Britain ejected from the EU – exit ramp engaged

I voted for continued membership of the EEC in 1975, not sure how I got to vote there as I was well under age. That was for a common market, and it’s something that has generally served Europe well over the intervening three decades.

However, there’s always been a religious element to the EU, the dream of a pan-European super state, a United States of Europe. These dreams tend to go to the head of political leaders, and as a result the original dream of a Common market, with harmonised technical and regulatory framework facilitating free movement of goods and services has been corrupted by the vision of a USE.

That vision was evident in the hubris of the creation of the Eurozone. It wasn’t apparent at the time, and much of the intent behind the Eurozone was good-intentioned. There isn’t a free lunch, however, and it seems that we created a way for Germany to bankroll increasing debt in other European states. National populations enjoyed increasing living standards as their previously inflation-prone currencies were stabilised and increased in value by the industry of other national populations. The Eurozone had monetary union but not cultural and productivity union, and these forces acted exceedingly slowly but with great force.

All this became apparent in the credit crunch, and now the search for a solution. In the end the people with the money are going to define the boundary conditions of the solution, and in the Eurozone this is Germany. Unfortunately what works for Germany is somewhat against the national character of many of the other countries, particularly Club Med. Some countries had bad luck – the Irish and the Spanish seem to be victims of bad luck as well as irrational exuberance.

Sarko, you are part of the problem if you blame the eurozone problem on the wrong causes...

And like anything that goes titsup, there’s a search to apportion blame. And our dapper little Frenchman with his lovely wife seems to be keen on one interpretation, that financial deregulation started a shitstorm that is tearing the Euro apart. What better way to fix the problem and improve his re-election chances than by ejecting the obnoxious troublemakers who have built their shaky economy on financial wheeler dealing?

The trouble with trying to fix something that is broken is that you need to tread carefully, reflection and analysis are the keys to success here. The main questions you need to ask, be the faulty component a eurozone or a piece of equipment are

  1. Is this faulty are are we using it wrong?
  2. if it is faulty, did it ever work correctly for the purpose it is used for?
  3. can we identify what is wrong with it?
  4. does our diagnosis stand up to scrutiny and testing?
  5. is it economically viable to fix this?

only when we have reasonable clarity can we decide whether to fix or write off and start again.

The assumption being made about the Eurozone is that it is fundamentally sound, does what the component nations want of it and needs fixing. A further assumption is being made that the credit crunch was the source of its current problems.

I’m not so sure. I think it is the inherent differences in lifestyles and attitudes to work across the Eurozone that is giving rise to the problems. I observe that the fire has started in the nations that are less productive, and who have had a history of currency depreciation relative to other Eurozone nations.

performance of various currencies against the erstwhile Deutsche Mark in the decade to 1996

I pinched this from here because I didn’t do the analysis myself. A cursory inspections shows that the Italian Lira, Portuguese escudo and Spanish peseta were on a very different track to the other currencies.

I think the seeds of the current crisis were set from the off, ie the design was wrong. We should have first asked the good people of Greece, Spain, Italy and perhaps Ireland this question on joining the Euro.

You can have a more stable currency more akin to the German Deutsche Mark. That’s the good news. The bad news is that you are going to have to raise productivity or be paid less. How do you feel about that?

Politicians fluffed this question, and borrowed money over the years to cover up the difference in productivity. And this is the money the bond markets want back, and if they’re not going to get it back, they would like to see a way to get the money they lend in future back from the Eurozone. They made the error of assuming all Eurozone debt is equal, they have been disabused of that notion, and they are now raising Cain and demanding that the Eurozone as a whole stands behind any money lent in future. To all intents and purposes that means Germany stands guarantor for the rest, because they’re the only ones with any money left at the moment.

Our little man Sarko, and indeed others, would like to blame it all on financial deregulation. They’re wrong. Deregulation was a different fault, and it was used ably to take up the slack of these inherent contradictions in the Eurozone that would have been apparent earlier, perpetrating property bubbles in Spain and Ireland, losing Greek debt at German rates etc. It allowed things to get worse, and blew up first.

It’s a very bad thing to confuse the symptoms with the cause in any diagnostic job. There is going to be hell to pay. The contradictions of the Eurozone run deep, and would be hard to address in the good times. They are virtually impossible to address in the hard times, and particularly if the symptoms are being tackled without adddressing the causes.

As for Britain, well, if the EU means a United States of Europe then I go along with David Cameron. We are Das Inselreich, an Island Kingdom, we are in Europe but in some ways not of Europe. In the end, if the other countries of the EU desire a more dirigiste economy, then that is not compatible with Britain’s economy and probably not of its national character. We will pay a heavy price for taking a different fork in the road. As the Indy headline said, this is not Britain leaving the EU. It is the EU leaving Britain, taking a path that is not our way.

The price will be heavy. But not as heavy, I fear, as the price that will be paid in unemployment, misery and Depression-era pain as the rest of Europe, particularly Club Med, is economically crash-locked to German standards. It may work. I don’t think it will. The Euro will change from something that was designed to bring Europe to an ever-closer union to one that sets the nations apart, as they are forced into a single economic mould via austerity and deflation. It doesn’t just scare me. It even scares the US Army, which has probably got more cojones than me 😉

It ain’t going to be fun. But if it was the choice of austerity/deflation or nothing, I’m happy with the nothing. We have very, very, serious problems in the UK, that may be hard to solve as it is. That’ll be rough as hell, but probably not as rough as the enforced austerity the Eurozone is going to go through. Good luck to them, and the best of British to y’all. I hope the eurozone has captains clever enough and economies strong enough to come through the storm. That which does not kill you makes you stronger…

PS Damn – the Economist has this “Lessons of the 1930s” prognosis which is a better argued prognosis of the way ahead for the Euorozone. It’s not inevitable, but it ain’t good.



Where are the leaders who will save Democracy in Europe

Across Europe we are seeing democracy suspended for technocracy. Papandreou in Greece, Berlusconi in Italy, where will the next democratic leader be ejected for the sake of holding the party line on the euro?

For several decades in the West we have become soft and failed to adapt our democracies to modern conditions of a more interdependent world. At the moment we seem to favour suspending elected leaders for imposed ones who can press through ‘reforms’. In the immortal words of Herman van Rompuy

Rompuy to Italians: You need reforms, not elections. Italians to Rompuy: Remind me again, when did we vote you in?

when speaking in Florence, “the country needs reforms, not elections

Now Herman Van Rompuy may well be right, but he’s right in the wrong way, because it’s not his call. It is the citizens of Italy to make that call, thanks very much. In the end if the Italians want to make a right cod’s of their economy, that’s their prerogative. Obviously if they want to borrow other people’s money then there are limits to what they can do, but the decision should always rest with the Italians. They could use reform. They could do with not electing septuagenerian bunga-bunga hosts again and again, but in the end if that’s really what they want to do then so be it.

As for Rompuy, he begs the question Josef Stalin asked about the Pope’s power base. “Where are his divisions?”

Clearly something has gone wrong with democracy in the modern world, and it’s not just limited to Europe. Politicians have discovered they can get voted in more easily by promising more than they can deliver with the resources they can tax. So they simply bung this on the national credit card and hope they’re in the right place when the music stops. Maybe we need to work out a new form of democracy, where a second chamber is voted in for ten year terms, but half are up for re-election every five years. This could be tasked with balancing the long term economic future over the multi-parliament term, things like pensions and energy/pollution/climate change that require thinking over decades rather than years, and controlling say 25% of the tax take. Plus a British version of the Stability and Growth Pact to go into the Constitution that we don’t have. The European SGP isn’t worth the steam off a cup of tea because of the aforementioned lack of divisions to enforce it, but on a national scale it would work well – or highlight that something irregular was going on.

One way or another, we need to improve the way democracy interacts with the long and the short term, so we don’t overburden our grandchildren with the debts to pay for jam today. Outsourcing the problem to unelected technocrats who can dictate solutions without having to face the poor saps that will be working to resource the solutions is a very bad alternative.

As a callow youth I voted for Britain’s continued membership of the EEC in 1975. Faced with the same information I’d do the same again – the freedom of movement and trade I am all for. However, I am not for the United States of Europe. Nor, it seems, are many of those even in the Eurozone. There isn’t enough common cause between the Germans and the Greeks for the Germans to want to sponsor the difference in lifestyle. I heard enough of my grandmother in Germany grousing about the extra taxes levied on her pension to sponsor the unification of  West and East Germany (she was from West Germany). They just ain’t going to do it for the Italians, and Spanish, and the Portuguese. Yes, Germany has benefited from having Southern Europe as ballast to keep the Euro down a little. And the Germans probably did loan a lot of what Southern Europe owe, and they aren’t going to be getting that back. That’s capitalism for you.

It wasn’t apparent at the time to many people, but harnessing the disparate cultures and people of Europe to a single currency was going to cause stresses where they didn’t match up with each other. They got away with it for 10 years, but the tide went out with the credit crunch and we could see who was caught short. It’s time to accept the mistake, and then back off. Carefully. We don’t have to then throw our toys out of the pram and dismantle the Common Market, as some of the EU technocrats opine, let’s hear it once again from Herman van Rompuy:

Let us be clear: we will not “prune” the Eurozone to a more selective club. That would be contrary to the letter and the spirit of the European political pact, as embodied in the Treaties. If the Eurozone’s integrity would not be preserved, one should not take the continued functioning of the Internal Market for granted.

Herman, old boy, sometimes there are no good options. I would rather be free and skint than enslaved and wealthy. If we need to suspend the working of the Internal Market while the eurozone sorts itself out, then so be it. Far better to do that, than to suspend the working of democracy while the technocrats ‘fix’ the economy. For the record, the EU transcript of the text of Herman’s speech is here. There is a lot of good stuff, and I came a way with a greater respect for van Rompuy’s intelligence. However, leading people is not all about intelligence. You have to take people with you, and here the EU leadership seem desperately out of their depth.

Finally, lest we forget what happens when we prize efficiency over freedom, the last time there was humongous economic turmoil in Europe efficiency was brought to bear on the subject with extreme prejudice by one of the most capable of European nations. The trains did run on time but a lot of people died, and this sort of thing happened

German troops march through the Arc de Triomphe, Paris, August 10th, 1940

More recently, Germany has also had experience of a tranferunion, when West Germany raised taxes to buy out the East German mark at par, vastly overpaying by about three to one. The cost of unification caused some grumbling in West German taxpayers who paid for it, and at least there was common cause, family and historic ties and a common language. Inflating the money supply or continual transfer of money to Club Med may well fix the probelms of the Euro, but unique among European nations, Germany had experienced the pain of both courses of action before.

So before the technocrats of Europe badger Angela Merkel to pay up or to permit the ECB to become the lender of last resort that the eurozone so desperately needs, they should remind themselves how it was that the Germans became so good at running an economy, indeed pulling themselves out from the ashes of WW2, with a big hat-tip to the statesmanship of the Marshall Plan.

It is because they experienced what happens when the government borrows on the never never and prints money to make up the difference. I heard my great-grandmother describe what life was like then, and this scar runs deep within the German psyche, that you just don’t print money because no good will come of it.

There are some kinds of knowledge that are won at great cost through experience. This is why the Germans, who are the only nation in the Eurozone that can credibly resource a stop of the bloodletting, is unlikely to release the dead hand of historical experience and go ‘hell, yeah’ to the technocrats advocating a transferunion or ECB unlimited bond purchases.

The technocrats should be careful what they wish for. It is easy for technocratically designed utopias to become dystopias when the simplistic technocratic assumptions about people get smashed on the rocks of human nature in its irrational form.

We need leadership that can acknowledge past mistakes and seek an orderly solution to the strains ripping the eurozone apart. Yesterday, on the 11th hour of the eleventh month, we held a two minutes’ silence in the memory of the Fallen on all sides. I hope that we do not hear the sound of gunfire in Europe in my lifetime, all because some jumped-up unelected twits couldn’t let go of their idea of the United States of Europe, and force the Germans to impose Germanic austerity on Club Med, which will cause horrific social discord and people will fall for the siren song of ‘strong leadership’. Let’s just all accept we cocked up here, roll back to the last known good state and take things slowly forward at their own pace.

The flame of self-determination and democracy is flickering in the wind of technocratic expedience. It needs some hands put around it and some TLC. We’re going to be a lot poorer in future, but we will still have a very good quality of life. Let’s try and make sure we are still free to determine our future, even screw it up royally like the Greeks, rather than be enslaved to economic expediency.

past the point of no return

The original wartime meaning of the point of no return is easy enough to work out. For an aircraft it is when slightly more than half the fuel has been used – in a single-hop journey the craft is then committed to carry on to its destination, for insufficient fuel reserves remain to return to the point of origin.

It isn’t so easy to determine the point of no return for a complex feedback system like the economy. In the Greek and Euro debacle I feel that time has come. Even in the UK economy, it feels like the rollercoaster has crested the rise, and we are staring at an uncontrolled descent. So much effort has been thrown at the Greek problem, and yet still more is required. It seem that the effort to fight the issues have failed – for the Greeks they could never work, and for the rest of the Eurozone the price seems too high.

Some ugly truths are becoming apparent, too. The people of a nation state do not appear to be in control of their own destiny. Yes, they were greedy, their politicians lied on entry to the Eurozone and they spent money that wasn’t theirs to spend.

Somewhere along the line, Greeks seem to have unwittingly surrendered their right to call which of the bad options facing them they wish to take up. The FT offers up a pretty grim scenario for what an uncontrolled exit would look like.

I’m not sure they’ve still got the option. Sitting here in the good ship Europe it looks like every economic indicator is heading towards the red, as the second dip comes our way. If it feels like this in the UK outside the Eurozone, then in Italy or France it must feel pretty dangerous, and as for Greece, looks like they no longer have any control of where they are going anyway. Outside forces even seem to be ready to ping the odious Silvio Bunga Bunga Berlusconi from Italy.

Throughout Europe there seems to be a desperate lack of leadership and direction. Each mini-crisis is fought as if it were an isolated incident. It isn’t. For ten years the West has been living way beyond its means, and in Europe the Eurozone was designed without a lender of last resort. Or perhaps it was always assumed that the lender of last resort was Germany,  which seems the only economy able to create real wealth, assisted by the ballast of the rest of Europe to drag the currency down.

Unlike the aircraft, the point of no return in economic affairs seems hard to foresee, and is only readily identifiable with hindsight. Nevertheless, I’ll stick my neck out and say I figure we will pass it by Christmas. The next year will be a hazardous time, though shot through with opportunities.

There isn’t enough time now to forestall the flameout of the financial system – my financial net worth could be destroyed in the maelstrom to come.  I’ve left it too late to try and convert my net worth into non-financial investments, and these are illiquid and often immobile to boot. I’m not even that sure how well the canonical hedge against financial collapse, gold would hold up. You need something that has value in the immediate aftermath of a financial collapse, not something that has value five years down the line, when there is some semblance of an economy that can value gold, and, more to the point, offer you something of value in exchange for it.

So the only logical thing is to play the second dip as if the financial system will recover. I’me already chuffed and having picked up Tesco in the August crapshoot for less than Warren Buffett paid for his share.

It is at points of great change that opportunities arise. If I am going to play on the principle that the financial system will recover, then I expect that the second dip will hold opportunities…