What in god’s name is Labour’s response to the Eurozone crisis?


8:40 am - November 25th 2011

by Sunny Hundal    


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I don’t really know how to say this in any other way: the Eurozone is in the midst of a long, drawn-out train crash of epic proportions. Follow it closely enough and you can almost see every sheet of metal rip like paper and huge objects smash into each other with terrifying force.

Jeremy Warner at the Telegraph has run out of adjectives to terrify people.

Hell, even I’ve given up trying to terrify people – I’m now worried about how this will play out politically.

I said earlier that the Euro crisis could set back the left for more than a generation.

There is every chance it could strengthen the Conservative party and lead to an even bigger assault on pensions, the minimum wage, employment rights and much more. If a manufactured debt crisis can lead to such cuts – imagine what they would do if the entire Eurozone defaulted.

Hopi Sen is right when he says:

It’s my theory that fearsome, confusing, barely understandable waves of economic distress tend to benefit those least likely to posess the solution to that distress. In times of uncertainty, the conventional, the standard, the uniform becomes attractive. Sadly, the conventional, and the standard are often manifestly ill-suited to answer the crisis.

People don’t understand the Eurozone crisis. And it’s still too early for floating voters to trust Labour with the economy again by default (they need time to get over Mey 2010). Voters may not like what the government is doing but they would become more likely to hold their nose and vote for the Tories while the left vote splinters, as it did in Spain.

Put aside debates on the scale of the cuts, deficit reduction and growth plans for now – if the Eurozone crashes everything goes out of the window.

My concern is that the Labour party (along with other left orgs) is incoherent on the Eurozone crisis.

Here’s what I’d like to see:
– a clear narrative on what was behind the crisis, feeding into a broader narrative;
– where the Conservatives are making a mistakes on approaching the crisis;
– what needs to change across Europe, going forward. What regulation is needed to ensure banks are not exposed like this again? (this is a bank debt crisis, not a sovereign debt crisis)

When (if?) the crash hits full force, Labour need to be sharpening their narrative not developing it from scratch. Maybe it’s out there already, buried in the mountain of press releases on the Labour website.

Maybe it’s just me who can’t see it. But frankly, I don’t see much discussion about what is likely to be the biggest crisis for the last 80 years.

I don’t want a manifesto going into the 2015 election – I’d like to see a clear alternative that stops the government from trying to use the crisis to impose even more austerity.

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About the author
Sunny Hundal is editor of LC. Also: on Twitter, at Pickled Politics and Guardian CIF.
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Reader comments


No Sunny, this is most definately a soveriegn debt crisis. 2008 was a banking crisis, but the Eurozone crisis is all about people taking a closer look at the amount of debt countries have, their spending and revenue patterns including their vast social security bills, and their ability to pay that debt going forward.

” it’s still too early for floating voters to trust Labour with the economy again by default”

Why do they ever given Labour’s appalling record on the economy? In fact I think Labour tends to get elected when people are happy that the economy can cope with the odd spanner but want other things to be done.

That all said, Labour have a real struggle here. The major problem is that countries have been spending too much compared to their tax receipts and have been doing this for a very long time. Given that Labour are the party of spending, how are they going to cope with this? Go into the next election on a policy of massive tax rises?

“this is a bank debt crisis, not a sovereign debt crisis”

Eh?

If there was no sovereign debt crisis there would be no bank crisis, would there?

this is a bank debt crisis, not a sovereign debt crisis

It really, properly isn’t. The one Eurozone country that was undisputably brought down by its banking sector was Ireland (and even there the Government was pretty culpable too). Greece, Italy, Spain, Portugal and so on (hell, France is coming into the mix) are coming under threat not because of their banks, but because they are perceived as being unable to pay the interest due on their sovereign debt.

It is, of course, perfectly understandable that Labour should want to downplay this. When countries are collapsing because they are unable to pay their debts, an economic policy that calls for borrowing £100bn more starts to look a touch counter-intuitive.

The explanation for Labour’s subdued response the Eurozone crisis is surely because Tony Blair was so keen for Britain to join the Eurozone. Even by June this year, he was saying: “there might still be a case for the UK joining the euro in the future.”
http://www.bbc.co.uk/news/uk-politics-13901954

Labour also has to account for Peter Mandelson’s ethusiasm for joining the Eurozone, as well as the enthusiasms of Lord Dr John Reid, the economic historian, and Patricia Hewitt, when she was DTI minister. Could it possibly be that they really didn’t understand the economic pressures within monetary unions with insufficient convergence and why fiscal unions are essential for stability?

A parallel puzzle is why Heseltine, among the Conservatives, evidently thinks that Britain will have to join the Eurozone. What makes that especially puzzling is that Heseltine’s economic adviser when he was DTI minister, Walter Eltis, produced a study for the Centre for Policy Studies – a Conservative thinktank – on: Further Considerations on EMU – It Will Create Instability and Destroy Jobs (1998).

On the evidence, Walter Eltis was absolutely right in his assessment. He also published a book: Britain, Europe and EMU (Palgrave, 2000), which is well worth reading.

6. So Much For Subtlety

Here’s what I’d like to see:
– a clear narrative on what was behind the crisis, feeding into a broader narrative;

Well yes, but what was behind the crisis? Apart from the Euro of course.

– where the Conservatives are making a mistakes on approaching the crisis;

I agree. But where are they making mistakes? It seems to me that they have been proved right on this issue. They said the Euro was a disaster in the making and now it is a disaster. Just as the Eurosceptics said it would be. What the American Right calls the “Blue State model” is dying – high regulation, high tax, high welfare. The Tories are probably going to be shown to be right on that too. So what is left?

– what needs to change across Europe, going forward. What regulation is needed to ensure banks are not exposed like this again? (this is a bank debt crisis, not a sovereign debt crisis)

Sorry but it is not a bank debt crisis. It may have started as one a few years back, but this has moved on to a sovereign debt crisis. What does need to change? Presumably now the Euro is dead. Will the EU survive? Probably. But in what shape or form, who knows? How can you regulate against political stupidity?

Labour seems to lack anyone at the top of the party capable of good communications work.

Labour’s position that the Tory proposals on cuts are a perfectly reasonable position. They claim the Tory plans would cut too fast, hurt services, and styfle growth – thus meaning that deficit reduction targets would not be met.

Amazingly, even though they could claim vindication on this (all be it subjective vindication – given that they can’t prove their plans would have worked) – no one at the top of labour seems to see a need to connect wider phenomenon to people’s lives. There is no three R approach – there is no bridging of the Eurozone crisis to the need for growth in the UK – there is nothing, in fact, being offered by labour that the public could plausibly have an interest in.

With the Eurozone issue it is no different. Labour have basically gone quiet. We have the French and German leadership mocking Cameron for isolating himself and thus wrecking the UK’s influence – and for hypocricy in calling for the UK to have special exemption and unique rules while opposing it for the Eurozone 17 as it rules anywhere in the EU have consequences across the EU.

The UK’s response to the Eurozone crisis has been abject. Far from leverage any influence or build bridges – a bunch of internal-party focused grandstanding has killed of our involvement and made us a joke sideline issue.

Yet Labour are nowhere. Labour have not highlighted the connection between Cameron’s impotence internationally and his alignment with fascists in the European Parliament. Labour have not emphasised that crumbling European economies will hurt our jobs and job security and our income in the UK. Labour has not emphasised that the Tories oppose a Tobin tax at the behest of a banking sector that caused the economic malaise we are in. And Labour has failed miserably to connect Tory euro-bashing and calls for repatriated powers to day-to-day life issues like job security, maternity leave, working hours and so on.

Labour may have a message – but until some one is hired at the top of the party who gets communication, we won’t really hear it and the public won’t really care.

Labour has not emphasised that the Tories oppose a Tobin tax at the behest of a banking sector that caused the economic malaise we are in.

Labour are also opposed to an EU-only FTT. Both parties appear to be in favour of a worldwide FTT, in the same way that both parties are in favour of cold fusion and rainbow-powered sweetie factories.

9. Mike Killingworth

Well, given the depth and duration of the crisis, it seems reasonable to suppose that it has more than one cause. I can identify at least three (there may even be others):-

(1) A bank debt crisis. There is no doubt that, by historical standards, banks in the USA and Europe have lent irresponsibly since the mid 1980s. In economists’ terms, they – and their customers, probably their customers first and the banks following – have adopted an ever higher discount rate. “Eat, drink and be merry, for to-morrow we die.” Except that, with modern medicine, we don’t.

(2) A sovereign debt crisis. It was widely predicted on both left and right that a common currency without political union was a catastrophe waiting to happen. However grave this element of the crisis is – and by its nature, benchmarks are few and far between – it has provided the best narrative opportunity for the political Right since WW2 – “Welfare states have always been funded by borrowing – the level of need is too great for them to be funded out of current taxes – and eventually they must crash in ruin.” And welfare, in this story, includes not only the NHS and benefits but also private sector pensions and healthcare insurance. Another way of looking at it is that the right’s narrative says that our life expectancy is way too high.

(3) A factor cost crisis. In round numbers, a worker in the West charges four times as much per hour as their counterpart in India and China. Some indeed, charge far far more – Ha-Joon Chang notes that a bus driver in Stockholm is paid 50 times what a bus driver in New Delhi is. And he suspects it’s easier to drive a bus in Stockholm than in New Delhi, too. We can put up all the tariff and immigration barriers we like, but in the long run this is unsustainable. However, fixing it involves among other things the destruction of residential property prices. No democratically elected government can contemplate the measures necessary to bring the West’s economy in line with the rest of the world’s.

There are deep faultlines running through both the Conservative and Labour parties on joining the Euro – there is no comparable faultline in the LibDems because they were (? and are) solidly in favour, hence Christopher Huhne in: Both Sides of the Coin.

I can’t imagine where this mistaken notion comes from that the Conservatives were opposed to EMU all along.

If so, how come Geoffrey Howe and Nigel Lawson, as chancellors, were lining up the Pound to join the European Exchange Rate Mechanism (ERM) and then John Major, as chancellor, actually put the Pound into the ERM in October 1990 – an essential precursor for eventually joining EMU – while Alan Walters, Mrs T’s personal economic adviser, was saying that wasn’t a good idea?

When New Labour were in government after the elections in 1997, Kenneth Clarke and Michael Heseltine were there on the sidelines acting as regular cheerleaders for joining EMU:

Heseltine backs Blair’s euro campaign
http://news.bbc.co.uk/1/hi/uk_politics/409314.stm

Voters may not like what the government is doing but they would become more likely to hold their nose and vote for the Tories while the left vote splinters, as it did in Spain.

In Spain, the government has been replaced by the opposition.

Logically, this statement suggests that Labour would win.

Margin4Error – well said. But I can’t see a Labour reaction or utterance of any value or substance on anything, even at times when they are vindicated by facts. And they are standing by as Welfare is cut. So don’t expect anything on the Euro – they don’t see their traditional support as caring.

There are deep faultlines running through both the Conservative and Labour parties on joining the Euro

I’d be surprised if you could name more than two Tory MPs who advocate joining the Euro (I’d actually be surprised if you could name more than one). The split in the Tory party on Europe was largely a generational one, and the Euro-integrationists have mostly now retired.

And there was a distinction, even then, between the ERM and EMU. There are plenty of countries who joined one but not the other.

14. Charles Wheeler

It’s basic ‘Shock Doctrine’ tactics. Naomi Klein has detailed the pathology of the disaster capitalists around the globe. Now we’re in the cross-hairs.

The problem we face is that a government intent on wiping out the public sector and shredding the welfare state has a vested interest in economic collapse. The last thing thy need is for the economy to recover – because it removes the rationale for savage cuts. At the same time they must preserve a belief that there is ‘light at the end of the tunnel’ to forestall the idea that the system itself is broken.

“What regulation is needed to ensure banks are not exposed like this again?”

The first and most obvious point is that you need to have a central bank that can actually act as a central bank. You know, that lender of last resort thing, the very thing the ECB isn’t legally allowed to do.

It isn’t just that the euro was a bad idea to begin with. It’s also that the way it was set up was entirely cockamammie.

16. Margin4error

Rentergirl

Not much a party can do but “stand by” when they are in opposition – that’s why winning elections is important. But no, even where Labour policy actually makes some sense and fits relatively well with evidence around it – they really are not conveying that at all with any of their reaction or utterances or otherwise.

BobB

Not sure the Euro is much of a fault line these days, nor the EU within parties.

The Tories split on Europe only in so far as how nasty to be about Europe, rather than whether to be pro or anti.

Labour are largely positive about Europe, but without any real enthusiasm for it or for the Euro – and with no interest in making the Euro or Europe a key priority.

The Lib Dems are enthusiastically pro-European, but have are never likely to have any real influence on government decision making.

So we have a weird drift wherby if the Tories are in power we’ll be isolated in Europe and the EU will forge ahead with policies that don’t benefit us particularly well – and when Labour are in power we’ll engage in discussions and get some value for the UK, but will always hold the EU back from significant development for fear of upsetting the public back home.

For Germany and France I’d say the best bet is let the UK vote Tory and just ignore the silly impoverished island off the coast while they invest in infrastructure, education and adopting new technologies and leave us further behind.

Mike Killingworth

Some partial answers:

Of course, through competitive pressures on TRADED goods and services and because of wars, national economies tend to converge, which is why Britain is no longer the leading global industrial power that it once was. At the beginning of the 19th century, Argentina was among the most affluent countries in the world in terms of estimated per capita GDP.

Try Raymond Vernon’s Product Life-Cycle Theory:
http://www.provenmodels.com/583/international-product-life-cycle/raymond-vernon/

Bus drivers in Stockholm don’t compete directly with bus drivers in New Delhi because domestic bus journeys are not a traded service. For the same reason, house prices and rents can vary widely in international comparisons.

18. Margin4error

rentergirl

Not much an opposition party can do other than “stand by” while stuff happens. That is why the first priority has to be getting into power.

But I agree that even where evidence suggests Labour are sound in their thinking, their utterances and reactions are woeful.

19. Luis Enrique

“this is a bank debt crisis, not a sovereign debt crisis”

and earlier

“people don’t understand the Eurozone crisis”

If there was no sovereign debt crisis, why would the banks be in trouble? Of course it is both. What’s happening in Italy etc. is a classic sovereign debt crisis. And because the Eurozones’ banks own lots of sovereign debt, thanks largely to regulations treating Eurozone debt as zero risk, it is also a banking crisis. And it is also a political crisis, and a crisis of Europe’s financial institutions. Charles Wyplosz explains all – and this Economist blog really explains how the EU institutions are interacting with the EU’s democracies.

Here is a very good post on how the crisis is affecting banks world wide, and here is an economics paper everybody is talking about that argues the EU crisis has the potential to screw up the US financial sector.

If you want regulations to prevent this happening again, and obvious start is to ask banks to have large capital buffers, so they can withstand larger losses, stop pissing about trying to put different asset classes into different risk categories. And of course you may also want to address the whole “governments borrowing too much” thing.

If we do see disorderly defaults and the break up of the EU, we will be hit by another huge banking crisis. Last time I checked, most left wingers vehemently opposed bank bailouts on the basis that they enrich the elites. I don’t know how vulnerable UK banks are, but if the global financial system seizes up again I guess they’re in trouble regardless of how much direct exposure to the EU they have. So that’s going to require central bank support again (liquidity) and possibly recapitalizations (bailouts again). How are left-wingers going to regard that prospect? Do they have any better ideas?

Why do (some) left-wingers feel the need to deny this is a sovereign debt crisis? Is it because admitting fault on the part of governments, acknowledging it is possible for governments to borrow too much, sounds like ceding ground to right-wingers?

20. Luis Enrique

Oh, I’d have thought most LC readers will appreciate this Martin Wolf editorial Why cutting fiscal deficits is an assault of profits

(and the depressing news that Germany is still adamantly sticking to austerity and ruling out solving the problem with the ECB printing presses)

21. Luis Enrique

Sunny,

if you are looking for an explanation for the crisis, I hope you will consider the explanations given by the Austrian School of Economics, such as by Peter Schiff and others, who have the kudos of predicting the crash when all the mainstreamers were claiming a new era of permanent boom had been ushered in.

There’s no such thing as left or right in economics, as economics should not look at the ends aimed for, but rather the means and what the likely effects of the means will be.

Labour are quiet because they are pro Euro and the European project as well as pro spending and borrowing
There isn`t anything for them to say really.

Warning: “if you are looking for an explanation for the crisis, I hope you will consider the explanations given by the Austrian School of Economics, such as by Peter Schiff and others, who have the kudos of predicting the crash when all the mainstreamers were claiming a new era of permanent boom had been ushered in.”

That is demonstrably untrue. Try the wikipedia entry for: Nouriel Roubini.

Charles Goodhart and Roger Bootle warned about Britain’s inflating house price bubble in 2002/03 and Warren Buffett warned in 2003 about the potentially catastrophic consequences from the lack of transparency about the assets underlying many traded financial derivatives – I’ve often posted relevant links.

Try John Kay in the FT:

The macroeconomics taught in advanced economics today is largely based on analysis labelled dynamic stochastic general equilibrium. The unappealing title gives the game away: the theorists are mostly talking to themselves. Their theories proved virtually useless in anticipating the crisis, analysing its development and recommending measures to deal with it.

Recent economic policy debates have not only largely ignored DSGE, but have also been remarkably similar to the economic policy debates of the 1930s, although they have been resolved differently. The economists quoted most often are John Maynard Keynes and Hyman Minsky, both of whom are dead.
http://www.ft.com/cms/s/0/19491372-472c-11df-b253-00144feab49a.html

Try the wikipedia entry for: Hyman Minsky.

Also: Robert Shiller: Irrational Exuberance (Princeton UP 2000)

Carmen Reinhart and Kenneth Rogoff: This Time is Different – 800 years of financial crises (Princeton UP 2009)

There are numerous papers and books on the economic pressures within monetary unions with insufficient convergence and without fiscal unions which lead on to instability.

In this thread, I’ve previously referred to Alan Walters and Walter Eltis. My own understanding was initially awakened on reading Rudi Dornbusch: Euro Fantasies in Foreign Affairs, September 1996 but try also the analysis in his popular textbook on Macroeconomics (McGraw-Hill). Economists working in the EU Commission must surely have been aware of this professional literature.

25. Margin4error

Paul

That’s not true though is it.

They could set out why it is some eurozone economies are coping and others are not – and build a narrative around the damage that short sharp shock tactics to bring down deficits without any focus on economic growth have done to place like Greece and Spain. They could also emphasise that while the eurozone crisis is not the cause of the UK’s economic malaise, which is fairly self apparent given the relative stability of some Eurozone countries, let along other non-euro eu members – and thus raise questions about the little englander “bash europe” approach from the government, which has in turn isolated our country and left us without any influence on the continent’s biggest evolving political issue.

They could also bridge the story to other stories such as that of why the present government is defending the banking industry and failing to commit to major improvements in our infrastructure so as to rebalance our economy and bring it more into line with Germany, which is coping far better with the downturn than us. Likewise they could bridge to the question of why government has deliberately hurt business by scrapping longstanding support mecnahisms for key kinds of investment (most recently the feed in tarrif) – costing jobs, investment and again failing to learn from Germany that long term packages make for a batter balanced economy.

Labour could be doing a lot to put pressure on the government in many ways. None of which is likely to bring down David Cameron. But offering a long termist alternative built on Germany models of stability seems a fairly sensible option for Labour while the eurocrisis is in the news. Likewise, pointing out that the tories wrecked our national interest by aligning with facsists and so giving themselves no say whatsoever in unfolding events on the continent – might be quite a useful criticism that gets the tories rowing about europe again.

I’ve certainly detected a growing realisation over the last few months by lefties that the EZ was indeed an epic crisis. I remember a thread on here 18 months ago about Ireland when there was just outright hostility and disbelief that the structure of the EZ had anything to do with the situation. Many posters could only envisage happy days ahead for the EZ as disparate nations worked together to solve problems and disaster for the UK for being outside the club. They never understood the fundamental problems and they barely understand them now. Rather predictably some have just decided it is all just bankers to blame and since it is now unseemly to blame the Jews, Goldman Sachs will do.

The contemporary UK left have been unable to forward a coherent response to solve the fundamental problem of the EZ because there is none. Moreover, it is like a loss of faith for some. They have spent decades believing that it was impossible that the UK government can ever be right and a European body can ever do anything wrong. To find out that those fundamental beliefs are wrong is akin to a religious person discovering that god died last Tuesday.

There was almost no circumstances where a crisis in the EZ would not happen with the current members. The very structure of the system and how it recycled trade imbalances made a debt crisis inevitable. The problem is not feckless southerners and virtuous industrious northerners, the problem is the EZ system itself. Therefore, there is no sustainable solution short of some leaving. Austerity will not solve the problems. However, it is difficult to see how some degree of austerity is avoidable. Calls for the ECB to be a LoLR to governments will alleviate the stress, but will not solve the fundamental problems. The ECB are already acting as LoLR to the EZ banking system. In fact, they are just about the only lender to EZ banks. A central bank acting as LoLR was always a concept that existed as a LoLR to banks, not to governments. If the ECB assumed the role of LoLR to governments, northern taxpayers are taking on huge risks. Hence, German opposition. One could argue that the same northern taxpayers will suffer anyway if the system collapses. Who ever said people were rational.

A huge credit crunch is already underway in the EZ, spreading to nations in Eastern Europe outside of the EZ. The system does not work and we are in the endgame and have been for about two months. The ECB acting as LoLR to governments will buy them time, however, even that has limitations. Buying time will not be enough and the austerity will break the system. Despite claims to the contrary, Europe does not all speak German now. The UK left response should be to accept their complicity, apologise, and argue for policies to alleviate the inevitable suffering as the system come to an end.

“The UK left response ”

was to advocate withdrawing from the EU in 1983 before it became fashionable. And remind me which one of blair and brown was against the euro?

You could just as easily say ‘the right’ has been deluded over the euro because Ken Clarke supported it.

This constant bollocks between left and right, why cant you just work with whats real and needs to be done?

@ 23 Bob B,

I’m not sure what you are calling demonstrably untrue. Perhaps me saying “all the mainstreamers”, rather than most of the mainstreamers. This does not however mean that the Austrian School should be dismissed, and you seem to hurry away from any mention of Schiff and others – “nothing to see here!’.

If other economists sounded the warning, good for them. Whether their preferred solutions are correct is a separate matter, and the extent to which any of them quote John Maynard Keynes is most certainly a measure of how wrong they are.

I think Labour is right to stay quiet for now. Cameron is doing a spectacular job of bringing the country to its knees and it seems rude to interrupt him in full flow. All Labour really need to do to get back into power is promise to reverse the damage the Tories did to the NHS.

Frankly though they probably won’t even need to do that, there will be enough Lib Dem voters voting Labour to win the next election.

Planeshift @ 26:

True, but in recent years, the right has tended to be more sceptical of the EU than the left has.

32. Chaise Guevara

@ Ross

“This constant bollocks between left and right, why cant you just work with whats real and needs to be done?”

Because people disagree on both counts. But if you’ve got a solution that everyone will agree with, by all means share it.

33. Anon E Mouse

@ 29 Monglor – If you actually believe that the current incarnation of the Labour Party is electable in this country, regardless of anything they articulate or any support from ex Lib Dem voters, then the government will have an easy ride at the next election.

So far I have heard the lone voice of Ed Balls sounding more and more desperate on Radio 5 Live about the economy as the Tory position is vindicated and the Euro teeters on the edge of collapse. And despite this Ed Miliband still refuses to rule out ever joining the single currency – it’s madness.

Labour should accept that regardless of what they wish for, at times of hardship voters always shift to the right.

They should also try a different message because the “hurting not working” slogan doesn’t cut it and I can only agree with this article being bang on the button…

34. Margin4error

Richard

It is strange how the left and right mirror eachother in that regard. The Eurozone member economies have benefited from an estimated €30billion a year in reduced transactions costs and resulting improve trade confitions since the Euro formed – and the right ran around with their fingers in their ears and their eyes closed, pretending it wasn’t so. (even though, clearly, any economics A-level student would note that, yes, innevitably, reducing the cost of trade clearly enhances the benefits attached to the theory of comparative advantage (the reason nations trade).

When the crisis first hit, the left did much the same and pretended it was all just a storm in a tea-cup and it would settle down and not be a problem in the long term – failing to recognise the inherrant faults at the heart of the monetary union project.

The solution to those faults is clearly more integration of the finances of member states – and proper EU control over national finances where they start to exceed the perfectly sensible but largely ignored rules attached to monetary union already.

The problem for the UK is of course that those new controls will be bought in – creating a more unified power-block in the EU that we have no say in and no influence over. (how can we have? much as the EU is a source of collective power in a world where a nation of 60million is insignificant compared to nations of a billion people, or even 350million (the USA – and it is still growing), so the eurozone is a source of collective power within an EU in which a nation of 60million is insignifcant compared to a block approaching 300million people.

Like the creation of CAP when the UK was beligerantly isolating itself – the EU is about to take another bold step to better integrate its members to better secure the economic benefits of monetary union – and the UK will play no part in shaping that direction.

In the long run the pessimist in me sees our influence collapsing to such an extent that we eventually do leave the EU – at which point the UK will break up and Wales and Scotland will rush to join and sign up to the Euro – leaving England all the more isolated and dependent on trade with a block it has no influence over.

But I’m not a pessimist by nature – and I still hope we eventually awaken to recognise that our enlightened self interest is not best served by grand-standing and aligning with fascists.

35. Margin4error

Annon

In what way has the Tory position been vindicated?

I ask because they have completely missed their deficit reduction targets and the UK teeters on the verge of recession again – suggestion something has gone rather wrong.

I always said that the Tories had under-estimated the scale of the crisis if they thought they could bring down the deficit as quick as they pretended. But then I also always assumed the Tories were lying about their plans in order to differentiate from Labour’s economic proposals.

I didn’t imagine they were so stupid as to think cutting spending would not impact on the economy – and thus drive up the deficit through increased unemployment and reduced tax receipts.

I may have been wrong on that – given they are running around to every trade body and lobbyist right now asking for proposals to get groth started again – suggesting they have learned a lesson that Labour had seemingly already factored in.

Better to cut sustainably than cut so fast that further cuts are needed.

“The Eurozone member economies have benefited from an estimated €30billion a year in reduced transactions costs and resulting improve trade confitions since the Euro formed – and the right ran around with their fingers in their ears and their eyes closed, pretending it wasn’t so.”

No, we knew this. We just didn’t think that 0,2% of GDP as the gain was worth the loss which the crash of the system, when it crashed, was going to bring.

37. Dick the Prick

I think we’ve all been screwed by short sighted politicians (and, if Private Eye is true, senior civil servants at HMRC – awfully convenient Leslie Strathie resigned) being infatuated with spivs and chancers in the city.

Blame who ever, it makes no odds – as far as I can tell only Ron Paul has a credible plan but it’s politically insane. Ho hum – back to Pie in the Sky.

38. Anon E Mouse

Margin4error – The position is that the borrowing costs for countries who have not embarked on an austerity program that is credible like Greece or Italy or not even started a program like the US are being hammered with high borrowing rates and we are cheaper now than Germany.

Labour are simply not credible on the economy – to suggest borrowing more money in a debt crisis is as stupid as claiming to have ended “Boom and Bust”.

The Tories are borrowing MORE than Labour did in their last year and whilst I agree that their plans have gone awry they have constantly banged on about not joining the Euro – an incredible as it may be Peter Mandelson, the last Labour business secretary was *still* claiming it was a possibility as was Dennis McShane.

The Tory position about the debt crisis this country is in – especially with the incoherent Labour view serves only to remind the public how hopeless Labour are at running the economy and with the unpopular cuts and the fact Labour are not light years ahead in the polls shows the party needs to offer a radically different narrative because the public ain’t buying what Miliband is selling I’m afraid….

39. Margin4error

Tim W

It does cover the cost of the bailouts thus far (give or take a negligible amount – though granted we avoided having to pay cost that by missing out on the benefits…

oh wait…

Sorry – couldn’t resist. Ironically I wasn’t in favour of joininng the Euro because it became a political project instead of an econmic one. An economic project would have seen the low countries invited in to the Deutchmark under the new name of “euro” and from there, they could have established strong rules on their finances. Other countries could then join when the time was right. When rules started being bent to get more and more countries in for a big bang launch – the whole thing lost its appeal to me.

The big loss for the UK is not the loss of 0.2% of our economic growth – though that’s a shame – it is that we have ended up on the menu again, instead of at the table.

40. Leon Wolfson

They’re not attacking the Euro, which makes them some of few responsible actors around.

@2 – Oh yes, they lowered the debt. So terrible!

@4 – Oh yes, talk down the UK. Talk up the damage traders are doing. Irresponsible.
@5 – The same thing…
@6 – The same thing…

@9 – So you argue against democracy and against the successful Nordic system. Erm…

@21 – And I hope you’ll consider the equally credible Lunarite Guild.

41. Margin4error

Anon

Your analysis is simplistic and politically motivated rather than meaningful in any real sense.

For example “how hopeless labour are at running the economy” is just cliched hyperbole. After all, which G7 country avoided contraction during the financial crisis bought about by the dot.com boom and bust? It is a bit ludicrous to attack labour for economic mismanagement after being caught up in the financial crisis that hit the world a couple of years ago, but not give credit where it was due for their using expansionary policy exactly how it should be used in the previous recession a few years before.

This sort of vapid thinking is reflected on the left too,

For example – many attack the tories over mismanagement of the economy at the start of the 90s, but fail to recognise the relative progress being made by 1996 towards generating more sustainable growth (along with other policy successes of that stage, such as falling crime rates).

It is presumably this political myopia that leads you to miss my point about the tory handling of the deficit.

The tories were quite clear that they thought the deficit could be overcome in five years. This was so transparently wrong it was idiotic for anyone to imagine they really meant it. Far more realistic, given the scale of the problem, was Labour’s proposal to halve the deficit in five years.

The reason the Tory plan was clearly just bad economics was that it imagines – because of a very weird ideology that has taken hold among non-economist free-marketeers – that activity in the state does not constitute wealth creation. Obviously any economist knows this is just not true – but those with less education about the matter kid themselves thus that if the state is cut, the economy is largely unchanged. Yet cut public spending by 1% and you are shrinking the economy by around 0.4% even before any knock on effect takes hold.

It is because of this that the tory plans have actually escalated our debt problem to an extent. Two means were needed to cut the deficit. One was growth in the economy, resulting in rising tax take and falling welfare bills – and the other was reducing public spending.

Pretending the second was a sole option and that there would be no impact on the second was just stupidity.

42. Leon Wolfson

@25 – But really, deep down,. you blame the Jews. Well, of course.
And I see, expel the Jews and argue everyone else should do the same then?

@32 – Of course, you need to punish the poor more for the error of living. The slogan’s true, you’re simply in denial as usual.

@35 – The crash you’ve tirelessly worked for, yes.

43. Leon Wolfson

@37 – That’s right, they’re channelling the cash into pork-barrel projects to benefit themselves and Tory voters. And you’re rabidly supporting them. So telling!

44. Margin4error

oh – and Annon

the bit about Miliband – surely the point of this thread is that he and Labour are not really peddling much at all.

As I said before, Labour need to hire some one competent at political communications for their top team.

45. Mike Killingworth

[39] Perhaps you’d like to show me an example of a democratic system surviving a 25%-50% cut in its voters’ standard of living. Because that’s what this is all about.

46. Margin4error

44
erm – two examples spring somewhat to mind.

the USA in the 1930s
the UK in the 1970s

@ 39 Leon,

your criticism of Austrian economics is obviously due to its most important figure, Ludwig von Mises, and a number of other key people, being Jewish, and you are clearly a rabid anti-semite, also indicated by your use of the non-kosher term ‘pork-barrel projects’.

48. Chaise Guevara

@ 47

That’s a poor satire, Trooper. Leon doesn’t give shit reasons for calling people anti-semitic, he doesn’t give any reasons at all!

@ 48

damn it, you’re right!

50. Leon Wolfson

@47 – Ah yes, conspiracy theories. I’m sure you believe in plenty.

51. Frances_coppola

Sunny,

I am no friend to banks – as you know – but this time I really don’t think it is a banking crisis. The culprit is the Euro itself, and the manner in which it was created. A single currency applied to seventeen countries with very different demographics and cultures, with no real commitment to political and fiscal convergence, was never going to work. The internal trade imbalances within the Eurozone alone are sufficient to tear it apart (and in my view this is the root problem of the crisis, as I wrote here: http://bit.ly/uMJRxz).

Yes, Eurozone banks have lent far too much – but they believed (wrongly as it turned out) that the countries they were lending to were backed by the whole Eurozone. And the risk weightings applied to sovereign debt under capital adequacy regulations don’t distinguish between debt issued by Germany and debt issued by Greece – it’s all treated as risk-free.

This is at heart a political and economic crisis caused by the premature creation of a single currency for which Europe was nowhere near ready. The remarkable thing is that has lasted as long as it has – but in a way that makes the situation more dangerous, because the longer the inevitable crash is delayed, the worse it will be.

52. Luis Enrique

Frances,

it’s both! check out the links I provided @19 – esp. that Shin paper.

53. Margin4error

Frances

your conclusion is about right – though the analysis is a little off.

It isn’t different demographics and cultures that make the euro problematic. Otherwise the Dollar would not have survived (contrast culture and demogracy of the north and south of the USA, or east and west, and it is as start or more stark than differences across the eurozone).

The failure was in how the currency was run from the start. Some very sensible rules were created to ensure nations stayed within sensible financual boundaries with their spending. An upper limit on accumalated public debt, and an upper limit on annual deficits – were put in place.

Had the Low countries (and perhaps one or two others, ironically incuding the UK) joined with Germany as a single currency – these rules would have been adhered to from day one – making it easier to apply presure whenever a country went beyond those rules – and making it easier to apply sanctions within.

By allowing France, Italy, Portugal and so on to play their part from the start – the rules were doomed to failure because the political from countries already in breach of the rules would never see the rules pressed on faltering countries, and would never see sanctions applied.

In effect – a rule routinely broken is no rule at all – and hence the trouble now faced.

It’s a bit like not allowing a guy into a club because he has trainers on – if you let him in but then tell him after an hour to put shoes on, it ain’t ever going to happen.

There is of course hope that from this the Eurozone will start to drive those rules in future, because there is now significant political will to avoid another equivelent collapse.

The leader on the Euro in this coming Saturday’s The Economist: Is this really the end? makes grim reading.

So far there is not even a glimmer of light at the end of the tunnel – Mrs Merkel in Germany is blocking all reforms which could prevent the Euro from sinking while claiming fiscal discipline with austerity is the only virtuous path to salvation:
http://www.economist.com/node/21540255

@33: “And despite this Ed Miliband still refuses to rule out ever joining the single currency – it’s madness.”

IMO Ed Miliband is simply sticking to the wise advice of Disraeli: Never say never in politics.

Labour, like the Conservatives, has fractitious faultlines on whether to join the Euro. In June, Blair was still saying Britain could still join the Euro. Labour’s avowed Europhiles Peter Mandelson, Dr John Reid, Patricia Hewitt and Denis MacShane have been keeping schtum.

I’ve been engaged in online debates over the pitfalls of monetary union in Europe since reading that paper of Rudi Dornbusch: Euro fantasies, in the September 1996 issue of Foreign Affairs.

It doesn’t take long to realise that those pushing EMU have what amounts to a fanatical religion – they simply don’t want to deal with any analysis which shows up the inherent flaws in a monetary union with insufficient convergence in the economies of member countries, where there is no fiscal union and where all have to live with one set of interest rates regardless of national conditions. Mrs Merkel thinks it’s all a matter of fiscal discipline and salutary austerity but that fails to recognise the depressing consequences for a country if it finds itself with a chronic trade deficit without the option of currency devaluation to restore competitiveness.

Martin Feldstein was absolutely right IMO in saying that EMU could lead to open conflict – forget the possibility of third generation warfare: no one has yet discovered a quick and effective way of containing fourth generation warfare.

55. Frances_coppola

53 Margin4Error

Hmm….haven’t noticed that people in American states speak different languages. And America did of course fight a civil war over its union. However, the main issue I have with what you’ve said is the notion that had the PIIGS not been admitted to the Euro the convergence criteria would have been adhered to. No they wouldn’t. Both Germany and France flouted the convergence critera for years – arguably they are still doing so, since both have debt well in excess of the 60% limit. It was unrealistic of the core countries to expect peripheral countries to adhere to convergence criteria that they didn’t observe themselves. The PIIGS were never going to impose fiscal discipline until they were forced to – after all, why should they? The same countries that wanted them to show fiscal restraint were lending them money so they could buy their exports. Double standards or what?

@ 50 Leon,

you’re right that I’m a conspiracy theorist. For instance, I’m convinced that your comments here are generated from an artificial intelligence programme, which needs a bit of fine tuning. I can’t prove it, I admit, but it would explain a lot.

Frances

For reference, these were the Maastricht Convergence Criteria:

•The amount of money owed by a government – known as the budget deficit, has to be below 3% of Gross Domestic Product (GDP) – the total output of the economy.
•The total amount of money owed by a government, known as the public debt, has to be less than 60% of GDP. The public debt is the cumulative total of each year’s budget deficit.
•Countries should have an inflation rate within 1.5% of the three EU countries with the lowest rate. This was supposed to push down inflation rates and lead to more stable prices.
•Long-term interest rates must be within 2% of the three lowest interest rates in EU.
•Exchange rates must be kept within “normal” fluctuation margins of Europe’s exchange-rate mechanism.
http://news.bbc.co.uk/1/hi/in_depth/europe/euro-glossary/1216651.stm

The state of play for applicant EMU members on the launch of the Euro at the beginning of 2000 was reported in depth in: The Birth of the Euro – the FT Guide to EMU (Penguin Books).

Strictly applied, only Luxemboug was eligible to join EMU at the launch. Britain would have been eligible except that the Pound had not been in the ERM for two years prior to the launch – the Pound having been famously forced out of the ERM in September 1992, which proved to be a blessing is disguise. The Pound depreciated by c. 25pc. By the final quarter of 1995, Britain’s (ILO) standardised unemployment rate was lower than that of France, Germany or Italy, and the employment rate of working-age people higher.

Greece joined late in 2001 because of concerns over whether it met the criteria. By John Major’s account, the convincing argument at the time came from France: You can’t say No to the country of Plato, which rather shows how much weight was attached to economic issues.

There was later hope in some quarters that Britain might join EMU at a negotiated rate for the Pound but that possibility was sharply dismissed by the EU Commission which insisted that the Pound would have to serve out the time required in the ERM at a stable exchange rate before joining the Eurozone. In June 2003, Gordon Brown announced to Parliament that joining the Euro was not then in Britain’s economic interests according to assessment by five tests.

Frances – I’m not denying that the Eurozone was structured badly. I agree with your analysis.

But we wouldn’t have this logjam and paralysis if the banks weren’t so over-exposed and in debt either.

59. Frances_coppola

58 Sunny

I think we would, actually. After all, the hikes in yields are caused by investors selling Eurozone debt. Yes, Eurozone banks are in a mess – not disputing that – and Eurozone governments have gone to enormous lengths to avoid doing what they should have done – ie force them to de-risk and recapitalize. But funds pulling out of Eurozone debt, German bund auction failing, Italy bond auctions only succeeding because of strong-arm tactics by the Bank of Italy – that’s not due to bank debt levels, that’s due to investor worries about the Euro itself.

Perhaps this silence from Labour indicates it’s own divisions?

58 “But we wouldn’t have this logjam and paralysis if the banks weren’t so over-exposed and in debt either.”

I can only imagine the number of articles written by you that could be pulled out of the archive section of this site right now if banks had refused to lend to various governments across the board in the amounts they have.

” Evil private banks refuse to support democracy ”

” Banks choking growth!!! against the 99%!!! “

The big issue for Germany and Mrs Merkel is fiscal indiscipline, hence the German insistence on a new Eurozone Stability and Growth Pact but with teeth next time to punish rule offenders.

The worry about the banks comes in if Greece – and perhaps others in the EZ – decide to default on sovereign debt or to drop out of the Euro in order to devalue a national currency to regain trade competitiveness. Either way, banks across the EU stand to lose sovereign debt assets, some a great deal more than others and that could bring instability to banking systems in and beyond the EZ. In addition, there would be much loss of EU political credibility as well as the much prized credibility of reserve currency status for the Euro.

In a worse case scenario, reversion of countries in the EZ to national currencies would bring a big appreciation of Germany’s DMark, which would hugely damage a swathe of German companies that have benefited greatly from a Euro made weaker by having the PIGS countries with their trade deficits in the Eurozone.

63. Leon Wolfson

@56 – Ah yes, of course…I mean as the right use bots for trolling, which you’d know about…

64. Leon Wolfson

@54 – And enemies of the EU also have their religion, let’s not pretend it’s one way.

@ Margin4error

you are beginning to sound like the Europeans who think everything would be just fine if everyone just obeyed the rules. People do not obey the law never mind rules. That is why we have sanctions as deterrents. What deterrent existed for EZ members breaking the Stability & Growth Pact? Only a Eurocrat could come up with the idea that an appropriate penalty for a nation running too high a deficit was to fine them. There never was any reason not to operate with deficits and build up debt until the bond market said enough was enough. All the incentives created by the EZ were for Southern Europe to build up debt to finance their trade deficit. I can’t think under what circumstance that would not happen as soon as they joined a monetary union with the euro-core. They went from borrowing at rates in the high teens to German rates and no rules were ever going to stop a crisis. Other than the North buying up huge chunks of the South, a build up of sovereign debt, corporate debt or household debt would be the outcome as long as the trade imbalances existed. The EZ system made their debts inevitable.

The thing you are not getting is that this is a balance of payments crisis. The European and German officials are reluctant to accept that because they say internal EZ trade imbalances do not matter. One should just look at the whole of the EZ as one market. That, of course, is nonsense. Trade imbalances even within nations have to be recycled through the banking system and by the national Treasury. The EZ mechanism for recycling the trade imbalances proved flimsy and has broken down for some members and currently breaking down for others. Club Med sovereign debt is the flip side of their trade deficit and if investors do not trust the sovereign debt, then the EZ trading system is failing. They regularly make comparisons with U.S. states having no problems with unbalanced trade between the states. However, that just proves how little they understand the fundamental problem. The U.S. banking system recycles internal U.S. trade, they have a national treasury, people move between the states. None of that exists to any significant extent in the EZ.

Simon Jenkins had a good article about Barroso et al as they decide what is good for whole nations.
http://www.guardian.co.uk/commentisfree/2011/nov/24/inevitable-eu-democracy-survive-mess

There are lots of things that current members could do to solve their problems. However, all the EU leaders and officials act like Adam Smith’s man of system moving whole populations around on a chessboard deciding what is good for them. They could all surrender sovereignty and become one nation. However, it will not be rule by consensus, it will be the dominant north telling the south what they can do. Resentment would be a recurring theme. Moreover, it can’t be imposed on populations against their will. No matter how good the idea is for solving the problems, you have to take the local populations with you. If things are just decided behind closed doors in Brussels, Frankfurt and Berlin. A potential tinderbox of grievances and resentment will take root that foreigners are imposing austerity on the south. The nationalists and populist demagogues will soon thrive in such an atmosphere.

@64: “And enemies of the EU also have their religion, let’s not pretend it’s one way.”

The analytics of the economics texts which deal with monetary union aren’t exactly conducive to rabid fanaticism. The standard undergraduate text is Paul De Grauwe: The economics of monetary union (Oxford UP, 2009).

Lately, De Grauwe has been leading on why the ECB should become a lender of last resort: Europe needs the ECB to step up to the plate (FT 19 Oct 2011)

Try: The Governance of a Fragile Eurozone:
http://www.econ.kuleuven.be/ew/academic/intecon/Degrauwe/PDG-papers/Discussion_papers/Governance-fragile-eurozone_s.pdf

67. Leon Wolfson

@66 – Don’t play games. I mean, as you know, the ENEMIES of the EU, who boast in the newspapers every time it suffers the slightest drawback. Academia? Pah, they don’t need to intellectual…

68. Frances_coppola

65 Richard W

And the other “flip side” of the PIIGS trade deficit is Germany’s trade surplus, of course. Funded by PIIGS debt kindly provided by French and German banks.

OK, here’s the answer:

1) It’s a crisis of capitalism
2) The Conservatives can’t cope because they’re stuck in the post-79 neoliberal paradigm
3) What needs to change across Europe (and indeed the world) is basically everything. We need to nationalise the commanding heights in order to gain democratic control of the economy and bring about a fundamental and irreversible shift in the balance of power and wealth in favour of working people and their families.

@69: “What needs to change across Europe (and indeed the world) is basically everything. We need to nationalise the commanding heights in order to gain democratic control of the economy and bring about a fundamental and irreversible shift in the balance of power and wealth in favour of working people and their families.”

That reads remarkably like the Soviet prescription except for “a strong leader”. Doubtless, someone would soon turn up to fill that space. They usually do.

With the expenses debacle in the last Parliament – more than half the sitting MPs had to repay expenses – I rather doubt the competence of Parliament to democratically control the commanding heights of the economy without pursuing personal interests.

Btw I’m never quite clear who comes into the category of “working people”. Does that category include the bankers and hedge fund managers who get paid for what they do? If not, which employees are to be excluded from “working people”? Just asking but I’ll probably get shot after the revolution as an enemy of the people for asking the question.

Hot news update:

The Organisation for Economic Development and Cooperation (OECD) is predicting that the economy will shrink, the Government was warned on Thursday.

Whitehall sources said the forecasts suggest that growth would be negative during the first six months of next year due to the euro crisis.
http://www.telegraph.co.uk/news/politics/8917161/OECD-figures-suggest-Britains-economy-will-slip-back-into-recession-at-the-start-of-next-year.html

72. Leon Wolfson

@70 – Sure, change the rules retrospectively and you can do what you like. Doubt away!

I’m reminded of that samisdat joke about Comrade Brezhnev I first heard in the 1960s.

He was showing his aged mother around his splendid official country dacha near Moscow. “But Leonid,” she said, “what if the Bolsheviks come back?”

@ 69 Chris

“3) What needs to change across Europe (and indeed the world) is basically everything. We need to nationalise the commanding heights in order to gain democratic control of the economy and bring about a fundamental and irreversible shift in the balance of power and wealth in favour of working people and their families.”

To achieve your aims, what you really want is free market capitalism. The economy will thus be under the control of the consumers, who are the same as the working people. Get rid of the cronyism, protectionism and economic nationalism, return to sound money, i.e. gold-backed money, and Bob’s your uncle!

75. Leon Wolfson

@74 – Only if you conflate the free market and capitalism. Which is, as ever, a mistake.

@75

“Only if you conflate the free market and capitalism. Which is, as ever, a mistake.”

Man, if you’re going to use your own definitions to words, you should at least explain what these personal definitions are.

77. Leon Wolfson

@76 – Bad troll is bad. Read econ 101 then come back here.

Frances – I’m not convinced

Let’s go back to the Greek situation. Assume Greece ran a big deficit for years and it got found out. It would have been easy to simply force banks into a big haircut and deal with the Greek situation properly and then force fiscal rules on them.

But they couldn’t force anyoen to take a haircut on the debt because the banks were not stable enough. Remember they failed the stress tests? That meant no one wanted to accept a haircut, and then it escalated from there.

In a worse case scenario, reversion of countries in the EZ to national currencies would bring a big appreciation of Germany’s DMark, which would hugely damage a swathe of German companies that have benefited greatly from a Euro made weaker by having the PIGS countries with their trade deficits in the Eurozone.

Yes thats the interesting thing, we are constantly being told how the German model is fabulous in every way, and no doubt, like any country, there is much to learn but BMWs are being sold with huge discounts and their reputation for quality is not deserved if you account for the true Price.
Switzerland has a successful manufacturing sector that trades in its own rock solid currency and it has specialised in super high end products. Chemicals , instruments, watches of course. When we talk about rebalancing the Economy I think it would be mistake to assume we can go back to the great days of British Leyland …

@79 Paul Newman: “When we talk about rebalancing the Economy I think it would be mistake to assume we can go back to the great days of British Leyland …”

Quite so. There’s wide agreement on the desirability of rebalancing Britain’s economy away from financial (?and business) services but virtually zilch on how that is to be achieved through government policy. A constructive start could be a debate about the reasons for the demise of what were once illustrious names of manufacturing companies in Britain, such as Alfred Herbert, British Leyland, GEC, ICI, Thorn, Marconi etc and why manufacturing now only contributes about 11pc of Britain’s GDP, as compared with about 18pc in Germany.

The size and diversity of the German economy means that it is better able to adapt to changing demands in export markets or respond to a fiscal squeeze on sales in the home market than countries with smaller and less diverse economies – which could explain why austerity measures elsewhere don’t boost competitiveness so effectively.

I suspect an important part of the explanation for Britain’s shrunk manufacturing sector is the poor structure we have for education in vocational skills in industry – in marked contrast to vocational skills in law, finance and medicine. For young people in schools and colleges, career routes through an academic education are much more clearly defined. In the run-up to the 1997 election, GB was pushing for an online University for Industry to address the shortage of industrial skills but Blunkett, as Blair’s first education minister, screwed that up.

As I learned in the early 1990s as an observer on the margins of apprenticeships in electronics offered by famous Japanese electronics companies in South Wales, it was very challenging for the companies to attract applicants with the minimum appropriate GCSEs A-C grades in maths, English and the three sciences. GCSE candidates with those grades were more attracted by the prospects from staying on in schools and colleges to get A-levels than going for top-class industrial apprenticeships in electronics. The result was that high-quality apprenticeship places went unfilled for lack of suitably qualified applicants. I suspect that not many among the million young people currently in NEETs will make good applicants for industrial apprenticeships.

81. Mike Killingworth

[80] This post nutshells why we’re where we are.

It – correctly – identifies a significant problem. (FWIW a friend of mine, an Anglo-German, identified the identical problem to me at the end of the 1960s!)

It has absolutely no idea as to what might constitute a solution, apart from suggesting – with no supporting evidence whatsoever – that one Labour minister had the answer but another “screwed it up”: whether from personal shortcomings or because it wasn’t actually the Golden Fleece after all, the poster doesn’t say.

I have no idea either. I was (supposedly) taught economics at Oxford, by a tutor who was solely interested in the elegance of mathematical models (he disliked real life), so the very little I know has been entirely picked up since.

All that I know that we can learn from Germany are (i) to learn to defer gratification – their economic success is primarily based on Adenauer’s ability to persuade (West) Germans to do so in the generation after WW2 and (ii) to draw the lesson of the unification of the Deutschmark and Ostmark in the early 90s – that politics always overrides economics.

I wish I could be more helpful. Sorry.

This is not a sovereign debt crisis, because the debt we are talking about (Greece, Italy, Ireland etc.) is not sovereign debt. These countries do not have their own currency. It is the crisis of countries borrowing someone else’s currency (the ECB’s).

And the crisis is squarely down to the ECB not having a sufficiently expansionary policy. A much larger monetary base and a higher inflation target would solve the problem. But the ECB does not want to/is not allowed to do that, and so the crisis continues.

@81 Mike Killingworth

In the 1992 election campaign, the late John Smith as shadow chancellor made much of why Britain should emulate Germany’s industrial apprenticeship system. Little became of that even when New Labour came to power – perhaps because those wars were so much more exciting and enabled TB to flit around the world.

The fact is that Germany started building its apprenticeship system out of the ruins from WW2 so it has a head start. That, the inflow of several million skilled refugees from eastern Europe before the building of the Berlin wall in 1961, and, importantly, the regular undervaluation of the DMark under the Bretton Woods system of pegged but adjustable exchange rates, were contributors to the German economic miracle of the 1950s and 1960s. Other factors were a large agricultural sector after WW2, which meant there was a pool of labour for an expanding industrial sector to draw upon (= high labour supply elasticities), and an independent central bank committed to curbing inflation. Unlike Britain, German governments did not believe in keynesian demand management – which JCR Dow described as destabilising in his book: The Management of the British Economy 1945-60 (CUP).

The European Common Market was intended to reduce the huge trade barriers inherited from the interwar years and to create a system to manage the gradual decline of the large agricultural sectors in much of western Europe – but not in Britain. European monetary union was a bolt on extra, initially pushed by the French in response to a continuing crisis for the French Franc in the early 1980s leading to a series of devaluations. But the literature on monetary unions is clear about the potential pitfalls if the economies of participating states haven’t converged. Sadly, those pushing for monetary union just didn’t want to know about potential problems because they believed that EMU was critical for promoting political integration in Europe so nothing else mattered as much.

IMO maths in economics is a hugely useful tool: some economists have made excellent use of it in analysis – eg JR Hicks, Franco Modigliani and Paul Krugman, to name a few Nobel laureates. Trouble comes when the economics is subordinated to the maths. But the troubles from EMU are a classic case of believing that politics trumps the economics. It didn’t.

84. Frances_coppola

78 Sunny Hundal

Which supports my point that this is a political crisis. The Eurozone leadership – especially France and Germany – knew full well that their banks were undercapitalized so chose to asset-strip Greece rather than allow their banks to take the hit, which would have meant bailout by the French and German governments against the will of their electorates, followed inevitably by loss of office for those politicians. And if you look at the economics it is obvious that the underlying problem has been the monetary policy pursued by the ECB, which has benefited the core at the expense of the periphery and encouraged banks in the core – in a general credit boom, remember – to lend far too much to periphery countries. Germany, especially, has built its prosperity on the excessive debt of the PIIGS. It really isn’t accurate to describe this as a banking crisis – it’s much more than that.

85. Mike Killingworth

[83] I agreed with you right up until your last sentence, Bob! I rather take the view that the politics did trump the economics – there was, after all, no economic reason to create the Euro – but that it was the wrong political solution.

Still, I do’t know how either of us could convince the other on the point.

@85 Mike Killingworth

On the politics trumping the economics, EMU was certainly created despite all the warnings in the professional literature but the politics couldn’t stop the chickens from eventually coming home.

What’s worrying IMO is an abiding impression that Europhiles either don’t understand or choose to ignor the consequences of what happens if an EMU member country starts running a chronic trade deficit. The deficit will depress that country’s economy leading to rising unemployment. Mrs Merkel evidently believes the root cause is bound to be fiscal indiscipline and the effective remedy is relentless austerity.

But the causes of the trade deficit aren’t necessarily due to fiscal indiscipline – the causes could be falling demand or prices in export markets. Austerity will make it challenging to get business investment into alternative sectors – and will likely promote brain and skill drains through emigration. Austerity will most likely make adjustment to the trade deficit more difficult. OTOH fiscal unions create systems to make regular compensating transfers to chronic deficit countries or regions – and Mrs Merkel doesn’t like that.

The standard response of Europhiles to this kind of modelling is to ignor it – and very likely abuse the modeller for being “xenophobic” so as to shut down the debate asap.

I’ve not seen any Europhile rebuttals of the criticisms of EMU from the likes of Rudi Dornbusch or Walter Eltis. One member of the EU Commission staff – Bernard Connolly – was effectively sacked in 1995 for raising challenging issues about EMU, which is hardly conducive to open professional debate about the pitfalls and appropriate policy responses. In short, denial prevails until the issues become explosive.

87. Leon Wolfson

@83 – I’m seeing a classic rendition of “stock markets > democracy” there.


Reactions: Twitter, blogs
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    What in god's name is Labour's response to the Eurozone crisis? http://t.co/ubzwxZKy

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    “@libcon: What in god's name is Labour's response to the Eurozone crisis? http://t.co/HwFvs0q0” "Er…" "Correct!"

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    What in god’s name is Labour’s response to the Eurozone crisis? That's what I'd like to know http://t.co/t9W1EmJX

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    What in god’s name is Labour’s response to the Eurozone crisis? That's what I'd like to know http://t.co/t9W1EmJX

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    What in god’s name is Labour’s response to the Eurozone crisis? That's what I'd like to know http://t.co/t9W1EmJX

  6. Paul Abbott

    What in god’s name is Labour’s response to the Eurozone crisis? That's what I'd like to know http://t.co/t9W1EmJX

  7. norrie mcdonald

    @tmcd7 good article http://t.co/86nrRnDB

  8. Oliver Wilkinson

    What in god’s name is Labour’s response to the Eurozone crisis? That's what I'd like to know http://t.co/t9W1EmJX

  9. Janet Graham

    What in god's name is Labour's response to the Eurozone crisis? http://t.co/ubzwxZKy

  10. Miljenko Williams

    Sunny's got a pertinent post up here: http://t.co/OqkUXf0T My response here: http://t.co/z8FGe0n0

  11. Paul Nezandonyi

    RT @sunny_hundal: What in god’s name is Labour’s response to the Eurozone crisis? That's what I'd like to know http://t.co/UGJvQICJ

  12. Dissenting Liberal

    What in god’s name is Labour’s response to the Eurozone crisis? That's what I'd like to know http://t.co/t9W1EmJX

  13. Rory I. Sinclair

    What in god's name is Labour's response to the Eurozone crisis? http://t.co/ubzwxZKy

  14. Paul

    What in god's name is Labour's response to the Eurozone crisis? http://t.co/ubzwxZKy

  15. Gareth Winchester

    While my comment doesn't say this, my view is that Labour are "doing an SNP": sit back & wait http://t.co/tNfGgY8L

  16. sunny hundal

    Me from this morning > What in god’s name is Labour’s response to the Eurozone crisis? http://t.co/t9W1EmJX

  17. Hugh Critchley

    “@sunny_hundal: What in god’s name is Labour’s response to the Eurozone crisis? http://t.co/4OOUkmOi” > a superb question!

  18. Time pay down national debt, Flaherty says « Paying Debt

    […] LATEST COMMENTS » Larry posted on Three important reasons why tax evasion matters in the UK » Len Arthur posted on Three important reasons why tax evasion matters in the UK » Pissed Proletariat posted on Three important reasons why tax evasion matters in the UK » Nemesis Republic posted on Three important reasons why tax evasion matters in the UK » Chaise Guevara posted on Report says 50p tax doesn’t deter ‘talent’ » Chaise Guevara posted on Report says 50p tax doesn’t deter ‘talent’ » Jamie posted on Three important reasons why tax evasion matters in the UK » Chaise Guevara posted on N30 demo: join the private sector wealth creators’ bloc » barnet_unison posted on Three important reasons why tax evasion matters in the UK » Bob B posted on Report says 50p tax doesn’t deter ‘talent’ » Jamie posted on Three important reasons why tax evasion matters in the UK » Chipshop-Forks posted on Three important reasons why tax evasion matters in the UK » cowan88 posted on Three important reasons why tax evasion matters in the UK » James Mark Hetterley posted on Three important reasons why tax evasion matters in the UK » Saggydaddy posted on Three important reasons why tax evasion matters in the UKSource: liberalconspiracy.org […]

  19. Jamie

    What in God’s name is Labour’s response to the Eurozone crisis? http://t.co/rZZ5o7w7 #EU #Milliband





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