The Long, Slow Decline of the EU

I have commented before on the failings of the Euro as a currency.  I have also mentioned protectionist trading and politicised economics, but in addition, I think if you put together:

1. The capture of the Commission by the big business lobbies,
2. Regulation by process rather than by outcome,
3. The precautionary regulatory principle to stifle innovation,

you have a fairly good recipe for long term relative decline.

Not so much an economy as a museum, still popular, but in the process of becoming a quaint antiquity. A bit like Rome in the 5th century AD, complete with a gradually shrinking empire.

Opinion Polls and EU Membership

The British, like many others, have a tendency to fall for the “post hoc ergo propter hoc” fallacy. That is, we tend to confuse A happening before B with A having caused B. Here’s the popular reasoning:

1. Fact: we left the EU.

2. Fact: we have subsequently suffered cost of living difficulties.

3. Conclusion, leaving the EU caused the cost of living problems.

Problem 1. Brexit did not cause either Covid or the Russian invasion of Ukraine. These two added together did, for a while, make us look like one of the ruins that Cromwell knocked about a bit.

Problem 2. The Eurozone economies fared even worse as a result of these problems, and none of them, by definition, had left the EU.

Problem 3. The EU responses to both Covid and Ukraine were a lot slower than the UK responses, and eventually they had to follow us, rather than vice versa.

Problem 4. The UK is increasingly attracting foreign investment that the EU’s over-regulatory system is driving away.

Better Conclusion: 

We are faster on our feet and more decisive as an independent nation. None of our current problems would have been eased by remaining in the EU. We would simply have added to the inevitable economic problems caused by world events beyond our control. How we proceed is now up to us to decide.

Book Review: 'Adults in the Room' by Yanis Varoufakis

Some critics of Varoufakis are clearly unreasonable. He did not create the Greek debt crisis of 2015; he inherited it.

A so-called bailout programme which actually reduces the national income of the debtor economy, rendering it even less able to pay than it was before, is demonstrably unsustainable. Kicking the can down the road, by what is called ‘extend and pretend’, protects badly-managed international banks at the expense of ill-advised Greek citizens and their livelihoods.

A Greek default would have led to the country’s ejection from the Eurozone and who knows how much damage to the EU project.

We need to remember that the single currency’s advantage over earlier programmes such as The Snake and The EMS was supposed to be its irrevocable nature. If Greece could be forced out, what would prevent the next victim of the single currency’s poor design being forced out too? Was it reasonable to expect Greece to take one for the team? I hardly think so.

The Lesson of ‘Adults in the Room’ is essentially an old and simple one: When you are in a hole, stop digging. But that advice is sadly oversimplified. You find that others in the same hole won’t, for a variety of reasons, stop digging. What’s worse, the owners of another, much bigger hole, see digging you further in as a wonderful means of digging themselves out.

Though his short career as Greek Finance Minister may have appeared Quixotic, the sad truth is that Varoufakis was tilting at real giants, not windmills. As is all too common with giants, many of these were not all that nice, and there were simply too many of them out there.

I recommend ‘Adults in the Room’ not just to critics of the EU, but to anyone tempted to overdose on a Public-Relations-based idealisation of a deeply-flawed organization.

*****

(5 Stars)

Quora Question: Why did Britain vote to exit the EU?

EU organisation diagram

I must reduce the number of questions I answer on Quora. One of these days I need to write something somebody will pay for. But meanwhile:

I can’t speak for my country.

I personally think the proximate cause was the unwillingness of the EU during Cameron’s negotiations to offer even minimal gestures towards reforming those policy areas that raised concern in the UK. They did this in the full knowledge that Cameron needed a deal he could sell to the electorate. Instead, he was humiliated. After a widely-derided effort to suggest that he’d obtained worthwhile concessions, he effectively had to drop the whole subject of the supposed reforms from the referendum campaign.

In respect of immigration, the critical issue was the way the economically-unsound idea of free movement of people had quietly replaced the economically-sound idea of free movement of workers in EU treaties. The latter is about allowing factors of production to move to areas of gainful employment; the former only makes sense as part of a political project and throws intolerable burdens on to the public and social services of richer member countries. It’s worth noting that other members subsequently adopted restrictions they’d refused to Cameron.

Let us also for a moment consider the alternative to the UK leaving. Remainers argue their position was the status quo; it was not. The EU has two major projects that define its objectives; these are the Schengen Agreement on open borders and the Euro single currency. The UK had already decided to opt out of both. We had no influence on these two central issues. Hence we could only ever have been a fringe member going forward.

In particular the Eurozone members collectively outvote the non-members in the EU. They meet together, without the non-members, in order to agree a common position before EU Council meetings. One Eurozone meeting even decided to commit EU funds to a bailout scheme despite the UK, a major contributor to EU funds, not being present at the table.

In summary, I rather think the EU left the UK.

Just Slaying A Couple of Dragons

1. By far the biggest threat to the Scottish economy is Brexit. (Source: the SNP, in resonse to virtually every economic bad news story for the last six months).

FALSE. The EU accounts for 15% of Scottish trade. The rest of the UK accounts for more than 60%. Even if Brexit resulted in the complete destruction of Scotland's EU trade, and there's no obvious reason why it should, it would do less than a quarter of the damage that Scotland leaving the UK Single Market would do.

Probably the biggest threat to the Scottish economy at the moment is the perpetual political uncertainty engendered by the SNP's determination to threaten a second independence referendum at any conceivable opportunity. Unlike the Scottish government, foreign investors can do sums. They know an independent Scotland would be a lot poorer and no-one really wants to invest in a shrinking economy.

AND if that weren't bad enough, Scotland is now the most heavily-taxed part of the UK. We have a lower level of income at which you start paying higher rate income tax, a higher level of big business rates and a higher tax on purchase of more expensive houses. Sure. Come and invest. Come and live in Scotland all you high-fliers. We guarantee you'll pay for it.

2. There are many possible forms of Brexit. The Government has no mandate to take the UK out of the EU Single Market / Customs Union / Euratom etc. etc. (Source: anyone who voted Remain who can't accept the result of the referendum and is still trying to keep the UK subject to one or more EU institutions.)

FALSE. The mandate was quite simple. LEAVE THE EUROPEAN UNION. In spite of which the determination to keep the UK subject to one or more EU institutions, and especially the European Court of Justice, continues undiminished.

Will the Remoaners please explain how the UK can cling on to vestiges of EU membership without being subject to the ECJ's power to arbitrate on all disputes?

Or how we could remain in the customs union and still negotiate independent trade deals with non-EU governments? 

No? Didn't think so.

There. That's those dragons dead. (I don't think).

Is there anybody out there who can count?

Those of us who, following the projections contained in the celebrated White Paper Scotland's Future, were not already convinced of the SNP's collective inability to count, should have been convinced by the First Minister's contention that losing her overall majority at Holyrood could be described as winning convincingly.

True, the SNP got more votes than anyone else, but that still left the anti-SNP majority very little changed from the Referendum almost two years ago. It would be nice to think that in the not too far distant future the nationalists' claim to a monopoly of Scottishness would be seen for the nonsense it is and attention could instead be returned to the delivery of public services. Health, education and law & order cannot indefinitely play second fiddle to the demand for constitutional change.

Meanwhile we can all turn our attention to the EU Referendum next month, where we are told by the SNP that it will be an outrage if Scotland is taken out of the EU against its will.

Let us leave aside for the moment the uncomfortable fact that Scotland as such is not a member of the EU, the UK is, and that if Scotland had voted to leave the UK it would therefore have been voting to leave the EU even more briskly.

What is interesting, given the tied opinion polls, is the prospect that a Scottish Remain vote might very well end up obliging the rest of the UK to remain in The EU against its will. Will this also be an outrage? I await enlightenment from the First Minister but I'm not holding my breath.

Although only a few months ago David Cameron told us we could prosper outside the EU and he would himself lead the Leave campaign if he failed to get reforms, we are now presented with the unedifying daily spectacle of (mostly foreign) experts and bigwigs lined up in an orchestrated fashion by the government to prophesy everything up to and including the Third World War if we are foolish enough to think of leaving the EU.

For some reason they have not yet got round to the plagues of frogs and locusts, but I expect they will if the poll numbers remain stubborn.

None of these foreign experts appear to appreciate the perverseness of the British character, which tends to make us more likely to do something, not less, when lots of people with a vested interest are all telling us not to do it.

For my part the key issue is the crippling burden of supporting the ill-starred Eurozone, of which the UK is fortunately not a member.

The Eurozone countries have an in-built majority in the EU and can out-vote the UK permanently, especially since Cameron's renegotiations gave up our right to veto Eurozone measures that are not in the UK's interest.

Already during the Greek crisis last year we have seen the Eurozone vote to use EU funds when non-Eurozone EU-members such as the UK were not even present at the table. In other words they voted for us to share a payment without bothering to consult us. Although a fudge was found to get round this when their abuse of power was exposed, it seems very likely to be a taste of things to come if we vote to remain.

No-one should be under any illusion that a vote to remain is a vote for the status quo. The status quo in the EU is not sustainable as the recurrent national insolvencies show. Despite the lack of a democratic mandate, the EU elite have no option but to pursue further integration, including political integration, for the Eurozone.

Woe betide those EU members who do not see this integration as being in their best interests.

The Betrayal of Steel

As a son of a steel city I am feeling particularly unhappy about the travails into which the UK industry has been forced by problems not of its own making.

It seems steel is suffering the consequences of four related problems:

1. The last Labour government (specifically Energy Secretary Ed Miliband) unwisely decided to set an example to the world by running well ahead of the field in anti-climate-change policy. As a result British manufacturing industry pays the highest energy costs in the world, far more than Germany or France and twice as much as China or the USA. In other words, metal manufacture, as a very heavy energy-user, was deliberately disadvantaged by our own government. This achieved negative results for climate change since it exported British jobs to China where the metals are produced by coal-generated electricity.
2. The present UK government is so keen on developing trade links with China that it wants to go ahead with the absurd Chinese-backed Hinkley Point power station project that will (if it is ever built) compromise our national security in order to produce electricity at triple the current wholesale price.
3. 

   And to make sure the Chinese stay on board with that and other trade schemes our government has led the way in blocking EU attempts to impose effective tariffs against the huge quantities of Chinese steel currently being dumped on the world market as a result of the economic slowdown in China itself. Moreover we are helping the Chinese achieve a fraudulent market economy status to make it even easier for their state-subsidised production to enter western markets. Meanwhile the Chinese themselves erect huge tariffs against Welsh Steel despite the fact that it is not state-subsidised and should therefore be entitled to free trade.
4. Domestic discrimination in public sector contracts or business rates in favour of British steel is outlawed under EU rules as long as we remain an EU member. Remarkably enough, the EU has managed to complete the single market in manufactured goods, in which the UK has a comparative disadvantage, but has not managed to complete the single market in services where the opposite applies. Needless to say, the same government whose energy policy has contributed so greatly to our problems in manufacturing trade is urging us to remain in the EU. No doubt they are worried that if the EU erected tariffs against us, obliging us to retaliate, it might even help us get a handle on our crushing Balance of Payments deficit.

Doing all we can, they say?  

Swallowing The Propaganda

Have you noticed how remarkably clairvoyant on Scottish matters are letter writers from England's southern counties? In Letters to the Editor pages of serious newspapers I keep coming across contributions from supporters of Britain remaining in the European Union.

Emanating from Surrey, Sussex and Suchlike-shire come confident predictions of how Scotland will vote in a referendum that is still more than three months away, how the SNP will react to that vote, how Scotland will vote in a second independence referendum months later and how the EU will respond to an application for membership from a newly independent Scotland long after that.

It seems the disaster of a break-up of the United Kingdom can only be avoided if the UK votes to remain in the EU.

In an earlier post I noted several reasons why the case for Scottish independence has weakened significantly in the eighteen months or so since the referendum. My view was confirmed recently by official statistics showing that our fiscal deficit would now be £15 billion, between three and four times the already hefty sum predicted in the SNP's independence prospectus. The SNP themselves have rediscovered the virtues of the Barnett Formula (by which Scotland's budget is subsidised), once they discovered they would lose money as a result of the fiscal autonomy they had vigorously demanded.

Despite all this evidence the Europhiles still trot out the Scottish card to persuade waverers to vote to remain in the EU.  The SNP has said there would have to be another independence referendum and so of course it must be true.

It is only fair, I think, that these southern experts who are so keen to write to newspapers should volunteer their services to the Scottish Government, because it seems quite lost. Whilst identity politics is based on emotion and nationalists are able to overlook the poor management of education, health, police, agriculture and so on by the present Scottish Government, there is nothing like the prospect of being hit hard in the pocket to restore a sense of reason.

Don't Ignore the Price

This letter was published in The Falkirk Herald yesterday.

There are people who desire Scottish independence at any price. That is their right. Those who take a more pragmatic approach should think twice about demanding a second independence referendum in the event of the UK voting to leave the EU.

It may well be that, offered a choice between leaving the EU and remaining, a majority of Scots would vote for Scotland to remain, but that is not on offer. Scotland as such is not a member of the EU and thus cannot remain a member if the UK leaves.

A subsequently independent Scotland would have to negotiate for admission as a new member and our application would be subject to veto by Spain and other existing members worried about their own separatists. The likelihood is we should end up outside both the UK and the EU.

However, suppose that, against the odds, we were to gain admission. The result would be the erection of an EU border between Scotland and England. Since a major reason for the UK's exit would be to cut EU immigration, there could not be freedom of movement across that border.

As an EU member Scotland would not be allowed to negotiate a bilateral trade agreement with the UK. The EU would negotiate for us and whatever deal they negotiated would apply to all EU members. There could be no special deals for Scotland.

EU rules require all new members to join the Eurozone. Even if the UK government were willing to allow a sterling monetary union to continue after independence, it would not be allowed. How many Scots really want to give up the pound and join a currency system that has strangled economic growth, plunged its poorer members into impossible debt and obliged its richer members to bail them out?

Given that the 2013 White Paper Scotland's Future looked forward to an oil price of $113 per barrel and still managed to show a projected fiscal deficit of £4.4 billion in the first year of independence, (in other words around £1,000 per adult member of the population), we may conclude that with oil prices currently in the region of $33 the Scottish fiscal deficit would now be eye-wateringly large. The present UK government's austerity would look like a spending spree by comparison with the cuts that would be required.

Unless the Scottish government reckons its people cannot do sums, the threat of a second independence referendum can be little more than a paper tiger designed to scare up extra votes for staying in the EU.

Devolution, subsidiarity and national influence

The European Union has a doctrine of subsidiarity. This holds that in order to be well informed and appropriate in their application, all political decisions should be taken at the lowest practicable level. For example, it should not be the business of the Union to regulate local taste in beer; on the other hand since pollution recognises no local boundaries the environment has to be tackled collectively.

In the remorseless drive towards ever closer union, seemingly defined in Brussels as centralised authority, this principle of subsidiarity is more honoured in the breach than in the observance. It is particularly frustrating when combined with majority rule. For example, island states such as the UK have a good deal more to lose from a badly designed common fisheries policy than landlocked central European countries.

The corollary however is that the more we demand local control, the less influence we have with those at the centre who exercise powers collectively.

When we examine the political future of Scotland, we should not lose sight of the fact that Scotland has supplied two prime ministers and three Chancellors to the UK in the last two decades, which suggests its influence at the national level has significantly exceeded that of England.

The more powers are devolved to Holyrood, the less there is for Scottish MPs at Westminster to do, unless we are to inflate the West Lothian Question to unanswerable proportions. How likely is it that underemployed Scottish MPs in London will be able to hold high public office in future? And whose fault will that be?

Scottish Independence - A Dialogue of the Deaf

Recent triumphalism from separatists claiming to be winning the argument is frustrating to people actually trying to think through the problems of independence. Rational discussion has not even begun. To date the so-called debate has been an emotional pantomime in which every claimed disadvantage is met by cries of "Oh no it isn't!" and little else.

To stress the risk of losing what we already have is not negativism. We have obtained certain advantages through the union. It is for separatists to explain either why we shall not be putting these advantages at risk or why it is worth it. Yet all we hear is flat denial of troubling claims such as those made by:

1. The Chancellor of the Exchequer, the Chief Secretary to the Treasury and the economic spokesman of the Labour party, who say that there will be no sterling currency union because it isn't in the UK's interest;

2. The Governor of the Bank of England who says that a sterling zone would require some ceding of national sovereignty in order to avoid the sort of financial instability that has hurt the Eurozone;

3. The Prime Minister of Spain and the President of the EU Commission who say that Scotland will not be an automatic member of the EU and will have to apply;

4. Economists who suggest that a refusal by Scotland to accept its share of the National Debt would lead to downgrading of our credit rating and a rise in our interest and mortgage rates;

5. The Institute for Fiscal Studies which says that oil revenues have been overestimated and Scotland cannot afford even current levels of public spending;

6. Financial institutions which have indicated that they may have to move south because regulations require their headquarters to be in the same jurisdiction as their largest market;

7. The Defence Secretary who says there is no guarantee that future UK contracts for warships etc. will be placed with a foreign country;

8. The former Secretary General of NATO who doubts that Scotland will be enthusiastically welcomed into the organisation whilst evicting Trident, an important part of NATO's defence strategy;

9. The Institute of Chartered Accountants in Scotland which has warned of major uncertainties for pensions after independence;

10. The Home Secretary who says there will have to be border controls and passport checks because continued free travel is incompatible with Scotland encouraging immigration whilst the UK discourages it.

These are just ten examples of warnings to which the standard response has been denial and accusations of bluff or bullying but not facts.

Let evidence now be brought forward. Let us hear detailed reasons why all these well-informed people are wrong. Until such time we may reasonably doubt that a rational, unemotional argument for independence has even been made, let alone won.

Read My Lips ...

I vaguely remember learning about the South Sea Bubble of the 18th century. Apparently back then there was such enthusiasm for floating new joint stock companies that people would even buy shares in 'a company to do something, nobody to know what.'

We are far less gullible today. I mean, no-one would vote for 'a country to have a currency, nobody to know what,' or 'a country to be in the EU, nobody to know how,' would they?

In the news this week:

• The Yes campaign's response to the refusal by all three UK parties and the UK Treasury to contemplate a currency union with Scotland is not to devise an alternative currency scheme. Instead they claim that nobody except the Yes campaign can do sums properly.

• They also point out that we may be dragged out of the European Union against our will by the 2017 in/out referendum. Safer to vote for independence and be sure, eh?

Since you couldn't make it up, it's just as well we don't have to.

Scotland's Currency Options

There has been much talk of the four currency options for an independent Scotland. Much that I have seen suggests that not everyone understands what the options are, let alone what advantages and disadvantages each has. Perhaps, leaving aside political issues for the moment, I might be allowed to outline them.

1. A sterling currency union means that both the UK and Scotland continue to use the pound by agreement. Between two economies of such unequal size as Scotland and the UK such an arrangement has little to recommend it except familiarity, (which was not enough to preserve the currency union of The Czech Republic and Slovakia after their political split.)

• It is not possible for a single central bank to operate two monetary policies. Market forces would oblige the central bank to pursue the monetary interests of the larger partner, even if political factors did not.
• Likewise neither partner could pursue an independent fiscal policy, because each government's borrowing would increase the common money supply. Agreement would be required.
• The UK would therefore have to cede a degree of its own monetary independence to Scotland. It has previously resisted doing this for the Eurozone, which is a much bigger market.
• An additional disadvantage would be each partner taking on an obligation to underwrite the finances of the other without the multinational burden sharing that is possible within the Eurozone.
• This is the option that the UK has ruled out. There are good economic reasons for ruling it out and no advantages for the UK that would come near to compensating for the loss of independence.

2. Informal use of sterling by Scotland means Scotland continuing to use the pound without the UK's agreement. This is the kind of arrangement used by Ecuador and Panama in respect of the dollar. It could not be prevented by the UK. It would avoid the introduction of exchange costs for trade within Britain, but is far from meaning that nothing would really change. Effectively it would take most of the so-called 'levers' of economic influence out of the hands of the Scottish government.

• It would not allow Scotland to create its own money supply.
• It would prevent a Scottish central bank from operating a meaningful monetary policy.
• Although this would also remove the need for UK government agreement of Scotland's fiscal policy, the same sort of constraints would be imposed instead by the need to obtain sterling through trade etc.
• It would remove the guarantee provided by the UK underwriting Scottish finances. This would imply a higher government borrowing rate for Scotland.

Thus neither formal nor informal currency sharing would allow a great deal of economic flexibility to the Scottish government.

Both formal and informal currency sharing would remove from the Scottish government's economic armoury the possibility of adjusting its exchange rate with the UK in order to absorb any imbalances that might develop.

3. A new Scottish currency is the only other option likely to be immediately available to an independent Scotland.

• This has a lot of short term costs and risks, including the introduction of exchange costs with the UK.
• However a more serious problem would be the need for the new currency to be underwritten by a Scottish government with no track record of debt management and which has incautiously flirted several times with the option of not taking on its share of UK National Debt. Possible lenders will remember perfectly well that a lot of the UK debt was incurred in bailing out Scottish banks and threats to walk away from responsibility for that debt can only raise the cost of borrowing by an independent Scotland.
• It might take some time to reassure foreign exchange markets that the new currency was 'hard', (i.e. it can be trusted to hold its value.)
• The new currency would also be a 'petrocurrency', (i.e. volatile and vulnerable to oil shocks.)

4. Joining the Eurozone is not a immediate option, because the entry conditions require two years' stable management of the domestic currency, a qualification which a Scottish government would lack. There may or may not be separate problems associated with Scotland's admission to the EU itself.

• It needs to be borne in mind that the Eurozone is just another currency union and that Scotland would be even less influential within this much larger zone than it would be in a sterling zone.
• Effectively monetary policy would be determined centrally and fiscal policy would be subject to the EU's Stability Pact.
• Even this has not been enough to preserve stability in the Eurozone of late and it seems likely that more political integration within the zone will be required in order to cement the stabilisation of the Euro as a currency.

Those, very briefly are the options. None of them are as advantageous as the present arrangement, but of course the present arrangement cannot be combined with independence.

The more things change ...

I hope that amongst those whose enthusiasm for Scottish independence has more than a passing resemblance to support for a football team, some will take time to consider the issues before they vote.  I won't be holding my breath.

Those who make out a reasoned case are capable of entering into reasoned argument.  Those who behave like football fans are not.  I speak as a football fan.  There is no one who will ever convince me of the superior merit of an alternative team to my own.  I was born to support my team and it never occurs to me to waver. Whether we are bottom of the league and regularly thrashed or masters of all we survey, we are who we are.  That's why I refer to my team as 'we' and, as everyone knows, 'we' are permanently in opposition to 'them'.

I can afford to be so illogical because, fortunately, my livelihood is not at stake in matters of football. In matters of politics mixed with economics the issues are, hard though it may be to accept this, more weighty.

These are some of the issues that I wish to see resolved:

1) It is claimed that Scotland needs independence in order to lay hold of the important levers by which our economy is to be directed.  It is simultaneously claimed that we shall immediately hand back all of the monetary levers and a large proportion of the fiscal levers to The Bank of England and the rest of the UK. The Governor of the Bank of England seems to have confirmed this. Question: remind me again what is the point?

2) It is claimed that a currency union is in the interests of the rest of the UK because of the way it will simplify trade. Problem: it also makes the RUK responsible for the debts of the Scottish government, banks and public institutions and gives the Scottish government a say in UK monetary and fiscal policy.  There are quite good reasons for their refusing to accept this. Please explain to me why they will do it.

3) It is claimed that we shall automatically continue as members of the European Union, despite the claims to the contrary of, amongst others, the President of the European Commission and the government of Spain.  Bad news; this has to be unanimously agreed by EU members and the Spanish have a vote.

4) It is claimed that we could be added to the existing membership of the EU without having to accept the rules normally applied to new members, such as signing up to the Euro and the Schengen free travel area and that for some reason we would be entitled to a share of the UK's current budget rebate. Problem: in return for all their concessions, we are giving the other members what, exactly?

5) It is claimed that we shall continue to enjoy a common travel area with the rest of the UK, whilst adopting a radically different immigration policy from them.  Question: exactly how do we stop them setting up border checkpoints to enforce their immigration policy?  How much would consequent delays cost us?

6) It is claimed that we shall be able to go on financing our universities by charging fees to students from the RUK, despite the fact that EU law forbids discrimination against other member states.  Right.  So we think that they will let us get away with charging the English provided we don't charge the Bulgarians?  Seriously?

That's to be going on with.  When I hear the answers to these I'll start on the rest of the questions.