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 .

EU demands Britain pays £2.5bn to plug massive black hole in budget

Union Jack and rag of stars
Britain could be forced to hand an extra £2.5billion to Brussels to help plug a massive black hole in the EU budget, it has emerged. In a dramatic admission, EU Budget Commissioner Janusz Lewandowski said Brussels overspent its budget by an astonishing £20billion last year.

Mr Lewandowski, who blamed the situation on late invoices, said the cash would be taken from this year’s budget in the short term. But officials conceded it was almost certain to lead to a request for a bailout later this year, making a mockery of claims that the EU budget has been brought under control.

A request on this scale would cost British taxpayers about £2.5billion this year – more than the entire annual budget of the Foreign Office.
The revelation prompted an angry response in Britain, where David Cameron claims he has curbed EU spending.

Tory MEP Marta Andreasen, a member of the European Parliament’s budget committee, said it was astonishing that the EU was asking for more money just three months after it was granted an emergency £10billion top-up to allow it to balance its books.

Miss Andreasen, a former chief accountant at the European Commission, condemned the EU’s ‘utter incompetence’ and ‘continued disdain with which it treats taxpayers’ money’.

She said European taxpayers ‘should not be throwing more money away on failing policy areas’, and added: ‘It seems the European Commission is not only unwilling but is also completely unable to live within the means agreed. It repeatedly comes back, blaming others and looking for more cash.’ 

Bill Cash, Tory chairman of the Commons European scrutiny committee, described the situation as ‘completely unacceptable’, and said Britain should refuse any demand for more money.

He added: ‘They are stretching the patience of the British taxpayer beyond breaking point. 

‘We cannot go on just paying up every time they come back with their begging bowl.’ 

Pawel Swidlicki, of the think-tank Open Europe, said it was time Brussels put its affairs in order rather than demanding even more cash from Britain. He added: ‘This highlights the shocking lack of long-term planning or adequate controls in the EU budget. Any shortfall should be made up from future EU budgets rather than via a fresh top-up from member states.

‘The budget needs to be radically slimmed down and overhauled – ending the pointless recycling of regeneration funds among the EU’s richest members would be a good start.’ 

The UK Treasury is expected to oppose any extra cash for Brussels, as it did with last year’s demand for £10billion.
But the decision is made by qualified majority voting and Brussels sources say the UK is likely to be out-voted, as it was last year.

 

The Euro – Doomed to Fail in the Beginning

Before deciding whether the UK should join the Euro the then Chancellor of the Exchequer, Gordon Brown, drew up 5 economic tests which the UK must pass for the UK to join. However the 5 tests were superfluous. They ignored the one defining test that was of far greater significance than all of the rest put together and that 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, high levels of unemployment were bound to come about in some EU countries and that is what we are seeing in Portugal, Italy, Greece and Spain already.

Let me explain what I mean by Unit Labour Costs. Simply put it is the labour cost of producing one item of something. Let’s say in a very simple economy you employ me to produce glass tumblers. You pay me £10 per hour and I produce 10 tumblers an hour. The unit labour cost is £1 per tumbler. In another country, let’s say they produce salt cellars. There they pay their workers €10 per hour and they produce 10 salt cellars per hour. The unit labour cost of one salt cellar is €1. So in this simple example, the terms of trade are equal and £1 will equal €1.

If my wages were increased to £11 per hour and but 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 per hour and increased their output to 11 salt cellars, their unit labour cost remains €1.00 per unit. The terms of trade are now against us. More £s leave our banks than the €s that are coming in because we now sell less of our products.

Under the laws of supply and demand the exchange rate of our currency would fall. In this simple example it would fall by 10%, bringing the terms of trade back into balance and trade carries on as it did before. This is how countries, like us, for decades have been able to increase the wages to our workers faster than their output has increased. The £ fell in value from around $4 to the £1 in the 1950s to about $1.50 now.

Unit labour cost is a factor of wages paid and productivity, but productivity itself among other things is dependent on the amount of capital invested in each worker and 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 northern 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, 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 more 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 – move large numbers of people from the East to the West.

So what will be the effect of unit labour prices rising faster in some countries than 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 and all of a sudden the government has to borrow large sums of money to keep going and in its turn faces bankruptcy.

The solution to the problem for an independent state, as Argentina did a few years ago, is to default on your debts, reduce interest rates and devalue your currency. These three things are 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 unit 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’d be back on the same path to disaster again.

If Portugal, Italy, Greece and Spain had kept their own currencies they would 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 people.

 

The world after the Euro by Robert Henderson

Amidst all the gnashing of liberal internationalist teeth and prophecies of doom if the Euro collapses a question goes unasked in the mainstream media: could the collapse of the Euro leave Britain in a better position than if the currency survives or could its failure even be positively beneficial for Britain? Sounds mad? Well, consider this, Britain may be far better placed to survive the shock than any Eurozone country because of two things: the fact that we have our own currency and our position as a world financial centre.

The Euro’s collapse would cause a good deal of economic riot within the Eurozone because of the difficulties of assigning values to the newly formed marks, francs, drachmas and so on, both in terms of establishing the new currencies and the adjustment of contracts, loans and other financial instruments which are drawn up in Euro values. Most of the contracts and loans in the Eurozone countries will require adjustment. That will involve a massive administrative cost and make Eurozone countries less competitive.

Britain will have none of the costs and disruption of re-establishing a currency. She will be affected where British contracts and loans have been drawn up with the Euro as the unit of value or financial instruments are denominated in Euros, but unlike the Eurozone members that will affect only a small minority of British financial agreements because most of British economic activity is within and for the British domestic market. The lesser costs will make British business more competitive relative to the Eurozone countries.

In addition, while the administrative changes and the task of valuing the re-established currencies in terms of the value of the Euro is proceeding, those wishing to enter into contracts from outside the Eurozone may be reluctant to do so with Eurozone countries until the currencies are fully re-established. This could drive non-Eurozone foreign contracts to Britain which might otherwise have been placed with Eurozone businesses.

While the turmoil of changing from the Euro to the re-established old currencies continues, there would almost certainly be a reluctance to buy the sovereign debt of even the likes of Germany at reasonable rates of interest. That would make British issued bonds more attractive and keep the rate of interest paid on them low. The difficulty in raising finance would also affect non- governmental corporate bodies such as companies, charities and other not-for-profit organisations.

There is of course the possibility of a substantial diminution of Britain’s trade with the Eurozone during the initial upheaval when old currencies are re-established and values assigned to contracts and so on; a much lesser chance of lost trade with rest of the EU which remains
outside the Eurozone (and like Britain retains national currencies) during the period of adjustment and a lesser chance still of disrupted trade with members of the European Economic Area (EEA)such as Norway and Switzerland.

How much might Britain lose? Claims of Britain having 50% of its exports going to the EU are misleading because they are inflated by “….two quite separate effects. The first, the Rotterdam- Antwerp Effect, relates to exports of goods and commercial services to Holland and Belgium. About two thirds of these pass through the two biggest ports in Europe, Rotterdam in Holland and Antwerp in Belgium, on their way somewhere else – some to other EU countries, the rest outside the EU.

“The second, the Netherlands Distortion, relates to Income. This often flows through Dutch “brass-plate” holding companies which offer tax advantages. As a result, much of the investment and income flows recorded in the British statistics as going to or coming from Holland in fact go to come from somewhere else, very often outside the EU altogether.”

(http://www.globalbritain.org/BOO/HowDependant.htm)

How much of an inflation of UK exports to the EU it is difficult to say, but it would probably be reasonable to knock the amount of our exports which go to the EU overall down to 40%.

Would Britain be ruined if the Euro collapsed? It is worth remembering that only around 18% of UK GDP is devoted to exports. UK GDP in in the financial year 2009/10 was £1453billion (http://www.ukpublicspending.co.uk/downchart_ukgs.php?title=UK%20Gross%20Domestic%20P roduct&year=1950_2010&chart=#ukgs303) and exports of goods and service came to £260 billion (http://www.economywatch.com/world_economy/united-kingdom/export-import.html) or 18% of GDP. If only 40% of UK exports go to the EU (or strictly the European Economic Area), that would mean around 7% of the UK total economic activity would be at risk.

Of course, no such wholesale loss would occur because stricken or not the Eurozone countries (and even more so the other continental EU countries not in the Eurozone) would not suddenly lose most of their economic activity. Moreover, it is conceivable that the re-establishment of national currencies could stimulate the economies of those involved remarkably quickly because it would allow them to trade on reasonable terms.

It is also probable that the UK financial sector would pick up much of the business involved in the break-up of the Euro as companies and governments both in the Eurozone and the wider world look to the financial expertise of the UK to help unravel the mess.

The problem of the Euro as a reserve currency

It is one thing to be a currency which is a national currency and little else: quite another to be the second largest reserve currency in the world which is the fate of the Euro. Extremely problematic questions arise from that status most pressingly, what will the holders of the Euro as a reserve currency receive if the Euro collapses??

The conversion of Euros to new national currencies of the Eurozone is in principle (but not in practice) straightforward, because the Euro holdings within the Eurozone could be converted to whatever the exchange rate of the each new currency is deemed to be, for example, a one to one parity for the Euro and a new German Mark and three to one parity for the Euro and a new Drachma (the conversion ratios could be achieved either by negotiation within the Eurozone
members or by allowing the new currencies to float for a few months and then using their market valuations).

The position of the holders of the Euro as a reserve currency who are not Eurozone members is completely different for they will not have a new currency to which to convert. All would want the new Mark and none the new Drachma. I suppose that they could be offered a basket of all the new currencies with the contribution of each weighted to a criterion such as the population of each Eurozone member. However, that would be tantamount to a substantial devaluation of their Euro holdings.

Running parallel to the position of the reserve currency holders is the status of private individuals and organisations outside of the Eurozone holding Euros. How will they be treated if the Euro ceases to be?

These are all questions which wait to be addressed. They are capable of causing immense tensions not merely in the EU but worldwide as holders of the Euro face massive losses.

Will the Euro survive?

The intense desire of the EU elites to preserve the Euro to provide the glue to maintain the greatly expanded union and as a platform for further federalisation is not at issue. A collapse of the Euro would both reduce to rubble the EUs attempt to project itself as a superpower and leave the EU subject to economic sanctions by countries outside the EU which had lost out through the Euro’s collapse. That alone would provide the most pressing reason for the Eurozone elites to maintain the currency, even to the point of engaging in large capital transfers from richer to poorer Eurozone members.

But the will of elites cannot keep a political system in place if the fundamentals are wrong. In the Eurozone they are wrong both in terms of the vicious absurdity of the Euro and the profound lack of democratic control. Ironically, the agent of immediate destruction will be a god of the Western elites own creation, globalisation, which has allowed that most truly supra-national of entities, the financial markets, to come into being.

If the Euro does fall, it could herald the end of the EU. That would be a savage irony because the Eurofantatics would have destroyed that which they most desired by feeding it on too rich a political fare.

The euro crisis has turned into a fatal disaster

Tradingfloor.com Lars Seier Christensen , co-founder & CEO, Saxo Bank A/S Filed in Lars Seier Christensen Denmark, 09 May 2013 at 13:09    In his keynote speech at this week’s #FXDebates event in London, Lars Seier Christensen, the co-founder and co-chief executive of Saxo Bank, said the euro crisis had turned into a fatal disaster with huge consequences for the members involved.

“I have rarely, in my 25 years career in foreign exchange, witnessed an equally turbulent and fascinating time,” he told the audience.

Here is the speech in full:

Talking points

Thank you for inviting me to open the second FXDebates event.

I am quite excited by the FXDebates initiative, so let me start by telling you a little bit about the initiative.

Last year, Saxo Bank joined forces with Bloomberg and published a series of articles for an e-book covering the latest trends in the Foreign Exchange market. In March, this turned into the first FXDebates event and I am delighted to open the second FXDebates on a rather daunting subject, the euro crisis.

I’m particular proud of our co-operation with Bloomberg as they have been champions in pushing ‘thought leadership’ to a new level with their editorial strategy. I would also like to extend our thanks to CityAM for their support of todays event.

Thought leadership is not just another buzz word. Thought leadership is rather an honest and rational approach to outperform in a rapidly changing digital economy.

It’s about business leaders recognizing the opportunities enabled by new megatrends in the market. Those in my view center around technology, of course, but also a significant shift in investor perception. Investors are looking for transparency, independent information and to enable their self empowerment and independence of thinking, where before they would rely more on traditional sources in the banks.

That is bad news for old, outdated private banking models relying heavily on client trust, but it is good news for financial institutions deploying technology, information sources and communication channels intelligently and innovatively, involving and engaging investors much more actively in the decision making process.

With the FXDebates, Saxo Bank, a specialist in online trading and investment, and our esteemed guests get an opportunity to highlight our and their intent to better educate traders and prepare them in the best possible way for the dynamic world of foreign exchange. The understanding of the importance of foreign exchange and the use of the market, both as an asset class in itself, and as a crucial overlay to other assets classes remains surprisingly limited, even among many professional participants.

Understanding fully the impact of currencies on our world and our investments is more necessary and relevant than ever. Used extensively as centrals tool in defining international trade policies and growth initiatives, investors need to fully grasp the implications on their portfolios. And of course, most importantly, the euro crisis has turned into a fatal disaster with huge consequences for the members involved. I have rarely, in my 25 years career in foreign exchange, witnessed an equally turbulent and fascinating time.

And as this is the main subject of our debate today, let us turn to the situation in the Eurozone.

Frankly, it is a complete mess. And it is a mess that gets worse and worse every day. Only not in Brussels. There we hear an endless litany of promises of recovery in six months time, always in six months time, we hear the Euro is safe, and that if just we all hand over more responsibility to our Masters in Brussels, everything will be just fine.

Nothing could be further from the truth. We have just been through the bailout of the fifth Euro zone country, and both Slovenia and Malta are queuing up to be next. When, not IF, the Troika arrive in these two countries, it will create to an absurd situation where nearly half of the Eurozone countries have been broken by their adoption of the common currency, the same EURO they joined with such high hopes for the future.

Now these are small countries, and can be treated as such… just look what happened to Cyprus. I would suggest to Malta, Slovenia and other bailout candidates that they hang on for dear life until after the German election. After Cyprus, we now know what happens if you get in the way of a German leader seeking reelection.

What is it that is going so wrong in the Eurozone? I think we all know very well by now. The Euro is a political construct, and it simply has no sound economic or fiscal foundation. Unless that is put in place, the Euro will be doomed eventually.

The political capital invested in Euro is gigantic, so the will to keep it alive for absolutely as long as humanly possible, should never be underestimated. Every tool in the box – and I seriously mean EVERY single tool in the box- will be tried, before the unelected, unaccountable people in Bruxelles capitulate to reality. But doomed it is, the Euro, be in no doubt about it.

Actually, a lot of people knew this already when the Euro was introduced. Saxo Bank’s chief economist, Steen Jakobsen, that did work related to the Delors commission back in the nineties, has often told me that the dangers playing out now, were openly discussed at the time. But the political pressure to move forward back then was relentless, and the momentum in the EU seemed so strong, that it was expected by many that the foundation could be put in place after the house was built.

Not so. Because during the first decade of the Euro, it became clear that the suggested benefits from the Euro never materialised. There was no strengthening of Europes clout in the world, there was no discipline among the members, there were serious issues beginning to show for the weaker countries that could not keep up with Germany when it came to competitiveness and productivity. There was no way to manage the economy without controlling your own short term interest rates. There was no way to devaluate your currency to create renewed equilibrium and ability to compete. There was no long term beneficial impact on long term interest rates, as the big winners from the Eurozone, Germany could and would not sell to their citizens that they should underwrite a common Eurobond, or make large transfer payments to the weaker countries forever.

And now, there is no way that the European populations are willing to move forward with the necessary further integration. Not that they get asked directly a lot,as almost all decisions are made by their parliaments or in Bruxelles behind closed doors, because no one dares to ask their populations via a referendum – they know the answer would be a resounding NO! And a NO it should rightly be, because Europe is not, and will never be, the United States. Our cultures, our economies, our populations are far too diverse to ever integrate efficiently and happily in a forced union.
Instead, integration is brought in via the back door, via contributions to the bailout mechanism, by corruption of the ECBs balance sheet, by the banking union that would destroy the credibility of even sound banks if fully implemented, by passing treaty changes quickly and uninformed via the parliaments, claiming that representational democracy justifies that. Well, it doesn’t. A parliament that gives up national sovereignty knowing full well that their population would reject it, are committing treason, in my view.

But one thing is politics, another is economics, although it gets harder and harder to tell the two apart.

Anyone with a rational view of the world now sees the currency collaboration as a historic failure that can lead to even further fatal consequences for Europe and the continent’s competitiveness vis-à-vis the rest of the world.

In my view, there are a number of things that are very clear. The Eurozone will eventually break up. It could happen in a multitude of different ways.

The weaker countries could leave. If this process was managed in an orderly fashion, it could be done at lower costs than the current and future bailouts, and it would quickly set the exiting countries back on a recovery course.

Germany could leave. As the sole beneficiary of the Eurozone until now, this is not likely to happen anytime soon, but as the bills begin to pile up even higher, that may all of a sudden seems an attractive solution to the German citizens. Of course, this would mean a much higher German exchange rate, but with the pressure off for a while, it would reduce the urgency of the crisis for the remaining 16 countries, that would experience a growth boost from a significantly, but not catastrophically lower Euro rate.

A multi-currency zone could evolve, with countries with more similar economic conditions and objective could group together and achieve more appropriate currency levels.

But all of these scenarios would require rationality returning to Bruxelles. It could be certainly be achieved with less chaos and less economic mayhem than what otherwise awaits the Eurozone.

This could even secure attractive outcome of an EU returning to focus on a common market, reducing trade friction between the economies, and benefit from the big diversity of different competences across Europe – we have the benefit of both highly educated workforces and low cost industrial workers, more than 500m consumers, and the benefit of competing tax and social welfare systems.

Again, I repeat, all of this requires rationality to return to the Eurozone. And frankly, this does not seem to be on the cards, unfortunately.

If rationality does not return, what can we expect…

In my view, recession will continue for years, and even turn into depression. Forget about recovery in six months, it will always be six months from now.

Euro denominated assets will remain unattractive, and downright dangerous, to hold for years to come.

Bond yields will rise substantially, in all the 17 countries as the unsustainability of the situation becomes ever clearer.

Bruxelles will claim ever more power, and use it ever more poorly. The financial sector will be drowned in self defeating regulation, taxes and cross border responsibility for failing banks, that will eventually destroy also the healthy banks.

Cyprus WAS a template. Expect not only bail ins, which if defined clearly ahead of time could be part of the solution, but also outright confiscatory wealth taxes, disguised as solidarity payments. The governments of Europe need money, and the private sector has it. It is as simple as that. Be very paranoid.

Expect latent surprises in the Eurozone minefield. The Cyprus chaos has ensured this. A normal private depositor that has worked hard to save up for his family, will not move his account to Switzerland or Singapore. But what will he do when his country is having a bailout over the weekend? I would say the mattress will look a safer place than his bank over that weekend. So bank runs could start instantaneously.

Of course, the answer to bank runs is capital restrictions. Expect a lot more of that, always introduces as short term and temporary, but very hard to remove once in place. Iceland is in its 5th year of “temporary” capital restriction – just for your reference.

There are a lot of things to worry and think about if you are a citizen or investor in the Eurozone.

So all the more reason to welcome the the second FXDebates event about the euro crisis. I for one look forward to hearing what our panel has to say.

This crisis will not pass. This is reality for investors and traders around the world and that’s why this is an important forum.

A crisis is also an opportunity as it creates conditions for change. Hopefully a change towards more transparency, reform but also intellectual honesty. This forum should be a stepping stone towards better understanding based on openness, intellectual capacity and two organizations with a firm belief in that voicing and exposing opinions is key, particularly in time of crisis.

FX and the debate of currencies is very much both part of the solution and the problem of Europe today.