FOR THE EU IT'S NOT THE DEFECIT, IT'S DEMOCRACY THAT'S THE PROBLEM

I sussed it. No seriously, I’ve worked out the euro problem.

Economists can stop thinking about that £250,000 prize money. It’s mine.

This is what is needed to bring this horrible, dragging, sorry tale to its conclusion:

Abandon democracy.

Think about it. The reason why there is a deadlock between France and Germany is political.

President Nicolas Sarkozy is heading into elections and the last thing he wants is a ratings downgrade or even worse a banking collapse, to give succour and, more importantly, votes to Marine Le Pen.

Over in Germany, the voters are sick to death of picking up the bill for Europe and this is being reflected in the growing impatience of the coalition with Chancellor Angela Merkel who, to add to her troubles, now finds herself hemmed in by a ruling from the Constitutional Court.

And look at those glorious bureaucrats in the European Union. They get it. They also can see that democracy is preventing them from doing what they wish.

Only this week, European Council President Herman Van Rompuy warned that it was “dangerous to let the fate of the world economy depend on domestic policy squabbles within the parliament of one of the 17 [Eurozone] countries, large or small”.

In the ultimate expression of the ever-growing mission creep of the EU, he added that further fiscal discipline and economic and fiscal integration was needed with countries accepting a “loss of sovereignty for all”.

You see, Van Rompuy is a visionary. They all are.

Over in Brussels, they have worked out that those pesky voters and their domestic squabbles are to blame. Never mind that for the likes of Germany, Holland and the UK, voters are individually forking out a fortune on this corporatist dream.

Why should they have a say in the billions squandered, most probably illegally, in propping up countries and banks through the European Stability Mechanism and the European Central Bank?

And never you mind, you voters, that some Eurocrat will soon be able to come into your country and rule on the budget and spending polices of a government that you had voted in. Remember, this is all in the name of Europe.

Although I have frequently called out the Eurozone for its dithering and indecisiveness, it is actually healthy for the body politic to behave this way.

What the politicians are failing to do is to devise a plan that can be presented to the people of Europe.

If there is an argument for more German money pouring in or for French banks taking a haircut, find it and make it to your voters.

If they understand, and if they believe you, then you will be voted in again. Hiding behind “manifesto promises” or internal issues will not help you find the solution to this mess.

This democratic deficit extends to the UK.

From the Bank of England printing money, to buying bad banks and guaranteeing loans to the Eurozone, these actions have been done without the participation of the voter.

Now, of course in a representative democracy we expect our parliamentarians to represent us and take actions on our behalf.

But Europe is an area where there has been a deficit since 1975. I, and millions like me, am of a generation that has never had a say on the direction of Europe and our position in it.

I have grown up watching the Common Market mutate into the single market, European monetary union, and now a vicious land-grab on our economic policies through Tobin taxes and financial regulation.

Van Rompuy warned that the “great enemy of any project is the scheming mind that asks, '“What do I get out of it?"' in what I presume was a dig at the UK (though it could have been a spiteful poke at Slovakia whose parliament, in the first instance, had the audacity to reject the euro bailout scheme only to be forced into an about turn two days later).

Well, I think that rather than expecting countries just to keep coughing up ever more funds and devolve ever more of their national sovereignty, a government has a duty to find out what its citizens really want..

Prime Minister David Cameron introduced the Back Bench Business Committee to rule on whether popular petitions should be rewarded with a debate, and a non-binding vote, in Parliament.

Yet bizarrely, the government is lining up a three-line whip on the vote on our future with Europe on Monday, risking outright rebellion and resignations from the executive.

Whatever your views on Europe, surely now is the time for our representatives to debate freely and without party-bias.

It is this democratic deficit that eventually will kill the EU. Politicians should represent the wishes of the people and the bureaucrats should enact those wishes.

This fundamental principle is being turned on its head at the moment, but as with the economic deficit, eventually the bills can’t be paid.

In a democracy, this usually takes the form of a ballot box massacre but, as events in Greece and elsewhere have shown, it could turn into something altogether different, and more violent. We shall see.

By the way, actually there is one idea on solving the euro crisis that hasn’t been looked at – the hard ECU, but in reverse.

The Greeks float a new drachma tied to the Euro, used electronically and domestically while the Euro is used internationally and to honour debt.

Hopefully, the drachma would stabilise at its natural rate and Greece would have control over its interest rates and economic policies using the Euro as a control mechanism for the country’s eventual withdrawal from full monetary union.

Can I have my £250,000?

Originally published at: The Commentator

GOING SHORT ON POLITICIANS

With the sell-off happening and European banks taking a hammering, it's good to see that the short-selling ban has worked...

Oh hang on, it hasn't has it. The problem with politicians is that they look for solutions that aren't there.

Such is the case with the short-selling ban. Short-selling was never a cause for the collapse in 2008, that was down to bad debt, bad credit and a ceasing up of liquidity. 

Short-sellers are the canaries in the mine, the problem was that far too many thought they were (to mix the metaphor) the message not the messengers.

SHIFTING SANDS

Isn't it always the way, you take your summer break and all-hell breaks loose, be it US downgrades, market runs or riots on the streets of London.

However, the roller-coaster still has some way to go. 

Last night, the Franco-German summit failed to convince markets that there was an action plan in place to save the eurozone, indeed, proposals were resurrected to put fear into the stock exchanges with financials particularly taking a hit this morning. 

As I have said before, a Tobin tax cannot work unilaterally. Money moves and in this electronic age money can move very quickly. Despite the individual costs being relatively low, it will add up and traders will shift to more friendly markets - in particular the burgeoning middle east bourses, I suspect will benefit, as will New York. 

From a UK political perspective, this raises an extremely interesting scenario. The Conservatives have, for the most part, successfully clamped down on the European argument in their own party which threatened to overwhelm them with an image of being a one-issue party. Also, despite being portrayed to the contrary, Labour is also riddled with divides over Europe, indeed until the mid-80s it was Labour that was vehemently opposed to European union. 

So the two biggest parties in the UK will find themselves in possible internal civil war with MPs from both the left and the right of the spectrum rising up against a further erosion of financial independence. The Lib-Dems will, inevitably, shift in the sand to the most politically convenient outcome for their party as personal manifestos make perfectly clear around the country, there is no real uniformed Lib-Dem policy, just convenient politicking. 

And yet the question remains of whether there is anything the government can do to stop this tax? The Lisbon Treaty is an enabling document, that is it can continually be changed to suit circumstances. However, it has yet to be fully tested so it will be interesting to see what, if anything, can happen if the UK becomes a blocking point.

The so-called lines-in-the-sand that all UK governments boast about are about to be swept up in the wave of European tax proposals and it could mean that the only solution is the one that all leaders fear, the eventual departure from the EU to the European Free Trade Area by the UK.

Implausible? Possibly. But when you consider that the Tobin tax would essentially tax London which is not in the eurozone to bailout the eurozone and possibly kill-off a key component of the UK economy, the question becomes one of what risks are more important to the politicians?

BANKING ON A STORM

In around an hour and a half's time, we will see how stable European banks really are with the publication of their stress tests.

It has been kite-flighted that around 10 banks will fail but analysts will probably play spot the debtee with the banks having to disclose their exposures to debt.

It is no wonder that the result are coming out after the UK and European markets have closed because there could be some vicious figures floating around out there.

THE PRESSING ISSUE

Yes the scandal at the now defunct News of the World is important and the cross-party moves against News Corp are impressive but surely there are more important issues that should be looked at the moment?

A quick glance at the BBC's website - still the information portal of choice for the general public - shows that BSkyB is still the top story while unemployment and IMF/Italy come in at second and third place.

At a time, where Euro-leaders are in a spate of indecision, doubts grow over the state of the UK recovery and worrying signs that China is slowing down, surely these are more important business issues than the behaviour of some hacks over at Wapping?

The risks to the global economy are in stark contrast to the risks to Murdoch's empire and there should be concern that the general public will not be fully informed if the crunch does happen, because if it does, it is not going to be pleasant.

Despite this, I will make one comment about the phone-tapping scandal - one of News International's main competitors which is loving the whole shebang is DMG, which published the Daily Mail, which was the biggest offender for phone tapping according to the research that the Information Commissioner did on the topic - go figure.

EU WHAT?

The Eurocrats have done it again.

Showing a canny lack of logic, they have, to quote Baldrick, come up with a cunning plan.

At a time when the pips are being squeezed everywhere, the EU has proposed not only a rise of 5% in their budget but also a Tobin Tax.

Yep, one of the engines of recovery for Europe in the shapes of Frankfurt and the City are going to get hit by a trading tax.

Although the individual amounts may be miniscule it all soons adds up and do you think major players are going to keep full trading here rather than going to another country?

The problem with Tobin taxes is that they will never work unless all territories, and I mean all territories, adopt the tax.

If this goes through, the playing field has become extremely uneven for European players.

RATING EUROPE

So moves have begun to create a rating agency in Europe to balance against the US top three - Fitch, S&P and Moody's.

As I wrote in the last Financial Risks Today, there has been a lot of anger against these agencies but at the end of the day, I honestly believe that if you just go on what an agency says and you fail to do your own due dililgence then, ultimately, it is your own fault.

Yes, there are issues over conflict of interest but does anyone honestly know a better way of payment?

Bizarrely, it can be claimed that the introduction of Fitch created the competitive environment that resulted in the agencies possibly giving kinder ratings than they should have.

Yet competition is the answer?

Yes, the agencies made errors, which the fully accept, but will the creation of a European agency help and will it be truly independent?

I hope so and to answer my own question - competition is healthy, as long as it keeps the competitors honest.

THE END OF THE BEGINNING?

In the space of 24 hours the Greek government has escaped a vote of no-confidence

So far so good.

However, Allied Irish Bank has effectively defaulted and think tank Open Europe has called on the IMF and Europe not to give Greece a second bailout - instead manage its default and restructure to scale down the event's impact.

AIB's credit event is fairly minor for the bank, not unexpected and for a very small tranche of senior debt.

However, it calls into question what the scope of Greece's CDS spread will be? How many underwriters will be affected if Greece defaults and CDS are activated - indeed, will the CDS be able to cover the default?

It is now known that UK banks have been shifting their exposures away from the Eurozone and the Treasury is holding emergency talks about what to do if contagion spreads.

The problem now is what will happen? How bad is it going to get? Open Europe firmly believes that even a second bailout will just delay the inevitable and the markets appear to agree with Greek spreads heading even higher than before.

We are in new territory every day it seems and the actions of both banks and countries will be vital if the global economy is to avoid going down the pan.

In the words of Winston Churchill (I don't know if Goodwin's Law applies to Winnie):

"Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning."

A tad hyperbole perhaps, but as we face this uncertainty then that view could be more pertinent than any of us realise.

INFLATING A RECOVERY

I've spoken about inflating your way out of debt before but I was a Charteris Treasury Porfolio Managers seminar yesterday and a few things stood out for me from its Chief Exec and Financial Risks Today contributor Ian Williams:

1) Globally we are in boom time. Ok, the barely breathing corpses of the UK, US and parts of Europe are not but essentially things are looking good elsewhere.

Of course there has been a transfer of wealth which began when factories starting shifting to China and India, but the big question for the UK and others is what do we do to keep up with the burgeoning economies of the BRICS?

2) The US is in trouble, serious trouble. Yeah I know, what's new? But, think about it, there is around $2bn (£1.22bn) floating out there because of QE1&2 and a possible third on the way. This in itself is feeding inflation through the commodities pricing but what happens if the US goes into recovery?

What does it do about the money? It can't easily take billions out of the economy without risking a recovery but at the same time, that unprecedented amount of money sloshing around the system will inevitably feed...yep inflation.

So is the States damned if it does, damned if it doesn't?

3) Oh, joy. According to Williams, we are yet to be at the top of the gold cycle.

We've still got someway to go - 2020 to be precise if the modelling is accurate.

ECB CAN GO BANKRUPT?

Open Europe is a think tank with grand ideas - namely one of a transparent Europe. Now bear in mind that the EU hasn't had its books signed-off in what seems like forever, I applaud organisations that are seemingly on a hiding to nothing, you know like the Football Association and Fifa.

However, in A House of Sand, Open Europe warns that the European Central Bank (ECB) could lose its capital base with just a 4.25% loss on its loans to the periphery Eurozone countries.

Now I do have a small issue with this estimate...namely that there isn't a chance in hell of the ECB going essentially bankrupt. Too many politicians and banks have an interest in this working. All central national banks support the ECB and, at the end of the day, the taxpayer will be called on to bailout if the unmentionable happens.

And hasn't that always been the case?

A MINISTRY OF FINANCE - REALLY?

Apologies but this is a gift that keeps on giving.

Greece is in a terrible state, Ireland and Portugal would dearly love some of that Quantative Easing that we and the States have indulged in and German is worried that its economy could overheat.

So not really the most ideal time to call for further centralised monetary controls and a ministry of finance is it Jean-Claude?

CURRENCY

In an ominous statement, Greek officials have warned that either Greece reforms its economy and makes sever cuts or it should return to the Drachma.

Now, that may not necessarily be a bad thing for Greece to do.

With control of your own currency, governments can, and do, use monetary policy to ease the deficit problem - re: UK - but without that control, there are very limited things that a government can do.

In addition there is the issue of what is the natural balance for a country.

It seems that the natural balance for Dollar/Sterling is between 1.45 and 1.65. Apart from a few blips, this range appears to be the norm as far as Forex is concerned.

Indeed, one of the major issues for the UK when it was in the ERM was that its peg to the Deutschmark was too high and the economy paid the price.

Some in the insurance industry have just come back from a golfing jaunt business conference in Spain and complained about the price of beer.

For years, Spain, Greece and Portugal were the destinations of choice, in part because of their relative cheapness after currency conversion. However, following the Euro, many noticed how much prices had gone up. Now, there was a sleight-of-hand mark-up in prices but also the currency was linked with that powerhouse Germany so prices went up after conversion.

If Greece does return to the Drachma, not only will it return to having a degree of control over its economy but in addition, prices will fall and tourists will return in their droves.

Is that necessarily a bad thing?

MARKET JITTERS

So the US has joined Europe in sending out the smoke signals over the continuing concerns over PIGS in general and Greece in particular.

With rating downgrades for Greek and Italian debt and the hammering that Spain's ruling socialist party received in the local and regional elections, understandably people are worried.

The key will be what the Greek government decides to do later on today as debt owners wait and see
whether the promise not to "restructure" comes to fruition.

However, as is usual in politics, once something is denied three times then usually it will come true so we could be in for some interesting times ahead.