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Archive for November, 2011

Infrastructure Investment: Privatisation

November 28, 2011 1 comment

George Osborne, ahead of Tuesday’s Autumn statement on the economy, has announced that there will be a £30bn investment in UK infrastructure. £25bn to come from pension funds and the China Investment Corporation and the remaining £5bn to be provided by central government funded by cuts elsewhere in the budget.

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.

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Retort to the Telegraph

November 18, 2011 Leave a comment

On Friday, The Telegraph ‘reported’ on “Germany’s secret plans to derail a British referendum on the EU”. The plans aren’t that secret. The think tank, Open Europe, has provided an English translation of the document, entitled:  The future of the EU: Necessary integration policies for progress towards establishing a Stability union.

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.

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

November 14, 2011 1 comment

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.