The ECB won’t save the day, but Germany might

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.

 

The Budget, Spending Review and Fairness

It was once said that ‘Beauty is in the eye of the beholder’. The same could be said for fairness. What one calls ‘fair’, another calls ‘unfair’. With the June Budget and October Spending Review, many have called them unfair. The government, on the other hand, calls them fair.

The government, in trying to reduce the deficit, has cut spending, increased taxes for every section of society. On this basis it is fair. However, seeing as the deficit was caused because of the recession, and the recession was caused by the deregulation of the financial sector, ultimately, it is unfair that everyone is effected by the changes in fiscal policy. To be completely fair it should be the financial sector and policy makers that should pay the shortfall and eliminate the deficit.

However, to do so would be unwise as they will look to the other sections of society and say “why aren’t they involved? We gave them credit, it’s not our fault they can’t repay it.” And thus it escalates until you are left with a large proportion of society feeling slighted, bitter and, those that can, an exodus of talent and wealth.

However, the main problem with the June Budget and Comprehensive Spending Review is that the poorest 10% are the second worst off, in relation to the policy decisions, behind the richest 10%.

In terms of income lost, the bottom 10% loses 1.6%. The richest 10% loses 2.2%. The main problem with this is that the bottom 10% cannot afford to lose 0.1% of their income let alone 1.6%. This section is either in poverty, or near to poverty. The richest 10%, arguably, can afford to lose 2.2% of their income. The poor rely more on public services than the rich, altering the percentages of how the cuts effect the actual income of these groups. This is unfair.

However, if the rich were negatively effected too much by the policy decisions then there would be an exodus, a loss of tax revenues and more demand on the next richest 10% to pick up the shortfall left by the top richest 10%.

Whilst we agree with the principle that every person must play their part to reduce the deficit, we also believe it is unfair to place the burden on the polar extremities of the wealth spectrum. Whilst we believe the poorest 10% should not be let off, we believe their contribution to be too much. The burden should fall in relation to the ability to pay, much in the same way that credit is granted. We believe this to be fair.

However, fairness is in the eye of the beholder.

Generation of the damned

The Coalition’s recent announcement of cuts to the Benefit system, coupled with perceived cuts to the public sector and welfare state in the October Spending Review has damned an entire generation to relative poverty and poor prospects.

It is a well known principle that investment in the welfare state and education can enable individuals to remove themselves from the poverty cycle. As has been discussed in a previous post: you are only as rich as your poorest citizen. The cuts seek to trap our poorest citizens in the poverty cycle without any means to remove themselves.

The Conservatives, especially Cameron, hark on about Broken Britain. Britain is not broken, but it soon will be. It is also well known that anti-social behaviour and general social ills are created and fuelled by poverty, bear in mind that there are always exceptions to the rule. So to ‘fix’ broken Britain what is needed is investment in education, as the great liberator, and welfare to work schemes as well as maintaining the welfare and universal benefit system – means testing might be a better option than an arbitrary reduction.

The ‘Free’ schools are another name for Grammar Schools but free from state control and therefore able to select pupils thus further damning children from poor areas. I, separate from Oldfield-Pike, advocate a fully comprehensive education system so that there is not two-tiers within the education system.

The perceived result of the Browne Review, set to announce tuition fees to £10,000, coupled with the governments reduction in funding for Higher Education will inhibit the majority from applying to go to University and will reduce the calibre of the institutions for those that do. Now, more than ever, do we, as a country, need to push for greater investment in education or we risk falling behind the rest of the world in teaching and research.

The Coalition government wants to get people into work and off the benefit system but the way they are approaching it can only spell disaster. The welfare to work programmes have been scrapped which means relying on the voluntary sector to provide the programmes through the ‘Big Society’, but, because public spending is being cut across the board, there is not any money for charities etc. to provide for these welfare to work schemes thus trapping them in the poverty cycle with their children and their children’s children ad infinitum.