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The Germany-UK axis and the long-awaited rescue of Europe

The long awaited rescue of Europe, along with its badly put together single currency, gets under way now that the German chancellor no longer has the distraction of an election to worry about.

Camerkel

Angela Merkel aspires to a business-minded Europe

Angela Merkel, the pastor’s daughter from the former Communist east, will get down to a lot of serious business. Her mission, no less, is to save the continent from imploding. In doing this she will seek help from her new best friend, David Cameron. Many of us here at home have gone off him, particularly the women, but he makes a good impression abroad. Even neo socialist Barack Obama gets on well with the ‘posh boy’ from Chipping Norton. He is mannerly, brimming with self-confidence and knows how to talk the talk. What else would one expect from an Old Etonian, that breed of Brits who once believed that they were born to rule. Incredibly, it seems that even in 21st century Britain they still have grounds to believe this.

Angela Merkel aspires to a business-minded Europe: caring but frugal; hard working, but at ease with itself. The last thing she wants is a Europe in tatters. Whether or not it was wise to create the euro in the form they did, we have to accept it is a fact of life. It certainly has benefitted German exporters, whose massive sales to the rest of Europe is part of the reason they are in such debt. If Germany were to go back to the deutschmark its exports would be so incredibly expensive that their export dependent economy would be in danger of crashing. So save the euro they must. But they must also save it for another reason: if it collapses, or even fragments, the whole European Project will as likely as not come off the rails and Germany will take the blame. For the third time in a century, people will say Germany has left Europe in ruins.

The simple truth is that the political and financial establishment have too much at stake to allow their dream project to collapse. The consequences would be seismic and coming at this time, when recovery seems underway, it would be unthinkable. Only Germany has the financial clout to save the Euro.

But Fritz does not want to open up his coffers – especially to what he perceives as lazy and corrupt southerners – but neither does he want to become Europe’s baddy all over again. He will drive a hard bargain which will involve some pretty nasty medicine when he takes responsibility for all that toxic debt and he will seek a powerful, respectable ally to share the howls of protest with. France is no longer willing to be that ally. She seems not to understand the scale of the problem. Perhaps that’s because she is herself part of the problem. That leaves only one ally available to Germany and it is not even in the euro. That ally is us.

Germany views Britain as a business-minded country, like herself, and it makes sense, in her view, to get Britain onside in her chancellor’s drive for reform because Cameron wants reform too. But his reform is not just in monetary matters. As it happens, Germany, as well as others, doesn’t much like a lot of what is coming out of Brussels so he could find himself pushing at an open door.

I am convinced Germany will do all that it can, within reason, to give Cameron what he needs from Europe rather than lose a necessary and valued ally. Merkel is said to be ready to discuss anything, so long as Cameron does not ask her to chose between Britain and Europe. She knows that if he cannot repatriate powers then Britain is a goner from the EU. That would be a body blow to the whole European Project and it would set a most unwelcome precedent. It would send shock waves throughout Europe and indeed the world.

Even before her re-election, when she had to be careful, she began her courtship of David Cameron. That weekend soiree to her country home in which Samantha and the kids were invited, was in my view, extraordinary. It spoke volumes. She has never asked any other political leader to visit her at home, never mind bringing the whole family. So even if the women on Dave’s home patch have abandoned him in droves, Angela most certainly has not. She thinks he’s lovely – ‘My naughty nephew’, she calls him, and can’t wait to team up with him in sorting out Europe. In all the photo shoots of recent times she makes a point of standing next to him, and the body language is very telling.

All in all, it causes me to think that we are in the early stages of seeing a new, powerful axis being formed…  a resurgent Britain alongside its fellow Teutonic  power Germany. That axis will be an outward-looking one keen to harness the enormous potential of half a billion Europeans, but moving to direct their energies to the world beyond Europe. Britain, for its part, is already travelling very successfully down that road and with its vast connections worldwide, its goodwill from its former empire and its universal language, it is peculiarly well placed to profit from it all.

Uncle Sam worries about the threat posed by the emergent Eastern economies – we all do – but he does not worry about Europe. Rather he wants to team up with it in a North Atlantic trade partnership. Such a partnership is a very real prospect; it will hugely benefit all of us and give the whole world a tremendous fillip.

I do not subscribe to the view that this century will necessarily be the Asian century. Yes, it will do well, but all the countries concerned have tremendous structural and political problems which the West overcame long ago. Endemic corruption and a lack of trustworthy institutions will also act as a break. Human Rights issues will plague them because justice, as we know it, does not exist. They have got a lot of work to do and are not in a position to give their undivided attention to coining a buck, as the West is. For a start, they are going to have to take better care of their people and that means creating something of a welfare state – and we know how ruinously expensive that will be.

As for Cameron, he has a great opportunity, but if he does not put forward some female friendly policies and quickly, he won’t be there after the election to take advantage.

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Cypriot Euro raid proves banks cannot be trusted

Banks are not to be trusted. That is the shocking message the Troika of the European Central Bank, the EU and the IMF have sent out when they seized up to 60 per cent of the deposits of their wealthier customers in tiny Cyprus.

The actions of Cyprus' powerful masters to curb the country's excesses has sent shock waves not just across Europe, but the entire world.

The actions of Cyprus’ powerful masters to curb the country’s excesses has sent shock waves not just across Europe, but the entire world.

Governments have attempted to get themselves out of holes in years past by raising money in all sorts of unlikely places, some of them truly bizarre. But never, until now, had they felt themselves entitled to raid peoples’ bank accounts and plunder them. That island state of 1.2m people may only represent 0.02% of Euroland’s GDP, but the action of its powerful masters to curb Cypriot excesses has sent shock waves not just across Europe, but the entire world. The reason is simple: if you can’t lodge your money in a bank account without feeling that it is safe, where on earth can you put it? Under the bed, perhaps, or in a biscuit tin? For all the derisory interest savings have attracted in recent years, that might not seem such a bad idea. The trouble is that almost no one has a pay packet anymore – it has to go straight into the bank – and we have allowed ourselves to be seduced by the convenience of the hole in the wall that we can no longer contemplate anything else.

What has happened to Cyprus, however, should make all of us take stock. It has breached what hitherto has been held as a sacred principal: that you cannot help yourself to something which has been placed in your safekeeping.

People have believed that in an uncertain world their humble bank deposit was at least safe from predators. Just the same, what is to be done with a bank which has got itself into a mess? Is it fair that people – i.e. taxpayers – who did not even sign up to that bank should be compelled to ride to its rescue? Those taxpayers are even more innocent (if you want to use that emotive term) than the lowly deposit holders who did sign up.

What is clear is that we can never again allow ourselves to be held to ransom as we were with the 2008 rescue of British Banks. We have suffered as a result of that rescue for coming on five years now and there is no end in sight to the misery that it has inflicted. High Street banks – the ones we need most to trust implicitly – must be ring fenced against the sometimes crazy risk takers in their investment arms.

In view of the banking industry’s unique capacity to bring the whole system down – even discrediting capitalism itself – they must all be closely monitored. Had this been done it is arguable the catastrophe which has overwhelmed us could have been avoided, or at least mitigated. In addition to all this we must enact laws that permit us to send bankers to jail, where reckless conduct and dodgy practices puts all our livelihoods at risk. Amazingly, there was no law in place that could hold ‘Fred the Shred’, to account: he broke no laws. This must change.

What really sticks in the public craw is that not a single banker is behind bars. Even members of the political class including peers, have ended up sporting prison blue. Their crimes, by comparison with the enormity of what the bankers did and are still doing, is of no consequence. Soon, no doubt, those numbers will be swelled by overzealous newspaper hacks and policemen who have had the temerity to keep them in the picture, even where no money has changed hands. Everybody – ministers included – it seems, can be jailed except ‘fat cat’ bankers. But even before consideration is given to criminalising certain banking activities, the Libor manipulation was an actionable crime. Why then is there no move to bring those fraudsters to justice? Their scams involved tens of billions of pounds worldwide. That question is doubtless answered by recently released figures which showed that access to Downing Street by bankers was of an order of ten times greater than that of anyone else – captains of industry and their like. Meantime the bonus culture continues on its lucrative way rubbing salt into our wounds and insulting us. These ‘gentlemen’ really are laughing all the way to the bank.

It has to be said that the Germans were unfairly treated by the hot-headed Greek Cypriots when they lampooned them as Nazis. The Germans had not wished for deposits to be seized from small depositors: that was a decision by their own Cypriot ruling class. They were fearful of upsetting all that hot money – much of it illegally acquired in Russia and stashed in Cypriot banks. It now seems that a benchmark has been set that only big investors and that, regrettably – since not all are crooks – is how it should be. If you have big holdings you should have the sense to see that when banks are offering returns out of kilter with banks generally there is likely to be a catch somewhere. If still you are prepared to take that risk, then so be it. You cannot look to others to save you from your own folly. Also you should not expect careful Fritz, who does pay his taxes and beavers away in a cold climate, along with other diligent north Europeans, to bail you out. At least the so called PIGS (Portugal, Italy, Greece and Spain) have the inestimable luxury and consolation of making a living under the Mediterranean sun. It tells you everything you need to know – that whereas Germans over the last two decades have voted themselves a 20% pay rise, the French have voted 90%.

Apart from anything else it was an affront to north European taxpayers that they should be expected to protect the ill-gotten gains of Russian oligarchs and the like and that a Euro country was being used to launder money. But you could say much the same about Luxembourg except that with more rigorous stewardship its banks have not gone belly up.

As for the future of the Euro itself, on which our own recovery is so heavily dependent, the storm clouds refuse to go away. This is because of the disparities between the economies of the north and south and the huge differences in competitiveness between them. It is so great that it has built up debt levels in the Club Med countries that are unsustainable. My belief is that the Euro will survive, but the weaker members, which never qualified for entry in the first place, will be let go. If only those rules of entry had been applied, so much of the pain currently being felt could have been avoided. But, as is so often the case, politics triumphed over sound money and we are all left with the consequences.

Germany: hero of the hour?

It used to be said that when America sneezed, Europe caught a cold. Now it’s the other way round, except that Europe has done a great deal more than sneezed; it’s almost taken to its bed. The reason for this is that Europe today is, despite appearances – the world’s economic powerhouse. It has on the way to twice America’s population and accounts for well over 40% of the world’s trade. But it has mismanaged its affairs to the point where the markets have had enough.

We must not blame the markets; they are only a reflection of how the guardians of our pension funds and insurance companies view future prospects. It is their job to identify risk and so protect people’s savings. They do not worry about the Scandinavians, Swiss, Dutch, Germans, or even us (now that we are in the process of balancing our budget and bringing our deficit under control). What they look for are not fine words and good intent – welcome as they are – but action.

They have seen it from us, but they have not been getting it in any meaningful way from Europe. From bestriding the world like a colossus in the lifetime of people still alive (not many, admittedly), Europe has seen its position twice destroyed by the two German wars.

The European Project was designed to ensure that this never happened again. For 50 years, Europe has painstakingly climbed back on its feet. Its people realised that old style nationalism was not the way forward, and today it is a beacon of cooperation and prosperity admired around the world. But all this is now threatened. Ruin, recrimination and bad – if not spilt – blood faces the continent unless it acts fast and decisively

It is to Europe’s great good fortune that it has one economy big enough and strong enough to silence the markets. But the leaders of that economy must step up to the plate. While we all understand why Germany is so paranoiac about printing money, no extra notes are actually printed – it’s just an electronic exercise in today’s world. And that is the point.

Today’s world is very different from the financial circumstances which brought Hitler to power. First, we now know that beggar thy neighbour, protectionist policies are counterproductive. Second, we are a much more joined up, globalised world, with powerful computers assisting our fragile brain capacities. Third, there are the great institutions such as the World Bank, the IMF, the World Trade Organisation, G20, and many, many more which were not in place when Germany’s Weimar Republic wrestled with its horrendous problems. (Not the least of these were the foolish and ruinous Reparations imposed by the victorious Allies in the Versailles Treaty). So Germany can take a more relaxed view today.

While it is important to learn the lessons of history, it is equally important not to be spooked by them. Germany has an historic opportunity to save Europe which its previous militarism helped to destroy. Germany must realise that if its fears and parsimoniousness allow the Euro to collapse, it will be among the greatest losers; its export-dependent economy would reel under the weight of a super valued Deutschmark. Nobody would be able to afford its goods. And that’s another thing! Nobody has benefited more from the reasonably priced Euro than have the Germans.

Poor, benighted Greece, (along, I might add, with the rest of us) has indulged itself on German products and that’s part of the reason it owes so much. There’s an irony in there somewhere, surely. Another irony is that this crisis has ended a British foreign policy which has been central to it for 500 years – even propelling it into any number of pre-emptive wars – never to allow a continental power bloc to develop which would overshadow us.

When our Prime Minister and Chancellor of the Exchequer urge Germany forward into a fiscal union, of which we will not be part, they are doing just that: putting the final building blocks in place which will lead to a united Europe.

It is a measure of the extraordinary trust which has built up that they feel safe to do so. So Fritz now has his chance to be the hero of the hour. Let him look at the big picture and rise to the challenge. Europe will be forever in his debt (literally). The European Central Bank must be the vehicle of his largess. It must be beefed up to the point where it can act like the Federal Reserve or the Bank of England – the lender of last resort.

The consequence of Germany opening up the coffers on all its hard earned dosh will not be without benefit in other ways. Systems will be put in place to ensure that such a drama never happens again; the feckless will be compelled into good housekeeping; corruption will be rooted out; Spanish practices in the workplace will be curtailed and Europe will have the fiscal union which, but for the crisis, it would never have had.

South Europe, despite all these measures, will always need a little forbearance, much like the poorer regions of Britain. We northerners will have to accept that with all that heat you will never get the Club Med countries to beaver away quite like us. But if they are unable to implement the austerity requirements – and they should not be too draconian (remember Versailles) – then they should be let go.

One thing, though, is certain. Either we all do our best to all hang together or we will surely all hang separately.

Taming Brussels

For a brief moment we thought we had got on top of the financial woes of the Credit Crunch and our personal and governmental debts which put all our livelihoods at risk.

At incredible potential cost, we had recapitalised our banks and put them on a sound footing. And then we began the painful long haul task of bringing our deficit under firm control. So far so good; the markets were impressed. The heat was off Britain.

But then the markets turned their gaze on the warring Europeans and their troubled, ill conceived euro.

The sovereign debt levels of the periphery countries quite spooked them. A slanging match had developed between the thrifty north and the spendthrift south. The Germans, in particular, were furious at the feckless and economically illiterate way the south Europeans had behaved, and the talk was that they had had enough of the haemorrhaging of their hard earned dosh. The whole future of the euro – and with it the European Union – hung in the balance.

Greece was the domino likely to go down first and very likely to carry a string of others with them. It was never an easy country to govern, and lovely people though they are, one of their irredeemable failings is that they make almost a national sport of not paying their taxes.

Yet at the same time, because they were part of the wonderful European Union, they expected to enjoy all the social benefits of the conscientious taxpaying north. How do you square a circle like that? After all, the north only got all those benefits because it was willing to cough up.

Greece’s public sector is bloated to the extent that it makes our own flawed product look like a sleekly toned race horse. What’s more, it only turns up for work when it feels like it and its appalling levels of absenteeism pass with just the Greek equivalent of a Gallic shrug. Then, after a semi-detached life of half work they insist on retiring ten years before the rest of us. No wonder the boys in their lederhosen are hacked off.

Yet despite what he and his other diligent north European comrades feel, he will not get his pride and joy deutschmark back. The ruling elite will see to that! The political classes have invested too much political and other capital in the so called ‘European project’ to let it founder. But after terrible dithering and lack of leadership which has propelled them to the wire, they have drawn back from what they see as the abyss of a collapsed Europe.

They are now determined, at last, to get ahead of the curve. They are putting together a package of such breathtaking proportions – three trillion (or 3,000,000,000,000) euros, no less – that even the money markets will recognise that they are putting their money where their mouth is and back off.

Yet the package will need approval of all 17 members of the eurozone and all 27 members of the Union for treaty amendments. Part of the deal, I’m sure, is that the people who underwrite the deal – principally the Germans – will insist on a future level of fiscal rectitude which will make it nigh on impossible for such a situation to arise again. There will be an oversight of all 17 member states’ budgets with a majority power of veto.

It will be, effectively, the final part of the jigsaw towards a united Europe: for all intents and purposes a fiscal union, which along with the existing monitory union will finally give the European single currency credibility. Politically, it couldn’t have happened at the beginning or at any point along the way, but dire necessity has forced the issue. It’s an ill wind that blows no good. The new Europe will not be such a bad place to belong so long as all that nonsense of an interfering Brussels is dealt with.

This is a heaven sent opportunity which will not come again. And because they need our signature on the treaty, we can insist on repatriation of those matters we all know to be flawed, such as the Working Times Directive, border controls, fisheries protection, and even that horney old chestnut: the Common Agricultural Policy.

Way back when we were haggling over the Maarstricht Treaty, they came up with that amazing word “subsidiarity”. What ever happened to it? It was adopted by the Union and was specifically designed to constrain Brussels.

If we seize the moment, we can then settle down to becoming the good Europeans we were always willing to be, instead of the perpetual awkward squad.

The world of tomorrow is going to be one of the big battalions, and Europe is a very big battalion indeed; one more than capable of stopping itself being pushed around by a resurgent China or anyone else.

The Perfect Storm

It is alarming that the markets have given a thumbs down to the Obama/Congress deal. And now we hear that they are seriously doubtful of Italy’s ability to grow its way out of the enormous debt it holds.

What with Spain teetering on the brink, and Greece, Portugal and Ireland considered lost causes, we have what amounts to ‘the perfect storm’. Yet we British have retained the market’s confidence; our willingness to bite the bullet allows us to borrow at the same rate as the Germans. But sadly that won’t save us. We absolutely have to sell our goods and services to the New World as well as the old.

43% alone of our output goes to the European Union, and another huge chunk to North America. The US Republicans – led by the Tea Party – refuse to aid a deficit cutting programme by including tax increases, even though the Federal Government’s tax take is barely half the European average. What right-minded system in today’s world allows Western drivers to fill up at not much more than half of the EU average?

Alas, Americans (and to be fair we) have been living high on the hog for too long. We in the West – especially the Americans with their consumption-driven economy – have been sating ourselves on China’s cheap goods, fueling its mind-blowing year-on-year 10% growth at the expence of increasing their own competetiveness. Industries have gone down like ninepins and jobs exported; they have allowed China to get away with a grossly undervalued currency and not to conform to World Trade Organisation rules. Perhaps most alarming of all, China stands accused of commercial and military espionage on a industrial scale by hacking into the West’s computer systems. This amounts to war by other means. So either the US treats balancing its budget almost as though it were a wartime priority, or it can say goodbye to being the world’s leading economy. Hello, China. Hello, India.

We may have been sold the idea that somethings are too big to fail, but believe me: a whole nation can fail – even the US if it hasn’t the stomach to put its house in order. The wars in Afghanistan and Iraq have done for the United States what the Kaiser and Hitler wars did for us… nigh bankrupted it. The difference is that in our case it was a noble struggle that simply had to be faced; a militaristic Germany bent on world conquest was a cause worth sacrificing even the British Empire for.

As far as the Euro is concerned, no matter how many sticking plasters they try to put over the crisis, nothing can hide the fact that the patient neeeds surgery. Greece and the others – the so called PIIGS – can’t service the debts they already have and provide for growth. And how does it help to foist more loans on them and push their service charges even higher? It’s the economics of the madhouse. They must all be cut loose; free to set their interest rates at the appropriate level; free to make a mess of things if they can’t get their act together without dragging everyone else down with them and also free to rejoin if they get their house in order and meet the strict criteria of membership, which they were meant to meet in the first place but never did.

The only alternative is for the sound economies of the north to take fiscal control of the hopeless cases in the south. In other words, a Fiscal Union to add to the unworkable existing Monetary Union. In the long run the PIIGS would all be better off. But would they stand for it? Proud, broken Greece would find it exceedingly hard to take the teutonic medicine that Frankfurt would insist they swallow.

As for poor old Britain, we are left dangling in the wind, waiting on events over which we have no control, but which are certain to turn all our lives upside down. I would hazard a guess, however, that if the Euro is reformed so that only successful economies can belong, then perhaps a very good case could then be made for us to join

There are huge advantages to be had in belonging to a truly powerful currancy bloc that might well take over as the world’s Reserve Currency. I fear the dollar’s day may be done, but I wouldn’t underestimate Uncle Sam’s recuperative powers and his legendary can-do approach when fired up. But please, please don’t let the Reserve Currency be the Yuan if Uncle Sam can’t make it.

The euro

How could Greece’s economy, which makes up only 2% of the Eurozone, potentially bring the whole house of cards crashing down? It is down to what the jittery markets make of it all. If they believe that the new bailout’s austerity demands (the second tranche) are unenforceable on a people who are now close to ungovernable, then they will panic, and a panicking bond market cannot be resisted. Indeed, we British had firsthand experience of this on ‘Black Wednesday’. And besides, the Greeks don’t have the stomach for more austerity: they would rather default on their debts and tell north Europe to get stuffed; they see only a future of unending misery as things stand.

As for the still fragile and barely recovering banks, there would inevitably be huge shockwaves all over again. But it’s the thought of a domino eftect on the other tottering economies of south Europe (Britain in extremis will save Ireland from going under) which is the stuff of sleepless nights. No body (neither the ECB nor IMF) can raise the sort of money needed to save the likes of Spain or Italy: it is truly a doomsday scenario which, amazingly, has got even China and India thinking they might have to step in.

The Euro is going to have to go back to the format which it originally drafted; that’s to say that only economies which can meet the five strict criteria laid down can be members. Alas, it was the failure to adhere to these requirements and the mad rush to admit anybody and everybody – and all the fudging that took place besides – which has led to the present situation. In that sense, north Europe has only itself to blame for not insisting on admission rules being sacrosanct. It is perfectly understandable that the hardworking, tax-paying, late-retiring North resents the happy-go-lucky, tax-avoiding and lets-play-the-Euro-system-with-its-cheap-loans South, which told a string of porkies about its indebtedness and then, to cap it all, wants to put its feet up early. But the South did only what most would do in the circumstances, given half a chance. Any thinking person could have seen it coming.

Watch this space!

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