Saturday, December 24, 2011

A financial nativity tale


A telling conversation with ghost of Christmas present

Christmas Eve at St Andrew's Square, in the centre of Edinburgh's financial district.
Wet snow falls on the scattering of tents housing the Occupy protesters. Jake Rice sweeps the slush out of the mess tent ... and onto the £300 hand-made shoes of Andrew Duncan, an investment banker.
AD: Jesus Christ!
JC: Oh, sorry. Didn't see you.
AD: Aye, well. You can now. And I'm bloody soaked.
JC: Um, but who ... what d'you want.
AD: Well, I was going to give you these bottles, but I'm tempted to drink them myself now.
JC: Why? You look like one of the people who've stolen 1% of the wealth. You're not from the tabloids again are you?
AD: No, and I've stolen a damn sight less of the wealth this year, I can tell you. Bonuses have been trashed by the crash.
(Sound of child crying.)
AD: Christ! you got kids here? In this?
JC: Only during the day.
AD: Yes I forgot, you lot all go home at night don't you – back to your warm middle-class beds.
JC: Actually we don't. I've been here for two months. Before that I was at St Paul's.
AD: Hear they've given up.
JC: No they haven't. They've agreed to move on rather than be forcibly removed in the New Year. We aren't going anywhere.
AD: OK, sorry. Look, I've been watching you here every day since you pitched up. Never believed you'd last. Which is why I'm bringing this crate. Just thought you deserved a bit of a winter warmer.
JC: That's kind of you, but I'm not sure we should really be taking donations from the people who've been wrecking the financial system, destroying public services and throwing people out of their homes.
AD: Ha, ha, ha! What school did you go to?
JC: That isn't the point. It's not where you come from that matters; it's what you do.
AD: Aye, well. I went to one of the worst schools in Edinburgh. We used to throw stones at people like you in your poncy blazers.
JC: Now it's my turn to tell you where to go ... If you don't understand why that doesn't matter then you can't possibly understand why we're here.
AD: Actually, I understand a lot better than you might think. Look, I'm sorry, I didn't come here for an argument or to jeer at you. As I say, in a curious way I respect what you are doing here. I'm glad someone's doing it.
JC: Why don't you join us then?
AD: Nah, I'm just not into that. I'm not a demo kind of person, never have been. Can't take it seriously.
JC: What do you actually do?
AD: I work in financial derivatives – currency mainly, and a bit of securitisation – but that's all frozen up at the moment.
JC: So you're a speculator then.
AD: Not really. I try to predict what various currencies will be worth, then we short on exchange traded funds valued in euros. At any rate, that was what we did.
JC: What possible value can there be to society in speculating on currencies? Don't you realise how people like you have driven commodity prices so high that people in Africa are having to sell their bodies to eat?
AD: Look, I never made the system. Really, it's just a job. Actually, I'm one of the people who agree about a Tobin tax, you know a tax on currency transactions – like George Soros says.
JC: A Robin Hood tax? You?
AD: I hate that phrase, but yeah. Why not? You have stamp duty on houses. Currency is just a market, it's just like selling anything – clothes or food. You make a profit on the sale. If you didn't have markets you'd not have this tent.
JC: Actually, this came from Blacks which has just gone bust thanks to people like you.
AD: I'm not to blame for high-street shops being hit by the internet. That's you lot with your MacBook Pros. You don't realise how you are changing everything with those things.
JC: OK. But if you look at the crisis as a whole, it's got a lot to do with greed, lax regulation, inequality, tax avoidance ...
AD: Well, actually. I agree with a lot of what you say. It's been appalling. Those financial scandals: endowment mortgages, payment protection insurance, private pensions, precipice bonds ... It's an utter disgrace. Trouble is ordinary people just don't understand the financial system. The politicians don't either. Next year, this Government is going to introduce a new semi-compulsory pensions system for the low paid which has been designed entirely to protect the profits of the pension providers. Bet you'd never heard of the National Employment Saving Trust?
JC: I don't have a pension.
AD: Course not. People like you don't work at all.
JC: The people are kept in ignorance by a compliant media, by the lies of the banks, and by corrupt politicians.
AD: Tell me about it. I couldn't agree more. People are completely defenceless. They should be taught about finance at school. They don't know how much they're being robbed because they're blind.
JC: But you make a living out of it. How can you stand there and say that?
AD: Actually, we're not so smart either. Look around this square at these grand bank buildings. There's absolutely nothing behind them. Empty shells. The money has all gone. They've killed themselves by their own greed.
JC: What about the trillion in public money that the Government gave you people to pay for your mistakes?
AD: Got me there, friend. Madness. Rewarding failure. Government handed a trillion to us, no strings. So what were we going to do? Go bust? That would have meant an economic depression.
JC: We're in an economic depression, or hadn't you noticed?
AD: (Turns to go) Actually I had kind of ... I've just been made redundant. Happy Christmas.

Wednesday, December 21, 2011

The last throw of the dice? ECB gives bankers a happy Christmas..

  Turns out that Francois Baroin, the French Finance Minister, wasn't far wrong last week.   The most hated man in the City of London said that Britain was in just as bad financial shape as eurozone countries like France, and that the rating agencies should be downgrading British debt.  We have higher inflation, lower growth and larger debts than France which is currently on the downgrade 'list of shame'.   Now Moodies has put the UK on credit death watch too. 

Thursday, December 15, 2011

Douglas Alexander, Scottish nationalist?

    It's extremely uncomfortable, especially at mealtimes.  All week my mouth has been dropping open inconveniently, bouncing off my chest, getting in my food, stifling coherent speech.   The reason:  the Shadow Foreign Secretary,  Douglas Alexander's,  jaw dropping intervention in the independence debate.  In a speech in Glasgow the one time protege of Gordon Brown (they're not so close these days) appeared to dump the Scotland bill in the dustbin of history and promised "an open-minded approach as to how the architecture of devolution can be improved".

   The clear implication is that Labour at least are no longer viewing the Calman Commisson report, and the Scotland Bill it inspired, as the last word on Scottish home rule.  Or rather, Labour is no longer prepared to go into the Scottish referendum allowing Alex Salmond to have an each way bet on the result, by supporting devolution max and independence.   Alexander is unspecific about exactly how far he is prepared to go down the road towards "devolution max" but there is no doubt that Labour is now resolved not to go die in the last ditch defending the status quo, while the SNP adopt the mantle of devolution.  I talked with him in the BBC studios on Saturday, and his irritation at the way the SNP have claimed credit for home rule, and made the Scottish parliament their own, even though they boycotted the Scottish Constitutional Convention, is very clear.
If there is a better devolution available, Labour will sponsor it.

  This is an astonishing moment.  The ground is moving under our feet.  If Labour is now contemplating fiscal independence, and though Alexander has not said this, I believe that is what he means, then we are on the verge of a constitutional revolution.   Let me explain:  the Calman Commission was, in a sense, unionism's last throw of the dice.  Professor Calman made what I argued at the time was a compelling argument for the Scottish parliament to have tax raising powers.  A grown up parliament must take on the responsibility of raising the money it spends, he said.  It must be accountable for its actions, transparent, fair, efficient.  However, the Calman solution, a fifty fifty split of income tax, was never very coherent and had all the hallmarks of a Whitehall fudge.  Even its supporters have difficulty explaining how it would work, or be an improvement on the present arrangements of a bloc grant from Westminster.

    The only way forward from Calman is a form of fiscal autonomy where the Scottish parliament raises the vast majority of the money it spends.  This has the advantage of moral clarity, and fiscal transparency.  There is no jiggery pokery with revised Barnett Formulas,  no deflationary fiscal devices.   There will be tax sharing, as there is in all federal arrangements, but the fundamental principle that parliament should be accountable is upheld.  Scots would no longer, under fiscal autonomy, be able to blame Westminster for "fiddling the figures".   The responsibility falls on the Scottish parliament to balance its books, pay its way, tax as well as spend.  Make the hard choices. And they are hard.  Fiscal autonomy is no easy ride for the SNP because it's main propaganda message - 'it's all London's fault' - is whipped from under them.

  No wonder Douglas Alexander/s namesake, Danny - the Treasury (?) is sounding increasingly desperate.  The unionist coalition built around the Scotland Bill has fallen apart. But this is only a recognition of reality.  Calman was a victim of the May election, when the SNP won an absolute majority in the Scottish Parliamentary elections.  Alex Salmond can do exactly what he wants in Holyrood, and he has made clear he is not going to vote through the Scotland Bill in its present form.  Since the passage of the bill requires the consent of the Scottish parliament this has killed the bill because the SNP will simply it.  What is Westminster going to do?  Impose a radical new tax regime which has been rejected by the Scottish Parliament?  Hardly.

   Douglas Alexander is a gifted political strategist and he saw the meaning of May long before his Scottish party had woken up from their post election hangovers.  It changed everything. Not just the balance of power in Holyrood, but the whole trajectory of Scottish, and British politics.  His sister, Wendy Alexander, may have set up Calman but that was in a different age.  Labour now faced the danger of being left out of the new order - forced to go down with a bill that has been moved by the hated Liberal-Tory coalition.   Labour had no option but to change course, as he tried to tell them in October when he reminded them that they had been "gubbed".  If Labour go into the independence referendum chained to a Tory bill they will be gubbed for good.

Wednesday, December 14, 2011

Salmond's first own goal. Sectarianism

  From The Herald.    Like most people concerned about freedom of speech, I've been watching the progress of the Offensive Behaviour at Football and Threatening Communications Bill, with mounting alarm. Outlawing the singing of songs at football matches seemed such a ridiculous proposition that initially I thought the Scottish government weren't serious. That Alex Salmond just wanted “send a message”, and that the loopier parts of this unnecessary legislation would be dropped. And if not, MSPs would realise that such a law as unworkable as it is objectionable. Surely, reason would prevail. It hasn't.
Yesterday, MSPs in Holyrood passed a law that could make the singing of the national anthem punishable by a five year prison sentence if it is associated with “offensive or threatening behaviour” in any context that involves football. No one knows exactly what “offensive and threatening behaviour” is, and anyway, because of the Catch 22 drafting, the very singing of “sectarian” songs is itself deemed offensive. There is no list of proscribed songs because to compile one would invite ridicule - “Give Ireland Back to the Irish” - Paul McCartney? This dumb law could also make the carrying of flags, colours or religious symbols illegal at football matches, in the trains going to football matches or in pubs or any public place where football is being shown. It could make singing The Sash illegal in a pub, but not in the street outside it. This is utter madness.

Tuesday, December 13, 2011

Who are the separatists now? Take Britain out of Europe and you can take Scotland out of the UK

David Cameron's decision to take the UK out of Europe will take Scotland out of the UK.  The Prime Minister's use of the veto against the EU treaty on budgetary reform looks like the game-changer that the SNP leader Alex Salmond has been waiting for.   Attachment to the Union in Scotland is likely to evaporate as Scots realise that they have become an appendage to an essentially isolationist England with a sceptic media saturated with an ugly chauvinism. The hostility shown towards European nations is like a bad version of the hostility that old school Scottish nationalists used to show towards England. Only they grew out of it. 

  David Cameron's narrow nationalism, putting the interests of the City of London above those of resolving the EU budget crisis, has fatally undermined the moral case for sticking with Britain.  If the UK is now a Banker's Union, dedicated to protecting the privileges a delinquent financial elite, what price internationalism, democracy, social welfare or any of the values that were supposed to define the common British project?

The SNP has suffered greatly in the past from accusations that it is a "separatist" party, seeking selfishly to divide the UK, and pit nation against nation.  But who are the separatists now?

  The argument for sticking with Britain was always that this gave Scotland representation at the highest levels of decision-making in Europe.  This is clearly no longer the case.  The UK is marginalised in Europe, whatever the Prime Minister may say - a "union" of one against 26.  This isolation is the culmination of decades of revanchist anti-Europeanism,  which has coincided with the decline in popular attachment to the symbols of Britishness on both sides of the border. 

   As England turns in on itself, lapsing into a financial parochialism, Scotland turns out - seeking to rediscover in Europe the communitarian values that it believed underpinned the UK.  The SNP used to be criticised for demanding "Scotland's Oil", for seeking to grasp the nation's natural resources for itself.  Well, Scotland gave the oil away, and now finds that it was used, not for the common good, but to build an evil empire of greed.  It surely won't get fooled again. 

£500 for independence?

From the Herald.   It sounds cheap at the price. 65% of Scots would opt for independence if they were £500 better off as a result, according to the latest poll from the Social Attitudes Survey. With all that cash the SNP has been accumulating recently through legacies and donations, Alex Salmond must be tempted just to send out a brown envelope with every referendum ballot paper. Perhaps they could redirect redirect some of that £60bn in fantasy funding for infrastructure projects announced this week. Scotland could be taking its seat in the United Nations before the decade is out.

There has been much scorn heaped upon Scots for appearing to put a price on their continued membership of the UK. Almost as much as has been heaped upon the Scottish Infrastructure Secretary, Alex Neil's, Mega Plan for road and rail projects, including a high speed rail link, with a sprinkling of housing and hospitals. Most of the projects won't come to fruition until the 2020s and beyond, and rely on optimistic funding from NPD, PPP, PFI or whatever form of private finance initiative happens to be in favour at the time. The Mega Plan also depends on the Scottish parliament getting the borrowing powers contained in the Scotland Bill, to which the SNP government is vehemently opposed. The consensus amongst the Mcchattering classes is that it has the ambition of Roosevelt's New Deal, but little prospect of becoming a real deal.

But at least the SNP are trying to do something. Industry bodies, including the Scottish CBI which is no friend of nationalism, have been praising the scheme for trying to inject confidence into a flatlining economy. Some foreign pension funds are reported to be interested in financing projects which, like rail, have guaranteed revenue streams. Most of the scornful newspaper comment concedes that someone somewhere really needs to be talking about growth and the SNP government is at least suggesting there may be life after the recession. Certainly Neil's plan puts the UK government's £5bn infrastructure plan announced in the Autumn Statement in the shade.

In a country like Scotland, where half the economy is the state, no one will invest if the government isn't taking a lead. For every £100 million invested, 1400 jobs should emerge in the wider economy. It's just a pity that so many of the projects are unimaginative road improvements, picked from the briefing sheets supplied by transport lobbyists: Forth Road Bridge, M8 link, A9 duelling, Aberdeen bypass, etc. I thought that the SNP was supposed to be in the green investment business, developing renewable energy.

But there is a broader political objective here. The SNP is playing a game of fantasy independence – giving voters some idea of how life might be in future if Scotland were to to it alone. Everything the SNP does right now, from Alex Salmond lecturing the Chinese on Adam Smith, to getting civil servants to research a “Scandinavian” prospectus for independence, is all about preparing the ground for the referendum, which looks like coming in the middle of 2014. The task is to eliminate the negatives – make independence sound like a bracing hill walk rather than a leap in the dark. The SNP is trying to think us into leaving the UK.

And that much-derided poll from the Social Attitudes Survey is, they believe, an indication that Scots are thinking the unthinkable.. A £500 a year bung may seem a crass, materialistic reason for seeking national freedom, but read differently it suggests that most Scots would now opt for independence if they thought it could be made to work economically. . Certainly, there appears to be precious little romantic or emotional attachment to the United Kingdom, kith and kin, the flag or any of the other symbols of Britishness.

Perhaps this a consequence of the very materialistic way that unionists have posed the argument. Opponents of independence invariably resort to versions of the “divorce is a costly business” argument. - the £4 billion deficit, the loss of the Barnett Formula.   Scotland hurled out of the EU and left destitute like a single parent on a bleak housing estate. It is the cost of the divorce that is always emphasised, not the emotional bonds that led to the original marriage.  In fact, the Union – Parcel o' Rogues aside – was a moral project as well as an economic one. 
   Even during the days of the British Empire, when Scottish soldiers shot the natives, Scots graduates ran the colonial administration, and Scottish bankers took all the money, there was a sense of mission: that this was somehow bringing civilisation to the world. After the fall of the British Empire there was a new moral union. It was based on working class solidarity, trades unions, the war against fascism, the 1946 Labour government and the National Health Service. Scots were fully signed up to the social democratic project, to the welfare state, and largely remain so today, even though the industrial working class is no longer a political force, and the welfare state is under challenge as never before.

Scots are thinking hard cash because they no longer recognise any coherent moral message from an increasingly eurosceptic United Kingdom, dominated by the City of London, and run by a government largely composed of ex-public schoolboys. Why should Scots keep faith with a union based on plutocracy, where personal enrichment is the only mission around? The SNP believe Scots are ready for a new political narrative in which Scotland figures as a rugged equalitarian Nordic nation, with a history of self-reliance and self-help, that doesn't need state handouts and can do very well on its own.

And talking of prospectuses, the nationalists think they can offer a pretty convincing IPO for the referendum: highly educated and versatile work force; £350bn in North Sea Oil; a quarter of Europe's wind and wave energy; thriving tourist industry, five world class universities and an awful lot of water.     It would be pretty poor management that could make a mess of those numbers. If I were a Japanese pension fund, I might consider investing in it.

    So, unionists should take little comfort from that risible price drop poll.  Scots are increasingly taking independence seriously, and are costing the future. A leap in the dark might be better than being left in the lurch.

Tuesday, December 06, 2011

Black November: it's enough to drive you to drink.

     November was when the banking crisis of 2008 finally hit home. The governments of Europe have bankrupted themselves by taking on the debts of the banks.  The latest move by Angela Merkel and Nicolas Sarkozy is the final nail in the coffin of the eurzone economies.  It saddens be greatly to say that, but I can't see any way out for them now. 

   What was decided in Paris was that, in future, private investors will not incur any losses in future defaults by eurozone countries.  In Greece, the banks and investment houses who had bought up Greek debt were forced to take a "haircut" of some 30-40%. This freaked bond investors and made them wary of taking on sovereign debt of any Mediterranean states - which is why Italy's borrowing costs leapt above the crucial 7%.   Markozy decided that the only way to calm the markets was to give them a promise that future losses will be taken onto the state.

   All very well, but the sovereign states of Europe are already effectively bankrupt, not because of public debt, but because of the 23trillion that has been lent by eurozone banks. This is the real wild card.  By any reasonable standards, the eurozone countries are already insolvent.  And there is no one left to come along and pay their debts for them.  This is why the rating agency, Standard and Poor's (what a wonderful, Dickensian name that is) has put them all, even Germany, on notice of credit down grade.  This will make it even harder for them to borrow money, and will increase debt. 

   But all those gloating over the misfortunes of the eurozone should remember that Britain is deep in the debt pit as well, and it is only because we have been debauching the currency and igniting inflation by Quantitative Easing that we have been left alone for the time being.  There is a reckoning here too. 

Friday, December 02, 2011

Everyone should have a decent pension.

   That's what the strikers' placards said, and they are right.  Everyone should have a decent pension.  The trouble is that the vast majority of workers in Britain don't have one, and don't have the remotest hope of having one.

   The basic state pension in Britain is worth only 17% of earnings the lowest in Europe, £102 pw for a single person, or just over £5,000 a year.  The average in Europe is 57% of average earnings, around £14,000.   Even in the Netherlands, the second lowest, pensions are worth twice what they are here.  Hardly luxury, but at least it is just about possible to live on it.   The UK pension simply isn't enough to live on.

   People here are expected to save for their retirement.  But the iniquitous means testing that is applied to the pension credit actually discourages people from saving. Which is why so many don't.   The average private sector pension is only worth around £20 a week, and yet this can disqualify a pensioner from receiving the pension credit which bumps the state pension from a £102 to £137 for a singe person.  And to add insult to injury, this is classed as taxable income - unlike tax credits or interest on an ISA.    Britain has the most complicated pensions system in the world, and many people who are eligible for the pension credit don't manage to complete the pages and pages of form filling.

   Let the public sector workers keep their pensions - but only if the rest of the working classes are given similar security.  The danger is that the majority of workers, who are not employed by the state, and who cannot afford any pensions, will refuse to continue to pay, through their taxes, for the relatively generous pensions of public sector workers.  There has to be some kind of equity here.

Tuesday, November 22, 2011

High pay equals low growth.

 The High Pay Commission has told us what we already knew: that the very rich have turned the economy into a personal wealth-generating machine.  Earnings for CEOs have risen thousandfold over the least thirty years as average earnings have only tripled. 

  There is no conceivable economic justification for their extravagant wealth, which has arisen largely through regulatory indolence and public ignorance.  Remuneration committees composed of highly paid executives naturally acquire an exaggerated sense of their own worth.  The idea that those dull boardroom suits, with their bad breath and stale management speak, are 'masters of the universe' is laughable. 

  The capitulation of successive governments to  neoliberal fantasies about how the productive economy actually works has allowed a climate of kleptocracy to command Britain's boardrooms. If even Labour politicians are "relaxed about people getting filthy rich so long as they pay their taxes" (Peter Mandelson, 01) then it is hardly surprising that the wealthy have filled their boots. 

  The trouble is that moral condemnation of this kind of elite behaviour doesn't work.  They don't have any morality beyond brute self-enrichment.  What is needed is a critique of the economic implications of allowing he top 1% to acquire 40% of the wealth.  In a British context it is about looking at the way this concentration of wealth undermines the productive economy.  

   The kleptocrats don't spend their money in productive ways, they use it for speculation in property, commodities and other assets.  This leads to stock market instability,  spikes in the prices of property, oil and food,  and to the creation of sophisticated financial products designed to increase yield, like hedge funds, special purpose vehicles, private equity.   Poor people spend their money on food, clothes and other consumer goods all of which generate economic activity and employment.  

   Grotesque inequality of wealth is not just an abomination, it is an economic depressant in the truest sense.  It creates stagnant pools of wealth, sucking the vibrancy out of the economy and depressing growth.  Roosevelt had the right idea when he slapped initially a 70% tax and then, ultimately, a 90% tax on incomes above $200,000.  If you look at the history of taxation rates in the UK and US over the last eighty years, it is no accident that the most productive years of the capitalist economy were in the 1950s and 1960s when tax rates were double what they are today.  

   That's the trouble with capitalism today.  They don't know what side their bread is buttered. 

Monday, November 21, 2011

UK Government launches sub-prime mortgage scheme

   How will using taxpayer's money to subsidise inflated house prices make home ownership more affordable?  The UK housing minister, Grant Shapps has announced a "get Britain building" programme (inspired I fear by similar moves in Scotland)  in which the state will lend most of the deposit on first time home buyers' mortgages.  They say this is to help first time buyers, whose average age,  according to the BBC, is now 43 years.  It won't - this is just a sop to the construction industry which is tanking again because of the euro-debt crisis. The money will go straight to the builders of the over-priced doll's houses that are too small for family life.

    There's a very good reason why building societies and banks are asking for deposits:  because house prices are falling.   Houses are still far too expensive in Britain, compared with continental Europe or America, and subsidising the sale of them will only keep prices unaffordable a bit longer.  What first time buyers need are houses that they can afford, not yet more debt.  Those lured into this scheme are likely to find, in future years, that they have taken on negative equity.   Anyone who seriously believes that house prices are going to rise during a double dip recession needs to be saved from themselves.  

 The government  also intends to increase the discount on the sale of council houses  so that people will be able to pick them up for half of what they are worth.  This is an unwarranted extension of the policy that has virtually destroyed social housing in Britain.  Selling council houses for a fifty percent discount to the market rate is immoral and should be illegal.  It is the taxpayer who paid for the construction of these houses and it is unforgivable to hand the capital gain to private home owners, many of whom will sell to buy-to-let landlords.  These houses will then be let at rents that can't be afforded by most working people, let alone the unemployed or low paid.  The inflated private rents will be paid by the government, the taxpayer, through housing benefit.  This amounts to a systematic asset stripping of public assets.  

   But the worst thing about both these policies is that it is all about trying to solve a debt crisis by yet more debt.  You would have thought after the last three torrid years that we had learned something about the dynamics of the debt economy, but apparently not.  All we need now is for the newly privatised Northern Rock (or rather the profitable bit, since the £50bn in dud NR mortgages has been retained on the state's books) to start offering 95% mortgages and the cycle will be complete.   If the government wants to help young people it should be taxing the profits and bonuses of UK banks who owe their existence to the tax-payer.   It should restore the cheapest and most effective means of building affordable homes, which is council housing.  And it should tax the speculators who sit on building land and make unjustifiable profits out of the housing shortage.  Ultimately, the UK housing crisis cannot be addressed without some form of site value taxation.  

Monday, November 14, 2011

Sovereign debt crisis? The answer's in Frozen Planet.

  Think of the european nations as a herd of bison pursued by a pack of wolves. For long periods nothing seems to happen. Until, one of the bison gets separated from the herd and the wolves descend in a lightning coordinated assault. However, if the herd regroups and charges, the wolves have no chance and will back off again.

I'm grateful to Frozen Planet for this imagery, which isn't exactly how financial markets work, but is helpful in explaining the political dimension of the sovereign debt crisis. The point is that the nations always have strength in numbers. The markets, which have been picking eurozone nations off one by one, can only do so as long as governments don't unite against them. Politics trumps economics

The trouble is that the euro bison, instead of charging the wolves, are wandering around the tundra, nibbling the grass, butting heads and generally failing to get their act together. This is because there's a failure of leadership: there is no dominant bison to call the others into line and charge the markets. Well, actually there is dominant bison – Germany – but for understandable historical reasons, Germany is reluctant to tell the rest of the herd what to do. A German dominated superstate is a very frightening prospect for countries, like France, who spent half of the 20th Century fighting them.

If the eurozone had a central authority, a proper central bank, or an institution like the Federal Reserve in America, the markets would be losers and would have to seek kills elsewhere – the cost of borrowing in Italy would be the same as in Germany because the Italian bonds would be european bonds, backed by the combined might of greatest economic force on the planet – the European Union. What is happening now is that the markets are testing highly indebted countries like Greece and Italy and the rest of the herd is leaving them dangerously exposed.

Sunday, November 13, 2011

The Clarity Act is as clear as mud.

  There is an air of quiet desperation in Whitehall as civil servants and UK government ministers try to out-manouevre Alex Salmond over the referendum.  They feel he's been getting away with murder, insisting on holding it at the time of his choosing and with an unspecified number of questions. 

    Westminster has finally realised that including "devo max" on the ballot paper as well as independence would leave Salmond with a win win  - since he would happily settle for fiscal autonomy for Holyrood if independence is rejected, as opinion polls suggest it would be.  Hence the threat to take it out of Scottish hands altogether and stage a pre-emptive independence referendum organised by the UK Electoral Commission.  After all, as constitutionalists like Oxford Professor Vernon Bogdanor keep telling us, Holyrood doesn't have the legal authority to run a binding referendum because the constitution is reserved to Westminster.  Why should England dance to the Nationalist tune?  It is a complaint uttered by UK commentators and academics around bodies like the Constitution Unit at UCL, who really think it's time to jolly well stand up to these separatists, and beat them at their own game

   The Labour minister, Margaret Curran, has wisely tried to head off this pre-emptive referendum which would of course play directly into the hands  of the SNP.  What better than for London to be dictating the constitutional destiny of Scotland? The SNP is hoping against hope that Westminster will make their day. The problem with the metropolitan political and academic elite - who only read the ultra-unionist headlines in The Scotsman - is that they have very little understanding of political dynamics north of the border, or how much attitudes have changed here over the last five years.  The SNP has an absolute majority in Holyrood, and any attempt to impose a referendum would be blocked.  There would have to be a consent motion passed by the Scottish Parliament for any legislation initiating a Westminster-led referendum.    

  So that is a non starter.  The next trick is to introduce a Clarity Act such as the one passed by the Canadian Government in 2000, though never recognised by the province of Quebec which inspired it.  This was the product of an examination of the legality of secession by the Canadian Supreme Court, and was seen by many Quebecers as an attempt to stifle their independence movement.   The Clarity Act states that subordinate regions or principalities have no legal right to secede. However, if a referendum is passed in which the question is clear, and there was a substantial though undefined majority, then the other states in the union have a duty to respond to the demand for autonomy.   It is a masterpiece of legal sophistry, open to almost any interpretion, from sending in the tanks to endorsing independence on the basis of a majority of one.  The latter is how Quebec separatists see it. 

   The Clarity Act, a reaction to the knife-edge 1995 Quebec referendum has never tested, so no one really knows what it means in practice.  It is the work of constitutional lawyers and, like economists, if you put twelve of them in a room you will get twelve different interpretations. But any attempt to use constitutional law to foil the Nationalists will backfire as assuredly as holding a pre-emptive referendum. The SNP holds most of the cards. Unionists would be far better advised to sit on their hands, and wait to see what Alex Salmond comes up with in 2014 – though I suspect that we'll be hearing about the question or questions long before that.

Thursday, November 10, 2011

Of course Scotland would be admitted to the EU. Look at Latvia, Estonia etc etc.

  I've been in this game too long.   I remember being taken by the Tories nearly twenty years ago to Brussels to hear Baroness Ellis  warn that Scotland would not be allowed to join the EU.  Don't even think about it!  France and Spain would block an independent Scotland to discourage their own separatist movements. England wouldn't accept Scotland as a legitimate nation.  There would be years of wrangling over budgets.  England would dump financial liabilities onto Scotland to reduce its contribution to the EU budget etc etc..
 Scotland would end up broke and isolated, a ragged and homeless fragment lost in the North Sea.   It was tedious rubbish then, and it is rubbish now. Yet, barely a week goes by without some report or other announcing that wee Scotland would be frozen out of Europe and told to go and sit on the naughty step. 
    I've just been looking at the latest report to hit the front pages.  It came from the House of Commons Library and it is a background briefing note, not an authoritative assessment of the Scotland's legal status within the EU. It carries its own health warning  "[This briefing note]  should not be relied upon as legal or professional advice or as a substitute for it.  A suitably qualified professional should be consulted."   It goes on to rehearse all the arguments that have been made about Scotland's relationship to the EU that have been made over the years. Pros and cons - naturally, the Scotsman chose the con and headlined this as "£8bn Bill To Join The Eurozone". This presupposes that Scotland would automatically join the euro, which of course is not going to happen, at least in the short term.  Just like Sweden, Scotland would have the right to decide whether and when to join the euro. The report goes on to question whether membership would be automatic and finds differing views among constitutional authorities. 
   Lawyers make their money from creating legal complexity, so you will always find that there are differing legal opinions about secession.  But the political reality is that it is inconceivable that the EU would try to block an independent Scotland from entry. The EU is founded on the principle of national self-determination, so the idea that Scotland would not be recognised as a nation in Europe is ludicrous.  Scotland is already a part of the EU through its participation in the United Kingdom, and as a nation in its own right, Scotland would automatically qualify for membership of the EU.   It would take concerted action by the other member states to prove, either that Scotland is financially insolvent, or that it is not a democracy, or that it is in in violation of the European convention on human rights.   That is not going to happen. 
  Sure, there may be bureaucratic obstacles to formal entry - calculations of Scotland's contribution, relationship to the eurozone, Shenghen - all of which are the subject of opt outs by the UK.  But many of these problems would also face the RUK (Residual United Kingdom) in exactly the same way.  How much should England and Wales pay exempt of Scotland?  What weight should English votes continue to carry in the Council etc etc..  
  But the central question: Scotland's ability to remain in the EU, answers itself.   in 2004, the EU admitted a raft of small European countries many of which had been part of the Soviet empire.  The idea that the EU would reject Scotland because it used to be part of the UK is laughable. Iceland is being given a free entry ticket to the EU as I write.  Scotland is a wealthy country, unlike Greece or the small former Eastern block countries like Latvia and Estonia or minnows like Malta.  Scotland has around £400 billion in oil reserves, a quarter of Europe's wind and wave energy, five of the top universities in the planet.  
I despair at unionists who make these arguments because they are only destroying their own case.  If this is the standard of debate we can expect in the run up to the independence referendum then - roll on independence!

Monday, November 07, 2011

Hollywood and the arms trade.

"The Shadow World - Inside the Global Arms Trade" by Andrew Feinstein Hamish Hamilton £25

     There's a memorable sequence at the start of the 2005 Hollywood blockbustrer, “Lord of War” which shows a bullet's eye view of a bullet's life cycle, from a manufacturing plant through various intermediaries till it ends up in the head of an African civilian via the chamber of a Kalashnikov. The message is clear: arms don't come from nowhere. From factory to gun, there is a path that is easy to trace for anyone with the will so to do. The fact is, as Andrew Feinstein explains in this remarkable and couragous book, that governments are so heavily involved in the deeply corrupt world of arms dealing, that they turn a blind eye to the human cost and the damage they do to their own economic and moral integrity.

The “Lord of War”, played by Nicolas Cage, was based on the life Russian arms dealer, Viktor Bout aka “the merchant of death”, who made his name busting arms embargoes in African states in the 1990s. He helped arm the Liberian dictator Charles Taylor's murderous NPFL, and the psychopathic Sierra Leonian bandit Foday Sankoh's RUF, which used child soldiers doped with crack cocaine to kill tens of thousands of civilians. The activities of the RUF featured in another Hollywood film, “Blood Diamond”, starring Leo diCaprio, in 2006 which connected up the dots between the illegal diamond trade and international gun running.

Despite their lurid celebrity these master of war are rarely prosecuted. Viktor Bout was finally arrested after a sting operation in Thailand in 2008 when he offered to sell weapons to US DEA agents posing as members of the Colombian marxist group, FARC. He had been under the protection of Russian oligarchs, who were furious when their man was arrested in Thailand and put pressure on the Thai authorities not to allow his extradition. It took two years and the personal intervention of Barack Obama to get him to America, where he was finally convicted last week.

It may be that Bout's capture was only made possibly by Hollywood. Had it not been for the publicity generated by these films, it's unlikely that the President himself would have been involved. In “Lord of War”, it was suggested that Bout's immunity arose from his being a US intelligence “asset”. There is evidence that he and his associates were indeed involved in George W Bush's “War on Terror”, and provided information about terrorist organisations like al Qaeda which Bout had supplied. Indeed, Feinstein clams that an attempt by the Belgian authorities to arrest Bout in Athens in 2002 was foiled when US intelligence sources tipped him off.

Fact is indeed stranger than fiction. Which is good news for Hollywood, but bad news for the future world peace. If it takes a multi million dollar film before any of these monsters are arrested, then God help Africa. Mind you, there is enough in Feinstein's book for a dozen film pitches. Bizarre characters leap from the page - like Adnan Khashoggi,confidant of royalty, who claimed to be the wealthiest man in the world, and whose yacht, Nabila, was used in the bond film “Never Say Never Again”.. Then there is Dale Stoeffel, a US arms adventurer and ex special forces agent in Bruce Willis mould, who stood to make a killing out of the war in Iraq, but was himself killed in 2004 after he crossed members of the provisional Iraqi government. Yoshio Kodoma, aka “The Monster”, worked closely with US arms companies as they bribed and bought their way to the heart of the Japanese government.

But the grand-daddy of them all, and the source of most of the wealth of arms dealers like Adnan Khashoggi, was the al Yamamah arms deal, the biggest in the world, negotiated personally by Margaret Thatcher with the Saudi Royal family in 1985. It was an arms-for-oil deal worth £40bn, benefiting the UK defence conglomerate BAE systems, and according to Feinstein, Iron Lady's son, Mark Thatcher, who swept up the crumbs. Huge sums were paid in “commissions” to Saudi Princes and shady intermediaries. More than £6bn was paid out, and some of it, according to Feinstein, even flowed through the accounts of the Saudi fixer, Prince Bandar, into the pockets of two of the terrorists responsible for 9/11.

Feinstein's account of how the Serious Fraud Office was nobbled in its attempt to bring BAE to justice is deeply disturbing because of the insight it gives into the way that the entire British establishment has been subborned by decades-long complicity in the arms firm's questionable activities. Feinstein has seen BAE's modus operandi at close hand. He was an MP in the South African parliament after the collapse of apartheid, and he saw how the African National Congress was persuaded by BAE to spend £6 billions on weapons systems it didn't need while millions died of HIV/AIDS.

We knew the arms business was corrupt, but only a book as exhaustively researched as this one is able to reveal just how serious and extensive this corruption really is, and how democracy itself is threatened. “The tragic reality”, Feinstein says, “is that arms companies, large and small, and arms dealers and agents, get away with corruption and bribery on a massive scale, complicity in crimes against humanity and even murder. They operate in a shadow world, taking advantage of gaps in the international legal system and hiding behind the protective cover of powerful politicians and intelligence agencies.”

The Shadow World is a heroic book by an author who, in writing it, has placed himself in the firing line. We surely can't go on leaving this story to Hollywood. The global arms trade totalled $1.6 trillion in 2010, up 53% in ten years. As the world plunges into a double dip recession, with huge stockpiles of weapons, the script is being written for the ultimate disaster movie.   

Wednesday, November 02, 2011

Greek referendum? Bring it on.

   Referendums and markets don't mix. A referendum on Scottish independence is coming, and already the markets, or at least analysts from Citigroup, are saying it “will create huge uncertainty” and advising investors to shun Scotland. The trouble is, democracy is all about uncertainty. Democracy is inconvenient. But in times of constitutional uncertainty, it is absolutely paramount that the people clearly register their support or opposition to change.
In Greece, where democracy began, the markets are threatening to bring the house down because the Greek government is going to put the EU rescue package to a referendum. This is being cast as a breach of faith, a spanner in the works, an “abject failure of leadership” as one financial pundit put it yesterday. How dare this jumped up prime minister, Papandreou, ask the people for their point of view? What have they got to do with it?
Well the people have quite a lot to do with it. It is they who will be losing their jobs, suffering a decade of falling wages, higher taxes and the humiliating presence of an “occupying force” of Brussels civil servants telling their treasury ministers what to do, where to cut, etc.. It seems to me that this involves such a diminution of national sovereignty that it really should be endorsed by the people. After all, changes in the Treaties of the European Union require a referendum of the people – though governments in countries like Britain are peculiarly reluctant to hold them.
The markets are a mob – a capricious and unthinking herd, liable to emotional spasms and irrational passions. Think of the crash, the property bubble, irresponsible bank lending. The markets are not capable of rational thought; only people are. The mistake was not to tag a ballot onto the Brussels bail out last week, so that it could be clear that the people of Greece would be fully behind the deal. Or not.

Now, admittedly, the referendum proposal did rather come out of the blue. The Greek government is in turmoil, and we don't even know, at this stage, whether Papandreou will survive in office long enough actually to hold it.  But I have a simple view of these things, which is that the people do have a right to decide on their destiny, and moreover, that an austerity programme of the magnitude of the one facing the Greek people, really needs a democratic endorsement. Better a referendum than a protracted general election.

The choice before the Greek people is this: they either stick with the euro austerity plans, or they go for default. At present, there appears to be a considerable constituency for default – certainly on the streets and in the media. But as we all know, it is dangerous to simply take the political temperature from street demonstrations. No one really knows what the mass of ordinary Greeks really think. Opinion polls suggest that a majority of Greeks are unhappy about about the deal, around 60%, but we also know that around three out of four Greeks say they wish to stay in the EU. A referendum campaign is the way to reconcile these conflicting views.
The costs of default could be far greater than the cost of the Brussels austerity. Restoring the drachma, at a hugely devalued rate against the euro, would increase Greek debt by at least 60%. This is because the debt remains denominated in euros and will still have to be paid. The cost of Greek borrowing would also increase because Greece no longer has the powerful economies of the EU supporting its currency. Greek peoples' savings and pension funds will of course be destroyed, overnight, Greek banks will collapse and borrowing costs to small businesses will soar. Those public sector workers, so vocal on the streets, and so defiant against Brussels, would be in penury and out of work because the government would not be able to borrow the money to employ them.
On the other hand, a default along the lines of the Argentinian default of 2001, would make Greek exports competitive, because they would be a lot cheaper. Markets don't look back, and once the default is over, if the economy appears to be stabilising, it's possible that investors might start lending again in five years or so. Greece could also negotiate some kind of loose peg to the euro and remain within the EU free trade zone. Greek holidays would certainly become a lot cheaper, and that could help build an economic recover.
But do the Greek people really want to be impoverished servants of wealthy German tourists? Maybe they do. By the time the markets start lending again, the Greek economy will be a shadow of former itself. With few natural resources, and very little advanced manufacturing, it would be in the situation of some low wage north African and middle eastern countries. It's not at all certain that the fragile Greek democracy would survive – it is only thirty six years since Greece was run by a military junta, and the colonels are restive again. The great thing about membership of the EU is that it requires countries to respect democracy, civil rights and the rule of law.
So, Greece has a very grave decision to make, with momentous implications that will affect the country for decades. A majority for the Brussels deal would impress the markets and ensure that the Papandreou government had a firm mandate for austerity, to implement the Brussels plan. A majority for default would also clear the air.. Greece could tell the private investors that they can sing for their money – or take a 90% haircut. A vote for default might even make Europe come up with a better offer, it if looks like the euro would collapse as a result.
What I find offensive is the way commentators have reacted as if a referendum is somehow illegitimate, a damaging distraction. When countries like China, under a communist dictatorship, start telling democracies like Greece to “shelve its unhelpful referendum” I think we have to ask who exactly these ”markets” really are. Democracy is always the worse choice – except for all the others. Last night, European leaders grilled Mr Papandreou about his plans late into the night. I hope he stands his ground.

Thursday, October 27, 2011

There's no greater enthusiast for the euro than...David Cameron.

    Now here's a thing.   There is currently no greater enthusiast for european economic integration than the British government.  George Osborne and David Cameron have become cheer-leaders for the euro, gatecrashing summits of the eurozone countries and appealing to EU leaders to press ahead with fiscal union - with creating the very "United States of Europe" that they condemn in their eurosceptic manifestos.  On the latest deal, Osborne welcomed the measures as far as they go, but insisted that the eurozone must move to  “greater fiscal union”.

   Of course, this is out of national self interest not ideology.  Britain realises that if the euro collapses so do we, not least because our banks are so heavily involved in European sovereign debt and because half our exports go to the EU.  The City of London is a europe's leading financial centre.  The economic destiny of these islands is therefore increasingly dependent on the success of the euro and the resolution of the crisis through the creation of a central european treasury.

   But hang on - if we are so up to our necks in europe, and indeed have a potential noose around our necks if the project goes under, should we not be in there fighting to get the crisis resolved in a manner that benefits, er, the UK?  And if there is no economic future for Britain without the euro, does that not mean that - defacto - we now accept it as the economic reality of the world economy.  And if we accept that, should we not be a part of it, if only to ensure that Britain's interests are safeguarded.   It's all very well to jeer from the sidelines - ha ha clever us for not adopting the euro - but the whole history of British involvement in the EU since the 1950s has been like this.  We say no no no until economic interest forces us to say a belated yes yes yes.

   This latest crisis summit over sovereign debt is a case in point. If we are so happy to be out of the eurozone, why are we so desperate to be involved in saving it?  Surely if it is a busted flush , we should be urging teh EU to restore national currencies not set up a multi trillion euro bail out fund.   And why are British Tory politicians arguing the case for fiscal union?  George Osborne has for months now been calling for a fast forward to the "ever greater union" that Tories are supposed to despise.  If integration is so good for Europe, and for the British economy, why are we so hostile to it?

Wednesday, October 26, 2011

Labour has no option but to adopt "devo max".

     Things are stirring in the Scottish Labour undergrowth.  While MP and leadership hopeful, Tom Harris. and the former aide to Tony Blair, John McTernan, continue to insist that Scotland has no future outside the union, and are warning Scots not to get big ideas about going it alone, others are beginning to realise that this is a doomed prospectus.  The former Labour First Minister, Henry McLeish, and Malcolm Chisholm, the only Labour MSP who remained standing in Edinburgh after the May massacre, are urging the party not to fall into the trap being left open for them by Alex Salmond.  Labour cannot afford to back the No campaign in the Scottish independence referendum.  It has no real option but to support "devolution max" or federalism.  Otherwise, Alex Salmond will win even if he loses because the SNP leader has colonised the centre ground.  Alex will be quite happy to accept fiscal autonomy as another giant step towards full independence.  He's a betting man and he likes an each way punt.  

Sunday, October 16, 2011

If David Cameron can support gay marriage - so can Alex Salmond.

      The campaign against the Scottish government's proposals to legislate for gay marriage reached critical mass last week - if you'll excuse the pun - with two senior members of the Scottish Roman Catholic hierarchy backing the former SNP leader, Gordon Wilson's call for a referendum on the issue.  Archbishop Mario Conti of Glasgow and Bishop Joseph Devine of Motherwell have condemned same sex marriage as an abomination. "Those in government need to be respectfully reminded", said Archbishop Conti, that a mandate to govern does not include a mandate to reconstruct society on ideological grounds, nor to undermine the very institution which, from the beginning, has been universally acknowledged as the natural order and bedrock of society, namely marriage and the family".  In other words: Alex, get your pink tanks off our lawn.  

    Archbishop Devine went even further: "We now have a straight fight between faith and atheism, morality and amorality, a culture of life and a culture of death,” he said last week. “The institution of marriage should not be corrupted by the transient fashions of society or by malevolent forces seeking to undermine the place of religious faith in society.”  This is turning into a Holyrood epic, with pointed hats firmly pointed at the SNP government. Alex is ducking for cover. 

   Now as an atheist, or rather a humanist, I have to object here that the gay marriage issue is not about undermining religious faith and undermining he natural order of society, whatever that is, still less an attack on religion.  Actually, if truth be told, the concept of same sex marriage is a triumph for the traditionalists and for people of faith.  It is an admission that there is something more to love than living together and that relationships need 
to be put on a firmer moral foundation. That moral foundation for - most people - still seems to be the essentially the Christian, to the extent that marriage is a Christian institution. 

 The fact that even gay people - the ultimate sexual outsiders- are now are seeking the sanction of marriage is surly the most obvious confirmation of that.  If there really is a straight fight going on, the Christians appear to have won.   That so many senior figures seem not 
to realise this is strange.

   Only twenty years ago, atheists, feminists and marxists condemned the "nuclear family" and marriage as a bourgeois institution that served to oppress women and block social progress.  Marriage was seen as inherently conservative, as a transmission belt for reactionary attitudes of nationalism and patriarchy.  Radical pyschiatrists like R.D. Laing - who has heard of him recently - railed against marriage as the  cause of mental illness and even extreme political movements.  In the sixties and seventies, people tried all sorts of alternatives to marriage - communes, 'open' relationships, serial adultery.   Marriage appears to have emerged from arguably the greatest challenge it has faced in its two thousand year history. 

    Gay marriage is now supported by the Quakers, the Episcopalian Church and unitarians.  The Church of Scotland has opened the door for gay marriage by accepting in principle the presence of openly gay and lesbian ministers.  It would surely be inconceivable for the Kirk to allow homosexuals to speak God's word from the pulpit and yet not allow them to marry each other.  Why is it that the Roman Catholic hierarchy seem to want to make this a political issue rather than a moral one?  

   I am treading into deep waters here and I don't have my arm bands on, so I'll leave it there.   The Church hierarchy is seeking to hijack the Scottish government's current consultation on the subject. And it has done pretty well so far, especially now that the former leader of the Scottish National Party, Gordon Wilson has come out in favour of a referendum on gay marriage.  He hopes it will be rejected.   I'm really not so sure: the only opinion poll I have seen on the issue suggests that 60% of Scots favour legalising gay marriage.   But judging from column inches, the Bishops are ahead on points. 

Sunday, October 09, 2011

Sir Mervyn King, Montague Norman and fractional reserve destruction.

 Politicians and economic commentators are still scratching their heads over the Bank of England governor, Sir Mervyn King's remark last week that the financial crisis is worse than the 1930s.  "Cheer up, Mervyn, it's not that bad" said Hamish Macrae in the Independent.  "Talking us into recession"  - said the Express.  Not since Montague Norman took to his bed during the gold standard crisis in 1931 has a central banker been so publicly distressed about the state of the economy.

  Perhaps that's the key.  Sir Mervyn worries he might be the Montague Norman of the 21st Century, forced to preside over the collapse of the international financial system.  Norman took to his bed when the British banks nearly went under in unison during the Great Depression as Britain's gold reserves dried up. He had been governor during the roaring 20s and was a bit of an international financial celebrity, like Alan Greenspan until the crash of 2008.

  Sir Mervyn presided over what he called the "NICE age" of the noughties.  "Non-Inflationary Continuous Expansion".  This turned out to be a massive Ponzi scheme built on a massive property bubble. Right until it went pop, King insisted that there was no unsustainable inflation in property prices - even when banks like Northern Rock were handing out 125% mortgages. 

   He thought he had saved the day by cutting interest rates to the lowest in 300 years and by printing money.  But clearly, he hasn't, and now the chickens are roosting all over Threadneedle St..  And all over Europe.  The coillapse of the French-Belgian bank Dexia suggests that another wave of banking collapses is in the offing.   King has warned banks not to expect another bail out, which can only mean one thing:  that governments will have to step in and do the restructuring of the debt - seizing bank assets and managing a mega default.

  Banks make money because of a trick called fractional reserve banking - lending money they don't actually have.  At any one time a bank may only have £1 of capital for every £100 lent out.  If only 1% of the bank's loans go bad, that means they are insolvent.  Businesses, bond-holders and ordinary depositors will queue up to find that the money they thought they had safely in their accounts is no longer there.  Fractional mass destruction then wipes out huge swathes of the economy.  This is unlikely to make people well disposed to the central banker who didn't see it coming. 

Saturday, October 08, 2011

Eurogeddon. It isn't just Greece's fault. Really, it isn't.

   We all know what the problem is:  Europe has a single currency but no central treasury - no overall financial supremo who can collect revenues and disburse them across the 17 eurozone countries on the basis of need and fiscal responsibility.  As they head inexorably toward default, the Greek people are quite rightly furious at being blamed for the financial crisis.  Ok - their public sector was bloated and pensions were extravagant - but they aren't alone in that.  And yes, the Greeks  aren't particularly fond of paying taxes.   But this was hardly a secret - and the European banks who lent £400bn to the former Greek government were fully aware that Greece was a fiscal basket case.  So why did they give them the money?   What about due diligence?  Why didn't someone notice that the government was cooking the books? The lender has a responsibility too. 

      But it's not just the irresponsible behaviour of  French, German and British banks. When the single currency was introduced, without any safeguards, it played havoc with the less advanced economies like Greece.  How could they compete with the Germans, who suddenly found that they were able to sell their cars and engineering plant at an artificially low price.  Yes, an artificially low  'rate of exchange'.  Just as the Greek euro was 'overvalued' , so the German euro was 'undervalued' - it got a massive trading advantage.  This should have been recognised by the authorities and appropriate action taken. That's what happens in Britain with the Barnett Formula for Scottish spending, which transfers some wealth north to compensate for the fact that all economic activity tends to be attracted to the south east of England.  

  Ok, let's not bring up Barnett with all its baggage.  The point is that there is a mutual interest between Germany and Greece in getting some equitable solution to the absence of fiscal union. .  Punitive austerity clearly is disastrous - for Germany as well as Greece.  German economic growth has come to an abrupt halt as Europe prepares for "D" day - default day..  To get all the countries of the euro going again there is going to have to be a central political and economic authority.  And it has to happen now.  And there really is no alternative.     

Monday, September 26, 2011

The euro is not the problem; it is the solution.

   I'm in the uncomfortable position of agreeing with the eurosceptic Telegraph commentator, Jeff Randall, even while he lambasts people like me who supported, and continue to support, the single european currency. He's right that some politicians were profligate fools for believing that monetary union could be achieved without any political union. He's right that the EU allowed Greece to join even though everyone knew it had fiddled its figures. He's also right that voters were deluded that debt fuelled consumption was the path to prosperity.

  But wait a minute. It wasn't the fools in Brussels who believed that debt was the way to prosperity. In fact, the Bundesbank has been a bulwark against the debt delusion perpetrated primarily by the Anglo Saxon economies of Britain and America.  Who were the countries that allowed the epic real estate bubble to grow unchecked? Not France or Germany for sure.  British politicians have spent years grumbling about the European Central Bank's apparent obsession with monetary stability. British economists have been urging Germany to join the debt delusion by manufacturing domestic inflation. 

  And in Europe, who was it who blocked any political union and urged the EU to extend its boundaries while not deepening its union? It was Britain above all who wanted a `”wider but shallower union”. Randall writes as if Britain played no role in shaping the EU. Wrong. We have been in there all along, keeping alive the flame of economic nationalism.

And now, as it is in danger of falling apart, what has been Britain's response? To begin the great currency war that has propelled the euro economies to crisis. Is Jeff proud of the fact that Britain has debauched its currency in order to gain a short term trading advantage through a devalued pound? As a fiscal conservative, surely this is the kind of short term fix that he loathes. Is quantitative easing, the inflationary Anglo Saxon solution to debt, really preferable to international co-operation? 

And now that everyone is getting in on the act of protectionism, how does he believe the international economic Humpty can be put together again? But yet more American debt-fuelled growth? That appears to be what is on offer. Under the Randall plan, presumably Greece defaults, Germany turns the euro into a new deutschmark; France's banks go bust and America retreats behind tariff barriers.  Meanwhile three trillion of tax payer's money is thrown at a financial system, shaped by the City of London and Wall Street, that has turned into a kleptocracy.

But as I say, I actually find I agree with Randall's conclusion. Let me quote him in full: “This illusion of political primacy is perpetuated because a confession of impotence would not only undermine the worth of those in power but also expose the euro's fatal flaw: monetary union without fiscal union is a marriage that weds the prudent to the profligate with no control over the latter's spending” .  He is dead right there.  There is no solution without 'more Europe'.

Without increased monetary and economic union, the countries of the world face a stark choice. Either mutually assured destruction through economic nationalism or a massive debt splurge through existing international agencies like the IMF. But the danger of the splurge is that it entrenches moral hazard. All those French banks who lent to Greece will feel an immense sense of relief that they can return to making irresponsible but lucrative loans to countries and households who can't pay it back secure in the knowledge that the tax payer will bail them out.

And countries like Italy and Spain will give up trying to pay their debts or manage their economies because they know that they will also get bailed out, just so long as they borrow enough money they can't repay. . That isn't an alternative. That is economic anarchy. At least the euro was an attempt to resolve these problems through human reason rather than the law of the jungle.