Friday, 9 December 2011

Cameron Relegates Britain To Third Division

Anyone who believed that the crisis in the EU was not political should have been disabused of that belief over the last 48 hours. What stands in the way of a deal which would create the kind of political and fiscal union, and from there the issuing of EU Bonds backed by the ECB, is political wrangling between the member states, each of which has attempted to look after its own national interests – which should not be overestimated because the national interests of each country depend upon a resolution of the financial crisis and the promotion of a strong EU economy – and has had to have an eye on its own Party members, and electoral support. That has been one of the main constraints on Frau Merkel agreeing to the kind of measures necessary to resolve the situation. But her problems were as nothing compared to those faced by Cameron. One TV reporter described Cameron's position as being like someone turning up to a wife-swapping party without a wife!

Cameron had absolutely nothing to bargain with. From the beginning Britain has had a stand-offish attitude to the EU, of which it is nominally a part. British politicians of all parties except the Liberals, have reflected the continuation of Little Englander, Nationalism in their attitudes to Europe. That is one reason that, the gutter press have been able to whip up their ridiculous anti-European stories, and stoke Nationalistic sentiment. Britain was outside the Eurozone already, and Cameron had even taken the British Tories outside the umbrella of the Centre-Right, European People's Party group. Instead he had linked the Tories up with all sorts of weird politicians from Eastern Europe that in Britain would have been on the neo-fascist fringe.

The extent of Britain's isolation was demonstrated by the fact that of the 27 EU members, 23 had signed up to the deal whilst, 2 more said they would consult before signing. That left just Britain and Hungary refusing to sign the deal. This morning it now looks like even Hungary will sign. As one commentator put it, its not so much that we now have a two-speed Europe, but that we have Europe occupying one large house, and Britain being consigned to the attic like some relative everyone wants to ignore. Britain's influence has been gradually on the wane, anyway, now Cameron and the Tories have ensured that it will be completely marginalised.

But, it was again politics not economics which determined that. In reality, Cameron was put in a vice. If he agreed to the deal, then it was clear that the Tory right-wing would have demanded a referendum. If Cameron had refused that, then the backbenchers would have forced a vote as they did recently. Cameron would have had to rely on Labour and the Liberals. The Tories may well have split with an increasing number defecting to UKIP. The Liberals are already dead as a political force as a result of their Coalition with the Tories, and their abandonment of their positions on Tuition Fees, Cuts etc. that necessarily flowed from it. Such a split in the Tories would have saved the Liberals, as the Liberal MP's would have then merged into the rump of the Tory Party, but such a split would have largely destroyed the Tory Party too. The other side of a split of the Right to UKIP would have meant that the right-wing vote would be split in a similar way to what happened to Labour after the SDP was established.

But, having vetoed the deal, Cameron has now just further isolated Britain, and given further encouragement to the Eurosceptics to press further for Britain to leave the EU, which is their ultimate goal. What is also interesting is that Cameron and the Tories have emphasised their intention to rebalance the UK economy by reducing dependence on the City, and encouraging growth of the manufacturing sector. But, Cameron's position has exposed the fraudulent nature of that. At the first opportunity Cameron has been forced into defending the interests of the City and Financial Capital at the expense of British manufacturers. It was on the basis of protecting the City that Cameron refused to sign, and that means that Britain will be increasingly sidelined. Decisions that affect the ability of British manufacturers to compete in Europe will be made without Britain having a say. If that simply affected British Capitalists there would be no reason for workers to shed any tears. But, it will necessarily work to the disadvantage of British workers too. Once again, the Tories put the interests of British bankers ahead of the interests of British workers.

In the meantime the deal itself, agreed by EU members other than Britain, is still not sufficient to deal with the crisis. The real problem is this. The economies of Greece and Portugal are fundamentally uncompetitive. They do not have a large enough sector of their economies, which is globally competitive and able to sell goods to cover the costs of the goods and services that they need to import. That is not the fault of Greek and Portuguese workers, as is often portrayed in the media. It is the fault of Greek and Portuguese Capitalists, who for years were prepared to sit on their existing Capital, and make profits from low paid workers. When these countries joined the Eurozone, cheap money meant that they could raise their living standards through borrowing. Instead of using the access to cheap credit to invest in new machines, industries etc. the Capitalists in these economies simply continued in their old ways, making larger profits as workers borrowed to buy their goods. But, this problem also affects other Eurozone economies in a less acute way. The same lack of a sufficiently large competitive sector also affects Spain, Italy, and a number of other economies.

This problem is not unique to the Eurozone. In Britain for instance, there are generally speaking the same wage rates paid to workers in the North-East, as in the South-East. Certainly, workers in one area receive the same Benefits, and pay the same rate of taxes as in any other. Yet, area like the South-East are rich in high-value, profitable industries, whereas the North-East has a deficiency in such industries. The South-East is like Germany, whilst the North-East is like Greece. This is one reason the Liberal-Tories are now looking at trying to abolish National Wage Bargaining so that workers in the North-East would get lower wages. But, at the moment that is not generally the case. Because Britain is a fiscal as well as a political union, taxes collected by the central State, are then used to pay benefits to everyone wherever they live. Because, there is more employment, and higher value production in the South-East, which pays higher wages etc. the State collects more taxes from there, and pays out less Benefits. There is an automatic fiscal transfer to the North-East, because in that area, there is higher unemployment, less high value production, and therefore, less high incomes. In the North-East it is the opposite to the South-East. The State collects less tax from there and pays out more in Benefits. But, no one in Britain generally argues that the North-East should have to pay its way, or that this fiscal transfer should not occur. On the contrary, there has been Regional Policy to try to put even more State Capital into these areas to stimulate employment. Government departments have been relocated there etc.

This is how the Eurozone should work, and if it had worked like that the current debt crisis would not have arisen. As unemployment in Greece, etc rose, there would have been an automatic fiscal transfer from the Central Budget. So borrowing would not have risen to cover these payments. Moreover, under such conditions, a Central State would have had a direct incentive to try to minimise these payments by adopting growth policies that help stimulate employment within these economies. Ultimately, in order to deal with the fact that economies go through cycles of boom and bust, States do not attempt to cover all of this expenditure out of taxation. They borrow money on Capital markets to smooth out their costs. This is what the Eurozone needs to do. It needs a fiscal union, whereby each economy has essentially the same level of taxation, certainly for the main taxes such as Income tax and VAT. That tax would be collected by a Central Treasury. This Treasury would then be responsible for paying out Benefits. But, that would mean that benefits throughout this union would also have to be harmonised. All of that means that you cannot have a Fiscal Union without a Political Union. The American Colonies after all fought a War of Independence on the principle of “No Taxation Without Representation”!

And, in order to ensure that these costs were smoothed out over the longer term, it would be necessary for such a union to borrow on the Capital markets via Eurobonds. But, as has been seen in recent weeks, a condition for such Bonds being effective is that a Central Bank stands behind them, prepared to buy them up, to prevent their prices falling, and interest rates rising too sharply.

But, so far the EU leaders have still not come to accept the need for such a resolution. The leaders seem to have made a number of decisions needed to set up a fiscal union, but its not clear how extensive those measures are yet. It does not seem that there will be any central Treasury, or harmonisation of tax and benefits any time soon. Even were that to be agreed, it would take up to a year to put the necessary administrative mechanisms in place. Moreover, Merkel is still opposing the central planks needed for such a resolution – the creation of Eurobonds, and the ECB acting as lender of last resort. Yet, in the absence of those two measures, there can be no resolution, because it is impossible for Greece and other PIIG economies to pay their way, and it is probably political impossible, for Germany to raise the taxes needed for a fiscal transfer of the size needed to cover their debts, and deficits.

In the absence of that the only temporary solution is for the ECB to buy up the Bonds of Eurozone countries when they come under attack. That is what it has been doing in relation to Spain and Italy in recent days. But, as Britain found out with the ERM crisis, the markets have so much money that if they decide to attack a single country it is pretty impossible to resist for ever. Moreover, the ECB is restricted in its actions by the requirement to sterilise any money printed to buy the Bonds of Eurozone economies, by withdrawing money from elsewhere in the system. Not only is their a limit to that, but it threatens to cause a credit crunch elsewhere in the Eurozone at a time when such a Credit Crunch is developing already as foreign banks and investors withdraw funds from Europe. On top of that, the new head of the ECB Mario Draghi, said at the press Conference yesterday that the ECB would NOT be stepping in to act as lender of last resort to Eurozone States. As a result the Yields on Spanish and Italian 10 Year Bonds soared yet again.

His comments should not be taken too much to heart maybe. What he emphasised several times was that the ECB could not act in that way because the current Treaty prevents it. But, of course, at a time when Treaties are being amended on a range of subjects that does not mean that if the Treaty under which the ECB operates were amended, he would not be free to act as lender of last resort to a new European State! The markets have so far reacted cautiously to the events in Brussels. In the past it has taken them a few days to absorb the full contents of what has been done. On the basis of what I can see so far, I'd expect the markets to resume their attacks again next week. The Euro is bound to fall one way or another. If no further progress is made it will fall as markets price in its demise. If the ECB intervenes to print money to support the Bonds of sovereigns – which is a very expensive and ineffective tactic compared with issuing Eurobonds – then markets will price in inflation and a devaluation of the currency resulting from an inflated money Supply. If a settlement is reached and Eurobonds are issued, then the ECB will have to print money to backstop them, and to cover the repayments.

But, Eurozone countries will not worry too much about a falling Euro. A report from Eurocredit the other day said that many European financials were looking to inflation as a means of reducing the debt. A lower Euro would also boost competitiveness, benefiting France and Germany in particular as against Britain. Given that Cameron has now made Britain an outsider at the Party, that is something they will welcome all the more.

1 comment:

Jacob Richter said...

What will happen to Scotland and Northern Ireland? Will they have the political will to secede from the UK in order to more fully integrate with the EU?

Meanwhile, I don't think all the euro zone will stay intact. It's likely that we'll see a diminished EU, even after Scotland and N. Ireland leaving Little England behind, because of the emerging Eurasian Union and friendly ties between various Balkan states and Russia.