The Great Debate UK
Hypocrisy piled on humbug
The row over bankers‘ pay and honours has presented the depressing spectacle of British public life at its nadir, with hypocrisy piled on humbug.
On the one hand, we hear bankers and their apologists arguing that their rewards are required to keep them from running off to sunnier climes, which prompts a number of questions. First, when bankers claim that they have to be paid a fortune in recognition of the size of the organizations they run, we may well ask: how many banks of this scale are there in the world today? How many are so hungry for skills like those of Britain’s bank bosses that they are willing and able to offer these sorts of rewards?
Three or four, maybe, at most – after all, several of the world’s largest banks are now owned by the Chinese Government, so they are unlikely to want a British boss any time soon, and the others do actually have a full management complement anyway. By definition, the number of vacancies at this level is extremely limited, so the danger of an exodus of top British bankers is much exaggerated.
In any case, does it really matter?
After all, even before the crash, there was quite a lot of sniping at high City payoffs and we were told at the time that the outrageous salaries and bonuses were needed to secure the services of people like (Sir) Fred Goodwin et al – and since then we have had ample opportunity to assess the true value of their high-price expertise.
Is it really being suggested now that the banks collapsed because pre-crisis pay rates were insufficient to attract competent CEO’s?
Or is the argument that, if they had paid less astronomic salaries, the banks would have lost even more money than they actually did in 2008-9?
The EU Summit was more farce than tragedy
By Laurence Copeland. The opinions expressed are his own.
We have now seen a series of French ministers and even the Governor of the Banque de France behaving like a footballer trying to bully the referee into booking his opposite number – impressive teamwork, but nul points for dignity.
Do they actually believe what they say? Surely at least the Governor knows that any comparison between the predicaments of Britain and France is crazy.
I am certainly not underestimating the gravity of the problems facing the UK economy. British productivity growth was never better than insipid, we run a near-permanent balance of payments deficit and Gordon Brown’s public sector binge would on its own have left us with a crippling debt burden, even before you add on the cost of continually bailing out our obscenely inflated banking sector. The bottom line is a debt-to-GDP ratio more or less the same as that of France, and an economy that is in at least as much of a mess.
Nonetheless, as far as our credit rating is concerned, all of the similarities are irrelevant beside two highly significant differences.
The first and most important difference between France and Britain is euro zone membership. After a decade of living in wonderland, the bond markets and most politicians outside France are finally focusing on the critical distinction between countries which have control of their own interest rates and exchange rates, and those inside the euro zone whose control is limited by their share of the votes in the ECB governing council. It is surely no coincidence that the UK, USA and Japan, three countries with little in common except their mountainous debts and their freedom to print their own money, are still able to borrow at rates below those of Germany.
Secondly, it is nearly a year since George Osborne mapped out the route back to a sustainable level of debt and, for the moment at least, the markets are convinced the UK Government will not waver, especially as it need not face the electorate again until 2015.
The grandiose but utterly unnecessary Treaty of 27 was intended to divert attention from the fact that the people who really should have been doing something effective to deal with the eurozone debt crisis, namely the 17 eurozone members, were incapable of doing so, and to show solidarity with Sarkozy’s election campaign, er, I mean, the great European project.
The euro is on life support, and the on-off switch is in Frankfurt
By Laurence Copeland. The opinions expressed are his own.
The short term solution to the problem of how to manage the euro zone crisis may now be right there in front of us. The central issue, as far as Germany is concerned at least, is how to reconcile bailing out the other member countries with keeping up the pressure on them to put their fiscal house in order. Quietly, without any official recognition of the fact, the ECB has taken charge of the situation and is now effectively running fiscal policy for most of the euro zone by simply buying enough Greek, Italian, Spanish and maybe French bonds to keep yields from going too high, but not buying so many as to reduce yields to anything like comfortable levels.
Moreover, treasury officials in every country will be only too well aware that what the ECB giveth, the ECB can take away. Any relaxation in austerity regimes can always be countered by an end to ECB purchases or even by ECB sales in the secondary market, driving yields back up in the space of a few minutes to 7%, 8% and beyond. In short, most of the euro zone members are now on a life support machine, and the on-off switch is in Frankfurt.
As a temporary situation, this suits everyone. Politically, it is far more acceptable both for Germany and its clients to conceal the fact that power in Europe is now shared only between Berlin and Frankfurt. Moreover, it conceals from the German electorate that the dreaded Transfer Union is already up and running, because they are in fact subsidising their neighbours via the ECB. With transparent subsidies ruled out – the European Financial Stability Fund has failed to get off the ground and Frau Merkel is unwilling to contemplate a Eurobond – the transfers are being made in the most opaque way possible.
Notice also that the current state of affairs is entirely consistent with developments in Greece and Italy, insofar as it means that technocrats are now running the euro zone too. For Europe, it is the culmination of the trend to unaccountable government that stretches all the way back to the Treaty of Rome in 1958.
Convenient as the current ad hoc arrangement may be, however, I suspect it will not hold up for long, though it will probably get us through to the New Year and beyond. Holding a gun to someone’s head only works if you are really willing to pull the trigger. If, or more likely when, one of the ECB’s clients calls its bluff by refusing or simply being unable to implement additional austerity measures for fear of bloodshed in the streets, a decision will have to be taken in Frankfurt and Berlin. Either stop buying bonds and run the risk of being seen to precipitate a collapse in both the economy and possibly in law and order too, or alternatively surrender to moral hazard, abandon any hope of controlling the money stock and accept inflation as the inevitable long run consequence.
Germans who believe, with their Chancellor, that fiscal integration is the ultimate answer might like to ponder the question: how would it differ from the current scenario? Would it involve some kind of rules to set limits on each country’s fiscal policy? If so, they should explain how those rules could be made any more effective than those in the Maastricht Treaty, which even Germany itself flouted. Some in Germany are said to favour fines for overspending countries, which demonstrates that there is in fact such a thing as a Teutonic sense of humour. (Imagine imposing a fine on Greece today. How do you levy a fine on any country, let alone one which is already bankrupt and which you yourself have to bail out? Presumably, Germany would have to pay Greece’s fines too?)
Thank you for this good summary of the current situation of the Euro zone. I agree with you that the Transfer Union is already operating, and that, while this may work for some time, the planned construction of a fiscal union will not be stable in the long run.
In the past, I believed an “United States of Europe” would be a reachable goal, and that the Euro (and especially the exptectable Euro crisis) would be the major tool to reach this goal. In a way, both seem to become true now – the Euro crisis as anvil to forge the Union. But the internal tensions in countries ruled by a German-led Fiscal Union are bound to break into the open through radical political movements, like the Front National in France or the Lega Nord in Italy. The later the final divorce comes, the higher will be the costs.
One needs only to look at history to see that state unions of different peoples, and with an inequilibrium of power and size, never are stable on the long run. Unless the largest 4 EU countries break up voluntarily (which will not happen), the EU should better remain an alliance of independent countries, not trying to convert itself into an U.S.-style Union.
Put the euro zone out of its misery
By Laurence Copeland. The author is a professor of finance at Cardiff University Business School. The opinions expressed are his own.
Let me make a wild guess – just a hunch, a vague feeling, the kind you get when you hear a football club chairman say “the manager has my full support”. My forecast is that the IMF monitors currently poring over the Italian government’s books will uncover a black hole somewhere, probably one big enough to swallow the euro zone, and the discovery will leave them as shocked as Captain Renault when he found there was gambling going on at Rick’s Bar in Casablanca.
My gut feeling is based on a deeply rooted suspicion of Italian statistics dating back to the early 1970’s, when I got my first job in academic life, as a research assistant in the University of Manchester. In that more tranquil era, it seemed possible to uncover a number of stable relationships between macroeconomic variables for all the other countries in the industrial world, but somehow never for Italy, which was always the outlier. Suspicion of the data is reinforced by the well-established claim that as much as 25 percent of Italy’s production is in the economia sommersa, the underground economy, exempt from taxation, unmonitored and unregulated (in fact, the Italian authorities have sometimes seemed to take a pride in its size, notably in 1987, when by a sleight of the statistician’s hand, Italy’s GDP was deemed to have overtaken that of Britain, thanks to an overnight reassessment of the scale of the country’s black market).
Even if Italy’s predicament is no worse than it appears from official statistics, the outlook is grim. It is hard to imagine a Berlusconi-led government successfully enforcing a serious austerity regime, but neither is it likely that an opposition dominated by ex-Communists could succeed where he failed. Moreover, as with Greece, those who are enthusiastic for a non-partisan administration made up of technocrats forget that mustering support in parliament is not enough. Restoring Italy to fiscal health will need a government able and willing to enforce spending cuts, raise taxes (or at least collect them more vigorously) and deregulate labour markets in the face of bitter and potentially violent opposition from trade unions, the professions and probably much of the public. It is not obvious to me that a government of supposedly neutral technocrats is better placed to achieve all this.
With a total debt of nearly two trillion euros, even a relatively modest haircut for Italy would be ruinously expensive to the European Financial Stability Facility (EFSF), and a Greek-style coiffure of 50 percent or more would use up all the additional funding promised (but not yet delivered). Moreover, there would be devastating consequences for the creditworthiness of the core countries — France in particular, but even Germany, and of course for all the major European banks.
For months now, commentators have been urging the EU authorities finally to get ahead of the curve, something they have repeatedly failed to do in the case of Greece. They began by refusing to admit the need for a bailout, then denied the inevitability of a partial default, then were forced to recognise the need for a 20 percent haircut, and have now been reduced to begging Greece to accept a 50 percent writedown, an offer which will still leave the country facing a crippling debt-to-GDP ratio for a decade or more and which may be rejected anyway — in which case we will end up with a disorderly default after all.
The same sort of slow-motion trainwreck with Italian debt will sink Europe’s (and possibly the world’s) banking system – yet the authorities in Brussels and Frankfurt seem set on that course. To those who ask whether we face another Lehman Brothers, the answer is yes – and probably worse than in 2008.
Having enlightend us with why it should be put out of its misery, now show us how?
Its that HOW that inflicts pain that no-one is willing to bear – perhaps a glance at your colleagues graphics might help illuminate that -
http://graphics.thomsonreuters.com/11/07 /BV_STRSTST0711_VF.html
Capitalism and democracy under threat from euro zone crisis
By Laurence Copeland. The author is a professor of finance at Cardiff University Business School. The opinions expressed are his own.
It takes quite a lot to make me feel sorry for politicians, especially the European variety, but I must say that Nicholas Sarkozy and particularly Angela Merkel have a right to be livid at the news that the Greek government now proposes to hold a referendum on whether they will agree to be given another gigantic dollop of aid. Having only reached agreement (of a very vague kind) at last week’s summit in the early hours of the morning, you can imagine how the French and German leaders must have felt when they discovered that their marathon negotiating sessions may all have been in vain. It seems the Greeks are now too wary of foreigners bearing gifts to accept their largesse without weeks or months of prior deliberation and debate.
The acceptance of the referendum proposal is apparently not a foregone conclusion, which is just as well, since it is plainly insane.
First, consider the wording of the referendum question. Opinion polls appear to show that Greeks remain keen on staying in the EU (and maybe even in the euro zone), so as things stand at the moment the outcome could be a majority in favour of rejecting the deal, but staying in the EU. But is this option still open to Greece? If not, the Greek government could end up with a mandate to follow a road that is already clearly blocked.
To pre-empt this scenario would require some sort of clear statement from Brussels about whether they would be willing to allow Greece to stay in the euro zone and/or EU if it rejected the latest round of austerity measures.
Even supposing the details of the referendum are sorted out, what then? How long is all this supposed to take? The vote could hardly go ahead before mid-January at the earliest. What on earth does Mr Papandreou think will be happening in the markets in the meantime? Does he think they will simply sit on their hands and wait patiently for Greek democracy to grind through the gears?
In reality, the momentum of this crisis is so inexorable that you can be quite sure that the deal currently on offer will have become totally irrelevant by the time any referendum is held, if the offer hasn’t anyway been withdrawn by the time you read this.
Spot on.
One thing I do find very strange in all this is the stubborn over-valuation of the euro. One can only assume that if and when the innumerable problems of the eurozone are resolved, one way or another, it will climb even further, exacerbating the already shaky trade situation of all its less efficient members.
Yet throughout all this, I don’t think I’ve heard a single EU politician or bureaucrat even express a desire for the currency to fall somewhat. One can only draw the conclusion that none of them really thought this through, and the only possible explanation for that is that they were all so fanatical about their beloved “European Project” that they couldn’t think straight.
A 6-1 defeat is not a draw
Michael Gove trying to laugh off Monday’s rebellion by 81 backbenchers sounds like a United supporter arguing that 6-1 was more or less a draw. For all the excuses, he can’t hide the fact that the government’s position is full of contradictions.
On the one hand, the PM has added his voice to the chorus calling for the euro zone to turn itself into a monetary-and-fiscal union, a proposal which certainly goes with the grain of the crisis. The idea has the support of the Americans and would probably be warmly welcomed in Asia too. In fact, it has great appeal everywhere except in the euro zone itself, where the main protagonists themselves have got a severe attack of cold feet.
And no wonder – they are being asked to accept what amounts to full economic integration: a huge decision taken more or less on the hoof, in the space of a few weeks, whereas they are only too well aware that it took the best part of a decade of consultation, summits and referenda to overcome the opposition to monetary union – and in the end their victory really was almost a draw.
However, fiscal integration is by no means a done deal, nor is it remotely certain that fiscal integration will solve the immediate problem, given that the crisis has already reached France and is directly threatening Germany’s own creditworthiness. But if such far-reaching changes are afoot within the euro zone, you would expect the government to be putting forward a clear vision of where it sees Britain fitting into the new architecture, rather than merely providing unsolicited advice which is bound to be both ignored and resented.
If fiscal integration does go ahead, it will confirm the two-tier model of Europe, with an inner core of countries run by a single government controlling all aspects of macroeconomic policy (and most of microeconomic policy too), and an outer tier consisting of… of what exactly?
This is a real opportunity for Britain to reshape its place in Europe, as the largest of a bloc of countries mostly on the periphery that are part of the single market, but which retain full economic sovereignty – control not only of their own monetary and fiscal policies, and their own currencies (and hence interest rates), but also of their own tax rates and their own regulatory authorities too.
Notice this is not a total retreat into a customs union. Apart from the fact that there is more – though not a lot more – to the EU than economics, it would still allow free movement of capital and, more controversially, of labour. Ending the latter would no doubt be popular, but stupid for a number of reasons. In the first place, most of the problems arising out of immigration are associated with arrivals from outside Europe. Secondly, in reality it is almost impossible to stop immigrants arriving, legally or illegally, even from outside Europe, let alone from, say, Poland or Slovakia. Thirdly, on purely pragmatic grounds, if we are ever to get what we want in Europe, we need all the support we can muster – and the Eastern Europeans will be far less supportive if we slam the door in their faces.
Salvation through inflation: The British way out
By Laurence Copeland. The opinions expressed are his own.
Accusing policymakers of acting out of sheer desperation is a pretty standard jibe by critics trying to put them off their stride.
Unfortunately, the latest round of QE came wrapped in comments from the Governor of the Bank of England which amounted, more or less, to saying: “Look! I’m staying calm – but it’s taking a hell of an effort, believe me!”
As the world economy teeters on the brink of relapse, Mervyn King’s action amounts to saying: “Forget the danger of inflation… we’ll settle for anything rather than a rerun of 2008”. He and his opposite numbers in Frankfurt and Washington are haunted by the fear that the history books may say the 21st century’s Great Depression happened on their watch.
The latest measures are probably not going to work and may make matters worse because the mess we are in is a matter of the distribution of real wealth – positive and negative i.e. net worth – and hence is unlikely to be improved very dramatically by printing money. Specifically, the economy is grinding to a halt because, internationally and domestically, even locally, those who save have accumulated wealth which they would normally feel inclined to lend or invest. But since the majority of would-be borrowers are already indebted to unprecedented levels, and investment opportunities are unattractive given that the output they generate would need to be sold to the same overindebted consumers, wealthowners are opting for the relative safety of Government debt, guaranteed bank deposits, gold and even, it seems, blue-chip real estate and agricultural land.
Like the self-similarity of a fractal, this same pattern is repeated at the largest and the smallest scale.
At the global level, the largest creditors – China and its neighbours, the Gulf Oil producers, Germany – feel understandably reluctant to keep adding to the trillions of dollars they have already lent to the debtor countries, nor are they overwhelmed by the attractions of direct investment in these countries, especially as the juiciest opportunities are often ruled out by political considerations (imagine a Chinese bid for Intel or Apple, for example).
Governments have a tendency to pass their mistakes (as profligacy) on to those of their subjects that are easiest to make victims of. Any similarity to extortion is purely accidental. Inflation is such a nice way to go about: silent and diffuse. And shameful.
The euro zone marriage is over
By Laurence Copeland. The opinions expressed are his own.
Under the Arc de Triomphe, tourists can gaze up at the engraved list of Napoleon’s great victories: Austerlitz, Jena, Wagram… Perhaps a similar triumphal arch should be built in Brussels to commemorate the string of victories won by a tiny band of heroic Eurocrats over the mass of their combined electorates: Rome, Maastricht, Lisbon, Wroclaw, and now Berlin, where, to nobody’s surprise, the integrationists in the Bundestag have easily seen off the opposition to their plan to bolster the EFSF. Cue the now-familiar backslapping in Europe after each of their knife-edge victories over the forces of democracy.
The starting point for these Eurocrats/integrationists is that the popular will is simply an obstacle on the road to the ultimate destination of a United States of Europe. Whenever they encounter one of these inconvenient roadblocks, they fume, argue among themselves about the merits of alternative routes until they finally swerve triumphantly round the obstacle, congratulating each other for their ingenuity and skill.
The trouble is that this game gets more dangerous at each stage. In the present case, it is reported that three out of four German voters is opposed to supporting Greece and co., and they’ve not even started paying for it yet. Moreover, it is not as though the largesse is going to create a reservoir of gratitude alongside the Mediterranean – far from it. Judging by reactions in Greece, the outcome will be a legacy of bitterness for decades to come.
It is important to realise that arguments about the cost of saving the euro zone are ultimately sterile, because under current conditions there is no limit to the commitment that the Germans are being asked to make – a point which is not lost on people in Germany. The €440bn additional funding for the EFSF sanctioned by the Bundestag is simply a first instalment, sufficient to cover the cost of propping up the bond markets on the assumption that it will prevent contagion from the Greek imbroglio – which, of course, there already is aplenty. It is several months too late to stop the panic spreading beyond the original porcine four – Portugal, Ireland, Greece and Spain – to engulf Italy and even to some extent France. Back-of-the-envelope calculations (which is as much as it is worth doing) suggest that the amount needed could be of the order of €2 trillion or more, equivalent to about 80 percent of Germany’s national income.
This may seem an enormous sum of money, but it is merely the downpayment on a potentially unending stream of subsidies in the nightmare transfer union scenario, as the Greeks slide back into their old, profligate ways, the Spanish continue to resist labour market reform, and the Italians replace the Berlusconi government with an administration stuffed with ageing ex-Communists.
How long will the Germans carry on financing this orgy? Like a bishop at a Berlusconi bunga-bunga party, they will either explode in a destructive rage or find the temptation to join in irresistible.
completely agreed with these arguments. I would add one distinction to the mix: most people belief of the efficacy of fiscal stimulus is based on the 30s. These were times when governments were worth 30% of the economies. Nowadays, governments such as France are worth 56% of the economy. The game has changed and they cannot go on expanding from that. (but as the article says, the political will to unfurl government is not there. people on the continent are simply not ready.)
Geithner’s fudge won’t kill the euro zone debt Ouroboros
The frosty reception given to US Treasury Secretary Timothy Geithner at the ECOFIN meeting in Poland last week tells you all you need to know about what is wrong with the EU. The hostility was directed not at the feebleness of the advice he had to give, but at the right of an American passport-holder to offer any advice at all to the policymaking elite of Europe, who are so obviously capable of handling the crisis themselves without any outside assistance.
As far as I can tell, Geithner’s proposal amounts to leveraging the EFSF so that it can be inflated to a level sufficient to assure the markets that it has the resources to do the enormous job it has been given: bailing out Greece, Ireland, Portugal, Spain, probably Italy and maybe even France at some point.
So, as ever, the American solution to the problem of excess leverage is… even more leverage. Financial wizardry is what Europe needs now – after all, it worked so well last time around… Risks? What risks? The additional borrowing will be guaranteed by the ECB, whose credit is cast-iron, so problem solved. Why did it take them so long to come up with an answer? If only it were so easy. Ask yourself: why is the ECB so creditworthy in the first place?
Not, in the final analysis, because its borrowing is backed by the governments of Greece or Portugal or Spain or Italy, nor even because it is backed by the Netherlands or Finland – however fiscally responsible they may be, they are simply too small to stand behind Europe’s central bank. In a crunch (and if we ever doubted that crunches happen, we know now that they do) even French support could be inadequate, given that it is currently running a sizeable budget deficit and faces a presidential election in a few months.
No: there are two meaningful levels of support that give the ECB its pristine credit status.
Firstly, the backing of the German government was, until recently, enough to preserve the ECB’s status as Son of Bundesbank. The trouble is that Germany itself has a debt-to-GDP ratio comparable to that of Britain, and the ratio would be a lot higher if it included commitments already made and about to be made to support weaker euro zone member governments. Moreover, even if they still have the capacity to do so, it is hard to see why the Germans would want to shoulder the bailout burden in this barely-camouflaged form when they are apparently so wary of entering into a more explicit transfer union (as they call the nightmare scenario of a Europe in which they are doomed to subsidise everyone else in perpetuity).
There is a second-level backstop for the ECB, and it is the one which I suspect will be called upon in the end. Although it is subject to all sorts of nominal restrictions on its freedom of action to reflect its multinational character, which have served to prevent it ever being free to behave like the Fed, the ECB is ultimately a central bank and, as such, it can always be given the green light to print Euros in whatever quantity is required to pay its debts or simply to cover the cost of more loans. The Geithner proposal amounts essentially to freeing the ECB from some of its existing constraints and preparing it to monetise Europe’s fiscal deficits, a policy similar to that which the Obama Administration itself has pursued vigorously so as to fund massive bailouts of Fannie Mae, Freddie Mac and other basket cases, with results that have been at best extremely mixed.
Germany at the crossroads
By Laurence Copeland. The opinions expressed are his own.
Baby-boomers like me, who grew up in the shadow of World War II, have to acknowledge with gratitude that the Germany which again dominates Europe is in most respects a model democracy – multiracial, prosperous and contented. However, there is one worrying aspect of the German mentality which seems to have survived intact from its unhappy history, and it is an aspect which is likely to be tested to the full in the coming weeks and months.
From the moment when the Maastricht Treaty was dreamed up in the early 1990s to the inception of the euro zone in 1998, Germany had any number of opportunities to kill the project off and indeed, time and again, policymakers in Bonn or Berlin or Frankfurt voiced their reservations in public. The Bundesbank, in particular, with its overwhelming prestige, spoke out forcefully against what it saw as the dangers of premature monetary union.
Yet, while Tony Blair, who dared to take Britain to war in Iraq in the face of overwhelming public opposition, nonetheless baulked at taking his country into the euro zone without a referendum, and while France actually had one (which the pro-Maastricht side only won by a whisker), Germany’s leaders felt no such need. On the contrary, Chancellor Kohl famously rejected the idea of consulting his electorate on the grounds that, if the opinion polls were to be believed, he would almost certainly lose.
What is it about the Germans that makes them willing blindly to follow a leader, even though they fear he is taking them over a cliff? Am I alone in finding this a worrying national peculiarity?
I raise this question now because the problem of what to do about Greece means that Germany stands at another fork in the road. Forget the technicalities and the small print, important though they are, and focus on the critical issue of principle which precedes it: is Germany going to give in and allow some form of fiscal integration to be introduced by the front door (unlikely), by the back door, the tradesman’s entrance or the catflap? It is coming under increasing pressure to do so from all sides – euro-politicans, commentators, economists, right-thinking or unthinking members of the chattering classes – in fact, almost everyone except those who will end up footing the bill i.e. the taxpayers of Germany itself, who for some obscure reason are a lot less enthusiastic.
This may be the last chance for Germany. One shudders to think what will happen if Germans are saddled with supporting the rest of Europe in perpetuity – which is what is involved, as Frau Merkel seems only too well aware.
