Tick, tick... boom?
The phrase "financial tsunami" has been used a lot during this crisis, but I have a feeling that for most of us the wave is still towering above us. We know it's going to hit, we are frightened, but we haven't yet felt the impact. 
I feel a lot of the discussion going on is scary, but it's very difficult to know what it's going to mean for you and me. To put it another way, it's a bit like discussing in huge detail the behaviour of neutrinos and isotopes before the moment the mushroom cloud appears.
We are still waiting for full details of the French and German rescue plans after cabinet meetings in Paris and Berlin, but they will presumably follow the agreement set out after yesterday's meeting in the French capital.
I have been trying to translate it from financial babble into plain English for my own benefit. This is what I think it means:
1. Healthy banking is important for all of us, for jobs and growth.
2. We will do something about it and have been doing stuff, particularly making bank dealings more open to scrutiny.
3. And we need to do more.
4. We will act together to restore confidence and get money flowing again.
5. So that individual countries and the EU's single market are protected, Eurozone countries have to act together following these guidelines: make accounting rules and the rules of the commission flexible enough to ensure banks have enough money to function.
6. We welcome the recent coordinated interest rate cuts.
7. And hope central banks will look at ways of getting more money into the system in the long term.
8. Our governments will act together to make sure banks have enough money in the long term. We welcome semi-nationalisations and guarantees to banks to encourage them to start lending to each other again.
9. It's better if the money can be raised privately.
10. National regulators should act to help increase stability, and value banks realistically, not according to current freak conditions.
11. We will support the financial systems but will make sure the shareholders and management bear the brunt, not taxpayers. And if we act, the banks have to sort themselves out.
12. The summit of leaders on Wednesday should set up new means for coordination between countries.
13. And we'll keep you up to date on how it's all going.
Will this defuse the ticking bomb or even reduce the impact of the blast?
Meanwhile, you'll be glad to know the commission's midday press conference was dominated by a warning about listening to MP3 players at high volume. We may all end up on the streets, but at least we'll have our hearing.
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© MMIX~RS~q~RS~~RS~z~RS~20~RS~)
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Mark:
it is true, that the tick-tick-boom effects are true!
also, i think this is going to be a financial tsunami...
thanks
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the news from france was very encouraging, but a few things still confuse me, and i think we are still far from out of the woods yet.
- the "loosening" of accounting rules in the eurozone may just end up being a way for banks to hide their losses. this is what happened in japan in the 90s. yes, it avoids a sharp recession, as banks can overstate their solvency and continue lending. but it also creates a much longer term drag on banks' activity and slows down the necessary restructuring of the real economy.
- i am still vague about whether any of the eurozone's policy are being implemented (rather than just coordinated) at the european level. for example, a joint and several guarantee from all the eurozone governments for new bank borrowings would be much better than individual national guarantees, for the simple reason that some eurozone governments' guarantees are worth a lot more than others'.
- where does this leave european countries that are outside the eurozone? this follows on from my previous point. does the eurozone's action leave countries like poland and hungary exposed (albeit that much of their banking sector is already owned by eurozone banks). and what about switzerland - if its two giants ubs and credit suisse suffered further significant losses, i doubt the swiss government would be big enough to bail them out (their combined balance sheets equal 6.5 x swiss gdp!)
- the "deleveraging" process still has some way to go, which means there will still be a lot of downward pressure on markets and the ever-present risk of big bad "events" happening. hedge funds are experiencing massive withdrawals by their investors, forcing them to continue dumping assets, so there is still a real risk of a blow up in the hedge fund sector. there is also a real risk that the downgrade of one or more banks or insurance companies (morgan stanley, ambac jump to mind) could trigger their collapses.
- so far the crisis has been primarily about the losses in the mortgage market, and how this has been amplified by excessive leverage in the global financial system. however, the coming economic downturn may reveal further significant losses that could wipe out all of the new capital that is now being injected into the banks. in particular, i fear losses in uk mortgages, credit card debt, and corporate loans (particularly the leveraged buyout market). could we see a second wave of losses and acute credit crunch in coming months?
- one of the biggest sources of the imbalances that led to this crisis has been the usa's (and to a lesser extent, europe's) persistent current account deficits with east asia and the middle east. as is well known, the chinese have bought literally over a trillion dollars of us government and quasi-government debt in order in effect to subsidise its exports to the usa. the current crisis shows that model to be bust - the american (and european) consumer simply cannot afford to import to the same extent. nor will the us (or european) governments want china to benefit overly from the revival of domestic demand that they will need to pay for via big fiscal expansions and cutting interest rates. does this then spell the demise of the dollar as the world's reserve currency? what would a significant decline of the dollar mean, and would it price the eurozone out of the market? could it lead to a sharp economic slowdown and a financial crisis in china?
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The problem is the banks have no readies in the till. They've got lots of paper promises and these have no real value. All the taxpayer er government is doing is providing liquidity so at least folk can pay their bills. The underlying problems still remain. Perhaps the banks should write off their dirivatives that means ALL of em, and go back to what they once were, ie banks and not financial gamblers. Ole Nick Leeson showed the way years ago and brought down Barings for what is now peanuts. Nick went to jail but no one else has faced charges or prison for the deeds that they've done this time and they're not likely to either.
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If for example, at every cycle a new money making method arises that is not prudent to our long term economic development (remember junk bonds) how is it to be stopped? Moreover, now that China has a "decreased" GDP growth rate of 6.3% and Eurozone 0 - 1% won't there be countervailing factors - like the need to make money (any way we can), so we have some financial control over our destiny.
In avoiding the first problem can we ever hope to meet the second?
Why is the latter a problem: because without financial control we will end up the same as those dysfunctional South American economies - broken by the big chaps and forever trying to re-establish some form of domestic control. Or can't that happen since we are part of a large outfit called Europe?
With eventually 500 million Europeans
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Mark,
Your second paragraph sums it up for me.
For the ordinary person this seems to be a financial/banking problem and the only visible part of the problem for the public at large at the moment is the difficulty for individuals and small businesses to get loans from the banks or the possible bankruptcy of the individual banks in which they have savings deposited.
If one pops over to Robert Peston's Blog, one can see the city boys posting comments like they are going out of fashion and there is a palpable sense of doom and gloom from them. The problem is that there comments are all about Robert's latest news and what it means for global shares, the stock markets, the banks and the future of banking.
No one, not least of all Robert Peston's Blog or the BBC in general (perhaps apart form Declan Curry's Blog) have actually intimated exactly what is going to happen to the little people.
It is almost like the second half of your second paragraph: The little people know the bomb is going to explode but they are not sure how it is going to affect them . . . . . (a) are they so close they wont know what has hit hit them as they will be instantly vaporised, (b) are they too close and they'll be burnt and irradiated but, inevitably, die just more slowly or (c) are they behind a hill/out of range and relatively safe from the explosion and all they have to worry about is radioactive fallout that may or may not kill them if they're not in the path of the atmospheric winds?
It all seems to be guess work and that is the problem - the financial wizards are gossiping about the Banks and their problems but not really seeing or submitting ideas to reduce the pain that the little people are going to suffer through the fallout!
How much more tax can the British people contribute to the government to pay for all this money the government are giving the Banks? The British already pay more tax than most people in Europe because of expensive luxuries like the NHS, Devolution and Social Care and Social Services.
Are Public Sector Jobs at serious risk of being closed down as governememt spending must be reduced?
I have savings. Should I spend the money before it is reduced in purchasing power if the UK Treasury starts to print extra coinage and inflate the economy?
I own a house. Is it going to be worthless if no one can get a mortgage to buy it if I choose to sell it and realise the capital.
I am retired with several inflation-proof pensions coming in but what about people who have share-related Pension Schemes instead of the really good but now-old-fashioned Final Salary Pension Schemes - are they going to see their pensions diminish rapidly or slowly or not at all?
If I was in work, is my company going to go to the wall and shed lots of jobs because of this much-spoken-about-recession.
Is there going to be a Great Depression instead of a Recession?
Should I just top myself now!
These are questions relevant to the people who live (or used to live/work) in the UK but I can imagine that the impact of the financial sector catastrophe will affect people in different ways around Europe where there may be different types of health schemes, pension schemes, savings schemes, etceteras.
If the impacts are different for the peoples of the different countries of the EU - should each country look at the potential fallout and address those problems rather than seek a cure for the Banks of each country which may be more sick than we imagine and the vast sums of money being injected into them may not be sufficient to produce a cure?
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all it will take is a few rouge traders to unstablise the whole package and thus waste billions of taxpayers pounds.
we cannot tell what overseas traders will do or what controls they have inplace to protect our investments.
shares and stocks have been riding a tidal wave in height and was due to be brought back to reality and reality will be a cold place unless governments make provision for the future.
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I hate to be the one to put a black lining in your silver cloud Mr. Mardell but the steps taken by central banks so far seem far too little and too late to make much difference. The points you cited ignore an enormous number of inconvenient facts which won't go away.
Trillions of dollars were loaned to people to buy and build houses they couldn't possibly afford to pay off and we knew it when it was being done, at least the people who approved this scheme. We don't even know how much money we are talking about but we know it is big. The teaser rates on those mortgages are expiring and with them they are nearly all going into foreclosure.
The risk both direct and indirect of those loans has been spread around the world to every economy on earth like never before. There is no safe shelter from the impact anywhere.
The people who made this possible by assuring us that the bulwark of restrictive regulations carefully constructed to prevent this because it happened once before 80 years ago told us barely a month ago that everything was fine and dandy and that our economies and finances were sound. They have proven to have beed dead wrong on every account yet they are the ones proposing the rescue plan. What possible reason is there to trust that they know any better what they are doing now than they did in the past?
The current bail out only attempts to deal with one of the most serious and immediate consequences of the disaster, the disappearance of credit on which all modern economies depend. It is not even clear if it will work. In the US, the government has given money to banks but they haven't started making any loans yet. The stock market is exhuberant and the DJIA is up 500 points right now but that means nothing except optimism for a moment.
What is the impact on individual people? First they will lose their jobs. If they work for private firms, those firms will not have the money to pay them anymore. They won't be able to get credit. Their customers won't be able to pay them. They will have to lay off employees and scale down operations. Many will go bankrupt. If you work for the government, you will not remain employed either because there will be no one to pay taxes on income to pay your salary. There will be no tax revenues on business profits. The government's only recourse is to print money like it's going out of style wiping out all debt and shooting interest rates sky high. That is what they have just started to do but so far the amount of money is a drop in the bucket compared to what will be needed. Anyone on a fixed income or who has loaned money at a fixed rate will be screwed.
The value of your house will go down. In the US especially, the flood of foreclosed mortgages and repossessed homes will flood the market with supply driving down the value of other homes because the supply demand balance will shift radically until population grows to fill them. This means what credit is available will not go to homeowners who want to borrow on home equity to purchase a car or a vacation or build more rooms on to their house. No new houses will be built either.
The prospect is that all economic activity will suddenly cease. That is the immediate concern. But the lack of return on the lost capital which would have been there had more prudent investments been made will not materialize and the hopes people had for that money will disappear with it.
So far not one incompetent mony manager whether in government or even in the private sector I'm aware of has been fired. Gordon Brown managed Britain's money for over 10 years. Greenspan is retired but Bernanke and Paulsen were there all along. None of the regulations that were removed have been put back in place. The banks don't trust each other. Then why should they trust themselves? If Chase and Morgan Stanley won't lend money to each other overnight then why should we trust either of them or any of their competitors. Yet instead of the govenment making credit available to credit worthy borrowers directly, they are giving it to the banks at least in the US and there is no telling what they will do with it.
If doctors were as incompetent as bankers, economists, and other financial wizards have been, we'd be getting treated by tribal incantations and folk remedy herbs for serious diseases because that is what we are getting.
No other way to say it, trying to paint any rosy picture of this really is putting lipstick on a pig.
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Mark:
I saw the end of your message about the MP3 volume, It is a brilliant and we can keep our hearing for another day or so.....
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Let me get this right:
I have worked for 26 years so far and have always paid my taxes, debts and have savings of 20,000 pounds.
So now if I want to withdraw the 20,000 pounds from the bank it's not actually my 20,000 I saved, but 20,000 of the bailout tax money which I already contributed when I paid my taxes earlier.
So to save 20,000 I actually put into the bank (18,800 + interest). However, if I want to cash the money out I actually receive (Other Tax Payers contribution to the bailout money + my contribution of the tax bailout money) = 20,000 pounds.
This is a farce: the bank had my 18,800 + interest, then receives another 18,800 + interest from the bailout money which includes my contribution of the bailout money, so it can give me my savings.
Is it just me or are we all living in cookoo land.
Can you tell me which Ethics are being used to resolve this financial crisis?
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Ethical Resolution and Ethical Financial System:
1. Suspend all Banking Sector trading on Stock Exchanges world wide.
2. Redirect bailout money to finance an Income Tax reduction of 5%
3. Increase state pension by 5% and then increase proportionally as Banks increase profits (see 7) based on pensionable/working age ratio
4. Central Banks must declare all profits to purchase either Gold, Diamonds or Silver stocks in exchange for bonds (from the Treasury)
5. Central banks must honour all other banks requests for money. If the Central bank does not have enough money it can trade with the treasury bonds for new money notes.
6. A bank can return to the stock exchange only when their books are balanced again (FSA to authorize)
7. All bank profits go to a pension fund for all the countries work force including bank Stock Exchange profits. This will resolve any countries pension conundrum. (Yes, even bankers will get a pension this way instead of bonuses)!
8. A new mortgage scheme from banks where they buy the house for you. However, after 20 years you have to save enough money to buy the house for the original price plus 20% interest (if you default at the 20yr point then each year the interest increases by 2% until you do repay the full amount. If you want to move after 1 year then you have to pay the bank 1% of the original price and 1% of the 20% etc, etc (This scheme is based on your current income with a projected income increase of 3% per year over the 20year period to obtain the affordable House price.) This will encourage/force everyone to save and to progress their potential while releasing people from debt.
9. All Landlords who rent a property must relinquish the property to the bank (Bank will buy the property) and those who are living in the property revert to the new mortgage scheme.
10. All credit cards must become Credit/Debit cards where the interest is fixed. 5% whether credit or debit balance. However, due to step 8 everyone has more money (No mortgage payment) so they should be able to stay out of using the card as a credit card. Each day a savings balance figure required to meet the amount to pay for the Mortgage (see 8) is highlighted in the account to assist you keep track of your commitment.
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philcrazyalien @ #9
I have further bad news for you . . . .
Congratulations on having worked for 26 years.
In normal circumstance you might expect to be able to retire in about 14 years time BUT due to the need for more tax to be paid by those in work the Governemt will be inviting those, lucky enough to have a job, to work until they die or 150 years of age - whichever occurs last!
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philcrazyalien
It's the ethics of pragmatism born out of desperation in dire circumstances. Actually, your 20,000 is gone? Which 20,000 is that you ask, the money you gave the bank and the iterest it should have earned or the 20,000 you gave the government? The answer is both are gone. The money you gave the bank was given out as a loan to someone who bought a house with it. Now they can't pay it back and you can't take out 20,000 worth of lumber, appliances, and cement from that house, the bank simply lost it. The other 20,000 was spent paying for all sorts of things govenments buy such as police, firemen, tax collectors, homes for the homeless. So where will that 20,000 you get from the bank come from? Your future earnings. The government will print it for you now but you will have to pay it back to them later as taxes on your future earnings.
Are you living in cukoo land? Yes along with the rest of us. What else could you call people who marched right over the edge of a cliff along with their American counterparts who played the fife and drum as they went?
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I recommend comment 7. Additionally, if a bank is given 20bn then the FR System allows them to lend 200bn, does it not?
So, a bank knows it is deep deep in the mire, so deep it can not quantify its own losses at all. Would you therefore lend that money to another institution you know is in the same situation? with possible margin calls and insurance defaults on the way? Is that a good risk?
I dont see interbank lending improving, but I am just a joe public.
To me, Sarkozy has it right, a government body that lends in its own right. does its own risk assesments. competes with banks and lends to business, the banks remain private.
I do still worry that the keynsian defecit model will prevail. As 7 said, how does one reduce the level of debt, government spending and inflation.
I hope I am wrong.
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philcrazyalien @ 9 asks
"Can you tell me which Ethics are being used to resolve this financial crisis?"
You must indeed be a crazy alien to assume that this government has ever tainted itself with ethics.
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Good initiative to translate the financial babble
As voters we should remember that the impersonal governments, banks or regulators consist of people we should remind of the rules and obligations they should stick to. If not we shall end up once again in the mess we are in now.
I would like to suggest as obligatory eductional material for our politicians and policy-makers Noreena Hertz's I.O.U.
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A few comments on some of the posts so far.
Everyone seems to have ignored ¤3 alanbloggz piece proposing getting rid of derivatives. I disagree, alan, if only because of the size of the problem Jacques Attali, writing in Le Figaro this weekend reckons that the mass of money created through derivatives equates to some 350 trillion (350.000 billion) Euros; whereas global GDP is estimated at 45 billion Euros.
To ¤7 MAII - for the first time ever, I tend to agree with your overall assessment! I'll make a doctor's appointment right away.
And to ¤10 philcrazyalien it's all about Ethics. Well, OK, but whose ethics? The banking system, like the whole world financail system is neither moral nor immoral - it is amoral. Morality is a question of personal values.
Better to seek a more generalised set of rules of governance for the financial markets. A Europe-wide set might be a good starting point. However, it appears that the seemingly pro-market heads of EU states find it difficult to agree on common financial support, never mind rules. (Perhaps they forget that, without a sound financial system, trade will fail?).
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To MarcusAureliusII (7):
I think that you have a little too gloomy picture about the US and the world economy. I myself believe that the coming recession will not be a deep and it will not be a long one.
Firstly, about the US economy...
1) US population is increasing strongly, in 2050 there should be 350 million Americans compared to 300 million today. That means that new infrastructure from electricity generation and roads to housing are needed.
2) US infrastructure is now decentralized and relies heavily on car usage. As the price of energy goes up and we move from oil to other energy sources, there is need for more centralized infrastructure: namely boom of metropolises and mass transportation.
3) US infrastructure is already in desperate need of investment and this includes almost all type of infrastructure from roads and rail roads to water and electric networks.
4) US government has many places where it could optimize its activities. In example you spend more on health care per capita than any other country in the world and you still get worser results, if you would nationalize your health care system that has created unbelievable amount of over-head, you could save huge amounts of money. Same applies to education too: money spend in all the wrong places with unsatisfactory results.
5) Applies globally. There is a global need to start transformation to nuclear - hydrogen based society, meaning more infrastructure from electricity and hydrogen generation to supply networks is needed.
If the next government that starts, starts a public investment program, but also legislates utilities companies to invest on their infrastructure, and starts re-structuring of the US government itself, it should start the recovery and also start the natural growth following increases of efficiency in the whole national economy.
I should also mention that I don't accept 'we don't have money' as an excuse on not taking on the five points I mentioned. Governments have the money and the people, its only a question on diverting that money from private consumption to public investment: i.e. fewer Big Macs to citizens, better roads for all.
In Europe points 3, 4, and 5 apply too in varying decrees. What however is badly needed especially in the western European countries is cutting down the amount of bureaucracy. Both Germany and France haven't had strong economic growth in the current and the last decade, because their bureaucracies are strangling economic activity and requiring unneeded over-head: i.e. the German tax code is just an incredible mess and scraping it would benefit everybody.
I think that the current financial crisis is a wake up call to start doing things that we should have done, but haven't been bothered to do. In my own country, Finland, this whole mess should put light the goverment to start investment and buildup programs, but also allow private investments to energy sector. We currently have three companies that want to build up new nuclear plants, before the crisis it was forecasted that at least one would get a permit, now the government should give permits to all three and thus activate the economy to recover more strongly.
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Mark,
7. And hope central banks will look at ways of getting more money into the system in the long term.
We can all look forward to the Bank of England and the European Central Bank printing lots and lots of new Pound sterling and Euro currency notes galore which will lead to inflation, rising interest rates and decimation of the value of any personal savings and assets.
Credit where credit is due, MAII has been prophesisiing this printing of Dollar, Pound and Euro currenciy notes for days if not weeks.
Does anyone really think the European governments have got a handle on the future or are they just sticking as many fingers in the holes in the Dykes as they have fingers to try and hold back the flood waters or "financial tsunami" to which Mark alludes?
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#2 - benagyerek
Para 4
The Hungarian Forint took a pounding overnight on the back of rumours that OTP which is Hungarian owned had problems. That appears to have been resolved now but there were huge queues on Friday at some branches of KandH, which is Belgian owned, with depositors trying to withdraw their money. There is also concern about UniCredit following issues with the Italian parent. There certainly needs to be some clarification regarding non-eurozone currencies. I particularly wonder whether Slovakia's entry into the eurozone in a few weeks looks to be on such good terms as orginally thought.
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The funny thing about Sarkozy's plan is that now that his own government is bankrupt by his own admission (many months ago), he will drain whatever equity is left in the ECB mostly contributed by the Germans. When he's done, they and everyone else in Europe will be in the same boat France is in. Ta dum!
Jukka_Rohilla
I keep hearing about the salvation of the hydrogen economy. How do you think you make hydrogen anyway? In case you don't know, you break it down from water using electric power from central power plants which burn coal, oil, and fission uranium. The thing is, you get less energy back from the hydrogen than you put in from the power plants.
By 2050 the US will have over 439 million. in fact I think that number is projected for the late 2020s or 2030s. By 2050, it will probably be over 500 million...or zero :-)
The US infrastructure has been badly neglected for decades. It needs to be completely rebuilt. But where will the money come from to pay for it? We don't have any. I guess we'll just have to print that much more of it.
Health care consumes about 16% of the US economy. In France it's 50%. There are efficiences to be had in improving it but not the kind that would turn this mess around.
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Paul Krugman, who was today awarded the Nobel Prize for Economics wrote the following in today's New York Times:
"the Brown government has shown itself willing to think clearly about the financial crisis, and act quickly on its conclusions. And this combination of clarity and decisiveness hasn?t been matched by any other Western government, least of all our own . . . the British government went straight to the heart of the problem ? and moved to address it with stunning speed . . Luckily for the world economy, however, Gordon Brown and his officials are making sense. And they may have shown us the way through this crisis".
I am not naturally inclined to take anything favourable that is penned about Father Brown with anything other than an enormous pinch of salt. But coming from Krugman, we maybe should take this seriously. It may well be that, while there is no quick fix, there is some light at the end of the tunnel and a tsunami can be avoided.
In the meantime, may I suggest Mark that you stop using the word boom in your headline just in case someone misunderstands and thinks the bust is over. It is here for some time to come.
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To Marcus 7 Unfortunately, I have to agree with your assessment of the United States financial situation. This is compounded by the uncetainty created by the forthcoming Presidential Election and strat of the new Presidency in January 2009. Until then nobody know what policies the new Administration will adopt and there is nothing that markets hate more than uncertainty.
Whichever team wins, there is no pre-knowledge on how successful they will prove to be. In Britain Sir Anthony Eden had been a very successful Foriegn Sectretary under Chirchill. He manage to sink the special relationship with America, along with what remained of the British Empire in the dirty waters of the Suez Canal.
I listened to the Press Conferance lives in French with Spanish simultanious translation voice over (on CNN+) and have read the assessment in todays El Pais Newspaper. To me there are two objectives for the Euro Zone.
Firstly to ride the present storm, mainly due to lack of confidence due to uncertainty.
Secondly, a longer term aim of developing a struture for the Euro which will enable it to funtion in co-operation with but independent of the U.S. dollar. Considering that the Euro only came into full operation in 2002, less than seven years ago, this is quite a challange.
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oj what a thread. and menedemus and mavrelius, all agree, how scary.
Took up Izvestia newspaper instead to find smth encouraging and what do I see on the first page: "Market reached bottom... and began to dig!".
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Massive inflation is on its way, as central banks are printing money like madmen.
And these decisions are made by the very politicians who tell us we should centralize all power in Europe in Brussels and put these powers in the hands of an unelected mutually appointed political class.
I see that parliaments are not being consulted in Europe (and after all why should politicians consult parliaments? The parliaments don't have any real power left, that's all been transferred to EU politburo and council).
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"Sir Anthony Eden . . . manage to sink the special relationship with America, along with what remained of the British Empire in the dirty waters of the Suez Canal"
He did what? He caved in to the US for the sake of the special relationship over Suez. In fact an acquaintance who was posted to Washington for a while used always to fly to New York and travel overland to DC because he flatly refused to fly to an airport named after John Foster Dulles.
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In case it can be of any consolation, below is the advice Izvestia (heavy Kremlin newspaper here) gives own Russians:
1. Even that private deposits in banks are state-protected (up to $32,000), keep a pile of cash under the matress, enough for you to last 2-3 months. That bank where your deposit is better be state bank (Sberbank).
2. Wait with buying a flat; in Moscow prices already began sliding (2.5% btw 3rd and 10th Oct - by one source; 15% - by another.) So soon you'll be able to buy cheaper.
3. Don't sell your own flat unless you absolutely have to.
A 1-room flat of $200,000 in Moscow now will be down to $150,000 in several months, 200k again in a year, and 220k, in, say, 15 months' time.
4. Wait with buying materials for house building or reconstruction, cement already began to drop in price and will drop even further. Likewise, gaterbeiters will become more agreeable in a while, so don't start house reconstruction at the moment.
5. Auto dealers already began offering discounts, in half a year prices will be down -then buy your new car.
6. Don't hurry to return back to bank the credit you took ahead of the time and in full. Carefully pay percentages to your bank but don't the whole sum.
7. If you take a credit in bank - take a huge amount and for many many years, nothing small and quick. Banks already raised credit conditions up and percentages and will behave likewise nasty in the near future.
Take credit in roubles. The inflation splash up will invariably put the Russian currency down.
8. Don't change jobs. Some companies look allright from the outside and how collapsing they are you'll be able to see only when you are inside them, and in a limited set of positions.
If you change job anyway take one close to gevernmental bodies and structures. Or in an industry that is not subject to cycles in development. (?)
Even if you work for a tiny business don't run away. Small business is like grass, grows everywhere, when big trees will be hit by the hurricane, those keeping close to the ground might shoot up through the asphalt.
The most difficult will be 2009, it hasn't started yet. All the problems that appear now will produce a combined effect. There will start job cuttings and salary cuts across. Don't put on rosy glasses and think the crisis will affect stock exchange traders only. In several months we'll see increase in the army of unemployed, fall in the prices for housing and second-hand cars.
We'll soon have much less banks and investment companies in the country, likewise - medium-sized businesses.
Right now the problems are in the fin. sector. Next will be trade sector and service sector. In several months problems will start in the real sector of the economy (the ones like factories I guess, who make something, not simply re-sell to one another). Then fin. sector will start to recover - they began first, so they'd dive out first.
The better the economy is developed - the more un-even the crisis develops, affecting various sectors at various times.
In a year we'll all be remembering about it all with a smile. (!).
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BYE BYE USD
sooner or later the dollar will collapse. i am talking about > usd 2.00 / eur. it may be this year, maybe next.
us demand will collapse. everyone has too much debt to repay. the demand side effect is much more acute in the usa due to the high household indebtedness and low savings there. although the banking sector pain has been as bad in europe as in america, once the banks are recapitalised, it is american households that will be left with massive debts and nothing to repay them with. eurozone economies do not have this problem. european borrowers will be better credits and have better access to the greatly reduced new lending available from the global banking sector.
due to demand-side problems, us interest rates will be cut to zero and the fed will start "quantitative easing" (i.e. leaving the printing press running 24/7). rates in euroland, uk, etc will remain substantially above us rates, as demand side issues are more manageable, and rates are higher to start with. the federal budget deficit will also balloon, massively increasing the supply of us treasuries - something that will make life for asian central banks more awkward.
the recent dollar rally was highly technical. people buying usd cash to meet margin calls on usd-denominated derivatives. people unwinding carry trades (where they had borrowed usd, invested in foreign currency) because they were forced to reduce their leverage. people unable to roll short-dated usd financing for usd assets they bought. as the interbank market unfreezes, these technical effects will reverse themselves, pushing the dollar back to where it was at the beginning of september.
the paulson plan is much less compelling than the uk's or eurozone's bailouts. the commitment of european governments to save their banking sectors by total nationalisation if necessary is beyond question - they have no ideological hangups, unlke the usa. nor does europe face elections in 3 weeks with an extremely hostile public.
collapsing us imports will undermine the rationale for east asian countries to prop up the dollar. why subsidise export-led growth if the us consumer cannot afford your cheap exports anyway? a dollar collapse will destroy the value of these countries' reserves. although china is the biggest owner of us treasuries, there are plenty of other countries (taiwan, russia, japan, singapore, etc) that, fearing a dollar collapse, may flake and decide to get their money out first.
speculators will identify the above trends. they will move in and squeeze china et al, forcing them to revalue, just like the uk was forced out of the erm in 1992. it will be a one-way bet: asian central banks will initially try to defend the dollar, buying dollars expensively from the speculators, before some of them flake as the selling pressure becomes overwhelming. the main constraint on speculators now is the inability to borrow dollars. as the interbank market unfreezes, speculating against the dollar becomes possible again.
btw, never underestimate the political will behind the euro. the european project thrives on crises. remember the euro was launched in reaction to the collapse of the erm. see the newsflow from europe today - a belated but much more convincing response to the crisis than the paulson plan. individual european governments have much more executive power than the us president does. the european problem is creating a consensus among these governments. crises are very good at creating this consensus, as we have just witnessed.
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#26 - WebAliceinwonderland
. . . and 10 - Become a burglar. There will be roubles under every mattress.
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threnodio @ #28
That's why Russia can move so quickly to becoming a Police State . . . .
Become a Policeman, arrest lots of burglars and and the confiscated loot can set you up for life!
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#28 threnodio
Exactly.
I was very glad to receive cheerful Kremlin advice ("don't buy your new car now") unfortunately all unappliccable - starting from No 1 ! Whether I put my 1 rouble at house now under the mattress... or above...
hard decision.
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Purely symbolically.
To cheer, as threnodio puts it, "the regulars" up.
Cow business
American corporation. You have 3 cows. You sell 2 of them and milk the remaining one for all. When it dies you wonder.
Itaian corporation. You have 3 cows. But where they are you don't know, because it's your lunch break.
French corporation. You have 3 cows. You go on strike because you want 4.
German corporation. You re-design your cows, so that every one is now 10 times bigger and gives twice more milk.
Japanese corporation. You have 3 cows. You upgrade them so that each gives 100 times more milk and can go for a month without food, and when it does eat - it feeds on own milk!
Swiss corporation. You have 5000 cows but all of them are not yours. You earn money guarding them.
Russian corporation. You have 3 cows. You count them and it appears you have 5. You count them again, and now it makes 17. You damn it all and calculate and they are 25. So you drop this counting business and open up a new bottle.
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To MarcusAureliusII (20):
It seems that you missed the key word nuclear from the nuclear - hydrogen economy. In this kind of economy you use nuclear to produce all the energy and use hydrogen to store the energy to use it in especially off the grid usage situations: namely transportation. Because nuclear is used to both produce energy for direct consumption and to hydrogen production you will have very stable and very high utilization rate for the nuclear plants thus increasing the overall efficiency and lowering energy costs. Of course there are still some problems with producing hydrogen and storing it, but they can be solved in time. The first step however is to build nuclear to replace fossil fuels in electricity production and move from there to complete transformation to nuclear - hydrogen and on later on to fusion - hydrogen economy.
Regarding the population numbers of the US, there are 305 million people in US, and even an increase to 350 million is a big step. I haven't seen anywhere in any statistics 439 million as an estimate of US population in 2050, care to site your source?
Regarding health care, in 2005 US spend 15,3% of its GDP to health care while France (11,1%), Germany (10,7%) and Nordic countries Sweden, Denmark and Norway spend only (9,1%) and Finland spend (7,5%). If you could drop your costs to the level of France, you would save 4,2% and with Finnish level you would save 7,8% of your GDP. With that kind of money you could either triple your military spending or start paying of your government debts, either way, serious amount of money in question.
Regarding building infrastructure, I don't think that there is any question or doubt that the US or European countries couldn't handle the costs of building new and upgrading old infrastructure. Its only a matter on reversing consuming habits and doing things differently. In example I have never understood why people in US opt for SUVs and not for station wagons? Why build McMansions with life cycle of approx 30 years and not quality housing or apartment buildings? Why eat everyday in McD's? By cutting the excessive waste all the infrastructure could be build and US in the process transformed into a better place to live, easily.
Regarding France, well, they have budget short over what the Stability and Growth Pact requires, but that is not the main question. The main question about France, Germany and Italy is are these countries going to cut bureaucracy and bureaucratic over head or not. If they will start restructuring efforts then the their GDP growth will quickly catch up any short falls in their budgets. Even so France has debt 64% of their GDP and United States has 60,8%. Relatively there are no big difference between different countries now, the big question is what countries are going to do.
PS. Reading other comments here, you are all doom and gloom. Cheer up... and.. always look on the bright side of life.
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A couple of comments.
1. The essence of the crisis is shortage of money available for commercial operations.
2. Money do not disappear, just change pockets.
3. Thus, the problem is not the lack of money, but a wrong distribution of money.
4. This situation illustrates a law of statistical physics: maximum rate of the system's dynamics corresponds to the maximum entropy, that is to the uniform distribution.
5. Therefore, the government's fundamental function is to maximise the uniformity of the distribution of money by redistribution (avoiding bloodshed as far as possible).
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@benagyerek (27)
the Euro will likely fail earlier than the dollar does. The Euro has always been a political project rather than monetary or economical. The EU is being torn apart by one group of countries who demand higher interest rate and another group who want them lower.
If only countries had kept their original currencies, they'd be able to apply fiscal measures. Now they have given the fiscal instrument away, they run into trouble.
And the consensus you mention about the European governments is, that it is best to take measures yourself. Finally governments too are waking up that the EU doesn't work. Elected national governments and parliaments will increasingly demand their powers back, and we'll see the death of the political EU (I say: the sooner, the better).
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To WebAliceinwonderland (31):
Laughed all the way :-) I couldn't resist make some updates to your cow analogy...
US company, outsources cows, brands milk to several different brands including Super Duper Fun Time Cow Drink for the whole family and in the process triples the profits (at least in the short while).
Italian company, decides to slaughter the cows and make high class prosciutto from the meat and luxury hand bags from the leather. Ends up wondering where all the cows have gone.
French company, with state interference mergers with another French company to sell cows and milk along side fighters and nuclear plants to third world dictators. Company motto: we sell to anybody, literally to anybody.
German company, specializes on supercows that produce over quality over powered over expensive milk to new money and executives: drinkers of German milk have no friends.
Japanese company, possesses company culture that demands ultimate sacrifices for the glory of the company and the Japanese people. 'Quality or seppuku' is their motto. Ends up producing average milk from average cows to average consumers.
Swiss company, guards your milk that it knows is not exactly yours, but doesn't care about it, after all who are they to say who owns the milk and who not. They are just guarding it, just like they are still guarding all that milk deposited before and during the WWII.
Russian company, makes an complaint to Kremlin about unfair competitiveness of foreign cow and milk producers. In an unrelated mater Kremlin introduces new, longer, custom procedures to foreign cow and milk importers.
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The EU will use this socalled crisis to further its own ambitions. Full political integration (on an undemocratic basis) has always been the goal, right from the moment democracy-hater Monnet first peddled his unsavoury ideas. A new political aristocracy would run Europe. We're still heading that way.
"The fusion (of economic functions) would compel nations to fuse their sovereignty into that of a single European State."
Jean Monnet, founder of the European Movement, 3 April 1952
"A European currency will lead to member nations transferring their sovereignty over financial and wage policy as well as monetary affairs. It is an illusion to think that states can hold on to their autonomy."
Hans Tietmeyer, President of the Bundesbank, 1991
"A free trade zone - precisely what we have been trying to avoid for the last 25 years."
Yves-Thibault de Silguy, Commissioner for Economic and Monetary Affairs, on the consequences of a delay in EMU, 1997
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fragility #33
That's a scientific approach! Hats off.
Even on my technical imbecile level, I now remember having heard from more learned family members comments like "when heated - entropy is growing" (with regards to dashing around the kitchen looking for lost things in vain).
and "according to the law of materia preservation, nothing disappears in nature; if it disapperas in one place - it appears in another."
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I expected the US dollar to drop against the Euro and the Pound. I was surprised it instead rallied for around a 7% rise these last few weeks. This may be temporary as Europeans banks and investment houses needed to buy dollars for technical reasons having to do with the American market. I agreed with Jukka_Rohilla that the US dollar could fall sharply against other currencies due to printing money to devalue everything including debt but I see that Europeans are doing the same so the fall of the dollar against the Euro and Pound may not be quite what I expected. Nevertheless, it's going to be a very bad retail environment in the US because of the high personal debt and the cost of housing, food, energy and medicine. Christmas will be bleak for retailers.
I expect China to suffer enormously and for them to dump vast quantities of goods on the US and Europe for whatever they can get for it. They will also face tough economic times including possible social unrest. We don't hear about it but occasionally we find out that there are many more protests and riots in China than we know about already.
It seems the US will match Europe's actions and will announce it tomorrow. They didn't announce it today because the bond markets are closed for the Columbus Day Holliday.
In 2000 European economists said that the looming slowdown in the US economy would not affect Europe. They were wrong. That time they had a recession that was longer and deeper than America's by a lot except for Britain. I think because of their current circumstances they will be impacted to an even greater degree this time.
I wouldn't put much stock in anything the Noble Prize committee does. They've given prizes to people for what seem like purely political reasons. They also make big blunders. They gave the prize for economics to two Americans who were "experts." These guys opened up a hedge fund based on their theories for billionaires only. They lost every penny invested with them. So much for the Nobel Prize. It isn't what it used to be.
Nanotchka, I've decided to take the Kremlin's financial advice. I will not be buying an apartment in Moscow anytime soon.
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#36 - mcdv-1975
While I don't agree with the position you are postulating, I have the greatest respect for your point of view and your right to hold it. I will be happy to debate the points with you on a level playing field.
However this is not a level playing field because your argument is not with the EU. Your argument is with the UK political establishment. There is not a single British political party with a realistic hope of power in the foreseeable which favours decoupling from the EU.
Like it or not, you either have to drag one of the mainstream parties kicking and screaming if necessary into the eurosceptic camp or you have to create a new political movement capable of commanding the necessary support. I constantly read in these posts that the majority of British people want out of the EU (or words to this effect). Where is the evidence? Where are the votes? Where are the people on the streets?
At the end of the day, selling a political cause is no different from selling anything else. If there are no buyers, there is no market.
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Forgot "Taliban corporation".
You have 3 cows. You load them with explosives and send pasturing to your neighbour yard. Your neighbour house blows up. You are happy.
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I'm very curious having seen Gordon McClown's bank rescue plan concerning the 47 billion Euros he's put up, it's reported today that Germany has approved a package worth up to 500bn euros (£393bn; $683bn), France will spend about 350bn euros and Spain has set aside 100bn euros. Having seen him waffle on Yesterday about being a rock of stability it makes me wonder why the size of the package was not comparable to Germany or France. Ok their packages were to enable bank lending but then ,has he blown so much in the past ten years that after saving Northern Rock and B&B there is so little left in the pot. As if it's necessary for Germany and France to do this I can't see how the UK doesn't also need such a measure.
Another 'great' announcement Yesterday was that four chief executives of the failing banks were to leave their post. Only four! I was under the impression that any director of a company that trades rashly was liable to be disqualified from ever being a director again. Anyone have any idea why there has not been even one disqualification so far?
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#39 threnodio
The UKIP got 2.2% of the Uk vote in 2005, or 603000 and odd votes. People don't hang around on the streets, as "you can catch your death out there".
Not sure of the UKIP's policies, but I should imagine that going back to living in caves, using stone cutlery and eating raw chicken is the way forward in their little world ;)
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Re post 42, agree with you think it is highly unklikely that the U.K. would leave the E.U. in the near future. I am certainly not in favour of the U.K. leaving.
What I want the U.K. to do, along with the citiziens of Ireland, France, Netherlands etc is continue to prevent any further integration and powers going to the E.U.
We have started with the Lisbon treaty, which I think will mark the high water mark of E.U. federalism. Contrary to popular opinion among euro enthusiasts the world has not stopped turning. The E.U. can cooperate, as nation states always have done, to deal with the worst economic crisis of our life time without the 'tidying up' as the Constitution/ Treaty was euphamistically called.
We can hopefully look forward to a period of stability and then a gradual repatriation of powers back to the Nation states. The E.U. federal dream is dead, some people just do not realise it yet.
May be an optimistic view point but prefer to be a glass half full person rather than one half empty.
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I have to clarify my point on the link between the money distribution and economic dynamics.
If all the money happen to be concentrated in the pockets of few, leaving the rest penniless (which would correspond to zero entropy distribution), the economy will stop. There are numerous examples of such exercises, including the 1929 crisis, and a more recent case - the Russian so-called reforms of 1990-s whereby the entire economy collapsed.
Once again, the root of the current problem is not banks, but the stock market. The latter is a fundamental source of instability and (negative) redistribution of money. To resolve the problem, the two have to be entirely decoupled. No public money should be allowed to use for the stock market speculations.
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#42 G-in-Belgium,
You mentioned "Not sure of the UKIP's policies, but I should imagine that going back to living in caves, using stone cutlery and eating raw chicken is the way forward in their little world ;)"
I don't think that is the UKIP angle in any way from what I've read of them, you're much more referring to the fools in the various Green party's. I'm sure you remember the farce our Greens in Belgium created a few years back with Francorchamps (in 2003) over cigarette advertising and how even now their electoral fortunes have thankfully not truly recovered.
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#7 MarcusAureliusII
I recall a recent dispute about the "Super Power" status of the USA. You seem now so down on your own country that you may consider bidding for the title "Soup-(line) Power".
These things take time to work through - see the history of the US home loans rescue corporation set up in 1933 and it subsequent closure in 1951. My guess is that the depression from this crunch will be eased by around 2020, certainly not before 2010 but possibly by 2015.
#43 jordanbasset
Re the UK and the EU.
The question is I think not about leaving as that would consign the UK's industry and employment to the dustbin of history and cut us off from our prime markets, but rather how best to utilise the EU as our 'home market' in the same way that US manufacturers treat their fellow states as their home market.
US states can do this as they have certainty of cost and price as all trade between states is in US dollars. You know where I am going now - I am sure. Can you give a strong economic reason why UK business should not be able to have the same certainty of cost and price as every US state in its home market? Can you then escape the necessity for the UK to join the Euro?
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Re post 46, thank you for your measured and reasoned response.
The strong economic reason for me would be the current economic crisis. The U.K. have the flexibility to change interest rates and increase or decrease money supply to meet the needs of the U.K., not Greece, Ireland or any other E.U. country. Gordon Brown's plan, not a supporter of him by the way, could be done relatively quickly because we had this control. Others in the E.U. are now following this, but it takes longer because you have to have consensus.
Re the U.S. it works because there is a strong political, social and cultural identity and different parts of the country are prepared to make sacrifices for the good of the country. Even then there have been times in the last 20 years when some parts of the U.S. have virually been in recession while other parts of the economy were overheating. But they have lived with that for the good of all (okay not without a few gripes, especailly from the South and manufacturing centres.
Within Europe under normal circumstances there is a tension, with some countries needing interest rates to increase, others to stay the same and still others who need them to reduce. They have lost that flexibility and without the political unity such tensions can only increase as we go through the economic turmoil
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mcdv-1975
the founding principals of the european union are friendship and common purpose among nations. this is something that very few people in the uk have ever understood. sadly, it seems part of the british (or english?) character is a desire to keep our friends at arm's length.
crises bring out the sense of common purpose in the eu more than anything else. when you say that "The EU will use this socalled crisis to further its own ambitions", who exactly are you talking about?
the commission has absolutely zero power in this - all it has is the power to propose, but it has no democratic mandate or authority behind its proposals. national governments can just choose to ignore it.
(i personally would much prefer it if the commission did have a democratic mandate so that it could voice that common purpose and reengage the public in the entire european project. but this is besides the point..)
decisions to further integration are taken by the european governments, and as we have seen, governments don't give up their powers lightly. in response to this crisis, i fully expect the eurozone leaders to agree on a common long-term system of bank supervision and financial crisis management that clearly was missing prior to this crisis.
as for pressures for the eurozone to break up, i really think you do not know what you are talking about (or maybe a serious case of wishful thinking?):
"If only countries had kept their original currencies, they'd be able to apply fiscal measures. Now they have given the fiscal instrument away, they run into trouble."
what are you talking about? the national governments have complete fiscal freedom (nb the "stability pact" that was supposed to limit budget deficits died a long time ago). it is monetary (not fiscal) policy they have pooled, and for good reason - last time there was a major global crisis in the 1970s, competitive devaluations spelled disaster for many european economies.
"The EU is being torn apart by one group of countries who demand higher interest rate and another group who want them lower."
which governments are calling for higher interest rates?? are you nuts?!? face reality, the eurozone economies (like the entire global economy) are highly convergent and becoming ever more so. the current crisis illustrates that point more starkly than ever before.
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#48, benagyerek,
I can't quite believe you said "which governments are calling for higher interest rates?? are you nuts?!? face reality, the eurozone economies (like the entire global economy) are highly convergent and becoming ever more so."
Have you not seen the extreme reluctance for the ECB to reduce the interest rates, for months now there have been calls from certain countries (Germany mainly) to raise the rate and it was only a compromise that they were left stable as other countries that could see the looming crisis wanted them cut to kick start their economies. It's taken a major melt down for the ECB to act and it clear that many 'experts' consider a half percent too little too late.
It's also clear now that fiscal policy alone is not sufficient enough for serious crises, and as I've said before by adopting the Euro the Eurozone has forfeited the right to adjust the monetary policy (Interest rates) and is in the hands of the bankers of the ECB in Frankfurt. Whoever controls the ECB controls the interest rates and so far the German government seem to have a disproportionate leverage on that control.
As for the Eurozone economies becoming convergent, that might be politically correct europhile spin but it fails examination. The post of jordanbasset #47 was spot on about the tensions that exist with the 27 member states and the introduction of the Euro has not reduced them in any way for the Eurozone subset. If anything it has exasperated those tensions, and in my area of Belgium, which was fanatically pro-Euro it is now hard to find people that don't regret it's introduction. As #47 pointed out the USA is a lot different from the EU and spreading manufacturing across the EU does not mean the economies are or will be converging.
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Buzet23 @ 41
The gross tax-payers funding for the Banks to draw on is 400bn pounds (@ 515bn Euros) - this is 50bn in immediate funds vs prime share swap and a further 100bn pounds for direct injection vs prime share swap if required. There is then a further 250bn pounds for the banks to borrow on an as needed basis. Thus the UK is investing slightly more than Germany but I don't think it is a competition . . . . . I think it reflect that both the UK and Germany are either taking the risk of bank failure the most seriously or they are taking it more seriously than France or Spain who are injecting less into their banks.
I am actually astonished that Spain is only injecting 100bn Euros! I have this gut feeling that their economy has been asset debt and loan fueled and the Spanish banks are as equally liable to failure as the UK banks. We'll no doubt see if this is so some time soon.
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G-in-Belgium @ #42
I think you can rest assurred that the UKIP vote does not reflect the attitudes of the majority of UK voters.
At 2.2% of the UK popular vote UKIP have done very well but they are a single issue party and, historically, such parties fail to catch on to the public imagination.
The fact is that their are three main UK parties and unless the UK goes away for its "first-past-the-post" electoral system, realistically, only two of the parties have any hope of forming government - Labour or Conservative.
The Conservative Party hold the mantle of being the most EU-sceptical of the two parties but as it was the Conservatives who had the UK (a) join the EEC, (b) sign up for Europe i would be very surprised if they then (c) opted to withdraw from the EU.
The suggestion is that the UK Conservatives (should they be elected to government) will put a referendum vote to the UK Electorate for the EU Constitution to be adopted IF Lisbon has not been ratified by ALL 27 member states but I would not hold my breath on that happening.
The reality is that the UK will never withdraw from the UK as the UK electorate will never be given that choice by neither the Conservatives nor the Labour Parties and the Liberal Party will, as always, sit on the fence - just as they did over the Lisbon Treaty vote when they abstained.
That fact that the UK remains in the EU suits me just fine but I would rather see the UK people given the opportunity to formally vote to stay in the EU as that would be the morally right thing to do.
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#47 - jordanbasset
So long as we understand that membership of the EU did not constrain the flexibility. It was the fact that the UK is not in the Eurozone which delivered that flexibilty.
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@47
Can you imagine, what would have happened the last months, if there were still Lira, Deutschmarks, France etc.?
Speculation against currencies, against countries.
Do you think under such circumstances it would have been possible to find a concerted framework to handle the crisis in Europe?
I think, by far, most of the people in the Eurozone are very pleased to be under the helmet of the single currency these days.
The Euro is not the result of the european unity, but the motor, as of course it makes much sense, to coordinate your fiscal and economical regulations, if you all work together into one single pot.
In my view, which might be biased as a german citizen, even GB can be pleased, that the Euro is there, because that gave the Pound Sterling some possibillities, that during decades allways benefitted the Deutschmark.
Germany was kind of forced to give up the DM as a price for the german unification, to calm the fear of a german hegemony, especially from your Iron Lady.
On the other hand, Germany since the 1950ies was in favour of a political european community.
So it was on one hand hard to feed to the ordinary people, to give up the icon of the Witschaftwunder, the Deutschmark, which at least was as mythic for the german soul, as the pound maybe for the english.
On the other hand, to get the undisputed support from the european partners for the german unification, was of course much more important to us.
Germany's plan was, first united european fiscal and economical standards, than single currency. But the circumstnaces forced us to believem that the premature establishment of the Euro could make some unnessecary problems, but in the end would force the participants to harmonize their laws as well.
In my opinion, the strength and security of the Euro is yet not far away from the good old Deutschmark days, the Eurozone shows just now, that it can handle big crisises, that the economical power is of a messure, that forces the USA has to talk to us on eye to eye level, and that, in the rare situations that the United Kingdom is on our side, we even can force the USA to the better.
As we can see now, as Paulson is adopting the Brown plan, after GB and Eurozone worked together.
I can understand, that GB people might think it is in their favour, that the can decide from case to case, wether they support the USA or the EU. Of course that has some benfits, as you can ask for bonusses.
But, the Euro is the motor for the harmonising of the fiscal and economicl structures and laws of the Eurozone, and in the nearer future 24 countries in the EU will adopt the Euro for sure, the two left smaller countries will overthink it againin.
Then the UK will the only big power in the EU that will not be in the same currency and economical framework.
You can imagine, that 26 of 27 countries with the need of harmonizing their structures under the pressure of the single currency, will not wait for the UK at any time.
So the conclusion is, IMHO, that it is not a question of wether the UK adopts the Euro, but wether the UK stays in the EU.
If you stay in the EU, you will take the Euro, may it be sooner, or later.
Wether you want to stay in the EU, is of course your decision.
I am sure, for the EU it would be better, if you are a main member.
And I think, that it would be better for you as well. But as I said, that decision has to be made by you.
I hope, that the actual political and economical circumstances will strengthen the Pro EU faction in your country, as you can see, that we are very strong together, and we have no problems, to adopt a good plan from the british, even if your are not in the Eurozone.
You must make the decision more sooner, than later, as it is much better for you, if you decide pro EU, that you sit in the front row with one hand on the steering wheel and one foot on the breaks, when the big decisions for the european future are made, as sitting back on the childrens seat.
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Re post 52, yes agree, not being in the eurozone is the key to the U.K. flexibility, apologies if I did not make that clear. Which is why I have no trouble with the U.K. being within the E.U., but do have problems with the until now increasing centralisation and federalism (including monetary union) as it does reduce that flexibility, quite apart from the democratic deficit.
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#47 jordanbasset
and
#52 threnodio
On the EU and the Euro
Your argument is that being outside the Euro allows the UK to competitively devalue the Pound against the Euro so that UK workers wages can be 'adjusted' without actually being see to lower them in numerical value, just in their purchasing power. (The Wilson Pound in your Pocket argument.)
On the other hand there is the uncertainty that business suffers from in buying and selling to our 'home' market which puts us at a competitive disadvantage. (This also ignores the large cost of exchanging currencies.)
So in essence your view is that it is better to maintain the downright deceitful 'Wilson' argument than it is to allow business to have the reduced costs of certainty of costs and prices.
On that basis would it also not be better to have different currencies in different parts of the UK - A Scottish (oil) pound (if they have any oil left?), A Welsh (lava bread - formerly coal) Pound, A Newcastle (shipbuilding) Pound etc. ?
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#50 Menedemus,
Thanks for the explanation as i was not sure what else has been promised since the picture has been changing almost every day. I'm also surprised about Spain as their Santander bank was involved in Fortis I believe so they must have got hit as well.
#53 starofthesouth,
What you say makes sense if the playing field was level but I'm afraid it never has been, the link between your country (Germany) and France is too incestuous for other countries including the UK to compete against. Just as the pressure to maintain high interest rates was somewhat forced on the ECB by Germany to the detriment of other less influential countries. I'm afraid that for countries like the UK, Poland, Czech etc to become more like leaders it would need the French and German governments to accept less control and more compromise, and so far there is little sign of that. Whilst National prestige is more important that the EU, the EU and the Euro will never be truly successful no matter how it's talked up or appears.
Having lived in a small country (Belgium) for a very long time I can see how National identity here is not as important to people as being in the the EU, but that does not seem to apply in France or Germany and to some extent the now cosmopolitan UK. The social mobility of the people of the EU would go a long way to redressing that but as many of us have experienced EU Social Mobility is thwarted often by protectionist local laws.
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Re post 55, no that is not my argument, and do not see how you could think that it was. My argument was that the U.K. has the flexibility to increase or decrease interest rates, decrease or increase the money supply, decrease or increase borrowing without having to get agreement from the eurozone. So we are better able to quickly meet the changing needs and demands of the world economy.
Re Wales and Scotland, if you read my post you would see I made a point re the U.S. being a close political and cultural union and so parts of the country accepted decisions taken for the good of the country as a whole. Indeed sometimes decsions have been taken in the UK which have been fine for the South east but less so for the North east, for example. But up until now this has been accepted, again grudgingly on occasions. There may come a time when Scotland want's to get out of the arrangement (less likely now I think than before the crisis). If so fine.
The Eurozone makes the situation so much worse as it is far less flexible and has been correctly pointed out, by Buzet, the bigger countries, such as Germany and France, tend to get their way re exchange rates at the expense of thiose smaller countries.
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jordanbasset,
I think you are absolutely correct that, with the current financial crisis, it has actually been a good thing for the UK to not have been tied to the ECB through having adopted the Euro.
This independence has given the UK Government the flexibility to identify a certain path to salvation and quickly adopt that path.
However, it is as yet not clear that the partial privatisation of the UK banks IS going to be the fix as the size of the debt held by the UK Banks is not known and not admitted therefore the sums provided may yet be insufficient.
I am also not so certain as you seem to be that the ECB is overly influenced by France and Germany.
Germany and, in particular, France do have a great deal of influence over the EU but the ECB is very independent and you may recall a recent Blog entry of Mark's wherein German Business Leaders were complaining that the ECB was not German enough.
I actually think the ECB is so independent that it is remarkably similar to the UK's Bank of England in that it sets a Bank Rate for the whole of the Eurozone regardless of individual notional needs. It also controls the money supply rigourously throughout the Eurozone.
The problem, though is that the EU component member states still make independent economic decisions and suffer the consequences of some EU nations being in a position where money supply and the current EU Bank Rate is counter-productive whereas other EU countries are positively improving their economies because the ECB's current money supply and bank rate are optimal for them.
I think that, as the various EU Nation States become harmonised in how their economies work and the EU goes forward with business regulations to enforce harmonisation, the Eurozone will steadily become more attractive for the opt-out nations such as the UK.
I do not yet think it is a prudent time for the UK to now abandon the pound sterling and join the Eurozone but that event will happen in due course - of that I am sure.
I, personally, look forward to that day as it will then become self-evident that the UK tax-payers pay more for their goods and service and higher indirect taxation than the rest of the EU (currently hidden behind currency exchange rates) and price/cost harmonisation and a better standard of life must inevitably follow for the British as prices, costs and taxation is equalised with the rest of the EU.
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This market looks like it's in a fakeout rally. The US, EU, and UK central banks and governments have taken coordinated heroic steps to save the lives of their dying patients but the underlying cause of the illness still exists. Besides the several trillion in worthless mortgages spread all over the world, 55 trillion dollars worth of Credit Default Swaps, 300 to 600 trillion in derivitives, and additionally guarantees of credit lines to large corporatons by American banks at rates which will create losses on every one of them are some of the time bombs still out there ticking. This rally would probably be a good time to sell any stocks still left in your portfolio. I emptied mine out years ago when I saw this coming, I've got one left which is not doing badly that I'll get rid of, and refinanced my house to raise even more cash. If we have a crash, it will be the buying opportunity of a lifetime. If not, by staying short in cash equivalents I'll be able to take advantage of higher interest rates. The most serious professional economic analysts on TV caution that the crisis is far from over while the TV stock pickers can hardly wait to tell you which if their favorites is about to shoot to the moon. Meanwhile, banks are highly levereged meaing that they have loaned out far more money than they actually have. In the US it's ten times as much, European banks (according to Brown and Darling in their press conference yesterday) are even more highly levereged. To investors as opposed to speculators the watchword is caution combined with a healthy amount of skeptical pessimism for the medium and long term. Meanwhile there should be credit enough to keep the economies alive for a while longer. After Christmas, there should be great buys on retail items including luxury goods like LCD High Definition TV sets. That market is already hurting.
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#57 jordanbasset
May I ask some further questions about your position with regard to the Euro?
I would perhaps find your arguments about the need for internal flexibility in interest rate policy (etc.) more persuasive if the UK was an isolated economy that mainly traded with itself. But changes in relative interest rate policy do have an impact on the exchange rate and thus revalue or devalue exchange rates and by so doing change the buying power of the Pound vs other currencies so I am yet to be convinced of the validity of your argument that internal market manipulation is independent of exchange rate manipulation. (c.f my Harold Wilson argument.)
Furthermore you dismiss the practical burden, and the bank changes, involved with handling multiple currencies for both business and individuals. Perhaps you could explain why this cost is worth paying and the advantage to the UK for us to continue paying this change and so put our business and our people at a relative disadvantage vis a vie our main trading partners.
This flexibility (of which you write) must be truly valuable to outweigh the permanent and ongoing bureaucracy, and bank changes of not using the same currency as out main customers. Do you have any numeric thoughts on the value of this flexibility as it is possible to evaluate the benefit of not having to change currencies and then we could compare the relative merits of the arguments?
A few years ago when we were told that the UK depended on the City of London and their 'world-class' skill in all matters financial your argument might have been more powerful, but given the now exposed shortcomings in the City I have difficulty in accepting it as valid.
Indeed what history shows us is that the UK is full of ingenious and skilled designers and workers and it is these who generally do most for the country (except for short periods of history i.e. the last decade or so) when we were led to believe that we don't need to do anything except fiddle the books to be a successful economy.
We have been kept out of the Euro for a decade and we have had to suffer the financial cost and currency uncertainty for the sake of the City and look what the City has done for the country.
It is my belief that we as a nation do best when we actually do things rather than just fiddle with derivatives and the people who do things need currency stability and the Euro presents us with such stability.
I also note that if the Euro Zone falls apart then we are at increased risk of further disasters, as has happened in the past when inter-state competition has become rampant and that this must be avoided, not at all costs, but if at all possible.
It will take a few years to prepare the UK to join the Euro because of the necessary technological work, but in a few years time we could be ready, if the others will let us join, which is by no mean a given. Another reason to propose preparing to join now is that doing the conversion work at a time when other developments are being reduced makes good use of the UK's skilled workforce (that is if we do not contract it out to the agents of a foreign power(!) as has happened to organisations such as the MOD.
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Well it's just before noon in New York City and the bull market rally is about over having lasted barely a full day and a half, the bulls have capitulated. The DOW is up an insignificant 56 points and the NASDAQ is down 25. Did you make your millions while you had the opportunity? Sorry to hear that. Well maybe with the next multi trillion dollar coordinated bailout you'll have another chance.
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Re post 60, again I did not say that 'internal market manipulation was independent of exchange rate manipulation'.
My reply was in relation to what you said about my argument -
"Your argument is that being outside the Euro allows the UK to competitively devalue the Pound against the Euro so that UK workers wages can be 'adjusted' without actually being see to lower them in numerical value, just in their purchasing power. (The Wilson Pound in your Pocket argument.)"
The first thing that should be said about economics is that it is not an exact science and no one can predict absolutely accurately about what will happen when you reduce or increase interest rates. However it is generally accepted that if you have an overheating economy with inflation starting to rise you increase the interest rate. By doing so the cost of borrowing increases and disposable income reduces. People have less money to spend and so demand reduces. This causes an over supply and prices are reduced (hopefully!) and also pressure is put on to reduce costs, including wages to achieve this.
In addition increasing interest rates means foreign investors find the rates more attractive and so they invest in sterling. This in turn will make the currency rise in value against other countries as demand for it has increased. (This also makes export goods more expensive and imports cheaper.) Hence the reason for interest rate rises this year to try and control inflation.
Again this is what should happen, there are other factors, for example the sharp rise and fall in commodity prices all have an impact. So of course interest rates effect the exchange rate. But it is far more complex than your suggested interpreatation of my argument.
However we are now in a situation where the lack of liquidity in the market has produced a situation that recession is a far bigger worry than inflation. So the interest rates are reduced, hopefully so the cost of borrowing is reduced, demand increases and we avert the worst of the recession. Reducing interest rates far from reducing wages, in a perfect market, should increase them as an increase in demand tends to fuel higher costs and hence wages(and maybe inflation). In addition the opposite occurs re the value of sterling against other countries if interest rates are reduced, that is sterling loses value. What I am saying is that this is not the be all and end all of how it works, it is part of it. Of course if sterling is devalued imports do become more expensive and exports bettere value, so this also helps the manufacturing economy and gain helps to stave of inflation.
However we are far from a perect market, people can only do what they believe will give us the best opportunity for the future proseperity of this country.
My whole point is that any country with an independent currency can do this to meet the needs of their economy. The euro currency countries can, and of course did do this, but my point is it is very unlikely to meet every one's needs because of the size and the differing conditions in each country. It does tend to mean it fits the needs of the largest countries at the expense of smaller countries. As we hopefully come out of this recession in the next year or so there will be tensions within the euro currency countries about what each country requires re interest rates.
Regarding the administration involved in using different currencies, with I.T. and far better communicatios this is far less of an issue than it was. Also eurozone countries have exactly the same admin issues when they try and sell in the U.K., so it is balanced out. They have to sell in pounds, we have to sell in euros.
I believe the U.K. economy has done better than most of the eurozone economies in the last 5 years, averaging around a 2.5% growth in GDP, so it would appear the administrative burden has not had a particularly detrimental effect on the U.K.
Time wil be the real adjudicator of this.
Menedemus I do agree with some of your thoughts, but of course not all your conclusions.
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To John_from_Hendon (60):
Just an addition to your otherwise excellent comment.
The City of London has been the one that has actually suffered on UK not being part in Euro. This is because other financial centers and especially Frankfurt have gained against London as they have profiled as gateways and leading financial centers in the Eurozone. After Euro London has lost some of its edge as its not a gateway to Europe anymore. After financial crisis it might be that Frankfurt will continue its rise and eventually become the leading financial center in whole Europe.
I should also add that in the five tests that the then UK government set, the goverment saw that the city of London would benefit from membership in Euro.
http://en.wikipedia.org/wiki/Five_economic_tests
It would be nice if the goverment in UK would after this crisis update its views on the five tests that were formulated. At least to me some other tests than the fourth about the city should be positive if not all.
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Re post 60, John, please do not take my post 63 as patronising, having reread it may come across that way. Just trying to explain why what I was saying was not how you interpretted it. I also agree with some of your points re the situation for the U.K. if the eurozone does fall apart and the large number of skilled designers etc in the U.K. Just disagree about the best way forward for the U.K. re the choice of currency - best wishes
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#60 John_from_Hendon,
You mentioned "Indeed what history shows us is that the UK is full of ingenious and skilled designers and workers and it is these who generally do most for the country (except for short periods of history i.e. the last decade or so) when we were led to believe that we don't need to do anything except fiddle the books to be a successful economy"
I tend to agree but for one slight thing, the other EU members and their banks are somewhat more adept at fiddling, and now the s**t is hitting the fan. Still thankfully the eyes are being opened for once and the fact that banks throughout the EU have been shown up for their arrogance in their supposed expertise is a relief. I think most now realise that they've been fooled for years by the banks in Europe and are surprised that few of the directors responsible have been dismissed. Rash or incompetent directors should never be allowed to work in that position again, just as in UK company law. Let's see if these fools suddenly reappear once more and more importantly who sponsors them.
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Jukka, thank you for expanding the cow bsnss story; I hoped someone will and it was you. Chinese melamin cow bsnss is also calling to be included into the story...
And thank you for the links; the one in Engl. doesn't hold the family name, must be wrong century. but is an invaluable source of info about Finland, finally I've got smth in English, all I tried before were in Finnish.
With the site in Finnish alas - can't figure out how the very word "name" looks like !
Finnish name of the village survived in St. Petersburg I guess simply because we are one big museum here under the sky. A still-life, not a city. So you can find many Finnish arte-facts. It is part of the history and Finnish influence is a big part of St. Petersburg history. (Your butter as min still rates tops).
Moscow is life; we collect evidence !
threnodio - you were right ab Iceland; today in Moscow a delegation cap in hand.
Central bank says no-no, are you nuts, they ask for what is 16% of what we just gave own banks, and our own can consume 10 times more. We'll fish out Iceland - who'll help us?" But dear Izvestia newspaper muses "It is a pleasant feeling to help the small ones, isn't it? especially pleasant that its own NATO friends left it without aid."
Agriculture minister Gordeev says he doesn't want more of their fish, all the fish we buy is anyway Russian fish, caught in Russian waters by Russian trawlers, who then go unload it in China and Japan, because on the home shore there isn't a single fish-processing factory. Or trains with refirigerators to carry fish across Russia. Or roads to deliver it by trucks. Like, give me icelandic moneies - I'll ensure that we don't buy own fish arriving to us by airplanes from hell knows where.
But as from Agriculture shouts no one can get "political dividents", there are chances Iceland delegation will return home with the cap full.
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Jukka, thank you for expanding the cow bsnss story; I hoped someone will and it was you. Chinese melamin cow bsnss is also calling to be included into the story...
And thank you for the links; the one in Engl. doesn't hold the family name, must be wrong century. but is an invaluable source of info about Finland, finally I've got smth in English, all I tried before were in Finnish.
With the site in Finnish alas - can't figure out how the very word "name" looks like !
Finnish name of the village survived in St. Petersburg I guess simply because we are one big museum here under the sky. A still-life, not a city. So you can find many Finnish arte-facts. It is part of the history and Finnish influence is a big part of St. Petersburg history. (Your butter as min still rates tops).
Moscow is life; we collect evidence !
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#63 - Jukka_Rohila
I am following with great interest the discussion between John_from_Hendon and Jordanbasset. I have not intervened because these gentlemen are discussing far more fluidly than my limited knowledge of economics would allow.
I would however like to take you up on your last post and would be interested in the other gentlemen's views. You refer to the five tests. I actually believe that there was a point reach about fifteen to eighteen months ago when all the tests were met. Had it not been for the credit crunch, this would have been an ongoing situation albeit we are now aware that much of it was artifice.
I think there is an unspoken sixth test which comes within the umbrella statement Mr. Brown was rather fond of when Chancellor. He spoke of joining the Euro when 'the circumstances where right', a phrase he inherited from John Major. The sixth test, in my view, is when the political will exists. This final test is the big one. There is no way that any UK government will commit to the Euro without a referendum and there is a better than even chance that it would be lost. Governments are therefore likely to ensure that at least one of the five is not met in any set of circumstances simply because they believe six cannot be met.
For this reason, desirable though many of us might think it is, British membership of the Eurozone is a non-starter until the other issues which fuel the fire of Euroscepticism in the UK are addressed. Since Lisbon is one of these, I fear that ratification will make Britain signing up less likely rather than more so.
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BP in Russia is a mysterious currency, in the sense of always so large fork btw how much it costs in roubles to buy 1 pound and to sell one pound. Never less than 5 roubles difference, like, to buy 1 pound I need 53 roubles, and when I want to sell it I get only 48. I don't know what it means.
Other currencies are normal, a rouble difference btw buying and selling on average (dollars and euros). Easy to buy sell, you don't think much, but BP strange gap confuses ordinary Russians. So savings and bank deposits are done in either dollars or euros. Roubles as well. Hardly ever pounds, bought only to travel to the UK.
Glad to hear referendum first, there will be a warning time then as min. If it ever happens at all. I was always fond of pounds because other currencies do this and that, and pound since I noticed it first ab 10 yrs ago only grows and grows or as min never becomes cheaper.
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#62 etc. jordanbasset
Just a couple of points:
Firstly I am not entirely happy that the skill levels of our economic and political/economic management have been shown to be that good that they can actually benefit the country by taking independent decisions.
and
Secondly, It seems to me that you maybe minimising, and perhaps underestimating, the economic costs and bureaucracy of managing multiple currencies for business (and individuals). You may be correct for larger concerns that can support a treasury function to manage and hedge their exposure to currency changes, but the majority of business are small and cannot support such a function and just have to live with the risks.
I have had personal experience of both situations for over thirty five years and from a practical point of view of running multi currency international and multinational global joint ventures (when these required approval from a signatory of the Bank of England) through to small businesses that just had to take the currency loss and suffer the sometimes outrageous bank changes and delays. From a purely practical and economic point of view to have certainty of costs and revenue saves so much time and money. Also note that the vast majority of businesses are small and thus to save them these costs may well have a considerable and beneficial economic impact.
In summary: I do not share your trust in the skills of economic management to actually benefit the nation and also my experience of multi-currency international trading leads me to believe that anything that minimises costs and reduces uncertainty is more likely to be good than bad for economic growth.
PS thanks for the best wishes - reciprocated.
#65 Buzet23
Human folly and incompetence is held against you more in Europe than in the USA where to have failed a few times is (was?) seen almost as a badge of competence when you are trying again, but also they, the Americans, do send fraudsters to prison for the rest of their natural lives!.
I too share your sorrow that our implementers of European legislation take such a rigid attitude to the rules, unlike some of our continental cousins! I put the blame on our Civil Servants - for example over than handling of farm subsidies - a truly disgracefully incompetent episode where we chose to implement a new and untested system that we did not need to implement through hubris and false pride. We made a truly horrendous mess up of the computer system (in the same way and for the same reasons that we do on most computer systems.) Whereas no other European country attempted to change the system without first testing the computer software, as we did.
Computer system procurement is a technological (and professional engineering) hobby horse of mine which I have ridden, and will continue to ride, furiously through Whitehall - but alas to no avail. I think things will only change when the Permanent Secretary is fired if a major system that he/she procures does not actually work - Prince 2 notwithstanding!
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#68 threnodio
wrote:
"these gentlemen" how kind and generous of you, but perhaps 'gentle person' might be a safer appellation! (As 'names' in these blogs may not be as gender specific as they may seem!)
On your notion of a sixth test - your are of course correct, in fact there are not six tests there is only one test and that is if the British people will accept the idea! The sophistry of five test could have been any number of tests.
The problem also goes to the heart of the credit crunch, and also more directly 'turkeys voting for Christmas'. Where the political parties garner support but making claims that they will lower taxes and improve services they manage to fool the few voters than make the difference between wining and loosing a general election. So parties dissemble to win, but their fibs bind their hands. It is likely that no party would have been elected on a manifesto of increasing regulation of the finance sector before the credit crunch, now every party agrees that more regulation is a necessity. That is the way of the World! (I am sure it is somewhere in the 'Prince' (Machiavelli)!)
Let us face it there is in fact a large pro European collation in both the Tories and Labour, but both major parties have anti-Europeans ( and assorted xenophobes and little Englanders) in their ranks.
Perhaps a National Government could take us into the Euro in a couple of years? Or even a Cameron government? (Much in the same way that Margaret Thatcher waved her handbag, but in fact signed up far Maastricht! Events have a strange way of turning things round - the old certainties fade away!
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If banks and governments had to keep their budgets balanced they way I have to keep mine balanced, and have real, concrete, physical resources to pay the bills with, instead of moving pretend money around in accountant's ledger's, this would never have happened. I am accountable, and I am the one who is prosecuted if I don't pay my bills. No one steps in to save me from my own incompetence. The same should be true at every level of the financial sector. These people are living in a fantasy that we are paying for, and it's got to stop or depression will hit one way or another.
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71. At 11:25pm on 14 Oct 2008, John_from_Hendon wrote:
"... both major parties have anti-Europeans ( and assorted xenophobes and little Englanders) in their ranks."
Being anti-"EU" is not the same a being anti-European. The "EU" is not Europe. Europe will be there when the "EU" is long gone.
I love Europe. There is so much to see and so many different languages and so much to admire and enjoy and to learn from.
There is also a negative side to continental Europe: dictatorial behaviour , fascist policemen etc. This is not xenophobia. It is xenofact.
The "EU" makes co-operation more difficult since it tends to camouflage its megalomania as cooperation.
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Austrian Radio website reports massive scandals involving Italian food:
Worms, mouse droppings, plastic, colour from labels has been found in food. It just goes on and on and on.
I don't want to be in a political union with Italy!
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@SuffolkBoy2 - me neither..and I am Italian...but anyway..what report are you referring to? I can't quite find anything in the news about it.
@Mark - Nice "translation" of political language. Almost makes them seem human.
p.s. maybe Marx was right after all..
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Alice,
Re #69
I think you will find that the large differenece in the currency exchange rate in Russia for British Pounds is simply that the British Pound is no longer as great a Reserve Currency as it used to be and that the vendors are keen ot get rid of pounds but not so keen to buy them back.
threnodio,
Re #68
I too am following John_from_Hendon and jordanbasset's discussion with interest.
I would suggest though that although the appetite for membership of the EU within the EU is probably not for staying in the UK (although I am personally now convinced that the UK's future prosperity depends upon working with its fellow European nations) I am not so sure that the Euro currency is looked upon with such scorn by the British people.
It must not be forgotten that a good many former British citizens now live elsewhere in Europe, many British travel across to France, Spain and Italy plus to other European countries regularly where they use the currency far more readily and with greater ease than a few years ago and the British, although conservative by nature, are far more accepting of change than they are given credit for.
I supsect that a referendum question on the EU might be very dissappointing for the pro-European Cooperative British such as myself but the currency question might have a surprisingly positive result.
It is clearly a matter of timing, prepartaion and selling of the idea of changing the currency but the success of the Euro is a compelling reason for doing so and that is, for me, its greatest selling point.
That, and my comment to Alice which highlights the Russian low respect for the pound sterling currency compared to only a few years ago and a view, dare I suggest, which is becoming normal throughout the world!
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Re post 71, think will have to agree to disagree re the substantive point.
I do agree the U.K. appears to implement E.U. directives rigidly. The obvious high profile example being the prosecution of small market traders who sell in pounds instead of Kilos. However, it is still against the law to sell in pounds and although an E.U spokesman has said there is no need to enforce it they can't or wont change E.U. law in this matter. To me this exemplifies the issues of the E.U., it is a bureacratic nightmare, even when officials recognise a law is stupid they cannot change it, they just say turn a blind eye to it. Fortunately or unfortunately the British Authorities don't do this. I am not sure if it is a good idea for unelected officials to decide which law should or should not be enforced.
Re bureacracy, yes the U.K. has it but we are amateurs when compared to the French. I am sure you are aware of the number of young French entrepreneurs who cam to the U.K. to start a busines because of the stifling bureacracy in France (This is a side issue as do not think it is to do with the E.U. rather France's home grown bureacracy.)
Re other posters and the pound v euro, 12 months ago you could get 1.44 euros to the pound. At the end of August this year it went as low as 1.22. This was the start of the major problems with Banks etc coming to light, since then the pound has risen to 1.28 euros. As my previous post said it is still too early to say how this would pan out but the evidence, far from suggesting in these trounle times that pound has low respect, is that respect is growing again. Not all together surprising as in desperate times people tend to be cautious and go to where they feel safer. I have no doubt there will be many ups and downs over the coming months.
Re the anti european comment, I concur with Suffolk boy,that being anti E.U. does not aquaint with being anti- european. I would go further as I am not even anti- E.U. I am anti an elite group within the E.U., who appear to have a master plan for increasing federalisation of the E.U. against the will of the populations of our wonderful European countries.
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#70 John_from_Hendon,
I've also shared your experience of computer systems and their procurement and especially the implementation of accounting systems. On a couple of times many years ago I was in projects involving the state and it always amazed me how the high level financial consultants that were engaged from the major financial companies managed to pull the wool over the eyes of the civil servants. It seemed that as long as the civil servants are not embarrassed the consultants are free to pursue their primary target, and that has always been to make as much money as possible for their employer, progress and targets were a joke. As an IT consultant I also had that pressure a few times from different consultancies I worked through, but it seems that the various governments never learnt that lesson. Fixed price contracts leave the door open to overcharging, as all amendments etc are wide open to abuse and all the vendors play that game willingly. Hence the number of IT scandals that have been reported across the whole of Europe over the recent years.
In the banks and even certain commercial companies it was often apparent that incompetent senior managers often hid their low grade ability by employing financial consultancies to take the decisions they were afraid to take. After all they could always blame the consultancy if it went wrong. I'm wondering if part of the recent banking problems are to do with this use of financial consultancies whose staffing preference is largely inexperienced graduates whose sole benefit is that their salaries are cheaper for the consultancy.
As for the Pound vs the Euro argument, there are a lot of good and bad things about joining the Euro. I have to say that for me the most negative thing is as I've said earlier, the disproportionate influence certain of the original EU countries hold over ECB decisions. I think that France and Germany need to learn that there are now 27 rather than 6 countries and until that happens the UK should keep the Pound no matter how much the Euro would reduce costs. Accounting systems are well capable of holding multiple currency books and don't legally need to keep daily currency rates as monthly are allowable for financial accounting. Whilst that does not solve potential losses (or gains) caused by currency fluctuation it is not too onerous to manage and a treasury department is mostly unnecessary as most accountants are more than capable of managing currencies. The fluctuations are simply accounted for by an adjustment posting just as provisions and reversals are.
I think the biggest gain for the UK people and companies if they were to join the Euro is when the banking system of the EU is truly open so that all payments are effectively domestic. Whether that will ever be achieved I'm not sure, but the project is in progress now I believe. Once again I think it will need restrictive practices in most countries to be removed if it is to truly work, i.e. many so called 'money laundering' measures run counter to the free movement of funds throughout the EU as they are solely there to protect and increase the tax take.
Even the harmonisation and application of V.A.T is not truly there yet due to differences of opinion between the powerful member countries. Once again Germany seems to be a blocking influence, especially concerning proposals to remove the tax on domestic fuel from the luxury band, and likewise for service industries like restaurants to be removed from the luxury band. In Belgium the Horeca sector (HOtels, REstaurants, CAfes) are struggling badly due to the VAT rates imposed, eg you buy food at 6% and have to serve it at 21%, the French this time want to solve that problem but the Germans don't. My hope is that the coming couple of years are going to see a sea change in the current EU direction and how that will affect the Euro, Pound, VAT etc we'll have to wait and see.
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To Buzet23 (78):
EU is already ahead of you. All EU and EEA countries and all European microstates are moving to a Single Euro Payments Area by 2011. What this means is that all payments become domestic in Eurozone. More about the SEPA system in Wikipedia:
http://en.wikipedia.org/wiki/Single_Euro_Payments_Area
Regarding Euro and ECB monetary policies. I'm little bit confused about the current conversation. France and Germany together account for approx. 70% of the Eurozone GDP and approx. 46% of population. In this context both France and Germany have less voice than their weight alone would dictate: remember both France and Germany have been the most vocal critics of ECB monetary policies. From personal experience, I haven't noticed any critic from Finnish government or from business circles or from business press about ECB policies: no accusations on ECB be bend over by big countries. I think this is because government has understood that being in Euro has lower costs and risks than being outside of it. The thing is, interest rates are in my view a poor way of doing economic corrections, what the governments should be doing is to balance the economy by their own influence: increase spending when economy is having slow times, and decrease spending in good times, in practice the infrastructure approach of Keynesian economics.
Regarding the VAT, I have to strongly object to your view on VAT. The current problem with VAT is that by having variable rates, governments are in practice giving subsidies to items some items and services. What EU countries should do is to harmonize VAT rates to be the same with all items and services. In example its ridiculous that in UK Jaffa Cakes have no VAT giving them competitive advancement against substitutes of Jaffa Cakes. Is it really in the interest of UK government to support Jaffa Cakes?
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Re post 79, Jukka, see the below -
"The UK Treasury is facing a £3.5m bill, because of VAT wrongly imposed on a Marks and Spencer teacake, the European Court of Justice (ECJ) has ruled.
Customers paid VAT for 20 years before the authorities accepted the product was a cake, which does not command VAT.
The UK argued that paying back the total sum would "unjustly enrich" M&S as customers had paid the money.
The ECJ ruled that, in principle, VAT had to be repaid in full, but left the final decision to the British courts. "
As can be seen it was not the U.K. who supported Jaffa cakes but the E.C.J. who said that VAT was not payable on them. The U.K. wanted to and did charge VAT. I tend to agree with you and the UK Government that it should pay VAT, but not for the first time the ECJ appears to make strange decisions.
What a great civlised thread, we can even get jaffa cakes in!
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#79 Jokka_Rohila,
Re interest rates being a poor way to adjust the economy you may be right, but it does have an effect if used correctly. I have long thought the UK has used that weapon more to benefit the very wealthy establishment that pull the strings than to correct economic problems. That if I'm right is also a strong factor as to why it is unlikely that the UK would join the Euro as the interest rates on savings you can get within the Eurozone are almost always less that the UK's.
Re mine and your comments on VAT, it is because certain products are maybe falsely labelled as luxury that I do not consider VAT to be either fair or working. Your example about jaffa cakes I've no idea about as I've not lived in the UK since 1990, it's probably due to some cakes being considered luxury and others not as I've read about the absurdity of EU regulations concerning this. It seems to depend on the percentages of the components of the cake or biscuit and has little to do with competitive advantage, just bureaucratic bulls**t. I also think it absurd that a life sustaining necessity i.e. food is taxed at 6% here in Belgium whereas it's zero rated in the UK, it should be zero everywhere.
Where your VAT problem comes is simply to do with the differences in fabrication and how EU VAT law has been interpreted in each country to deal with the components of any particular food product so as to decide whether it is luxury or not. As for actually harmonising the VAT rates across the EU, I am totally against that idea, the current bandwidth regulation gives a small amount of flexibility to allow for local variations that better suit regional industries, services etc. It is the concept of 'one size fits all' that the EU elite would like to have that is most worrying and that applies to both VAT and taxation rates. No matter what you believe the EU economies are not similar or converging as I've said before, there are too many climatic, cultural differences, working practice differences that can never be fully harmonised eg tourism is far more important for Med countries that Scandinavian countries. The concept of a product having the same tax rate across the whole of the EU sounds great in principle but makes no allowance for the fact that you can buy externally to the EU. You may consider it right for the EU to bully external suppliers about this but that can't solve the problem. Likewise single rates won't solve the problem if the French and Germans decide solely on the basis of what suits them and smaller countries like yours have to tamely agree. You've seen the criticisms targeted at the UK, Poland, Czech because they have on occasions dared to voice objections to the power countries, so why continue to support the idea of harmonised rates if the playing field is not level?
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#76 - Menedemus
I think you are over-complicating the rouble-pound question. The tourist business between the two countries is still not large, the Brits buy very little from Russia except caviar and vodka and the Russians buy very little from the UK except high end techno priced in dollars. The big business is in commodities, especially fuel which is priced in petrodollars. Quite simply, they are not very interested in the pound.
#79 - Jukka_Rohila
The Jaffa Cake, if you will excuse the horrible parallel, is a red herring. Food for home consumption is exempt from VAT, confectionery and sweets are not. There must be hundreds of products designated as cakes (food products) rather that sweets. It is just a one off example. But you are right in your general argument. Tax harmonisation long term is a desirable objective. Short term, VAT would be a very good place to start.
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#79, Jukka_Rohila,
I forgot to say, re the single payment area you mention that is due for 2011, my earlier comment stands. For this to work in practice a lot of the money laundering regulations that disguise protectionism will have to go or be neutered. I look forward to it's introduction as it's been long in preparation here in Belgium with IBAN's, international virements already used. It will be a great advantage over the Swift system of BIC codes that was the primary means of international transfers within Europe until recently.
My other concern about this is how long such a 'domestic' payment will take as the banks are great of delaying such transfers for their advantage. The European transfer system used to take almost a week as compared to Swifts three days so for the domestic system to be good there needs to be control on the time-scales otherwise the correspondent banks will sit on the funds as long as possible.
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In a very small way, doesn't this Jaffa Cake story sum up the whole economic problem quite neatly? Marks and Spencers do not have a snowball's hope in hell of contacting everyone who has bought Jaffa Cakes in the last 20 years, having them find their receipts and repaying them. So, if HM Customs and Exercise are forced to repay it, it will go straight into MandS director's pockets. Corporate greed at its egregious worst.
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To Buzet23 (83):
I don't posses knowledge about current money laundering regulations nor what has been decided in the EU level, but quick search through the net revealed that some legislation has already been enacted like 'European Union withholding tax' and 'the Interest and Royalties Directive'.
To my knowledge all inter-bank transactions in the SEPA area take the same amount of time regardless be it intra or inter country transaction. Also I don't believe its the banks that are delaying transactions. In my alma matter we had guest lecture from a director of Nordea and when pressed about interbank transactions he said that they had the technical capability for real time transactions and no objection to it, but it was the government that wanted delays on interbank transactions. I can understand the point, if there would be no delays, we would have Necromancer kind of world where cyber criminals would launder and hide money by making millions of transactions in a day and circling the money around the globe in a matter of minutes.
To jordanbasset (80):
It was the British government originally that set the VAT rate for cakes to 0%, it was the British courts that decided that the Jaffa Cake is a cake. What ECJ only did was to look on was laws and regulations followed. In other countries like in my country, there are no items or services that command 0% VAT. This is solely an issue with British government setting VAT rates and making exemptions.
To Buzet23 (81):
Varying VAT rates between items and services interfere free markets and thus skew and make them less efficient.
In example, in some countries restaurants have lower VAT rate than food items. This skews the markets: the competitiveness of restaurants rise relatively against ready-made-food manufacturers. Usually governments justification to this is that restaurant employee more people. This is actually false thinking. What actually happens is that restaurants waste human resources that without the government VAT subsidy could and would have been used in other industries. In the long run this skewing of the market leads to higher and higher opportunity costs: i.e. restaurant serving, kitchen and food preparation automation is slowed. The market friendly approach would be to set all items and services to have the same VAT thus decreasing government interference to markets and thus achieve more optimal functioning of the economy.
About EU and VAT. When you import from outside the EU to EU you are required to pay besides customs also VAT. I also believe that having unified rates causes less harm than having different rates thus common policies should be supported even thought they may sometimes be skewed by member countries. In the end the aim should be unification of rates and leveling of the market to allow the market achieve its optimum state. Sometimes the first step might be favorable you, but that doesn't mean that by time the process couldn't deliver favorable market state.
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To my own post (85):
I should have better QA for my posts. Neuromancer, not Necromancer. :-)
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Re post 85, Jukka, you do worry me when you use phrases such as 'restaurants waste human resources', far too 1984 for me.
The Government did make cakes and biscuits VAT exempt, as you say, but those chocolate covered had to pay 17.5%. Last time I looked jaffa cakes had chocolate on them, but ECJ decided other wise, and they made the final decision.
I absolutely agree the U.K. and other countries can and should decide the level of VAT. (But not particularly fond of Jaffa cakes I suppose!) I repeat the decision of the ECJ was strange and even perverse for the reasons given by threnodio. But it is definitely not the first and am sure it will not be the last stupid decision made by the ECJ.
My views about VAT are on the lines of Buzet 23
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#85 - Jukka_Rohila
The problem with imposing VAT on food in the UK is that all food which are not produced in temperate climates have to be imported over water. Exemption keeps prices roughly in line with mainland Europe (although local produce remains relatively cheap). To suddenly impose VAT on something as widely purchased and significant as basic foodstuffs would put an unacceptable upward pressure on inflation at a time when it already poses a real problem.
Personally, I think that having any exemptions in the first place was the big mistake. A flat rate across the board tax would have been politically problematic but not impossible at that time. It is now fraught with so many political problems as to be virtually impossible. The only way to do this would probably be to reduce the overall rate at the same time as extending the goods and services covered to everything. Bearing in mind that, at 17.5%, the UK is one of the lower tax markets already, this would be very difficult to manage.
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#85, Jukka_Rohila,
An electronic transfer like Swift is effectively instantaneous as it's simply a message format, what caused some of the delays in the past has been the use of correspondent banks which meant a transfer was not just from your bank to the recipients bank. The transfer went from your bank to another in your country, who then transferred it a bank in the other country for them to forward it to the recipients bank. This is really why the IBAN has come about as it uniquely identifies you and your actual agency rather than a department in your bank like the BIC code did.
Therefore money can be transmitted in seconds if the will is there, however as you know banks like to hold money as long as possible as it is in effect an interest free loan that can be used. Whether some governments impose delays as well I've never come across during the years I worked in the banking sector (including Swift). Where some delay does occur is in the clearing of the transfers at end of day so that may be what the governments are ruling about.
With regard to your comments about VAT I'm afraid I think we'll have to disagree on this as I really don't like the 'one size fits all' concept in any way. The more inflexible we are the more our economies are also inflexible and consequently moribund. We also need to remember that service sectors like restaurants do provide a great deal of employment, and whether those that work in that sector should be alternatively employed in factories assumes that you have sufficient factories to enable you to do that. We quite simply don't these days, as more and more goods are imported. Ready meals are one of the few things often produced locally and cafes here in Belgium can sell artisanal ready meals due to the access to profession laws that we have here. The leisure industry is also one of the few that can't be exported so we should be thankful for it's existence.
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