Crisis in the Zone

Everyone will be familiar with the euro crisis and the possible departure of Greece and other countries from the monetary union. The crisis has many sub-plots – political, economic and financial – but even a well-informed reader might be forgiven for not following the curious tale of the TARGET2 (Trans European Automated Real Time Gross Settlement Express Transfer) balances.

It has attracted little attention in the UK press but it has emblazoned all over the German media. The story begins with the birth of monetary union and involves a fundamental lack of transparent accounting which has fuelled complexity and distrust throughout the entire system.

Within a currency area, payments between participants are ultimately settled by their banks in ‘central bank money’. This means that the payer will instruct its bank to transfer money to the recipient’s bank. The respective banks will reflect their settlements via their accounts with the central bank. A central bank will monitor balances with individual banks and may set limits. In addition, it will usually ask for any claims it may have on a bank to be collateralised by, for example, government debt.

Within the euro area, there are seventeen national central banks (NCBs) and the European Central Bank (ECB), collectively called the euro system. These separate organisations have to function in effect, as a single, central bank and the role of TARGET2 is to bind them together.

If a depositor transfers money from a Greek Bank to a German Bank, ultimately the transfer will show up as a claim by the Bundesbank against the National Bank of Greece. These balances between NCBs are not cleared down or settled by the transfer of foreign exchange or gold, nor are they collateralised. Incredibly, there is no cap on how large they can get.

When the euro was set up, the claims were bilateral between NCBs. However, as the pre-euro national payment systems have been replaced by TARGET and now TARGET2, the ECB has stepped in as a clearing house. Intra-Eurosystem balances are now automatically aggregated and, at the end of the day, netted out throughout the euro system, leaving each NCB with a single bilateral position vis-a-vis the ECB. As a result some NCBs have a TARGET2 claim and others are TARGET 2 liability vis-a-vis the ECB.

Lack of Accountability

Does any of this matter? Before the crisis, the balances between the NCBs were not significant at January 2007. The banks funded them through the interbank market privately. However, following the crisis, these private sources of funding dried up and the banks in sovereign states of the periphery (the PIIGS – Portugal, Ireland, Italy, Greece, Spain) could only raise funds via the TARGET2 system. The TARGET2 balances began to rise after 2007 but this was not noticed because of the opaque accounting treatment adopted by the ECB. Any normal bank or company shows the money owed to it in its current assets and money owed by it in its current liabilities so you get a full picture of what is due in and what is owed. But the ECB is not a normal bank. It NETTED OFF the liabilities against the assets so it showed a mere €49.4 billion owed to it by member states.

However in 2011 two enterprising economists, Hans-Werner Sinn and Timo Wollmershauser, found a way of sourcing the full data from the IMF databank and were able to present the full picture.

As of April 2012, the debtor NCBs have BORROWED over €850bn from the rest of the system , €650bn of which is owed by the PIIGS. This is principally funded by Germany (€463bn) and the Netherlands (€152bn) and little Luxemburg ((€109bn. Worryingly, these negative balances have arisen despite public money inflows such as European Union International Monetary Funds loans, which eventually end up in the banking systems. These balances represent massive transfers of wealth – Germany’s balance represents 20% of its annual GDP. This transfer happened without any political accountability or democratic process – just through the automatic function of the monetary union. It is worth comparing this complete absence of political process with the attention and scrutiny associated with the European financial stability facility (EFSF), which was recently increased to €780bn.

Who Knew?

In the absence of standard accounting practices, or at least disclosure by the ECB, nobody knew what was happening. The ECB responded that the TARGET2 system was working as it was intended to, and cannot be capped since a euro must be worth the same in all parts of the currency area, and freely transferable as well. Some official voices have even suggested that the size of these balances is only a problem if the public know about them.

The debate, indeed outcry, in Germany about these balances shows that the full implications of monetary union were not properly understood by the vast majority of citizens, even though there were references to the possibility of this type of event in academic literature.

Concern is particularly high now because if Greece were to leave the monetary union, it would not be in a position to repay the €100bn odd Euros that its NCB owes the rest of the euro system. Of course, the whole edifice was set up without any limitations on TARGET2 balances, wholly on the basis that no country would ever leave the euro. Although this remains the official position of the ECB, in practice politicians speak openly of this as a possibility.

If the ECB were to suffer from an NCB not meeting its obligations on TARGET2, a Greek exit would wipe out the entire capital of the ECB which has capital and reserves of approximately €31bn, rendering it insolvent. This would require the other NCBs, which collectively own the ECB, to contribute additional capital to it but 12 of the 17 NCBs are already heavily indebted to the ECB and are certainly not in any position to contribute more capital.

The absence of proper accounting for these balances deprived the public of visibility on the balance of payments crisis developing within the euro zone after the credit crunch and has the potential to bring down the ECB and national central banks of member countries with it.

Intra Eurosystem Assets (€billion)

Austria                -34.6 Belguim             -52.8 Cyprus                  -7.9 France                -79.6 Greece             -104.8 Ireland              -142.4 Italy                   -191.4 Malta                     -0.4 Portugal             -60.9 Slovakia             -13.6 Spain               -150.8 Total                 -842.0
Intra Eurosystem Liabilities (€ billion)

Estonia                1.0 Finland              66.0 Germany         463.3 Luxembourg   109.5 Netherlands   152.8 Total                 792.6
Adapted from an article which was published in Accountancy magazine

This time the Greeks must beware of Paris bearing gifts by Tim Gordon

EU summits to save the Euro seem to happen on a more or less monthly basis. Summits happen come along so often they must be called a ridge.

The June 2012 summit was a little different: it has been reported as a rebellion led by Hollande and Monti against Angela Merkel. Some have seen it as a rebellion against Germany to relieve the misery of those countries suffering from a so-called bailout.

Moreover, it has been reported as a victory for the rebellious colonies and a defeat for the Empress. Those lands ravaged by Teutonic austerity may have a hero, a Nevsky, in the new French president. His gifts for PIIGS but cultured not real.

French European policy since the last war, the whole French purpose of the EU, can be summed up as the denial of Europe as a German empire. France and Germany are equal partners, they say, and besides, it is not an empire: all those other members of the EU are sort of equal too.

But it is not really possible to describe the Euro in any other way than a system with Germany at the centre that exists for the benefit of German exports. Germany really is the only country to benefit, economically, from the Euro. The Euro does seem to give some kind of psychological and emotional benefit to peoples without much self-confidence, but this is illusory. The Euro gives Germany power over the Eurozone – and Germany should accept the responsibilities like a good, beneficient imperial should.

French and Italian and other governments have more reasonable complaint about the conditions of empire. But that is how it is. So, Greeks should beware of Paris when he says he is bearing gifts, because the gifts are not his to give. Hollande can rebel but can never call the shots. That is the first lesson.

I am very fond nowadays of going around quoting Karl Marx: the people who pay for an empire are the working classes of the imperial power. Therefore an empire collapses when the benefits that derive to the elites and the working classes of the imperial are no longer sufficient to warrant the price paid by those working classes. And just because I think it was Marx who said it does not mean it is not how it is. You pay for your empire as long as is profitable. When it is no longer profitable, you dump it.

As long as Germay profits from the Euro, Germany will do what it takes to keep the Euro alive.

So far what has Germany paid? That word “bailout” is a lie in itself. The bailout is not a gift, support, it is an enforced loan for a purpose not supported by the victim country. Germany benefits from the Euro because it locks a continent into a favourable trade relationship: it keeps German factories busy. What Paris thinks is neither here nor there. What is said in Finland can be fun but when it comes to it, the Finnish contribution to Germany’s Euro is comparable to Britain’s contribution to USA’s invasion of Iraq. All Paris has is a complaint and a series of petulant demands and peurile fantasies that are all that passes for socialism nowadays.

Alright, there is the conventional view. What a disappointment that HM Government still sees it as being in Britain’s interest that the Euro and with its German hegemony (if I can be forgiven for using such a 1980s word) is maintained and flourishes. It is not that it is German but that it is a single continental order essentially hostile to Britain and her friends that is the problem.

The Eurosceptic must put forward a series of policies that really can offer a way forward to the people of Greece, Ireland, etc, etc. Never mind the Euro, it is the people we need to save.

What policies should be the focus now of eurosceptic thought. Imagine Greece was a struggling business you had just bought. It is desperate because it has been mismanaged but is basically good. Would you run it as Germany is running Greece? Of course not. But Greece is not some struggling business but a decent nation of people who command respect.

It is a source of shame to Britain that our Government does not have an alternative policy but advances the silliness that while membership of the Euro would be bad, the existence of the Euro is critically important. It is the essential purpose of the eurosceptic movement to provide a superior policy to that of the Euro. Although we offered a warning against what has happened, we must now offer a way ahead.

Decline of the eurozone

It is said by the three main political parties that the UK must remain in the EU because it is our major trading partner and hence vital to our prosperity.

Professor Tim Congdon CBE, with the help of figures from the International Monetary Fund (IMF) database (see below) explains: The numbers are immensely helpful because they extend over a 25-year period and so help in identifying trends. They start in 1991, when the Maastricht Treaty was being negotiated and the euro was conceived, and end with forecasts for 2016. (The analysis is slightly incomplete, because it ignores some of the smaller countries, but apart from Poland and Sweden none of these 10 countries is of much importance).

In 1981 the eurozone output represented 21.8% of the world output. Their problem was and remains, that the excessive taxation and heavy regulation inflicted on them by the EU has held them back. The figures show that the eurozone’s share of the world output has plunged by a third – from 21.8% in 1991 to 14.3% in 2011.

It is entirely plausible that out grandchildren will live in a world where the eurozone produces only 6 or 7 per cent of world output. In other words, in their world the nations that today have neither EU membership nor the euro as their currency will outweigh the eurozone by well over ten to one.

Eurozone as a percentage share of world output per year

1991 21.821 2000 18.349 2009 15.015
1992 20.172 2001 18.300 2010 14.556
1993 19.610 2002 17.968 2011 14.253
1994 19.485 2003 17.482 2012 13.861
1995 19.290 2004 16.989 2013 13.478
1996 18.887 2005 16.541 2014 13.100
1997 18.606 2006 16.235 2015 12.722
1998 18.659 2007 15.881 2016 12.350
1999 18.535 2008 15.534

First appeared in EuroFacts, 22nd June 2012

Government confirms that the British Army will ‘never’ be part of a European Army from the press office of The Lord Stoddart of Swindon

In a written reply to a question from independent Labour Peer Lord Stoddart of Swindon, the Government has confirmed that Britain will ‘never sign up to a standing European army.’

Responding to Lord Stoddart’s question about the reasons for the reduction of the army by 20,000 soldiers and whether this was due to the need to fit into a future European army, Lord Astor of Hever (Under-Secretary of State at the Ministry of Defence) said: ‘Many but not all of the operations we wish to be involved with in the future are likely to be conducted with our allies, particularly those from NATO. The UK Government will continue to decide when and where they deploy their national forces, and have made it clear that they would never sign up to a standing European army.’

Commenting on the Government’s response, Lord Stoddart said: “I am sure that many people, including the soldiers themselves, will breathe a huge sigh of relief at hearing this confirmation that our armed forces will never be deployed at the behest of the blundering, unelected European Commission. It should only be Her Majesty’s Government which has the responsibility and authority for sending young men and women from our armed forces into danger.”

The Snooper’s Charter by Anne Palmer

Headlines in the Daily Mail 15th June 2012 page 6. “Police demand the Right to snoop on everyone’s emails “ Even a special Daily Mail “Comment” on the matter on the same page, and then “Our” “Littlejohn” “Trust me, you can’t trust this lot with any more powers.” Again more information on the same subject. But why no mention where this legislation actually came from and why is it being implemented now by our Coalition Government?

EU Directive from the Official Journal of the EU 13.4.2006 L 105/54 perhaps has the best information. From Article 3, 4 and 5 it advises on exactly what each Nation State has to do and what information they should gather and keep, length of time also given. Article 13 describes the “Remedies, Liability and Penalties”.

I say to Mrs May, the money your alleged Government are removing from the elderly, the sick, the kids, making us pay more for everything we buy is so that you can spend a billion or so British pounds to allegedly catch criminals through this EU legislation? That they, if caught, will probably have a slap on the wrist, and sent on their way and all because you have to obey EU legislation?

In the last war-which I remember very well indeed-no one minded letters opened etc in those days, and we were glad such security was activated-we got used to our letters being opened to and from our serving Forces, and some-times words completely obliterated. That was in WAR TIME, a full scale war here in the UK from the bombing. Friends and relations here one day, gone the next. We didn’t mind the security THEN, BUT WE ARE NOT AT WAR NOW ARE WE? We can’t even close our Borders to prevent would be “terrorists” from coming into our Country. Why do you not tackle THAT problem first, that is far more important than this.

The EU is all about Peace, Security, Sharing, my, the EU even brought out Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data. Then there is the EU Charter of Fundamental Rights enshrined in legislation and the European Convention on Human Rights, ah yes, so many RIGHTS for the people, and then there is our own Magna Carta, envied through-out the World and our Bill of Rights—

  • That excessive bail ought not to be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted;
  • That all grants and promises of fines and forfeitures of particular persons before conviction are illegal and void;
  • And that for redress of all grievances, and for the amending, strengthening and preserving of the laws, Parliaments ought to be held frequently.

And they do claim, demand and insist upon all and singular the premises as their undoubted rights and liberties, and that no declarations, judgments, doings or proceedings to the prejudice of the people in any of the said premises ought in any wise to be drawn hereafter into consequence or example; to which demand of their rights they are particularly encouraged by the declaration of his Highness etc as being the only means for obtaining a full redress and remedy therein. All Ignored but they are still there and they will not go away for to destroy the
Constitution of course, is an act of treason.

As for the suggestion, I have recently read in these papers, that the European Union could “fine” our own sovereign Government if they do not obey EU legislation, should give our Government the hint that it is time to withdraw from such an Organisation.

For our Government to betray the people that elect and pay them to actually Govern this Country according to its law, yet to actually choose to snoop on them, brings shame on ALL of those in that once proud Houses of Parliament where I remember a GREAT man stood and brought courage to the people of this Country to withstand the mass bombing of this Country in war-time. His famous words I remember even now “ACTION THIS DAY”. And sadly, the present lot choose freely to activate such a snooping law brought out by foreigners, on their own people. How could you!

Yet we have a Government we pay and some have sadly elected, and all this Government can come up with is this snooping on their own people, rather than saying NO. In my book, our Government have betrayed the very people that elected them. It really is time to beak the chains that bind us to such an Organisation that comes up with such as this. How on earth do any of you sleep at night? How will you look your children in their faces when they too realise what between you have done to their Country.

Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data

2006 on the retention of data generated or processed in connection with the provision of publicly available electronic communications services or of public communications networks and amending Directive 2002/58/EC

There are others of course.

I am sure you all know your own Bill of Rights. 1689

Incentives for Polish Migration


1. There is a significant financial benefit for Polish nationals to migrate to the United Kingdom in search of work. Even modest savings would allow Polish workers on the minimum wage in the UK to save what they would earn in an entire year at home. The much higher benefits for families in the UK compared to Poland will also act as a significant pull factor.  Poland is the major source of migrants to the UK but similar considerations apply to the other new Eastern European members of the EU, known as the A8.  Any significant increase in A8 migration would undermine the government’s efforts to reduce net migration to the ‘tens of thousands’ by the end of this Parliament.

Polish Population in the UK

2. Following Polish accession to the European Union in 2004, a large number of people migrated from Poland to the UK in search of work. The new EU nationals were free to come to the UK to work as a result of the previous government’s decision not to impose transitional controls; only the UK, Ireland and Sweden opened their labour markets immediately. The Annual Population Survey estimated that in 2010 there were 550,000 Polish born residents in the UK1 In 2004 there were just 95,000.2

3. The vast majority of Polish nationals who migrated to the UK did so in search of work. The profile of A8 migrants shows that they are disproportionately young compared to the UK population, they are relatively highly educated, and have higher rates of participation in the labour market.

4. Unemployment in Poland at the time of accession was close to 20%. Following accession the unemployment rate fell quite rapidly to about 10% in 2006. Those who migrated to the UK in 2004 must have been influenced by high unemployment but that will have been a less important factor after 2006.  Although unemployment has risen somewhat in Poland since the onset of the recession, it remains at about 10%, just below the EU average.3

Incentives for Polish Migration

5. This reduction in unemployment suggests that a major driver of more recent Polish migration has been the considerably higher standard of living in the UK and the potential to make savings in the UK which translate into significant sums of money in Poland. Anecdotal evidence suggests that single workers often live in multiple occupancy housing as a means of keeping costs down; most migrants from the A8 plan to stay in the UK for less than four years and do not see their move as permanent.4

Financial Incentives of Migration to the UK for Single Workers

6. In the UK, a single person earning the minimum wage will take home £254 per week after tax but including benefits. (See Annex A) This is an annual income of just over £13,200. If Polish workers were to make a modest saving of 20%, they would be saving about £50 per week. Yet this weekly saving is the equivalent of around 250 Polish Zloty at the current exchange rate – roughly what a worker would earn in a week in Poland on the minimum wage. (See Annex B)

Financial Incentives of Migration to the UK for a Family of Four

7. An individual in the UK who has a dependant spouse and two children, earning the minimum wage would receive a weekly income, including benefits, of £543, or annually just over £28,200. (See Annex A) Again, if a Polish family made a 20% weekly saving, this would equate to around £110 which is worth 540 in Polish Zloty. In Poland, a person in the same circumstances would have a weekly income of 375 Zloty (after tax and including benefits). (Annex C) Thus, if they could save 20% of their earnings in the UK, they would be saving almost one and a half times what they would have earned in Poland.

Higher standard of living in the UK

8. Aside from the savings that can be made in the UK which translate into significant sums of money in their native Poland, a family is able to enjoy a far better standard of living in the UK than at home. In order to compare wages across countries, Purchasing Power Parity (PPP) data has been used which allows for the different costs of living. (See Notes)

9. In Poland a family on the minimum wage would have a weekly income of 375 Zloty. Once the differing costs of living have been accounted for, this is the equivalent of around £145. In the UK, the same family on the minimum wage would have a weekly income of £543 which is almost four times what they would earn at home. Even a family which had been in the favourable position of being on the average wage in Poland would still be able to increase their standard of living significantly. At home they would have a weekly income of around 615 Zloty. Once the differing costs of living have been accounted for, this is the equivalent of around £235. In the UK however, their income on the minimum wage would be £543 or almost two and a half times as much as they would receive at home. (Annex D)

Annex A

Minimum Wage Household Incomes in the UK 

GBP Total household income at min. wage
SinglePerson CoupleTwo Child
Gross earnings Income Tax National Insurance







Net weekly income



Working Tax Credit Child Tax credit Child Benefit







Total direct benefits



Housing BenefitCouncil Tax Benefit





Total housing benefits



Total Income per week



Total Annual Income 13218


Savings of 20%Zloty





Source: DWP Tax Benefit Model

DWP Tax Benefit Model is based on a selection of hypothetical families. The family lives in a local authority or privately rented property appropriate to its size and pays average amounts of rent and council tax for the 2010/2011 financial year.

Annex B

Household Income of a Single Person in Poland on the Minimum Wage in Polish Zloty and converted to £s 

Single Adult on Minimum Wage in Poland after Tax and including Benefits
Polish Zloty
Annual    Weekly
Gross IncomeMinus Income TaxMinus Social ContributionsHousehold Net Income








Household Net Income in £s


2699 52

Based on exchange rate

Annex C

Household Income of an individual with a dependant spouse and two children in Poland on the Minimum Wage in Polish Zloty and converted to £s

Individual with Dependant Spouse and Two Children on Minimum Wage after Tax and including Benefits
Polish Zloty
Annual Weekly
Gross IncomeMinus Income TaxMinus Social ContributionsPlus Family Benefit

Plus Housing Benefit

Household Net Income












Household Net Income in £s
3930 76

Based on exchange rate

Annex D

Comparison of household incomes in Poland and the UK

Total Household Income of a two child sole worker family After Tax and Inc. Benefit

Working in Poland

Working in the UK
Net Polish Zloty

Converted to US$

using PPP

Converted to £s using PPP














Minimum Wage
AnnualWeekly 32017616 19480375 17976346 10937211 12169234






Based on Purchasing Power Parity for Actual Individual Consumption Data from OECD, 2010: Poland – 1.781125 UK – 0.676954

Exchange Rates (OANDA, as at 29/3/2012):£1 = 4.95731 Polish Zloty €1 = 4.15008 Polish Zloty

Eurostat data on minimum wage earnings

Average Wage Earnings, Polish Statistics Authority

Tax and Benefit Data extracted using OECD Tax-Benefit Calculator


Polish Household Incomes

The OECD Tax-Benefit Calculator has been used to calculate the approximate take home pay of an individual in two scenarios in Poland, a single worker with no dependants and a worker with a dependant spouse and two children. Calculation is based on a salary of 18,061 Zloty, due to restrictions with OECD Calculator. The minimum wage, derived from EUROSTAT data, is slightly lower at 16,756 Zloty.

Purchasing Power Parity

Purchasing Power Parity (PPP) data adjusts for the differing costs of living in two countries which simple exchange rate mechanisms cannot account for. PPP therefore compares household incomes in different countries after taking account of the different costs of living.


Data from the OECD Tax-Benefit Calculator is based on data from 2010 and is the latest available.

1 Office for National Statistics, Population by Country of Birth and Nationality, April 2010 to March 2011, Table 1.3, URL:

2 Office for National Statistics, Population by Country of Birth and Nationality, 2004, Table 1.3, URL:

3 Eurostat News Release 176/2011, 30 November 2011, URL:

4 International Passenger Survey, Table 3.17 Intended Length of Stay by country of last or next residence.