Euro ‘house of cards’ to collapse

By Ambrose Evans-Pritchard. This article originally appeared in the Daily Telegraph.

The European Central Bank is becoming dangerously over-extended and the whole euro project is unworkable in its current form, the founding architect of the monetary union has warned.

“One day, the house of cards will collapse,” said Professor Otmar Issing, the ECB’s first chief economist and a towering figure in the construction of the single currency.

Prof Issing said the euro has been betrayed by politics, lamenting that the experiment went wrong from the beginning and has since degenerated into a fiscal free-for-all that once again masks the festering pathologies.

“Realistically, it will be a case of muddling through, struggling from one crisis to the next. It is difficult to forecast how long this will continue for, but it cannot go on endlessly,” he told the journal Central Banking in a remarkable deconstruction of the project.

The comments are a reminder that the eurozone has not overcome its structural incoherence. A beguiling combination of cheap oil, a cheap euro, quantitative easing and less fiscal austerity have disguised this, but the short-term effects are already fading.

The regime is almost certain to be tested again in the next global downturn, this time starting with higher levels of debt and unemployment, and greater political fatigue.

Prof Issing lambasted the European Commission as a creature of political forces that has given up trying to enforce the rules in any meaningful way. “The moral hazard is overwhelming,” he said.

The European Central Bank is on a “slippery slope” and has in his view fatally compromised the system by bailing out bankrupt states in palpable violation of the treaties.

“The Stability and Growth Pact has more or less failed. Market discipline is done away with by ECB interventions. So there is no fiscal control mechanism from markets or politics. This has all the elements to bring disaster for monetary union.

“The no bailout clause is violated every day,” he said, dismissing the European Court’s approval for bailout measures as simple-minded and ideological.

The ECB has “crossed the Rubicon” and is now in an untenable position, trying to reconcile conflicting roles as banking regulator, Troika enforcer in rescue missions and agent of monetary policy. Its own financial integrity is increasingly in jeopardy.

The central bank already holds over €1 trillion of bonds bought at “artificially low” or negative yields, implying huge paper losses once interest rates rise again. “An exit from the QE policy is more and more difficult, as the consequences potentially could be disastrous,” he said.

“The decline in the quality of eligible collateral is a grave problem. The ECB is now buying corporate bonds that are close to junk, and the haircuts can barely deal with a one-notch credit downgrade. The reputational risk of such actions by a central bank would have been unthinkable in the past,” he said.

Cloaking it all is obfuscation, political mendacity and endemic denial.  Leaders of the heavily indebted states have misled their voters with soothing bromides, falsely suggesting that some form of fiscal union or debt mutualisation is just around the corner.

Yet there is no chance of political union or the creation of an EU treasury in the forseeable future, which would in any case require a sweeping change to the German constitution – an impossible proposition in the current political climate. The European project must therefore function as a union of sovereign states, or fail.

Prof Issing slammed the first Greek rescue in 2010 as little more than a bailout for German and French banks, insisting that it would have been far better to eject Greece from the euro as a salutary lesson for all. The Greeks should have been offered generous support, but only after it had restored exchange rate viability by returning to the drachma.

His critique will exasperate those at the ECB and the International Monetary Fund who inherited the crisis, and had to deal with a fast-moving and terrifying situation.

The fear was a chain-reaction reaching Spain and Italy, detonating an uncontrollable financial collapse. This nearly happened on two occasions, and remained a risk until Berlin switched tack and agreed to let the ECB shore up the Spanish and Italian debt markets in 2012.

Many would say the crisis mushroomed precisely because the ECB was unable to act as a lender-of-last resort. Prof Issing and others from the Bundesbank were chiefly responsible for this design flaw.

Jacques Delors, the euro’s “political” founding father, issued his own candid post-mortem last month on the failings of EMU but disagrees starkly with Prof Issing about the nature of the problem.

His foundation calls for a supranational economic government with debt pooling and an EU treasury, as well as expansionary policies to break out of the “vicious circle” and prevent a second Lost Decade.

“It is essential and urgent: at some point in the future, Europe will be hit by a new economic crisis. We do not know whether this will be in six weeks, six months or six years. But in its current set-up the euro is unlikely to survive that coming crisis,” said the Delors report.

Prof Issing is not a German nationalist. He is open to the idea of a genuine United States of Europe built on proper foundations, but has warned repeatedly against trying to force the pace of integration, or to achieve federalism “by the back door“.

He decries the latest EU plan for a “fiscal entity” in the Five Presidents’ Report, fearing that such move would lead to a rogue plenipotentiary with unbridled powers over sensitive issues of national life, beyond democratic accountability.

Such a system would erode the budgetary sovereignty of the member states and violate the principle of no taxation without representation, forgetting the lessons of the English Civil War and the American Revolution.

Prof Issing said the venture began to go off the rails immediately, though the structural damage was disguised by the financial boom. “There was no speed-up of convergence after 1999 – rather, the opposite. From day one, quite a number of countries started working in the wrong direction.”

A string of states let rip with wage rises, brushing aside warnings that this would prove fatal in an irrevocable currency union. “During the first eight years, unit labour costs in Portugal rose by 30pc versus Germany. In the past, the escudo would have devalued by 30pc, and things more or less would be back to where they were.”

“Quite a few countries – including Ireland, Italy and Greece – behaved as though they could still devalue their currencies,” he said.

The elemental problem is that once a high-debt state has lost 30pc in competitiveness within a fixed exchange system, it is almost impossible to claw back the ground in the sort of deflationary world we face today.

It has become a trap. The whole eurozone structure has acquired a contractionary bias. The deflation is now self-fulling. Prof Issing’s purist German ideology has no compelling answer to this.

A Charm offensive by the Bank of England

George West and I were among an audience of business people, local councillors and reporters at a meeting called by the Bank of England at the National Space Centre near Leicester to explain its role. It was one of a series being held throughout the country to improve the bank’s image and public relations.

 We were addressed by the elegant Deputy Governor, Minouche Shafik. She explained how the bank had now taken over regulation of the banking and insurance sectors with a duty to maintain stability in a turbulent international situation. The bank, she said, was politically neutral and independent of the government.

 I had an opportunity to mention that the members of the Campaign for an Independent Britain felt that the Governor, Mr Carney, had stepped outside that brief by his strong intervention on the “Remain” side during the referendum. I hoped she would make it clear to him that we felt that this had been unhelpful and beyond the  functions of the bank,  as described by her.

She explained that quantitative easing was a means of putting more cash into the hands of banks for financing increased business activity. The bank did this by buying assets such as government and latterly corporate bonds. She admitted that the money for this was effectively conjured out of thin air. Having been in the food business, I asked whether this was not equivalent to watering the milk and would we not face massive inflation as a result? She replied that inflation was low and that the introduction of this liquidity into the market plus the very low rate of interest had, in their view, avoided a recession turning into depression.

In reply to questions from other businessmen, she explained that those banks which did not increase their loans would face higher interest rates on their borrowings from the bank. Some of the new “challenger” banks felt that the regulation they faced was too onerous and hindering their efforts to provide finance which would stimulate growth.

On the way home, I heard very trenchant comment on Radio 4 News from an American financier, talking down Sterling very hard and emphasising the perils of Brexit and the uncertainties until the deal was done.  There was a spirited rejoinder from Roger Bootle. It was then reported that Mark Carney, the Governor of the Bank of England, had announced that he was going to allow the inflation rate to rise above the bank’s target of 2% to stimulate growth. I have to admit to feeling uneasy about that. Inflation is, in fact, a tax on the thrifty saver by the borrower  – and the most feckless and reckless borrower is Her Majesty’s Government. We have not had nearly enough austerity to reduce government borrowing and we have an appalling balance of payments deficit on our trade.

Let us hope that the lower value of Sterling will help to put that right before long.

 

 

The UK’s strong hand in trade negotiations

The war of words between UK ministers and EU officials continues. Donald Tusk, the President of the European Council, insisted that the only choices available ot the UK were “Hard Brexit ” or No Brexit” – in other words,  give up trying to leave the EU or accept that if we will not accept freedom of movement, we canot have access to the single market. The article mentioned Norway and Switzerland, which both accept freedom of movement. It failed to mention Liechtenstein which, as we have frequently mentioned before, does not.   

As we have pointed out, this is not he first instance of the media being less than helpful in reporting the prelimiarnbies to the negotiations. However, sometimes, some useful facts to appear. The article below, from the Economic Research Council,  indicates the importance of the UK as an export market for several leading EU nations. Of course, the UK needs to ensure that our goods meet all the EU’s complex regulatory requirements to access the Single Market, but if we adopt the Liechtenstein route or some sort of shadow-EEA arrangement, we do have quite a bit of leverage.

Summary: The chart shows some aspect of each nation’s position on trade with the UK in the run up to Article 50 negotiations with access to the single market being the key issue. Theoretically, countries with a greater reliance on the UK for exports could (or should!) take a softer stance on Brexit negotiations, in order to safeguard these trade links. Where the export/import ratio increases; this pressure to achieve favourable terms should be compounded.
ercchart4116

What does the chart show? The blue bars show the export/import ratio of each nation. Values above 1 denote that the country is a net exporter to the UK, and values below 1 show that the country is a net importer from the UK (of the nations shown, only Greece and Ireland are in this category). The red dots show each country’s exports to the UK as a % of their total exports to EU28 countries, so higher values therefore signify a greater reliance on the UK trade in their dealings with other EU nations. The data represents trade in goods only (not services) and is from 2015.

Why is the chart interesting? The chart shows that the key European nations individually have a very significant reliance on trade with the UK, with five of the key players doing over a tenth of all their export trade in Europe with the UK. What is also underlined is that, unless a united front from the EU states is shown in negotiations, Britain has serious clout with each of them through the sheer scale of its buying power. In addition, the graph only displays trade in goods not services, which might increase EU state’s reliance on Britain yet further.

There has been much speculation on the tone Article 50 negotiations are likely to take, not helped by entrenched ideological positions. We have seen firm and unequivocal comments from some ministers in EU member states who are taking a decisive ‘all or nothing’ stance. This toughening of tone stands in contrast to early conciliatory statements in the days that followed the result. On the other side, the self-assured attitude of some members of the British government, particularly Johnson and Gove, stems from their confidence in the UK’s strength based on the EU’s reliance on UK trade.

What the chart illustrates well is that for the key states in Europe, these negotiations are about far more than trade, indeed they may well allow their economies to take a hit for the longevity of the political union.

Two more brexit monographs from the Leave Alliance

The Leave Alliance, of which the Campaign for an Independent Britain is a member, has produced two  further monographs on the subject of Brexit.

They can be downloaded here:-

Authorised Economic Operators

Taking Back Control

Alternatively, a full list of monographs can be found on this page of the Leave Alliance website.

Précis of all these monographs can also be found on the CIB website

All are well worth reading, setting out some of the issues we will need to face when negotiating our exit from the EU. The Authorised Economic Operators monograph addresses a little-known subject of crucial importance to our international trade.

Brexit progress at the beginning of September

To ensure a successful and permanent separation from the EU, three tasks need to be accomplished. Firstly, Article 50 needs to be invoked, beginning the two-year process (which can be extended subject to mutual agreement)  which will actually take us out of the EU. Secondly, the government needs to have studied the alternatives and come up with a well-researched Brexit strategy that will ensure that we arrive at the exit door with the best possible future ahead of us, our trade with both the EU and the rest of the world in good shape. Thirdly,  remain voters, especially the young, need to be de-programmed and years of indoctrination undone so that the scales of europhilia will fall from their eyes. At the same time our democratic processes need to be renewed to ensure that no politician will ever be able to repeat Edward Heath’s litany of deceit to drag us back in.

The Campaign for an Independent Britain will do what we can to put pressure on HMG to ensure the first of these tasks takes place as soon as practically possible. As far as the second is concerned, we have sought to provide a forum for an exchange of views on the subject. Tackling the third will be a major long-term challenge and one which, no doubt in common with other pro-independence campaign groups, we are only starting to get to grips with. The Harrogate Agenda has gone some way to devising a blueprint for democratic renewal, but more needs to be done, especially in our schools and universities, to provide a counter-weight to years of pro-EU propaganda which young people have been fed and – in many cases – uncritically imbibed.

Another part of the de-indoctrination process is to provide resources. There is a need to disseminate news of post-Brexit developments, including informed comment. The shock of Brexit has left something of a vacuum and there has been no shortage of on-line doom mongers claiming that Brexit will never happen, while disgruntled remainers continue to call for a second referendum and to latch onto any piece of bad economic news.

We are therefore producing pieces like this article both to reassure worried leave voters and to provide them with information to use in their dealings with any remainers among their acquaintences. Once we separate the wood form the trees, the picture is actually pretty encouraging. Early economic indicators suggest that the “do-it-yourself recession” over which George Osborne fretted has not happened and is not going to. Meanwhile Theresa  May has proved much firmer on the issue of Brexit than many leave voters had expected. She intends to trigger Article 50 at some point next year and has ruled out a second referendum or an early general election. Her comments at yesterday’s cabinet meeting at Chequers have been quite unequivocal:-

“We must continue to be very clear that ‘Brexit means Brexit’, that we’re going to make a success of it. That means there’s no second referendum; no attempts to sort of stay in the EU by the back door; that we’re actually going to deliver on this.”

She also added that “quite a lot of work” had already been done over the summer to prepare the way for the Article 50 exit negotiations, although no more details were provided. She has stated that there will be a “red line” on free movement from the EU and thus that we would pursue an unique relationship with the EU rather than adopting an off the shelf solution such as the Norwegian or Swiss models.

Mrs May has also confirmed that there will be no parliamentary vote before Article 50 is triggered. This will spike Owen Smith’s guns, but is perfectly fair. After all, the referendum bill saw Parliament hand over to the electorate the final decision about whether or not to stay in the EU. Even if both Houses of Parliament have strong europhile majorities, it would still be nothing less than immoral to ride roughshod over June 23rd’s vote.

So it does look like Article 50 will be triggered and that we will therefore begin the withdrawal process at some point next year. This is all very positive. It would be good to know a bit more about the likely exit route and how the key issues of restricting migration and access to the single market will be dealt with.  It is no secret that there are disagreements over these issues within Mrs May’s cabinet. However, in view of her tough rhetoric on immigration at last year’s Conservative conference, it is no surprise that she has thrown her weight behind some restriction on freedom of movement – after all, immigration was one of the main factors behind the leave victory and recent statistics have underlined the scale of the task which her government faces if these aspirations are to be met.

Returning to the economy, things look pretty positive.  Last week, we mentioned Anatole Kaletsky, who claimed that over time, public opinion would shift back towards EU membership. In the interest of fairness, it’s only right that we report his “Remainer’s Recantation”  – in other words, his admission that  the post-June 23rd armageddon he predicted hasn’t come to pass:- “Nobody can say at present whether this newfound indifference to Brexit will turn out to be well-founded realism, complacency or wishful thinking, but it is definitely not the attitude that I expected in the panicky hours immediately after the vote.”

The CBI’s latest quarterly survey also shows that business and professional services firms – which include accountancy, legal and marketing firms – reported that business volumes were unchanged on the quarter, after rising in May. Meanwhile, consumer services companies – which include hotels, bars, restaurants, travel, leisure – saw further moderate growth in business volumes. The report highlighted a decline in optimism, but given that the CBI was a staunch supporter of remain, this isn’t really a great surprise. With business performing better than expected, it is likely that this lack of optimism will prove a short-term issue, which will dissipate once a clear timetable for Article 50 and details of the withdrawal strategy are spelt out.

This article from the oil and gas industry’s magazine expresses some concern about the possible effects of Brexit on a very unstable EU, claiming that it could trigger a fall in demand, but the article goes on to say that “things rarely turn out as bad as we feared or as well as we hoped.”  Meanwhile, consumer spending has rebounded, with strong high street sales figures reported for July.

All in all, a pretty upbeat picture of our economy. In fact, in view of the data, it is highly questionable whether the Bank of England should have re-started its Quantitative Easing. The economist Tim Congdon called the move “crazy”.

For all that, we did the right thing on June 23rd and if anyone is in any doubt, the recent behaviour of the European Commission should put their minds at rest. Less than two months after  the decision by one of the biggest EU member states to leave this project, the Commission President, the arch-federalist Jean-Claude Juncker showed just what a different world he lives in compared with the average UK voter. “Borders are the worst invention ever made by politicians”, he recently said in a recent meeting to discuss the future of the EU following the Brexit vote.  Our Prime Minister replied that people of the United Kingdom consider the control over their country’s borders to be important.  Indeed, the desire to regain a greater degree of control of our borders was a big factor in the Leave vote.

But we are not alone in our concerns. The migration crisis is causing borders to be reinstated in many frontiers across Europe, even between countries who signed the Schengen accord. Mr Juncker’s desire to see national borders sompletely abolished is increasingly out of step with the wishes of many EU “citizens”.

Meanwhile, his colleagues at the Commission have seriously upset the Irish.  Margrethe Vestager, the EU’s Competition Commissioner, ordered Apple to pay €13 billion in tax to the Irish government, claiming that its arrangement with the Irish government is illegal under state aid rules. Not only is Tim Cook, Apple’s Chief Executive, annoyed by this decision, calling it “maddening” and “political”, but reaction in Ireland has been very hostile. The Irish cabinet is contemplating an appeal against the decision, while Michael O’Leary of Ryanair, one of Ireland’s most well-known businessman, used somewhat stronger language to register his disapproval.

While such resentment is unlikely to build up a sifficient head of steam to lead to calls for Irexit, there is no doubt that the European Commission could prove one of the withdrawal movement’s key allies in our longer term campaign to ensure we never re-join the EU.  Its behaviour makes our end-game a lot more achievable – namely when we reach the same point as Switzerland where, to quote  Thomas Minder, a counsellor for Schaffhausen state, only ‘a few lunatics’ want to join the EU,

Brexit – the mood at grassroots level eight weeks on

Away from the debate between politicians, businessmen and campaigners  about the best exit route, eight weeks after the memorable result of June’s referendum, life for ordinary people has settled down remarkably quickly.

In fact, it soon became apparent within a matter of days after June 23rd that life was carrying on as normal for much of the country. I recall a trip to London during the final week of June.  Walking down the south bank of the Thames, it struck me how little effect the referendum result  was having on day to day life. A long queue of people of all nationalities were waiting to buy tickets to the London Eye and the restaurants were full – in fact, my train home was even fuller! In short, you wouldn’t have thought we had just taken a major political decision only a few days ago.

Initial statistics suggest that life did indeed carry on much as normal during the first full month after the Brexit vote.  The number of people claiming unemployment related benefits fell by 8,600 in July. It had been expected to rise by around 9,000. The fall was the first since February this year. Other data showed that the employment rate in the UK reached a record high of 74.5% between April and June this year. Retail sales also grew by 1.4% during the month. The vote to leave the EU has not deterred people from spending money.  Furthermore, for all the uncertainly generated by David Cameron’s decision to call the referendum, London attracted more venture capital for start-ups than other major European cities. According to an article in Frankfurter Allgemeine Zeitung, it attracted €1.5bn in the first half of the year, well ahead of its nearest rivals Stockholm (€1bn), Paris (€674m), and Berlin (€520m).

Significantly. although the rate of UK consumer price inflation jumped to 0.6% in the year to July followin the Brexit vote, it was only slightly up on the 0.5% recorded in March and still well below the 1% threshold which triggers a letter from the governor of the Bank of England to the Chancellor explaining why inflation is so far below the 2% target!

BBC Radio 4 broadcast an interesting programme on Wednesday Evening where two groups of people from the most pro-leave and the most pro-remain areas of the UK met in separate rooms to discuss their feelings following the Brexit vote. Two Rooms, hosted by Fi Glover,  was another fascinating insight into how quickly life has settled down. The leavers, from Boston, Lincolnshire, were the more optimistic of the two groups, expressing great hopes especially for the UK’s trade prospects. The remainers, from Brixton in South London, talked of their shock when the result was announced. They were concerned about possible loss of access to the single market and expected an economic downturn.

Both groups,  however, accepted the result. Indeed, one person used the phrase “now we’ve left”, even though we haven’t even invoked Article 50 let alone come out the other end! Interestingly, both groups saw Brexit as a long overdue opportunity to re-boot our democracy and to decentralise power to a local level. For all the initial horror of some Brixtonian remainers, there were no calls for a second referendum. They may not have wanted a leave vote, but Brexit as far as they were concrned means Brexit.

Such attitudes at the grassroots level should not come as a shock. For four month’s David Cameron’s decison to call the referendum  thrust the issue of EU membership into a prominence it had never previously enjoyed.  A year ago, just before the General election, a survey by YouGov placed “Europe” as far down as 7th in its list of voters’ priority issues, well behind housing, welfare and health. Anyone who has ever stood as a UKIP candidate will have known the frustration that in general elections, the EU was never widely viewed as the most important factor in determining how people would vote.  After its moment in the spotlight, it is therefore unsurpisingly again receding into the background.

But not totally. News that over a million Eastern European migrants are now working in the UK will have served as a reminder to some people why they voted to leave, while the Daily Express has unearthed another story which will raise plenty of hackles:- a German-based agency called medaltracker.eu whose data is used by offical EU websites, has published a chart showing that the greatest number of medals in the Rio Olympics has been won by the EU! Nowhere is the UK to  be seen, which is  particularly galling considering the tremendous performances by Team GB. It seems that the Brexit vote has done nothing to change the mindset of the EU élite who opened a museum four years ago costing £44 million and called the “House of European History” which calls the Second World War a “civil war“, in spite of quite a bit of the action taking place in North Africa and the Far East

While it seems impossible to change this very selective and bizarre interpretation of history, hopefully, if our government and Civil Service can get their act together, by the time the 2020 Olympics begin in Tokyo, “now we’ve left” really will mean “now we’ve left” and the likes of Medaltracker will not be able to repeat their insult to our heroic athletes.