Stagnation

Italy has a new government, but only after a great deal of wrangling. The principal reason for the impasse is that, like the Brexit vote in 2016,  frustration with the European Union was an important motivation for the Italians’ decision to vote in large numbers for two eurosceptic parties.

The situations in the two countries at the moment are nonetheless very different. We are on the way out. True, many Brexit supporters are finding themselves increasingly frustrated by the lack of progress in the Brexit negotiations but there are good grounds for believing that we will leave – eventually., somehow.

Italy, by contrast, is still in the EU and there is no immediate likelihood of “Italexit”. Many inhabitants of this founder member of the European Union are distinctly unenthusiastic at the way EU membership has affected their country, but this doesn’t mean they want to leave altogether..

What both countries have in common is that they have come up against the dead hand of inertia. Essentially, big, bloated states and bureaucracies do not make decisions quickly. Stagnation is the inevitable result. Those of us who can remember the latter years of the Soviet Union will recall that by the time of Mikhail Gorbachev, it had lapsed into stagnation – unable to respond to events. The EU is in a similar position. No senior figure since Jacques Delors seems to have any vision for the EU’s future direction. The enlargement process, after the celebrations of 2004, seems to have ground to a halt.

However, just like the Soviet Union, the EU does not like anyone trying to take it in a direction in which it does not want to go. This piece by Norman Lamont  claims that the EU is very uncomfortable with democracy when it produces a result it doesn’t like. Unfortunately for the Italians, the stagnation into which the EU has descended is going to make it difficult to sort out their country’s moribund economy. A well-informed website claimed that it was actually Berlin which forced the Italian President to reject the nomination of a Eurosceptic finance minister by the putative new government, forcing a climbdown and nearly precipitating new elections, the result of which would most likely have been a parliament containing even more Euro-critical MPs.

For us in the UK, this tendency towards stagnation has made it very hard for us to achieve a successful Brexit.  Last week, Michel Barnier delivered a speech expressing his frustration at the slow progress of Brexit talks. In one sense, he has some justification – our side has been going round in circles ever since Article 50 was invoked. To leave the EU seamlessly requires a lot of research and an appreciation of the nature of the beast. It could be argued that our side has failed almost totally on both counts.

And the struggles the EU is going through, including the Italian crisis, are more than sufficient vindication of our decision.  In a fast-moving world, the EU’s inbuilt bias to inertia makes it ill-equipped to respond to change. We could do much better as a sovereign state – the big problem is making our escape. A rocket needs a huge amount of power to escape the gravitational pull of the Earth and fly off into space. Our negotiators will need to try a lot harder if we are to escape from the gravitational power of the EU.

 

Risk management of Brexit to date

Politicians generally don’t give much thought to risks and risk management. After all, risks are part of the downside of their policies (or ‘bright ideas’) and they try to airbrush or spin them out of the narrative.  Whilst risks and their effective management are serious concerns across all areas of government from agriculture, through defensive and security, education, international relations, justice, law and order, to the economy, the National Health Service etc., a successful Brexit presents unique challenges. Furthermore, it does not help that the government has had to start from a state of total unpreparedness; Messrs Cameron and Osborne prevented the Civil Service from preparing any viable Brexit plan.  So how well are Mrs May and Mr Davis doing – both in understanding the risks involved and effectively managing them?

‘In-depth’ subject knowledge is obviously essential to being able to ‘tease out’, understand and manage risks. An aircraft pilot who knows nothing (if allowed to fly at all) is potentially dangerous, and so is a clueless politician. Sadly, this government has not given any serious indication that it knows much about how trade deals are negotiated or even how the EU works. There is very little, if any, detail in Mrs May’s and Mr Davis’s pronouncements. We hear predominantly robotic mantras, aspirations and wishful thinking. There also seems to be an unwillingness to acquire that necessary in-depth knowledge.

Subject knowledge is not enough to manage risks. Our Brexit team needs to understand the subtleties of the EU’s approach to risk and its effective control, and hence how these impact on the Article 50 negotiations.  The EU in general – in theory if not in practice – follows something like the Prussian edict ‘everything is forbidden except that which is allowed’. Pre-emptive mandatory standardised (inflexible) regulation controls risks at each stage of activity, with the result that an acceptable outcome is achieved.  Regulation gives rise to surveillance, monitoring, oversight and ultimately centralised control by the EU’s bureaucracy. Anyone with some exposure to this environment in one field should be able to recognise the same general approach, some of the terminology and regulatory or monitoring agencies, and role of the centralised EU bureaucracy, when they encounter it elsewhere.  The EU’s approach also fits in well with extending control into an ever-increasing number of areas, thus fulfilling its mission of creating a superstate.

The traditional alternative to the EU’s approach to risk management is to emphasise accountability. When things go wrong there are the options of civil courts, damages, or even criminal prosecution. In the case of politicians, they will be ejected from office. In English law, everything – in theory – is allowed except that which is expressly forbidden.  In practice, this purity is often replaced by some form of hybrid of ever-expanding regulation and increasingly punitive accountability.  Mrs May and Mr Davis, perhaps because they were schooled outside the EU loop, seem unable to understand or accept the EU’s rigidity, its risk control rationale or the implications for the Brexit negotiations and the resulting risks posed.

Mrs May’s commitment to leave the Single Market and instead negotiate a bespoke free trade agreement supposedly providing equivalent utility appears indicative of poor risk management.  This decision was reportedly made by her alone after consulting her closest advisor and without involving the cabinet or even discussing it with them.  It was a similar story regarding her decision to call a general election in last June, with disastrous results for her party and her reputation.  Mrs May does appear to make decisions based on flimsy advice, ignoring sensible safeguards and risk management tools.

Mrs May has ended up choosing the most difficult and complex Brexit option, requiring the greatest flexibility and cooperation from the EU and the most (competent) resources. We are not told what other options for leaving were considered, what risks were posed and why they were dismissed.  There also appears to be nothing actually in place (or comprehensively planned) to absorb any potential problems or risks.  To date, little or no progress appears to have been made in successfully delivering her ambitions or mitigating the risks. Meanwhile, time is marching on.

The approach to negotiating a free trade agreement with the EU has once again demonstrated a cavalier approach to the management of risk. We are told it will be all right in the end, because at the eleventh hour the EU will cave in and give everything wanted.  It is highly unlikely that it will do so, but even if it does, leaving a significant part of the future economic wellbeing of the country in a state of uncertainty until the last minute is a huge risk. It is a wild gamble based on successfully negotiating a myriad of potentially show-stopping trade (and other) conditions and one which totally ignores the EU’s general approach to risk management, which I have outlined above.

Just suppose that the EU caved in to Mrs May’s demands for an ambitious, innovative, deep and special relationship. It would create a precedent which would cause much concern in Brussels. Granting any exceptions to one country (even if possible) would open up disorderly and uncontrolled challenges elsewhere and could violate the EU’s general risk control philosophy.

Then the European Union (Withdrawal) Bill, spun as providing certainty in the fundamentally changed situation of ‘third country’ status outside the EU and the Single Market contains many undisclosed potential problems and risks. Some pieces of transposed EU legislation may not actually function as intended, because they were designed to operate in an environment of close integration with the EU and its administrative apparatus. The Fisheries regulation 1380/2013 is a good example.

It would be a tragedy if we ended up with a poor Brexit because of poor risk management. Brexit provides us with a tremendous opportunity to escape the clutches of the EU’s political folly with its unaccountable, extravagant agenda to create a superstate regardless of the costs to its subsumed peoples. Effective risk management historically does not form part of the EU’s political agenda or mitigate its actions. By contrast, the return of full responsible government to these shores should mean our elected representatives will once again respond positively to the wishes of the people, accepting responsibility for their actions and – most importantly of all – behaving responsibly.

The Brexit negotiations – a German perspective

This speech By Dr. Markus Krall was delivered at the House of Lords on the  invitation by Lord Nicholas Fairfax on October 24th, 2017 Although rather long, we feel it is well worth reading right through as it is a most helpful explanation of the predominant German mindset. The original was first published by Global Britain and is used with full permission.

Honorable members of the House of Lords, Ladies and Gentlemen,

I Introduction and Summary

Before sharing my perspective on the negotiations of the terms of separation of Britain from the EU, or Brexit, allow me to express my gratitude for the invitation and the opportunity to speak to you at the House of Lords. I feel honoured and privileged to have been invited by Lord Fairfax.

This parliament stands as a beacon of liberty and free speech going back to times when the continent was still subject to the power of absolutist, non-constitutional monarchs. This long standing tradition of liberty lies in my humble opinion at the heart of the decision that

the majority of the British people has made with regards to its future role in Europe and the world. I would like to put my deliberations into perspective:  A German perspective I will deliver to you today,

is not one shared by the German government or mainstream media. It is rather my personal one which is based on a number of discussions with political staff in Berlin, including government officials, members of parliament, and lobby groups.

Based on this I will try to provide you with a brief picture of the German and the Brussels mindset and their interaction regarding Brexit before spending a few remarks on the misguided game theory approach resulting from the underlying ideological edifice. This will lead us directly to what I think to be the German governments, specifically Mrs. Merkel’s, approach and how the gaps in its consistency can provide opportunities for the UK negotiation strategy. Finally I will take the liberty for a very short statement why I am taking an EU-critical position in a debate that is well known to my valued audience.

II  The German State of Mind

Now, allow me to start with some observations about what I would like to call “the German state of mind”. I once stumbled upon a little article in the Economist recounting an anecdote from 19th century France: Emanuel Litrè, the leading French linguist of his time once

Fell prey to an error of judgment and as a consequence was caught by his wife with their housemaid in the conjugal bedroom in flagranti. As his wife entered the room she exclaimed “Dear, I am surprised!” And what did the erring Frenchman reply? “No dear, you are astonished, it’s us who are surprised.” The term “astonished” very neatly describes the state of mind regarding Brexit in Germany, especially among its economic and political leadership. Germany is probably the one country in Europe that was emotionally and intellectually least prepared for the news that a majority in the United Kingdom had decided to call it quits with the European Bureaucratic Union. That has several reasons.

One is that we Germans – regrettably – have a tradition of belief in the infallibility of government. While the liberal school of Anglo-Saxon origin views the state and its bureaucracy with a healthy dose of skepticism this is not so to the same degree between the rivers Rhine and Oder. This is also true for the media, which are toeing the “official line” because 80% of journalists identify themselves as left of centre. There is a resulting lack of democratic control and public debate.

Secondly, very much in line with the undemocratic decision-making the EU has adopted, we have seen a systematic erosion of the rule of law in Germany regarding European matters. This included the illegal bail out of broke €urozone members, Greece among others, the thinly-veiled practice of government funding by the ECB through various programs in contradiction of the treaties and the opening of the borders in clear defiance of the Schengen treaty. It is, by the way, a most deplorable observation that you can cajole my fellow countrymen – or at least a sizeable minority of them – in to going along with the erosion of the rule of law if it’s for a presumed greater moral good. The end justifies the means.

The EU is a clear beneficiary of this attitude as Government and Brussels have become interchangeable terms for good reason. So for a majority of Germans as well as of officials in Berlin it was simply an unthinkable heresy when British voters said “we leave”. As it actually happened, they were completely astonished, and intellectually unprepared.

Thirdly, in the past, Germany and Britain have often been aligned in efforts to tame the Brussels bureaucracy, and push the EU towards free trade and open borders. The common market in its original free trade design was largely the result of Margaret Thatcher’s pressure. The Germans, who didn’t have the same political weight as a result of well-known historical developments gratefully took this for granted. The presence of Britain in the EU was in the German view a necessary counterweight to the school of étatisme, the primacy of the state bureaucracy coming from Paris. Now this balance of power in the EU is damaged. To put it bluntly: You guys are leaving us alone with a bunch of socialist Latin-European nut-heads. We are not delighted.

III The Brussels Attitude

The EU bureaucracy immediately adopted a hostile attitude towards your country’s democratic  decision. It was viewed as a dangerous precedent, especially in the light of the frictions caused by the Euro and the widening cultural divide between what Donald Rumsfeld once called the old Europe versus the new Europe.

In the bureaucrats’ view, nobody should be incentivized to leave the club or even to think about it. He must not go unpunished. This attitude makes it impossible, by definition, to tolerate an economically successful United Kingdom outside the Brussels sphere of hegemony. Because if Brexit is a success, economically, politically and socially there is proof to the pudding that prosperity s possible without them. The plethora of Europe’s presidents from Schulz (now ex-President) and Juncker to Draghi and Tusk would be walking naked –  emperors without clothes.

The resulting reaction has several elements:

  • Accusations of the vote being undemocratic because the British voters are not adults, and therefore presumably followed liars
  • Meting out punishment in the form of an extortionate “Brexit Bill”, and
  • Propagating fictional beliefs as facts which don’t stand the test of reality.

The result is what I call a Brexit trap consisting of a prisoner’s dilemma to be solved in a timeframe that is insufficient if one follows the Brussels script.  From all this brouhaha guiding negotiation principles were derived with the aim to let those little warm-beer-drinking and on the wrong side of street of history (let alone real roads) driving inhabitants on a chilly European archipelago understand their political heresy: “Turn back and repent, you English fools!” The indulgence selling priest Johan Tetzel would have loved the drama.

Let us take a closer look at the parts:

  • Liar’s Poker:

The accusation that the voters fell into a trap of lies originated, of all places, in the EU Commission whose bibulous president Juncker once coined the telling bon mot “if things get serious you have to lie!” Well, let me cautiously put it that way: This is difficult to beat in terms of irony, hypocrisy and unintended satirical quality.

  • The 100 BN €uro bill:

The final sip that the subsidy-hungry Brussels bureaucracy and its sycophants would like to take out of the net-contributor bottle that generously used to be provided by the United Kingdom. This is the indulgence receipt for those little black souls on the banks of the River Thames. Just to imagine Britain could ever be willing to continue the huge transfers which were one of the main reasons to leave the club is totally bizarre. However, bizarre and Brussels are compatible. The British tolerate this kind of thing by calling it “eccentric” which means several standard deviations away from the norm of mental sanity.

  • What are those fictions being mixed with facts?

Fiction No 1: “We must not allow cherry picking”

This statement insinuates it is an altruistic act towards others to open your own borders for free trade. The EU which, if the new US President offers himself as a convenient target, presents itself as a champion of free trade and permanently talks of win-win through open borders, yet has no problem whatsoever to ask non-members for entry payments for common market access. That is a kind of protection money in return for not obstructing the free flow of goods and services with tariffs. That doesn’t mean though they will not obstruct it with non-tariff hurdles. They are just giving it a different name. They call it “regulation”, “norms” and “ban” and it’s almost a no-brainer that all the small countries in the Brussels periphery have to swallow these toads and translate everything into their national legislation. Bruxella locuta, causa finite. Trade imperialism at its bes.t

Fiction No 2: “The four freedoms of the common market are indivisible”

This fiction is supposed to give strength to the demand of unlimited immigration and to make it impossible for EU member countries and Great Britain to deflect the storm of badly trained and even worse educated immigrants into their social systems. The claim of indivisibility is pure nonsense of course. No free trade agreement the EU has negotiated with third countries under the flag of TTIP, CETA or any other acronym makes this assumption. The reason is quite simple: Other large countries would tell the EU in unflattering words what they think of this if the demand would ever be brought up.

Fiction No 3: The United Kingdom needs the EU more so than vice versa

Yes, the market for goods and services is larger in continental Europe. So what? If you are running a trade surplus of 120 billion Euros annually, you don’t want to put that at risk, do you?

That though is the EU surplus with the UK. A continent that by design and ignorance, has neglected its infrastructure for security and defence over decades might have an incentive to be friends with a country which didn’t commit that folly. Again Brussels has to look over the Channel. The party that has – with over 3 million – three times as many people working in Brexit country compared to just one million British working on the continent should be interested in not failing on a deal to protect all of them, does it? Who needs whom in this situation? Is that really so clear? I beg to differ.

Fiction No 4: 30.000 regulations need to be renegotiated

Smugly the members of the platitude party point out to us that 30,000 EU regulations and laws supposedly need to be renegotiated between Great Britain and the EU27 and that it would be impossible technically to achieve this. In this we can find a misunderstanding and an involuntary confession: The misunderstanding is that Britain and the EU have to agree on all paragraphs of this deluge of laws. Is it not rather a sovereign decision of the United Kingdom to adopt these regulations partly, in full or not at all? If the EU views some of them as conditional for a free trade agreement they should draw up a list and use CETA and TTIP as benchmarks. Then one can discuss if the UK can accept that list or not.

Now to the involuntary confession: We are flooding the continent with so many regulations, laws, executive orders and decrees that it becomes impossible with normal human capacity to comply with the law. Winston Churchill had a comment on this: “If you have ten thousand regulations you destroy all respect for the law”. Exactly! Juncker’s minions have over delivered on this by a factor of three.

IV The EU Chicken Game Theory Negotiation Guide

The political intention behind the use of these fog grenades is easy to discern and one could even have a certain tolerance for it, if it was just about the creation of a rational negotiation strategy. The problem is: Europe’s politicians have told this to each other so often in their echo chamber that by now they really believe it! They have fallen prey to their own propaganda.

The result of this giant echo chamber of mutual self-assurance and stew of self-righteousness is the conviction that the Brexit negotiations are inherently a game of chicken. The one who first

blinks will lose. The concept is completely insufficient to capture the inherent complications of the problem, but also pretty obviously overtaxing the intellectual capabilities of its proponents. The enemies in this game of chicken are not just the insubordinate secessionist rebels in London, but all countries and political forces toying with the thought of following their example; or those just daring to remind the Bureaucratic Party of the principle of subsidiarity in an “ever closer union”. They shall get a preemptive lesson that it will be painful to spurn the intrusive love of those who define their political raison d’être in attaching their tentacles to other people’s fridges.

This game theoretical toxic waste is even articulated by some professors who belong to the close circle of advisors of the German government. It is though pretty obvious that the question as to what game we are playing is far from resolved. This game is not one of chicken. It is not an “I win you lose” game. That is only the case in the thin intellectual reasoning of people who would do well to learn about the assumptions and limitations of game theory before they employ it and turn it into a guide for their political war cry.

Looking at the economic and technological realities mentioned above makes it clear this game rather is a prisoner’s dilemma. Incentives for cooperation will be switched of on both sides as a result of the erosion of trust. This is a sorrow state of affairs that will produce losers only. The ability for critical reflection has been degraded and degenerated by this exercise in such a way that old and proven principles of behaviour and respect in the mutual dealing between sovereign nations have gone overboard.

This is specifically true regarding the respect for the territorial integrity and sovereignty of the United Kingdom. Quotes bubble up from Europe’s capitals about the desire for secession of Scotland, Northern Ireland and Wales, even of London! The NATO ally Spain is encouraged to abuse the opportunity for a Gibraltar debate by giving Madrid a veto over a matter they had not even asked for.

Instead of minding their own business they are minding the business of a sovereign nation in a completely outrageous way. Why? Because they do not view members of the EU as sovereign states with sovereignty embodied in the will of their people. This is the Juncker version of the Brezhnev doctrine. EU member states are viewed as provinces which have to be administered for the advantage of the administrators and whose population (note: not People!) is granted the privilege to occasionally applaud in an acclamatory fashion in order to demonstrate their gratefulness.

In clear denial of the facts it is being claimed that for Scotland there is indeed a new situation after Brexit justifying a new vote on independence. When Scotland voted, the Brexit vote had already been scheduled. Everybody knew it could go either way. So Scotland voted, in the full knowledge of the possibility of Brexit, for the continued Union with England. What then is the new fact on the ground? Would another outcome of the vote also have constituted a reason to vote again? Do we want to turn every democratic decision of political significance in the future into a reason to split up nations after centuries of common history due to regional differences in the voting result?

The whole debate is testament to the abysmal disdain of the Brussels bureaucrats and their satraps for the voter’s will and the expressions of this will by the people. Polls are accepted only if they fit their purpose. Especially with regards to European matters we have seen it more than once that people were called to the polls until the result was compliant. In this sense Ms. Sturgeon is a docile padavan to her Brussels masters: Repeat the vote until you get what you want and then lock that in. This lack of democratic credibility is a central Leitmotiv of the EU`s governance, where the composition of every decision making body is s the result of horse trading instead of universal suffrage.

There is a reason why the term “one man – one vote” originated in the English language. We even use the English term in Germany quite frequently. This reason is the historically developed democratic tradition on the island. And this is the very same reason, why the British have a deep rooted aversion against undemocratic bureaucratic elites. And it will be damned difficult to exorcise it out of them.

V The German Government’s Situation and Position

Let me briefly talk about the German governments political motivations. The first element driving the German government into the arms of Mr. Barnier ́s confrontational approach is the budgetary aspect. The UK is, together with Germany, the only other net contributor of significance to the EU-Budget. The expectation that the sycophants in the Berlaymont will not reduce their subsidization and redistribution schemes because of Britain ́s departure can be taken for granted. Getting a budget under control, let alone reducing one is totally anathema for this “class distributif”.

Germany alone has not nearly enough votes in the EU Commission, the council, or any other common institution to organize cuts in line with the smaller size of the budget available. In every European council exercising power, from the commission to the ECB, the rule of one ountry – one vote leads to the absurd result that the weight of a voter is inversely proportional to the size of his country’s population. In the doubtlessly most influential body on the continent, the ECB council, a Maltese voter has the weight of 204 German voters. That probably reflects the fact that a Maltese understands monetary theory and policy 204 times as well as a German citizen. I dare to call this sorry state of affairs a special form of apartheid. It contradicts democratic principles and traditions and an institution with the ambition to replace democratic nation states cannot claim any legitimacy on such a basis.

And even though Germany does have some leverage, albeit not de jure but de facto, Merkel does not want to use it as a matter of principle – unless forced by circumstances. If the outcome of the recent elections can contribute to this remains to be seen. I would so far say it didn’t. So, not willing to pick a fight over budget reductions and savings in the corridors of the Berlaymont, chancellor Merkel has decided that the Brexit bill is of utmost importance to limit the additional demands directed at Germany. To blow it up to €100BN would imply that Britain’s net contributor position is preserved for a decade or so at current levels. Needless to say, the coalition formed by these interests will not want to give anything back in return to the UK taxpayer.

Deflecting these demands from Britain can only be managed by disputing the components of the bill line by line, demanding value added in return, a quid pro quo, because that was also part of the deal in the past. And free trade is certainly not a quid pro quo in this sense, because both sides profit from it from the start, the EU even more so than the UK.

There is a second element which I believe has a large influence on a number of key decision makers in Berlin, especially on our very powerful finance minister Wolfgang Schäuble. He is part of a generation of politicians with a genuine “faith” in the EU as the central “project of peace” on the continent. This group does not believe that they can succeed in building a new version of the Europe des Patries that the founding fathers dreamed of if the existing institutions are demolished and hence support the misguided idea of an “ever closer union”. For that reason they don’t see the original vision as an option any more. What they see being endangered is no less than their lifetime achievement. This is no weak force for inhibiting sound judgment.

The problem they face is the timely coincidence of Brexit with the €uro-crisis. They know that it is impossible to push the southern European countries towards the market reforms necessary to enable their economic survival inside the €urozone. They have tried and failed repeatedly. However the €uro is of such centrality in the ideological edifice they have erected that it is being defended come hell and high water even in the face of complete absurdity, unsustainable cost and life threatening risks.

The €uro, however, is the time bomb that will likely blow up the European institutions in a single cataclysmic event. I am convinced it will do so during the next German government’s term in office. The reason is simple. The Euro has created huge trade imbalances inside the Eurozone. Goods and capital have been flowing from a super competitive Germany (for which the €uro is undervalued) to a decrepit “Club Med” (for which the €uro is overvalued). As a consequence, unsustainable levels of debt held by Germany through a variety of vehicles have been accumulated. At risk are bonds bought by German institutional investors (€1.8 TRN), the ESM commitments as part of the “Euro-rescue” efforts (€200 BN), and the Target-2 exposure.

Target-2 is an overdraft loan the Bundesbank has handed out at zero interest, unlimited, unsecured, for indefinite time and without any control or discretion to the other central banks of the €uro system. As of September 2017 it added up to €850 BN. I call this combined approximately €2.8TRN exposure my country is running “the biggest hedge fund on the planet with one single bet, namely that the €uro will be saved”. The problem with this sort of policy is that it creates imbalances in the real economy which cannot be kept under the rug forever. Specifically the flat yield curve at zero level erodes the earnings power of commercial banks. Our calculations show that most German and indeed EU commercial banks will start suffering substantial operational losses from 2019/20 onward.

This translates into shrinking risk taking capacity of the banks which in turn leads to shrinking credit volumes, shrinking bank money creation and deflationary pressure. Paradoxically the desperate push for more inflation thus will create deflation.

Furthermore, the zero interest rate environment has kept hundreds of thousands of companies in business that would have gone bust under normal cost of capital conditions since 2007. Thus, it created what I call an army of corporate zombies which infect the banks credit books with junk quality loan exposures. These companies will fail in the event of rising interest rates or a downturn in the business cycle. Their breaking wave of defaults will likely lead to losses north of €1,500BN for the €urozone banking system taking down more banks than the US mortgage crisis did.

While refusing to acknowledge this publicly, the German government has been made acutely aware of these imbalances as the OECD, IMF, BIZ and a number of private institutions have all confirmed the estimate that so called zombie firms are by now making up 9-10% of Europe’s total number of firms. It reinforces the stance of Juncker, Barnier, Merkel and Schäuble that they must avoid cracks appearing on the facade of the remaining EU-27. Politically they cannot afford to lose a single additional country. Not from the EU, and not from the €urozone, as leaving it automatically involves a trigger to leave the EU.

VI The Leverage the UK can apply

Now, how does this play into the Brexit negotiations? Paradoxically, this situation could be leveraged by the UK to the advantage of a constructive negotiation strategy. It might be a winning strategy to put some focus on Berlin in the coming months. This has several reasons:-

It is of utmost interest for Germany to avoid being pushed into an even higher net contribution after Brexit. This can either be achieved by an outrageous Brexit bill for the UK or by savings in Brussels. The UK needs a clear communication strategy to the German public and political decision makers that spending in Brussels necessitates big cuts. A targeted PR strategy  focusing on Germany might be worthwhile to be considered. The EU-27 have a 120 BN €uro trade surplus with Great Britain, much of it coming from the bilateral trade between Germany and the UK, much of it easily substituted from other sources. When I attended a presentation of a Ministry of Finance official to the commission of the Economic council for the Financial Industry a few months ago this matter was brought up in the subsequent discussion. It very quickly resonated with the representatives of companies and banks that were present. However, before the number was thrown into the debate, 95% of the participants were unaware of it.

The resulting question for the UK negotiators is: How can public awareness be built with the effect to create political awareness? The security debate in Germany is heating up. The influx of 1.5 Million refugees from Syria and North Africa, 85% of them young men, into Germany has created a severe public security problem. Germany has dropped to rank 51 in the global travel security index and now trails behind Rwanda, Morocco, Korea, Albania, Azerbaijan and Tajikistan. Cooperation with the one country in Europe that is leading in electronic intelligence is therefore imperative for our security. That fact alone creates a certain level of leverage through mutual interest and it would not hurt reminding Berlin of this.

We are also witnessing an increasing tendency for the Russian bear to flex his muscles. At the same time our American friends are dealing with an internal constitutional crisis. It is clearly of the utmost importance for the European members of NATO to step up their own defence spending and reinforce their mutual defense commitments. Here, realistically there are three, possibly four relevant countries: UK, France, Germany and Poland. The survival of the EU is conditional on the continued willingness of the militarily significant European members of NATO to work together for mutual defense. The critical decisions will be taken in Berlin, Paris, London and Warsaw – not Brussels. Again, it is clear that the UK would not use this as a point of leverage, but Berlin can be obtuse when it comes to issues of defence and it would not hurt to remind the Chancellor of these matters.

Why do I believe this collection of German interests is relevant for the UK? Because while we have seen above what the current drivers of the Merkel administrations behaviour are, it is also clear that she does have a huge leverage over the other key players, namely Macron, Juncker, Barnier and the governments of the southern periphery which she is reluctant to use:- The monetary policy of the ECB which currently accommodates the unwillingness to reform Italy, Greece, Portugal and others could not be conducted without Merkel ́s tacit approval. Draghi wants to continue this as long as he presides over the ECB-council in 2019.

France ́s president Macron has aimed for a mix of timid reforms and more intra-European redistribution. Transfers and socialization of risks through schemes like Eurobonds, etc. are his goals. There will be some sort of deal of money for reforms and although I don’t think it will work, he is looking to Berlin for help. President Macron’s  biggest worry currently is that the liberal FDP opposed to this gains too much strength in a future German government.

Italy needs, apart from the continuation of the ultra-loose monetary policy Berlin’s tacit approval to rescue more of its banks with tax payers’ money in violation of the new treaty regulating failed banks resolution, a move that will create more debt and more target-2 transfers from the Bundesbank to the Banca d`Italia.

To summarize it: Germany is the one country in Europe that can least afford to let the Brexit negotiations fail. And it is the one country with the largest leverage over the negotiations while at the same time refusing to use it. This may have some implications for the UK`s negotiation strategy. I also think any discussions need to take place at the very highest level, power is concentrated in my country and it would take a rare courageous minister to buck the line coming from the Kanzleramt.

However, make no mistake with regards to Chancellor Merkel’s attitudes. She will not be helpful to the UK without the application of what I would call “constructive pressure” changing her European equations in favor of a balanced result of the negotiations!

VII Concluding Remarks

Honorable members of the House of Lords, Ladies and Gentlemen, The Prime Minister of the United Kingdom during its finest hour, Sir Winston Churchill, whom I regard as the greatest statesman of the 20th century, and whom I hold in the highest esteem for liberating Europe and my home country, once coined the immortal phrase: “The truth is incontrovertible. Malice may attack it, ignorance may deride it, but in the end, there it is.”

For me in this matter there is one simple truth: The British people have made a democratic decision in line with your best traditions, values and a vision of Britain that recaptures and preserves its state of liberty, freedom and democratic patriotism, a role model for a free and prosperous Europe. They have done this because they observed that those values collide with the direction the EU has taken. This decision is to be respected and this is a truth that is currently attacked by malice, derided by ignorance, but in the end, there it is.

I thank you very much for your kind and patient attention

 

An Italian businessman is thinking of moving his business here!

(With thanks to CIB Committee member, Rev Philip Foster, who spotted this letter in the 31st October Daily Telegraph)

Sir

As an Italian businessman, I am seriously considering moving my business to the UK after Brexit.

The EU has proved to be a disaster for Italy, with youth unemployment at 45 per cent, a stifling taxation system, plummeting property values, and (according to official statistics) national unemployment at more than 12 per cent.

Many in Italy look to Brexit with the hope that it will be the beginning of a new era, in which democracy wins over bureaucracy and arrogance.

Viscardo Paganelli
Siena, Tuscany, Italy

Photo by Davide “Dodo” Oliva

Leaving the EU is safe; remaining in isn’t!

‘I really want to leave the EU, but with so many warnings about the dangers, I’m really scared’

Apart from Boris’s boisterous optimism, little is being reported in the media to refute Mr Cameron’s Project Fear and the subliminal message that we are all useless. Also, when European Union (EU)-fanatics sing the praises of perhaps the biggest scam on earth, little is said to show that we can do much better without even trying. Again, we hear a few meek statements along the lines of “we used to manage our affairs before the control-freaks from Brussels arrived” or “we’ve got ingenuity” but that is all. Sadly Leave Campaign leaders appear unaware of any systematic way of proving what we all intuitively realise, that (1) there are no significant risks in leaving the failing EU and (2) if the EU appears to do anything ‘good’, we can do much better.

This country is the world leader in risk management – ahead of America and light years ahead of the vacuous, clueless leaders and bureaucrats of the EU. If they knew the basics, they wouldn’t be repeatedly making disastrous mistakes like, the Euro, debt mountains, stalling competitiveness, and runaway migration which impacts on the most vulnerable in society. Risk, including the likelihood of occurrence and severity of undesirable consequences, can be managed very successfully. Otherwise electricity would be too dangerous to use, air travel wouldn’t get off the ground, money couldn’t be invested and major projects, such as Crossrail’s tunnelling under London, would peter out unfinished.

The inherent problems which the EU suffers trying to get its policies right and fine-tuned cannot be cured. One size does not fit all (28 divergent states or former countries), and the considerable hierarchical and physical distance between them and us means they can only guess what might work, drawing on their Dreamworld ideology of an EU Superstate. By comparison, the SAS (living in the real and dangerous world with serious jobs to do) delegates authority down to the lowest level, nearest the action. And we often know from our personal experiences what havoc distant, out of touch management can create, whereas being close to the action delivers faster moving, better decisions and ultimately, results.

Moving major decisions outside the nation state, with its homogeneity, transparency and democratic accountability, is intrinsically risky. The worst effects of the EU’s many mistakes fall especially hard on ordinary hard working people and the most vulnerable. Yet Mr Cameron and EU-fanatics appear not to understand this. Or they are cavalier in ignoring the obvious? Restoring national policymaking or even localising it further will deliver better results. Not surprisingly the trade deals negotiated by small, independent countries, such as Switzerland, are more numerous and better than the EU’s efforts. There is also a theory, based on the study of many successful innovations from the dawn of civilisation which can predict this, and can be used to repeatedly improve results. There is no ‘leap into the dark’ by leaving the centralised bureaucratic corporatist EU, just a leap into a far less risky, better performing and democratic situation.

We can do better still, taking any risk out of the transition period in leaving the EU. This comes about by managing the processes involved using best practice, arising from current knowledge and invention. Process management for low risk is something the EU is, again, very poor at and Mr Cameron does not appear to know much, if anything, about either. The starting place is to use normal risk management tools, which these days are well refined. We can go further still and build in ways of adapting and self-learning to ensure that anything that hasn’t been thought of in the beginning can be suitably dealt with. This gives the lie to the claim that the EU will not co-operate; it can be made very much in their interests to negotiate a WIN-WIN divorce.

This brief overview cannot go into the details of risk management, process management, collaboration management and low risk innovation. However, the more you drill down into the detail, the more obvious it becomes that we are being deceived. The high risk option is to stay bogged down in the EU-quagmire. The low risk alternative is to leave and thus create a sound basis for our future progress as a nation.

Every example of Project Fear only reinforces the impression that our EU-loving ruling establishment cannot manage risk effectively in its various forms. We, as an independent country, can do much better and achieve vastly improved overall results. Messrs Cameron and Corbyn and your distant EU-overlords, Mr Juncker and (and his boss) Mrs Merkel, please explain honestly to us why we can’t?

The Hidden Costs of EU Membership

Is the European Union (EU) draining our country of the vitality needed to create prosperity for all? Are we losing the means for improving living standards including motivation, ethical standards, resources, funding and efficient resource allocation pathways, which cost us dearly?

There is evidence for the EU’s actual cost being far greater than the figures usually highlighted, such as our annual net contribution (often stated as £55 million per day) or the extra £1.7 billion demanded last year because our economy is apparently ‘thriving’. The problem is that it is easy to slip into the simplification of ignoring items that cannot be easily quantified; the McNamara Fallacy which can have disastrous decision-making consequences.

Our net contribution to the EU (visible and quantifiable) effectively disappears from our economy and boosts economies elsewhere. Obviously this money can no longer help us, and in certain areas of the economy our money could have made a considerable difference, there is a multiplier effect present. For example, ‘EU tax pounds’ (spent on EU bureaucrats and their perks) if used to fund research or retained by businesses and invested in production efficiency could have helped produce scientific breakthroughs, better products, lower prices, more competitive enterprises and higher paid jobs, in turn worth many pounds of return for each pound used (or ‘invested’). So to service the voracious appetite of the EU we have worked hard to raise the money in the first place and then had to forego a considerable benefit (opportunity cost) because we cannot allocate that money more beneficially in ways we choose. This is only the start of where we are losing out.

The EU works hard at devising ever expanding legalistic rules and regulations, which are of a ‘one size fits all’ nature to apply to all member countries. There is always a direct cost for compliance (by the targeted individuals and organisations) and enforcement (by one or more regulatory bodies). And an opportunity cost, if the money could have been better used elsewhere, for example, on research, improving competitiveness, skills and productivity, paying higher wages, or reducing prices. These rules and regulations may also be ill-conceived with harmful effects and resulting opportunity costs, for example, creating other victims, continuing obsolete practices, shrinking the talent pool available of people who could otherwise be more productive, and imposing dis-proportionate burdens on smaller and more innovative enterprises making their existence and growth less likely.

EU social engineering, in particular the destruction of the democratic nation state and heritage, transfer of wealth (and businesses) to the less successful EU nations, uncontrolled mass migration, and forcing authoritarian legalistic regulations upon societies, have costs not just in financial terms or individual quality of life, but in identity, ethical standards and social cohesion. Inevitability a problem created by the EU needs to be managed somehow (if at all possible), and this has costs, and diverts resources that could be more productive elsewhere, again substantial opportunity costs exist.

The opportunity costs identified so far are part of a bigger issue, that of the quality or performance of government. Poor government will inevitably cost more than it should through higher taxation (and associated opportunity costs) than if it was better run or more efficient, and there will be costs and opportunity costs arising from the consequences of its poor policies and mistakes (for example, the destruction our fishing industry or the negative effects of the Euro). The EU is a remote, bureaucratic, ideologically driven and autocratic institution. It is also a centre of corporatism, ruled by the few, for the few; big government, big business; big other organisations. Based on its track record, the EU can be expected to go on delivering an inferior government performance than a much more democratic national government in tune with the people and the Internet Age. There is empirical evidence that countries outside the EU like Norway an Switzerland do better economically than their equivalents inside.

Various writers have plotted the direction of bureaucracies with somewhat similar conclusions regarding their increasing arbitrary unreality and costs, and destructive or inhuman effects, including Franz Kafka, The Castle, C Northcote Parkinson, Parkinson’s Law and The Law and Carroll Quigley, The Evolution of Civilizations. Joseph Schumpeter, the economist and political scientist, has written about corporatism in Capitalism, Socialism and Democracy. The EU has emasculated national parliaments and disenfranchised electorates pretty much in textbook form. Such activities bear direct costs or burdens and much larger opportunity costs; loss of democratic accountability and sovereignty impact our lives in many intangible ways. More tangibly we cannot readily carry out (Schumpeter’s) Creative Destruction to the increasingly obsolete EU in order to facilitate much innovation, wealth creation and improved wellbeing; again a considerable opportunity cost. The EU appears far more interested in seizing and somewhat arbitrarily re-distributing existing wealth than in supporting us all becoming richer through the creation of new wealth, consequently resulting in us all being poorer.

Yet the biggest opportunity cost of all would be the decline and ultimately the collapse of European civilisation, hastened by the actions (or inactivity in the face of crises) of the EU. Parkinson in East and West and Quigley in The Evolution of Civilizations are too close for comfort in their prescient analyses of civilisations. The EU certainly displays characteristics of evolving from something that some years ago may have been useful into an extravagant institution that exists for its own sake, which these authors identify as a prelude to decay (of civilisations) and ultimately invasion. It is hard to see how the sclerotic EU can defy historical precedents and rejuvenate itself or the countries of Europe. Commonly the mainstream (such as the EU) is set in its ways and slow to adapt, progress (paradigm shifts or ‘thinking outside the box’ in particular) coming from the periphery as noted by Thomas Kuhn in relation to science in The Structure of Scientific Revolutions.

The actual cost of the EU in a competitive, changing world is therefore far greater than the obvious headline monetary figures, which are just the tip of a very large and destructive iceberg. It is an increasingly burdensome and out of date political/bureaucratic experiment. Historically our country, operating on the periphery of Europe, has performed better, often leading in many different fields including intellectual curiosity, philosophy, political thought and democracy, science, technology, education, international trade, financial services and the rule of law. Being held back and down by the institutionalised EU millstone around our collective necks rather than setting an example to everyone makes not just us, but the world poorer.

Photo by StockMonkeys.com