Migration, the deficit and the recovery

Anthony ScholefieldOne of the matters I raised at a meeting in the House of Commons on Tuesday 16th December was:

The effects of mass immigration are now so large
that they are impacting on the economy as a whole and, specifically,
on the deficit, the debt and the ‘recovery’

The ‘Recovery’ and the Deficit are linked

– The import of a large migrant workforce has inevitably added to total GDP so nearly one per cent of growth of total GDP p.a. can be put down to simply having more workers and consumers. Those enthusing over the ‘recovery’ should be aware of this.

It is standard economic theory that immigration transfers income from newly plentiful factors to newly scarce factors, that is, from labour to capital. What is not noticed, however, is that much capital in the UK is now foreign owned so the transfer also is in part from British workers to foreign capitalists. Foreign capitalists get dividends and capital gains tax free. Moreover, due to the tax regimes in Ireland and Juncker’s Luxembourg, a great deal of foreign corporations’ profits in the UK are, effectively, lost to the British tax system under ‘freedom of capital’.

– The way the tax system for workers is now set up means that low earners (and migrants are overwhelming so) pay little tax and actually get tax refunds. Additionally, of course, they place demand on the existing ‘public services’ such as schools, hospitals, etc.

– Further out there are plans and projects for more public capital spending on transport, housing, schools, etc., as well as, unseen, capital diversion to provide the private sector tools and assets that migrants require: factories, office blocks, shops, houses, etc.

It should be noted that there is a great difference between employing existing natives who already have their ‘social capital; in the form of housing, roads, dams, etc., and migrant workers who require equipping with appropriate capital items from the ground up. The capital both extra native and migrant workers need (and this need is common) is for ‘the tools of production’: factories, equipment, office buildings, etc.

– The electorate are aware, even if the political class is not, that migrants send much of their savings abroad. There is no proper counting of this; it all relies on Office of National Statistics (ONS) speculation and guesstimates as is admitted, but it is several billion pounds a year.

In any case annual savings by migrant workers or their employers are far too small to provide the capital they require to operate and live in the British economy (less than 1% p.a.). This phenomenon means that the capital to equip migrants has to be found mainly by natives either by taxation or by capital diversion.

– All of this means, therefore, there must be appropriation from the taxpayer to fund extra current expenditure and the extra capital requirements of the public sector. These expenditures count as GDP growth but, of course, do nothing for the incomes and wealth of native workers. Actually they reduce both.

– Therefore, the ‘recovery’ with high inward migration may mean a statistical increase in aggregate GDP but produces little tax revenue either from workers or capitalists and places extra demand on public sector investment and current spending on the public services. Migration also diverts capital investment from natives to equipping migrants by the process of capitalists re-ranking the profitability of investments as the economy changes shape. In this way capital intensification is reduced for native workers; therefore reducing their income. It is not just the political catchphrase, ‘pressure on the public services’, it is pressure on the private sector and on capital formation. Instead of capital intensification for natives, there is capital diversion to equip and supply migrants.

– By not taking strong steps to rein in migration, the government is making its task of reducing the deficit much harder to achieve and makes the ‘recovery’ a statistical mirage with little effect on native income. It also is deceiving itself, as much ‘capital investment’ adding to GDP statistics is simply a means of equipping more workers in the economy.

When considering the ‘recovery’, it is also worth noting that the GDP deflator has been rebased and effectively reduced since 2008. A reduction in the GDP deflator means that ‘real GDP’ is statistically increased. Thus a further part of the ‘recovery’ is also a statistical mirage.

Another point on the GDP deflator is that the fall in crude oil prices will, for about a year, mean a higher GDP deflator as price falls in imports add to the GDP deflator and, therefore, increase the statistical overall ‘growth’ or real GDP and the ‘recovery’.

The Debt

– In addition to the massive increase in government debt, the off balance sheet liabilities for state pensions and healthcare are mushrooming all the time and have not been recalculated since 2010. To enthuse over GDP growth, but not calculate off balance sheet liabilities, is living in a fool’s world.

Even the hoariest of all false factoids, that immigrants are needed to pay for British pensions, keeps returning. For example, in the New Statesman on 5th December 2014:

“There is a truth that no politician will utter: if Britain is to maintain a welfare state … its current economic model demands more immigration.”

Yet every study by the UN, OECD or the Home Office, has always come to the conclusion of Chris Shaw, the government actuary, writing in 2001:

The single reason why even large constant net migration flows would not prevent support rates from falling in the long term is that migrants grow old as well.”

The UN calculates that, to maintain the UK worker/dependant ratio, the UK would have to support 60 million immigrants by 2050 and, by then, migration would be running at 2.2 million per annum, and increasing.

This is a dead-end in thinking.

– The accumulated, to date, off balance sheet liabilities for state old age pensions (not including public sector retirement pensions) were last calculated in 2010. They had then increased from £1.3 trillion in 2005 to £3.5 trillion in 2010 according to the Department of Work and Pensions. With the guaranteed 2.5% increase in pensions per annum, even in times of low inflation, the off balance sheet liabilities since then are increasing alarmingly. The fall in interest rates may also have a massive effect as the ONS states, “For example, reducing the discount rate to 4 per cent leads to a 31% increase in total pension entitlements (by £1,174 billion)”.

In 2010 the ONS used, in alignment with Eurostat, a rate of 5 per cent (nominal) for its discount. The rate is based on high quality corporate bonds yield. Rough calculations are that discount rates for corporate bonds are now in the region of 3.5 per cent. This means that the off balance sheet liabilities for state pensions at 2010 have risen to the area of £5.3 trillion – and this does not make any provision for the rises since 2010 or those built into the Coalitions’ pension promises.

Quite evidently, pension promises are quite out of control. Adding more lower paid migrants is adding to the liabilities with little contribution to the costs.

The Future

One can therefore forecast that:

  •  Capital employed per head will be static or reduce
  • Native incomes will remain static at best.
  • The ‘recovery’ will only partially reduce the deficit.
  • Taxes on capital and labour will fall short of projections.
  • The deficit will persist.
  • Debt and off balance sheet liabilities will continue to mushroom.

Eurozone QE:- Economic necessity triumphs over political idealism

This is not an economics website, so not the place for a debate on the rights and wrongs of Quantitative Easing. However, the political implications of Thursday’s announcement by the European Central Bank are worthy of comment.

The announcement of a €1.1 trillion asset purchase programme was made by Mario Draghi, the governor of the European Central Bank, but the process will not be as straightforward as when the UK or the USA launched their QE programmes because only a single nation and a single central bank was involved in those asset purchase schemes.

Under the ECB scheme, only 20% of the asset purchases would be subject to risk-sharing, meaning potential losses could fall on central banks of the Eurozone member states. This is a significant development for the next big step in the evolution of the Eurozone has long been expected to be Eurobonds, where debt was mutualised. There would no longer be any Bunds (German government bonds) or Greek Government bonds for sale, just bonds for the Eurozone as a whole. If the aim of the Euro is to help create a single country – a United Sttes of Eurozone, a  common fiscal policy was the next logical step.

It is very apparent that behind the scenes, some serious wrangling has been going on between Draghi and the German government prior to Draghi’s announcement. Germany, which has two members on the ECB’s governing council has been dragging its feet every inch of the way. Any easing of austerity, it was argued, would let the profligate Southern European countries off the hook. Whenever a country has asked for a bailout, Berlin has insisted on cuts in government spending including drastic reforms to the public sector as one condition of money being loaned. Given that Greek public sector workers have often been able to retire on a good pension in their 50s whereas their German counterparts have to stay on into their 60s, the Germans did have a case, but their intransigence has not gone down well and has resulted in the rise of far-left parties like Syriza in Greece and Podemos in Spain. However, Germany continued to hold the line even as youth unemployment topped over 50% in these countries and deflation took hold. It has taken a fall in the annual German inflation rate to 0.2% for the Germans to come round to a more conciliatory position.

But today’s measures prove that the willingness to share risk across the single currency area necessary for Eurobonds just isn’t there. Given that Alternative für Deutschland would benefit immensely if it was shown that German taxpayers were going to have to shoulder even part of the risk of debt defaults by the “Club Med” governments. Merkel could not afford to give any ground on debt mutualisation.

It is likely that the struggling Eurozone economies will breathe a little more easily after today’s announcement, but the price the EU has had to pay for QE is to kick any sort of fiscal union into the long grass. European integration has taken a step backwards.

And how long with the markets’ euphoria last? Well, let’s see what happens in Greece on Sunday.

EU to “bleed us dry” of another £64.2 billion (net) by 2020

Lord Stoddart

In response to a written question from the independent Labour Peer, Lord Stoddart of Swindon (Hansard 6.01.15), Lord Deighton, the Commercial Secretary to the Treasury, has provided confirmation via data from the Office of Budget Responsibility, that the UK will spend £64.2 billion (net) on EU membership between 2014 and 2020, £97.7 billion gross.

Commenting on the Government’s response, Lord Stoddart said: “I have had to combine the annual totals myself but these statistics make it very clear that we are going to continue to pay through the eyes, ears and nose for our ongoing membership of the EU, for the rest of the decade. The EU will bleed us dry to pay for public services in other member states, while steadily dismantling our Parliamentary democracy and freedoms.

“Apparently, the Government is perfectly happy with this situation and these appalling costs, despite telling us that we face four more years of austerity and with no real sign of our £1.6 trillion national debt coming down. In other words, we are financing these grotesquely huge figures out of borrowed money. We should never lose sight of the fact that we are passing these monstrous debts on to our children and grandchildren. They will pay for our mistakes and, in particular, for the folly of EU membership.”

The full text of Lord Stoddart’s question, the Government’s reply and the contributions table is as follows:

Hansard 6th January 2014, column WA137

EU Budget: Contributions: Question asked by Lord Stoddart of Swindon

To ask Her Majesty’s Government what is their present projection of the United Kingdom’s gross and net contributions to the European Union budget for the whole of the seven year budget agreement 2014–20.[HL3534]

The Commercial Secretary to the Treasury (Lord Deighton) (Con): The independent Office for Budget Responsibility is responsible for forecasting UK gross and net contributions to the EU Budget. The Office for Budget Responsibility’s forecasts can be found in Table 2.19 of its Economic and Fiscal Outlook supplementary and fiscal tables – December 2014 (See link below)

EU Contributions

The joys of life outside the Eurozone!

This week has seen the release of economic data from both the UK and the Eurozone and the stories they tell could not be greater. UK Gross Domestic Product – the total value of goods and services produced by a country – grew at an annualised rate of 3.2% in the second quarter of 2014, slightly higher than the original 3.1% estimate. Across the water, the economy in the 18-nation single currency bloc did not grow at all. Of course, this is an aggregate figure for 18 different countries some of which managed to achieve modest growth – Portugal and Spain, for instance, both grew at an annualised rate of nearly 2½% with the Netherlands not far behind at 2%.

The biggest shock was the contraction of the German economy, which shrank by 0.2% in the second quarter. France’s economy failed to grow at all, while Italy entered a “triple dip” recession, recording two consecutive quarters of GDP contraction. Greece, of course, has not had a triple-dip or even a double-dip recession. It has yet to exit a downturn which began in 2008 and which has seen its economy contract by over 25% during this period.

These figures come on top of monetary data showing that deflation affected five Eurozone nations in July – Spain, Portugal, Slovakia, Greece and Cyprus. Prices have been falling continuously for 18 months in Greece, which may sound good news for hard-pressed shoppers but is not so good for manufacturers and retailers, as consumers delay purchasing big-ticket items in the hope that they will become cheaper. Deflation is also bad news for heavily-indebted governments as the reduction in tax revenue it makes it harder to pay off the money they have borrowed. Ambrose Evans-Pritchard, the Daily Telegraph’s International Business Editor, recently argued that in Italy, where inflation is nudging close to zero, the government may have considerable difficulties in ever paying off its debts unless it returns to the Lira.

With the recently-imposed sanctions on Russia still to bite, the picture could get even worse in the coming months. However, Mr Putin cannot really be blamed for the Eurozone’s woes. The issues go back to the very start of the single currency. Like the EU itself, it was a political project disguised as an economic project. The political objectives were simple enough – to further European integration. However, the economic objective – a convergence of the economies of the participating nations – hasn’t happened. There were design faults with the Euro right from the start and while many of these are of a complex and technical nature, the bottom line is that the classic approach to an economic downturn in countries like Italy – currency devaluation – is now out of bounds. This is no surprise given the dominance of Germany, where memories of the 1923 hyper-inflation still linger. The Bundesbank has always supported a strong currency and even now the German members of the board of the European Central Bank (ECB) show little sign of sympathy towards the struggling economies of the Eurozone periphery.

Mario Draghi, the ECB governor, is not short of advice on how to deal with this unfortunate situation, with many economists predicting he will eventually follow the lead of the central banks in the UK, the USA and Japan launch some form of Quantitative Easing or asset purchase programme. This would face strong opposition from Germany, even though the downturn of their economy has caused some German economists to soften their stance in recent months.

Meanwhile we in the UK can observe these problems from a distance. We’re not by any means totally detached, thanks our considerable trade with the EU, but at least we have control of our own currency. This has unquestionably been a factor in the UK being able to recover from the downturn quicker than the Eurozone. What is remarkable is that our relative success has not caused any serious debate across the single currency area as to whether these countries too might be better off outside of the Euro straightjacket.

However, this is only part of the story. It is obvious that we have benefitted by keeping the pound and not joining the single currency. It is equally obvious, and not just to observers fro this country, that we would have benefitted even more if we were subject to even less interference in our country’s affairs. Given the obvious advantage of our opt-out from the Euro, it is hard to imagine the other member states agreeing to David Cameron unilaterally repatriating powers to the UK as this would only increase our competitive edge. If we therefore wish further to improve our advantage, we must withdraw from the EU completely. Who knows? In so doing, our success may encourage other countries to follow our example and bring this sorry, failing institution to an end.

Photo by Alex Guibord

 

 

The Euro – Dividing Europe, destroying lives

John Harrison
A Speech by John Harrison FCA, FCCA, Honorary Treasurer of The Campaign for an Independent Britain in Derby, 11th July 2014

Introduction

The European project was always a political project. The economic side was the cover for gradually creating a single European state. On one of the rare occasions when he spoke the truth about it, Sir Edward Heath said “The project was and is political. The means were and are economic”. People were deliberately misled by the deceitful use of the term “The Common Market” into thinking that we were entering a simple trade agreement.

I’d like to refer to a couple of passages that I found when reading Stanley Knight’s “History of the Great European War” which is a contemporary account as the title suggests of the First World War, which I thought was appropriate in this year, the centenary of the outbreak of the war. In the first volume Knight describes “Pan-Germanisation” He says:

“The expression Pan-Germanisation is equivalent to All-Germanisation or Germany Everywhere. It is the title of, and also well summarises, a movement in Germany which is at once a doctrine, a policy, and a faith. One might almost term it a Political Religion.”

He describes how economic growth in Germany gave rise for the necessity for it to extend its boundaries and that it should acquire adequate seaports. Knight describes the German plans to take into its territory Denmark, Holland, parts of France, the Austro-Hungarian Empire, the Balkans and Turkey. He goes on to say that Germany sees Britain as its greatest and most formidable obstacle and describes how Britain has defended the weaker European States from those who would consume them into a single European State.

I’d like to read another section from page 45 of the First Volume:

“Apart from war, therefore, the only means available to a State to attain its ends is by diplomatic efforts, such, for example, that of ‘peaceful penetration’; and what is that but the ordinary case of the stronger nation taking advantage of the weaker, of might resolving itself into right? The stronger State constructs and develops the railways, public works and natural resources of the weaker State, peoples that State’s territories with its commercial and other agents and eventually with its police and even its soldiers, lends money to the smaller State and to its traders, takes more than adequate security and waits and perhaps works for default, and then, like the most unscrupulous of moneylenders, seizes and occupies the territories of the weaker State as the result of its ‘peaceful penetration’ operations.”

As Winston Churchill quoted “Those who fail to learn from history are doomed to repeat it
Now I’m not suggesting what we are seeing in Europe is merely Pan-Germanisation. Indeed it might be better termed Pan-Europeanisation as Germany is allied to others but I do see it as disheartening that the United Kingdom that defended the smaller European states in the past is now an active member of the project.

Monetary Policy

The 18 countries of the Eurozone have agreed to co-ordinate their affairs increasingly into a single, economic government which has a permanent majority of votes in the EU. If the euro survives those 18 Eurozone countries will be able to dictate the policy of the whole EU to the 10 states which still retain their own currencies.

They have agreed to abolish what little remaining democracy they have as individual states in order to try to save the Euro currency. Britain is now a permanent, second class member of the EU and can be outvoted at any time on any economic issue and indeed any other issue.

When the Euro was launched, there was a supposedly unbreakable rule that no Euro country would ever be made responsible for the debts of another.  However due to the imminent collapse of the Euro the European Stability Mechanism, (ESM) was set up the Euro countries agreed irrevocably and unconditionally to pay any capital demanded of an unlimited account within seven days of it being asked, and the ESM also has power to borrow unlimited sums from others in the names of its members, who have the legal responsibility to repay the loans.

Those ESM treaty gives the institution (of the same name) “full legal capacity to institute legal proceedings” but:

“The property, funding and assets of the ESM shall, wherever located and by whomsoever held, be immune from search, requisition, confiscation, expropriation or any other form of seizure, taking or foreclosure by executive, judicial, administrative or legislative action. The archives of the ESM and all documents belonging to the ESM or held by it, shall be inviolable.

The Members or former Members of the Board of Governors and of the Board of Directors and any other persons who work or have worked for or in connection with the ESM shall not disclose information that is subject to professional secrecy. They shall be required, even after their duties have ceased, not to disclose information of the kind covered by the obligation of professional secrecy.

In the interest of the ESM, the Chairperson of the Board of Governors, Governors, alternate Governors, Directors, alternate Directors, as well as the Managing Director and other staff members shall be immune from legal proceedings with respect to acts performed by them in their official capacity and shall enjoy inviolability in respect of their official papers and documents.”

So it is a law which can never be changed. It is literally a super-state agency above the law and, whilst we are not in the Eurozone, that same anti-democratic government is part of our government whilst we remain in the EU. We have no prospects of having a vote or even a say in its decision making. Indeed as its meetings are held in secret and its members sworn to secrecy we have no means of discovering the nature of its deliberations.

Fiscal Policy

The attempted creation of a single economic government amongst Eurozone members with the active support of HM Government and the impending change in EU voting procedures will give that Eurozone group permanent outright control of all major EU decisions, provide the backdrop against which the independence struggle and any referendum campaign will take place.

A tax on financial transactions is mooted. This is expanded from the original idea of the Tobin tax which applied only to spot currency deals. As 70% of the EU’s financial transactions take place in London this particular policy will affect the UK much more than other EU countries.

If the euro recovers, then regardless of opt outs and derogations, Eurozone countries will have the power to impose this tax which is particularly directed at London. A British government committed to staying within the EU would have no choice but to accept it.

In practice it would be an added dealing cost which would be passed on to buyers of shares, bonds and currencies such as the pension funds that you rely on to provide your income in retirement. It would also discriminate against currency transfers between Eurozone and non-Eurozone countries within the EU, giving extra financial pressure for joining the euro.

The EU has long aimed to acquire rights of tax raising without the need to go through the parliamentary processes for contributions from member states. This is called “own resources” and already exists to some extent in customs duties on goods entering the EU from non-EU countries. With the reduction of customs tariffs worldwide as a result of WTO agreements, this is not as fruitful a source of funding as it used to be so the EU is looking to this ‘Tobin tax’ so that it can raise money from member states, in this case the UK, without the possibility of democratically elected governments having the power to vote against it.

Exchange Rates

By locking incompatible economies onto the same currency, the existence of the euro is making worse a mess which already existed. It began in the Seventies at about the time Britain joined the EEC and was triggered by President Nixon’s decision to take the US dollar off the gold standard.

Under the Bretton Woods system which stabilised the post war currency system, the major currencies were pegged within a small range of variation to the dollar, which was pegged to gold. Every so often, adjustments were made. Britain had to devalue on several occasions because of balance of payments difficulties.

Incidentally, one of the objectives of the Bretton Woods agreement was to give Germany and Japan favourable terms to enable them to rebuild following the devastation to their economies caused by the Second World War. Under the Marshall Plan substantial loans were made available to the European allies to help them rebuild their shattered industries and it would not have been politically acceptable to provide the same resources to Germany and Japan.

Instead they were given exchange rates which were fixed at a level below which the true level would have been in order to create favourable economic circumstances to facilitate their recovery.
After the Bretton Woods agreement ended Germany has had the policy of doing everything that it can to peg the value its currency to the level of the other EU countries, its main trading partners, with the objective of maintaining the trading advantage that the Bretton Woods agreement gave to Germany. This has been pursued ever since with total disregard for the disaster that it inflicts upon other countries.

Some of you will remember the ‘snake’ which was the first attempt to co-ordinate the values of the European currencies. The value of any currency was only allowed to vary by limited amounts within the average values of all of the currencies. This failed, of course for reasons that I will come to later, neat to the end of this speech.Then we had the infamous Exchange Rate Mechanism which was to be the forerunner of the single currency which failed for the same reason. Now we have the Euro which itself is doomed to fail and is causing untold misery in southern Europe, but still maintains Germany’s trading advantage over its neighbours and indeed the rest of the world.

The Monetary Mess

When the dollar came off the gold standard it was decided that currency exchange rates would “float” and go up and down against each other according to market circumstances. Freed from the restrictions of the Bretton Woods system, British and other governments relaxed controls on credit, allowing the banks to become the de facto issuers of currency.

The privately owned banks used to have the right to issue bank notes. The government realised that printing bank notes can lead to inflation so it passed the Bank Charter Act of 1844 which prohibited them from doing that and gave the sole power to the Bank of England to issue bank notes.

That worked fine until the advent of computers when banks became empowered to issue currency again. The liquidity ratios allowed them to lend £8 for every £1 they held in deposits. So if you deposited £1 in your account, they could lend me £8. I could then pay that to you to buy your vastly inflated produce and you pay it into your account. They have now got another £8 on which they can lend me £64 and so it goes on. This is how the banks have built up bigger assets/liabilities on their balance sheets than entire GDP of the countries in which they are domiciled.

Governments have been happy to turn a blind eye to this ballooning catastrophe because – guess who borrows the most money? Got it in one! The governments themselves! That is why Gordon Brown was so desperate to get the banks lending again in 2008.

But shouldn’t this vast increase in money supply have increased inflation over the last twenty years? Of course it should have, but the monetary effect was negated by the massive importation of cheap goods from the Far East. In other words China postponed the impending doom approaching the Western world. Though is now starting to manifest itself in rapidly rising house prices.

But back to the banks. What happens when the loans they made go sour? Well, first point, due to a change in accounting regulations they only have to report bad debts when insolvency proceedings commence – unlike the rest of us who have to write off as soon as we suspect the debt is bad. So the banks can and do keep bad debts on their balance sheets. Ultimately, of course, those companies go under. As the average lending ratios are now 33:1 instead of the 8:1 I mentioned earlier, it only requires bad debts of 3% of their total assets to wipe out their capital entirely, and most banks are in that situation.

So what happens then? First, the loss is sustained by the bank’s shareholders, then they borrow on the inter-bank market and lastly the government’s unwritten guarantee comes into play to protect the nation’s savers as ours did with Northern Rock, Royal Bank of Scotland et al. So the banks got into trouble because they had lent too much, largely to governments, and under Gordon Brown’s “Save the World” strategy, the governments took all the debt back onto their own balance sheets.Now you have the problem where the sovereign states are buckling under the amount of debt they are carrying. So the solution is for the European Central Bank to create £2,000 billion of extra cash to bail out the governments.

But wait a minute! Who are the unwritten guarantors these new £2,000 billion of debts? Well, actually they are those very same sovereign governments which are insolvent anyway. It will probably have the same effect as throwing a tanker load of petrol onto a fire to try to dowse it. Stand well back, if you can!

The Divisive Effect on the People of Europe

The euro has done terrible things to the economies of Europe. Portugal, Italy, Ireland, Greece and Spain (PIIGS) have seen their economies ruined – particularly Greece where there is utter misery.
The EU believes that a one size economy fits all but that can’t possibly be true in any region unless it is what Bernard Connelly describes as an Optimal Currency Area. This is an area which, inter alia, has free movement of people and capital, interest rates which are equally relevant for all and an external exchange rate which is equally beneficial or harmful to everybody in the currency area.
Language and cultural differences restrict the free movement of people and while individual States are responsible for their own sovereign debt (which unofficially includes their banks’ debts) there will never be total free movement of capital because of the risk of bad debt faced by the lenders.

It is certainly the case that a common interest rate cannot be good for all, neither can a common exchange rate. They have to be set for the benefit of the largest economy in the region and it would be stupid to do anything else. So Ireland, which needed to increase interest rates to curb increasing house prices had to halve their interest rates instead which eventually caused economic disaster.
When a country gets into severe financial difficulty it will approach the IMF for a loan and agree policies to get itself out of difficulty. These usually include reducing the fiscal deficit by increasing taxes and cutting spending, reducing interest rates to stimulate its economy, and devaluing its currency to make its exports more attractive. Together these three steps soon show improvement.

The PIIGS need a reduced exchange rate to promote their trade but they are stuck with the same rate as Germany, who incidentally, carries out a lot of its trade with other EU countries so having a permanently fixed exchange rate works very well for it.

Their interest rate is set by the European Central Bank so they cannot vary that. The only economic tool they gave left is fiscal policy, increasing taxes and cutting state spending, often known as ‘austerity’.
Greece is in a much worse position today than it was in 2010 when these austerity measures were adopted. The public debt grew as a percentage of GDP from148% to 175% in 2013 (paradoxically, as government spending counts as part of GDP, reducing government spending increases the percentage of debt to GDP)- the very thing they are trying to reduce.

Unemployment in Greece rose from 15.3% to 27.3% and over 60% of young people are unemployed. Suicides increased by 45%. Poverty is on the increase. One in three Greeks now lives below the poverty line and some people are actually going hungry. Spain has more than one in four people unemployed and 70% of young people unemployed.

Because the Greek National Health Service has been plundered of funds, many drugs are not available and health care standards have dropped enormously. The mortality rate of young children has risen by 40% as part of the ‘austerity’ intended maintain the integrity of the euro currency. It is quite true to say that Greek babies are dying now because of the need to cut public spending to save the euro.

Greece has no chance of ever recovering whilst within the Euro and even if it did, the people would find that every profitable business and public utility will have been sold off to foreigners in a vain attempt to pay off the so-called “bail out” funds which are being piled onto their indebtedness.

Where you have a deficit on your income account it has to be met from your capital account – reducing savings, increasing borrowings or selling off assets. This what our government describes as ‘inward foreign investment’ which they say is a good thing. In reality it is the sale of water and energy utilities, high value houses and businesses to foreigners to raise the money to pay for our trading deficit with the EU. More of the Orwellian double speak used to hide the truth.

Remember what I said right at the beginning about the methods used under pan-Germanisation.

Why the Euro Currency doesn’t work and can’t work

Before deciding whether the UK should join the Euro, the then Chancellor of the Exchequer, Gordon Brown, drew up five economic tests which the UK must pass before joining. They were economic harmonisation, flexibility and the effects on investment, financial services and growth and jobs

However, the tests were superfluous. They ignored the one defining test that was of far greater significance than all the rest put together – the one thing that doomed the Euro to failure from the start.
That was the growth of Unit Labour Costs throughout the Eurozone. Without that being the same everywhere, high levels of unemployment were bound to occur and that is what we are seeing in Portugal, Italy, Greece and Spain already.

Let me explain what I mean about Unit Labour Costs. Simply put, it is the labour cost of producing one item of something. Let us say in a very simple economy you employ me to produce glass tumblers. You pay me £10 per hour and I produce ten tumblers per hour. The unit labour cost is £1 per tumbler.
In another country, let’s say they produce salt cellars. There they pay the workers 10 euros per hour and produce 10 salt cellars per hour. The unit labour cost of one salt cellar is 1 euro.
So in this simple example, the terms of trade are equal and £1 equals 1 euro.
If my wages were increased to £11 per hour and my output remained at 10 tumblers per hour, the unit labour cost is now £1.10 each. If our neighbours increased their wages to 11 euros per hour and their output to 11 salt cellars, their unit cost remained at 1 euro per unit.

The terms of trade are now against us. More £s leave our banks than the euros that are coming in because we now sell less of our product.

Under the laws of supply and demand, the exchange rate of our currency would fall by 10% bringing the terms of trade back into balance and the trade carries on as before.
This is how countries like ours for decades have been able to increase the wages to our workers faster than their output has increased. The £ fell from a value of about $4 to the £ in the 1950s to about $1.70 now.

Unit labour cost is a calculated from the wages paid and productivity, but productivity itself, among other things, is dependent on the amount of capital investment in each worker – and of climate. Capital, because if you have been given a new machine and I am producing solely by hand, you will produce a lot more than I would. Climate because it is much easier to work in the fairly temperate North of Europe than it is in the hot South, where it is often too hot to work in the afternoon.

For a single currency area to work, unit labour costs have to increase at the same rate in each country all of the time – but that is impossible.

Assuming that the European Commission can do nothing to change the climate, though it does seem to be trying very hard to do so, I’ll concentrate on capital.

The amount of capital invested per worker would have to be the same in every country and increase at the same rate so there would have to be an ABSOLUTELY MASSIVE transfer of capital from the industrialised Northern countries to the most impoverished Southern and Eastern ones.

It had never occurred to me until now that the European Commission would deal with this in an altogether different way- moving large numbers of people from South to North and East to West.
So what will be the effect of unit labour prices rising faster in some countries than in others? Quite simply it will be loss of exports and jobs in the poorer performing ones, which is what we have seen in recent years.
Unemployment rises, the government’s tax receipts fall because there are fewer people in work. Welfare spending goes up because there are more unemployed people and – all of a sudden – the government has to borrow large sums of money to keep going and, in its turn, eventually faces bankruptcy.

The solution to the problem for an independent state, as Argentina did a few years ago, is to default on its debts, reduce interest rates and devalue its currency. These three things were done together and the economy goes through a dramatic recovery. Unfortunately these solutions are not available to the countries in the Eurozone.
Instead the European Commission has imposed austerity measures on the Southern European states, putting up taxes and reducing government spending which actually makes the situation worse by creating more unemployment.

Incredibly, to try to bring labour costs down, they are actually reducing the wages paid to workers. Even, if by some miracle, this reduction in wages brought them back to parity with Northern Europe, it would be a fleeting solution only, as in the very next day unit labour costs would change by different amounts in different countries and we would be back on the same path to disaster again.

If Portugal, Italy, Greece and Spain had kept their own currencies, they would have been able to devalue them over the years, allowing them to remain solvent. Instead the EU’s great vanity project, the Euro, has been imposed on them and maintained at extraordinary costs to their own peoples.

It is a truism that the glue that holds together democracy in a country in which people with diametrically opposite is the certain fact that if I don’t like the way you are running the country and I can persuade enough of my fellow citizens that your way is wrong and my way is right we can vote you out of office and impose policies that are more agreeable to us.

But once you take away the peoples’ power to change their way of government through the ballot box they will eventually resort to non-democratic means to achieve the same ends.

It always brings a lump to my throat when I hear the Swiss sing Edelweiss on the French “La Marseillaise”. Europeans want to be free. The Euro has taken their freedom away.

British interests increasingly and systematically likely to be over-ruled

UK must secure EU financial regulation reform or face the choice of joining Euro or leaving EU by 2020, finds new report “If we cannot protect the collective interests of non-eurozone member states then they will have to choose between joining the euro, which theUK will not do, or leaving the EU” – Chancellor George Osborne, 2014

* New report reveals future end to double majority voting and finds that UK likely to be systematically overuled by Eurozone interests

* Report follows publication of letter organised by BfB of leading City figures calling on politicians to protect ability of Britain to decide financial legislation

A Europe Economics report, commissioned by Business for Britain (BfB), has found that British interests in EU financial regulation are increasingly and systematically likely to be over-ruled in favour of those of the Eurozone. It reveals that specific EU legislation could wipe out the UK’s power to prevent it being overruled by the Eurozone as soon as the end of the decade.

The in-depth report details how “only very considerable reforms” to the process of setting EU financial regulation will prevent Britain from being forced to choose from either joining the Euro or leaving the EU potentially as soon as 2020. The stark choice, dubbed “Osborne’s fork“, is the result of the increasing voting power of the Eurozone block and its divergent interests from the UK. The report reveals that EU financial rules will bring an end to double majority voting, a major concession previously won by Chancellor George Osborne, when the number of non-Eurozone EU counties drops to 4 or fewer – which is expected to happen in less than a decade.

The report acknowledges that Britain may have benefited from having financial services regulation set at an EU level in the past as regulations often mirrored or were influenced by existing British financial rules, but concludes that since the 2008 financial crisis and the Eurozone crisis of 2010, the nature of EU financial regulations have changed significantly and that the UK’s influence on EU-level financial services regulation has declined markedly.

Summary:

* Prior to the Eurozone crisis, the general thrust of EU financial services measures reflected the UK’s traditions of liberalisation, competition and the encouragement of trade meaning EU-level financial regulation affected other Member States much more than it affected the UK. EU regulations tended to mirror pre-existing UK rules.

* Since the financial crisis of 2008 and especially since the Eurozone crisis of 2010 onwards, the UK’s influence on EU-level financial services regulation has declined markedly. Since 2008, the UK’s legislation has been geared towards increasing the quality of supervision and strengthening market incentives. Yet at EU level the focus has been much more upon extending the scope of regulation, curbing specific behaviours, and protecting the integrity of the Eurozone.

* This change in the direction and objectives of EU-wide financial regulations has been accompanied by the Eurozone’s growing collective power, under QMV, to force through its preferred regulations against any ability of the UK to block new rules and has resulted in considerableloss of UK influence.

* Opportunities for financial services exports outside the EU are growing (and expected for the foreseeable future to grow) whilst the opportunities for rapid growth in financial services within the EU are likely to be limited. The main threats of competition to the UK from regulatory arbitrage are less and less from other European countries and more and more from outside the EU.

* Current proposal for reforms to EU-level setting of financial services regulation such as the extension of “double majority voting” would only work in the very short term (up to around 2018).

* EU rules are in place to end double majority voting where it has been already introduced as the Eurozone expands and the number of non-Eurozone EU counties drops to 4 or fewer. This could occur as soon as 2020 on current plans.

* The report concludes if the UK financial services sectors are to avoid the fate of systematic over-rule by Eurozone interests, without taking either the joining-the-euro or leaving-the-EU prongs of Osborne’s Fork, there will need to be very considerable reform to the process of setting EU regulation. Non-Eurozone members of the EU would need some mechanism, beyond QMV, to block new financial services regulation that was manifestly against their interests.

Matthew Elliott, Chief Executive of Business for Britain, said: EU-wide financial regulation may have opened up markets to the UK in past, but now it looks set to ensure the UK is comprehensively overruled by the Eurozone’s needs – at the expense of our greatest global asset. The UK’s power to influence EU decisions has declined markedly and unless major reforms are secured, Britain will be faced by the stark choice of either joining the Euro or leaving the EU altogether. Politicians at home need to secure Britain a new deal abroad to ensure the city, and business more widely, benefits from its position within Europe, rather than being weighed down by it.

Dr. Andrew Lilico, author of the report and Director of Europe Economics, said:  “Britain’s influence upon EU financial regulation has been an important gain of EU membership in the past. But that influence has waned severely since 2008, and as matters stand, with the non-Eurozone EU set to shrink to only between two and five members within a decade, and with the very different interests of the Eurozone dominating new EU financial regulation, the future appears likely to be one of Britain being systematically over-ruled by the Eurozone. Changing that in any sustainable way would require not only new voting rules but also many new long-term non-Eurozone EU members.

David Buik, BfB Advisory Council member, and Dr Andrew Lilico, reportauthor, are available for broadcast interviews .