Development aid to India, about £280m annually, is becoming increasingly controversial. Concern began when Indian billionaires started to buy British companies and India embarked on a space programme. But Pranab Mukherjee, India’s finance minister, really set the cat amongst the pigeons. He recently declared “we do not require the aid. It is a peanut in our total development expenditure”.
Following on from this bombshell it emerged that Nirupama Rao, India’s (then) foreign minister, had suggested in 2010 that India shouldn’t accept any more DFID aid because of the “negative publicity of Indian poverty promoted by DFID”. But British ministers had apparently responded by saying they had spent so much political capital justifying the aid to their electorate, that it would be embarrassing if India just “pulled the plug”. So India is apparently accepting our aid, regarded by many Indians as patronising, unnecessary and counter-productive, in order to help DFID to save face.
Mr Mukherjee’s comments came to light when the Indian Government appeared to be opting for French fighter-planes rather than British, as if to add insult to injury. There have been howls of outrage. But we really should be listening to India’s politicians.
DFID shows uncanny similarities to Mrs Jellyby in Dickens' Bleak House. She was obsessed with her African project to the considerable detriment of her long-suffering family. DFID wants to be a leader against global poverty, irrespective of whether others follow or, more amazingly still, whether the recipients want our charity or whether the British people wish to pay for it.
There has been much speculation that, not least of all on this site, Chris Huhne’s resignation as Secretary of State for Energy and Climate Change will lead to more realistic, less flawed and less costly energy policies. Mr Huhne was widely seen as a “green fanatic” and, significantly, his departure has been much mourned by the green movement. George Monbiot tweeted “I’m sad to see Chris Huhne go. He’s been one of the few voices of (relative) sanity in the Coalition”. And he added “…with Huhne gone, climate change deniers in Coalition will be emboldened. Kind of ironic that it’s about speeding.” Ironic indeed.
Ed Davey, his successor, has come from BIS and should be more attuned to the needs of business. He has already homed in on the impact of high energy costs for households, where green policies add a 15% “stealth tax” to electricity prices. One can only hope his concerns will extend to the impact of high energy costs on businesses, where the “stealth tax” is over 20% and rising.
The damage to businesses, especially energy intensive manufacturers, of the extra electricity costs is well documented. Last November for example Rio Tinto Alcan announced the closure of their aluminium smelter in Lynemouth, Northumberland. RTA could not have been clearer in their reason for closing the plant. They said “…it is clear the smelter is no longer a sustainable business because its energy costs are increasing significantly, due largely to emerging legislation”. As high energy costs close plants here the work, along with attendant carbon emissions, goes elsewhere.
The Government has acknowledged the problem. We remember the Chancellor’s conference speech last October which suggested that British companies would not be sacrificed in the race to build a greener economy. He said Britain would move “no slower, no faster than our fellow countries in Europe” and “we are not going to save the planet by putting our country out of business”. Reflecting these concerns, he announced some compensation for energy intensive users in the Autumn Statement, but not enough to offset the extra “green energy” costs coming down the track.
The annual World Economic Forum jamboree for politicians, businesspeople and other worthies ends today. The talking, networking and skiing will be over for another year. Next year there will be another jamboree – and yet more talking, networking and skiing. Perhaps I’m just jaundiced but these meetings strike me as mere displacement activities. Surely the world’s leaders would better spend their time dealing with urgent and troublesome economic problems back home. OK so they only last a few days, but a few days too many. And, boy, are there problems back home.
It will however be business as usual tomorrow in Brussels, when the next European Union Summit is convened to take stock of developments since the Summit of 8-9 December. And there have been significant developments, though little progress towards resolving the Eurozone’s underlying problems. The Standard and Poor’s downgrades to France and eight other Eurozone members came and went, reminding us of the fiscal fragility of many members of the currency bloc. (Fitch’s followed by downgrading five countries last Friday night.)
The markets took the event in their stride, partly because they expected the downgrades and partly because they had been lifted by the ECB’s huge liquidity boost to Europe’s banking sector. ECB President Mario Draghi has been hailed as the hero of the hour, pumping nearly €500bn of 3-year funding into the banks. His action probably prevented another almighty credit crunch. As the markets’ mood has improved there has even been loose talk that the Eurozone’s travails are being “resolved”. But talks surrounding Greece’s second bailout, initially proposed last July, drag on. The German Government, patience wearing thin, has proposed that Greece should cede its authority over fiscal decisions to a Eurozone “budget commissioner”.
Helped by the ECB’s huge liquidity boost, launched last December, the financial markets have recently become more optimistic about the prospects for the Eurozone. There has even been talk that the Eurozone crisis may be on the way to being “solved”. Alas, this can only be, as ever, a false dawn. The grinding realities of the Eurozone’s dysfunctional economy are never far from the surface. And, as if on cue, a leaked paper from the IMF containing some depressingly predictable downgrades to the Eurozone’s growth prospects appeared in the press towards the end of last week.
The IMF now expects Eurozone GDP to fall by 0.5% this year compared with an increase of over 1% last September. Indeed the currency bloc is probably already in recession. Even Germany’s GDP fell back by about 0.25% in the fourth quarter of 2011 as recovery petered out. The IMF now forecasts falls in output for both Spain (1.7%) and Italy (2.2%), instead of September’s expectations of modest growth, whilst the contraction in Greek and Portuguese GDP can only be expected to worsen. The southern European economies, uncompetitive and struggling with demanding austerity packages, are trapped in a vicious downward spiral of falling output, rising debt and worsening growth prospects. Joseph Stiglitz has recently commented that austerity packages are “suicides pacts”, akin to medieval “blood-letting” which left the patient sicker than before. The language may be melodramatic but the sentiment is fair. Faced with catastrophe the EU’s leaders continue to insist on austerity whilst doing little to help the patient onto his feet.
Stories about wind turbines self-destructing in gales have become staple fodder in the wind-sceptic press. Pictures of turbines catching fire and detached blades hurling themselves across the countryside raise a hollow laugh, doubtless adding to the general gaiety of the nation. But wind-power really is no laughing matter at all. It adds to electricity costs, raises fuel poverty and chips away at Britain’s competitiveness.
Figures for the costs of generating electricity by the various technologies are not difficult to find. Indeed the Government has commissioned several highly respected engineering consultancies to provide such data. In a recent report for Civitas I discussed estimates by Mott MacDonald, Parsons Brinckerhoff and Ove Arup. The detailed references were provided in my report.
The recent 10th anniversary of the introduction of the euro’s notes and coins was a curiously muted affair. How different from the launch back in 2002, all balloons and fanfares, with more than a few hints that we naysayers were seriously unhinged.
Will the euro survive this year? Who knows? But what I find so fascinating about the current debate is that the question is increasingly being asked, undermining the currency at every turn. The IMF’s Christine Lagarde’s attempt to defend the euro last Friday, when speaking to journalists in South Africa, sounded rather tepid, if not unsure. “Will 2012 be the end of the euro currency? I seriously don’t think so,” she said.
In the absence of any hard news about the beleaguered currency, the aftermath of last December’s summit, the Cameron veto and the forthcoming treaty mainly designed to strengthen fiscal discipline in the Eurozone, rumbles on. The latest episode relates the likelihood of a new confrontation between David Cameron and Nicolas Sarkozy, after the French president insisted that the EU member states signing the new fiscal treaty should be allowed to set their own policies for the Single Market, with Britain excluded. It is French Presidential year after all.
The latest draft of the treaty has apparently been amended to commit the signatories to “enhanced governance” to enable “deeper integration in the internal market.” One does not need to be paranoid to believe that the Single Market in financial services will be a prime target. Look out, City of London, the EU really is after you.
The fallout from last week’s EU Summit rumbles on. Anglo-Gallic name-calling seems to have sunk to new lows amidst threats by the “Anglo-Saxon” ratings agencies to downgrade Eurozone debt in general and France’s in particular. Fitch’s is French-owned, by the way.
Meanwhile the EU machinery cranks on. European Council President Mr Van Rompuy sent the draft fiscal compact treaty to EU leaders on Friday night. He hopes to finalise the treaty by late January for signing in March. Just in case there is the odd mishap en route with individual countries’ ratification procedures, democracy is such a nuisance you know, the treaty will be enforced if a minimum of a crude majority of Eurozone states ratify it. In other words, all will be well if just nine of the EU17 endorse it. The EU hierarchy will then view their work, pronounce it good and declare the euro rescued.
Well, maybe. I would like to know if any of the EU leaders seriously believe that the agreements made at the December Summit, amounting to a rehashed Stability and Growth Pact and a rehashed EFSF, tackle any bit of the Eurozone’s inherent flaws. For truth to tell, the Eurozone crisis is no nearer to resolution than it was before last week’s Summit. As the evidence mounts of the damage being done by the Eurozone crisis to Eurozone economies specifically and to the western world including ourselves, more generally, frustration with the vacillating Eurozone leaders is turning from bemusement to desperation.
Last week’s Summit will go down in history. Following the Prime Minister’s treaty veto, the EU17-plus-six, probably backed by Hungary, the Czech Republic and Sweden, will battle on with their rescue plans for the euro. The fanciful notion that Britain could lead the “outer 10” as a counterweight to the EU17 was summarily despatched. Britain will be “isolated”.
Even though the proposed monthly meetings of the EU17+6+3 will constitutionally be restricted to taking decisions solely with regard to euro matters, it is inevitable that they will take decisions that will affect UK interests. One example immediately springs to mind. It is the very issue that was behind the rift between Britain and the rest of the EU last Friday morning, namely the City of London. It is now glaringly obvious that the City, which many of us still regard as an asset of immense economic importance, is being prepared as the scapegoat, the sacrificial lamb, for the ills of the Eurozone. It is now clear that President Sarkozy, supported by Chancellor Merkel, attribute the Eurozone crisis to the speculative Anglo-Saxon capitalism that caused the crash in 2008 rather than the euro’s inherent structural flaws. Britain and the Wild West ways of our Anglo-Saxon financial markets, predatory and anti-communautaire, are being groomed to take the blame if/when the Eurozone finally falls over.
Britain will therefore be outside the tent when the problems of the Eurozone, inextricably interlinked with our financial services industry, will be discussed. There are no prizes for concluding this will mean more stifling EU regulation for us. Indeed this would be no more than a continuation of what we have already. Open Europe released a report (pdf) last Monday which concluded “regulation is now less geared to financial services growth but more towards curtailing financial market activity, irrespective of whether such activity is good or bad”. There were 49 new EU regulatory proposals potentially affecting the City either in the pipeline or being discussed at EU-level, with very few aimed at promoting financial services trade. The UK was moreover already losing influence on the legislative agenda. Tellingly, this was happening at a time when opportunities in EU markets were limited whilst global opportunities were “exploding”.
Last week was an extraordinary week by any standards. The economic forecasts produced by the Office for Budget Responsibility to accompany the Autumn Statement were truly shocking. The growth projections to 2013 were revised down significantly and the public finances, deficits and debt, were substantially revised up. The OBR concluded however that both the fiscal mandate (which relates to the removal of the structural current deficit on a 5-year rolling basis, currently by FY2016) and the supplementary target (which relates to achieving a fall in the debt/GDP ratio by FY2015) were met. But they only met by some rather fancy figure-work in the forecasts. A happy combination of buoyant GDP growth and tough public spending cuts in FY2015 and FY2016 delivered the “right result”. The probability of achieving this fortuitous combination of events strikes me as close to zero. Nevertheless the financial markets, somewhat distracted by events across the channel, appeared well satisfied with the Autumn Statement and the Chancellor should be congratulated for sticking to his plans.
Tellingly the OBR’s forecasts were based on the assumption that the Eurozone would muddle through and not implode. The OBR said with admirable constraint “…the possibility of a more disorderly outcome represents a significant risk on the downside to our forecast, but one that is impossible to quantify in a meaningful way given the range of potential outcomes.” There could therefore be a “much worse outcome” for Britain. The OBR’s approach is quite understandable and it is difficult to see what else they could have done under the circumstances.
But we should keep a possible collapse of the Eurozone and its economic implications for Britain in perspective. The current uncertainty is undoubtedly undermining growth, it is damaging and unsustainable. And whilst the crisis goes on, confidence and growth will continue to be undermined. A resolution, one way or another, is long overdue. The Eurozone’s leaders have really only two basic choices. They either establish a full fiscal union for the euro area or they acknowledge that a major reconfiguration is in unavoidable. In the short-term reconfiguration would of course be economically disruptive. But by lancing the boil and restoring certainty, confidence and growth could then be restored. The notion that a break-up of the euro would mean economic perdition and therefore “must not be allowed to happen” is absurd.
When the Chancellor stands up next Tuesday to unveil his latest policies for economic growth, we can be certain of at least one thing. He has not been short of advice, not least of all from our new-style, lachrymose Shadow Chancellor.
When he is not being moved to tears by the Antiques Roadshow or The Sound of Music, Mr Balls obsessively calls on Mr Osborne to ease his fiscal consolidation plans. But the Chancellor can claim, with every justification, that his deficit reduction plan (“plan A”) in June 2010 did, indeed, preserve Britain’s triple A rating for sovereign debt. And, this in turn, has enabled Britain to achieve “safe haven” status as the Eurozone crisis intensifies, which has led to remarkably low interest rates. The sight of German 10-year bond yields nudging above Britain’s is remarkable given our debt-soaked circumstances. How long this “safe haven” status will persist, given the poor outlook for the public sector finances, is of course a different matter. It cannot be an assumed “given”.
The Prime Minister conceded last week to the CBI “…getting debt under control is proving harder than anyone envisaged”, doubtless to prepare us all for a deterioration in the OBR’s public finances forecasts. It is not as if the numbers are not bad enough already. In March the OBR projected an increase in Public Sector Net Debt of well over £300bn over the forecast period from £1,046bn (in 2011-12) to £1,359bn (in 2015-16), nearly 70% of GDP. These projections were based on a pretty solid growth performance over the period. The OBR will however almost certainly significantly downgrade the GDP forecasts for 2011 and 2012 (at minimum), which will have unfortunate knock-on implications for public borrowing. Commentators will, in particular, be focusing on whether the Chancellor’s fiscal mandate, aiming to eliminate the structural current deficit on a 5-year rolling target, and/or his supplementary rule, targeting a falling debt/GDP ratio by 2015-16, will be missed.
The destruction of British industry, prosperity and jobs goes on. The latest casualty is Rio Tinto Alcan’s aluminium smelter in Lynemouth, Northumberland. RTA could not have been clearer in their reason for closing the plant. They said “…it is clear the smelter is no longer a sustainable business because its energy costs are increasing significantly, due largely to emerging legislation”.
It is widely expected that the Chancellor will offer some assistance to energy intensive industries in his Autumn Statement, but it will be too little, and in some cases, too late. This has been obvious for some time. Instead of tinkering at the edges, he should be putting pressure on the Prime Minister and DECC to radically update our energy policies if he really wishes to help manufacturing industry. As Matthew Sinclair recommends in his latest, excellent paper (pdf) the carbon floor price should be abandoned. The EU renewables targets, which are driving the heavy investment in costly and inefficient wind-generated electricity, should also be abandoned and Britain should opt out of the EU’s Emissions Trading System (ETS). Finally, the draconian carbon reduction targets, as specified under the Climate Change Act (2008), should be radically reassessed for their practicality. I return to this issue below.
Let us take stock of where the economy is now. Unemployment is now rising rapidly, the economy could well be heading back into recession and the public finances are still in a parlous state. The on-going crisis in the Eurozone will act as a drag for the foreseeable future. It could be 2013, or even 2014, before GDP recovers the level of the last peak in early 2008, prior to the great recession. We are in a depression. The last thing the economy needs is damaging high cost energy policies, which were conceived in economically happier times when “dangerous manmade global warming” was perceived by some as a major issue. I suspect there are few who regard this semi-religious phenomenon as a major issue now. The world has moved on to a much more dangerous place. Our energy policies are not just foolish, they are past their sell-by date as well.
I had intended that this week’s piece would be an “EU free zone”. But the Eurozone crisis staggers on and the latest Commission forecasts were shocking and merit further comment. The Commission, be praised, did not mince its words. They wrote “…the EU economy is moving in dangerous territory. The recovery has already come to a standstill…any further bad news could amplify adverse feedback loops pushing the EU economy back into recession”.
Eurozone GDP may increase by only 0.5% in 2012 (after 1.5% this year) compared with spring’s projection of 1.8%. Growth in Germany and France is expected to slow sharply in 2012 and Italy’s economy to flat-line. Spain will struggle and Portugal and Greece will face further economic contraction. But even these scenarios look optimistic, especially for Italy and Spain.
The southern economies are in for a torrid time, saddled with the twin burdens of an endemic lack of competitiveness and growth-draining, masochistic austerity packages as they either slide back into recession or contract further. The countries need an improvement in their relative labour costs of around 30-40% to regain to competitiveness, which they can do by either major deflation (in an extended depression) or devaluation. In the absence of the devaluation option, the deflationary route could take years of pain to achieve the required competitiveness. In addition they are highly unlikely to achieve the deficit reduction targets the tough austerity budgets are intended to deliver, if they have no growth.
Even by the standards of international meetings, last week’s G20 shindig in Cannes was a costly failure. There were hopes that the meeting would acclaim the Eurozone’s latest rescue package, as agreed in Brussels the week before, as a triumphant solution to the Eurozone crisis. But it was not to be. Putting aside the loose ends of the rescue package, the event was overshadowed by Greek PM Papandreou’s outburst of democratic zeal when he said the latest bailout terms would be put to the people. Suffice to say he and his troublesome referendum were quickly despatched by his fellow brothers and sisters.
There were however two fascinating developments at Cannes. The first was the suggestion by Angela Merkel and Nicolas Sarkozy that Greece might leave the Eurozone after all. This was a first. It was an acknowledgement that the “ever closer union of the peoples of Europe” may actually be reversed. Mark Hoban’s confirmation that the Treasury had contingency plans to deal with the potential collapse of the euro seemed more than reasonable under the circumstances. The second development was Italy’s agreement to the IMF’s monitoring its public finances. Given Italy’s mountain of sovereign debt, at €1.8tn it is the third largest in the world after the US and Japan, and a less-than-serious Prime Minister this is a useful development.
Moving on to more parochial issues, it is becoming increasingly clear that Britain’s semi-detachment from the heart of Europe has moved up a gear. Sarkozy’s spat with David Cameron a fortnight ago was, of course, a clear indication that he believed Britain should keep out of the debate over the Eurozone’s troubles, even though we had already contributed £12bn to the bailouts, and there may be more to come through the IMF. And in response to the BBC’s Paul Mason the French President uttered “…you come from an island, so maybe you don’t understand the subtleties of European construction.” This comment, apart from its sheer banality and discourtesy, was curiously reminiscent of de Gaulle’s belligerence towards Britain in the post-war years. Mind you, de Gaulle did veto our membership of the EEC twice. Alas he was not immortal.
Last week’s events were extraordinary. It may well be that it will be remembered as the week when “events, dear boy, events” began to shape Britain’s future as a country free of the EU’s crippling bureaucracy and bickering politicians.
Starting with last week’s EU summit there are probably four main conclusions to be drawn from the outcome. The first is that the painfully negotiated rescue package will not save the Eurozone in its current configuration. There was nothing in the deal to help Europe’s economies under stress. But it does give the beleaguered currency bloc more time to contemplate its future.
The second is that the negotiations in the lead-up to the deal were fraught in the extreme. Most of the negotiating ahead of the summit was, of course, done by the Chancellor Merkel and President Sarkozy, with the other EU leaders notable by their absence. The EU appears to be more dominated by the Franco-German partnership than ever. But even this relationship was tense. The gulf between France and Germany was obvious for all to see. There were major differences between Merkel and Sarkozy concerning all three aspects of the deal – the recapitalisation of the banks, the enhanced EFSF and the decisions about Greece. Suffice to say, Merkel basically called the shots, exposing France’s economic and fiscal vulnerabilities. But at least Merkel and Sarkozy maintained a unified and civil face to the world. Sarkozy’s attack on Greece and the smirking Franco-German dismissal of Signor Berlusconi were unedifying.
At last weekend’s G20 meeting of central bankers and finance ministers, there was yet another grandiose and hubristic statement that this weekend’s European Council Summit would result in a package that would be “decisive” and “save” the euro. Suffice to say that by the middle of the week, Germany’s minister of finance, Wolfgang Schäuble, had poured cold water on any notion that there would be the “big bazooka” that markets believe is needed to prevent the currency club breaking up. The cycle of expectation, nay elation, followed by disappointment and bitter reality is now well established. And by the end of last week we were told that few decisions will actually be made today. There would be another Summit on Wednesday at which we have been reliably informed there will be a “breakthrough”.
Well maybe. Without going into details, the factor that hits a casual observer between the eyes is the sheer lack of political direction and will in the face of the mounting Eurozone crisis. We are seeing a play in which the players seem to be making the script up as they’re going along. Or worse, they seem unsure as to which play they are appearing in.
There are three main issues on the agenda at this weekend’s Summit. Briefly, the key issue concerns the enhancement of the European Financial Stability Facility (EFSF) in order to build a firewall around Spain and Italy. France, in one corner and aware of the vulnerability of its own “triple A” rating, is in deep disagreement with Germany, which is allied with the ECB. The second concerns revisions to the second bailout package for Greece, which was agreed only last July. In particular, there are Franco-German disputes over the size of haircut private holders of Greek sovereign debt should be expected to bear. And the third issue concerns the re-capitalisation of Europe’s banks. Capitalisation of over €100bn, apparently from private and public sources and not involving British banks, was agreed yesterday. We await next week’s announcements on the first two.