More EU or better EU?

Mrs Merkel went to Ventotene yesterday to meet the Italian and French leaders to try out her latest sound bite. She says she wants a better EU, not more EU.

The meeting however was full of images and associations pointing to more integration and more EU. Ventotene itself was chosen as the island where Spinelli and Rossi wrote their manifesto for a federal Europe. The three leaders commemorated his impulse to EU integration at his grave whilst there.  They highlighted the work of the Garibaldi, the Italian aircraft carrier leading the EU Sophia naval mission to tackle migrant smugglers and assist with Libya. These were not convenient or easy venues, so someone wanted to make strong points that with the UK leaving the EU can get on with more integration and more common foreign policy , more common borders  and security policy.

In practice France and Italy do want to press on with more EU involvement and integration, but they also want to relax the German controls over the purse strings. France wants much more EU infrastructure investment to boost economies. Italy wants to relax the 3% budget deficit ceiling imposed on Euro area members and strongly recommended to non Euro members. France too would probably welcome fiscal relaxation at the national level. Germany will be unwilling, feeling that more borrowing by less prudent states will end up with Germany paying more of the bills. Germany is always ready to remind anyone who will listen that they get on just fine in the Euro with a large balance of payments surplus, so why don’t the others?

Mrs Merkel will return from her needlessly complex travels in Italy to receive various EU leaders at Schloss Meseberg near Berlin. There she will have to reassure the Scandinavian EU members and the Netherlands that their worries about too much EU interference and too much migration will be tackled, just after hearing the case for more integration in Italy. They will  be followed by eastern European leaders wanting to know that freedom of movement will still be untouched and that subsidies will still flow to the lower income countries after the loss of the UK contributions.

The French President is in a weak position domestically, with polls pointing to his exit at the forthcoming Presidential election. He now faces an opponent from the left wanting to restore more national independence, as well as the attack by the National Front. The Italian Prime  Minister has committed himself to a constitutional referendum which he may  not be able to win, which is damaging his standing.

When the three leaders say they want a reset, a new EU rebuilt from the bottom up, they are all acknowledging that the EU project is losing support and traction in their own countries and making their political positions difficult. Yet when you listen to what they want to do about it, they sound boxed in. They cannot easily change the Treaties or relax the laws that bite from the EU. They are unable to sort out the migration issues posed by common frontiers.  They cannot even agree amongst themselves to relax the controls on spending and borrowing. So they stand on an Italian aircraft carrier talking of more co-operation, when their grip on events is loosening.

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Well done to Team GB at the Olympics

That was a great result. The large number of  medal winners , and the even larger number of competitors from the UK who also put in brilliant world class performances is a tribute to their hard work, dedication and skill. The nation is rightly proud of them all. It is a fine thing to reach Olympic qualification standard, and an amazing thing to end up Olympic champion in your chosen sport.

I don’t think it is mainly about money, though obviously the money to provide backing and support helps. The Lottery has been a good means of allowing more people to spend their time in training.  It is mainly about the sheer determination and stamina of each competitor, their coaches and mentors, and of their families. It  shows that people  can achieve great things if they put their mind and body to it.

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UK membership of NATO

To me the Treaty we signed to help establish NATO is a model international agreement. It is short, straight forward, and preserves our freedom for independent action. Any party may leave the Treaty Agreement one year after giving notice. When NATO is considering taking action each member state can determine how and whether  it wishes to participate and what level of participation it offers.

During the Referendum campaign pro Remain spokespeople often asked   people like me how we could live with the supranational commitments under NATO but  not under the EU. I replied that NATO does not seek to lock us in to decisions and issues  against our will.  It does not have legal authority over us, our budgets, law codes and decisions. It is a very different kind of international collaboration from that of the strict legal requirements of the EU.

The opening statement of the NATO declaration is a pledge to promote peace and diplomatic solutions to problems.  It states  that each state agrees to “refrain in their international relations from the threat or use of force in any manner inconsistent with the purposes of the UN”. It also says such independent NATO actions will cease once the UN is in charge.

The central pillar of the alliance which most latch on to is the tenet that “an armed attack against one or more of them in Europe or North America shall be considered an attack upon them all”. (Article 5) It is collective defence security through strength in numbers.  It goes on to say, however, that a member state if challenged by an attack upon another member  shall “take such action as it deems necessary” which may include military action. It does not lay down that every member state has to go to war immediately, nor does it presume to say which forces a member state has to supply to the common cause.

Mr Corbyn is therefore entitled as someone who wishes to be Prime Minister both to call to leave NATO or to rule out certain types of military action whilst staying in NATO. Both courses of action would  be legal under the Treaty. The issue is does he undermine our safety by so doing? Collective defence through a voluntary agreement like the NATO one rests on any potential enemy believing there is a  credible threat of military response if they attack a NATO country. It weakens the UK’s defence and our collective defence if potential aggressors to parts of NATO come to  believe  that the UK, NATO’s second largest military contributor to the alliance, is not willing to go to the military aid of another member state should need arise. For the defence alliance to work properly   any aggressor has to think that in extreme circumstances the UK and other NATO members will use force to resist aggression.

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What is the single market?

Many of the people who tell me we must stay in the single market are usually unable to define it. Before deciding what our relationship with it should be, it is first important to understand it.

I was given several difficult jobs in government that I would not have asked for but was prepared to do. The worst job turned out to be Single Market Minister. I am sure the offer was meant nicely. I was asked to negotiate for the UK the remaining legislative items that made up the 1992 single market programme. It entailed passing 282 new laws. Some of them had little to do with trade. It always included  a “citizen dimension” of individual rights, and a “governance dimension” of legal controls.  This large legislative programme  was called “completing the single market”. After we did all that many more things were added in, and to this day in some descriptions they are still trying to “complete the single market”.

I approached the task only mildly sceptical about what I was being asked to do. I had  no problem with the alleged aim of the  policy, the expansion of trade and business between member states. I began by asking myself why it would need so many pieces of legislation to do that. The simplest way to achieve a freer market after all is to simply allow goods and services free access on the basis that if they are approved for sale in country A why not let them also be offered for sale in country B. Customers and a free press can make up their minds on whether they are wanted. The authorities just have to say they are legal.

I soon discovered that the so called free market programme was a huge legislative programme enabling the EU to greatly expand its power and reach with every Directive or Regulation that it passed.  It was about the doctrine of the acquis or the occupied field. Once we had passed a Directive on say environmental or safety issues for certain products all those issues fell to the jurisdiction of the European Court and under the policy and law making wing of the EU. I was soon in damage limitation mode, dashing round Europe or hitting the phones to organise blocking minorities to stop the most worrying features of proposed regulations and laws. Most of the  business lobbying I received was to take things out of draft laws or to soften them, not to have more of them. Sometimes I found enough support to prevent measures going through. Other times owing to qualified majority voting the UK  had to accept an unsatisfactory compromise to avoid something worse.

Today many of our former EU partners have a different view of the single market to us. There is no separate body of law called Single market law distinct from the whole body of EU law. The “Single European Act” has long since been subsumed into the enlarged general Treaty of European Union. Many members see the single currency, freedom of movement, environmental policy, health and safety policy and the rest as central to the single market. They do not see it as just a limited regulation of product and service standards and specifications in the way some UK businesses do.

Many big businesses lobby against new Directives or regulations when they are first mooted, or argue to amend their early drafts. They then come to accept the approved body of such measures, as they make themselves able to conform and see that they make market entry more difficult for smaller rivals. I was interested to read this week that more in the City now accept that leaving the EU means leaving the single market as widely defined by the EU itself. That does not prevent us trading with the EU market, as many independent countries around the world do very successfully.


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More infrastructure

The government will want to step up the pace of providing more homes, roadspace, rail capacity, electricity generation, broadband and other essentials for economic growth and industrial recovery. They may also allow a bit more borrowing at current very low rates to speed it up. There are plenty of schemes we require and networks we need to strengthen.

Meanwhile the incoming government has to make some very tough calls on three blockbuster projects that the pervious government favoured. Do they want to build Hinkley? Should HS 2 go ahead?Will they permit a new runway at Heathrow?

The business case for HS2 is the worst of any I have  seen. Hinkley poses issues over timetable, the costs of the power and security. Heathrow arouses considerable environmental objections though the business case is much stronger than the other two. All have considerable political and other downsides  from cancellation and entail writing off considerable  outlays and upsetting co investors . In each case there would need to be other answers to general transport and energy capacity matters, and efforts to replace the lost work.

I have my own views on what should be done. I invite you to give me your thoughts on these big three decisions.

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Brexit recession postponed – UK retail sales boom

In July UK retail sales rose by 5.9% on a year earlier, and were 1.4% up on June. If Brexit was going to have an impact on consumer confidence it would have been in the five weeks immediately following the vote, when a proportion of Remain voters were very unhappy and shocked by the result. Instead people have gone out and bought more  clothes, DIY and household goods. Many have also  been to spend more in hotels, restaurants and bars. These are all the kinds of purchases you make when you are  not unduly worried about your future financial position, as they are discretionary. It’s not all tourists, as it takes time for people to book and come after a fall in the currency.

Employment hit record levels by the end of June. The uncertainties of the campaign and the vote did not interrupt new hirings. The UK economy added 172,000 additional jobs in the second quarter of the year. Employment hit a new all time high at 74.5% of the working age population.  In July, after the vote, the claimant count fell again, showing that job creation continued. Unemployment fell by 8,600 in the first full post vote month.

Recent results from companies bear out this generally positive picture. Lookers reported good continuing sales of cars. Housebuilders report decent levels of interest in new properties. Kingfisher’s trading results for the 13 weeks to end July, including five weeks post vote, saw sales growth of 7.2% on a like for like basis (UK and Ireland) in stark contrast to its large French business where sales were down 3.2% over the same time period.

Some people remind us that construction figures have been weak in the first half of the year. This is true. However, when you look at the make up of the figures you see that private sector housebuilding showed good growth, and private sector commercial a little growth. There was a steep fall in public sector housebuilding and a fall in general public sector work. So was the wider public sector trying to make a point by holding back work? Or did the Treasury hold back money, inducing bad news?  It is certainly wrong to deduce from the overall decline that it was a drop off in private sector confidence owing to Brexit.

I wonder for how long will the Remain commentators carry on ascribing whatever happens in the economy to Brexit? There are many more influences on the UK economy than this vote. I do not for one moment ascribe the big increase in retail sales to the vote. As they made so much fuss about how there would be an immediate and dramatic loss of confidence causing a short term recession, it seems entirely fair to scrutinise the short term post Brexit figures. So far they show  we who ridiculed the official forecasts of a recession and house price collapse on a Leave vote have had the  best of the argument.

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Labour attacks its own privatisation of the NHS

Owen Smith’s drive to the left and search for popularity has brought him to one of Labour’s oldest scare tactics – claiming the Tories have a secret plan to privatise the NHS.

Labour have claimed this every time the Conservatives are in government, and every time we fight a General election. During the long periods of Conservative government since the NHS was established the party has resolutely stuck to the principle of free at the point of need, and has maintained a largely public sector NHS workforce.

Labour in office has introduced prescription charges and charges for dentistry and glasses, which Conservatives have kept. Labour introduced wide ranging PFI contracts. involving the private sector much more in new projects and in carrying out clinical functions for the NHS. Conservatives have sought to reduce PFI use  and to get better value for money from some of the contracts Labour signed.

Both parties in office have relied extensively on private sector companies for a wide range of goods and services for the NHS. Both have bought all the drugs the service needs from private sector concerns. Both have used some private sector builders, cleaners, caterers and other support services. Both parties have allowed GPs and dentists to be private sector businesses contracting with the NHS for much of their workload. Both have occasionally bought clinical capacity from private providers.

So why doesn’t the media ask Mr Smith a few more pertinent questions. Does he intend to nationalise drug companies? Does he intend to take all cleaning, catering, building and other activities in house? Will he discontinue all contracting out, and stop all new PFI contracts? How much does he think such changes would cost? Why were previous Labour governments so wrong to use the private sector in this way?

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Claimant count falls in July post Brexit vote – another gloomy forecast bites the dust

The latest excellent figures for employment and jobs include the good news that in July the claimant count fell further. All those who shifted their forecast of job losses from the uncertainty of run up to the vote to the immediate aftermath of the vote have been proved wrong on both counts.

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Buying bonds cuts state debt- though so far they will not admit it

Japan, the Eurozone, the USA and the UK have all run programmes to buy up state debts through Central Bank action. In each case they buy the bond, but keep it, pretending that the state still owes the money. They find a way of accounting for the fact that they pay the interest due on the bond to themselves – it goes from one government account to another, as the Central Bank is  a creature of the state. It may have a little more meaning in the case of the ECB, buying up the debts of a range of countries. When the bond falls due for repayment they repay themselves, and normally reinvest the money in another bond they buy from the private sector.

In the case of Japan the purchase programmes have been particularly large and long lasting. There with state debt at a massive 230% of GDP they have avoided a problem meeting the interest costs of the debt by the twin effects of QE. Rates are now tiny or negative on new debts incurred. More than one third of the total state debt is now owned by the state itself through the Central Bank. The Japanese now have various options. They do not seem ready to simply announce they are cancelling all the debt they  owe themselves, as they could do. They might find a half way house. They could, for example, convert all the state debt they own into irredeemable or ultra long non interest bearing debt, which is almost the same thing as cancelling it though it  might look more prudent to some.

In the Euro area the latest substantial programme is running at Euro 80 billion a month, mainly government bonds. The authorities already own Euro 875bn of bonds. In the UK the Bank has decided to add £60bn to the stock of £375 bn they already own, out of a total state debt of £1.7tn. The US owns 12.8% of the stock of US Treasury bonds issued. All this means the actual indebtedness of these advanced countries is lower than the gross figures. The stress of having so much debt is doubly reduced,  by the very low interest rates they now have to pay people and institutions that do lend them money, and by the fact that they owe so much to themselves.

So far this process has not triggered worrying domestic inflations in the way you might expect, thanks to the weak state of many commercial banks over the banking crisis, and the fiercer controls against extra lending on the back of the money in circulation. There have been some inflationary pressures from weak currencies, which could be  brought on by relatively looser money and higher rates of QE. All the main countries in recent years seem to have favoured some decline in their currency, or have been unwilling to do anything to stop it. They cannot all devalue at the same time against each other. It will be interesting to see which if any of these authorities makes the next move in these unusual changes to the cost and ownership of state debts.

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The Labour leadership

In my piece about the contest, I asked what was the point if Mr Smith ended up offering more or less the same policies as Mr Corbyn? The answer from the Owen Smith campaign is he can win an election to carry them out, whereas Mr Corbyn cannot.

Today a poll is published (BMG Research). It says 9% of the public would be far more likely to vote Labour if Mr Corbyn wins, and 10% a little more likely. For Mr Smith just 5% would be far more likely, and 13% a little more likely. Mr Smith has some way to go to prove his point.

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  • About John Redwood

    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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