UK inflation back down to target. A devaluation may well have something to do with the quantity and price of money.

The Bank in its defence is right to point out that the UK has not suffered a wage/price spiral in recent years, so  inflation has not soared above the 5% level. It is right that fighting recession requires looser money anyway – the problem with that argument is they did not deliver it at the right time as we discussed before.

The Bank is trying to control price rises in an economy which is vulnerable to import prices on  weaker sterling, vulnerable to energy and raw material prices, and vulnerable to state price rises and tax rises as the government battles to get the deficit down by increasing state revenues.

If the bank had moved interest rates higher in 2005-6 it would have curbed the inflation that broke out, and would have restrained some of the excess credit creation that followed. If the government had not run such a large deficit before the recession boosted spending  and cut taxes, that too would have helped keep price rises under control and would have given the state more flexibility in the downturn. If the government did more deficit reduction by controlling costs in the public sector, and less by pushing up taxes and charges on the private sector, that too would cut the inflation rate.

          The Bank’s remit includes assisting in promoting sensible growth, after ensuring price stability.  In 2008 Gross Domestic Product fell by 7%. It recovered a little in 2009-10, but has recently been hovering around zero growth. On current Bank projections it will not be back to the 2007 peak levels until 2014.

           The Coalition government forecast better growth in its first plans in the summer of 2010. Since then it has revised these down sharply for the first three years of the period, but reckons with the Bank that growth should be at much better levels in 2014 and 2015.

             The Bank’s main way of trying to assist recovery is to inject more money into the economy by creating it and buying government bonds. When it buys a government bond from the private sector, that frees cash for the private sector to spend or invest in something  more risky than a government loan. That should, according to the Bank, stimulate more activity.

                  It has certainly kept down the interest rate on government borrowing. This has been most helpful to the public sector, where additional  borrowing remains at high but reducing  levels. It allows more of the extra cash spending by government to go on goods and services rather than on additional debt interest.

                   It has not been so successful in keeping down private sector interest rates. The market in money between banks remains damaged. The leading banks all have to raise more capital or curtail their loans to comply with the much stricter cash and capital rules now in place, and to position themseleves for the even stricter ones coming in later.

                          The approach of the Bank of England is different from that of the European Central Bank. That has made much more money available to the commercial banks, to stimulate them and their lending capability directly. The Bank of England was keen to avoid lending to businesses through the corporate bond market, doing very little in its first programme of Quantitative Easing, and ruling it out in subsequent programmes. 

                            Some now think the Bank should intervene more firmly in the inter bank markets, to get private sector interest rates down closer to official rates to enforce its will for easier money. Others think the QE programme will in due course prove inflationary, and are concerned about the continuing run of inflation numbers well above target. The Review should ask why GDP has behaved so erratically, why it is now so low, and why it is taking so long to get it back above previous peak levels. The Reviewers need to answer why such a huge QE programme has had so little effect on the private sector.  It should ask if banking regulaiton is offsetting much of the QE impact outside the public sector.

           The collapse of Northern Rock and RBS, and the rapid sale of Alliance and Leicester and Bradford and Bingley were worrying and unusual events.  Pictures of people in queues trying to withdraw their money from Northern Rock have become the iconic pictures of the most severe financial crisis to hit the UK since the 1930s or even longer.

            The typical explanation is that these banks went down thanks to the greed of their senior executives and the “City”. The Regulators had only a bit part, it is argued,  as they had been rendered ineffective by “light touch” regulation. Testosterone fuelled lending was reacklessly pursued in the interests of earning more bonus, paid on profits taken long before the full outturn of the lending was known. It was a rotten City model. The answer is ban or tax bonuses, put in much stronger regulation, and buttress banks with large increases in capital in case they do it all over again.

               Recalcitrant facts get in the way of this comfortable explanation for the politicians and regulators who presided over this mess. Surely the main aim of all the regulation in place should be to stop just such a crisis happening? If the regulators thought they lacked the powers they should have asked the government to do something. If the government thought the regulations were too light they should have taken action. In  the UK, after all, the whole system of banking regulation was revised and new under the incoming Labour government.

                   The truth is the regulators had the powers to demand more cash and capital under the law as it stood. It was their call. They decided that they could allow the ballooning of balance sheets. They resisted anyone who argued for less debt in the economy, buying into the thesis that banks could now manage risk much better.

                 It is also true that in the UK the Labour government was keen for understandable reasons to promote large banks from parts of the country that had not traditionally flourished in the financial service area. The two largest ones that got into difficulties were from the North and from Scotland. Their rapid growth had full government support. The Bank of England allowed it to happen,no doubt understanding the political pressure for it to happen.

              The FSA has apologised for its part in all this. It had the prime responsibility for individual banks. The Bank of England, however, should not excape all blame. It was a central part of the tripartite arrangements for regulation. It had a duty to keep the system safe. The problems at troubled banks soon upset the system in a major way. It had the ability to monitor and the duty to understand the consequences of expanding bank balance sheets on money and inflation. It is difficult to say it did well in these areas. When RBS got into trouble, its balance sheet was larger than the entire annual GDP of the UK. Surely the Bank had to take an intelligent interest in its solvency and liquidity, as it was so crucial to the whole system.

I have argued for some time that the UK has gone above the tax saturation level. A country which does this finds that increased taxes become very unpopular, and may collect less not more revenue.

Mr Osborne wisely cut oil company taxes in his latest budget, realising that the tax increases of 2011 on this sector had depressed exploration and development.

He has now wisely changed the pasty and caravan taxes, and offered some compensation to churches for the VAT on historic building repairs.

The changes to Income Tax and National Insurance made by the outgoing government were wrecking amendments which are reducing the revenues. Mr Osborne has promised some changes in 2013 but will lose output and tax revenue in the meantime.

Some of you have rightly argued that it was not just or mainly the Bank of England to blame for the crash  of 2008-9. Under the tripartite Labour scheme of regulation the main blame rested with the government as the convenor of the tripartite system and the most powerful of the three parts. The government was removed from office by the voters, mainly for their economic and banking failings.

The FSA was also to blame. It has been the subject of review and agreed it made important mistakes in the way it regulated banks. The purpose of these blogs is to do the same for the Bank which so far has escaped review.