I have received a copy of a letter from Dame Lucy Doolittle  to Dr Roy Spendlove:

 

Dear Roy,

I am writing to reassure you. I know how worried you were that the government might cut spending too fast, and might take a combative approach to the EU. I think we can now be reassured that our strategy of cautious  accommodation of Ministers is working.

On the spending front it is encouraging to see realism in the latest revision to the pensions proposals. Allowing  people within ten years of retirement to keep their original deal is progress. You and I must not of course get involved in the Union response, but this may not be the last tweak to the system.

The useful contribution made by overall public services to growth in the last quarter has passed off with little remark in the press. We must make sure Ministers understand that this is still a case of cuts, with highly visible ones in areas like Defence and welfare. Ministers seem to come to sensible moderate conclusions when we suggest taking  the raw edges away from   policies like the forest sales and the capital spending cuts. I was pleased to see this issue of cuts has come out into the open over border controls, as we need to make sure the background to all this is understood, whilst being attentive to Ministers’ wishes. The problem comes if Ministers wish contradictory policies, where we need to sort it out in advance by securing the funding needed.

The March budget relaxed the envelope by £34 billion over the four years of the Plan. I would expect sensible proposals to relax it further this autumn will be received positively. Ministers are likely to want further jobs related announcements, and a stream of “shovel ready”projects to announce, so we must be ready. They are also keen in the Treasury on Credit Easing, which may be a useful vehicle for us to use for a variety of good purposes. I would like you to take a close cross cutting interest in this matter, and to be  innovative so we can get the full benefits from any extra money it may bring in.

I do think Ministers have shown statesmanship over the difficult EU issues that now confront them. We need to keep up the pressure to be in the room, and to keep Ministers committed to involvement in the stresses and strains of the Euro area as well as the wider EU.  I think the Euro area choice to go for  more IMF involvement is inspired, and I am pleased Ministers are taking this up. The UK can now pay to play, whilst paying through a more trusted intermediary. Germany too likes this route for her own reasons, so it makes a UK-German rapprochement over certain key features that much easier. I do hope you and your team can offer good positive  back up to any Ministerial wish to stay engaged, as this is a crucial time for the relationship. We have a special duty now to nurture it.

The UK’s official position is to be in favour of a substantial move to stronger political and economic union by the Euro zone. We must help Ministers ensure that we have seamless working arrangements with the zone for the UK. I think in due course this means the UK accepting more of the common positions, but I would suggest this is not the moment to make that case. Today we must concentrate on keeping the UK there as an important EU 27 player, and accepting the need for much more integration in the zone.

It is good to see how well  Lagarde has made the   transition to a serious working official. She has handled the need to use the IMF to assist the  Eurozone well, with no sign of a backlash from poorer countries. I am also hopeful that the new Head of the European Central Bank will steer it towards a more activist policy. His interest rate cut is a useful first step, but of course much more bond buying and quantitative easing will be needed.

Yours in EU solidarity

Lucy

 

Sometimes it is best to do nothing. It was good we were spared the high flown rhetoric that they saved the Euro and the world. It was even better than no new money was committed to bail outs. The IMF subs were not quantified and remain to be worked out next year.. The US President let it be known that Euroland is rich enough to pay its own bills. The one positive change was the Chinese promise to move their currency closer to a market rate.  If they wish to save the Euro they need to balance budgets and export more. Shuffling more IOUs round is not going to solve it.

 

On 16 September 1992 the EU gave up on the narrow band Exchange Rate Mechanism. Italy was forced out of the narrow bands. Spain, Portugal  and others were also unable to hold their currencies against a strengthening DM.

The Euro is the ERM it’s more difficult to get out of. The ERM still left countries free to set their own interest rates and budgets. They had to juggle their policies to try to keep confidence going in their currencies. The failure to do so was pretty comprehensive, as the market ganged up on currency after currency. The ERM was meant to be a dry run for the single currency. Instead it set it back. When they did go ahead they simply ignored the fact that several leading players in the Euro had been unable to remain stable against the DM in the ERM days.

The ERM should have been a warning to the founders of the Euro. If markets could destroy a currency locking device, why did they think markets would leave a single currency untouched? They obviously forgot that the debt markets were still open. Investors and speculators can make their views known through the bond markets, just as they did through the currency markets for the ERM.

I find it sad that some of us have had to spend so much time and effort trying to explain why the ERM would not work, and now trying to explain why the Euro cannot work in its current form. It’s bad enough having to do it once. Having to do it twice is worrying. What part of the ERM experience did they not understand? Why do they think the debt markerts will now behave differently from the currency markets? It is after all at base the same argument. Economies have to be in line with one another for the project to work. If countries become uncompetitive against Germany – as they did and as they are again – there needs to be some way to relieve the pressure in the system.

The G20 is considering an IMF expansion. The IMF usually promotes a programme of budget deficit reduction linked to devaluation and appropriate monetary policy and interest rates, set by the sovereign government it is assisting. Euroland countries do not have the ability to devalue or to set their own money policy. This makes it difficult to see how IMF programmes can work. The IMF does not lend to California or New York, so how can it lend to Greece or Portugal?  I would prefer a Euroland fix of what is a Euroland problem.

 

 

 

             The untimely intrusion of democracy into the best laid plans of Euroland may have left some leaders thinking today you can have too many summits. This was meant to be the summit where Euroland told the world it had solved its problems, if only the Chinese and some of the others agreed to lend very large sums to complete the fix. Instead this may be the summit where the rest of the world in private turns critical of the way Euroland is running its affairs.

             I would like to hear an apology from the leaders of the single currency. It is now doing visible damage, not just to some Euro area countries, but also to the wider global economy.

             I would like them to say sorry for setting up a single currency long before they had brought their various economies into line. They broke their own  sensible rules, allowing countries in who were miles off qualifying.

            I would like them to say sorry for letting members of the zone borrow much larger sums than the rules allowed, imposing no discipline on debt addicted governments.

            I would like them to say sorry for thinking that much poorer countries than their own would get out the cheque book and pay for their excess spending, through the IMF and by direct loans from China and elsewhere.

             I would like them to say sorry for running a monetary policy which created large property bubbles in countries like Ireland and Spain, weakening the banking systrem.

           I would like them to say sorry for failing to demand sufficient cash and capital in the banks, and for publishing favourable stress tests which turned out to be wrong. 

               I would like them to say sorry for pretending they have a 1 trillion Euro fund to fix it, when all they have is a Luxembourg company with the right to borrow money on behalf of Euro governments.

                 There can be no fix to the underlying problems until the leading governments recognise their mistakes.

                 The sad truth is you need to borrow less if you want to get out of debt crisis. Euroland still does not know how to do this. Yesterday the EFSF decided to withdraw a bond issue because it did not like the look of the market reaction.

 

              The interview I was offered on Monday to give on Tuesday after the publication of the GDP figures was cancelled. Clearly the figures were too good to make it interesting. Growth came in at 0.5%, instead of the 0.3%  forecast. The story of a double dip or a falling economy was ruled out, or postponed as the government’s critics might say, on these  numbers.

             The year’s performance is still slow. Over the last twelve months  manufacturing is down. Construction took a tumble in the third quarter of 2011. Business  services and transport were strong.

              The most interesting thing that might surprise all those commentators and media specialists who have been talking about the public spending cuts is the continued buoyancy of  public spending. Government services boosted growth in the third quarter. They are up by 1.4% for the last year in real terms.

            Meanwhile over at the Treasury I welcome the arrival of Sajid Javid MP as the Chancellor’s Parliamentary Private Secretary.  Just before getting the job he published his thoughts on the Euro. He wrote ”  the euro is an idea built on economic and political dishonesty…. there is no hope that fiscal union would save the eruo…..It would be massively undemocratic… Why should the Greeks willingly become a German vassal state?….If European leaders would only accept that their grand economic experiment has failed, the impact would be more predictable and more manageable….”

               That sounds like good straight honest advice.

 

               The decision to let the Greek people vote on the latest deal to try to save the Euro is a wise one. One of the biggest dangers of the deal was the lack of consent by the Greek people for the austerity measures that were a crucial part of it. The Greek government was unlikely to get away with the tax rises, spending cuts and requirement for lower wages if it had just blundered on without asking the voters. Inside the currency Greece needs big wage cuts. Outside, these matters can be disguised by devaluation.

               Many proponents of the Euro will be worried. They will say Greece has no choice. They will be alarmed that Greeece might vote No. They will dislike the uncertainty and delay which the referendum causes.

            In reality, there was no ability to deliver their preferred policy without some means like a referendum of getting people to accept the chosen course of action.  The Greek government and the Euro elite now have their chance to persuade the Greek people that staying in the Euro and accepting the cuts is their best way forward. They might be able to do that.

              If they cannot win a referendum, there are still two courses of action open to them. They can improve the deal for Greece by finding more money to help them from elsewhere in the zone, or they can sort out their exit from the single currency.

               Let us hope the Greek people are more sensible than their government. Early opinion polls say they will vote down this scheme. Getting themselves out of the Euro would be the least damaging of the various unpleasant choices before them. It will be interesting to see if the Euro elite have the power of persuasion to save their currency  in Greece.

               Meanwhile, of lesser importanace, we will watch yet another Euro area government face major defeat. This currency scheme is a great way of  getting rid of elected governments. It makes its popularity with those governments all the more suprising, as politicians usually want to survive in power.

               The Labour and Lib Dem  parties and Conservative Coalition Ministers argued last Monday that if the Uk held an EU referendum now it would distract from the crucial Euro area process of sorting out their troubles, which should take priority. Now the Greeks themselves from within the Euro zone think a referendum is necessary this UK argument looks less well based. 

               I made enquiries of the Backbench Business Committee concerning the timing of the Petition debate on the EU, as one blogger said it would have been better to have it this week. A representative of the Committee explained that last Thursday was the only date the government gave them for any debate, so they thought they had just  better get on with it. Other worthwhile and popular debates remain in the queue.

 

              We read this week-end that the government is responding to the vote on Monday. We hear the Foreign Office is masterminding an exercise to ask all government departments what powers they would like to regain, with a view to drawing up a possible negotiating brief.

                 Reading between the lines , there is still an issue over the timing of any such renegotiation. Those of us who say we need a bigger price for granting more power to Euroland to bail out each other, have not yet heard that the government intends to dig in over this “technical change which does not affect us” with a view to getting a better deal for the UK. They seem to have in mind delaying  further negotiations until  other possible Treaty changes are discussed.  Euroland may need more changes to strengthen economic government on the back of the “save the world” package we have just been  treated to in outline.

           There also remains a disagreement between those of us who say real powers are being given away continuously through Directives and Regulations, whilst the Foreign Secretary only counts powers given away in a new Treaty.The Prime  Minister does now recognise the powers being surrendered over the City without a new Treaty as a serious threat. This is a welcome development. His worry could lead to a more vigorous approach to new law and regulation by the government.

            I would like to hear from you over your priorities for repatriation. I appreciate many of you just want to pull out of the whole EU in one go. This option is not favoured by most MPs, and there is nowhere near a majority either for pulling out or even for an IN/Out referendum. That is why we do need to respond positively to the newfound enthusiaism for powers back. This policy is clearly endorsed by a very large majority of the UK electorate.

              The powers could include:

1. Resumption of UK control of borders and entry policy, including people coming from the rest of the EU. (The UK used to have an opt out from the common migration policy under the Conservatives)

2. Return of powers to make our own employment and social laws. (The UK did have an opt out from the Social Chapter under the Conservatives)

3. Return of fishing policy. (The Comon Fishery Policy only applies to Northern Europe, not the Med. It has been unpopular with all political parties in the UK for many years)

4. Return of Agricultural Policy

5. End of any more opt ins to Criminal Justice Policy, and ending the Common European Arrest Warrant in the UK

6. Smaller EU budget and larger UK rebate (Labour gave away part of the rebate successfully negotiated by Mrs Thatcher)

7. Environmental policies – return of powers to settle our own approach to energy

8. Financial regulation

                For the UKIP supporters who will write in to condemn what we are trying to achieve, I have two simple questions. What power have the UKIP MEPs got back for us? And what progress have the UKIP MEPs made to getting the UK out of the EU in line with their stated policy?

 

Some of the advocates of a hung Parliament see it as a way of avoiding hard choices. Some indeed are starry eyed about a new kind of politicis that would result, with all the parties and politicians “having to get on with each other” and with the parties choosing the best policies from each for a coalition governent. Dream on.

In practise a hung Parliament could bring out the worst in many politicians. There would be a scramble for jobs, horse trading on policies to try to find a way of securing the most jobs for a given party, and an ultimate package that failed to tackle the deficit crisis because the easy way out for many politicians would appear to be spending more money they do not have.

We know Mr Brown wants to cling on to power. We learn today that Mr Clegg wants half the Cabinet posts in any hung Parliament for Lib Dems, so the bargaining has already begun in an unseemly way before the electorate have spoken. Of course it would be nice to have the Lib Dem tax cut without the large and partly unspecified Lib Dem tax rises, to have some extra front line spending on better schools or healthcare without cuts to pay for it, but that is simply unrealistic.

If we do not elect a government that is serious about controlling the deficit, the deficit will come to control us. The Greeks today are protesting and complaining about the IMF, saying the IMF wants them to cut too much. They should have thought of that before needing an IMF loan. They have lost control of their country and its policies because they overspent. There is a danger the UK could do the same thing, a danger intensified if we do elect a hung Parliament with too many new MPs who think they can borrow and spend other people’s money with a view to promoting themselves into the Ministerial limo.

It is a bit rich that the Greeks blame the money lenders who are coming to their aid at a price – they should be grateful that the IMF and the EU are prepared to lend them more at a lower interest rate than the markets demand. If they were wise they would get on with sorting out their finances, so they do not need the begging bowl.

Promoted by Christine Hill on behalf of John Redwood, both of 30 Rose Street Wokingham RG40 1XU