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

MAXING OUT

With more gloomy data and markets in freefall, it is time to take stock and maybe put that credit card away.

I am a big fan of the Arthurian legends and have read various interpretations over the years. However, there is always that time when the proud King is going to be betrayed and he is going to go into his last battle and although you know that it is going to happen, there is nothing you, the reader, can do to stop it from happening.

The global economy appears like this at the moment. Like the slow-motion of a car crash, we can only look on in horror as the world approaches the buffers.

David Cameron made a telling point to the Canadian parliament this week when he pointed out that this is not an ordinary cyclical recession. Too right it’s not, mainly because we never really left the last one. Since 2008 we have been limping along, hoping that our numbers come up and we can head to the uplands.

Despite the self-congratulations of policy makers two years ago, we are back where we started where the money markets are beginning to shut themselves down to banks with heavy sovereign debt burdens, global growth is stagnating and even China seems to have reached its peak in terms of economic activity.

We are, in the words of the World Bank’s chief Robert Zoellick, in the danger zone.

But what are we going to do?

Cameron told the Canadian parliament that “it’s a debt crisis”. And debt is a problem.

In Canada, the politicians hit the debt problem during the boom times and so led to the state of the nation today where they have a more than ample war chest to offset the hazards that are on the horizon.

Essentially, Canada paid off its credit card and stuck it in a drawer and has vowed not to take it out unless absolutely necessary.

In Greece, the debate is whether to borrow even more money to service the credit card whilst being given a diet of broth and hard labour or to declare bankruptcy and start again with creditors impatiently waiting for it to earn enough money to begin to pay back its debt – if it pays it back at all.

Here in the UK we are in a half-way house where although we know that we should be paying back the debt but our family keeps demanding new shoes so we pay a little back, spend a little more and hope to inherit some money.

America? Well, America appears to be magicking up new credit cards whenever it hits its limit.

Let me make it clear to you – if you run up a credit card, max it to the hilt, do you keep spending and to hang with the repayments bill or do you cut back on your spending and try and clear the debt?

Many complain that we must spend our way out of recession but if we just keep driving up that credit card, eventually, like some European banks are finding out, the credit will stop and where will we be then?

Now, there is a risk that we will be forced into some speculative spending. But instead of some Roosevelt public spending plan, why not a tax cut? If we are going to have to use that credit card again to stimulate the economy, put that stimulus into the producers. Yes there is a risk that people will just hoard the bonus but that is what the banks did with the bailouts and at least the money will be with the private individual rather than a further expansion of the state.

On an aside, I quite liked the idea of instead of bailing out the banks, we should have just given each taxpayer £300,000 to put towards a house. Mad, but amusing and possibly effective at the same time.

At least for the moment, we in the UK are not getting more credit cards. Quantative easing (QE) is only effective in a short spell. The QE program that the Americans embarked on has had zero effect on its economic problems and may indeed have exacerbated them with doses of inflation and unemployment.

To me, the idea of QE being an effective way of managing your way out of debt is about as useful as giving a drunk a shot of whisky so they can make it to the next pub.

There is a further problem to contend with in our current situation. Uncertainty.

The markets are marking themselves to the situation at hand which is one of sheer uncertainty. We are unsure of what the eurozone is actually going to do next. With briefings and counter-briefings flying all over the place, the markets reflect this, hence the volatility.

Whichever decisions the eurozone makes, it will have to be clear and unambiguous. Whichever way they go, the markets will act in the appropriate manner but at the moment the markets are just unsure about whether Germany is going to take away Greece’s credit card or pay it off.

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?

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?