Showing posts from tagged with: European Union

Stable Growth likely to Continue

Posted by Tim Congdon in News Archive | 0 comments

In my last monthly e-mailed note (on 28th June) I said that money growth patterns in the four leading advanced country jurisdictions (USA, Eurozone, Japan and the UK) were more or less perfect. To recall, “4% a year is a more or less ideal rate of broad money growth in developed countries, with a trend rate of output growth of 1% - 2% and an aim to keep inflation around 2%. Amazingly, and no doubt more by happenstance than design, 4% a year is at present common to the USA, the Eurozone, Japan (just about) and the UK.” Well, not much has happened since then to alter the assessment. The picture is as follows,2016-08-25_11-45-20The numbers  for China and India, the two big developing countries (both with trend growth rates of output of over 5% a year), are as follows2016-08-25_11-47-55  

Global money round-up in mid-2016

Posted by Tim Congdon in News Archive | 0 comments

The victory for the Leave campaign in the UK’s referendum on EU membership has dominated financial news since 23rd June. It is of course a major event, not least because numerous forecasts of a mini-recession in the UK are now to be tested. The evidence so far is mixed, with the latest survey from the Confederation of British Industry (published a few days before 23rd June) reporting a rise in the balance of companies planning to expand output in the next three months. Elsewhere the main features are, first, in the developed countries continued growth of broad money at the almost ideal annual rate of 4%, and, second, in China and India signs of a slowdown in broad money growth. The slowdown in both China and India has come about suddenly, and may soon disappear from the data and not prove  meaningful.  On  the  other  hand,  the  slowdown  could  last  a  few months, perhaps even more. Once a money slowdown/acceleration persists for six months or longer, it starts to matter to the cyclical prospect. My overall assessment is – despite the Brexit shenanigans – the global monetary background remains consistent with steady growth in world demand and output in late 2016 and into 2017. Far too much fuss is being made about Brexit. The UK’s share of world output (when output is measured on a so-called “purchasing power parity” basis) is modest, less than 2½ per cent.   The credit downgrades faced by British banks have created possible funding strain for them, recalling the crisis of late 2008. The problem needs to be countered by the provision of long-term refinancing facilities from the Bank of England, just as Draghi handled a similar challenge in the Eurozone in December 2011  

The Leave campaign has been about the recovery of British control over British business etc

Posted by Alec Tritton in News Archive | 0 comments

Brexit-lite and Brexit proper

Post-Brexit discussion suffers from a serious vacuum. Although the British people have voted by a narrow margin to leave the European Union, the next prime minister has not been appointed, and no one knows exactly how he/she and his/her team will organize the negotiations. Two main options (both with many potential variants) are emerging,
  • Brexit-lite (“the Norwegian/Swiss option, plus or minus”. The government gives priority to maintaining access to the EU’s Single Market, although seeking  (like Norway and Switzerland) to restore parliamentary sovereignty and judiicial supremacy (i.e., that the highest court in the UK is its own Supreme Court, not the European Court of Justice in Luxembourg). Control over new regulations would be with the UK Parliament, but EU regulation would have to be respected in much of the economy and not just on exports to the EU. The UK would pay some money (“danegeld”) to the EU. Given the politics of the situation, the UK would want significant concessions on “freedom of movement”, so that it did indeed control its borders, but something like “freedom of movement for workers only” night be devised.
  • Brexit proper. The government says that access to the Single Market is not essential, as the UK can trade satisfactorily with the EU under World Trade Organization rules. It says this, even if UK exports would be subject to the “common external tariff”. Of course the UK restores parliamentary sovereignty and judicial supremacy. It also oversees all new business regulation, although exports to the EU must anyhow comply with EU regulation. The UK pays no money to the EU and recovers full control of its borders.
It would over-simplify matters to say that Brexit-lite is the preferred option for the Eurosceptic Tories, while Brexit proper is the approach favoured by UKIP. But an over-simplification of that sort would not be outright misleading. My surmise is that the prime minister will be Boris Johnson and that the outcome will be Brexit-lite. If the prime minister is Theresa May, the outcome will be Brexit-extremely-lite. UKIP will protest that the British people have again been betrayed and deceived, but its vote share in the 2020 general election is very difficult to conjecture. The size of the danegeld will be a sensitive issue. (My further surmise is that, with the EU’s economic importance [and hence its share of UK exports] declining Brexit-lite may become Brexit proper in due course, perhaps after another decade or two. But who knows? Questions are being raised about the EU’s own internal cohesion.)  

How high is UKIP’s support at present? Is it really changing the face of British politics?

Posted by Tim Congdon in News Archive | 0 comments

The UK Independence Party claims to be ‘changing the face of British politics’. The big support it received in the May 2013 county council elections certainly came as a shock to the three so-called ‘main’ parties, with one of these parties – the Liberal Democrats – receiving far fewer votes than UKIP. (The LibDems had 14% of the vote and UKIP 23%, and UKIP was in fact only 2% behind the Conservatives.) However, opinion polls tend to show UKIP support at only just into the double digits per cent and not much above the LibDems. Are the opinion polls telling the truth? UKIP is doing far better in local government elections than in the opinion polls. In the following note I compare opinion poll and local election results since late August. In the 47 local government elections analysed the UKIP vote share was 19.0% and its average result where it stood was 20.8%. (But note that this 20.8% was lower than the 2nd May figure! Admittedly, the difference is small.) By contrast, the UKIP share in the 59 opinion polls compiled by UK Polling Report in this period was 11.6%. On this basis, the opinion polls are seriously understating the size of the prospective UKIP vote in both the European elections of 2014 and the general election of 2015. It also needs to be emphasized that the UKIP share in local government elections has climbed from 3.1% in 2010 to 19% plus in 2013. If it continued to make gains at this sort of rate, it would certainly be ‘a major party’ in the 2015 general election and could even win it. For clarity, this is not what I expect, but for some years to come fluctuations in the UKIP vote share, around a rising trend, are likely to disrupt the thee-party, Lib-Lab-Con pattern of British politics which began in the 1980s. (This pattern began with the formation and rise of the Social Democrats, and their eventual absorption into the Liberal Party.) It is unclear whether a four-party pattern (Labour, Conservatives, UKIP and LibDems) or a three-party pattern will now develop, but a case can be made that UKIP will supplant the LibDems as the third party.  

Immigration and the UK labour market

Posted by Tim Congdon in News Archive | 0 comments

Heavy net immigration into the UK has occurred in the last 15 years, reflecting the impetus of mostly administrative changes at the start of the last Labour government in 1997. (No major announcement was made and no public debate was held on the desirability of this new development in British life.) A particularly important new trend was inaugurated about a decade ago. Following a decision by the then prime minister, Tony Blair, the UK would not impose any restrictions on the inward movement of workers from eight East European countries when they joined the European Union in May 2004. Since spring 2004 UK-born employment in the UK’s labour market has fallen, whereas foreign-born employment has increased by about 1.8 million. Roughly half of the 1.8 million come from the so-called ‘EUA8’ countries, i..e, the eight accession countries of May 2004. The mere recital of figures does not demonstrate a causal connection, but more detailed work (such as on regional employment patterns) does suggest that UK workers have lost jobs because of the influx of foreign workers. On 1sJanuary 2014 people from Bulgaria and Romania – which together have a population of about 30 million people – will be free to come to the UK, and to live and work here. The following note – which is chapter 4 of the 2013 edition of my study for the UK Independence Party on How much does the European Union cost Britain? – discusses these developments in more detail.  

The costs of regulation

Posted by Tim Congdon in News Archive | 0 comments

From a constitutional standpoint, the European Union is a monstrosity. Powers have been ceded to EU institutions  that  place  them  above  the  member  nations  in  the  constitutional  hierarchy.  These institutions are, in effect, federal bodies that  constitute a ‘government’  for  the  EU as a  whole. Nevertheless, the member nations have retained trappings of statehood, and in particular continue to have their own military forces, their own legal systems and their own fiscal prerogatives. Critically, most taxes are raised and most public expenditure is administered at the national level. EEC expenditure was a mere 0.03% of member states’ aggregate gross domestic product in 1960, and had climbed to 0.53% of that figure in 1973 on the UK’s accession. The ratio has subsequently risen to slightly more than 1% of EU GDP, as we saw in the last chapter. But it is striking that Germany – the main sponsor of European integration – has over the last 20 years been one of the member states most opposed to additional spending in the union’s name. At the Edinburgh meeting of the European Council in 1992 Germany actively supported a spending ceiling of 1.27% of aggregate member nations’ GDP.1 On the face of it the EU has two layers of government, one at the national level and the other for the union as a whole. But the word ‘layer’ implies, falsely, that a clear and definitive understanding has been established on the proper relationship between the two. In fact, EU member states are in the dysfunctional situation of having two distinct governments, one in the national capital and the other in Brussels, with their relative powers and responsibilities largely unsettled. The EU bureaucracy has been unable to wrench the key fiscal prerogatives, the powers to tax and spend, from the member states. To compensate for this failure, it has tried to expand its influence by pressing for more European ‘laws’. The heart of the process is that the European Commission proposes new ‘directives’ and ‘regulations’ to the Council of Ministers. Successive treaties have weakened the power of individual  nations  to  block  new  EU  legislation  that  they  dislike.  Particularly  since  the  Single European  Act  of  1986 the  nation  states  have  become  increasingly feeble  in restraining the  EU juggernaut. Over the 55 years of its existence the European Commission has authored thousands of directives and regulations that have the force of law across the EU. At the last count the EU’s various legislative enactments – which are termed the acquis communitaire – covered over 120,000 pages. As far as the EU is concerned, the acquis is sacrosanct and must be adopted by all new member states without cavil. Directives and regulations are the main expression of EU authority, and nowadays infiltrate every nook and cranny of national life. In the words of Lord Denning over 20 years ago, ‘Our sovereignty has been taken away by the European Court of Justice…No longer is European law an incoming tide flowing up the estuaries of England. It is now like a tidal wave bringing down our sea walls and flowing inland over our fields and houses—to the dismay of all.’2  

Greek public-debt-to-GDP ratio again over 150%

Posted by John Petley in News Archive | 0 comments

Press reports have suggested that the International Monetary Fund has become  unhappy  with  the  Greek  government’s  austerity  measures, since it felt not enough was being done to maintain fiscal solvency. Anyhow the latest tranche of money has been credited to the Greek government and life goes on, although Greece’s international creditors are watching the budget numbers month by month. The following note  recognises that the Greek government is not far from achieving a ‘primary budget balance’ (i.e., non-interest public expenditure is only slightly above tax revenues). In that sense, much has been done to restore the creditworthiness of the Greek state. However, the cost has been calamitous, with falls of about a quarter   in   real   terms   in   both   national   output   and   government expenditure. Even worse, it is not clear that the big austerity drive so far will be sufficient. Two points have to be emphasized. First, output has fallen so heavily from the peak (i.e., in 2007), and is still falling at such a rate, that a budget surplus would be needed to stop the debt/to/GDP ratio from rising further. There is no sign of that. Despite the defaults to private sector creditors, IMF data show the debt-to-GDP ratio now at about 175%. Second, the drop in output has of course a large cyclical element and, sooner or later, a cyclical recovery must surely happen. However,   a   deeper   problem   is   now   emerging,   that   international investors are shunning Greece and the trend level of output may be going down. To halt the rise in the debt-to-GDP ratio, Greece therefore needs an overall budget surplus over a series of years and not just a primary surplus in an emergency period Again, there is no prospect of that in any relevant planning horizon.  

Anyone for PEXIT?

Posted by Tim Congdon in News Archive | 0 comments

The Eurozone resembles a vast dyke which is full of holes and liable to disintegrate at any moment. This note concentrates on Portugal, where the recent resignation of the very able finance minister, Vitor Gaspar, was a huge disappointment. (It must be said that the Eurozone’s holes in Greece, Spain, Italy and France also remain large and conspicuous, despite international officialdom’s attempts to patch them.) Portugal’s problems arise partly because the economy’s trend rate of growth is now very low, perhaps even zero or negative. Gross domestic product per head is lower than ten years ago. With inflation almost zero, nominal GDP is at best flat. As a result, any deficit leads to an increase in the ratio of public debt to GDP. A May 2011 bailout negotiation with the ‘troika’ extended €78b. of loan and other financing, to help the Portuguese government and banking system. It must be acknowledged that Portugal has tried hard, with Gaspar at the finance ministry, to meet the conditions attached to the bailout plan. The cyclically-adjusted budget deficit fell from 9.0% in 2010 to 4.0% in 2012. Nevertheless, the debt-to-GDP ratio has kept on rising and is now over 120%, the kind of figure that was associated with the Greek dégringolade in 2012. (A fair verdict is  that a  debt-to-GDP  ratio  of  120% is  sustainable  when  the nominal interest rate on the debt is 5% or less, but – once the interest rate goes into double digits – the debt interest burden runs amok like a Frankenstein  monster.)  The  Portuguese  people  are  apparently weary with austerity, and it has to be said that – without a resumption of growth and particularly of asset price appreciation, which would help banking solvency – the danger has to be that further deficit-reduction measures would not restore fiscal sustainability or national solvency. Holders of Portuguese banks’ bond liabilities and depositors with Portugal’s banks, you have been warned! PEXIT (Portuguese exit from the Eurozone) is – almost certainly – a better option than staying in.  

Is UK monetary policy on the right lines? 1 3/4.

Posted by Tim Congdon in News Archive | 0 comments

The following note is work-in-progress. It is part of an attempt to bring to an end the great mass of confusions that have cluttered discussion of ‘quantitative easing’ in the UK’s monetary policy debate and indeed the monetary policy debates of many nations, in the last few years. Work on the note will resume next week…and perhaps in the following weeks.  

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