10.53 A German Government spokesman says that an EU-wide financial transaction tax is still the goal, but that there may be a possible bridge with the UK via a bourse tax.

What is a bourse tax?

Frankly, I have no idea beyond speculating that it’s a tax on transactions within a stock exchange. A bourse is an organized market where tradable securities, commodities, foreign exchange, futures, and options contracts are sold and bought. The very things which would be taxed under a FTT anyway.

The fact that it is limited to the individual exchanges would mean that it is an attractive deal to the British. However it does raise complications, considering that the largest Pan-European exchange, Euronext, merged with NYSE in 2007. Another large European exchange, OMX is a Scandinavian exchange with activities in Norway. Confining finance and the taxation of finance to the Eurozone will only create more problems than solutions.

However, with the smaller exchanges, such as the Deutsche Boerse, this confinement could happen without angering any non-eurozone interests.

As can be seen from the Box Plot below, a pattern emerges when output per worker (productivity) is run against the standardised unemployment rate. For the normal unemployment rate (6 per cent) productivity is between 0 per cent and 1 per cent – this is good as the economy is growing.

When unemployment is high, between 7 and 8 per cent, productivity is either negative or stagnant. This can be used to indicate recessions. What is interesting, however, is that when unemployment is very high, 9+ per cent, productivity is also high. I am inclined to suggest this is so due to either a recovering economy or a desire, on behalf of workers, not to become unemployed.

The variables are as follows:

• degree of monetary stability
• level of democracy
• the rule of law
• the size of government
• level of education
• health of population
• fertility of population

The perfect conditions for the perfect economic model is: a very stable inflation rate, averaging less than 2%; weak democracy; strong rule of law; a high education level where the average years of schooling is 10; a healthy population and a relatively low fertility rate, but high enough to maintain population levels.

Now, most of these are glaringly obvious apart from, perhaps, the bit about weak democracy.

Barro’s work actually showed that too much democracy wasn’t necessarily a good thing for economic growth (of course it may be the best model for social development). He found that at very high levels of democracy, income redistribution becomes a dominant force, which serves to restrain entrepreneurial endeavours. And democracy places a disproportionate weight on winning current votes, potentially at the expense of future votes, and therefore can hinder the investment required for long-term development.
Overall, authoritarian regimes can deliver economic success if the system manages to set in place the incentives that a market-based system naturally delivers, namely competition and a motivation to drive efficiency.

In short, democracy is good but, like most things, you can have too much of it before it becomes detrimental to your economic health.

Mr. Shirakawa delivered a very interesting lecture the centred around, among other things including his love of the Beatles, how central banks should play a role as a guarantor of financial system stability. I have not touched the role of central banks in the past, but my opinion on the role of central banks differs from Mr. Shirakawa and probably from a lot of central bankers too.

My opinion is that the role of central banks should not extend beyond price stability. Why? Because the adoption of a extra-governmental role in guaranteeing financial system stability: a) reduces independence of a central bank; and b) aids in the depression of growth.

The independence of a central bank is undermined when it engages in a role outside price stability because, ultimately, the mechanisms and controls of a central bank are given over to the whims of politicians. For example, Quantitative Easing is a monetary mechanism to produce demand. Whether this actually works is another matter.

The crux of this argument revolves around the depression of growth.

The Bank of England’s base rate dramatically fell from 5% in September 2008 to 0.5% in March 2009, where it has stayed since. UK CPI trend since 2008 has been upward, largely encouraged by low interest rates. The same can be said of the Federal Reserve. QE itself is, arguably, a depressor of growth as the practical results would indicate an entrenchment of non-investment. Lender of last resort encourages the risky banking practices of the pre-2008 crash which aids in financial instability and depressing confidence. Unintended consequences of a policy often extolled by politicians.

By acting in an extra-governmental role, central banks maintain the status quo of “government spending is best”. This, to most economists is crass. Government spending, at best, does little to encourage innovation and enterprise because it is too busy propping up businesses that would otherwise have gone bust.

So, instead of an invigorated and dynamic economy, government spending and central bank intervention in its extra-governmental role is inhibiting growth.

This applies aptly to the Tory right and UKIP. Some might be theoretically libertarians but by calling for a withdrawal from the EU they cannot call themselves libertarians in practice.

The EU guarantees free trade, the basis for a free market, across member states. Freedom of movement for goods, capital and, most importantly, people.

Any renegotiation of Britain’s membership would precede the removal of these important contributing factors to the British economy.  Britain would become an isolated island with an increasingly discriminatory immigration system.

The EU is not perfect. Any one who says otherwise is deluded. However, it does lay an important foundation for the liberalisation of a global economy. The future of make-up of the world economy will likely be based on political and economic blocs – like the EU is. Like the USA technically is.

Once this shift has occurred free trade can take place between the blocs. It won’t happen in for a long time, but it will happen based on ongoing political and economic trends of co-operation at a supra-national level.

The right wing wish to prohibit this trend. A protectionist measure in the name of freedom.

Italy’s €33bn austerity programme is as follows:

• Property tax on first homes, increase on taxes for second and third houses.

Not to make too much of a premature prediction and hopefully not to become a Michael Fish type figure, I don’t think the situation in Libya will turn into Afghanistan number 2, like Iraq did. This is because the West learnt from their mistakes in these conflicts. This was not a Western intervention to depose an unpopular leader like in Iraq, but a movement which started in Libya, by Libyans. Moreover instead of rushing in with all guns blazing to support the rebels, the West played a supporting role – giving them all the tools and support needed to defeat the Gaddafi regime without bringing the government down itself. The effect of this was two-fold:

1. It didn’t undermine the legitimacy of the rebels by accusations of Western imperialism. This was a Libyan movement – by Libyans for Libyans
2. The West gained credit for its role in supporting the democratic movement. As I argued in my last post the West needed to finally back up its avocation of democracy with support for the democracy movement, and in this instance it has done and done it well. This has helped to gain some credibility in the region which will help with the war on terror and the achievement of liberalisation.

Furthermore as well as learning that not getting directly involved helped increase the legitimacy of the movement, the way in which the West did involve itself helped too. This was that the unpopular US (after their actions in Iraq and Afghanistan and their ties to Israel) has taken a back seat. Efforts were made to include other Arab countries as well and were successful in getting them to condemn the Gaddafi regime. Thus all legitimacy and possible allies lost, the war for Libya was only going to end one way, and so it did.

What next for Libya? Who knows, but for the first time in 42 years its people and not one man are master of its destiny and to an extent they have the Western support to thank, which can only help when a new government is eventually formed.

What next for the region? The situation in Syria seems to be taking a similar course with its expulsion from the Arab League. With the West and the Arabs condemning Assad and imposing sanctions on Syria, it must only be a matter of time before either he goes or the West also intervenes there (a UN resolution for armed involvement was vetoed in October by China and Russia but if the current atrocities continue it is only a matter of time that China and Russia can prevent the action which Turkey and the US are vying for.) Once again the West needs to be involved in some level in order to avoid accusations of hypocrisy but needs to be involved in the way it was in Libya and not Iraq.

As a Keynesian, I favour a demand led approach but I also recognise that there is also a shortfall in the supply side, such as re-skilling of the unemployed. As Sam Bowman tweeted earlier: “Ha ha. £30 bn of infrastructure spending. Good one. That will help people to reskill for the future, won’t it? #jesuswept” I also recognise that the two are symbiotic, but that’s for another blogpost.

Investment in the UK infrastructure could be handled much better and it could also draw in more short-term capital for the Treasury. I’m referring to privatisation. Fixed Phone Lines, made of copper, need to be replaced by fibre optics to cope with increased demand on bandwidths due to a recent surge in people and products using and requiring broadband. BT currently has a de facto monopoly on this aspect of telecommunications infrastructure, with Virgin offering a cable based alternative in limited areas. The liberalisation that often comes with privatisation will provide more choice to the consumer, remove BT’s Universal Service Obligation as it has, in my opinion, failed in its obligation to provide access to advanced communications (broadband) across the nation, and create a more efficient broadband service thus aiding in growth.

Motorways could be sold off and made toll roads based on a Vignette. This would increase the immediate short-term access to capital that the UK government needs to reduce deficit and debt, remove its obligation for maintenance of the system and collect a revenue stream through a tax on the toll charges.

The attraction to these types of investment would be that the return of investment would be almost immediate and it would be of benefit to most of the citizens of this country. If the Chinese are looking to invest in the west, then the UK must be open to investment. With $410bn, that is a lot of capital to invest and the UK could do with all of it.

The document itself mainly concerns itself with changes to Article 126 of The Treaty of the Functioning of the European Union. Article_126 is largely about maintaining a resemblance of balanced budgets amongst member states.

The document proposes that paragraph 10 of Article 126 be deleted. Paragraph 10 states “The rights to bring actions provided for in Articles 258 and 259 may not be exercised within the framework of paragraphs 1 to 9 of this Article.”

Article 258 and Article 259 deal with legal proceedings being brought against a member state by either another member state or the Commission if a Treaty is deemed to have been broken.  This would allow direct intervention into the affairs of the offending member state by the Commission or, in this case, a European ‘Stability Commissioner’.

The crux of The Telegraph’s argument comes as a note at the bottom of the penultimate page.

“Limiting the effect of the treaty changes to the Eurozone states would make ratification easier, which would nevertheless be required by all EU member states (thereby less referenda could be necessary, which could also affect the UK).”

The proposals in the document are a change to a part of a treaty which only affects Eurozone members. However, as all treaties have to be ratified by members of the EU Britain would need to ratify the changes. The changes would only affect Britain if it were to join the Eurozone.

I recall the public being offered a referendum on Britain’s continued membership of the EU if there was a fundamental treaty change which affected its relationship with Europe. This proposed treaty change doesn’t affect Britain in the slightest.

As things stand in the Eurozone the European Central Bank (ECB) is incapable of providing the much needed status of Lender of Last Resort. It is prohibited from printing money by the Maastricht Treaty, but it is able to buy government bonds as part of its function to maintain price stability. As had been experienced last week when there was a run on Italian and Spanish bonds, the ECB bought bonds to force the price down, and thus stable (for a short period of time).

As has been pointed out by Paul Krugman, the crisis that is currently striking the Eurozone is a result of an imbalance of payments. Germany, thus, needs to spend. It’s very rarely that I praise George Osborne, but he has said:

“If you think of currency unions, here in the United Kingdom or in the United States, we do transfer money around the country in order to try and get greater equality in the economy. I’m afraid that needs to happen in the euro, because we are not there yet and the instability is having a huge effect.”

This is crucial for the survival of the Euro. A monetary union requires a fluid movement of capital across the union. So far, the Euro has been a disappoint. A monetary union without the necessary sacrifices to make it work. I believe it has only worked through a series of fortunate circumstances, such as a prolonged period of growth. 2008/9 was the the first time the Eurozone had experienced a recession in its 10 plus year history. Now that a sovereign debt crisis has struck the southern economies of Greece, Italy and company – which was created by the cheap and easy credit of the noughties – it is the first time where the Euro has been tested to its limits. Its limits have proven to be woefully weak.

But progress is being made, on the political stage. On Monday, at a Christian Democrat Union (CDU) Conference, Merkel was reported to have pressed for an economic and political union in the Eurozone. @EPPTweet tweeted earlier: RT @SMuresan: #Merkel at #CDUpt11: “We have to complete monetary and economic union and pave the way for political union in #Europe“ #epp

This is a step in the right direction, but there also remains a stumbling block – the German constitution. We shall see what happens, but progress is being made and the faults of the Euro are, apparently, in the process of being corrected.