2017 – make or break for the EU?

The strong UK economic performance in the second half of 2016 defied the gloomy predictions of many economists. Nevertheless, these same people are determined to tell us that Brexit will result in economic problems in 2017 instead. According to a number of economists surveyed by the Financial Times, growth will slow markedly during the year. Well, we shall see. The fall in sterling will almost certainly cause a rise in inflation, but worst case estimates put the annual Comsumer Price Inflation figure at something between 2-4%, which in recent historical terms is not that high, albeit not terribly good news for consumers.

In spite of Brexit, however, it is events in a number of the other 27 countries of the EU which are likely to cause far more concern during the course of 2017. While the Eurozone economy is recovering, it is still not strong enough to manage without the Quantitative Easing programme which the European Central bank began in early 2015. Italy in particular is looking very wobbly. It is estimated that 18% of all loans made by its banks are “non-performing” – in other words, are highly unlikely ever to be repaid.  These amount to a staggering €360 billion in total.

Furthermore, outweighing the economic concerns is the political scene. This year will see general elections in France, Germany, the Netherlands and the Czech Republic and possibly Italy. The likelihood of parties from outside the “mainstream” making significant gains or even ending up in power has been widely reported (See for instance here and here.)   Indeed, Mark Blyth, an academic based at Brown University in the USA, has predicted has predicted that the EU will cease to exist by the end of this year.

As James Forsyth wrote in the Spectator article mentioned above, however, “The British, it is said, always underestimate the sheer political determination to keep the European project moving forward.” Perhaps he has a point. Many of us who campaigned for Brexit regard the whole EU project as at best misguided and at worst, simply daft. Both during referendum debates and in articles for this website, I have publicly declared “I wouldn’t wish EU membership on my worst enemy”, but is this a sentiment confined to a minority of people in one country which has never been that keen on the EU project anyway?

Certainly Angela Merkel in Germany still exhibits the determination of which Mr Forsyth speaks. She reiterated her belief in the European project only a couple of weeks ago. “We Germans should never be deceived into thinking that a happy future could ever lie in going it alone nationally”, she said in her New Year message.

Meanwhile the Slovak Prime Minister, Robert Fico (whose surname, out of interest, should be pronounced “Feet-so“) has urged member states to stop their “adventures” – in other words, holding referendums on domestic issues  – because they “pose a threat to the EU.”

What will we do if … there is a referendum in Italy on the euro and Italian citizens decide they don’t want the euro?” he asked. What indeed?

On the surface, it appears that Mr Fico is singing from the same songsheet as Frau Merkel, but scratch a bit deeper and it very apparent that the former Soviet bloc countries, while seemingly committed to the EU, have a rather different idea of the way forward. In Poland, for instance, Jaroslaw Kaczynski, the leader of the governing  Law & Justice Party, has called for a new EU treaty in the wake of Brexit which would stop, if not reverse, the flow of power from national parliaments to Brussels. “We need reforms which clearly define that the EU is an association of national states and that national states are the foundation,” he said.

These words are hardly in the spirit of the “Ever closer union” from which David Cameron sought to exempt the UK last year – and it needs to be remembered that this phrase goes right back to 1957. It features in the preamble to the Treaty of Rome which was the treaty which launched what has become the European Union. It is a foundational concept to the whole European project.

Kaczynski is often labelled “Eurosceptic” as is his Hungarian counterpart Viktor Orban. Whether or not this is an accurate label, there is no doubt that their vision of the EU is vastly different from that of the Western European leaders 20 or so years ago. Indeed, according to Martin Schulz, the outgoing president to the European Parliament, the attitude of these men has hamstrung the entire EU project:- “The generation of [Helmut] Kohl and [François] Mitterrand travelled to Brussels with the attitude that a strong Europe is in the interest of our country… The [Viktor] Orbán generation says ‘we have to defend the interests of our country against Europe’ – as if they were being attacked by Brussels.”

Schulz went on to defend both the €uro and the eastward enlargement of 2004, even though both have created enormous problems for the EU. The former has brought Greece to its knees and has given Italy a “lost decade” economically, the latter has brought in a group of nations whose outlook on life is very different from the mindset of Herr Schulz or his Chancellor and are none too keen to change.

It could be that Mr Forsyth is right and that, in spite of both the misery the Single Currency has caused to several Mediterranean nations and the opposition to multiculturalism, social liberalism and various other -isms in Eastern Europe, the EU will muddle through. On the other hand, throw into the mix the forthcoming General Elections and the fact that 2016 did not turn out as the “experts” predicted and  it would be a brave man who would bet his money on it.

Symbolism in politics – Italian style

Wise politicians know how to use symbolism. Winston Churchill posed with a tommy gun in 1940, Ronald Reagan wore a cowboy hat and Neville Chamberlain – less successfully – had a piece of paper.

So what was Italian Prime Minister Matteo Renzi doing with symbolism when he made his somewhat rambling resignation speech yesterday evening? Behind him were three very obvious things:

1 – The flag of Italy

2 – The flag of the European Union

3 – A mural by the great Renaissance painter Raphael.

The two flags are straightforward enough. Renzi was Prime Minister of Italy, a member state of the European Union. Both flags were of the same size, both on upright staffs and both of the same height. That means that neither was given precedence over the other. Of course, the flag of the EU should take precedence as it is a supranational organisation of which Italy is a mere part. But in the world of smoke-and-mirrors that is the EU it would never do to admit that. The pretence is made that member states are still democratic and independent. EU trickery and obfuscation, nothing new there.

No, it was the painting by Raphael that caught my eye. The picture in question is “The Meeting between Leo the Great and Attila”. This masterpiece of Renaissance art depicts a key historic event that took place in 452. Atilla, ruler of the barbaric Huns, had spent the previous 12 years butchering his way around Europe, and now he was marching on Rome. Pope Leo I led a trembling delegation north to meet Attila. Against all odds, Leo persuaded Attila withdraw back over the Alps. Rome was saved from the barbarians.

So what can we read into this?

Was Renzi seeking to portray himself as a latter day Pope Leo, seeking to save Italy from the northern barbarians? If so, he might have been casting the big German banks in the role of Attila – not the first time that Germans have been likened to Huns. After all, it is largely the need to stick to German inspired fiscal measures that has got the Italian economy – and its banks – into the mess that they are in. Or was the EU itself being likened to the Huns?

Unlikely, I think. Renzi is a creature of the EU. He was raised up to implement its policies and now has been cast down as a result.

Perhaps Renzi was seeking to liken his constitutional reforms to that previous great turning point in Italian history. If so, it was an unfortunate analogy. Rome was saved from the Huns, but it fell to the Germanic barbarians soon after.

Actually, I think any symbolism to be found here lies in the fact that the historic allusions were ignored.

That is typical of Renzi and of the EU. They were seeking to change radically the Italian constitution so that they could ram through highly controversial measures that would have brought the Italian banking system and finances even more into line with EU diktat than they already are.

They ignored the historic reasons why Italy has the rather unwieldy constitution that it does. Those who drew it up in 1947 wanted to achieve two things. They wanted to make it impossible for any single person again to wield the sort of power that Benito Mussolini had achieved under the old constitution. They also sought to reflect the identities and powers of regions which, within living memory, had been separate countries while at the same time binding them together into the nation-state of Italy.

This delicate balancing act within the Italian Constitution was to be swept away for the temporary convenience of the EU masters in Brussels and German bankers in Frankfurt.

The constitutional vandalism, disrespect for the past and contempt for the views of the people are typical of the EU – and summed up by Renzi’s disdain for the symbolism of the painting behind him.

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.

State of disunion

There has been very little to report recently concerning the triggering of Article 50 and Brexit negotiations. Last week, David Davis, the Secretary of State for Exiting the European Union, stated that it would be “improbable” that we would stay within the Single Market. The following day, a spokeswoman for the Prime Minister stated that Mr Davis was only “expressing his opinion.” Likewise, Boris Johnson’s enthusiasm for an Australian-style points system to manage immigration does not represent offical government policy. The same spokesperson said, “There are various ways you can do that and it is something the government is looking at and will come forward with proposals”.

So apart from a statement from Mr Davis that the WTO route looks “unlikely”,we are none the wiser about Mrs May’s exit plans, Indeed, Mr Davis said that “the government will not give away its negotiating position”, although he stated on Monday that the talks may be “the most complicated negotiation of all time.”

One of the biggest surprises following June 23rd’s vote was the reaction of senior figures from the EU member states and its institutions.  After the implication of the vote had sunk in, the message coming from Brussels was “get on with it and get out.” In other words, rather than begging us to reconsider, the powers-that-be wanted the UK to trigger Article 50 as soon as possible to prevent contagion and to make the period of uncertainty as short as possible.

A note of realism has crept in to more recent utterances from across the Channel, recognising that, with David Cameron refusing to allow the Civil Service any opportunity to plan a Brexit strategy before the vote, the UK would have to  do a great deal of homework before being ready to trigger Article 50. However, the “get on with it” message was  restated on Monday by Guy Verhofstadt, the former Belgian Prime Minister who is likely to be the lead Brexit negotiator from the European Parliament.

“I want the UK to trigger Article 50 as soon as possible, so we can finalise these negotiations by 2019,” he said. “I can’t imagine we start the next legislative cycle without agreement over UK withdrawal.”

In view of Mr Davis’ statement about the complexity of Brexit negotiations, this may be a tad optimistic, but from the EU’s point of view, with European Parliamentary elections due in 2019 and the next seven-year budget cycle due to begin in 2021, the desire to move on from Brexit is understandable.

On  Thursday 14th, Jean-Claude Juncker, the President of the European Commission, delivered a “state of the union” address to the European Parliament. In the wake of Brexit, it was hardly going to be a particularly upbeat speech. “Our European Union is, at least in part, in an existential crisis,” he said.

He went on to say that “never before have I seen such little common ground between our Member States. So few areas where they agree to work together.” He has some justification. He and some other Western European leaders are keen to press on with further integration whereas there is very little support for further surrender of soverignty among he former Soviet bloc countries. Their lack of enthusiasm for the EU’s federalism was behind Juncker’s comment that “We have to stop with the same old story that success is national, and failure European. Or our common project will not survive.”

But what was his remedy? More Europe. What a surprise!! With the UK headed for the exit door, the loudest opponent to the establishment of an EU army has been removed. “It is time we had a single headquarters” for the EU’s military missions, he said. “We should also move towards common military assets, in some cases owned by the EU. And, of course, in full complementarity with NATO.”

Surprisingly, there was little mention of the UK referendum.  “We are even faced with the unhappy prospect of a member leaving our ranks, ” he said. Just one sentence.

On Friday (16th) Mr Juncker will travel to Bratislava, Slovakia, to meet with the 27 heads of State. Mrs May will not be going. In view of the manifest differences of opinion within the leaders of the Member states over the refugee crisis and the path of future integration – not to mention the possibility that Greece could re-ignite the Eurozone’s woes, it is hard to imagine  she will lose any sleep over the lack of an invitation.

An open letter to a high-profile remainer

If we all write to our opponents, they may start thinking a bit more seriously about future membership of the European Union, giving us a far better chance of winning the coming referendum.

The following letter highlights risk management. There is a strong case for spreading its message  because we traditionally are far better at risk management and the EU is a failing political/bureaucratic experiment that encourages irresponsible behaviour and mutualises the resulting problems making them far worse.

Dear Mr Cameron,

I read with some concern a transcript of your recent speech (9th May on strength and security) which supported remaining in the European Union (EU) and highlighted the risks of leaving.  Whilst to paraphrase Mark Carney on the Andrew Marr Show, 16th May, highlighting risks is necessary in order to mitigate them, nothing is being said about the risks of remaining.  Could this be that whilst we traditionally are rather good at risk management, the risks arising from remaining within the EU are beyond our capabilities of risk management or mitigation? Thus the Public could be unaware of serious risks of remaining which cannot be effectively mitigated, whilst also being fearful of leaving under an erroneous impression regarding its riskiness?

I find developments within the EU, as reported recently in the Daily Mail  and the Daily Telegraph, rather alarming; hence my raising the subject of risk management and mitigation. We are not being asked to remain in the EU as it is now, but an EU which is highly unstable and on a trajectory to create a superstate.

From a risk management perspective, the EU, by extending its powers and adopting ‘one size fits all’ policies that apply to all member states, faces serious risks whereby some Member States will be extremely adversely affected. Some examples of this are the €uro and mass migration. Also there is a tendency to mutualise local issues or problems to all Member States making the results far worse, where previously these problems did not exist, such as with certain ECJ rulings.  It would appear, then, that the EU is inherently much poorer at risk management and mitigation than we are.

Can the EU become much better at risk management or even reform?  Professor John W Hunt, concluded on the basis of his studies of organisational behaviour in the EU and other international bodies, that reform always gets pushed to the bottom of the pile. He noted: “International bodies rarely have a power base of their own….. To justify themselves, these highly paid, often initially idealistic staff spend their time developing yet more ideas that can’t be implemented. The result is the worst of all worlds, there being nothing more cynical than a bunch of rich, demoralised ex-idealists.” Thus it is reasonable to assume the EU will largely remain unchanged, unreformed and poor at risk management.

I would be happy to discuss this further because we really do need an intelligent debate on all the serious risks not just those of leaving (which can be mitigated), but also those of remaining (which cannot).

You should, after an examination of all risks and their risk management, including those of remaining, heed the words of a great former Conservative Prime Minister, Lord Salisbury:- ‘The commonest error in politics is sticking to the carcasses of dead policies. When a mast falls overboard, you do not try to save a rope here and a spar there in memory of their former utility. You cut away the hamper altogether. It should be the same with policy, but it is not so. We cling to the shred of an old policy after it has been torn to pieces, and to the shadow of the shred after the rag itself has been torn away.

Peer says PM is ‘grossly overstating his powers’ in claiming that the Britain will never join the euro

THE PRESS OFFICE OF                                                           

The Lord Stoddart of Swindon

(Independent Labour)                                                                                          

News Release

 

29th March 2016

 

PM is ‘grossly overstating his powers’ in claiming that Britain will never join the euro says Peer

 

The independent Labour Peer, Lord Stoddart of Swindon has taken the Prime Minister to task for claiming that ‘Britain will never join the euro’, pointing out that Mr Cameron is ‘in no position give such an undertaking because it is not supported by our constitution, which makes it perfectly clear that no Parliament may bind its successor.’

In a written question to the Government, Lord Stoddart had been asking whether Parliamentary approval would be required for any decision to join the eurozone and why the Prime Minister has stated that the UK will never join.

Replying for the Government, Lord O’Neill of Gatley said:  ‘As set out in Protocol 15, the United Kingdom is under no legal obligation to adopt the euro as its currency. Under the EU Act 2011, a decision by the UK under Protocol (No 15) leading to a decision by the Council under article 140 (3) of the Treaty on the Functioning of the European Union would require an Act of Parliament and a referendum result in favour before a Minister of the Crown could support it.

‘The Prime Minister has been clear that Britain will never join the euro.

Lord Stoddart said:  ‘I am not sure whether the Government either understands or respects the constitution.  The constitutional position is clear – no Parliament may bind its successor.  It is perfectly possible for a future government, of whatever colour,  to repeal the EU Act 2011 and take Britain into the euro, without even bothering to hold a referendum.

‘For the Prime Minister to categorically state that ‘Britain will never join the euro’ is palpably untrue and grossly overstates his powers.  Therefore, despite what Mr Cameron says, there is no question that remaining in the EU is a serious threat to the future of the pound.’

Ends

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

Lord O’Neill of Gatley, HM Treasury, has provided the following answer to your written parliamentary question (HL6811):

 Question:

To ask Her Majesty’s Government whether parliamentary approval would be required for any decision to join the eurozone, and if so, why the Prime Minister has stated that the UK will never join the eurozone, in the light of the fact that one Parliament cannot bind its successor. (HL6811)

Tabled on: 08 March 2016

Answer (22nd March 2016):

Lord O’Neill of Gatley:

As set out in Protocol 15, the United Kingdom is under no legal obligation to adopt the euro as its currency. Under the EU Act 2011, a decision by the UK under Protocol (No 15) leading to a decision by the Council under article 140 (3) of the Treaty on the Functioning of the European Union would require an Act of Parliament and a referendum result in favour before a Minister of the Crown could support it.

The Prime Minister has been clear that Britain will never join the euro.