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We’ve got intellectual pygmies like Will Hutton telling us that we should join the euro:
Will Hutton, journalist and executive vice chair of the Work Foundation and co-compiler of the report, argues that failure to enter the Euro would risk ‘endemic inflation’.
The we’ve got real intellectuals like the most recent Nobel Laureate in Economics, Paul Krugman.
So what can Spain do? It needs to become more competitive — but it can’t have a devaluation, because it’s a euro country. So the only alternative is wage cuts, which are desperately hard to achieve (and create big problems for debtors.)
Contrary to what everyone seemed to be saying even a few weeks ago, being a member of the eurozone doesn’t immunize countries against crisis. In Spain’s case (and Italy’s, and Ireland’s, and Greece’s) the euro may well be making things worse.
And Britain’s plunging pound, unpopular though it is, may turn out to have been a very good thing.
So who are you going to believe? A two bit journalist or someone recently awarded the highest accolade in the intellectual world?
Toughie that one, isn’t it?
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Real interest rates of minus 2pc set by Frankfurt for German needs led to a Spanish property bubble of fearsome scale. Construction rose to 16pc of GDP, trumping the British and US bubble by large margins. Spanish companies tapped the euro capital markets as if there was tomorrow. Reliance on foreign borrowing reached 10pc of GDP, among the world’s highest. Wages went up and up. The result is a current account deficit that is also 10pc of GDP.
Interest rates were too low for Spain (and Ireland etc) in the boom times. Now they’re too high in the bad times. But much more than that we know of two ways which a country can use to get out of these bad times. The first is to lower interest rates and thus devalue the currency. But if you’re in a single currency like the euro of course you cannot do that. The second way is to have wage deflation in that country.
That means falling wages….not just falling wages in real terms (ie, accounting for inflation) but falling wages in nominal terms (that is, the actual amount of cash people gets must fall). Now this is indeed possible: but I’m not sure that I can think of any democratic society that has managed to reduce nominal wages. At least, not without a great deal of rioting in the streets.
Spain has to claw back 20pc to 30pc against a stern German that will not inflate. Therefore, Spain must deflate. It must embark on a 1930s policy of draconian wage cuts.
It remains to be seen whether this will be tolerated by a democracy. Brussels expects Spanish unemployment to reach 19pc – or 4.5m people – by late next year. This is a depression.
This is an effect of the euro. No, it’s not a side effect nor was it unseen. It’s a direct effect of, if you’re going to have one currency then you also have to have one interest rate, and it was predicted. Indeed, it’s the sort of thing that even I, not an economist, was predicting back in the 1990s.
Thank goodness we didn’t in fact join and let this be a lesson to those arguing that we should. If it’s not an optimal currency area then a single currency just doesn’t work.
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Please do go and read this.
Read it all.
It’s almost unbearably sad and massively enraging. You certainly wouldn’t want to be a holocaust denier anywhere around someone who had just read that.
Do make sure to read the very last line.
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Here at UKIP press office central we’re right in the heart of Westminster. This means that when the military musicians decide to take their instruments out for an airing they march and play just outside our window.
Just spotted something that rather confused me. So there’s 20, 30 men in greatcoats and bearskins marching down the road and pumping out the 19 th century equivalent of pop music and behind them are another 20, 30 men (umm, a platoon I think from my limited military knowledge) in greatcoats and bearskins carrying that rather nifty looking new rifle.
There’s also a rather pretty looking policewoman on a horse traling along behind them in her turn.
Why?
What might happen on a London street that a woman on a horse can deal with and thirty armed men cannot?
It just puzzles me.
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From Booker’s column:
Another British industry which may soon disappear, thanks to our masters in Brussels, is production of that remarkably useful metal aluminium. Although we rank only 19th in the world production league, our two main plants, in Anglesey and Northumberland, are as efficient as any of their competitors. But aluminium relies heavily on constant supplies of electricity.
The Holyhead plant, Wales’s largest electricity user, is supplied at a discount price by the nearby Wylfa nuclear power station, state-owned through the Nuclear Decommissioning Authoritty (NDA). If the NDA was privately owned, it says it would be happy to carry on selling power to its largest customer at a discount. But under EU state-aid rules this is now “against the law”.
This is willful stupidity on the part of the EU. The major cost in producing aluminium is electricity. So much so that you normally build your smelters right next to a long term source of cheap power. So much so in fact that you might deliberately go and build a dam (as has been done in many parts of the world) and then build your smelter right beside it so as to get cheap electricity.
In a country like the UK, where we’ve not got much hydro power possibility unused, we might build our smelter close to a nuclear plant. And the nuclear plant would be very happy to have you next door as you’re going to be a reliable customer for a good percentage of their power, decade after decade.
In fact, this symbiotic relationship is so strong that the decision to build or not to build a nuclear plant will be informed by whether someone would like to build an aluminium smelter next door. And this is indeed what happened here. There is no coincidence in Wylfa and the smelter both opening in 1971. They were both built knowing that the other would be. The smelter gets a guarantee of low cost electricity, the nuclear plant knows that they have a long term customer for a substantial chunk of output and is willing to offer a discount to get one.
Think about it in any other line of business. “I’d like to take 30% of the production of that new plant you’re thinking of building for the entire lifetime of the plant but I would like a discount”.
Is he going to get his discount? Sure he is. And the EU now says this is illegal.
They’re fools.
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Godfrey does Goddersvision.
Most fun.
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But Lord Malloch Brown said: ‘With 24 countries having approved the Treaty, I am not sure whether the voters of Ireland should have a right of veto over the aspirations of all the other people of Europe. I am not sure whether that is or is not democracy.’
Quite remarkable, don’t you think? That a man who is a member of a democratic government doesn’t seem to know what the word “democracy” itself means?
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Move along now….and in fact there isn’t anything to see here.
Caroline Flint, the Europe Minister, was reported as saying that we might at some time join the euro. Now of course, we think that we would be an entirely disastrous idea but it does have to be said that what Flint was saying isn’t a change in policy or anything.
Europe minister Caroline Flint opposed a promise made by David Cameron yesterday to keep the pound regardless of the circumstances.
She told Metro: ‘We will make a decision based on economic conditions. We have identified five tests that have to be met: convergence with other European economies, flexibility, impact on investment, the impact on the financial services industry and growth stability and employment.
‘At the moment, those economic tests have not been met.’
Britain has maintained the same position on the euro since 1997 when Mr Brown as chancellor devised the tests to assess whether the country was ready to switch to the euro.
What we’ve got to worry about is when they either stop referring to those tests or start to claim that they’ve been passed.
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Interesting fact for today: The Pesticide Action Network, who were interviewed by the BBC yesterday, welcoming the EU’s decision to ban a range of pesticides, are funded by…the EU.
That’s from Bishop Hill.
That’s where some of that 2.4 billion euros the EU spends on propaganda goes. To so called “independent” organisations so that they can praise whatever it is that the EU is up to this week.
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We’ve had a fun little back and forth with some Greek MEPs over the last couple of days. Yesterday Nigel makes a speech in the Strasbourg Parliament which points out that the Greek bonds have a spread of 233 basis points over the German Bund (no, don’t worry, you don’t need to know all of this financial terminology. Essentially, the Greek Government has to pay a lot more to borrow money that the German one does because the markets think they’re a dodgy bunch….).
Then the Greek MEPs allied with the EPP (ie, sitting with David Cameron’s bods) send around an email which says this:
Following today’s attempt by Mr Farage to attack the EURO through provocative statements on Greece’s membership to the EMU -during the plenary debate on the 10th anniversary of the EURO-, the Greek EPP-ED Delegation (Nea Demokratia) would like to inform you that today’s tender of government bonds yielded a total amount of 2,550 billion Euros at an average rate of 2,51%, well below the Euribor rate of reference. The final result covers more than 6 times the amount targeted by the Greek government.
This offers a tangible response to any Member seeking to establish the truth regarding the credibility of Greece’s performance as a trustworthy member of the Eurozone.
Mr Farage was really unlucky to attack Greece on the same day that markets proved their confidence to the Greek economy.
Ohh, get that eh? They’ll be scratching our eyes out next.
(Boring technical stuff. Skip this unless you like details. Actually, the Greek government didn’t issue bonds. They issued bills. Bonds are for more than a year, bills for less than one. Also, they didn’t get “below Euribor”. Euribor was 2.19% yesterday for 360 day bills. The Greeks paid 2.67%. This is known in financial circles as “more” than, not “less than” or “well below”. The implication of this is that the markets think that the Greek government is a worse risk than your common or garden bank.)
But what is really delightful is that today S&P cut their credit rating for Greece.
This is, to use again that impenetrable jargon of the financial markets, evidence that the markets do not have confidence in the Greek economy, not proof that they do.