This EU Won't Work

Whether intended or not, the ECB’s response to the financial crisis protects the rich countries from the diseases of the poor. Also, the £350 million that Vote Leave claimed was the cost to Britain of EU membership wasn’t too far out.

         Funny Money

There’s plenty of funny money in ‘wealthy’ Germany but it won’t be so funny when taxpayers and savers find out just how much of it is in worthless Target2 ‘accounting units’ that will never be settled. That’s half-a-trillion Euros-worth owed by Italy alone, with Germany owed double that in total (Netherlands, Finland and Luxembourg are also on the hook). For all its export success that’s half of Germany’s foreign-asset surplus, and it earns no interest. [1]

Fortunately, the European Central Bank has been on the case with its ‘unconventional monetary policy’ (QE) so judgement day has been postponed. As ECB President Mario Draghi told the European Parliament in January, “Supported by these policy measures, the euro-area economy has steadily recovered.” He was referring to growth and employment since the program started in 2015, after the global financial crisis of 2008; the ECB was slow to act, the US and UK had ended their programs by then. As he spoke Draghi may not have seen figures showing that Italy was in recession at the end of 2018 and Germany was on the brink. As we have said before, correlation is not the same as causation.

The Netherlands Ministry of Economic Affairs sponsored a report examining models that showed Draghi’s policy had been working. It concluded that “… many of the euro area policy responses to the crisis that have lowered financial market stress in the euro system as a whole have done so because they have lowered the contagion risk from crisis countries to non-crisis countries. Hence, core euro area countries with healthy financial systems benefit from these developments, whilst the crisis countries do not.” [2] Rather wonderfully the authors substituted random numbers for the ECB’s balance sheet figures used in the models and found the results were very similar.

The ECB has reached the limit of how much debt it can buy, its rescue tools are exhausted just as the world economy seems likely to wobble due to one or more factors, such as a no-deal Brexit, a Trump trade war, a European banking crisis and the end of China’s growth boom. Little has been done by the eurozone to protect the weak members, it has spent its efforts protecting the strong. Why does anyone still believe the propaganda?

[1] Italy Missing the Target

[2] CPB Netherlands Bureau for Economic Policy Analysis; Adam Elbourne, Kan Ji  ‘Do SVARs identify unconventional monetary policy shocks?‘

         Bus Money

It could be about time for a remake of the film True Lies (released in 1994, starring Arnold Schwarzenegger) but with Boris in the lead role. Instead of secret agents fighting terrorists the updated plot would be about accountants fighting over the facts. Here’s a synopsis of what they would find.

In 2015, the last budget year prior to its Referendum on EU membership, the UK’s contribution to Brussels’ budget was €18.29 billion which divided by 52 was €353 million per week – gross. Total subsidies paid back to the UK amounted to €7.46 billion so the net contribution was only €10.84, or €208 million a week. That figure would probably have served the Leave campaign just as well because both amounts are hugely beyond what a typical voter can comprehend; it would have been less controversial.

Remainers were angry about the ‘lie’ but perhaps ‘deliberate misrepresentation’ would be fairer – their own campaign concocted misrepresentations too, specifically the Treasury forecasts of the effect of leaving on future household incomes and an immediate recession if we voted out (it didn’t happen). This was another example of an unreliable economic model, or rather the deliberate choice of unrealistic input values. [3]

The Leave campaign bus was plastered with the figure of £350 million per week – not 350 million euros. This was probably careless rather than deliberate, after all few have picked this up since. Instead Remainers grumbled that we don’t send the 350 million to Brussels, some of it never leaves the country. It’s also interesting to note in passing that the similarly sized French economy received double the UK’s subsidies (nearly three times as much for agriculture but less for R&D for example), but then the French designed this unequal system, together with Germany.

In 2015 the UK paid Brussels the VAT and customs duties on goods imported from outside the Single Market amounting to €3.2 billion net on top of the figures mentioned, so we’re back up to a net €270 million a week. Then there was a unexpected charge in 2015 of £1.7 billion (yes, pounds) when the EU decided to include the charity sector, illicit drugs industry and prostitution (estimated of course) in its calculation of the UK’s GDP. Some countries received rebates but clearly we’re still leaders in sex, drugs and rock ‘n’ roll. That’s another €44 million a week so we’re not far off now at €314 million (euros!)

All these numbers, if not quite random are very unpredictable from year to year. Some of the corresponding figures for 2016 are given by the EU here [4].

The story, if not perhaps gripping is at least intriguing.

[3] The £350 Million Question

[4] http://www.europarl.europa.eu/external/html/budgetataglance/default_en.html#united_kingdom

         Dinner Money

Many of those objecting to leaving the EU without a deal (like Sainsbury’s’ boss) are trying to frighten us with the prospect of higher food prices because of tariffs and shortages of EU produce. This could happen, temporarily. If so we’ll grow our own produce, or find new sources, or EU growers will pressure the Commission to relent, or we’ll change our recipes.

We will adapt but we must not let the EU or Remainers trick us, like Jacob did his brother:

“Esau selleth his byrthright for a messe of potage” (William Tyndale).

We explored this issue in more detail in [5] and beyond the food sector in [6].

[5] Bacon, Lettuce and Tomatoes

[6] The Future’s Bright, The Future’s Oranges