King Tut

‘I saw that letter from business leaders this week saying we should stay in. Some of them are the same people who said Britain should adopt the euro. Why on earth should we listen to them?’  Mervyn King

So the world will implode if Britain leaves the EU.

Funny that the Deutsche Börse doesn’t think so…

London Stock Exchange in merger talks with Deutsche Börse

The London Stock Exchange is in talks to merge with Germany’s Deutsche Börse in a £21bn deal that would seal an alliance first discussed at the turn of the millennium.

The LSE said on Tuesday it was in detailed discussions with its German rival about an all-share merger. Under the proposed structure, the balance of ownership favours Frankfurt, with Deutsche Börse shareholders owning 54.4% of the combined company and LSE shareholders holding 45.6%. However, the merged company’s board will have equal numbers of members from each business.

The UK exchange said: “The boards believe that the potential merger would represent a compelling opportunity for both companies to strengthen each other in an industry-defining combination, creating a leading European-based global markets infrastructure group.”

Nor of course did HSBC as it decided to remain in the UK rather than flee to the Far East.

What of that ‘leap in the dark’ that Cameron and Osborne’s ‘Project Fear’ warns us of?  One moment Osborne is telling us how well the UK economy is doing and how it will be in surplus in no time at all…the next he’s warning us that it is about to go into intensive care…of course this has more to do with the referendum than anything else…we must stay in the EU or chaos will ensue.  But the real leap in the dark might be becoming ever closer tied to an imploding European Union.

The BBC presumably doesn’t want you to think there is any problem with the EU…look at this anodyne report on the thoughts of the ex-Bank of England Governor Mervyn King…..‘New crisis without reform’ warns ex-Bank of England boss..

The former Bank of England boss has warned in a new book that another financial crisis is “certain”, and may come “sooner rather than later”.

Mervyn King, who stood down in 2013, says reform of monetary and banking systems may help prevent the crisis.

But he says that failure “to tackle the disequilibrium in the world economy makes it likely that it [a crisis] will come sooner rather than later”

But what were his thoughts on Europe?  The BBC makes no mention of that for some reason….perhaps this is why….He says in essence that the Euro Zone is finished…..as the Telegraph headlines it…Mervyn King: the eurozone is doomed…..

With different political histories and traditions, a move to political union is unlikely to be achieved quickly through popular support. Put bluntly, monetary union has created a conflict between a centralised elite on the one hand, and the forces of democracy at the national level on the other. This is extraordinarily dangerous.

In 2015, the Presidents of the European Commission, the Euro Summit, the Eurogroup, the European Central Bank and the European Parliament (the existence of five presidents is testimony to the bureaucratic skills of the elite) published a report arguing for fiscal union in which “decisions will increasingly need to be made collectively” and implicitly supporting the idea of a single finance minister for the euro area. This approach of creeping transfer of sovereignty to an unelected centre is deeply flawed and will meet popular resistance.

In pursuit of peace, the elites in Europe, the United States and international organisations such as the IMF, have, by pushing bailouts and a move to a transfer union as the solution to crises, simply sowed the seeds of divisions in Europe and created support for what were previously seen as extreme political parties and candidates.

It will lead to not only an economic but a political crisis.

European Monetary Union (EMU) is the most ambitious project undertaken in monetary history. EMU has not proved to be an easy marriage, with the enterprise trying to navigate a safe passage between the Scylla of political ideals and the Charybdis of economic arithmetic.

How long this marriage will last is something known only to the partners themselves; outsiders cannot easily judge the state of the relationship.

The basic problem with a monetary union among differing nation states is strikingly simple. Starting with differences in expected inflation rates – the result of a long history of differences in actual inflation – a single interest rate leads inexorably to divergences in competitiveness. 

Some countries entered European Monetary Union with a higher rate of wage and cost inflation than others.

Instead of being able to use differing interest rates to bring inflation to the same level, some countries found their divergences were exacerbated by the single rate. 

The resulting loss of competitiveness among the southern members of the union against Germany is large, even allowing for some overvaluation of the Deutschmark when it was subsumed into the euro.

It is evident, as it has been for a very long while, that the only way forward for Greece is to default on (or be forgiven) a substantial proportion of its debt burden and to devalue its currency so that exports and the substitution of domestic products for imports can compensate for the depressing effects of the fiscal contraction imposed to date.

The inevitability of restructuring Greek debt means that taxpayers in Germany and elsewhere will have to absorb substantial losses.

Germany faces a terrible choice. Should it support the weaker brethren in the euro area at great and unending cost to its taxpayers, or should it call a halt to the project of monetary union across the whole of Europe? The attempt to find a middle course is not working. One day, German voters may rebel against the losses imposed on them by the need to support their weaker brethren, and undoubtedly the easiest way to divide the euro area would be for Germany itself to exit. 

But the more likely cause of a break- up of the euro area is that voters in the south will tire of the grinding and relentless burden of mass unemployment and the emigration of talented young people. The counter-argument – that exit from the euro area would lead to chaos, falls in living standards and continuing uncertainty about the survival of the currency union – has real weight…. leaving the euro area may be the only way to plot a route back to economic growth and full employment. The long-term benefits outweigh the short-term costs. Outsiders cannot make that choice, but they can encourage Germany, and the rest of the euro area, to face up to it.