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Forget what Cameron did, the Euro summit was a disaster anyway


10:30 am - December 13th 2011

by Frances Coppola    


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The European press have almost universally consigned the UK to the outer darkness, and the UK press have generally been pretty critical of Cameron, although some right-wing writers have been more positive.

Reuters concluded that Cameron’s action would be disastrous for the UK, which would end up being isolated. But Felix Salmon, also at Reuters, took a completely different view. And for me, Salmon gets it right.

You see, Cameron’s actions were completely irrelevant.

Who cares whether the UK is in or out of a fiscal union that is born out of a desire to maintain a fundamentally flawed currency union, and is itself fundamentally flawed? As Walter Munchau points out in the FT (paywall), it is unclear whether a “treaty within a treaty” is legally possible.

And it doesn’t address the real problems in the Eurozone anyway. What is proposed is not a fiscal union in any meaningful sense.

Real fiscal unions, such as the UK, the US and Canada, have mechanisms for transfer of funds from richer areas to poorer areas within the union, and overall budget-setting and taxation for common expenditures.

No such facility is proposed for the Eurozone. What is proposed amounts to the same old mantra of “fiscal discipline”, based upon the Stability and Growth Pact that was flouted from the start, but this time brutally enforced with painful sanctions and accompanied by dilution of democracy in the weaker nation states.

Germany can have democracy, it seems; but Greece, Italy, Spain and Portugal cannot. Austerity measures in deficit countries without a corresponding expansion in surplus countries will eventually drive the whole area into recession.

But an even more immediate problem is the weakness of the European banks and the ongoing flight of capital from the European banking system. Liquidity for European banks is becoming a real problem, because banks don’t trust each other enough to lend funds.

And investors are removing their funds at a rate of knots – selling their holdings of sovereign debt from deficit countries, selling their holdings of bank shares and debt, and even (in Greece) removing funds from bank deposit accounts.

Capital is leaving the Eurozone: the Euro is falling and safe haven investments such as US Treasuries are trading at negative interest rates. The financial sector is calling for a “big bazooka” to backstop sovereign debt and stem the capital flight. It didn’t get one from this summit, so the European financial system will continue to haemorrage money.

Eventually it will bleed to death, and there will be massive banking failure that will make the 2008 crisis look like a minor blip.


A longer version is at Frances Coppola’s blog

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About the author
Frances is an occasional contributor to Liberal Conspiracy. She spent 17 years of her life working at a senior level in banks, but now is a professional singer, singing teacher and image consultant. She blogs here.
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Story Filed Under: Blog ,Economy ,Europe ,Foreign affairs

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Reader comments


1. Man on Clapham Omnibus

That pretty much sums it up!

Good article. Now can you please email it to The Labour Party so they also understand why the whole Euro project is a dead duck and the longer we are isolated from that snake pit the better.

In the past at least Labour used to seem democratic yet not one commentator I’ve seen has criticised the fact the krauts have basically removed democratically elected governments from Greece and Italy.

And can someone please let Barroso know that on the day the peoples of Europe get a vote we’ll boot him out as well…

The left needs a coherent approach to Europe because after decades of characterising those wary of further integration as Little Englanders they now realise Europe has to be either unmanagable as a unit, or undemocratic. And we know Cameron must be in the wrong somehow because he’s, well, Cameron, but we can’t get specific of our criticisms as that means committing ourselves to being either pro- or anti-Europe, or worse, allying ourselves with Clegg, and there are Ten Reasons we can’t do that, none of which are anything to do with Europe.

In the news this morning:

Days after leaders pledged to channel €200bn through the IMF to help rescue the eurozone, Britain, the Czech Republic, Estonia and the German central bank have come out against the idea, with similar reactions from Japan, Canada and the US.
http://euobserver.com/19/114605

The main objection is that IMF funds cannot be reserved to only provide aid for one special group of countries. The Bundesbank has other objections.

5. Northern Worker

Frances – An absolutely excellent summary! Not that an impending financial tsunami makes me feel any better. Perhaps something I read recently – “If you can’t afford to buy gold, buy baked beans” – looks like good advice in the circumstances you describe.

6. Frances_coppola

Poland’s opposition party today objected to the dilution of democracy that the proposed “fiscal compact” would mean, and the cost to the Polish economy of propping up the Euro:
http://www.wbj.pl/article-57306-polands-sovereignty-under-threat-from-european-integration-says-kaczynski.html

France’s main opposition have already said they would renegotiate the proposed deal if elected – which is both quite possible and imminent.

Quite right, an excellent article. And as pointed out by Bob at 4, it may have been 26-1 on the night, but this will change.

Quite simply, perspectives based on “left”, “right”, “pro-EU” etc are irrelevant at this stage.

Whether or not you believe in a single European currency, logic (and the Maastricht treaty) says you shouldn’t believe in this one.

Labour would do well to state their own way forward for both the UK and the EU as a whole, and ignore the flannel, politics and tantrums (yes you Sarkozy). They wouldn’t have to do much to come across as adult and coherent. .

Yes – what is needed now is solid economic analysis of the fundamental flaws in EMU and why the EU summit deal doesn’t address those flaws. The rest is political froth.

Predictably, EZ country governments are in denial about their engagement in a flawed project for EMU – in which only Luxembourg was eligible to join at the launch according to the Maastricht convergence criteria.

Jacques Delors interview about 11 days back: Euro would still be strong if it had been built to my plan
http://www.telegraph.co.uk/finance/financialcrisis/8932640/Jacques-Delors-interview-Euro-would-still-be-strong-if-it-had-been-built-to-my-plan.html

“Real fiscal unions, such as the UK, the US and Canada, have mechanisms for transfer of funds from richer areas to poorer areas within the union”

How sustainable is this for the UK in the long run?

Isn’t it arguably the case that these transfers have operated against the interests of the poorer regions of the UK for too long – i.e. they have had their interests subordianted to the needs of the city and have only been compensated through welfare payments and increased payments to local authorities. Gee, thanks for that.

Real fiscal unions, such as the UK, the US and Canada, have mechanisms for transfer of funds from richer areas to poorer areas within the union

Quite right.

But then daft rightwingers jump up and down and point to bogus statistics which show that 60pc or so of North East or Scottish jobs are in the Public Sector.

Wonder if they can see the reason now why we all shrug at them and ask “so what”?

A “fundamentally flawed currency union”.
Indeed it is.

But where have all the euro-enthusiasts gone?
Or are we all “swivel-eyed” now?!

Planeshift,

Real fiscal unions, such as the UK, the US and Canada, have mechanisms for transfer of funds from richer areas to poorer areas within the union”

How sustainable is this for the UK in the long run?

Is not the point of any union that it need not be forever? Empires and Kingdoms, Republics and Democratic states all rise and fall eventually (how long have we had the United Kingdom in its present form for example – less than 100 years…).

The Euro seems to have highlighted that a badly-designed union is less likely to last, which is hardly a major shock to anyone. But there seems to be no particular reason to assume that the UK will exist in the long run if the current fiscal union (which we probably agree on the effects on, even if we might not agree the cause) does not serve its purpose. It is simply a case of change over inertia.

@9: “Isn’t it arguably the case that these transfers have operated against the interests of the poorer regions of the UK for too long – i.e. they have had their interests subordianted to the needs of the city and have only been compensated through welfare payments and increased payments to local authorities. Gee, thanks for that.”

There are two separate bits to that.

Fiscal unions in many countries, regardless of currency, include automatic fiscal mechanisms for transferring funds from richer to poorer regions. A raft of government spending programmes typically apply across all national regions regardless of local tax revenues contributed to the national treasury. In addition, there are often targeted regional assistance programmes, urban regeneration programmes, disaster relief etc. And all that makes good political and economic sense.

A second issue is the extent of Britain’s unusual dependence on its financial services industry, a global leader which contributes about 10 pc of Britain’s economy. The appeal for New Labour was that up to the banking crisis of 2008/09 and the deep recession of 2008Q1 to 2009Q1, when GDP fell 7 pc, the financial services industry generated buoyant tax revenues which were used to boost New Labour’s public spending programmes on healthcare services and education.

Dig a little and New Labour ran a much drier industrial policy than did the Thatcher governments of the 1980s – when billions were spent propping up British Leyland and the nationalised coal industry. The 1984/85 mining strike was about spending even more public money on propping up the mining industry and then, in 1985, the world price of oil dropped by half. Since coal prices paid by the electricity generators derived from oil prices, that dramatically cut the sales revenues of the nationalised coal industry.

The New Labour government didn’t have to be so pro financial services and run such a dry industry policy. Other policy choices could have been made.

As I understand it, if the UK had agreed to the treaty, that does not mean it would have been forced into the fiscal compact. The eurozone will go ahead with their compact regardless, and Frances Coppola may be right that they are doomed anyway. But to say Cameron’s veto had no effect is wide of the mark. It has generated immense ill-will: already the EPP is talking about putting the British rebate back into question, for example.

” A raft of government spending programmes typically apply across all national regions regardless of local tax revenues ”

But that’s sort of where my point leads – there is a major disagreement over funding in the UK. People the wealthy areas of the UK frequently complain that they have to subsidise the poorer, unproductive areas. One reason why the euro is doomed is because the German electorate simply doesn’t want to pay taxes to fund Greek public services. The same applies in the UK (but on a lesser scale at the moment), taxpayers in Kent simply don’t see why they have to fund welfare in Wales, and when you add in the different decisions made by devolved governments (limiting tuition fee rises, free prescriptions etc) then this increases the sense of unfairness. On the other side of the severn meanwhile, all the political parties including the tories accept that the barnett forumula leaves Wales underfunded (if you define funding on a needs basis) and without fiscal powers the welsh government has no incentive to spend money on schemes to increase growth.

How likely is it that this status quo is sustainable for the UK?

16. Frances_coppola

14 Richard P

On the contrary, according to Ollie Rehn yesterday the fact that the Eurozone wants to go ahead with the fiscal compact anyway means that the UK will be forced into budgetary surveillance and compliance with SGP rules as well. If that’s true then Cameron’s action solved nothing for the UK either.

@ Planeshift

As you say, the United Kingdom may not be sustainable. The South East has been the only region with above average GDP per head for a very long time. This is due to geography, and London, rather than any innate superiority of course, but tensions certainly exist on both sides. Some in the South East think they’re subsidising everyone else, whilst many Scots and Welsh think too much of their talent and resource drains away to the capitol.
This desire for more local self-determination is common in Europe (Walloons and Flemish in Belgium, Catalans and Basques in Spain and France, the Balkans, etc). This runs counter to the recent direction of the EU project.

cjcjc, 11:
“But where have all the euro-enthusiasts gone?
Or are we all “swivel-eyed” now?!”

This is why left-right arguments are so unhelpful. When was the last time our politicians actually discussed the EU properly? When did the EU last discuss it properly? It’s become faith-based rather than rational.

It should at least be possible to be pro-EU without agreeing with the structure, but this has become heresy.

19. Northern Worker

@ 16

Frances, we couldeer alwayseer ignoreeer thateeer idioteer Ollieer Rehneer. Most of the other 26 ignore rules which don’t suit them. Which is one of the many problems with the E.

20. gastro george

@16 Frances

“… the fact that the Eurozone wants to go ahead with the fiscal compact anyway means that the UK will be forced into budgetary surveillance and compliance with SGP rules as well”

Genuine question. How come? If we’re not part of the Eurozone, and have used the veto against EU-wide agreement, then how can the SGP be applied to us? What is the mechanism?

Or is this “oblique” enforcement – “you can’t trade in the single market unless …”. In the same way that the City will eventually lose control of the Eurobond market as the Eurozone will ensure that they must be traded inside the zone.

Planeshift

For years following Germany reunification in 1990, there were regular gripes among taxpayers resident in the territory of the west German Bundes Republik about the scale of government spending in the old territory of the GDR in east Germany. There are continuing issues in Spain about the extent of regional autonomy – Catalonia likes to do its own thing. In Italy, there are continuing, embedded tensions between the prosperous north and the depressed south with the Northern League reportedly wanting to cut adrift from the south.

The USA runs a national fiscal union in the sense of transferring funds from richer states to poorer states – as does Canada.

No one here seems to have noticed that the Canadian dollar is separate from the US dollar – the exchange rate between the two national currencies flexes from day to day according to market pressures and few regard that as untoward or “unacceptable”. The US economy is the largest in the world in terms of national GDP while Canada’s is smaller than Britain’s. The US market is the largest export market for Canada. Each country retains national autonomy in respect of fiscal and monetary policy – although doubtless the government of each pays regard to what is happening on the other side of their long common border.

This situation of peaceful co-existence has prevailed for centuries. Neither country seems to feel the need for fermenting the current hysterical froth in Europe, a sure sign of political immaturity and nationalistic tendencies towards autocracy and protectionism. In a fit of nostalgia, I believe that some are trying to resurrrect Napoleon’s Continental System in time for the French presidential election next year.

22. Frances_coppola

gastro George

I’d guess that Rehn imagines the fiscal compact will be forced through on qualified majority voting and will apply to the EU, not just the Eurozone. The UK will have no vote but will either have to comply or leave the EU.

Of course, it could just be political posturing with no legal substance by our Ollie – like the EPP’s notion that since they have failed to get any money out of the UK by attacking the City, they can do so by removing the UK’s rebate.

23. Frances_coppola

Gastro George

The EU has no means of influencing the trading of “Eurobonds”. Currently, the term “Eurobond” simply means a bond denominated in a different currency from the issuer’s own. London is a major centre for the trading of these Eurobonds and there is absolutely no reason to suppose that this should change.

Should the Eurozone leadership by some miracle actually agree to the issuance of Euro bonds replacing national debt in the Eurozone, then yes they may well impose rules about where those can be traded – and they would have every right to do so. But at the moment Germany is absolutely opposed to those – as I noted in my longer blog (link at end of article) – so they simply aren’t on the table at the moment.

24. gastro george

@Frances

22 – Thanks.

23 – Probably my loose use of terminology there. I thought I’d heard that the Eurozone/ECB was intent on ensuring that Euro-denominated bonds (issued by individual companies or the ECB should that ever happen) were handled inside the Eurozone. I’ll try to find a link.

25. gastro george

companies = countries … duh

Frances, everything you say is true. However, there really was no realistic prospect of them setting up a fiscal transfer union in the immediate future. Something like that would take years of planning before implementation. They really are fixated on preventing some future crisis, rather than dealing with this one. What is remarkable is the amount of people who still retain faith that they will sort it out in the end. I decided 12 months ago that they are idiots and they will not sort it out. Without the ECB cavalry turning up, I can’t see a positive resolution.

The EZ and Eastern Europe are heading for a huge credit crunch. Monetary figures in the periphery are terrible and heading for levels associated with depression. Eastern Europe could be hit the hardest from EZ banks delevering and they are not even in the EZ. Hungary are moving towards a fascist state and Greece has virtually been reduced to a vassal state. All happening in the midst of the European Union. There is huge potential for social breakdown.

The ECB 3-yr money is designed to try to slowdown bank deleveraging. We even got the vertically challenged French President suggesting that banks should pick up the apparent free money and engage in the same trade that bust MF Global. I don’t think they will do it in enough size to bring down Italian and Spanish yields. Most of the big EZ banks are already highly leveraged and need to reduce leverage to comply with the 9% rule. The U.S. banks are leveraged about 13.1, compared to 30-40.1 in the EZ. Buying Italy at 6.5% to repo with the ECB at 1% would increase their leverage. They would need to mark to market the bonds and would be taking on large default risks. Their share prices would come under even more pressure if they do not delever. Société Générale are already trading at 0.3 of book value, which is a bit of an indication what kind of writedowns are expected. If the 3-yr money does not work, what chance is there of Italy and Spain rolling over almost 600 billion euros next year?

As recession bites in the EZ and asset prices fall the pressure on banks to delever can only increase. Maybe Lagarde will come to the rescue, but even the IMF do not currently have the resources to save Italy. A truly dismal outlook in my opinion.

Does anyone remember the few hours of consternation when Papandreou, the former Greek Prime Minister, threatened to put the imposed austerity programme to a referendum?

They put him in a room, tied him to a chair and pulled out three of his fingernails until he decided it was a bad idea. Then they replaced him anyway.

It is somewhat ironic, that 70 years after the last attempt, Germany, with the help of some Vichy French, has managed to impose it’s extra-democratic grip over half of Europe and has the other half clamouring for subjugation.

And not one Panzer has fired a shot.

When they come after us with their new fangled FTT weapon we’d better be prepared to defend the beaches again….

28. Frances_coppola

Richard W

I think you should have written this article, not me!

29. Frances_coppola

24 Gastro George

Yes, I’m sure the Eurozone would love to impose rules forcing trading of Euro-denominated bonds to take place only within the Eurozone. They think that way they will have a captive audience that can’t escape their proposed transaction tax. Trouble is, investors don’t like being held to ransom, and they don’t have to invest in Euro-denominated securities or trade in the Eurozone. If the Eurozone attempts to restrict trading in Euro-denominated securities to the Eurozone, and imposes taxes as well, I would expect the market for Euro-denominated bonds to become much less liquid and yields to be much higher. My mother calls that “cutting off your nose to spite your face”.

In the news, EU Commission president Barroso is saying that to have agreed to Cameron’s opt out would have threatened the integrity of the Community.
http://www.telegraph.co.uk/news/worldnews/europe/eu/8953464/Jose-Manuel-Barroso-UK-made-EU-treaty-compromise-impossible.html

Apart from the obvious interpretation, there is no clarification of why that matters – unless, of course, it means that an unwanted implication of what Cameron was asking for is that Britain won’t be levying a Financial Transactions Tax and handing the proceeds over to the EZ to salvage the situation there.

By reports, there was no discussion of the detail of the opt out that Cameron was seeking. It was just dismissed by Sarkozy as “unacceptable”.

Recall that the rules for financial discipline in the EZ are laid down in the Growth and Stability Pact of 1995. But that was widely breached. The governments of EZ countries can’t be relied on to stick to mutual agreements.

31. Northern Worker

I heard or read somewhere the summary that: “The euro is a patient in need of immediate life support, but the EU leaders have decided to build a hospital.” I thought it summed up the problem quite well.

Pagar @ 27 I love the fingernail thing!

32. Frances_coppola

30 Bob B

Yes, I find Barroso’s argument unpersuasive. Surely isolating the EU’s third-largest economy would be just as damaging to the single market – if not more so?

I know this is an unpopular view, and I’ll probably be shouted down, but I find it hard not to see the Eurozone leadership’s attitude to the UK (or certainly Sarkozy’s) as being something like “give us the money or we’ll send you to Coventry”.

“Forget what Cameron did, the Euro summit was a disaster anyway”

He did Fuck All

“And investors are removing their funds at a rate of knots – selling their holdings of sovereign debt from deficit countries, selling their holdings of bank shares and debt, and even (in Greece) removing funds from bank deposit accounts.”

Not just Greece. Even the once secure northern Europeans look shakier nowadays.

http://blogs.wsj.com/emergingeurope/2011/12/13/latvia-bank-rumors-highlight-trust-issues/

Any little thing can set off panic when uncertainty and volatility are the constant daily fare. Welcome to the Risk Society.

32 Frances

As usual, our analysis converges, which I find reassuring.

I can’t see how Britain excluded – along with London’s leading global financial markets – maintains the “integrity” of Europe.

It seems that we are still without any discussion of the detail of the opt-outs for Britain’s financial services industry that Cameron was seeking for the new EU fiscal union. I hope the fine print will shortly be disclosed if only in the financial pages of the broadsheets.

Without that detail, too much of the public debate is likely to stay obsessed with European power politics and the froth. But that was the cause of much of trouble with the foundation for the Eurozone at the very start. As I recall from those fevered online debates c. 2000, the focus then was all about the imperative of ever closer European integration and hardly ever about whether the conditions for a stable monetary union were being met. The economics of EMU was widely dismissed as of marginal significance.That is a large part of the reason for why the EZ is where it is now with financial indiscipline added on as a consequence of the trade imbalances resulting from insufficient convergence. Delors has virtually disowned the Euro because the safeguarding plans he laid were ignored.

The deleveraging of EZ banks as they struggle to meet higher capital requirements looks sets to be a story that will run and run. That may go some way towards explaining why Cameron’s request for an opt-out so Britain’s banks could be required to meet capital requirements above EU maxima was so quickly found to be unacceptable. Consider the market implications if British banks are working with higher capital ratios while a number of EZ banks found it challenging to meet stress tests. Just a week or so back, I recall reading news reports from the EZ about the stress tests being called unfair.

I could be quite wrong but I strongly suspect that pushing Britain to the margins was a carefully planned strategy on the part of Sarkozy motivated by the forthcoming French presidential election. Just in the news, Dominique De Villepin – a bitter rival of Sarkozy in the very murky politics of the centre-right in France – is going to stand as a presidential candidate and he is an over-the-top admirer of Napoleon. Sarkozy will be wanting to undercut him.

just curious why leon wolfson has not commented to tell both Bob and Frances that they are wrong, let alone Sally…..for what it’s worth, your analyses seem spot on and I am glad that cameron did not try to aligh us with the misery of the Euro-bloc…if ever a new marshall plan were needed, it is now, but who can afford it?

37. Frances_coppola

Bob B

We do seem to think along similar lines, don’t we!

To be honest the whole Cameron business looks like smoke and mirrors to me. Did he play into Sarkozy’s hands? I don’t know – though I too suspect Sarkozy engineered the whole thing for political reasons connected with the forthcoming French election. But the Cameron affair has done a wonderful job of distracting attention from the abject failure of the Eurozone leadership to address the real issues – such as the catastrophic weakness of Eurozone banks and the awful economic prospects of much of the Eurozone. Maybe that’s what they wanted.

The fact that Rehn and Barroso are spending so much energy attacking the UK does suggest they are concerned by Cameron’s action, though. If the UK really wasn’t important to the EU (and the Eurozone) they wouldn’t bother, would they?

It has perhaps comes as a bit of a shock to Clegg, the LibDems and Labour that the early polls in Britain are showing strong support for Cameron in his refusal to sign up to a new EU treaty without safeguards for Britain’s financial services industry.

FWIW I think that if it comes to a referendum or an election over this, the Conservatives are on to a winner and I’m not a natural ally of Cameron and the Conservatives.

I’m old enough to (just) remember the fall of France in June 1940 when Britain stood alone in Europe until the Nazi war machine invaded their declared friends by treaty, the Soviet Union on 22 June 1941. There were and are some who believe that Britain should have reached a peace settlement with the Nazis. We didn’t. We also stood up to Napoleon in the revolutionary and Napoleonic wars which lasted from 1793 to 1815 and there is absolutely no doubt that Napoleon wanted to integrate Europe with France as the hegemonic power.

@37. Frances_coppola: “To be honest the whole Cameron business looks like smoke and mirrors to me. Did he play into Sarkozy’s hands?”

Why presume that there is a game plan?

Do people believe that Greece will not go bust?

40. Frances_coppola

39 Charlieman

1) Probably I’m just an old cynic….but marginalising the UK, which has long been a thorn in the side as far as France is concerned, would help Sarkozy’s election prospects, especially as his main opponent is an admirer of Napoleon (as Bob B pointed out). France has never been keen on UK membership of the EU: De Gaulle twice opposed the UK’s application to join the then EEC.

2) The ability of the Eurozone leadership apparently to believe six impossible things before breakfast puts them firmly in Wonderland territory. Given that, it wouldn’t surprise me if they do in fact think Greece won’t default. (It is already bust). Everyone else knows better, of course. Which is why markets have been pricing in Greek default for weeks now.

@40. Frances_coppola: “Probably I’m just an old cynic…”

Yes, but our times are strange. France/UK are military partners (I guess that all UK military pilots are studying crash courses in French). And France participated in the NATO airforce operations in Libya.

42. So Much For Subtlety

You see, Cameron’s actions were completely irrelevant.

Not for us they weren’t. Cameron refused to allow us to board the Titanic. We should be thankful that the Boy Wonder found some spine at last.

Real fiscal unions, such as the UK, the US and Canada, have mechanisms for transfer of funds from richer areas to poorer areas within the union, and overall budget-setting and taxation for common expenditures.

Sorry but no they don’t. At least they don’t have to. We tend to do this as a result of the welfare state. Not as a result of the fiscal Union. America was a fiscal union from the Civil War at least and yet large scale transfers did not take place until the 1930s. We do have common expenditures in all countries, and this may take money from rich areas to poor areas – but it may not as well. It depends. Traditionally America and Britain spent little except on defence and that tended to go to richer areas, not poorer ones.

However you ignore the fact that the EU does have mechanisms for such transfers. The EU was set up to transfer reparations from Germany to France thinly disguised as a Coal sharing agreement. It went on to become a means by which German workers paid French farmers not to farm. The CAP is still a large scale transfer of funds from richer countries like Germany, Britain and Holland to poorer countries like Greece, Spain and even Italy.

No such facility is proposed for the Eurozone. What is proposed amounts to the same old mantra of “fiscal discipline”, based upon the Stability and Growth Pact that was flouted from the start, but this time brutally enforced with painful sanctions and accompanied by dilution of democracy in the weaker nation states.

Sorry but what facility did you have in mind? The Americans do not transfer funds to state governments that have gone on a credit binge – as the coming default of states like Rhode Island and California show. Of course the Americans don’t stop the states spending their way into bankruptcy either.

Eventually it will bleed to death, and there will be massive banking failure that will make the 2008 crisis look like a minor blip.

It looks that way. What have we done to deserve a government of such pygmies at this time? What happened to the stature of Western politicians? Myself, I think that a military coup in places like Greece – and even France (they are over due for one given they have had one every 60 years or so) – is the lesser evil.

43. So Much For Subtlety

12. Watchman

But there seems to be no particular reason to assume that the UK will exist in the long run if the current fiscal union (which we probably agree on the effects on, even if we might not agree the cause) does not serve its purpose. It is simply a case of change over inertia.

Or of experience over hope. A fiscal union that has existed for a long time ought to be respected, like anything else that has worked for a long time. Even if just for the reason it has worked for a long time. As we can see with the Euro, very clever men with very clever ideas may think they are clever enough to do better but it does not follow they are.

Whether the British fiscal union works or not is another matter. I think that many people are unhappy with it. But the question is what to do about it. The reasons for different people thinking it is not working probably differ. I think that the North and the Celtic fringe suffer from a lack of administrative autonomy and chronic welfare dependency. I doubt many others would agree. I think it is those transfers that are the problem.

13. Bob B

Fiscal unions in many countries, regardless of currency, include automatic fiscal mechanisms for transferring funds from richer to poorer regions. A raft of government spending programmes typically apply across all national regions regardless of local tax revenues contributed to the national treasury. In addition, there are often targeted regional assistance programmes, urban regeneration programmes, disaster relief etc. And all that makes good political and economic sense.

Sorry but what automatic fiscal mechanisms exist in the US? Or the UK for that matter. The EU’s spending typically applies across all national regions. Indeed their main spending is precisely a fiscal transfer – northern workers pay southern farmers. The CAP is a huge expense. And there are only three or four long term consistent net contributors to the EU – Germany, Britain, the Netherlands. The same people expected to bail out the southerners once more. God knows the EU has targeted spending programmes for the welfare bums as well.

So where’s the issue here?

14. Richard P

But to say Cameron’s veto had no effect is wide of the mark. It has generated immense ill-will: already the EPP is talking about putting the British rebate back into question, for example.

Good for them. We will refuse to pay. What are they going to do about it?

15. Planeshift

One reason why the euro is doomed is because the German electorate simply doesn’t want to pay taxes to fund Greek public services.

More to the point – they can’t. Germany nearly went bust trying to restructure East Germany. How can they be expected to do that again for Greece and Portugal and Spain and so on? They don’t have that much cash.

17. Jack C

The South East has been the only region with above average GDP per head for a very long time. This is due to geography, and London, rather than any innate superiority of course

Geography? Ha! The suicide of the economies of Scotland and the North are mostly their fault. Not entirely, but mostly. The EU has not helped as Britain’s economy has turned from the Atlantic – and hence the port cities that faced to that sea like Liverpool, Glasgow and so on – to the mainland. Which benefits London a lot. However the main problem has been local politics and local trade unions. If they reject the modern world and its demands, they are going to slide into irrelevancy. As they have done. Only one thing can be said to be not their fault – increased centralisation in Britain. As the State became more powerful, it became more important for every company to have a headquarters in London where the government could be lobbied for permits and licences and so on. A London-based company could take Ministers to dinner in a way that a Leeds or a Manchester based one could not. As headquarters moved, so did factories. After all if you have a national pay scale you may as well move your factory to London. There is no benefit to being up North. The end result is like France where nothing of importance takes place outside Paris.

However the North and the Celts continue to vote for Parties committed to that centralisation so it is their fault too.

@43 SMFS: “Sorry but what automatic fiscal mechanisms exist in the US? Or the UK for that matter.”

US federal government spending in a US state doesn’t relate to the federal tax revenues generated in that state. For some states, federal tax revenues exceed federal spending or vice versa in other states. That is what a real fiscal union entails and the deal at the EU summit goes nowhere near that. The EU fiscal union is a legal structure for punishing EZ or, perhaps, EU member states, for infractions of fiscal discipline rules. In fact, there were already strict rules for fiscal discipline in the EZ Growth and Stability Pact of 1995 but the rules were widely breached, including by France and Germany. On the evidence, EZ country governments can’t be relied on to stick by their mutual agreements.

As for the UK, I have previously posted many times a link to this Oxford Economics paper showing estimates from pre-financial crisis times of public spending by UK region as compared with tax revenues by region:

Regional winners and losers in UK public finances
http://www.isitfair.co.uk/Reports/Public/OE%20UKPublicFinance.pdf

The conclusion was that only London and the south east regions were making net fiscal contributions to the national exchequer. For other regions, public spending exceeded tax revenues except for the Eastern region where there was an approximate balance.

Those estimates illuminate the importance of Britain’s financial services industry – which contributes about 10 pc of Britain’s economy. The New Labour government used the buoyant tax revenues generated by the financial services industry to fund its growing spending programmes for healthcare and education. NL maintained a very dry industrial policy, much more so than the Thatcher governments of the 1980s.

Do try and keep up.

45. So Much For Subtlety

44. Bob B

US federal government spending in a US state doesn’t relate to the federal tax revenues generated in that state. For some states, federal tax revenues exceed federal spending or vice versa in other states. That is what a real fiscal union entails and the deal at the EU summit goes nowhere near that.

Sorry Bob but so freakin’ what? Yes, the US spends what it spends where it likes. It does not have a fiscal transfer in the sense you mean. The EU also spends what it likes where it likes. As I said, often, and you chose to ignore, the Common Agricultural Policy involves taking money from the rich north and giving it to the poor south. So by your definition the EU does have a system of fiscal transfers.

The conclusion was that only London and the south east regions were making net fiscal contributions to the national exchequer. For other regions, public spending exceeded tax revenues except for the Eastern region where there was an approximate balance.

So exactly like the EU and the CAP and the CFP and everything else it does then

Do try and keep up.

Bob, if I wasn’t in such a good mood, I would point out you don’t know what you’re talking about. The EU works the same way. By your definition of fiscal transfer, it has a fiscal transfer. It is irrelevant as fiscal transfer means something else.

@45 SMFS: “Sorry Bob but so freakin’ what? Yes, the US spends what it spends where it likes.”

Frankly, you haven’t a clue and you haven’t kept up with posts in other threads.

The effect of a genuine fiscal union is to redistribute funds from richer states to poorer states.

If public spending in a state is restricted to the tax revenues generated in that state then the GDP of that state would be lower as a result (other factors equal) and it would therefore import less from its neighbouring states so their GDP will be lower and so will the tax revenues those states generate, which will force a contraction of public spending in those states too.

This is the objection to Mrs Merkel’s notion of an EU Fiscal Union as nothing more than a legal structure for imposing fiscal discipline. The overall effect of that will be to depress EZ economies.

The EU summit deal goes nowhere near resolving the issues which have created the crisis – this seems to have passed by the LibDems.

There’s a credible political explanation as to why those who effectively run the EZ (Germany and France) are maintaining the pretence that the basic problems of the Eurozone are due to lack of fiscal discipline and empathically not due to diverging competitiveness issues between EZ member economies leading to some having chronic balance of payments deficits.

Once chronic balance of payments deficits are admitted to be the root cause of EZ problems, that would amount to admitting that EZ economies hadn’t “converged” sufficiently, a key requirement for maintaining a stable monetary union. Lack of convergence also requires that a genuine EZ fiscal union should take on the function of transferring funds from chronic surplus countries (or regions) to chronic deficit countries (or regions) to alleviate the recessionary pressures in the latter. Germany, with its big economy in chronic trade surplus, certainly doesn’t want to take on that liability for political reasons – so it cannot be admitted that balance of payments deficits are the root cause of EZ problems.

The net effect of imposing fiscal discipline without a transfer of funds from chronic surplus to chronic deficit countries will be to exert depressing pressures in the chronic deficit countries of the EZ – and those pressures will spill over on to trading partners.

There’s nothing original about this analysis. It accords with what Martin Wolf is saying in today’s FT. As posted in a previous thread, my awareness of the looming problems of the EZ was awakened on reading a paper on: Euro fantasies by the late Rudi Dornbusch in the issue of Foreign Affairs for September 1996. Try reading recent editions of his popular student text on Macroeconomics (McGraw-Hill).

47. So Much For Subtlety

46. Bob B

The effect of a genuine fiscal union is to redistribute funds from richer states to poorer states.

No it isn’t. As I will point out yet again, the US had a full fiscal union well before they started handing out money to the poorer states. Just as Britain, for many decades, had one currency but did not hand out money to poorer regions. In fact, as I said, many poorer regions lacked factories and so things like military spending went to richer areas, not poorer ones. Before 1914 military spending being one of the largest areas of state spending.

You are using fiscal union as a synonym for the welfare state and it is not. You simply do not know what the word means.

If public spending in a state is restricted to the tax revenues generated in that state then the GDP of that state would be lower as a result (other factors equal) and it would therefore import less from its neighbouring states so their GDP will be lower and so will the tax revenues those states generate, which will force a contraction of public spending in those states too.

Except that taking money from richer people in other states means that those richer states have a lower GDP and hence everyone is poorer. You have put forward a bad case for a welfare state but it has nothing to do with a fiscal union. Again, before 1914 the American Federal government did not routinely transfer money to poorer states. They did not help much with their spending. If the South was poor, they were poor and it was up to them to do something about it.

The EU summit deal goes nowhere near resolving the issues which have created the crisis – this seems to have passed by the LibDems.

This is irrelevant.

There’s a credible political explanation as to why those who effectively run the EZ (Germany and France) are maintaining the pretence that the basic problems of the Eurozone are due to lack of fiscal discipline and empathically not due to diverging competitiveness issues between EZ member economies leading to some having chronic balance of payments deficits.

So is this.

Once chronic balance of payments deficits are admitted to be the root cause of EZ problems, that would amount to admitting that EZ economies hadn’t “converged” sufficiently, a key requirement for maintaining a stable monetary union.

Chronic balance of payments problems are not the root cause. A lack of competitiveness is. That causes the balance of payments problem. They have not converged – and the South has been allowed to borrow and spend rather than push for convergence.

Lack of convergence also requires that a genuine EZ fiscal union should take on the function of transferring funds from chronic surplus countries (or regions) to chronic deficit countries (or regions) to alleviate the recessionary pressures in the latter.

That is simply a recipe for permanent welfare dependency. The only solution is for the Greeks and the Italians and the rest of the South to reform their economies and improve their competitiveness. Paying them to be idle is no solution in the long run. In that the Germans are right.

The net effect of imposing fiscal discipline without a transfer of funds from chronic surplus to chronic deficit countries will be to exert depressing pressures in the chronic deficit countries of the EZ – and those pressures will spill over on to trading partners.

In the short term. In the long term they will stop retiring at 50, paying Athens train drivers more than the British PM or whatever it is they are doing and they will catch up with the Germans. Rewarding fecklessness only leads to more fecklessness.

There’s nothing original about this analysis.

It is also irrelevant to what I said.

@SMFS

There is simply no point in my continuing a dialogue with you on this – it’s a waste of my time.

As other threads have shown, you are both ignorant and clueless. Enjoy your bliss.

FC: “Eventually it will bleed to death, and there will be massive banking failure that will make the 2008 crisis look like a minor blip.”

SMFS: It looks that way. What have we done to deserve a government of such pygmies at this time? What happened to the stature of Western politicians?

LOL you’re looking at it from the wrong end SMFS. It is that very narrow-mindedness of our contemporary elite which cannot see farther than their own egos, short term advantage and lust for filthy lucre which is the cause of all the crises (financial, social, ecological) that will overwhelm us in the coming decades in the first place. Shame on us for letting ourselves be bewitched by these sirens who used our own greed to manipulate us.

We are only just starting to pay the price for our foolishness and gullibility.

50. gastro george

@SMFS “Chronic balance of payments problems are not the root cause. A lack of competitiveness is.”

Possibly, but then we need to talk about solutions as well as causes. Implicit in your answers is that you consider it necessary for Greece to cut wages and benefits (indeed the state) in order to regain competitiveness. But, as we are seeing today in the latest IMF report, this doesn’t work. You just destroy a country and it’s civilisation, and the deficit gets worse.

51. Frances_coppola

SFMS

There is a huge difference between subsidies from richer to poorer areas to prop up industries seen as politically or strategically important, and the automatic stabilising effect of common taxation and spending policies in a fiscal union. You don’t seem to understand that fundamental difference, so everything you’ve said misses the point.

We need less of the political frothing and EU arm-twisting politics but more hard economic analysis of the reasons for the failings of EMU. The continuing attempts of politics to trump the economics are why the EMU is in the mess that it is.

41. Charlieman

” Yes, but our times are strange. France/UK are military partners (I guess that all UK military pilots are studying crash courses in French). And France participated in the NATO airforce operations in Libya. ”

This apparent contradiction is because of realpolitik in different theaters. For example, in Europe, France sees Germany as their allies. At the global level that encompasses the UN and the military, they see the UK as their ally. Germany are naive about realpolitik and Merkel assumed that their close relationship with France would automatically continue to such places as the UN. She was quite shocked to discover that the world does not work like that and France have no use for them. Everything France does is to promote French interest and they can do that best in the military sphere by allying with the UK.

France are allying even more with Germany in Europe as a way to weaken the EU Commission, that they see as having a too Anglo perspective.

” For decades now, the three Western permanent members of the Security Council (US, UK, France) have formed a discreet, but cozy, directorate known as the P-3. In January 2011, Germany began its two-year term as a rotating member of the Security Council and, according to one account, was “shocked, shocked, shocked” to discover the existence of this directorate (which had not bothered Germany the least during its previous stint at the UNSC in 2004):”

“Even prior to the Libya vote, Germany had become aware that even its closest allies were not willing to grant Berlin a special role. The Germans wanted to be involved in preliminary discussions among the French, British and Americans, as the Security Council veto holders established their position for future sessions. But Berlin was coolly and decidedly rebuffed. Instead, the Western powers merely promised to keep Germany informed. Indeed, from the perspective of New York, German influence is extremely limited. A different hierarchy prevails in the UN than in the European Union, even among the Europeans. The Germans and the French are the closest of partners in the EU; at the UN it is Paris and London. The veto powers enjoy a special status. From their standpoint, the Germans are still novices in international politics. For the French and the British, there is no reason to support Germany’s petition to join their club. ”

http://smallwarsjournal.com/jrnl/art/toward-a-gentler-kinder-german-reich#comment-form

@52. Bob B: “We need less of the political frothing and EU arm-twisting politics but more hard economic analysis of the reasons for the failings of EMU. The continuing attempts of politics to trump the economics are why the EMU is in the mess that it is.”

Arm-twisting politics are what created EMU/EZ. Arm-twisting politics were behind last week’s Alice in Wonderland proposals.

So whilst I share your desire for rationality, I conclude that arm-twisting and head-banging will be part of the solution. @40. Frances_coppola noted: “The ability of the Eurozone leadership apparently to believe six impossible things before breakfast puts them firmly in Wonderland territory.”

55. So Much For Subtlety

50. gastro george

Possibly, but then we need to talk about solutions as well as causes. Implicit in your answers is that you consider it necessary for Greece to cut wages and benefits (indeed the state) in order to regain competitiveness. But, as we are seeing today in the latest IMF report, this doesn’t work. You just destroy a country and it’s civilisation, and the deficit gets worse.

In the short term it may make things worse. But in the long term, it works. It is the only thing that works. After all, what is the alternative? If Greek workers are paid 25% more than their productivity suggests? Who is going to buy their stuff? The solution proposed here seems to be some sort of permanent welfare state which is insane. If the Greeks cannot be bothered to collect the taxes due what is the solution? If the Greeks are corrupt what is the solution? Getting the Germans to pay for it all can only be a short term solution at best.

This has been left too late. The costs of doing the right thing are probably too high now. But the North is reluctant to do pay through the nose in order to do the wrong thing. Which means that the markets will decide. But that does not change the fact that the Germans actually do have a point.

Frances_coppola

There is a huge difference between subsidies from richer to poorer areas to prop up industries seen as politically or strategically important, and the automatic stabilising effect of common taxation and spending policies in a fiscal union. You don’t seem to understand that fundamental difference, so everything you’ve said misses the point.

It is not me that is missing the point. It is other people – Bob in particular. But perhaps you will explain to me what automatic stabilising effects common taxation and spending has in a fiscal union. It did not stop American states going broke in the past. It is not stopping them going broke in the present. There is nothing whatsoever about common taxation and spending that even suggests a stabilising effect. If the British government only taxed the North and the Celtic fringe, and only spent in the South East, the South East would be happy but the Rust Belts would not be automatically stabilised. It varies from case to case. And if you’re like Rhode Island and you want to spend yourself into bankruptcy, as they are doing, you can do so in the US. Despite a common system of Federal taxation.

@54: Charlieman: “Arm-twisting politics are what created EMU/EZ. Arm-twisting politics were behind last week’s Alice in Wonderland proposals.”

Absolutely – as mentioned I’m a veteran of the online debates c. 2000 about EMU, debates which were too often a disgrace because of the abuse directed against any who dared post critical commentary about the Euro while ignoring the growing academic literature on the hazards of monetary union if participating economies had insufficient convergence and, why, in particular, Britain didn’t fit for solid technical reasons. This was notably because Britain’s housing market, with a preponderance of variable-interest mortgages, would make Britain’s economy much more sensitive to changes in interest rates set by the European Central Bank (ECB).

The implication was that the British economy would become more volatile and bear the brunt of ECB inflation targeting – see Walter Eltis: Britain, Europe and EMU (2000). That analysis was simply ignored by the Europhiliacs who bulldozed ahead claiming that commercial ruin awaited any EU country who stayed outside EMU.

John Monks, then Gen Sec of the TUC, went around the country saying how wonderful signing up to join the Euro would be for home owners in Britain buying their homes on mortgages because of the lower interest rates then prevailing in EMU. Christopher Huhne was actively pressing the cause, hence his part of the book with James Forder: Both Sides of the Coin (Profile Books). Christopher Johnson, then chief economic adviser to Lloyds Bank, produced a book: In With The Euro Out With The Pound (Penguin) – I had an “exchange” with him at a civil service seminar.

Looking now at the deep malaise in EMU, we can perhaps appreciate how wrong-headed they were. Comparing Canada with America, we can see that is easily possible for two large economies to function side-by-side in harmony with a flexible exchange rate between their respective currencies while each retains full national autonomy over fiscal and monetary policies.

In the news tonight, Sarkozy has taken to hurling puerile insults at Cameron: “Obsessive David Cameron acting like subborn child”:
http://www.metro.co.uk/news/884925-nicolas-sarkozy-obsessive-david-cameron-acting-like-stubborn-child

That’s par for the course – avoid the diagnostics of what’s causing the EZ malaise and resort to abuse instead.

Those running the EZ dare not admit to insufficient convergence among EMU national economies because that would amount to admitting a fundamental flaw in monetary union and the need for a fiscal union with a system to transfer funds from EZ countries with chronic trade surpluses to countries with chronic trade deficits to compensate for the depressing effect of trade deficits often amounting to several per cent of national GDP.

No wonder the fiscal discipline rules of the EZ Growth and Stability Pact were so sidely breached – we obviously can’t depend on EZ governments to stick by their mutual agreements.

57. Frances_coppola

SMFS

You might find the OECD’s Fiscal Network website useful.

This paper on the difference between tax sharing and intergovernmental grants in federal systems is informative: http://www.oecd.org/dataoecd/8/22/43072896.pdf

58. Frances_coppola

SMFS

sorry, OECD Fiscal Federalism website link is here. http://www.oecd.org/department/0,3355,en_2649_35929024_1_1_1_1_1,00.html

This paper on the effects of the current crisis on sub-central government is also informative – not least because it demonstrates how very simplistic is your view of the way fiscal unions work: http://www.oecd.org/dataoecd/21/4/44729769.pdf. The current EU has almost none of the characteristics of a fiscal union as depicted in this paper, and the proposed “fiscal union” wouldn’t be much closer. Note the very last line in the paper, about the reliance of US states on federal funding. That’s what’s missing in the EU and in the Eurozone proposals.

@43 SMFS

“However the North and the Celts continue to vote for Parties committed to that centralisation so it is their fault too.”

Eh? Are you honestly that ignorant, or is it just that you choose to ignore facts when they don’t suit your worldview! The Scots just elected a majority SNP government… how does that equate to a desire for centralism exactly? Even when “the Celts” delivered Labour votes that had to be weighed rather than counted, it was just as often a fairly desperate measure to keep the Tories out, rather than a slavish desire to see Labour win.

The Tories are awfully keen to point out how undemocratic the EU is, and the dangers of centralisation in that context, but peculiarly deaf to calls for decentralisation and/or devolution nearer to home. That hasn’t worked too well for them in Scotland or Wales has it? Labour in Scotland got a good kicking earlier this year because people wised up and realised that New Labour were still calling the shots in the Scottish Labour Party, and they wanted nothing to do with it.

Britain distancing itself from the EU, or even leaving, will be manna from heaven for the SNP, as there is no guarantee that the Scots.. already seeing the benefits of giving both the Tories and New Labour a good kick in the arse… will be willing to follow the UK into the wilderness.

Galen10

None of that gets to grips with the fundamental flaws in EMU when the participating economies have insufficiently converged. You need to ask what happens when an EMU economy has an increasing trade deficit and is unable to devalue a national currency to restore competitiveness because the national currency has been locked into the Euro.

This habitual tendency to look at Eurozone issues from a political perspective ignors crucial economic analysis of faultlines. The result is that the EU summit has failed to come up with solutions. The proposed EU Fiscal Union as a means of inflicting punishment for infractions of a code for fiscal discipline will not resolve the problem of the depressing effect of large trade deficits. The EZ already has such a code – the Growth and Stability Pact of 1995 – which was widely breached, including by France and Germany. EZ governments can’t be relied on to stick by mutual agreements.


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