Why Nigel Lawson is wrong about the EU

image

Oliver Kamm

Asked about Lord Lawson’s argument in The Times today that Britain should leave the EU, Vince Cable, the Business Secretary replied that Lawson was “a terribly clever guy but he’s often wrong on the big issues, like climate change, and this”.

That’s well put. I admire Lord Lawson’s huge memoirs on his time as Chancellor (it’s an outstanding book on applied economics). I’ve debated with him on Europe. He is an intellectually formidable proponent of arguments that are often an unreliable guide to policy.

The best point Lawson makes against EU membership is that the costs of exit are less now than the costs of remaining outside the EEC were 40 years ago. The reason is that international tariff barriers are lower, owing to a general and extremely welcome liberalisation of global trade. But that doesn’t get the argument far.

There would be some immediate financial gains from leaving the EU of about £8 billion, if we no longer made a budgetary contribution. But note that Norway, whom UKIP cite as a possible model, does contribute to the EU budget and accepts almost all EU regulations. It does so because it wants access to the Single Market. And being outside the EU, it has no say in forming its regulations. The nations within the European Free Trade Association (EFTA) have to negotiate their own bilateral trade arrangements rather than be represented by the EU. And they have suffered countervailing duties on important exports (Norwegian salmon, Swiss cheese).

If Britain left the EU, it would moreover suffer a loss of business investment. This would be true even in financial services. The City is highly unlikely to retain its importance as a global financial centre without being part of the EU’s Single Market rules and when sterling is not a reserve currency. Its international competitiveness would also be damaged by the removal of the right of entry to the UK for skilled young workers in finance and IT.

But the main damage to British interests from leaving the EU would be a long-run decline in diplomatic importance. The most important bilateral component of the transatlantic alliance for much of the postwar era has been between the US and Germany, not the US and Britain. Britain outside the EU would be of far less significance in Western foreign policy. We’d be a medium-sized power with a narrower, less liberal ethos. No, thanks.

What’s your view? You can vote in the Times IN/OUT poll here.

Crippling austerity and a euro break-up won’t help Europe recover

Oliver Kamm

Political speculation and newspaper commentary this year have concerned the possibility and consequences of a Greek exit from the euro. I have long been sceptical that this would happen, owing to its immense costs. But I felt that the austerity programme required of Greece was so unyielding that it was counterproductive. While living standards have been collapsing, the debt burden threatens to become overwhelming without credible plans to restructure it. (See here an Intelligence Squared/Google debate on austerity – which I argue is not the answer for Europe – a few months ago where I discuss the problem with, among others, George Papaconstantinou, former Greek Minister of Finance.)

Recent Greek developments have thus been modestly encouraging: a successful debt buyback, an improvement in the country’s credit rating, and a decline in government bond yields after the European Central Bank said it would again accept Greek sovereign debt as collateral. If the eurozone is to get out of this mess, it will do so this way: not by fantasies of a purportedly orderly break-up of the euro, but by structural reforms in the debtor countries that are acknowledged, rewarded and made easier.

Greece is an extreme case, and the conjunction of variables in each of the problem countries is different. In Greece, the banks were relatively strong but were undermined by a catastrophic fiscal position (in 2009, the Greek Government admitted that its budget deficit of 12.7 per cent of GDP had been vastly understated in an earlier estimate of 3.7 per cent). In Ireland, the weakness ran the other way: a banking crisis born of excessive bank lending, rather than a crisis of public debt, that then became a fiscal crisis owing to the need to nationalise the stricken banks.

What the countries have in common, despite these differing histories, is extreme stresses that turn private debt into potential public debt. And the only route out of this is to build the fiscal dimensions of the euro that were lacking at its launch, make structural reforms and adopt a more rational approach to the economics of austerity.

@OliverKamm

Why is Mark Carney the new Governor of the Bank of England?

Oliver Kamm

The appointment of Mark Carney as Governor of the Bank of England is a political coup not only for George Osborne. It has also given heart to conspiracy theorists (see here for a peculiarly silly example) who believe the world is ruled from Goldman Sachs, where Carney spent 13 years. Carney’s cachet in fact reflects not the power of Goldman’s but the reputation of the Bank of Canada, where he has been Governor since 2008.

The Bank of Canada has a good name in international markets as well as the domestic economy. That is reflected in the surprising strength of the Canadian dollar during the financial crisis. Normally, a high-yielding currency does best in times of global financial stability. In a crisis, investors usually prefer the safety of the US dollar, as the world’s leading reserve currency. But amid immense ructions in the financial system, the Canadian dollar and the Swiss franc have been big beneficiaries, rather than the US dollar and the euro.

Part of the reason is the credibility of Canadian monetary policy. Canada had an inflation problem in the 1970s. John Crow, Governor of the Bank of Canada from 1987 to 1994, withstood political criticism to run a tight monetary policy. Canada adopted inflation targeting in 1991, a year ahead of the UK. Whereas the UK’s adoption of that framework was an outcome of the failure of the previous policy of targeting the exchange rate and joining the European Exchange Rate Mechanism, Canada’s policy was a natural development from what had gone before. It has achieved what it set out to do.

Canada’s financial system proved notably resilient to the global banking crisis of 2007-09. Restrictions on mergers of the big domestic banks were a source of stability. Carney commented to international central bankers in 2009 that “price stability does not guarantee financial stability and is, in fact, often associated with excess credit growth and emerging asset bubbles”. That judgment describes recent British economic history. The new Governor of the Bank of England has expertise and experience in charting a different course.

@OliverKamm

Read our editorial on Mark Carney’s appointment

The main message of Bob Woodward’s new book, The Price of Politics, is not the incompleteness of Barack Obama. It is that cutting spending and long-term government borrowing is almost impossibly hard – even in America where there is strong political pressure to restrict the size of the State.

And this is why Britain should stick to its policy of deficit cutting despite foundering economic growth, says Daniel Finkelstein

Sadly, there is nothing in the early autumn air to suggest that the economic crisis is over. Things still look wobbly, messy and somewhat depressing. There is, moreover, one thing to note: a striking sort of unity among Western governments. None of them knows what to do. All are following the great Micawber’s principle: hoping that something will turn up.

And governments are making things worse by sticking obsessively to their austerity programmes, says Bill Emmott, former editor of The Economist

Two numbers – $135 and $12 – explain why Britain’s and Europe’s economies are stagnant or shrinking. The first is what the average worker in the West earns per day. The second is what the average worker in urban China earns.

A 15 per cent decline in standard of living could be needed to rebalance Western economies, says John Moynihan, chairman of PA Consulting Group

A major study into household income in 30 Western countries found that in the past 25 years, inequality rose in 18. The rich got richer faster than the poor in nearly all countries. But railing against the 1 per cent and occupying Wall Street won’t provide a solution to rising wage inequality. What we need now is not to search for villains but to work out sensible tweaks to taxes and benefits.

Dr DeAnne Julius, the economist, examines a major new study into wage inequality by the Organisation for Economic Co-Operation and Development

Olympics home advantage…unless you’re from North America

Data from the last 10 Olympic Games shows that US and Canadian athletes appear to perform better away from home.

Britain’s haul of 47 medals (19 gold) at the Beijing Olympics was its best since London 1908 (146 medals, 56 gold). But at the last London Olympics, in 1948, we didn’t do too well: 23 medals, 3 gold.

Read more: “We estimate that the short-term effect of staging the Games will be to boost UK output in the third quarter by about 0.3 to 0.4 percentage points.” – Economist Kevin Daly (who provided the chart data) writes for The Times

The dwindling fortunes of Old Blighty, in charts

This chart shows the change in the UK’s gross domestic product (GDP), the main indicator of national prosperity, versus the change in GDP of the G20 group of countries between the fourth quarter of 2009 and the first quarter of 2012. Data for the second quarter of UK performance in 2012 was released today – and it wasn’t good.

But just in case you thought we were doing any better than countries that use the troubled euro as currency:

Gloomy indeed…

(Charts: The Times, Data: ONS and OECD)

Read more: “The UK’s economic problem is not so much a return to recession but a complete absence of recovery” – Stephen King, group chief economist at HSBC

Dutch boy’s plan to avert eurogeddon

The man behind the Wolfson Economics Prize is writing for us today about eurogeddon…which gives us the perfect excuse to revisit Jurre Hermans’ entry to the £250,000 competition, challenging entrants to prepare a contingency plan for a break-up of the eurozone.

Hermans, who was 11 at the time, explained:

All Greek people should bring their Euro to the bank. They put it in an exchange machine. The Greek man gets back Greek Drachme from the bank, their old currency. The Bank gives all these euro’s to the Greek Government. All these euros together form a pancake or a pizza. Now the Greek government can start to pay back all their debts, everyone who has a debt gets a slice of the pizza.

Entirely sensible. Although the Greek chap doesn’t look too excited.

Twitter: @jamesdean_lives

Read more: Simon Wolfson - We’ll survive eurogeddon if we are prepared

European integration has done more good than harm | Oliver Kamm

Last week, at the Engelsberg Seminar in Sweden, I debated European integration with Lord Lawson. The former Chancellor argued that the euro made no economic sense, because dissimilar economies need an adjustment mechanism. It was instead a political project. European politicians cannot resolve the crisis: they need to declare the euro a failure and dissolve it.

I replied that the EU is an attempt to supersede historic conflicts and the errors of inter-war economic policy. Its record in microeconomics and politics is good: an internal market binding 500 million people with €12 trillion of output has enabled efficiency gains. In Cyprus, Ireland and the former dictatorships of southern Europe, the prospect of EU membership has spurred liberalism. Europe’s crisis is due to neglect of budget-making institutions and structural reforms, but there would probably have been disruption without the euro.

Twitter: @OliverKamm

Read more: The Times has from the outset criticised the notion of a single European currency “on economic and democratic grounds”.

Sober assessment of reforms Spain and Italy could make to create export base and help attract foreign investment.

Read more | Our leading article on Greece, Germany and the next steps for the euro

Loading posts...