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

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.

INTEREST-ING

Yesterday the head of the ECB, Jean-Claude Trichet, signalled that interest rates in the Eurozone will rise again to stem inflationary pressures.

In the UK, the interest rate is still at its record low as the country fights against a possible downturn coupled with the austerity programme.

So who has the right policy?

Clearly, in the UK, there is a high degree of inflating our debt away while cutting the deficit but what if inflation is trending? What will that do to consumer confidence? There is already clear signals that inflation is hitting the essentials - that is food and fuel - and the harvet forecasts look quite grim, possibly leading to further price hikes.

OK, so inflation is lower than the last quarter at 3.9% but can the UK survive with high prices and low growth?

Over in the Eurozone, things are less clear. Obviously tempering the heat will benefit Germany and the Netherlands but how will a strong Euro benefit those struggling in the periphery?

Finally,  there was an interesting comment by Jürgen Stark, Member of the Executive Board of the ECB,
at the “ECB and its Watchers XIII” conference in Frnakfurt today where he explicitly rejected the idea of relaxing monetary policy: "Easy money cannot and will not address the root causes of the crisis".

However, as always, there is a sting in this particular tail, I believe that to a degree Stark is right about easy money - as far as Germany and Netherlands are concerned - but as I, among others, have consistently said, for Ireland, Greece and Portugal, easy money is precisely what is needed to get them out of their morasses and they should not simply be dismissed as a "mere 6% of the euro area GDP" as EU President Herbert Van Rompuy did this morning. 

I'm sure those countries' "perspective" differs to that of the president.   

IMF

So the IMF says keep going to George and the government.

That is good for George who dismissed economists who criticised the plans in the weekend papers as "left-wing academics".

But there are still danger signs on the horizon of sluggish growth and higher inflation. On the other hand, inflation is expected to drop back to 2% next year according to the IMF.

Now whether that is because no-one will be buying anything because we are all skint or, whisper it, the Bank of England is correct and the inflation wasn't trending remains to be seen.

What ever happens next, it seems that once again we have dodged the bullet.

Napoleon said he wanted lucky generals, I wonder if the same applies to chancellors?

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?