Tag: businesses

What is Theresa Waiting For?

Author
Angus Dent
Date

Whatever my views, we’ve decided to leave the EU and as Mrs May is now famous for saying ‘Brexit means Brexit’, so why doesn’t she get on with it?

Preparation takes time. Before negotiating even the smallest of deals, you need to be well prepared, and we’ve been advised this week of the expected additional cost and recruitment needs. Set next to 43 years of membership and integration and the time the negotiations will likely take, the period of preparation measured in months rather than years is disproportionate.

It seems that hardly a day goes by without either a UK pro-Brexiteer or an EU official suggesting that we should get on with it. There’s a gap between the unelected officials and the elected representatives of the people.

The EU, and particularly the countries of the Euro Zone, are in a mess. There’s a German hegemony that is beggaring southern Europe (under-valued German currency and massively over-valued southern European currency). There’s never been a successful monetary union without a parallel or preceding political and fiscal (read corporation and income tax) union. To state the obvious, there are the beginnings of a political union in the EU and no fiscal union. Without a single fiscal authority within the Euro Zone there can be no common monetary policy for that zone. The political will / union appears to be fracturing; the unelected officials of the EU seem to be further and further ahead of the European electorate when it comes to integration. With political union stagnant at best and possibly fracturing there’s no chance of a fiscal union.

The question becomes then how long will the Southern European countries and France put up with this, probably not much longer. In any case, the situation gets worse by the day, deficits rise, borrowing rises to fund deficits, and the need to devalue to re-balance the economies becomes worse. Or in the jargon austerity continues so that Germany can, in theory, be repaid debts that in practice can never be repaid and which must, therefore, be forgiven. Plus we may have another banking collapse, lead this time by the German banks.

The worse the mess in the EU the better the deal that the UK can negotiate and / or the less impact a so-called hard Brexit will have on the UK. Playing the long game may be playing the smart game. A ‘week is a long time in politics’* six months is a lifetime.

*Harold Wilson, UK PM 1964 to 70 and 1974 to 76.

eu-and-brexit-zip

Quantitative Easing – Too Blunt an Instrument?

Author
Angus Dent
Date

[avatar]

Maybe I’m not the only person who grew up in the 70s who finds a great irony in governments now trying to stimulate inflation. Just as they had little idea how to control inflation I doubt that Quantitative Easing (QE) is the best way to stimulate it. A more targeted approach is required, an approach that will do more than increase asset prices, an approach that might get industry and economies growing and growing faster.

Yesterday the European Central Bank (ECB) announced a larger than expected two year program of QE in the expectation that this will avoid continued deflation in the Eurozone. While QE is likely to be successful in this limited aim, it is possible that despite QE the UK will suffer a period of deflation, the lessons from the UK and the US suggest it will do little else.

QE in the UK and the USA, and arguably already in the Eurozone, has increased asset prices. Maybe it has even created an asset price bubble, if it has then as night follows day, bust will follow bubble. What QE has failed to do in any meaningful way is to:

  1. get capital into businesses, particularly smaller and medium sized businesses – the engines of all economies,
  2. increase the buying power of consumers, there is some evidence that wages are growing again now, but generally wages have not increased these last several years,
  3. increase productivity, which by some measures has fallen, this may be linked to 1 above, and is the largest single problem facing the UK economy today.

There are many restrictions on government, national and / or EU, passing money direct to companies and direct to their citizens. However as part of the program to avoid deflation greater emphasis should be given to this. If commercial banks won’t lend to any but government and the largest corporations, and the evidence of the last few years is that they won’t or have forgotten how to, then government sponsored development banks, programs for state aid and AltFi businesses should be given more of this money to do so and stimulate industry. Giving more money to consumers is relatively easy, reduce personal taxes. In consumer lead economies its nonsense to take money away from those who drive effective demand.

Of course there’ll be cries that this approach is unfair; the Germans may well be better at state aid than the Greeks for example. And taxes are for national government not EU, so there will be a disparate approach. There’s also a question of how to make sure there’s value for money from the investments made. Then again there’s little value from QE, beyond possibly a small amount of inflation.