Britain and Europe

(this post is mostly for my own future reference: so I can see what I thought now, without the distorting lens of memory. but you might care too)

So, we’ve vetoed the grand European dream, and they will go off without us. The papers, of course, personalise it, because they are rubbish and believe that none of their readers will pay any attention to stories about things rather than personalities. But while the Grauniad may try to frame it as David Cameron blocks EU treaty with veto (let alone “casting Britain adrift in Europe”) really this is our government, reflecting the will of parliament and, I think, the will of the people too. The FT, which is a real paper, does better.

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Obviously, there is politics in all of this. so the Grauniad (left) can’t help but lead with a headline that implies this is all a disaster; and the Torygraph (right) that this was correct. Cast all that aside, and instead wonder what exactly was it that we vetoed? The G&T are far too busy politicking to bother tell us, and perhaps it isn’t even known – I get the impression this was more a mood-music kind of thing. The T says

Paris and Berlin are now expected to try to agree a treaty outside the EU that commits the eurozone members to new limits on their deficits, in an effort to restore financial markets’ confidence. As well as the 17 countries using the single currency, the nine other EU members could also sign up, making Britain the only member outside the “euro-plus” bloc.

which at least tells you what they’re going to do now, a bit. If this was (as billed) mostly a save-the-Euro meeting, then it isn’t clear to me why we were expected to join – we’re not in the Euro. Aside: when the Euro was being created, I wanted us to join. I’m less enthusiastic now, but still on balance I’d have liked us to join. In retrospect it is clear that what really needed to happen was for countries like Greece to not join – or at least, to not be allowed to lie about their national accounts. But the creation of the Euro was as much politics as economics – itself a bad thing – and so there was immense pressure to smooth over any problems. That was definitely Bad. But if Greece hadn’t been in, Italy wouldn’t have been either, which while economically good would have been politically very hard.

The real test of this, of course, will be the markets. There is a strange line from the Beeb, The reaction on the markets so far is not reassuring – but given the deal was agreed late friday night when the markets were shut, I don’t really understand that. And anyway the FT says After dropping in early trading, the FTSE Eurofirst 300… rallied to end the day 1.3 per cent higher, while the euro climbed the most against the US dollar in over a week… Italian and Spanish bond yields also fell sharply, as investors turned more positive towards the eurozone’s more embattled members but Germany’s 10-year bond yield climbed 13 basis points to 2.14 per cent. and it is hard to see that as bad.

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PaulB has some nice stuff, trying to work out what really happened. Which all looks plausible. It looks like the real sticking point (other than unanimity would have lead to a new treaty which wouldn’t have passed) was the “Tobin tax”, but no-one is prepared to say so. Given the EU rules and structures, I doubt that tax makes sense. Timmy says so a lot, please read some of that before replying “of course it makes sense” without actually thinking about it. In particular, it really isn’t clear why Sarkozy was so violently anti-us.

So what exactly is the Plan for Europe? PaulB provises a link to something. Apparently We commit to establishing a new fiscal rule, containing the following elements: General government budgets shall be balanced or in surplus… which sounds a touch idealistic. We certainly can’t meet that, this year or next. Well, there is more, read it if you find such things interesting or comprehensible, but I suspect that the secret will be in the implementation. So I don’t know; I certainly haven’t read it all, and maybe the details aren’t fleshed out yet. PaulB’s guess The plan as it stands seems to be to calm down the bond markets with more or less believable promises of austerity, with the ESM – a slightly souped up EFSF – to contain any local difficulties seems believable – at least, as what they consider their Plan, I have no comment as to whether it is a workable plan. FWIW, even the Grauniads economic analysis says “Europe blunders into a blind, and dangerous, alley”.

What will happen? I don’t know. The people I read, who look competent (but hey, I can’t judge economic competence) think this isn’t enough, that the politicians can’t and won’t move fast enough. If I (from my position of ignorance) was proposing a plan (to save the Euro, not my Optimal Economic Plan), it would be: throw Greece out, which would be in their own best interests and would help terrify the likes of Italy into behaving. But now Italy has thrown Berlusoni out they have some hope, and some competence.

Addendum: looking more at the Grauniad, I find the moment when the nations of Europe came together to take a first step towards the long-cherished dream of political union – and as the moment when Britain began the long, lonely walk away. Maybe. But in that case Our Glorious Leader was correct to say no, because our parliament and (I think) our people do not share this long-cherished dream.

Refs

* Pix ripped off by searching Flickr for “stoat”, except for the one of me sculling, which is from the row-up to the Christmas Head
* The UK is as Isolated as Somebody Who Refused to Join the Titanic Just Before it Sailed.
* Charlemagne and Bagehot

Comments

  1. #1 Tim Worstall
    2011/12/10

    “In particular, it really isn’t clear why Sarkozy was so violently anti-us.”

    Because “the markets”, “The City” are the scapegoat. For it couldn’t possibly bhe true that the actions of the French State are not really up to scratch. That’s impossible. Therefore it must have been the Anglo-Saxons undermining us.

    Absurd logic, I know, but there really are a lot of continental politicians who really do think this way.

  2. #2 TheGoodLocust
    2011/12/10

    If you are concerned about problems with the Euro you might want to consider investing in some PM’s. I’d recommend silver, but I think you have to pay VAT on that (not gold?).

  3. #3 Lazar
    2011/12/10

    Meh

  4. #4 Vinny Burgoo
    2011/12/10

    Stoat: Cast all that aside, and instead wonder what exactly was it that we vetoed? The G&T are far too busy politicking to bother tell us, and perhaps it isn’t even known

    I’ve been trying to find out all day. Thanks for the links. Perhaps one of them has the skinny.

  5. #5 Eli Rabett
    2011/12/10

    Without agreeing that what Merkel and Sarkozy want is good policy (actually Eli thinks it is ritual suicide), how does this differ from the austerity policy of the current British government (which is also ritual suicide as shown by recent economic results)?

    Just asking

    [The point re similarity appears valid, which is another reason for being puzzled why they could not agree -W]

  6. #6 Alexander Harvey
    2011/12/10

    FWIW,

    I thought it wise for the Pound not to join the Euro, not for the UK’s sake but absolutely.

    Not to be rude but the Euro was a greater DMark, it replaced a major internationally traded currency with a variant of itself. I think that most international trades were in either the USD, Yen, DM, or Pound, the rest didn’t really matter.

    Adding the Pound to the Euro would have made a big difference to the Euro in terms of the volume of trades. The world would have lost a major tradable currency and a currency of flight to or from depending on how the others were performing. Those flows would have been added to the Euro if generated from outside of Europe. That would be both lucrative and stressful.

    In my opinion, the UK and Germany, would not have been able to sort their acts out. Germany had the better economy but the UK had The City (London Markets). Two heavyweights tied into a dumbell but under two different juristictions.

    Worst of all, the markets are not dumb but malign. They would have sniffed the inherent weakness and seen much fun to be had and money to be made out of breaking the UK out of the Euro, probably in the run up synchronisation period.

    The problems that exist inside the Euro today, a currency union without fiscal, politcal and social union would have been much magnified by the inclusion of Sterling.

    They are currently trying to patch up a pretend fiscal union, all I have seen (which isn’t everything) is the adoption of fiscal restrictions that are more or less the ones they had but chose to ignore some years back. They need to do much more than this and that includes some steps towards a social union.

    As it stands, France and more so Germany, are trying to have an Empire on the cheap. All the benefits, all the clout, but none of the responsibilities.

    Greek debt is a terrible thing but it is a lucrative thing, provided the major players can keep Greece sufficiently alive while they transfuse out its life blood, Greece will continue to generate profits for them without ever getting out of debt.

    We are often fed the narrative of Greece as profligate and the major countries as hard done by, and having to bail Greece out. The alternative is to see the situation as loan-sharking, bleeding the victim but not quite killing them. The truth is somewhere in between. But for certain the real damage was done by major financial institutions and they are not in Greece, but are in the UK, France and Germany.

    Interstingly the PIGS group, are acting like an anchor on the Euro, weighing it down, keeping the Euro cheap much to the benefit of Germany. Cut them loose and up it bobs and down goes Germany’s propects as an exporter of manufactured goods.

    I think it is clear that I think that Greece is getting not just a bad deal but is being morally maligned. Were I a Greek protestor or anarchist/occupy type I would excercise my rightful freedom to roam the EU and protest where the real power and the majority of the blame lies.

    Alex

  7. #7 Alexander Harvey
    2011/12/10

    FWIW,

    I thought it wise for the Pound not to join the Euro, not for the UK’s sake but absolutely.

    Not to be rude but the Euro was a greater DMark, it replaced a major internationally traded currency with a variant of itself. I think that most international trades were in either the USD, Yen, DM, or Pound, the rest didn’t really matter.

    Adding the Pound to the Euro would have made a big difference to the Euro in terms of the volume of trades. The world would have lost a major tradable currency and a currency of flight to or from depending on how the others were performing. Those flows would have been added to the Euro if generated from outside of Europe. That would be both lucrative and stressful.

    In my opinion, the UK and Germany, would not have been able to sort their acts out. Germany had the better economy but the UK had The City (London Markets). Two heavyweights tied into a dumbell but under two different juristictions.

    Worst of all, the markets are not dumb but malign. They would have sniffed the inherent weakness and seen much fun to be had and money to be made out of breaking the UK out of the Euro, probably in the run up synchronisation period.

    The problems that exist inside the Euro today, a currency union without fiscal, politcal and social union would have been much magnified by the inclusion of Sterling.

    They are currently trying to patch up a pretend fiscal union, all I have seen (which isn’t everything) is the adoption of fiscal restrictions that are more or less the ones they had but chose to ignore some years back. They need to do much more than this and that includes some steps towards a social union.

    As it stands, France and more so Germany, are trying to have an Empire on the cheap. All the benefits, all the clout, but none of the responsibilities.

    Greek debt is a terrible thing but it is a lucrative thing, provided the major players can keep Greece sufficiently alive while they transfuse out its life blood, Greece will continue to generate profits for them without ever getting out of debt.

    We are often fed the narrative of Greece as profligate and the major countries as hard done by, and having to bail Greece out. The alternative is to see the situation as loan-sharking, bleeding the victim but not quite killing them. The truth is somewhere in between. But for certain the real damage was done by major financial institutions and they are not in Greece, but are in the UK, France and Germany.

    Interstingly the PIGS group, are acting like an anchor on the Euro, weighing it down, keeping the Euro cheap much to the benefit of Germany. Cut them loose and up it bobs and down goes Germany’s propects as an exporter of manufactured goods.

    I think it is clear that I think that Greece is getting not just a bad deal but is being morally maligned. Were I a Greek protestor or anarchist/occupy type I would excercise my rightful freedom to roam the EU and protest where the real power and the majority of the blame lies.

    Alex

  8. #8 grypo
    2011/12/10

    They dropped interest rates rates, which while important, isn’t a magic bullet for the bond markets. Unfortunately, the countries now have forced austerity and no way to devalue (which is obvious in a single currency union) so how these countries are supposed to run a surplus anytime over the decade is a mystery. To top that all off, the entire periphery is heading into recession (likely). And the entire idea behind Italy and Spain being irresponsible is nonsense. Before the banking housing crash, both countries were running surpluses and not in any debt danger. Greece is its own animal, and they probably wished they’d collected taxes over the last decade. but they’ll be in deep trouble as the government is admitting that there is a slow bank run right now. Everyone who has the ability to leave is leaving. I’ve been watching this slow motion train-wreck for a year now, and while they’ve finally decided to stop being afraid of non-existent inflation and stopped raising interest rates, I don’t know how the Euro survives any prolonged recession. Youth unemployment is running at 30 – 50 % in the PIIGS countries as it is.

  9. #9 David B. Benson
    2011/12/11

    Well I certainly don’t know what was vetoed; moreover I certainly don’t know why it should matter one way or the other.

    An e-rag on this side of the Pond reported an opinion that the British PM negotiated badly, but over what was not made clear. Somehow the affair reminds me of “Last Year @ Marienbad”.

  10. #10 Eli Rabett
    2011/12/11

    and it also can’t really be that the markets have screwed the pooch, now can it. It is not necessary to insist on a single cause when many will do

  11. #11 Andrew G.
    2011/12/11

    Any plan which purports to legislate a requirement for balanced government budgets is comparable to an attempt to legislate perpetual motion – you know in advance that it will fail.

    Under plausible assumptions (notably that the private sector always likes to save at least a little bit of its income), the only way a government can have a long-term balanced or surplus budget is if it has an export surplus (one at least as large as the private sector net savings surplus)- and it is manifestly impossible for all countries to do that. This is a basic consequence of the equation:

    (government surplus) + (private sector surplus) = (export surplus)

    which is necessarily true as a matter of simple accountancy.

  12. #12 informania
    2011/12/11

    @8 That would have to depend on the strength of correlations and plausible mechanisms involved.

  13. #13 Hank Roberts
    2011/12/11

    Let’s see if I can sneak two URLs past the three-headed Cyberus guarding the stoat burrow here

    > the markets [bond makers?] have screwed the pooch [the EU?]
    Got that backwards, don’t you?

    > loan-sharking, bleeding the victim but not
    > quite killing them.
    That’s ‘loan-leeching’ — many small bleeds become a problem when the attached leeches overdraw from their victims.

    > Berlusconi
    blog.seattlepi.com/davidhorsey/files/2011/11/Silvio-11-15-11-color-640×470.jpg

    This conviction that a debt can be created by some legal obligation on paper, and treated as an asset — bundled, sold, sliced, diced, packaged, rated — seems dubious. Any debt is at its base borrowing from a hypothetical future.

    Then that future becomes increasingly less probable — if it was believable in the beginning.

    Much of the “debt” now was based on one or another unbelievable fantasy — not credible even at the time the papers were signed.

    Yet the system that promotes these real debts based on fairy tales is what gets propped up and maintained:

    “Federal Reserve lending to banks peaked at a record $2.3 trillion … almost enough to pay off every home mortgage loan in the U.S ….”
    http://www.bloomberg.com/apps/news?pid=washingtonstory&sid=aGq2B3XeGKok

    So why not erase that debt instead of the banks’ losses?

    I’d be interested in seeing comparable numbers for the Greek and Italian bonds compared to the bailout of the EU banks.

    [I don't think you've got this right. The UK govt bailed out RBS, yes - by buying lots of it. We now own, what, 80% of it? Do you want the govt owning a pile of people's mortgages? -W]

  14. #14 Hank Roberts
    2011/12/11

    My longer comment is probably waiting in the usual place.
    Brief followup — note that the next domino is poised:
    http://www.businessweek.com/magazine/china-forgets-inflation-and-goes-for-growth-12082011.html
    “… the euro crisis has pushed Europe—China’s largest overseas market for toys, textiles, machinery, and electronics—closer to outright recession….”

  15. #15 crf
    2011/12/11

    The press is once again going soap-opera over this (OMG, Sarkozy didn’t shake hands with Cameron. OMG Britain is leaving Europe!).

    There isn’t much in the press on the actual details of the deal, or why Britain wouldn’t sign up. Or even what problem this deal is really going to solve.

    The press will steer any complicated story into a narrative a reporter can understand (for example, in terms of basic human emotions or morality), but which doesn’t necessarily reflect reality. And reporters are loath to question their frameworks.

    Same as much climate reporting, really.

  16. #16 Eli Rabett
    2011/12/11

    Hank: Markets require both buyers and sellers. In this case both were in fantasyland

    Weasel: Why yes, it worked quiet well in the US for 50 years, they were called FHA, Fannie Mae and Freddy Mac mortgages and such. Then, of course, the Fannie Mae and Freddy Mac were floated onto the market and had to up the returns

  17. #17 Hank Roberts
    2011/12/11

    > Do you want the govt owning a pile of people’s mortgages? -W]
    Sure; doesn’t yours?

    The idea over here came from a fellow named Roosevelt.
    https://www.google.com/search?q=government+mortgage+new+deal

    It worked for decades, until the agencies got ‘privatized’ — and then you know what happened.

    [Correlation != causation - W]

    That approach this time could’ve paid off the variable-rate balloon-explosion cupidity-expolitation toxic-asset loans before the rates skyrocketed, giving a whole lot of people good reason to stay in their homes and keep maintaining them. Those who couldn’t wouldn’t; those who’d overleveraged or were flipping houses fast would still suffer.

    This country’s full of houses that were maintained — often in rather inventive and slapdash ways — during the last Depression when nobody had money for quite a few years. Today, there’s far better information on how to do that right. People could’ve.

    Whoever owns them gets the simple short term payout instead decades of income (or loss). Refinanced at today’s rates, a bargain for the next 30 years, and all of the money floods back into circulation — because no small person or small business can just stash away that much income (unlike the banks, which could and did sit on that amount of money).

  18. #18 Hank Roberts
    2011/12/11

    PS, William, I’m not arguing for any particular politics here, I’m sitting back in amused bemusement as I creep into my old age, watching the Fermi Paradox illustrating itself. In this specific case, watching “debt” and rereading Overshoot
    http://ecx.images-amazon.com/images/I/41JbNA4GGjL.jpg

    But hey, people probably got all gloomy about the Black Death too, and nowadays it’s just history.

    We will be also.

  19. #19 sidd
    2011/12/12

    a few days ago, charlemagne at the economist had a link to a pdf which contained some detail as to what cameron wanted:

    “After much studied vagueness on his part about Britain’s objectives, Mr Cameron’s demand came down to a protocol that would ensure Britain would be given a veto on financial-services regulation (see PDF copy here)”

    the pdf link is

    http://dl.dropbox.com/u/46265023/Uk%20-%2009%20Dec%202011%2001-01.pdf

    the economist article is:

    http://www.economist.com/blogs/charlemagne/2011/12/britain-and-eu-summit

    reading the pdf made me smile, as i thought of all the clever ways it might be abused to protect cameron’s allies/paymasters/…

    [Nothing obviously bad about the pdf - and your quote is wrong: it isn't a req for a British veto, but for everyone to have a veto -W]

    [I think the critical bit is "In an effort to stabilise the euro zone, France, Germany and 21 other countries have decided to..." That says to me that the UK should have been accomodated with an opt-out, since the key driver to all this is stabalise-the-euro. The opt out could have said "these changes only apply to members ot the euro" or some-such -W]

    sidd

  20. #20 Eli Rabett
    2011/12/12

    Cameron is playing prime minister’s dilemma between his Euroseptics and the EU. Expect a tit for tat response.

    And, oh yes there is lots of scientific evidence that the lending standards at Fannie and Freddie went to hell after the privatization

  21. #21 Hank Roberts
    2011/12/12

    > correlation … causation

    >> Fannie Mae and Freddy Mac were floated
    >> onto the market and had to up the returns

    sunk, salvaged, and refloated:

    “… Federal National Mortgage Association, known as Fannie Mae, and Federal Home Loan Mortgage Corporation, Freddie Mac…. seized by the government in 2008 to ensure the availability of mortgage loans, provide money to lenders by buying new loans, then bundle those loans into securities for resale to investors….”
    http://economix.blogs.nytimes.com/2010/11/09/when-privatization-increases-public-spending/

    > UK govt bailed out RBS, yes – by buying lots of it.
    > We now own, what, 80% of it?

    RBS invested billions in complex loans that bosses did not understand — Guardian
    In June 2006 RBS decided to launch a big push into complex US loan structures linked to sub-prime mortgages. The board feared being left behind in this ….”
    http://www.guardian.co.uk/business/2011/dec/12/rbs-invested-billions-complex-loans-fsa?newsfeed=true

    ——
    But, hey, you don’t need the economic news to figure out why there’s no sign of intelligent life detected in this universe.

    Just look at the user pictures here:

    http://www.amazon.com/gp/customer-media/product-gallery/B000IZGIA8/ref=cm_ciu_pdp_images_all

    How many of them do you imagine were bankers?

  22. #22 Eli Rabett
    2011/12/13

    The UK is not insulated from a Euro failure. Glug. glug. glug.

  23. #23 J Bowers
    2011/12/13

    David Miliband and Jack Straw asked Cameron exactly what was under threat before last Thursday. Cameron had no reply. It would seem the PM didn’t even know why he did what he did. He didn’t even give his advisers a chance to prepare, which suggests to me that it was all about pandering to the Eurosceptics and designed to cause a rift between us and Europe, or alternatively and at best, Cameron is simply too lazy and too lightweight to play the international stage.

  24. #24 Greg henderson
    2012/03/07

    This might be a little late but i definitely think the pound is better off NOT joining the euro.
    I also think just basic economic science suggests the same thing.

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