News and Events

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Events

20 May 2009: Immigration and the European Union

The Bruges Group. Details from info@bruges group.com

European Elections 4 June

If the politicians won't give us a referendum on Lisbon, let's make the European elections our referendum. Give them a resounding vote of no confidence in the EU. Vote only for parties who promise a referendum on Lisbon.

News

EU attack on City of London is 'opportunistic'

The European Union's plan for a new machinery of financial regulation is an "opportunistic" attempt to extend EU power and is largely based on unsubstantiated claims, according to a hard-hitting report by the Adam Smith Institute and the London Business School.

By Ambrose Evans-Pritchard, TELEGRAPH Business 10.7.09

The study said the British Government has responded with incoherent or irrelevant objections as Europe's elites seize on events to rush through laws that greatly increase EU control over the City of London.

"The proposals seem opportunistic, using the financial crisis to provide an opening for long-held political objectives," it said, accusing Brussels of trying to transform the financial system "while it is too weak to object".

"Since financial crises of this scale come along only every sixty years, there is no economic reason for this haste," it said.

The European Commission has made no attempt to validate it claim that lack of EU cross-border rules was a key cause of credit crisis, ignoring evidence that the real damage stemmed from the failure of countries to enforce their existing rules properly. "Instead of dealing with the fundamental problem, the Commission is instead proposing to add new bureaucratic structures."

The key bone of contention is the creation of three new "Authorities" with a permanent staff and binding powers: a European Banking Authority in London; a European Insurance and Pensions Authority in Frankfurt; and a European Securities Authority in Paris.

While they look like the current advisory committees made up of chief regulators from the 27 member states, they are in reality executive agencies able to impose their agenda, with powers to "settle the matter" in the case of disputes. They effectively strip Britain of ultimate control over much of the City, leaving "day-to-day" matters to the Financial Services Authority.

Keith Boyfield, co-author of the report and chair of the Regulatory Evaluation Group, said the raft of proposals coming from Brussels together amount to an extremely serious assault on the City .
"When you look at this you wonder whether Alistair Darling's White Paper is a pointless exercise," he said.

The Government appears confused by the rush of events. Rather than fight the core issue of transferring control to Brussels, it has been arguing over whether the bodies should be run by the Commission or the Council. Either way, London loses ultimate control.

Gordon Brown agreed to the plans at last month’s Brussels summit, provided they do not impinge on “fiscal sovereignty”. Lord Mandelson has since said Britain should forge an alliance with those EU states in our camp to limit it saying “we have more skin in this game than the rest of Europe put together”.

An EU insider said the credit crisis had thrown up an unholy alliance between nationalist politicians from France, Italy, and Spain hoping to chip away at the City, and Left-wing forces opposed to market capitalism.
The two together are a formidable bloc.

EU's regulation of City would 'strangle' London, says Mayor Johnson

Boris Johnson, the Mayor of London, said yesterday that European plans to regulate the financial services sector threatened to drive hedge funds out of London and Europe, even though they were "blameless" for the crisis.

By Angela Monaghan, Telegraph Business 10.7.09

Speaking at a conference in London he said: "It's utterly crazy that we should allow the EU to launch an attack on the City's alternative investment funds. I believe this EU directive is a mistake and against the interests of Europe," he said.
"Hedge funds won't go to Paris or Frankfurt, they'll go to New York or Shanghai. What is good for London is good for the UK and what is good for London is good for Europe."

The Mayor's office said it was estimated that hedge funds contributed about £3bn in tax a year, and employed 35,000 people directly and indirectly in London. Mr Johnson said that the right thing to do would be for regulation at the global level – by the G20 – reflecting financial services' worldwide nature.

That way, he argued, regulation could be formed that worked for London and its competing cities, including New York, Geneva, Hong Kong and Singapore. Otherwise the City of London would be "strangled".
"My greatest worry is that this is just the start of a flood of draft directives that will start to filter out of Brussels," he said.

The Mayor called on Lord Mandelson, the Business Secretary, and the Government to help him to resist. However, Lord Mandelson, who spoke immediately after Mr Johnson, said that it was in Britain's best interests to co-operate with Europe.

"We've got to be involved in the regulation. We won't influence EU policy by cutting ourselves out of Europe. I hope that's a message Boris takes to his colleagues," he said, [Let us hope that Boris takes the threat seriously and tells Cameron that ‘This is War’. -cs] adding that London must stay alert to competition in the rest of the world and stay ahead of the curve.

He added: "Cultural change in the boardrooms and back offices will need to take place. Old-fashioned banking needs to return to the City."

The Mayor also urged London businesses to double the size of their apprenticeship schemes to ease the impact of rising unemployment

Charlemagne: Was London behind the ball on the EU hedge fund directive?

Economist, 10 July 2009

The Economist’s Charlemagne blog looks at the EU’s proposed directive on alternative investment funds and reports that senior EU officials felt under “intense pressure from the French and Germans to impose the strictest possible regulation on hedge funds”, and were expecting to come under balancing pressure from the British, who did not show “strong lobbying”, according to one insider.

The blog suggests that the Commission would not have been hostile to British arguments against strong regulation for hedge funds, saying Internal Markets Commissioner Charlie McCreevy was “deeply sceptical” about heavy regulation of financial services, but that the “right phone calls were not made.”

The blog suggests the reasons for this failure are that hedge funds have never been good at lobbying Brussels; British officials have lost some confidence and been distracted by political crises in London; and Britain agreed at the G20 that hedge funds would be regulated, and “It is simply too late to complain now that the European Commission should leave such funds alone.” The column quotes one ‘player’ saying “London was behind the ball on this”.

The Telegraph reports that, speaking at a conference yesterday about the EU’s proposed alternative investment fund directive, London Mayor Boris Johnson said, “It's utterly crazy that we should allow the EU to launch an attack on the City's alternative investment funds. I believe this EU directive is a mistake and against the interests of Europe.” He went on, “My greatest worry is that this is just the start of a flood of draft directives that will start to filter out of Brussels”.

Meanwhile, writing in the Times, Olivier Kamm argued, “The EU proposals would place limits on leverage and require hedge funds to use European banks as custodians. There is scant economic justification for these measures.”

We're going to win the election and kill the Lisbon Treaty, says Hague

Philip Webster and Francis Elliott, The Times, April 29, 2009

William Hague yesterday became the first member of the Tory leadership to predict a Conservative victory next year and said that his party was psychologically prepared for government.

The man named by David Cameron as his “deputy in all but name” went farther than before in suggesting that a Tory government would kill the Lisbon treaty and halt the latest process of European integration. He promised immediate legislation for a referendum to reject the treaty if it had not been ratified by the whole of the EU by the time that the Conservatives took power.

He left open the door to the possibility of the Tories promising a referendum in their election manifesto even if the treaty had been ratified by then.

In an interview with The Times, the Shadow Foreign Secretary cast aside caution: “It is likely that we are going to be able to win the next election . . . I put it no more strongly than that.”

While there was no complacency in the party, he said that a trend was setting in. “However much opinion polls go up and down there is a mood of ‘this is long enough of a Labour government’ .” The Tories were psychologically prepared for government, he said. “We have the right mixture of excitement — when you have lost three elections it is quite exciting. But there is also a sober atmosphere, because if and when we win we will have the worst financial inheritance of any government in peacetime.”

In a sign of the leadership’s increasing confidence about the election, Mr Hague revealed details of handover talks with the Civil Service — and contrasted them with the “fantasy politics” that marked the talks he had held as Conservative leader in 2001.

Mr Cameron’s team has instructed the Permanent Secretary of the Foreign and Commonwealth Office to prepare for a “national security council”. Headed by Mr Cameron, it would include the defence, foreign, home and energy secretaries. Breaking with Labour’s “sofa government” it would be a decision-making body staffed by the Cabinet Office secretariat, he said. Putting the Foreign Office on notice, Mr Hague said: “That is one of the things we would expect them to be prepared for when we come to office.”

He said that, under Mr Cameron, the Tories approached the next election as a “genuine team”, in contrast to the divisions of the past — including those during his leadership. “One of the most refreshing things about coming back on to the front line was returning to a totally different atmosphere. David Cameron creates a great team atmosphere with the right combination of collegiateness and decisiveness.”

Mr Hague expressed confidence about the party’s advance, drawing attention to victories in the North. He said that it had moved at “the right pace” in laying out policy, promising new green papers in the coming months.

He acknowledged that the “budgetary situation had changed dramatically”, making it even more difficult to make specific pledges, but said that the party would know the Tories’ intended “direction of travel”.

The leadership was not “remotely complacent”. He was astonished that Gordon Brown had not cashed in on popular goodwill when he took over at No 10 and called a poll: “It was his best chance . . . He could well have won.”

He praised Mr Cameron’s coolness under fire when he was seen as “political toast” in the autumn of 2007. He recalled how, on the eve of the Tory conference, Mr Cameron had told his top team they had to achieve the “biggest political turnaround in modern political history” — in only a week that the Tories had achieved it. The episode had helped to bond Mr Cameron’s top team, he said.

Mr Hague used the interview to reassure President Obama and European leaders that a Tory government would be “active, energetic and engaged members of the EU”. The party had welcomed every foreign policy initiative by the new US Administration and Britain “owed” it to Mr Obama to back his plan for Afghanistan, he said.

The chances of the Lisbon treaty not being approved by next year, with difficulties in the Czech Republic and Poland and Ireland still to hold a second vote, were 50-50, he said. If his party wins, it will recommend rejection of the treaty in the referendum.

He also said that if the treaty were ratified in the run-up to the election or soon afterwards it would not have democratic legitimacy, implying that the British vote would still go ahead.

And for the first time he hinted that a referendum could still be promised in the Tory manifesto, even if the treaty had been ratified. Previously the Tories have said that they would not let matters rest in the event of the treaty being ratified but have declined to expand on what they might do.

Mr Hague said that, if it were not ratified by the time of a Tory victory, there would be a referendum “in the opening months” and a Bill preparing for the vote would be ready. If the treaty had been ratified, the party would, nevertheless, spell out in its manifesto what action it would take to reverse European integration. Pressed on whether in those circumstances a referendum could still be promised in a Tory manifesto, he said: “We would not rule anything in or out.”

The Shadow Foreign Secretary said that formal talks on an “amicable separation” from the European People’s Party in the Strasbourg Parliament had been completed. The Tories would leave after the European elections on June 4 to establish a new group. Its name had been decided and he was “very confident” that parties from the required minimum of seven nations would sign up. “We’ve got lots of partners in the wings.”

On issues such as climate change, energy liberalisation and the single market they were “great enthusiasts”. “Our difference is that we are not in favour of the institutional aggrandisement of Brussels,” he said.

Asked whether he expected British troops to be in Afghanistan at the end of a first Tory Parliament, he said. “They will be if we’re getting somewhere. We’re not going to succeed in Afghanistan if people think we’re going to walk away every five minutes.”

Britain had borne a “disproportionate” military burden, he said, but hinted at support for Mr Obama’s “reinforcement of the military position”. There was consensus with the Government on much foreign policy, but a Cameron administration would give higher priority to relations with the Gulf states and India. The role of the Commonwealth would be restored.

Mr Hague defended Mr Cameron’s record on promoting female Tory MPs. He said that the aspiration that a third of all ministers would be women by the end of a first Tory government was a “correctly ambitious goal”. In seats where sitting Tory MPs were standing down “about half” of the candidates were women. Mr Hague admitted that one of his mistakes as leader had been to pull back from insisting that a woman be on every selection shortlist.

Asked whether the Tories were in danger of seeking to “coast” to victory, he replied sharply: “Do we look like we are coasting? There is a lot of hard work going on here.” He defended Mr Cameron against accusations of over-caution, citing the leader’s frank warnings over the need for public sector control. “I don’t think that’s overcautious, David Cameron is bold.”

He said that the leadership was examining savings in public spending. The MoD budget was “not immune”. But he again pledged his party to upgrading the Trident nuclear deterrent.

Mr Hague, who cheerfully admitted having made “a lot of money” in his time away from frontline politics, backed the full disclosure of MPs’ outside earnings. He said things were “not so bad” when MPs were not paid at all and Parliament was made up of those “enterprising enough to have some other income”.

Hague attacks Brown on EU treaty

William Hague has accused Gordon Brown of "debasing the coinage of politics" by not holding a referendum on the European Union's Lisbon Treaty.

The shadow foreign secretary said Labour has squandered voters' trust by not giving them a say on EU reforms. He used speech ahead of June's European elections to argue this is a betrayal of Labour's manifesto promise of a referendum on the failed constitution.

Ministers say the treaty does not carry the same weight as the constitution.

Britain became one of 25 EU nations to ratify the Lisbon Treaty, which aims to streamline the EU's institutions and replaces the failed EU constitution, after a Parliamentary vote in June last year. The document has proved controversial, with unsuccessful attempts in the UK Parliament and the courts to force a referendum on the issue.

Mr Hague used his speech to put the treaty at the heart of his party's campaign for the European Parliament elections on 4 June.

He told the Conservative Spring Forum in Cheltenham: "The message we will take to the doorsteps in the coming weeks is that if you vote Conservative it is not too late to have the referendum you were promised. It is a matter of trust; it is a matter of faith in politics

"It is not too late to send Gordon Brown a message on June 4 so loud he cannot ignore it, and it is not too late to elect a Conservative government that will fulfil the promise that all parties made at the last general election and to which only the Conservative Party has stayed true."

Mr Hague repeated the Tory promise to hold a referendum on the Treaty if it remains unratified by any of the EU's 27 states if the party is elected to government.

"It is a matter of trust; it is a matter of faith in politics; and our commitment rests on the truth that, in a democracy, lasting political institutions cannot be built without the people's consent," he is expected to argue.

Mr Hague went on to say the government has contributed to the public's "disillusionment" with politics and justified their "mistrust".

"They have not only devalued the currency of the nation, but their breaking of promises has been so brazen, and in the case of the referendum so inexcusable, that they have debased the coinage of politics itself.

"Their legacy will be to leave office with the word of government less believed than at any time in our lifetimes - another aspect of the scorched earth they will leave behind them, on which only a new government can plant the seeds of trust and belief afresh."

Tory MEP Daniel Hannan, whose three-minute European Parliament speech attacking Gordon Brown as the "devalued prime minister of a devalued government" became a worldwide hit on YouTube, gaining more than two million hits, is to address the party's spring conference on Sunday.

The Lisbon Treaty is awaiting approval by the Czech senate and president and Poland's president.

In Germany, despite parliamentary approval, the constitutional court is studying the treaty to judge whether it conflicts with the German constitution.

It will also face a second referendum in the Irish Republic, where it was rejected in 2008.

Under EU rules, the treaty cannot enter into force if any of the 27 member states fails to ratify it.

We've got it all wrong on fishing strategy, says EU

Stocks of cod, bluefin tuna and anchovy have been almost fished to extinction

David Charter in Brussels, The Times, April 23, 2009

Europe’s fishing industry is on the brink of suicide and several species are in danger of extinction after 25 years of policy failure,the European Commission said yesterday.

Officials admitted five key failings in the EU’s Common Fisheries Policy as they prepared to tear up the idea of a centrally dictated strategy. They launched the search for an alternative, saying that much of the responsibility for fishing must be returned to EU member states.

One key failing that has led to the near-extinction of stocks of cod, bluefin tuna and anchovy is the “deep-rooted problem” of fleet overcapacity, with campaign groups arguing for a 40 per cent cut in the EU’s 90,000 vessels. Its admission that Europe’s controversial fisheries policy had failed was broadly welcomed by the fishing industry.

The Commission said that 88 per cent of EU stocks were overfished, compared with only 25 per cent worldwide.

“Most of Europe’s fishing fleets are either running losses or returning low profits,” said Joe Borg, the EU Fisheries Commissioner, in a Green Paper published yesterday. “There is chronic overcapacity, of which overfishing is both a cause and a consequence — fleets have the power to fish much more than can safely be removed without jeopardising the future productivity of stocks.”

He said that cuts in fleets of only 2 to 3 per cent a year had been offset by increases in catching capacity.

Ministers from individual EU states were given much of the blame in the Green Paper. They meet every December to set fish quotas and every year they override expert scientific advice, which, for example, has been calling for cod fishing to be closed in the North Sea to allow it to recover.

Last year 93 per cent of cod was caught before the fish were mature enough to reproduce. But a higher cod quota was set for this year, under pressure from member states.

“Sustained political and economic pressure has led industry and member states to request countless derogations, exceptions and specific measures,” the Green Paper stated.

Many EU fishermen then receive subsidies to help them to stay in business — for instance, those involved in the anchovy grounds that have been closed to save the species. “European citizens almost pay for their fish twice: once at the shop and once again through their taxes,” said the Paper.

One of the most senior European Commission fisheries officials added: “The sector is overfishing and, if you like, committing suicide.”

Spain has the biggest fleet in terms of tonnage, but its 11,350 boats are still outmatched by Greece, which has 17,350, and Italy with 13,700. France, which traditionally is at the forefront of industrial action against EU fishing restrictions, has almost 8,000 boats.

Britain has 6,763 fishing vessels, according to an official survey in 2007, compared with 8,458 ten years earlier.

The EU consultation, which will run to the end of the year, will be followed by studies next year, but it will be 2011 or 2012 before decisions must be taken.

Campaigners called for the politicians to be taken out of detailed quota-setting. “Cod in Newfoundland never came back after it was fished to extinction and bluefin tuna is going the same way ,” said Julie Cator, of Oceana, a marine conservation organisation. “We cannot keep fishing down the ecological chain until we are left with jellyfish.”

Bertie Armstrong, chief executive of the Scottish Fishermen’s Federation, said: “Reform is very necessary indeed — by anyone’s standards the Common Fisheries Policy has failed.”

Richard Lochhead, Scotland’s Fisheries Minister, said: “Those who are best placed to protect our precious fishing stocks are those with the greatest interest in them. Therefore, it is fundamentally wrong for landlocked member states, and others with no interest in crucial Scottish fisheries, to have a decisive say over how that resource is managed.”

Aaron McLoughlin, head of the European Marine Programme at WWF, said: “The Commission have produced an admirably honest critique of a dysfunctional fisheries policy.” He said the successful fisheries of Alaska, New Zealand and Norway, based on long-term management plans for fish stocks and cuts in fleet capacity, could be copied in Europe.

William Hague interview: Gordon Brown could be forced into European referendum

Gordon Brown could be forced to call a referendum on the new European "constitution" if faced with a large protest vote in the forthcoming European elections, the Conservatives believe.

By Robert Winnett, Deputy Political Editor, Daily Telegraph, 10 Apr 2009

In an interview with today's Daily Telegraph, William Hague, the shadow Foreign Secretary, says that Britain urgently needs to renegotiate its relationship with Europe. It will be a priority for the Conservatives if elected.

He is particularly angered at suggestions that Tony Blair is being lined up to become the first full-time EU president.

Mr Hague and David Cameron are planning to make the failure of the Government to call a referendum a key campaigning point in the run-up to June's European elections. The shadow Foreign Secretary today calls on Britons to use the elections to cast a "protest vote".

However, it represents a risky strategy for the Conservatives which could open a rift within the shadow Cabinet over European policy in the run-up to the general election.

Mr Hague says that he expects Ken Clarke, the shadow Business Secretary who is a passionate supporter of the EU, to vote against the Lisbon Treaty in any referendum.

He also indicates that the Conservatives are likely to attempt to scrap the Treaty - possibly by calling a retrospective referendum - if they are elected.

The Prime Minister has faced intense public criticism after reneging on a Labour manifesto commitment to call a referendum on a European constitution. The Daily Telegraph has campaigned for a referendum.

Labour claim that there is no need to ballot voters on the renegotiated constitution - known as the Lisbon Treaty - although it is virtually identical to the original agreement.

In the run-up to the last European elections in 2004, Mr Blair was forced to offer a referendum in the face of widespread public concern.

Mr Hague now believes that the Government could be forced into a similar climbdown. The Irish are preparing to hold another referendum on the Treaty in the autumn.

"It's not too late to stop the Lisbon Treaty," Mr Hague said. "I think it's time to ring the alarm bell, it's time to alert people to the fact that this denial of democracy is not far away unless we do something.

And the opportunity to do something is in the European elections, which are only two months away now."

"It's possible to make Gordon Brown change his mind. If you remember in 2004, in the run-up to the European elections that is when Tony Blair did his famous u-turn on the referendum.

"He [Mr Brown] doesn't want to have a referendum, he doesn't like having elections about anything. But I think it's a Government of such spectacular u-turns you can't rule anything out."

The shadow Foreign Secretary reveals that other European leaders have discussed with him the possibility of Mr Blair becoming the first president of the EU. "Our point about this is that this would be unacceptable to the majority of people in Britain," he said. "It would be a double denial of democracy because we would have a former Prime Minister returning to a position of influence and power over British affairs without any electoral mandate of any kind.

"If a figure like Tony Blair assumed the presidency of the EU, it would be Tony Blair who went off to visit the White House claiming to represent all the people of Europe including Britain once again. Just when people thought they were free of that, that would be back, And they wouldn't be able to do anything about it."

The shadow Foreign Secretary, who is also Mr Cameron's deputy, insists that he is not concerned about campaigning against further European integration. The issue has previously proved highly damaging for the Conservatives as splits within the party emerged.

Ken Clarke, before returning to the shadow cabinet, earlier this year said that calls for a referendum were "absurd". However, Mr Hague today makes it clear that Mr Clarke will now be expected to block the Lisbon Treaty.

When asked if Mr Clarke would have to vote "no" in any referendum, Mr Hague said: "I wouldn't expect any member of the shadow Cabinet to oppose the party's policy...to reject the treaty. Ken has joined the shadow Cabinet in full knowledge of our policy on this."

Mr Hague signals that, if the Conservatives are elected, he plans to spend the first few months in office renegotiating Britain's relationship with Europe. He is not concerned about being isolated at a time when Barack Obama is making extensive efforts to improve relations between America and the EU.

"We are committed to restore national control to social and employment law," he said. "It is something we feel very strongly about, it is something that will be reflected in our manifesto but clearly it is also something that has to be negotiated.

"The EU should be concentrated on adapting to globalisation and global competitiveness, not building more powerful centralised institutions in Brussels," he said.

The former Conservative leader refuses to reveal exactly what he plans to do if the Lisbon Treaty is ratified and he becomes Foreign Secretary.

However, he makes it clear the Conservatives would consider calling a referendum retrospectively - which could dominate the party's early months in office if they are elected.

"We will address that if we come to that point," he said. "We would face a treaty that lacks democratic legitimacy and we wouldn't let matters rest there...You can still get a referendum on Lisbon. If that happens we don't have to worry about what we do if it is ratified."

Mr Hague's call to tackle further European integration will delight many Conservative activists. The shadow Foreign Secretary is one of Mr Cameron's closest frontbench colleagues and friends say he is relishing the prospect of becoming Foreign Secretary.

He is already beginning to "run down" his outside interests which have proved a source of controversy. If the Conservatives are elected, it is thought he may only serve for one Parliamentary term and he will therefore be keen to make rapid progress on the delicate task of extricating Britain from legally-binding European commitments.

Britain must take back control of its own laws

Telegraph View: It is time for the UK to opt out of the jurisdiction of the European Court of Human Rights

Sunday Telegraph leader, 4 Apr 2009

Lord Hoffmann, one of Britain's most senior Law Lords, has fired a well-aimed bullet at the heart of one of the great sacred cows of contemporary political and legal life: the European Court of Human Rights which sits in Strasbourg. This institution, as Lord Hoffmann pointed out in a lecture to the Judicial Studies Board, has arrogated to itself the power to be the ultimate arbiter on any issue which the Court interprets as involving human rights. Since, as the Court's practice demonstrates, it thinks that almost every legal matter involves fundamental rights, it has given itself the power to dictate to Britain – and the other 47 countries that have signed the European Convention on Human Rights – what laws should be obeyed .

As Lord Hoffmann also patiently explains, there is no legitimate basis for the Court's conception of its power. When Britain signed the treaty which created the Court nearly 60 years ago, the government of the day did not think that it was surrendering sovereignty over the law: it did not believe that it was creating the equivalent of the Supreme Court of the United States, which would then dictate federal law for all the states of Europe. But that is how the judges on the European Court have conceived their task. They have ruled – to give one example of many – that British courts infringed human rights when they allowed a statement by a woman who had been raped by a doctor to be admitted as evidence against him in his trial. The woman had been so traumatised by what the doctor had done to her that after she had given her statement to the police she committed suicide. The Strasbourg Court nevertheless overturned the doctor's conviction on the grounds that her evidence was "hearsay" and should never have been allowed.

Even if the judges on the Strasbourg Court were of the very highest quality, that would not give them the entitlement to overrule settled law in Britain in that way. But they are not of the very highest quality. In fact, their legal reasoning is often incompetent. They reached their decision in the rape case, for example, without even reading the careful examination of the question by our own Law Lords. Every one of the 47 countries that have signed the Convention is entitled to a judge on the Court. Judges from countries such as Bulgaria, Romania, Slovenia and Russia – states which have little experience of the rule of law, never mind of human rights – receive a tax-free salary of £200,000 a year for handing down decisions which overturn laws made in Britain.

The solution is simple: Britain should formally opt out of the jurisdiction of the European Court. Lord Hoffmann's quarrel is not with the European Convention of Human Rights, which he thinks was rightly incorporated into British law by the Human Rights Act of 1998. His issue is with the way those rights are interpreted by the Strasbourg Court. Human rights can be interpreted in different and conflicting ways by different countries, as the difference between the way Britain and the United States interpret, say, the law on freedom of the press illustrates. It is the fundamental mistake of the Strasbourg Court to believe that there should be uniformity on the interpretation of rights, and to impose it when in fact such issues can only be resolved at a national level, by answers that are informed by the legal and political traditions of each individual nation.

Britain needs to take back control over its own laws. Many of the objections to the Human Rights Act evaporate if its interpretation were left to British judges, rather than being ultimately determined by judges on the Strasbourg Court. We hope that if Labour cannot bring itself to see the merit in Lord Hoffmann's arguments, the Conservatives will – and that the ability of the British people, and British institutions, to determine the nature of the laws we have to obey will be returned to this country.

The DM says: see the United States of Europe

Now we treat our fishermen like drug dealers

Fishermen have been ruined and sent to jail thanks to a ruthless war waged by the marine agency, says Christopher Booker.

By Christopher Booker, Sunday Telegraph, 4 Apr 2009

The Proceeds of Crime Act is now invoked in the cases of fishermen exceeding their EU quotas Photo: PA
We now know where the EU's Common Fisheries Policy, brought into being after Edward Heath gave away Britain's fishing waters in 1973, has ended up. The answer is in Walton Prison, Liverpool, a notoriously tough jail where two respected fishermen from Northern Ireland, Charlie McBride and his son Charles, are currently incarcerated.

Although I briefly noted this story last week, it is so shocking that I now return to it in greater detail. In December 2007 the two McBrides appeared in Liverpool Crown Court, having pleaded guilty earlier in the year to misidentifying catches of fish for which they had no quota under EU rules. But instead of just asking for fines to be imposed on fishermen who break quota rules, the Marine Fisheries Agency (MFA) now has a new tactic. It calls in the Serious Organised Crime Agency (Soca) to use the Proceeds of Crime Act, designed to recover money from international drugs traffickers, money launderers and other major criminals.

Soca – which last year replaced the Assets Recovery Agency, after it had spent £65 million to recover £23 million – assumes that if someone has benefited from the proceeds of crime for more than six months, he is living "a criminal lifestyle". Everything he owns can then be deemed to have derived from criminal activity.

In the case of Charlie and Charles McBride, all their assets were thus valued at more than £1 million, including their boat and homes (valued at the height of the property boom). On this basis Judge Nigel Gilmour not only imposed on them fines of £385,000 – infinitely more than the value of the fish they had wrongly declared – but ruled that all their assets should be frozen as "proceeds of crime", even though the home and boat had been bought before the offences were committed. He also told the men that, unless they paid the fines within six months, they would go to prison for up to three years.

At their wits' end as to how to raise the money, the two McBrides negotiated a second mortgage on their homes. Charlie McBride presented Soca with £120,000, asking that it should be taken as a down-payment on the fine until he had somehow found the rest. The agency asked how he had come by the money and, when told that it came from remortgaging his house, told him that he would be charged with contempt of court because the house was a "frozen asset".

Two weeks ago the two men were accordingly jailed for contempt, and having been allowed one telephone call to tell his wife Karen what had happened, Charlie is now serving out his sentence as a prison refuse collector.

So delighted is the MFA at discovering the Proceeds of Crime Act that it has used this sledgehammer tactic twice more in the past year. Three Thames fishermen were fined £317,000 for catching sole for which they had no quota. (Most of the UK sole quota
had been given to foreign fishermen.)

In January the owners and skippers of six Newlyn boats were fined £188,000 for catching hake for which they had no quota (though hake were abundant). Among those fined were an 83-year-old widow, Doreen Hicks, and 82-year-old Donald Turtle and his wife Joan. They were found guilty by Judge Wassell because they were part owners of boats skippered by their sons.

In all these cases, the absurdly disproportionate fines have caused serious hardship; but the McBrides are the first fishermen who have been not only ruined but sent to jail, thanks to the ruthless war waged by the MFA.

When Mr Heath gave away Britain's fishing waters 36 years ago, his ministers lied to Parliament by pretending that we still retained control of our waters out to 12 miles. But even Mr Heath cannot have foreseen the day when, thanks to the zeal of British officials and judges, our fishermen would end up alongside violent criminals in a Liverpool prison.

EU Commissioners to take home more than £1 million each on leaving office

From Open Europe

New research from Open Europe has found that European Commissioners leaving office later this year will receive more than £1 million each in pension payments and so-called 'transitional' and 'resettlement' allowances.

Long-serving Communications Commissioner Margot Wallstrom - whose main job has been to promote the EU - will receive almost £1.8 million if she leaves the Commission this year.

Meanwhile, UK Commissioner Catherine Ashton, who replaced Lord Mandelson and who has been in the job for less than a year, will qualify for an ample pension of £9,600 a year, in addition to three years of 'transition' payments, valued at over £89,000 a year. On top of this, she will receive a £18,700 'resettlement' allowance.

This is in addition to the salaries and perks that Commissioners are entitled to during their term of service. Commissioners receive basic salaries of at least £220,000 a year (more for Vice-Presidents and the President) - meaning that in one five-year term alone, a Commissioner earns in excess of £1 million.

Commission President Jose Manuel Barroso receives an annual salary of over £275,000, which is almost exactly equivalent to US President Barack Obama's salary ($400,000). This is in addition to a host of other perks, which include residence allowances of 15% of their salary (£40,000) and monthly 'entertainment allowances'.

Reacting to the news, European Commission spokesperson Valerie Rampi justified the pay-outs, saying, "Open Europe didn't discover anything new, it's all public and online... Everyone who has worked as a commissioner is entitled to pension rights, like you and me". She said the money was to help Commissioners with their "re-entry" into the non-EU world. (EUobserver, 24 March)

She also denied that Commissioners received "golden one-off payments", despite the fact that all will receive £18,700 in 'resettlement' allowances. Chief Spokesman Johannes Laitenberger said the payments system helped Commissioners "to preserve their independence". (AFP , 30 March)

Meanwhile, Danish Commissioner Mariann Fischer-Boel told newspaper Politiken "I'm worth all the millions", while Belgian Commissioner Louis Michel denied the figures, and told newspaper De Standaard: "if that's true, I'll retire immediately". The paper reported: "After consulting an assistant, the report seems to be accurate. This was followed by Louis Michel suddenly changing his tune, saying the compensation is completely justified. "We are being well paid, that is. But every morning getting up at 5 o'clock, lots of travelling, heavy files... This is a parachute, but not a golden one'". (Politiken, 25 March; Standaard, 27 March)

French daily Le Monde noted that Commission salaries are "historically high" in order to be competitive with the salaries in the steel-manufacturing industry, which prospered in the 1950s when the European Community was first conceived. The Malta Today reported that Fisheries Commissioner Joe Borg is "Malta's highest paid pensioner". (Malta Today, 29 March; Le Monde, 1 April)

For details see: http://www.openeurope.org.uk/media-centre/pressrelease.aspx?pressreleaseid=102

or EU Waste

Lisbon Treaty round-up: Europe Minister admits she has not read the Treaty

From Open Europe

During questions in Parliament this week, Europe Minister Caroline Flint admitted that she had not read the EU Lisbon Treaty in its entirety. Following a series of vague answers on the implications of the Treaty for European defence, Shadow Europe Minister Mark Francois asked, "Has the Minister read the elements of the Lisbon Treaty that relate to defence?". Ms. Flint replied, "I have read some of it but not all of it." She went on to say: "I have been briefed on some of it."

Reportedly, Flint's admission went down like a "lead balloon" in the Foreign Office. A colleague said: "Her department is both furious and embarrassed...She was given a copy by her staff as soon as she got the job". (Express, 1 April)

Mark Francois said, "It's wonderfully honest of the Minister for Europe to admit that she hasn't actually read the renamed EU Constitution. It's not every day that someone will admit they haven't read the most important document for their job. Her astonishing admission does leave some questions. How does she know if the Treaty's good for Britain if she hasn't read it? How could she lecture the Irish that they'd only rejected the Lisbon Treaty because they didn't understand it?" (Parliamentary Committee debate, 30 March; Mail Telegraph Sun, 1 April)

Meanwhile, plans to tack proposed Irish 'guarantees' onto the Lisbon Treaty via the Croatian Accession Treaty have run into opposition in the European Parliament. The 'guarantees' were agreed by EU leaders in December in return for a second Irish referendum on the Treaty. Liberal Democrat MEP Andrew Duff, one of three MEPs who sat on the intergovernmental conference that drew up the Treaty, told journalists that adding an Irish-specific protocol with legal guarantees to an accession treaty was not legally possible.

He said: "Adding this protocol to the Croatian accession treaty would leave the treaty wide open to attack in the courts." He said that rules in the EU treaties governing accession treaties only allow issues pertaining to a state's accession to be dealt with, and that the insertion of an Irish protocol into the EU treaties may have to wait for a new EU treaty to be drawn up and ratified.

Irish PM Brian Cowen has said that the 'guarantees' promised by EU leaders "must be legally robust in order to reassure the public about the treaty". A final decision on how to structure the guarantees is expected at an EU summit planned for June. (Irish Times, 2 April)

Meanwhile, the resignation of Czech Prime Minister Mirek Topolanek, current holder of the EU presidency, has the potential to impact on the ratification process in both the Czech Republic and Ireland. Czech Deputy Prime Minister Alexandr Vondra said that the government's collapse will make it harder to ratify the Treaty in the Czech Senate. "The ratification process is on track...but it will be a lot more difficult now to convince people to vote in favour," he said. In addition, it is Czech President Vaclav Klaus, a critic of the Treaty, who has the power to choose who forms the next government. (FT, 26 March)

EU Commission President Jose Barroso reacted by saying, "The Czech Republic has signed the treaty and so the Czech Republic has an obligation to ratify. I really hope that this domestic, political development is not used as a way to put in question the treaty." The President of the European Parliament, Hans-Gert Pöttering said, "I cannot imagine that 10 million Czechs will turn against (the other) 490 million EU citizens." A European Commission official has said the situation has the potential to influence a second Irish referendum in October: "if it is still stuck in the Czech Republic by then, it becomes a lot less risky for the Irish to vote against. Then they are not the only bad guy". (Telegraph, 26 March; Volkskrant, 27 March)

Irish Foreign Minister Michéal Martin, who is negotiating the terms on which to hold the second Irish referendum, said, "Now we have to see how things evolve with the Czech presidency and who we will be negotiating with...that's a bit more complex than we would have anticipated." (FT, 26 Marc

Britain sees 40 per cent rise in cash lost to Brussels, National Audit Office says

The public spending watchdog has raised concerns about how Brussels is spending the increasing amount of cash given to it every year by Britain.

Daily Telegraph, March 27, 2009

The National Audit Office found that Britain's net cash contribution to Brussels jumped by 40 per cent to more than £4billion between 2006 and 2007. In the same year, the total value of reported irregularities rose by 20 per cent to €1,392 million (£1.3billion) across all European Union countries, a report published today finds.

This figure is set to continue rising. Treasury figures released in December showed that the net payment to Brussels in 2008/09 will be £6.1 billion.

Next year in 2009-10, the net figure will be £6.4 billion.

The rises are the result of a 2005 agreement by Tony Blair - with Gordon Brown's backing - to a staged series of cuts in the rebate, which was won by Margaret Thatcher in 1984.

The report found that 11 per cent of the cash intended to offer economic support for member states was mis-spent. Errors were mainly due to inclusion of ineligible costs, over-declaration of money spent, or failure to respect procurement rules. Of the irregularities across all member states, the United Kingdom reported 1,666 irregularities (including possible fraud), an increase over 2006, up 18 per cent.

The report, Financial Management in the European Union, found that for the first time the European Court of Auditors has confirmed the acounts gave a "true and fair view". But for the 14th year running, there was no positive "statement of assurance on whether the underlying transactions conformed to applicable laws and regulations".

Edward Leigh MP, the chairman of the Public Accounts Committee, said: "EU financial systems are still far too complex."

Mr Blair, as Prime Minister, justified the removal of Britain's EU subsidy as an "anomaly" and said it had to be linked to farm subsidy reform.

Matthew Elliott, chief executive at the TaxPayers' Alliance said Britain was spending more and more on Brussels and getting "fewer tangible benefits in return. It was bad enough that the Government abandoned the rebate, but it is very worrying that even the Treasury don't seem to understand how much that deal is going to cost."

"It's time the Government grew a backbone and started doing what's right for Britain, instead of kow-towing to Brussels."

Philip Hammond, Shadow Chief Secretary to the Treasury, added: "It is outrageous that the EU's shambolic financial management will force struggling British taxpayers to surrender even more of their hard-earned money to Brussels - particularly when this is partly due to weak financial controls here in Britain.

"Yet again, people will be furious that Gordon Brown signed away a huge chunk of Britain's rebate in return for absolutely nothing."

You can forget about getting British justice

To help fulfil the EU dream, you could end up in a foreign jail, says Alasdair Palmer.

Telegraph, 20 Mar 2009

It has often been claimed that the project of "ever-closer union" within the EU is over, killed when the Lisbon Treaty was rejected by the Irish, the only people who had the chance to vote on it. That's a big mistake. The Eurocrats think integration is inevitable and essential – and they are certainly not going to let it be derailed by anything as vulgar as the fact that most of the EU's citizens do not want it.

Perhaps the best example is an imminent change to the justice system, designed to make it easier for one state to imprison citizens who live and work in another. Under the present rules, the Government is not obliged to hand over a British citizen who has been convicted of a crime in another EU country. There are very good reasons for that. The procedures of justice are not of a uniformly high standard across the EU.

The EU must be made to listen to concerns. Organisations such as Fair Trials International have many examples of British citizens who have been convicted of crimes in countries such as Romania, Bulgaria, Greece and even Portugal, where the most basic elements necessary to a fair trial were absent, and where the defendant was not even present.

It is true that British judges do not always treat claims by, say, a Romanian court that a British citizen was given "a fair trial" in his absence with the scepticism they deserve. However, British courts do have the power, at present, to decide that it would not be in the interests of justice to extradite a Briton who was not present at his own trial to serve his sentence in a foreign jail.

Under the new regulations, we will lose that power: our courts will be compelled to order the extradition of British citizens to any EU country that wants them. The state that wants to extradite a Briton will simply have to sign a form which says that it told the Briton of his trial, and gave him some form of legal representation.

Such an assurance will, in many cases, be worthless – at least without independent investigation and verification.

Bulgaria, for example, is the only country in the EU that claims to have implemented "99 per cent of EU regulations". In fact, even the EU recognises that almost none of its regulations is complied with in Bulgaria. That country is also universally recognised as being totally corrupt, with the police and judiciary being particularly rotten.

The EU enthusiasts, however, simply pretend that "variations in the standards of justice" do not exist. So once the forms have been received by the British government, that will be that – you will have to be packed off to serve the sentence imposed on you by a Bulgarian court, at a trial at which you were not present, and may not even have been told about. And it doesn't matter what the offence is: it could be a traffic misdemeanour, it could be misuse of your credit card, or it could be murder.

Our Government has not just enthusiastically endorsed the new regulations: it has sponsored the legislation, passed by a huge majority in the EU Parliament last September. Why? No one seems to know.

The Ministry of Justice has said the change will "help our citizens", but I cannot see how it will help anyone to lose any protection that the British government might have been able to provide against the injustices perpetrated by foreign courts. That, however, is the only "benefit" that this new regulation will deliver.

Do not be fooled by Labour's weasel words. This is about showing the EU bureaucrats that we are committed to "ever-closer integration" – and if that means giving up our ability to protect British citizens from injustice, then that's just fine by our Government.

The DM says: The United States of Europe will not be a democracy

Those EPP extremists and fascists in full

Posted By: Daniel Hannan at Mar 17, 2009

José Manuel Barroso is cross because the Tories are leaving the Euro-fanatical European People's Party. Paul Waugh of the Evening Standard glosses the Commission President's remarks as follows:

"Why is Cameron linking up with fringe parties, some members of which have strange views on climate change, homosexuality and race?"

Hmm. Let's have a look at some of these "fringe parties", shall we? Here's the Deputy Speaker of the Polish Sejm rejoicing in a court's decision to deprive a lesbian mother of custody of her four-year-old daughter: "The court didn't bow to pressure from the aggressive homosexual lobby, which came to make a scene as usual".

Here's a blatantly homophobic poster from last the Italian general election ("Daddy and Papa? This isn't the family we want!")

Here's the first minister of Hesse calling for deportations: "We have too many criminal young foreigners... Germany has had a Christian and Western culture for centuries, and foreigners who don't stick to our rules don't belong here".

(Even more blatant, incidentally, was that party's slogan in North Rhine-Westphalia in 2000, when it campaigned against the proposed immigration of computer programmers from India with the slogan Kinder statt Inder: "Children rather than Indians".)

And let's not forget the Austrian party whose Secretary General recently called for the banning of burqas, adding: "If we allow consultations to be held in Turkish, we will one day become Turkish ourselves".

What do you reckon? Acceptable partners for the modern Cameronian Conservatives?

Well, here's the thing. All these parties are currently in the EPP. They are, respectively, the Polish Civic Platform, Forza Italia, the German CDU and the Austrian People's Party.

Now you might object that I am quoting them selectively. You might protest that every party has its share of cranks and bigots. You might argue that a quick Google would reveal similar dirt on pretty well any party in Europe. And you'd have a point.

But can you imagine what Labour and the BBC and the Guardian would be making of these remarks if they had come from parties whom the Tories want to join outside the EPP?

Actually, you don't have to imagine. Ten years, the same Paul Waugh, then working for The Independent, wrote several reports about how the Conservatives were about to link up with "Italian neo-fascists". The reports were unfounded: no one had the slightest intention of sitting with the Alleanza Nazionale (which is whom he meant): as if its fascist roots weren't enough to disqualify it, the party was also anti-American, corporatist and Euro-fanatical. Not that this stopped the Indy running pompous comment pieces about "Tory extremism", and filling its pages with pictures of Mussolini.

Well, guess what? The Alleanza Nazionale is now joining the EPP. I've been scouring the pages for the denunciations by all those who have spent the past decade raging against the rumours of a Conservative/Alleanza tie-up. At the very least, Paul himself, having made such a big deal out of it, ought to be congratulating David Cameron for walking out the EPP rather than allowing his MEPs to sit with "the heirs to Mussolini". Oddly, I can't find anything by him yet. I'm sure it's on its way.

There is a serious point here, and it has to do with double standards. Being pro-Brussels is somehow regarded as an inoculation against the possibility of extremism. You can't possibly be a bigot, reason Leftie commentators, if you want to give more powers to the EU. (Actually, plenty of fascists have been Euro-fanatics, from the 1930s to the present day.) Do try to be even-handed, guys. There are good and bad people who oppose the EU, and there are good and bad people who support it. Any party can be caricatured through selective quotation. But being against Euro-federalism doesn't ipso facto make anyone extreme

Is the Euro Sustainable?

New booklet by the Bruges Group - click Euro

Libertas to contest European Elections in UK

Libertas website, 10 March 2009

Libertas, the movement that led the successful campaign against the Lisbon Treaty in Ireland, is to run candidates in the UK for the European Elections. The party will also contest elections in countries across Europe to get the voters' mandate to bring more democracy, accountability and transparency to European Union governance.

Announcing the UK campaign today, party chairman Declan Ganley said "Almost 80% of laws that change the daily lives of Britons come from Brussels, and those laws are drafted by unelected, unaccountable civil servants. Brussels does not want to answer to the people of Europe. We want to bring the EU back to its people."

Heading the campaign in the UK is Robin Matthews, a former British Soldier. Speaking at the launch, Robin Matthews said "By building a pan European bloc of seats in the European Parliament, Libertas offers the only real opportunity for people across the UK to get a better deal from Europe. National parties are powerless - the biggest UK party in the European Parliament has less than 4% of the seats and represents only one country out of 27".

On the Lisbon Treaty, Declan Ganley said “The Labour government promised the people of the UK a referendum on the Lisbon Treaty and then reneged on the promise. This election is the last and best chance that voters have to send a very clear message that they do not support the Lisbon Treaty.” . Robin Matthews added "If people want a strong and healthy Europe that is democratic and answerable to them, they should vote for a Libertas candidate. If they do not want Europe to succeed or if they are happy with the current undemocratic practises, then they should vote for another party".

Libertas is to run candidates right across the United Kingdom and is currently building its candidate lists.

Sitting MEPs join Libertas for election campaign in France

Libertas website, 11 March 2009

The Libertas European Parliament election campaign in France kicked off today with political parties Mouvement Pour la France and CPNT announcing that their candidates will run for Libertas. Jérôme Rivière, a former member of Parliament for the ruling UMP party, will be Campaign Director for Libertas France.

Speaking at the campaign launch in Paris, Libertas Chairman Declan Ganley said “millions of French people have shed blood throughout the generations to achieve democracy. That democracy is being taken away from the French by elites in Brussels. Those elites tried to silence the voice of the French on the European Constitution. They tried with the Dutch and they tried with the Irish. It’s time to change.”

Philippe de Villiers, President of Mouvement Pour la France, sitting MEP, and candidate for Libertas said “we want a Europe that defends its peoples’ interests, not attacks them. We want a referendum on the Lisbon Treaty. We want the democratic will of the people of France to be treated with respect.”

Frédéric Nihous, chair of CPNT and candidate for Libertas said “We do not want the Europe that belongs to Brussels. We want another Europe. A Europe that is ours.”

As well as running candidates in all eight constituencies in France, Libertas will support candidates in all 27 member states. By building a pan European bloc of seats in the European Parliament, Libertas offers the only real opportunity for people across France to get a better deal from Europe. National parties are powerless - the biggest French party in the European Parliament has a tiny proportion of the seats and represents only one country out of 27.

Declan Ganley called on the people of France to “vote for democracy. Vote for France. Vote for Europe”. He said “France must be at the heart of the democracy renaissance in Europe. You have the audacity and the ambition to make a change”

THE LEAKED BRITISH E-MAIL ON THE IRISH GOVERNMENT’S REFERENDUM STRATEGY

IRISH DAILY MAIL: (Front page report on Monday 14 April 2008 + Editorial on page 14)

THE TREATY CON

by John Lee and Michael Lea

The Government has hatched an elaborate plan to deceive voters over the forthcoming EU treaty referendum, the Irish Daily Mail can today reveal.
A leaked email shows that ministers are planning a deliberate campaign of misinformation to ensure that the Lisbon Treaty vote is passed when it is put to the public as required by the Constitution

Foreign Affairs Minister Dermot Ahern has even been personally assured that the European Commission will “tone down or delay” any announcements from Brussels “that might be unhelpful”. Alarmingly, the email says that ministers ruled out an October referendum, which would have been better procedurally, because they feared “unhelpful developments during the French presidency - particularly related to EU defence”. This suggestion will raise grave fears that the State’s constitutional commitment to military neutrality could be undermined by the treaty - a rehashed version of the failed EU constitution.

The memo was sent to the British government by Elizabeth Green, a senior UK diplomat in Dublin, following a briefing from Dan Mulhall, a top official in the Department of Foreign Affairs. Its aim was to relay to her political masters in London the lengths to which the Government here was going to in its bid to ensure a “Yes” vote in the referendum.

Ireland is the only EU state which is allowing voters a say on the treaty, and European heads of state are terrified that they will reject it. Campaigners have warned that the new treaty could remove Ireland’s powers to decide its own tax rates and social policies.

However, the most controversial aspect is the likelihood that it will be used to advance the concept of a “European army” which would violate the principle of neutrality that has long been a foundation-stone of the State. France is particularly keen to advance the notion of an EU force, which critics fear could be ordered into action over Irish objections by a majority vote of EU heads of state.

Already concerns have been raised that soldiers who are part of the Irish peacekeeping force being sent to Chad could be compromised by French political and military objectives in the area. The leaked email admits that this is one of the issues which needs to be kept from voters, saying that the possibility of the French speaking out on this issue meant that the referendum could not be delayed until the autumn.

It states: “Mulhall said a date in October would have been easier from a procedural point of view. “But the risk of unhelpful developments during the French presidency - particularly related to EU defence - were just too great. (Nicola) Sarkozy was completely unpredictable.”

The Irish official was also worried that the latest World Trade Organisation talks, which have already aroused the fury of farmers, could turn the voters against the new treaty. Farmers and suppliers are planning a one-day shut down this week to protest at the tack being taken by EU trade commissioner Peter Mandelson. The email said that Mulhall was concerned about “a WTO deal based on agricultural concessions that could lead the powerful farming association to withdraw its support”.

However, Government ministers appear to be basing their hopes on the fact that the treaty cannot be read or understood by most voters - and that launching a quick referendum would stop them from doing so. “Most people would not have time to study the text and would go with the politicians they trusted,” it said. And it pointed out that the Government plans to keep people from analysing the details, saying the “aim is to focus the campaign on overall benefits of the EU rather than the treaty itself”.

It goes on to explain the details of the Referendum Bill, which it says, was “agreed following lengthy consultation with Government lawyers and with the political parties”. However, it admits that the bill is “largely incomprehensible to the lay reader”.

The memo refers to plans to fool campaingers over the date and states:
“Irish have picked 29 May for voting but will delay an announcement to keep the No camp guessing. “The Taoiseach and (Dermot) Ahern saw a slight advantage in keeping the No camp guessing.” It has since been stated that the referendum will be held on June 12 - although it is not clear from the email whether this is the correct date or whether the May
29 option is still being considered as a possibility in order to destabilise the “No”campaign.

The email adds that the EC was doing its best to keep any bad news from the Irish voters and that Mr Mulhall had maintained that other partners - including the commission - were playing a helpful low-profile role.

It added that during a trip to Dublin, Vice-President Margot Wallstrom “had told Dermot Ahern that the commission was willing to tone down or delay messages that might be unhelpful:.

The leaked message also points out that most Irish media have been supine on the issue, saying “Mulhall remarked that the media had been relatively quiet on the ratification process so far. We would need to remain in close touch, given the media crossover”

A Government spokesman refused to comment on the leaked email last night- merely saying: “The date is as set by the Taoiseach, there is no change in that.”

__________

Editorial Comment (page 14)

LISBON CAMPAIGN IS ANOTHER BITTER BETRAYAL

Whether the Lisbon Treaty is accepted by the Irish public or not, one thing is clear - the Government campaign in its favour is already one of the most deeply dishonest in Irish history.

The revelation that the Government has conspired with foreign politicians to deceive its own electorate speaks of profound betrayal.
For months, ministers have been calling for a fair campaign based on the facts of the treaty itself. Now we know that all the while the very same ministers have been collluding in a campaign of deliberate misinformation.

That the Irish people should be the victims of a dishonest alliance between their own government and outside powers is something many will find very hard to forgive quickly.

As for the Lisbon Treaty itself, voters will now find it very difficult to trust a single word the Govenrment says in its defence. At each stage, the aim has not been to inform the electorate but to deceive it.
Instead of scheduling polling day for October,which would allow the country to come to grips with the treaty’s byzantine complexity, the Government has specifically chosen a date to capitalise on the artificial uncertainty this premature vote creates. Even the precise timing has been cynically manipulated to catch the other side off-guard.

This is not just poor form; it is a thoroughly undemocratic way to conduct what is supposed to be a free and fair vote. These low tricks are not just a case of using dark arts for narrow tactical advantage, they are deliberate lies about crucial matters of the Irish national interest.

One reason there is so much understable uncertainty in the electorate over the Lisbon Treaty is that it might mean we lose control over our military commitments and that our low corporate tax rate might be abolished by Brussels.

Now we know that on both counts the Government’s conspiracy has specifically sought to conceal the truth. We are voting earlier than would ordinarily be expected so that voters will not have a chance to see new defence developments in the EU that officials expect from the French EU presidency later this year.

Opinion divides on the merits and demerits of Irish neutrality, but that question should be decided by Irish voters, not slipped through on false premises. Today’s revelations also prove that neither our Government nor the French Government can be trusted when they say that well-known plans to introduce tax harmonisation have been sidelined.

This all amounts to a shocking culture of lying in the highest echelons of Irish politics. Deliberate lying about vital matters of Irish national interest should be unreservedly condemned by those in favour of Lisbon as much as by those against. The political culture in which this is possible is the proof, also, of just how corrosive the departing Taoiseach’s lying has been for public life.

Many people have not yet reached an opinion about the Lisbon Treaty.
That decision must be taken on the full facts and not on a shimmering mirage of dishonesty. Nor should we be afraid to consider our relationship with the EU anew. We have been well served by EU membership in the past. We are under no obligation, though, to vote blindly for whatever is put before us simply for that reason.

If there is a case for the Lisbon Treaty on the merits of the actual document, the Government should make it - and should be able to make it easily and persuasively. That they have not will lead many to wonder why a campaign based on proven dishonesty should be given the benefit of the doubt when such crucial issues are at stake

EU ruling will delay operations on NHS

Patients face a significant increase in waiting times for operations because "insane" European rules mean doctors’ hours will be cut so much they will not be able to cope, surgeons said.

By Rebecca Smith, Medical Editor, Telegraph, 12 Mar 2009

The majority of NHS patients are treated within the target of 18 weeks from seeing their GP, but this will be reversed if junior doctors limit their working hours to 48 per week, down from 56.

The extension of the European Working Time Directive would result in the loss of thousands of doctor shifts, John Black, President of the Royal College of Surgeons, said. As a result, patients could have to wait months for routine operations as surgeons prioritised emergencies.

The Royal College of Surgeons also said trainee surgeons should work a 65-hour week in order to produce safe, properly-trained doctors and cover the workload. Mr Black said: "If the 48-hour limit is enforced, surgeons will have to make a hard choice between caring for emergency cases and dealing with elective cases as there will not be the time available to do both.

"Surgeons will put patient safety first and focus on looking after emergency patients. All the progress on reducing waiting lists will go out of the window. Forty eight hours for surgeons is currently insane if we want to maintain surgery in the NHS," he said.

Doctors said that by cutting doctors’ hours, an average hospital trust outside London would lose the equivalent of three trainee surgeons. Other specialities such as paediatrics, trauma, and intensive care were also likely to be affected. The Department of Health is understood to be considering an increase in the time it takes to qualify as a consultant surgeon, from seven years to eight or nine, so doctors can gain enough experience and comply with the reduced hours.

Vanessa Bourne, of the Patients Association, said: "How can this be happening in a supposedly patient-centred service? Access to high-quality, safe care is the paramount requisite for patient and clinician alike and this muddle needs sorting out before patients are put at risk."

The regulations come into force on Aug 1, when hospital trusts will be trying to cope with organising the new intake of junior doctors. Remedy UK, the junior doctors’ pressure group, said limiting juniors to a 48-hour week was the equivalent of losing one working day per doctor per week, or up to 70,000 doctor days per week.

Dr Matt Jameson Evans, co-founder of Remedy UK, said: "Just imagine the impact of a blanket reduction in doctors’ hours by one full day a week. A creaking system will collapse. And yet most doctors want the freedom to choose to opt-out of 48 hours.

"We’re begging for some common sense – an official endorsement by government of the individual opt-out for trainee doctors would go a long way."

Andrew Lansley, the shadow health secretary, said: "NHS staff have been absolutely clear that if the 48-hour working week is imposed it will leave many junior doctors with insufficient experience. It will also threaten the care that patients receive because there will not be the same continuity of care and because smaller surgical teams will have to be shut down."

The Department of Health wants to delay the introduction of a 48-hour week for some specialities and is expecting an answer from the European Commission by the end of May.

However, this would only mean some doctors could remain on 56 hours until 2012.

A spokesman said: "Most UK doctors in training already comply with the Working Time Directive, and the overwhelming majority will do so by Aug 1.

"However, we have notified the commission that we intend to operate a derogation for a small number of services involved in delivering urgent care."

The Working Time Directive is already in force in most areas of business, limiting the working week to 48 hours and setting minimum rest periods.

Thanks to the Bank it's a crisis; in the eurozone it's a total catastrophe

By Ambrose Evans-Pritchard, Telegraph Business, 8 Mar 2009

The Bank of England may have averted a catastrophe. If ever there was a time when this country needed its own monetary authorities – acting with wartime urgency – this is the moment.

Those nations with fossilised or timid central banks clinging to outdated ideologies are not so lucky. Even less lucky are those such as Spain and Ireland that have surrendered policy to a body that is deaf to their pleas and constitutionally obliged to ignore the welfare of their particular societies. They face crucifixion.

Spain's agony is already well advanced. Industrial output has fallen 24pc. Some 352,000 people have lost their jobs in two months. BBVA expects unemployment to reach 20pc next year, touching 4.5m. Premier Jose Luis Zapatero can do nothing as long as Spain remains in monetary union. He cannot devalue to claw back 30pc in lost labour competitiveness against EMU's German bloc, or take emergency steps to slow the property crash. In an odd lapse last week – perhaps a slip – he advised Spaniards that the best thing to do in these dark times was to ****.

Yes, it is dangerous for the Bank of England to buy up a third of all long-dated gilts. But it would be even more dangerous to allow deflation to run its course in an economy where debt levels have reached such extremes. Debt and deflation are a deadly mix.

The errors that led to our current predicament are well-known. A small army of economists – Austrians, Monetarists, and Keynesians – warned that central banks were playing with fire by fixing the price of credit too low and ignoring asset bubbles. The $6.7 trillion in reserve accumulation by China, Japan, and the petro-powers drove bond yields too low for safety.

Credit signals were gravely distorted. In Britain, Gordon Brown poured petrol on the fire by pushing the fiscal deficit to 3pc of GDP at the top of the cycle. Wretched man. However much we rage at Sir Fred or Citi-wrecker Chuck Prince, let us not forget that this crisis was confected by governments. To blame the free market is to miss the bigger point.

But I digress. We are now faced with the post-debt wreckage. The task at hand is to hold our societies together as best we can. One dreads to think what would have happened if the Hoover-Brüning nostalgics had succeeded in blocking every remedy.

As it is we have seen industrial production collapse in every region. The drops in January were: Japan (-31pc), Korea (-26pc), Russia (-16pc), Brazil (-15pc), Italy (-14pc), Germany (-12pc). Falls that took two years from late 1929 have been compressed into five months.

Those who say this is nothing like the Great Depression are complacent. Household debt is higher today, and UK banks are in worse shape. (No bank of size failed in the British Empire during the slump). Britain's economy contracted by 5.6pc from peak to trough in the early 1930s (Eichengreen). Some put the figure at nearer 8pc. We may surpass that this time.

America suffered worse. Real GDP fell 28pc. But the worst occurred in the second leg, after the heinous policy blunders of late 1931. Reading contemporary accounts, it is clear that hardly anybody – not even Keynes or Fisher – realised that the world was slipping into a depression during the first 18 months.

Nobel laureate Paul Krugman says the Fed has been as far behind the curve today as it was then, given the faster pace of collapse. It is bizarre that Ben Bernanke has not started to buy US Treasuries a full three months after he floated the idea, despite a yield rise of 80 basis points.

He has been stymied by the hawks. Kansas chief Thomas Hoenig said last week that the top priority is to drain liquidity before recovery later this year sets off inflation. Well, Mr Hoenig said last May that inflation psychology was gaining a hold "not seen since the 1970s and early 1980s" with a risk that inflation would become "embedded in the economy." The price spike broke within weeks. If his model was wrong then, why is it right now?

As for the ECB, it has not reached the starting line. Jean-Claude Trichet insists that there is no danger of deflation in Europe. What is the weather like on his planet, asked Mr Krugman.

The ECB has cut rates to 1.5pc, but since they need to be minus 1pc on the Taylor Rule, this leaves the breach as wide as ever. The Bundesbank is blocking any serious move towards quantitative easing.

Given that Germany's economy is imploding (Deutsche Bank sees 5pc contraction this year) one wonders if the Bundesbank would be less hawkish if the D-mark still existed. Even their hard-money brothers at Switzerland's SNB are cash printers these days.

So has monetary policy in euroland been paralysed by squabbles at a calamitous moment, blighting every member state? Almost certainly.

I'll take the Old Lady of Threadneedle Street any day, warts and all.

The bill that could break up Europe

Leader, The Economist - 27 February 2009

If eastern Europe goes down, it may take the European Union with it

TUMBLING exchange rates, gaping current-account deficits, fearsome foreign-currency borrowings and nasty recessions: these sound like the ingredients of a distant third-world-debt crisis from the 1980s and 1990s. Yet in Europe the mess has been cooked up closer to home, in east European countries, many of them now members of the European Union. One consequence is that older EU countries will find themselves footing the bill for clearing it up.

Many west Europeans, faced with severe recession at home, will see this as outrageously unfair. The east Europeans have been on a binge fuelled by foreign investment, the desire for western living standards and the hope that most would soon be able to adopt Europe’s single currency, the euro. Critics argue, with some justice, that some east European countries were ill-prepared for EU membership; that they have botched or sidestepped reforms; and that they have wasted their borrowed billions on construction and consumption booms. Surely they should pay the price for their own folly?

Yet if a country such as Hungary or one of the Baltic three went under, west Europeans would be among the first to suffer (see article). Banks from Austria, Italy and Sweden, which have invested and lent heavily in eastern Europe, would see catastrophic losses if the value of their assets shrivelled. The strain of default, combined with atavistic protectionist instincts coming to the fore all over Europe, could easily unravel the EU’s proudest achievement, its single market.

Indeed, collapse in the east would quickly raise questions about the future of the EU itself. It would destabilise the euro—for some euro members, such as Ireland and Greece, are not in much better shape than eastern Europe. And it would spell doom for any chance of further enlarging the EU, raising new doubts about the future prospects of the western Balkans, Turkey and several countries from the former Soviet Union.

The political consequences of letting eastern Europe go could be graver still. One of Europe’s greatest feats in the past 20 years was peacefully to reunify the continent after the end of the Soviet empire. Russia is itself in serious economic trouble, but its leaders remain keen to exploit any chance to reassert their influence in the region. Moreover, if the people of eastern Europe felt they had been cut adrift by western Europe, they could fall for populists or nationalists of a kind who have come to power far too often in Europe’s history. How to avert disaster

The question for western Europe’s leaders is how best to avert such a disaster. Although markets often treat eastern Europe as one economic unit, every country in the region is different. Three broad groups stand out. The first includes countries that are a long way from joining the EU, such as Ukraine. Here European institutions may help financially or with advice, but the main burden should fall on the International Monetary Fund. These countries will have to take the IMF medicine of debt restructuring and fiscal tightening that was meted out so often in previous emerging-market crises.

Things are different for the countries farther west, all EU members for which the union must take prime responsibility. One much-touted remedy is to accelerate their path to the euro, or even let them adopt it immediately. It might make sense for the four countries with exchange rates pegged to the euro: the Baltic trio of Estonia, Latvia and Lithuania, plus Bulgaria. (Slovenia and Slovakia have joined the euro already.) None of these will meet the Maastricht treaty’s criteria for euro entry any time soon. But they are tiny (the Baltics have a population of barely 7m), so letting them adopt the euro ought not to set an unwelcome precedent for others nor should it damage confidence in the single currency. Yet the European Central Bank and the European Commission firmly oppose this form of “euroisation”, even though two Balkan countries, Montenegro and Kosovo, use the euro already.

Unilateral or accelerated adoption of the euro would make far less sense for a third group of bigger countries with floating exchange rates: the Czech Republic, Hungary, Poland and Romania. None of these is ready for the tough discipline of a single currency that rules out any future devaluation. Their premature entry could fatally weaken the euro. But as their currencies slide, the big vulnerability for the Poles, Hungarians and Romanians, especially, arises from the debt taken on by firms and households in foreign currency, mainly from foreign-owned banks. What once seemed a canny convergence play now looks like a barmy risk, for both the borrowers and the banks, chiefly Italian and Austrian, that lent to them. Stopping the rot

The first priority for these four must be to stop further currency collapse. The second is to prop up the banks responsible for the foreign-currency loans that are going bad. The pain of this should be shared four ways: between the banks and their debtors, and between governments of both lending and borrowing countries. From outside, these two tasks will necessitate help from several sources: the European Central Bank as well as the IMF, the commission’s structural funds, the European Bank for Reconstruction and Development and perhaps the European Investment Bank. Given the scale of the problem, the lack of co-ordination between these outfits has been scandalous. A third aim must be to get eastern European countries to restart the structural reforms they have evaded thus far.

Bailing out the same mythical Polish plumbers who just stole everybody’s jobs will be hard for Europe’s leaders to sell on the doorsteps of Berlin, Bradford and Bordeaux, especially with the xenophobic right in full cry. German taxpayers are already worried that others are after their hard-earned cash (see article). The bill will indeed be huge, but in truth western Europe cannot afford not to pay it. The meltdown of any EU country in the region, let alone the break-up of the euro or the single market, would be catastrophic for all of Europe; and on this issue there is little prospect of much help from America, China or elsewhere. It is certainly not too late to rescue the east; but politicians need to start making the case for it now.

The Whiff of Contagion

The Economist, 4 March 2009

Eastern Europe's woes are not unmanageable. But they are not being managed. The result could be catastrophe

AMID the wreckage of Latvia's retailing industry, which has declined 17% year on year according to the latest figures, one item is selling well: T-shirts with seemingly mysterious slogans such as "Nasing spesal". Latvians are glad to have something to laugh about, even if it is only their finance minister, Atis Slakteris. In an ill-judged foreign television interview, using heavily accented and idiosyncratic English worthy of the film character Borat, he described his country's economic problems as "nothing special".
Put mildly, that was an original interpretation. Fuelled by reckless bank lending, particularly in construction and consumer loans, Latvia had enjoyed a colossal boom, with double-digit economic growth and a current-account deficit that peaked at over 20% of GDP. Conventional wisdom would have suggested applying the brakes hard, by tightening the budget and curbing borrowing. But the country's rulers, a lightweight lot with close ties to business, rejected that. Fast economic growth made voters feel that European Union membership was at last producing practical benefits, after a disappointing start when tens of thousands of Latvians went abroad in search of work, leaving rural villages and small towns depopulated.

The central assumption, in Latvia and many other countries in or near the EU, was that convergence with rich Europe's living standards and other comforts was inevitable. Lending in foreign currency went from 60% of the total in 2004 to 90% in 2008. Why pay high interest rates in the local currency, the lat, when the cost of a euro loan was so much cheaper? In a few years Latvia would surely join the euro anyway. Similarly, worries about financing the inflows were dismissed: Swedish banks would no more abandon their subsidiaries in Latvia than they would pull out of, say, southern Sweden.

Last year tested those assumptions nearly to breaking point. First, Latvia's housing bubble popped. Then the main locally owned bank, Parex, went bust and had to be nationalised, amid fears that it could not pay two syndicated loans due this year. In December Latvia accepted a humiliating €7.5 billion ($9.56 billion) bail-out led by the IMF.

The big cuts in social spending that the package entailed led to vigorous public protests. Now the government has resigned. At a time when strong leadership and public trust are needed more than ever, the country's squabbling and discredited politicians look hopelessly out of their depth. Latvia is an economic pipsqueak, with just 2.4m people. But the rest of the region is watching nervously, fearful that more bad news from the Baltics could bring others crashing down too.

It is easy to be pessimistic. This is indeed the worst economic crisis since the collapse of the communist planned economies and the wrenching process of privatisation, liberalisation and stabilisation that followed. The main ex-communist economies are likely to contract by 3% this year, according to Capital Economics, a consultancy. Yet the picture is not uniform. Only a few countries have needed an IMF bail-out. One is Latvia, whose economy is set to contract by at least 12% this year, and whose credit rating has just been downgraded by Standard & Poor's to junk. Another is Hungary, burdened with a larger debt-to-GDP ratio than almost any other new EU member. It received $25 billion in October and faces a contraction of up to 6%. A third is Ukraine�"chaotically run, corrupt and badly hit by the slowdown in its main export market, Russia. Ukraine's IMF deal brought it $4.5 billion in November. But a second tranche of $1.9 billion is stuck; the deal is unravelling as politicians squabble over spending cuts. Its economy is likely to shrink by 10% this year. Other countries with IMF packages agreed or pending include Belarus (a Russian ally which is still expected to see growth this year), Georgia (which was bailed out after last year's war with Russia) and Serbia.

Most other countries in the region are faring much better, though. Poland�"by far the largest economy of the new EU members�"is nowhere near collapse. Unlike its central European neighbours, it is big enough not to depend chiefly on exports to the rest of the EU. By European standards, its public finances are in fairly good shape. Its debt-to-GDP ratio is below 50%. Growth will be negligible, or slightly negative, but nobody is forecasting a big decline. Some Polish firms and households have taken out foreign-currency loans�"but the figure is around 30% of all private-sector lending, compared with twice that in Hungary.

The second-biggest economy, the Czech Republic, is in good shape too. Its economy may shrink by 2%, but it has a solid banking system and low debt. Its neighbour Slovakia is in better shape still: it managed to join the euro zone this year. Like Slovenia, which joined two years ago, Slovakia can enjoy the full protection of rich Europe's currency union, rather than just the indirect benefit of being due to join it some day.

Farther afield, the picture is very different. For the poorest ex-communist economies, the problem is not financial meltdown. They lack much to melt. Their exports are raw materials, agricultural products and people. In six countries, money sent home by foreign workers counts for more than 10% of GDP (in Tajikistan and Moldova it is more than 30%). Outsiders who agonise over the Latvian lat or Hungarian forint are rarely bothered with worries about the somoni (Tajikistan), leu (Moldova) or manat (Turkmenistan).

That highlights an important problem. Outsiders tend to lump "the ex-communist world" or "eastern Europe" together, as though a shared history of totalitarian captivity was the main determinant of economic fortune, two decades after the evil empire collapsed. Though many problems are shared, the differences between the ex-communist countries are often greater than those that distinguish them from the countries of "old Europe".

They range from distant, dirt-poor despotic places to countries in the EU that are not just richer than some of the old ones, but have better credit ratings, sounder public finances and stronger public institutions. In almost any contest for good government, stability or prosperity, Slovenia (under a sort of communism until 1991) looks better than Greece, which invented democracy and was never communist.

The thirst for capital

Historical and geographical quibbles aside, what the ex-communist countries have shared over the past decade is a mighty thirst for capital. Having missed out on decades of growth and integration with the outside world, almost all (a few oddballs in Central Asia aside) are trying to catch up. Money from abroad has come in from borrowing on the bond market, from foreign direct investment or from selling shares. Most often it has come through bank loans.

At one extreme is Russia, which enjoyed huge external surpluses thanks to its wealth of raw materials. But its big companies borrowed lavishly on the strength of that, creating a potential short-term debt problem. Russian corporate borrowers have to pay back around $100 billion this year. At the other extreme lie countries such as Slovakia. They attracted billions from foreign car manufacturers, drawn by a skilled workforce, low taxes and decent roads in the heart of high-cost Europe.

Countries that relied chiefly on foreign direct investment are the least vulnerable now. The new factories may shut down. But it is harder for that capital to flee. Those that rely on foreign investors buying their bonds, such as Hungary, are the most vulnerable: their fortunes vary with every twitch of a trader's fingers. In the middle are those that rely on lending from foreign banks to their local subsidiaries. That looked solid in the boom years, as Western banks scrambled to win market share by offering good terms to borrowers and lenders in the fastest-growing bit of Europe. It is still highly unlikely that any Western bank will pull the plug on a subsidiary anywhere" even in troubled Ukraine.

But nerves are jangling. The ex-communist countries have survived the first phase of the crisis, thanks to their own policies and some external support. The second phase, in which the rich world is turning stingier and possibly more protectionist and lenders are scurrying to safety, may be harder. The ex-communist economies must repay or roll over a whopping $400 billion-odd in short-term borrowings this year. Coupled with the lazy but easy lumping of nearly three dozen countries together, that creates the region's biggest danger: contagion. In other words, failure in one place sparks a disaster in another, even though it may be far away and have the same problem in a far more manageable form.

Contagion could happen in many ways. One is if depositors lose confidence that their savings are safe. So far, Western-owned banks have enjoyed rock-solid credibility: more so, in many cases, than governments or other public institutions. But that confidence could be undermined. If only one foreign bank pulls the rug from under one local subsidiary, leaving depositors stranded, it will cloud perceptions of banks' reliability across the region. The most dangerous kinds of bank runs would be those in which depositors try to pull out either their foreign currency, or local currency which they would then attempt to convert into hard currency. In some countries that could overwhelm the ability of the central bank to support the financial system.

Another weak point is where shareholders take fright. If a foreign bank with big exposure to the region�"Swedish, Austrian or Italian�"needs to raise more capital but finds that outsiders think its loan book is too risky, what happens? The price of rescue may be that it sheds a troubled foreign subsidiary. Signs of shareholder twitchiness are growing.

For now, the most likely source of contagion is collapsing currencies. The paradox is that for countries with floating exchange rates, an orderly depreciation would in normal circumstances be a good way of cushioning an external shock, such as the slump in export markets now hitting the ex-communist economies. It stokes competitiveness and, along with lower interest rates, it lays the foundations for a return to growth. Governments with sound public finances might also consider running a looser fiscal policy to counteract the downturn.

Propping up the currency

For most of the countries in the region, such a textbook response is out of the question. Some have currency boards, or pegged exchange rates. In the Baltic states these have been the centrepiece of economic policy for more than 15 years.

Abandoning them would not only bankrupt big chunks of the economy that have borrowed in euros. It would also be a huge psychological blow to public confidence in the whole idea of independent statehood. These countries have suffered the most painful part of being in the euro zone�"the inability to devalue and regain competitiveness�"without getting all the benefits.

Countries with floating exchange rates have a bit more room for manoeuvre. Their problem (a big one in Hungary, a lesser one in Romania and Poland) is that falling exchange rates may bankrupt the firms and households which have, in past years, taken out unwise loans in foreign currencies, chiefly euros and Swiss francs. That was, in effect, a convergence play. If you believed your country was heading for the euro zone some time in the next few years, then why not take advantage of the low interest rates there, rather than suffer the higher ones in your domestic currency?

What seemed a minor risk back then now looks painfully mistaken. For those earning forints or Polish zloty, the big swings in exchange rates in recent weeks have sent the size of both loans and repayments spiralling upwards. The zloty has dropped 28% and the forint 22% against the euro since the middle of last year. If the East Asian crisis of 1997 is any guide, these and other currencies may yet have further to fall.

This risk of a currency collapse will limit these countries' options. So far many big central European countries have cut interest rates heavily to try to boost their economies�"Poland's central bank cut its policy rate again this week. But currency weakness will limit their room for manoeuvre. The Czech, Hungarian and Polish central banks issued a co-ordinated statement this week hinting they might intervene to support their exchange rates. But that route is tricky. Russia has blown half its reserves in a series of unsuccessful attempts to try to prop up the rouble.

Spending and tax policies would be another way of dealing with a downturn. But these are constrained, too. Those countries with a chance of joining the euro are scrambling to cut their budget deficits to get them in line with the 3% of GDP target set by the EU's Maastricht treaty. Yet that aggravates the problem. The danger for Latvia and Ukraine is a downward spiral, where cuts in public spending damage the economy in a way that helps to entrench the deficit.

So far, the economic crisis has not translated into populist or protectionist politics. It is the east European countries that have been demanding that the rest of the EU stick by the rules of the single market. Their development over the past decades has been thanks to the free movement of capital, goods and labour. They would like a lot more of it: in a contest to subsidise industries, rich countries always win.

But that stance will not hold indefinitely if things get worse. Willem Buiter, a prominent economist, believes it is only a matter of time before some of the ex-communist countries introduce capital controls. That, in theory, would allow them to concentrate on stabilising their economies without worrying so much about the external value of their currency. If voters find the economic pain of adjustment unbearable, politicians can pass laws that will make foreign-currency borrowings repayable in local currency. That would be met with fury by the foreign banks, who would in effect see their loan books expropriated. But it could happen.

Against that background, what can be done? The east European countries are, belatedly, co-ordinating their approach within the EU, holding their own mini-summit on March 1st. They want to embarrass countries such as France for what they see as its protectionist approach to the crisis. They are supporting each other: the Czech Republic and Estonia were among those contributing to the Latvian bail-out.

But even co-ordinated local efforts are unlikely to make much difference, given the scale of the problem. The real lead, and the real money, must come from outside the region. That brings into play a slew of political problems. Having trumpeted their free-market principles in past years, and dismissed the stodgy approach of countries such as Germany and France, the new EU members from eastern Europe are now turning to old Europe in the hope that it can hurry up the flow of EU structural funds to counteract the downturn, bail out or prop up over-exposed banks in places like Austria, and stretch the rules of the European Central Bank to let it provide support to countries outside the euro zone.

The case for such measures is strong, and it is in the interest of all Europe that contagion is contained. But that does not mean that it will happen.

It's the Europhiles versus reality, and reality is going to win

Milton Friedman was right to predict that the euro might not survive a recession, notes Simon Heffer.

Simon Heffer, Telegraph, 4 Mar 2009

During the current crisis we have several times heard invoked the wisdom of Milton Friedman about the unfeasibility of the euro as a currency surviving a recession. In an interview not long before his death three years ago, Friedman said: "The euro is going to be a big source of problems, not a source of help. The euro has no precedent. To the best of my knowledge, there has never been a monetary union, putting out a fiat currency, composed of independent states. There have been unions based on gold or silver, but not on fiat money – money tempted to inflate – put out by politically independent entities."

It is what lies below the surface of this observation that is putting not just the euro, but the entire confection of the European Union, under such intense pressure. Any recession would bring into play tensions between idealism and nationalism: the desire by those who pilot the European project to maintain the confection for as long as possible and as intact as possible, that it might come out on the other side of this economic horror bloodied but unbowed; and the inevitable identification of hundreds of millions who stand outside the fantasy world of the political class with their own nation state, their own nationals and their own national interest. Without a degree of coercion beyond what even this undemocratic, Sovietised swindle has attempted in the recent past, the national interest will in the end prevail.

There have been auguries of this for some months, while we have waited for the breakdown of the condition of denial in which Europe's political class finds itself. We recall last September's banking summit, at which the Germans decided to go freelance to shore up their own banking system, not least because it appeared that theirs was in far better shape than that of almost any other European country. Then about a month ago one of the most pro-European newspapers in the EU, Le Figaro, carried an article by one of its economics experts that for the first time took the paper's readership into its confidence about the gravity of the situation: it admitted that a country could drop out of the euro.

Last week Jean-Claude Trichet, head of the European Central Bank (ECB), said much the same; and Joschka Fischer, the former German foreign minister, followed that with a hint of Germany's unwillingness to continue to bankroll the more economically delinquent nations of the 27 and implying, for good measure, that Franco-German relations had probably not been so bad as this since Monty and Eisenhower chased the Wehrmacht over the Rhine in 1944.

The truth is that Europe has never had so dire a crisis since the Treaty of Rome was signed in 1957. Sauve qui peut is the watchword. President Sarkozy has entered a familiarly Gaullist phase, ignoring EU competition policy and pushing through a €6 billion support for the French car industry; other manufacturers, notably in eastern Europe, have protested to no avail.

Mr Sarkozy's assertion that he is not a protectionist is purely rhetorical. When a German minister says that "now is not the time" to let workers from the EU's former eastern bloc countries have full immigration rights in Germany, he is saying the same thing. Gordon Brown may not be able to ensure British jobs for British workers, but the Germans are determined to keep their jobs for German ones.

This bending of the rules – or rather this wholesale disregard of them – is the surest sign of a currency, and quite possibly an empire, in terminal decline. Mr Trichet went to Dublin last Friday to try to calm the Irish, whose own crisis brought 100,000 protesters on to the city's streets 10 days ago. He said the usual stuff about Ireland's being able to come out "well placed" to take economic opportunities after the slump. He was less able to square the political point about how Brian Cowen, the Irish prime minister, will win an election if he swallows the medicine the ECB is forcing down his throat: spending cuts, public sector wage cuts and eye-watering tax rises to bring Ireland's deficit down to the levels demanded of a member of the eurozone.

But the dishonesty with which all this is being addressed is breathtaking. Joaquin Almunia, the EU's economy commissioner, has initiated "disciplinary action" against France, Spain, Malta, Greece, Latvia and Ireland for breaking the fiscal rules by running excessive deficits. The offenders could be fined. It would be pointless. Both Greece and Portugal have been fined in recent years and have never paid a penny.

There have already been riots in Greece. The government in Latvia has been thrown out, and the Latvian people are now aware that whatever replaces it will have no scope to pursue anything other than an even more unpleasant economic policy. The danger of civil disorder is already spooking Mr Sarkozy, whose intelligence services have told him that it is not just the banlieues that are at risk of going up in smoke. Imposition of the strict rules on these six countries could lead to revolutions in some of them, Ireland not excluded. How would any fines be paid? With a loan from the Germans? Forget it.

Tomorrow the ECB is meeting to discuss the interest rate, and it is predicted that it will be cut from two to 1.5 per cent. That would make little odds in countries that, like Latvia, have literally run out of money. The IMF is trying to build up a special new fund to bail out countries in distress. It may soon become apparent that this attempt at a currency for disparate nations is about to disappear under the weight of reality – nationalist reality – and the big boys are going to have to come in and sort some nations out. For some countries there will be only three means of staying in the euro. One is to impose the discipline, and risk rioting and the fall of governments. The second is to persuade the ECB to bend the rules to such an extent that the illusion of the euro's strength (it is still, as I write, at an incomprehensible 90p against sterling) is forcibly broken and the speculators have their own field day with it, at last. The third is to get the lender of last resort – the Germans – to bail out countries in trouble.

The Germans have, quite commendably, refused already to do that. When Ferenc Gyurcsany, the Hungarian prime minister, asked them for a €190 billion handout last weekend to prevent a new economic Iron Curtain from going up across the continent, Angela Merkel told him to get lost. She has the German people and, more to the point, German business behind her: why should they pay for the unregenerate behaviour of others? Why should they worry about the collapse of the zloty and the forint? Why should it bother them that Latvia's debt now has junk rating, or that the Irish are almost broke? If Mrs Merkel wants to stay in power, and German workers wish to keep the fruits of their own labours, they must harden their hearts.

As for the rest of Europe, it must choose either to devalue and end the pretence of economic strength, or persist and risk the breakdown of individual governments. Either way, it is never glad confident morning again for the EU and its bastard currency. Milton was right.

How long will Germany carry the EU?

Daniel Hannan's blog 4/3/09

When I was an undergraduate, I once discussed the future of Europe with a Right-wing Italian student. “Brussels will eventually be brought down by anti-German feeling in the rest of the EU,” he said. I contradicted him sharply: “No: it’ll eventually be brought down by anti-EU feeling in Germany.”

People are rarely so indelicate as to draw attention to the fact, but the EU rests on the sufferance of the German taxpayer. No other country (other than Britain, obviously) does so badly out of Brussels. Germans have been the largest net contributors in every year since 1956, even though several other member states have higher incomes. In return, they get the poorest per capita representation in EU institutions.

Why do they put up with it? Well, at first the EU was a way to return to the comity of nations. Konrad Adenauer and his contemporaries believed that Germany would be allowed to become prosperous, powerful and, in time, united, only when her neighbours felt that she was, in a sense, their country, too. This calculation worked, and it has ruled German policy ever since. As Helmut Kohl put it in 1990. “German unification and European unification are two sides of the same coin”.

But, as so often happens, the political class is clinging to a policy whose rationale has long since ceased to be relevant. Ordinary Germans can see this. Hence their court challenge to the European Constitution Lisbon Treaty, on grounds that it is not democratic enough to be compatible with German Basic Law. Hence the recent poll showing that four out of five Germans believe that the EU has “some of the characteristics of a dictatorship”. (Perceptive bunch, the Jerries, no?) Hence, too, the first recognition by a mainstream party of how out of line it is with public opinion: the Bavarian CSU, worried about falling below the five per cent threshold at June’s European elections, now says it wants a referendum on European integration. While it is plainly in no position to deliver such a referendum, being a regional party, its reading of its voters’ mood is telling.

So, turning to the question of the day: will German taxpayers consent to bail out Central and Eastern Europe? Will they respond, as they always have in the past, to the unspoken appeal to historical responsibility? Will they shell out in order to avert the Hungarian Prime Minister’s threat that five million unemployed Magyars will thunder Westward across the plains and line up outside dole offices in Düsseldorf?

Maybe. But I wouldn’t bet on it. The old incantations—the assertion, above all, that Europe was an antidote to aggressive nationalism—have lost their power. The Euro-shamans still chant them, but there is less and less response. The magic is fading. The dream is dying

Will the Euro survive?

Posted By: Daniel Hannan at Feb 26, 2009

Listen to the swelling tumult. The euro won't last! It has only ever known prosperous times! This is its first trial, and it will fail! After its hubris comes its nemesis! Woe, woe woe, sings the chorus.

So far, I have refused to join in. Brussels, it seemed to me, had invested too much in the single currency, politically as well as economically, to let it fail. If the EU had been chiefly interested in the prosperity of its citizens, it would never have launched the euro in the first place. Eurocrats would surely hold the currency together, whatever the cost to the ordinary citizen.

Now I'm starting to wonder. No less a figure than Karl Otto Pöhl, who ran Germany's Bundesbank with almost unalloyed success in the 1980s, is predicting a default by one of the smaller countries, probably Greece. Were this to happen, says the tough old central banker, "the exchange rate would go down, 50 or 60 per cent and then interest rates would go sky high because the markets would lose all confidence."

Pöhl is no Euro-sceptic. On the contrary, he is often referred to as one of the fathers of the euro: his anti-inflationary policies created the conditions that made monetary union possible. True, he was never a dogmatic Europhile. He was alert to the potential dangers of a European Central Bank that lacked the tough monetarism of the German Central Bank. If the euro was to work, he felt, it had to be soundly based.

Which is precisely what makes his apostasy so damaging. The support of people like Pöhl has always been critical to the credibility of the single currency. As long as Pöhl was for it, we could all feel that the spirit of the Bundesbank was infusing the ECB. Suddenly, Europhiles are crying "Pöhl, Pöhl, why persecutest thou me?"

The euro rests, ultimately, on the sufferance of the German electorate. If German voters decide that they are not prepared to bail-out governments that lack their fiscal rectitude, the whole thing is over. Finished. Vorbei.

EU pledges eurozone rescue

Europe's financial authorities have revealed the existence of a contingency plan to rescue eurozone states at risk of default, giving the first clear assurance that the EU will mount a defence if monetary union comes under speculative attack.

By Ambrose Evans-Pritchard, Telegraph, 4 Mar 2009

Joaquin Almunia, the economics commissioner, said EMU economies in distress can count on EU solidarity if they get into trouble, rather than having to go cap in hand to the International Monetary Fund.

"It is clear that there are serious problems in certain countries. If a crisis emerges in one eurozone country, there is a solution before visiting the IMF. We are equipped intellectually, politically and economically to face this crisis scenario. It's not clever to tell you in public. But the solution exists," he said.

Mr Almunia said the probability of a eurozone break-up is "zero", despite the surge in interest spreads on Greek, Irish, Austrian, and Italian 10-year bonds above German Bunds. "Who is crazy enough to leave the euro area? Nobody. The number of candidates to join is growing," he said.

Officials are keeping a close eye on renewed stress in Europe's credit markets. The iTraxx Crossover index measuring default risk on low-grade corporate bonds jumped above 1,100 yesterday, nearing the panic levels after the Lehman collapse last year.

Hans Redeker, currency chief at BNP Paribas, said the "real" yield on 'AAA' corporate bonds has crept up to 5.3pc over recent weeks, the highest in seven years. "There is an urgent need for credit easing by the European Central Bank to bring down yields. The eurozone's peripheral economies are sliding into depression," he said. Spain's unemployment rose 154,000 to almost 3.5m in February.

The ECB is expected to cut rates from 2pc to 1.5pc on Thursday, and is exploring options for "quantitative easing" along US, British, and Japanese lines.

Christian Noyer, the Bank of France's governor, said the ECB was "studying the whole panoply of measures", including the direct purchase of commercial paper to help unclog the credit markets. While the ECB has lent freely, it has held back from buying assets outright.

Jacques Cailloux, Europe economist at RBS, said the ECB is wise to move cautiously before taking on credit risk. "Everybody is pleading for something to be done, but they have not their homework to find out what really works," he said.

Mr Almunia's promise of a eurozone bail-out is certain to anger East European leaders. They were denied backing for Hungary's €190bn plan to prop up the region's financial system at an EU summit over the weekend. They were advised to look to the IMF instead for external support.

Hungary's premier Ferenc Gyurcsany said the contrasting treatment of East and West was denegerating into the "greatest crisis in the history of European integration. We do not want any new dividing lines. We should not allow a new Iron Curtain to be set up," he said, warning of an eruption of political unrest across East Europe.

Klaus Schmidt-Hebbel, the chief economist of the OECD club of rich states, said fast-track euro membership was no magic cure for a region that built up huge imbalances during the bubble years. "Some of these countries are facing a big crisis. This is not only a balance-or-payments crisis, it is also financial crisis with a risk of default on debt," he said.

The "massive accumulation of foreign debt" creates the risk of repeating the Mexican and Asian blow-ups in the 1990s.

Europe sees trouble rising in the East

Economic crisis has brought tensions between the 'old' and 'new' EU to boiling point, say Adrian Michaels and Bruno Waterfield, Telegraph, 2 Mar 2009

So much for a compelling display of European unity. A disastrous summit in Brussels at the weekend laid bare what everyone already knew: the global economic crisis is threatening to tear apart both the continent's single market and the peaceful transition to a prosperous European era after the dissolution of the USSR.

Mirek Topolanek, prime minister of the Czech Republic, one of the first former Eastern Bloc countries to hold the European Union's rotating presidency, warned of "the greatest crisis in the history of European integration". Ferenc Gyurcsany, his Hungarian counterpart, spoke of fears that the economic meltdown would lead to the abandonment of poor by rich, of East by West. "We do not want any new dividing lines. We do not want a Europe divided along a North-South or an East-West line … We should not allow a new Iron Curtain to be set up."

But disputes between East and West were very much in evidence. Germany scoffed at Hungary's call for a mass bail-out of economies near the brink in eastern Europe. The French, who recently handed the EU presidency to the Czechs, continued to act like disruptive back-seat drivers. Nicolas Sarkozy openly suggested the Czechs were not up to the task of running the EU.

On Sunday, following a tense lunch hosted by the Czechs, he even claimed that the whole idea of an emergency summit had come from him and from Angela Merkel, the German Chancellor.

So far, Latvia's government is the only one to have fallen in the East. But there are increasingly shrill demands from countries such as Hungary to be bailed out by their wealthier European partners. Germany, understandably, has balked at being considered the sole source of funds. Its economy is contracting fast and it has limited resources.

The problem is a serious one. If Europe cannot solve its difficulties, say the doom-mongers, the euro will split, the union's authority will be fatally undermined and member states could find themselves run by xenophobes and extremists, being wooed back into the fold by a wounded but competitive Russia.

Robert Zoellick, president of the World Bank, said last month: "It would certainly be a political and human tragedy if you saw the reuniting of Europe from 20 years ago [when the Berlin wall came down] come to a crisis now."

Two years ago, the EU celebrated its 50th birthday in the shadow of Berlin's Brandenburg Gate. The symbolism of marking the Treaty of Rome's anniversary at the point where the free West once met the totalitarian East was obvious. Leaders partied to the strains of Joe Cocker and solemnly intoned: "Thanks to the yearning for freedom of the peoples of central and eastern Europe, the unnatural division of Europe is now consigned to the past."

But countries in the East still feel apart, in spite of 10 former Soviet satellites being members of the enlarged EU. (Slovenia and Slovakia are already using the euro.) Nine countries held their own breakaway summit on Sunday morning, discussing their worries that the West was treating them as second-class citizens.

Meanwhile, global summits reinforce the East's view that it is being made to ride in the back of the bus. The G20 group of developed and developing nations will be the major discussion and co-ordination forum for the crisis and the next meeting is in London next month. The big EU four – Germany, France, Britain and Italy – will be there.

As a courtesy, the Czechs will be there in their capacity as holders of the EU presidency. Thanks to President Sarkozy and Gordon Brown, Spain and the Netherlands are also on the guest list.

But Poland, for example, which is a new, large and crucial eastern member of the EU, has been shunned. "Since when did it become the G22 and since when was Holland bigger than Poland?" asked one diplomat.

Poland can feel particularly aggrieved in being left out of discussions. Its economy, though under pressure like everyone else's, is far from the desperate straits suffered by some of its regional neighbours. The East is no monolith and its comparatively healthy economies such as Poland, the Czech Republic and Slovenia are, by many measures, faring better than Spain, Ireland or Greece.

But there is no denying the pain currently afflicting many of the countries that celebrated their post-Soviet freedom by rushing headlong into free trade of goods and services and loading up on debt-fuelled expansion.

Western companies were attracted to the East for its cheaper manufacturing costs. Now there are fears that subsidiary plants will close while subsidised jobs are protected at home. In Hungary and elsewhere, citizens abandoned mortgages denominated in their home currencies in favour of the lower interest rates on offer in euros or Swiss francs. Now the monthly payments are hard to meet.

Italian and Austrian banks were allowed to buy up most of the region's largest financial services companies. There are now legitimate fears they will repatriate their dwindling funds to focus on home markets.

Meanwhile, far too much debt was taken on and the risk of default is rising. The East must repay or strike new deals covering $400 billion in short-term debt.

The Baltic countries have pegged their currencies to the euro in the hope of speeding their accession to the single currency. But the lack of consequent room for manoeuvre means swingeing cuts in spending are required while exports collapse and the recession deepens.

The cost of getting eastern Europeans, including the EU's poorest countries, out of the crisis was estimated at £169 billion by Hungary, a sum that was dismissed out of hand at the summit in Brussels.

But the figure might not be extreme. Zoellick, at the World Bank, has called for western Europe to find the lion's share of £85 billion of fresh banking capital for the East – big money when western countries are facing their own crisis. A decision last Friday by the European Investment Bank, the European Bank for Reconstruction and Development and the World Bank to find £22 billion seems a drop in the ocean.

Whatever Germany may feel about being the saviour of last resort, the truth is that the EU cannot afford to let countries in central and eastern Europe fall apart: the political consequences of a new Iron Curtain would be too grave.

The EU needs a blueprint to sell to western voters as their own economies contract. So far, it has put what seems a sensible brake on further enlargement. Germany and the Netherlands last week blocked an assessment of a membership application from Montenegro. Long-standing promises, made in 2003, that Albania, Bosnia and Serbia will be considered for EU entry look like being broken. Turkey's entry bid is stalled.

Next month, Germany, Austria and Belgium are expected to extend free movement restrictions on workers from central and eastern European countries, a full five years after they joined the EU. Eleven countries have announced that restrictions on Bulgaria and Romania, which both joined the EU in 2007, will be in place until 2012.

But Thomas Klau, Paris director of the European Council on Foreign Relations, warns that these measures could undermine Europe's stability. The very promise of entry into the EU was driving essential economic reforms and leading to prosperity, even though hectic growth and too much debt contributed to the crash. An enlarged EU with open markets has in general spread benefits across the bloc.

"To take back the firm commitments [of EU entry] would be devastating," Klau said.

Just as Europe needs to keep open the door to future new members, it needs also to defend the openness of its markets and societies from protectionism. New EU countries grew 5.5 per cent per year over the five years before the crisis, compared with about 3 per cent before entry. Meanwhile the West should remember that exports to the East have tripled in the last decade and East-West trade has generated three million jobs.

Twenty years after the fall of the Berlin Wall, Europe needs a unity and new sense of purpose. Plau emphasised that if European interests were to be upheld on the world stage, then the EU must try to speak with one voice at next month's G20 summit in London. "Europe's contribution is absolutely vital," he said. "The answers cannot be left to the Americans and the Chinese alone."

Confidence falls in eurozone as economy fears grow

Gráinne Gilmore, Economics Correspondent, The Times 4/3/09

Consumer and business sentiment in the eurozone plunged to a record low in February, heightening fears that the recession is tightening its grip on the 16 nations that use the single currency.

The economic sentiment indicator, published by the European Commission, fell by 1.8 points to 65.4 this month, the lowest level since the series began in 1985. The wider gauge of sentiment for the 27 nations in the European Union also plunged to a record low of 61.

This was the third consecutive monthly fall for both indexes, which are now well below the long-term average of 100 points. The readings disappointed analysts who had hoped that the fall in confidence had bottomed out.

Howard Archer, of IHS Global Insight, said: “The further deterioration in economic sentiment in February bodes ill for investment, employment and consumer spending across the eurozone over the coming months, and suggests that the region is likely to see further marked contraction in the first half of the year at least.” Some analysts forecast that eurozone GDP will fall by as much as 3 per cent this year. However, one glimmer of hope emerged as consumers’ inflation expectations remained low, easing the way for more interest rate cuts by the European Central Bank.

The fall in confidence affected all sectors of the economy except retail, which recorded a rise of a single point.

The worsening plight of the eurozone economy was underlined as private sector lending stagnated. An indication of this steep decline in the growth of lending came as new figures showed that the annual growth rate in money supply fell sharply from 7.5 to 5.9 per cent.

As unemployment rises and the global economic turmoil continues, analysts fear that banks will become even more conservative in their lending, acting as a dampener on any potential recovery in 2010.

Ben May, European economist at Capital Economics, said: “The eurozone banks are becoming increasingly reluctant to lend and we think this could prompt bank lending to decline by about 10 per cent over the next couple of years. Falling bank capital looks set to prompt a sustained contraction in loans to households and firms, suggesting that any economic recovery in 2010 will be modest at best.”

There are anxieties that the increasing economic woe across the eurozone will inflame political tensions, particularly as countries in emerging Europe plunge into economic turmoil.

Richer eurozone countries have so far resisted calls to contribute more to the International Monetary Fund to fund aid schemes. The IMF yesterday renewed its calls for member countries to double the lender’s resources as more countries turned to it for aid.

The scale of the deepening gloom engulfing emerging economies came as Standard & Poor’s, the credit ratings agency, this week downgraded Ukraine’s sovereign credit rating. Although Ukraine is not in the EU, the move has added to concerns of a “domino effect”, with the difficulties faced by countries in the region leading to added pressure on Western European economies. Latvia and Romania have already had their ratings downgraded to junk status.

Breaking point for the eurozone?

Ireland's 'miracle' economy has turned terrifyingly sour - and as it strains against the inflexibility of the euro, its next crisis may shake the entire EU.

By Gordon Rayner, Telegraph, 27 Feb 2009

They can barely let the words pass their lips, but some of the EU's most important policymakers were forced this week to discuss what was once unthinkable: that at least one of the 16 eurozone countries might be on the brink of ditching the single currency.

Jean-Claude Trichet, president of the European Central Bank, admitted that the 10-year-old eurozone was under "extreme strain", with weaker countries struggling to keep their economies afloat in the face of the devaluation of other currencies, such as sterling and the dollar.

Joschka Fischer, Germany's former foreign minister, darkly suggested that we would soon find out whether the eurozone would turn out to be "a disaster", while the German finance ministry is vacillating on whether it would be prepared to bail out insolvent states.

The current thinking is that Germany and France, as the strongest economies in the zone and "lenders of last resort", would have to bail out failing states: the prospect of the eurozone breaking up would bring the future of the EU into question.

But the most startling fact to emerge this week is that the country which is seen as the most vulnerable, and therefore the most likely to ditch the euro, is not Slovenia, or Cyprus, or Greece, but Ireland.

Until a year ago, the Republic's Celtic Tiger economy, which attracted such blue-chip companies as Dell, Microsoft and Intel, seemed unstoppable. In a decade, the Irish economy grew by almost 90 per cent, catapulting it from one of the poorest countries in Europe to the fourth-richest per capita. Government advisers from as far afield as Chile and Israel made pilgrimages to marvel at a model that they were desperate to emulate.

Not any more. All of a sudden, Ireland's debt-fuelled economy, built largely on a construction boom, has collapsed in a more spectacular manner than almost any other in Europe. Irish government bonds are rated as the riskiest in the EU (see graphic), and there has been panicky talk of Ireland as "the next Iceland".

On the streets, there is a whiff of revolution, with 120,000 people staging Dublin's biggest mass rally in 30 years last weekend to protest at the government's handling of the economy and its decision to impose what amounted to a pay cut on public sector workers. The unions have now threatened a "Doomsday" strike next month if the prime minister, Brian Cowen, does not think again. As the celebrated Irish economist David McWilliams put it: "The entire Irish episode will be studied internationally in years to come as an example of how not to do things."

So how did it all go so wrong?

Visiting Dublin this week, I took a stroll down the south bank of the River Liffey, to the site where Ireland's tallest building, the U2 Tower, should by now have been rising out of the ground as the ultimate symbol of the Celtic Tiger's "economic miracle". Designed by Lord Foster, the
60-storey glass skyscraper was to have housed dozens of one-million euro apartments (£1 million), topped by a penthouse recording studio for Ireland's most successful band.

Instead, there was nothing to see but dead grass, crushed beer cans and a rusting skip inhabited by 3ft weeds. Two months ago, the developers postponed the project indefinitely. This scruffy patch of former dockland represents the end of the dream for Ireland, whose "economic miracle" was largely based on a crazy construction bubble, fuelled by tax incentives, which, when it finally (and inevitably) burst, created a black hole that threatens to suck in the rest of the failing economy.

In 2006, Ireland (population 4.2 million) built 88,000 houses, compared with 150,000 in the UK (population 60 million). At one point, a fifth of the workforce, swelled by tens of thousands of immigrants, worked in construction.

Irish families on middle and even low incomes cashed in their pensions or borrowed heavily to buy second, third or even fourth properties, believing they could rent them out to the migrant workers who had caused net immigration for the first time in Ireland's history. They could borrow from banks that enjoyed one of the loosest regulatory regimes in Europe, and which shipped in money from abroad to further stoke up the boom.

Ireland now has up to 350,000 empty homes – more than its entire private rental market – many of them simply abandoned as builders went bust. House prices are expected to fall by 80 per cent.

Ireland might have been able to withstand Europe's most savage property collapse had not its export trade been shredded at the same by currency devaluation in its two key markets – Britain and America.

The relative rise in the value of the euro against sterling and the dollar has made Irish goods – and wages – prohibitively expensive. Businesses in the north of the Republic are on their knees because competitors in Northern Ireland are undercutting them by as much as half.

In an ominous sign of things to come, the computer firm Dell has announced 250 redundancies at its plant in Limerick, simultaneously confirming that it intends to create thousands of new jobs in Poland.

The slump in the Irish job market means that the country's youth, who for years now have been able to find jobs at home, are once again having to look abroad for employment, so that the Republic may soon return to its traditional pattern of net outward migration. Already, large numbers of Irish workers are moving to Britain seeking work.

Crucially, the Irish government is powerless to act because, as a member of the eurozone, it has no control over interest rates or currency devaluation.

While the Bank of England could cut interest rates to one per cent and plans to devalue sterling with "quantitative easing", the Irish have had to resort to desperate measures to reduce their budget deficit, such as the public sector wage cuts which led to the mass demonstrations.

Evidence of the effect on Ireland's real economy, as unemployment heads towards 10 per cent, is everywhere.

In Dublin's docklands, once expected to become a sort of European Dubai, row upon row of kitchen suppliers, interior design and furniture shops have closed since my last visit nine months ago, their windows covered in a thick layer of grime.

Catherine Claffey, whose family have sold flowers at the same pitch in Grafton Street, a few yards from Chanel and Louis Vuitton, for 85 years, told me business was down 60 per cent on last year.

"I've only been able to keep going because I've never taken out any big loans," she said. "But I have friends earning very modest salaries in the public sector who have been told their wages are going to be cut by 500 euros a month. How are they going to survive?"

A hundred yards down the road, a group of taxi drivers was staging a noisy protest over the government's failure to manage taxi numbers. Thousands of workers who have lost their jobs in other sectors have been allowed to set up as cabbies, meaning that Dublin now has 16,000 licensed taxis. New York, with a population 17 times as large, has 13,000.

Andy Doyle, a cabbie for 20 years, said: "There are so many taxis now that you can be waiting two-and-a-half hours on a rank before you pick up a fare. Yesterday I waited an hour and three quarters for a 6.20 euro fare. You just can't live on that. But the government is happy to let it go on because it keeps the unemployment figures down. It's madness."

The resounding "No" vote in last year's referendum on the European Constitution suggested that Ireland has finally fallen out of love with Europe. But will it now take the ultimate step and ditch the euro?

Sean Murphy, director of policy at the business organisation Chambers Ireland, believes not.

"Everything positive in the Irish economy for the past 30 years has been driven by our membership of the EU," he said. "In the long term it will continue to benefit us. We have a small, flexible economy, which means we will be able to turn it round much quicker than a bigger economy like the UK's.

"It's become clear that we need a more balanced, diverse economy, with more jobs in things like alternative energy and information technology. I believe our EU membership can only help with that."

But if the Irish economy, and that of other struggling EU states, continues to nosedive, the cohesion of the eurozone is likely to be tested to breaking point.

Are Germans giving up on the Euro?

Ambrose Evans-Pritchard, 26 Feb

Ex-Bundesbank chief Karl Otto Pohl has just said that Ireland and Greece are in danger of defaulting on their sovereign debts and/or may be forced out of the Euro, for those who may not be aware of his Sky interview by my colleague Jeff Randall.

"I think there are countries considering the possibility. It would be very expensive," he said. "The exchange rate would go down, 50 or 60% and then interest rates would go sky high because the markets would lose all confidence."

Professor Pohl said Germany's political class is afraid their country will ultimately have to pay for the EMU mess. His view is that the burden should be shifted to the IMF (ie. the US, Canada, Japan, Britain). Thanks a lot Karl Otto. You broke it, you fix it.

This is more or less what ex-foreign minister Joschka Fischer has been saying in London over the last two days, although his main point is that Russia is now the equivalent of Germany in the 1930s: an embittered nation with a revanchist and dysfunctional leadership class.

Mr Fischer now thinks monetary union is beyond saving. A massive rescue will be needed. It will not be forthcoming. German-French relations are the worst since the war, he said. The European insitutions have lost virtually all authority in this crisis. The half-century Project is collapsing. .. or words to that effect, from what I hear.

As regards Prof's Pohl's comments, they are revealing. Why should the currencies fall 60pc unless they are massively overvalued? If they are massively overvalued by anything like this amount - or even half - how can they possibly rectify this within the eurozone? Is Germany going to inflate at 10pc to let them claw back competitiveness? Of course not. This is pure madness.

Prof Pohl shrinks from the implications of his own logic, as almost everybody does in Euroland when they near the high-voltage line. EMU is inherently unworkable. It was launched before there had been real convergence of productivity growth rates, wage bargaining systems, legal practices, mortgage markets, etc, and without the fiscal transfers and debt union that makes monetary union work (badly, but on balance positively) in, say, the US, Canada, and Britain. The destructive effect has now brought the EU project to this unhappy pass, where even Joschka Fischer is giving up on it.

I remember hearing Joschka give a speech in Strasbourg eight years ago in which he said the euro was a powerful federalizing force - "quantum leap" - that would lead ineluctably to full political union. Here is the piece I wrote.

He seems to have changed his mind.

On the same theme, three notes have hit my desk on the risk of EMU break-up/default -- one from France, one from Benelux, and one from a Swede in the City

1) Laurence Chieze-Devivier from AXA Investment Managers -- in "Leaving the Euro?" -- says that the rocketing debt costs of Ireland, Greece, Spain, and Italy are taking on a life of their own. (Italy has just revised is public debt forecast from 2010 from 101pc to 111pc. That is a frightening jump. While the CDS default swaps on Irish debt is are at 376 basis pouints. Austria is at 240. This is getting serious).

It is far for clear whether all these countries will accept the sort of drastic retrenchment required to stay in EMU. "By leaving the euro, internal adjustments would become less `painful'. An independent currency would re-establish economic competitiveness quickly, not achieved by a sharp drop in employment or wage cuts".

Mr Cheize-Devivier makes a point often missed. Countries in trouble may not have a choice. "In our view a FORCED EXIT could be provoked by investors' distrust."

The AXA view is that the crisis will ultimately lead to the creation of a new EU machinery -- in effect, an EU economic government -- ensuring the survival of EMU.

(This, of course, is what many Brit, Danish, Swedish, and Gallic eurosceptics always suspected, which is why wanted their countries to stay out. Romano Prodi candidly said once that the euro would lead to a crisis one day that would let the EU do things it cannot do now)

2) Carsten Brzeski for ING in Brussels said the eurozone laggards were more likely to default than pay the punishing costs of leaving EMU.

"It is difficult to believe that Portugal, Italy, Ireland, Greece, and Spain, would be better off outside the eurozone. While a government could possibly get away with a redenomination of its debt, the private sector would still have to service its foreign debt. We believe any attempts to leave monetary union would lead to the mother of all crises, and total isolation in any future European integration"

Mr Brzeski said the bigger danger is that countries will face a buyers' strike for their debt as a flood of bond issues across the world saturates the markets.

"A further worsening of the crisis could lead to (partial) sovereign defaults in one or several countries."

Others would launch come to the rescue. The "No-Bail" clause in the Maastricht Treaty would be ignored. The EU would instead use the "exceptional occurences beyond its control" clause (Article 100.2) to do whatever it wanted.

There would be a price. "The country in question could be partly warded and have to fuilfil strict controls".

Quite. This is another long-held fear of eurosceptics: that EMU would lead to vassal states.

3) Gabriel Stein from Lombard Street Research in "A Road-map for EMU break-up" says the euro has shielded weaker member from a currency crisis in this global recession, but only the cost of letting imbalances get further out of hand. Currency crises are often good. If you don't get tremors, you get an earthquake.

Mr Stein says a country like Italy that has lost some 40pc in labour competitveness could in theory do what Germany has done for the last 13 years after the D-Mark was locked into the euro system at an overvalued rate. It could screw down wages but that was during a period of global growth. No Greek or Italian government is likely to opt for mass unemployment, or stay in power if it does so. (Actually, I would go further. I doubt whether Italy can possibly do this. Germany was able to pull it off because the Club Med states were all inflating merrily. Italy would have to deflate against a low-inflation Germany. If Italy deflated with a public debt of 111pc of GDP, it would face a debt compound trap. In my view, Italy is already past the point of no return.)

Mr Stein's piece is a study of break-down mechanics. What would actually happen? The country's parliament could pass a law redenominating debt into the new Lira, Drachma, or whatever. But there would be a pre-emptive run on bank deposits long before then. "Anyone not desirous of losing money would presumably see the writing on the wall and transfer any funds beyond the reach of the state. In other words, close down that account with Monte dei Paschi di Siena and open a new one with Commerzbank in Germany".

Such a wholesale shift would lead to a collapse in the money supply, perhaps equal to the 38pc contraction in M3 from October 1929 to April 1933 in the US -- but concentrated in a much shorter period. "Banks would be forced to call in outstanding loans, bring about a collapse in the country's business."

That is something I never thought of before. Italy is really damned if it does, and really damned if it doesn't. Lasciate Ogni Speranza, Voi Che Entrate EMU

An ever weaker union

Far from being ready to take on banking regulation, the EU may yet struggle to keep its currency union together.

Telegraph Editorial, 25 Feb 2009

José Manuel Barroso, the European Commission president, has proposed a pan-European regulatory system which would cover the City of London and all other financial centres. He wants to see sweeping changes to how banks, insurers and markets are supervised to apply lessons from the credit crunch. Characteristically, the Commission has simply not caught up with what is happening inside the EU. The member states are not coming together like circling wagons under attack in the Wild West; rather, the Union is fragmenting. The eurozone itself is under threat.

These are not merely the observations of a newspaper that has always been deeply sceptical about the European single currency. The evidence of its unsustainability is growing daily and is causing serious alarm even among the most ardent supporters of the EU. Earlier this week, Jean-Claude Trichet, president of the European Central Bank, conceded that the eurozone is under extreme economic strain. Weaker countries, he admitted, are feeling the pressure of staying within the currency's parameters.

While no one in the eurozone wishes to contemplate it, the possibility is growing that one or more countries will leave, dealing a severe blow to the concept of "ever closer union". Germany, as the eurozone's surplus economy, should be bailing out those in difficulty; but the Germans have made it clear they do not intend to do so. In a gloomy speech to the London School of Economics on Tuesday, Joschka Fischer, the former foreign minister of Germany, said European nations are retreating into their nationalist shells in the face of the crisis. But it was always going to be thus. The euro was conceived when the global economy was booming and its true test was always going to be in a time of want. That time has come.

MEPs walk out when Vaclav Klaus questions European integration

Posted By: Daniel Hannan at Feb 19, 2009

I've just witnessed one of the most unintentionally hilarious scenes ever to have been played out in the European Parliament. Vaclav Klaus was addressing the chamber as President of the Czech Republic, the state that currently holds the EU presidency. His speech was moderate, thoughtful and restrained - in places, almost to the point of being platitudinous. Governments worked better when there was an opposition, he said. We should all listen to dissenting points of view, he said. He had grown up in a system where there was no opposition, he said, and he didn't want the EU to go down that road.

The response of MEPs? To hoot their derision and flounce out. By a delicious coincidence, the walk-out happened just as Klaus was making his point about listening to opinions you disagreed with. It may have been an accident of timing: the vinegary Thatcherite had, moments earlier, been arguing that democracy was not necessarily enhanced by giving more powers to the European Parliament. Perhaps the walk-out was a delayed response to that implied slight, or perhaps the simultaneous interpretation was taking a while to catch up. But the effect was that, when Klaus made his anodyne plea for tolerance, MEPs responded by shouting "Shut up!" and storming out of the chamber.

What a perfect symbol of the entire European enterprise.

European Elections - June 2009 - Our chance for a Referendum

The DM says: The European elections in June this year will be a crucial test of public opinion on the EU. It is the only election where EU issues are given their full weight. Before voting, we need to look very carefully at what the parties say in their manifestoes. David Cameron has made a very clear pledge to leave the federalist European People's party in the European Parliament, and to hold a referendum on the Lisbon Treaty. The big question is whether he will keep those promises. His promise about the EPP is below, with Dan Hannan's explanation of why it is important for the Conservatives to leave the EPP.

Seven reasons to leave the EPP

Daniel Hannan's blog Dec 4, 2008

The row continues over at ConservativeHome about whether Conservative MEPs should leave the Euro-federalist Christian Democratic bloc in the European Parliament, the EPP. Some MEPs, emboldened by having already checked David Cameron on this issue, plainly believe they can do so again. My friend Charles Tannock, for example, argues that we could stay as we are, but dress it up as some sort of new EPP-ED confederation. (As if the experience of the past 5 years hasn't comprehensively discredited this option.) The excellent Rupert Matthews, a Euro-candidate in the East Midlands, deals with Charles's arguments here.

It seems timely to repeat the basic case for leaving. So here, once again, are seven reasons to leave the EPP:

(1) The European Parliament lacks an Official Opposition:
At present, every political alliance in Europe - the Communists, the Socialists, the Liberals, the Greens, the Christian Democrats - supports the euro, the constitution, a common foreign policy and an EU criminal justice system. Indeed, the EPP goes further than the others, demanding a single EU seat at the United Nations, a European army and police force and - my particular favourite, this - a pan-EU income tax to be levied by MEPs. Once there is a mainstream conservative bloc positing a different kind of Europe, the cartel will be broken. From that moment, Euro-federalism will cease to be inevitable, and become one among a series of competing ideas.

(2) Our message must be consistent:
"I want Conservatives to be saying the same thing in Westminster, in Brussels and in Strasbourg," says David Cameron. Spot on. In the past we have suffered electorally - especially at the 2004 European Election, when we got our worst share of the vote since 1832 - because we were thought to be dissembling. We fought Euro-sceptic campaigns in Britain and then, when elected, we scuttled off and sat with the most integrationist group in the chamber.

(3) An independent group will control its own resources:
Every political group in the European Parliament receives millions of euros for political activism. Some of this money is passed on to the national parties to allocate as they wish; but a good deal is held back to spend on pan-European campaigns. So what does the EPP spend our money on? You guessed it: campaigns to promote the European Constitution, the Common Agricultural Policy, the Charter of Fundamental Rights and so on. A chunk of money - the money to which Tory MEPs ought to have been entitled - was spent in support of "Yes" campaigners when Sweden voted on the euro. Outside the EPP, we'd be free to create a campaigning machine to promote a completely different vision of Europe: one based on free markets, national independence and the Atlantic Alliance. This, of course, is what the other side fears.

(4) Leaving the EPP will put Conservatives in the mainstream:
Nothing - nothing - could be further from the truth than the idea that the only parties outside the EPP are far-Right. The persistence of the notion that "Tory MEPs may end up with Italian fascists" is one of the most successful pieces of black propaganda I've ever encountered. No one has ever proposed such a thing and, for what it's worth, the party that is descended from Mussolini's, the Alleanza Nazionale, is currently applying to join the EPP. Nor does anyone deny that there were enough respectable parties to form a new group two years ago. This time, there are several more parties in play, including from Romania and Bulgaria, as well as others that have become uncomfortable with their existing affiliations.

(5) We mustn't sit with extremists:
Let's look at some of the supposedly far-Right parties, shall we? Some do, admittedly, say unpleasant things. One of our potential allies, for example, ran election posters showing a gay couple with the slogan "Daddy and Papa? Say No!" Another has had hundreds of its MPs and councillors convicted in fraud cases. A third campaigned against the immigration of some computer programmers from India under the slogan "Children Before Indians". But here's the thing: all three of these parties are currently in the EPP. They are, respectively, Forza Italia, the French UMP and the German CDU. High time we found some more moderate partners, I'd say.

(6) British leadership in Europe:
Don't just think of it as leaving the EPP. Think of it as what it really is: leading the crusade for reform in Europe. Let me quote David Cameron again: "I want to apply the modernising approach that I am bringing to the Conservative Party to our approach to Europe. I want us to be the champions of change, optimism and hope in Europe as well as Britain. It is time for a Europe not of deals but of ideals. So we say to the moderate mainstream, who are not satisfied with the EU as it is today: come and join us - we have a future to fight for." Hard to disagree, no?

(7) Conservatives keep their word:
There are not many things an Opposition can do. There are plenty of things it can promise that it would do if it were in power, but precious few it can deliver in the mean time. This is one of them. We need to convince people that we mean what we say, so that when we promise to improve schools, cut taxes, or decentralise power, they have cause to believe us.

'I want us to be the champions of change and hope'

Telegraph, 14 Jul 2006

David Cameron explains his party's approach to Europe

During the Leadership election, I made a pledge that Conservative MEPs should leave the European People's Party (EPP). I made that promise for a very simple reason - I think it is right.

While the British Conservatives and Continental parties in the EPP agree on many things, such as open markets and deregulation, we don't share their views about the future direction of the European Union.

The Conservative Party is opposed to the Constitution, and believes in a Europe of nation states co-operating where it is in their interests to do so, looking outwards to the world, flexible, competitive, ready to face the challenges of globalisation. The EPP takes a more federalist view, backing the Constitution and steps to closer union.

Commentators, including some on The Daily Telegraph, have robustly criticised the direction in which I am taking the party but they can't say that I have somehow hidden my intentions from it.

I fought an incredibly frank leadership campaign on the need to make changes. These include changes to our policies, like ending the approach of up-front tax cuts or subsidising private health care. I stressed the need for changes to our party, like ensuring that we have more women and black and minority ethnic community candidates as well as changing the way we do politics, like supporting Government legislation when we agree with it, for instance the Education Bill.

Yesterday I made good my promise to take the Conservative Party out of the EPP. The Czech prime minister designate, Mirek Topolanek, and I announced our decision to establish a new group straight after the European elections in 2009. The delay is at his request but the agreement to form a new group is not an aspiration, it is a guarantee - and it will be delivered.

We will also set up, immediately, a Movement for European Reform. This movement will be open to all like-minded parties from EU member states and from EU candidate countries, who share our ideas of a modern, open, flexible and decentralised EU, ready to face the challenges of the 21st century.

Some will argue that the right course would have been to leave immediately and sit on our own in the European parliament. I looked carefully at this option and rejected it. It would have meant sitting next to figures such as Mrs Mussolini and Robert Kilroy-Silk. Others say it would have been possible to form our new group now, without the Czechs. I looked carefully at this option too and decided it would have been very difficult to sustain over the long-term. It could easily have collapsed at any moment.

Others believe that we should just stay in the EPP but it would not be right to remain in a group with such fundamentally different views from ours about the institutional and constitutional direction of the EU.

I want to apply the modernising approach that I am bringing to the Conservative Party to our approach to Europe. I want us to be the champions of change, optimism and hope in Europe as well as Britain.

We are a new generation. We have no time for the culture of hopelessness that has plagued the way the EU addresses the global challenges we face. It's because we want to see a future for the EU and believe in a strong Europe that we want to make the EU confront its failings and grasp the opportunities open to us. We refuse to accept failure as Tony Blair has. We want to win the arguments, build support and get things done.

It is time for a Europe not of deals but of ideals. So we say to the moderate mainstream, who are not satisfied with the EU as it is today: come and join us - we have a future to fight for.

Spain's downward spiral spooks bond investors

Spain lost almost 200,000 jobs in January in the worst one-month rise since records began, lifting the unemployment rate to 14.4pc and inflicting further damage on the credibility of the Spanish government.

By Ambrose Evans-Pritchard, Telegraph Business, 3 Feb 2009

The ferocity of the downturn has led to a sharp jump in borrowing costs for the Spanish state, which lost its AAA credit rating from Standard & Poor's last month.

A €7bn treasury auction of 10-year Spanish bond on Tuesday saw yields jump to 137 basis points above German Bunds, a post-EMU high. Foreign investors were conspicuously absent, leaving Spanish banks to soak up the debt.

"This is a national emergency. The government is being overwhelmed by events," said Mariano Rajoy, the opposition leader. The mood has changed dramatically in recent weeks as debtors launch hunger strikes and one builder threatened to set himself on fire to protest the credit crunch.

Maravillas Rojo, the labour secretary, said four million people may be out of work by end of the year – up from 3.3m now. "We're suffering from a grave international financial crisis, lack of liquidity, and falling consumption," she said.

Spain is losing jobs at three times the rate of the US, in proportionate terms. Over one million Spanish men under thirty are unemployed, leading to a surge in applications to join the armed forces. Three quarters of the army candidates are being turned away.

Industry minister Miguel Sebastian has launched a "Made in Spain" drive, exhorting the nation to buy Spanish clothes and to take ski holidays in the Sierra Nevada instead of the Alps. He claimed that 120,000 jobs can be saved if every citizen spends €150 less this year on imports.

The campaign amounts to a partial boycott of foreign products and may breach EU law. It is the sort of protectionist reflex becoming visible daily in much of the world.

Mr Sebastian blamed the banks for causing the crisis by tightening credit. "We're losing our patience," he said.

But the banks themselves are coming under strain – even though they have held up better than Anglo-Saxon and German banks so far. Bad loans have reached 3.5pc and are expected to surpass the 8pc peak seen in the crunch of the early 1990s.

"Banks have closed the tap," said Jesus Barcenas, Spain's small business leader.

Finance minister Pedro Solbes says there is almost nothing Madrid can do to halt the downward spiral. "We have exhausted our margin for manoeuvre," he said.

While he has avoided blaming Spain's euro membership for the country's plight, there is no question that Spain's failure to adapt to the rigours of EMU is at the root of its structural crisis.

S&P said euro membership had become part of the problem since it prevented the country resorting to aggressive monetary stimulus to counter the housing crash, or from devaluing to restore competitiveness.

Spain has become trapped after letting wage costs rise faster than German and French costs for year after year, leading to a current account deficit of 10pc of GDP. The socialist government of Jose-Luis Zapatero has so far recoiled from imposing the necessary remedy of wage deflation. It may be forced to do so by the bond markets.

Pressure on UK to find shelter in the euro

EC looks for coordinated action to tackle crisis as Barroso warns states cannot face challenge alone

By Sean O'Grady, Economics Editor, The Independent, in Davos, 30 January 2009

The President of the European Commission has hinted again that the pound should now join the eurozone. Jose Manuel Barroso said that "even the biggest states can't face these challenges alone", and that he would seek "more coordinated EU action" to deal with the financial crisis.

He voiced his belief that more majority voting would help EU decision-making. Despite sterling's slide and the well-known problems in the UK's banking system, Mr Barroso seemed as keen as ever to hint at his enthusiasm to see the pound in the European single currency.

In December Mr Barroso embarrassed Gordon Brown when he claimed: "Some British politicians have already told me, 'If we had the euro, we would have been better off'."

Yesterday he did not take up the opportunity to repeat earlier remarks that the UK was "closer than ever" to joining the euro and that the "people who matter" in British politics were contemplating giving up the pound; but the hints were plain.

The European Commission also wants to acquire "oversight" over national financial regulators, such as the UK's Financial Services Authority. Mr Barroso said that "national supervision systems did not work – that is obvious".

Individual European governments soon broke ranks during the pressure of the banking crisis last autumn, with nations such as Ireland and Germany acting unilaterally to guarantee banks and depositors in emergency conditions, creating chaos as investors moved money around European institutions offering the most cast-iron guarantees.

Mr Barroso said he wanted to see a "more coordinated approach at the European level" and that work was in progress to pull together the various national regulators. Troubled European banks with extensive retail cross-border activities, such as Fortis's branches in the Netherlands and Belgium, caused serve strains last year.

However, despite these reservations, Mr Barroso and the President of the European Central Bank (ECB), Jean-Claude Trichet, expressed confidence in the other arrangements surrounding the euro. Mr Barroso also stressed that the flexibility in the Stability and Growth Pact, agreed under the Maastricht Treaty, would be enough to contain the current strains, and that the EU is not thinking of changing the Maastricht criteria.

M. Trichet dismissed concerns about strains in the eurozone arising from soaring spreads between relatively well-regarded German government debt, or Bunds, and euro-denominated debt issued by other members states, notably Greece and Italy.

The credit ratings agencies have also downgraded or revised to the downside their view of Spanish, Irish and Portuguese government debt in recent weeks. The more apocalyptic observers imagine that some or all of these nations might be driven out of the eurozone. The legendary investor George Soros said on Wednesday that he considered it to be a "constitutionally incomplete" currency and many others have called for a single European Treasury to work alongside the European Central Bank.

M. Trichet said: "I do not see the euro at stake, certainly not the solidity of the euro area. What is at stake is the judgement of the market at the moment on the sustainability of fiscal polices. We have always said we should not have a single message for states and that they should use the room for manoeuvre" in the EU's Stability and Growth Pact, which limits government debt and borrowings. M. Trichet added that despite threats there would be no "bailout" and that "various executive branches", ie national governments such as Greece, were "getting the message".

Perhaps not, though: Italy's Finance minister, Giulio Tremonti, during the same Davos session on "the Economic Governance of Europe", replied that taking private as well as public debt into account made Italy look much better. He suggested the issuance of government debt by the European Union, rather than individual states: "Now my feeling – I am speaking of a political issue not an economic issue – is... now we need a union bond."

On the day the Bank of England announced its asset purchase scheme, M. Trichet also indicated that further cuts in rates and "non-standard" tactics are ruled in by the ECB.

"I said we could engage in non-standard actions, and indeed we have already done so, notably on refinancing... We are at 2 per cent and I didn't exclude we could go below 2 per cent. What I have said is we have a very important rendezvous in March," M. Trichet added.

M. Trichet also tackled the issue of collapsing bank shares, and the signal from the markets that the banks should be augmenting their capital positions rather than, as most governments and the EU would like, running them down. "It is not our position, and we will do all that we can to pass the message that we are not in agreement with that," he said. "That would augment the pro-cyclicality of the present period."

Trichet is bounced into defence of the euro

Europe's top officials have been forced into repeated assurances that the eurozone is in no danger of falling apart, despite growing stress in the Greek, Italian, Irish, Spanish and Austrian bond markets.

By Ambrose Evans-Pritchard in Davos, Telegraph, 30 Jan 2009

"There is no risk that the euro will break apart," said Jean-Claude Trichet, the European Central Bank's president, speaking at the World Economic Forum.

Yesterday was the second day Mr Trichet has had to parry questions about the viability of monetary union. He seemed ill at ease when asked whether Greece and Italy had become so uncompetitive they might be forced out of the EMU.

EU officials are furious over comments this week by Dominique Strauss-Kahn, head of the International Monetary Fund, who said the euro could prove unworkable unless the member states give up some control over fiscal policy. "Otherwise, differences between states will become too big and the stability of the currency zone is in danger," he said.

The yield spreads on Greek 10-year bonds have reached post-EMU highs of 265 basis points over German Bunds. The spreads have jumped to 236 for Ireland and 153 for Italy, levels unthinkable just months ago.

The spreads are watched by traders as the eurozone's stress barometer. They also imply a large jump in funding costs for the budget deficits of heavily indebted states such as Italy and Greece. The Italian treasury needs to raise €200bn (£184bn) of debt in 2009.

José Manuel Barroso, the European Commission's president, insisted that the single currency had more than proved its worth since the crisis erupted. "The euro has acted as a very important shield," he said. "Just compare Ireland with Iceland. I don't agree at all that the euro is at risk."

However, the questions refuse to go away. Investor George Soros said it was far from clear whether EMU's weaker states would be able to uphold their bank guarantees, given the "structural weaknesses" of a system where each country is in charge of fiscal policy and EU bail-outs are prohibited.

"There has to be agreement at EU level on spreading risk. Germany has been reluctant to reach into her deep pockets for countries like Italy," said Mr Soros.

Mr Trichet denied the ECB was unable to take the sort of measures being considered by the Bank of England and US Federal Reserve. "We could engage in non-standard actions and, indeed, have already done so. What we have done is extraordinary," he said.

The ECB has increased its balance sheet by more than the Fed, accepting housing debt as collateral from banks. But it has not gone to the next stage by purchasing bonds outright.

Such a radical move would open a political can of worms, raising suspicions that German taxpayers were funding a covert bail-out of Club Med.

Italy's finance minister, Giulio Tremonti, who was sitt-ing on the same Davos panel, nevertheless called for the issue of a "union bond". Any such instrument would amount to a huge leap forward for an EU debt union.

Mr Tremonti said Italy had been unfairly singled out. While its public debt is high at 107pc of GDP, its private debt is very low. Indeed, Italy has avoided the sort of housing bubbles that are affecting other states.

"Our banking system is quite solid. They don't speak English," he said.

Fall in sterling may avert UK depression

The devaluation of the pound over the past year has given Britain its best chance of avoiding a depression, experts have said.

By Angela Monaghan and Edmund Conway, Sunday Telegraph Business, 24 Jan 2009

The 25pc fall in sterling since early 2008 has sparked fears of a run on the pound, and prompted warnings that the UK is facing near-bankruptcy. However, experts said the fall should be regarded as a "competitive devaluation" which would help lessen the pain for the UK in the coming years.

Albert Edwards, strategist at Société Générale, said that the UK may stand a better chance of avoiding a deep decline because of the fall in the pound.

Sterling fell last week to the lowest level since 1985. It closed at $1.37 on Friday, after being worth more than $2 last July. Many economists suspect that the weak pound will leave the UK well-placed to recover because it will boost exports as well as encouraging investment.

Mr Edwards said: "The next few years will be the worst since the Great Depression. A depression is effectively assured for the US. But the UK had a much shallower recession than the US in the 1930s – largely because it devalued sterling and abandoned the gold standard. Now, it's doing the right thing by devaluing its currency, as it did in the Great Depression."

In a review published today Roger Bootle, economic adviser to Deloitte, warns that the UK is ill-prepared for the period of deflation which is almost certainly in store this year, and possibly further ahead. While a short bout of inflation would do little harm, he says, a longer period poses a more sinister threat.

Could the fall of sterling be a tonic rather than a torment?

From Gary Duncan, The Times, November 15, 2008

If the strength of a country’s currency is often taken as a national virility symbol, then the fortunes of the pound in recent weeks suggest that Britain’s economic potency is fading fast.

Little wonder, then, that George Osborne, the Shadow Chancellor, has seized on sterling’s freefall in recent days as a powerful political weapon with which to lash Labour’s economic record.

His attack on Gordon Brown and Alistair Darling is made all the more telling in the public imagination by now-hazy memories of “runs on the pound” under the Labour governments of the Sixties and Seventies, and Harold Wilson’s notorious 1967 “pound in your pocket” speech, justifying that year’s devaluation of sterling. Mr Osborne surely hopes to make sterling’s latest slump an equally telling emblem of Labour economic failure.

A more cynical interpretation is that the Shadow Chancellor is seeking to deflect pressure on his policy of opposing Mr Brown’s plan to reinvigorate the economy with a “fiscal stimulus” of tax cuts and higher public spending. Knowing that this may well prove popular, Mr Osborne is on the defensive over his insistence that tax cuts must be “funded” by offsetting tax increases or spending cuts elsewhere. This strategy of giving with one hand and taking with the other is unlikely to do much to jump start stalled growth. So the claim that Mr Brown’s scheme threatens to undercut the pound makes for a useful political counter-strike – especially since the precipitous drop in sterling makes it all the more compelling.

The pound has plunged at a headlong rate. Its overall value against a basket of rival currencies has hit a 13-year low, after it plummeted by 15 per cent against the dollar over the past month, and by 8 per cent to record lows against the euro. Yet while the fall has been dizzying, it can hardly be seen as a surprise. Sterling’s plight can be traced back to the deepening woes of the country’s stricken economy, and their fallout. Britain is entering its first recession for 16 years, and is set to fare worse in the global downturn, worse than its rivals. The Bank of England has cut interest rate to 3 per cent, a 54-year low.

The result is a double whammy for sterling. Dire prospects for UK plc make investing in British assets unattractive, while very low interest rates make Britain a much less appealing place for investors to park cash. So flows of “hot money” that have flooded in during the good times are starting to flood out.

How much does any of this really matter? There are two main dangers. First, as Mr Osborne argues, a weak pound that makes it even less attractive to invest in Britain could make it harder for the Treasury to borrow in the markets by selling government bonds. In turn, that means that it may end up having to pay more to finance surging government borrowing.

Secondly, a weak currency risks igniting inflation by driving up the nation’s import bills.

For now, however, while the pound’s fall is sharp, it is not unprecedented and the threat to Treasury fundraising remains limited. Nor is the second problem a real headache for now. Inflation is set to tumble. In a recessionary climate, businesses are unlikely to be able to pass on the higher cost of imports.

Crucially, a weaker pound will actually help to bolster the economy, making British exports more competitive. As other economies revive, this ought, eventually, to allow an export-led recovery. Provided that the pound does not collapse in a destabilising and disorderly way, its slide can be seen as a tonic, not a torment.

Sterling’s fall can rescue Britain

By Peter Oppenheimer, Financial Times, Jan 4 2009

Two seemingly opposite dispositions among policymakers have done much to bring about the recession. One is undue faith in markets. The other is undue faith in themselves. Both were typified in the US by Alan Greenspan, the former Federal Reserve chairman, and in Britain by Gordon Brown, the prime minister. Mr Greenspan has shamefacedly admitted it. Mr Brown has yet to do so. Their failures may be partly a matter of individual psychology but they also have systemic and intellectual roots. To gain insight into these, historical parallels help.

One is tempted to compare Mr Greenspan with Rudolf von Havenstein, the man in charge of the German Reichsbank during the 1923 hyperinflation. At the height of the crisis he promised to relieve the shortage of currency through the Reichsbank’s new high-speed printing presses. But Mr Greenspan’s failings, although extending to monetary policy, were mainly in financial sector regulation, where his instinct was to rescue delinquent institutions without disciplining them.

For the same reason an analogy with Arthur Burns does not work. Burns was Richard Nixon’s Fed chairman. In the aftermath of the 1971 dollar devaluation he pursued untrammelled monetary expansion to boost Nixon’s re-election prospects, thereby helping to kindle the global inflation of the 1970s.

The parallel is much closer between Mr Brown and Burns’ British partner in crime, Anthony Barber, who as chancellor of the exchequer was author of the Heath-Barber boom of 1970-73. This, like Mr Brown’s fiscal expansionism, was supposed to put an end to “stop-go” in the British economy. It too ended in monetary collapse, namely the secondary banking crisis, which came close to necessitating the rescue of NatWest. No less illuminating, however, than these similarities between Mr Brown and Barber are the differences. The Brown boom threatens to prove far more damaging than its predecessor, because it lasted so much longer – more like 10 years than two-and-a-half – thanks to international payments patterns and elastic credit markets.

This meant a correspondingly prolonged overvaluation of sterling and of UK assets. British export capacity, especially in manufacturing, was severely eroded. In the face of poor productivity performance, expansion relied on immigrant inflows and external borrowing. British consumers became habituated to unsustainable spending, based on misleading indicators of household wealth as well as lax credit conditions.

So much for the bad news. Two aspects of today’s global economy make the prospects for renewed upturn nonetheless more favourable than was the case 35 years ago – or for that matter 75 years ago, in the early 1930s. One is that, despite disconcerting fluctuations in commodity markets, especially for oil and gas, the world has had near-stable price levels for two decades, something not achieved since 1914. The other is that world economic expansion is no longer hyper-dependent on the North Atlantic area. Asia has come into its own, led by China and India. They are not immune to global recession in the short term. But their underlying growth impetus is a long way from exhaustion. They are not on a deceleration threshold like that of western Europe in 1970 or of Japan in the late 1980s.

It follows that the most promising development for re-expanding Britain’s economy in the medium term is the decline in the sterling exchange rate. This was achieved by currency market responses to the emergency easing of monetary policy precipitated by the banking crisis. No further macro-policy activism is appropriate for the UK at this juncture – certainly not the knee-jerk fiscal stimulus rightly mocked by Germany’s finance minister.

The “automatic stabiliser” effects of lower tax receipts and higher social security spending are the only source of wider UK budget deficits that should be contemplated. Debate on this matter being unavoidably associated with John Maynard Keynes, it needs emphasising that in his The General Theory he was concerned with escape routes from chronic depression, not with growth maintenance or damping the “normal” business cycle.

The main strategic challenge today is not demand management but regulation of financial markets. These need to become less competitive and less technically inventive. In short, more boring. The difficulty of achieving this in a world of global enterprise is not to be underestimated.

The writer is student (ie fellow) emeritus of Christ Church, Oxford

The DM says: Lucky we didn't opt for the "safe haven" of the Euro, like Ireland and Spain - see below. It may seem hard to believe, but things could be worse.

A little spot of rioting doesn’t bother the EU

Simon Heffer, Telegraph 24 Jan 09

Mr Brown is not alone in being oblivious to his catastrophic mistakes and their consequences; he has that in common with the gang of crooks, sleazeballs, inadequates and incompetents who run most of the countries of Europe. But at least they have decided they ought to meet in a few weeks’ time – there is manifestly no hurry as far as they are concerned – to discuss the wave of rioting and civil unrest across the EU as its financial and economic system starts to creak, with unemployment piling up. There seems to be a pretence that it is organised anarchy, but in fact it is the only resort for people in many countries, such as Greece, where voting in a different government won’t change the value of the currency or economic policy. As my colleague David Blair pointed out yesterday, the costs of a country seeking to leave the euro would be crippling, with the prospect of widespread debt defaults. But it may soon be apparent that the price of staying in is social meltdown.

'Worst day' in Irish financial history

Ireland's entire banking system may have to be nationalised after the "worst day in Irish financial history" in which the benchmark index fell the most since 1993, according to a leading economist.

By Rowena Mason, Telegraph, 19 Jan 2009

The six-member Financial Index plunged 48pc, with Allied Irish (AIB) down 59pc and Bank of Ireland (BoI) down 55pc, over speculation they may soon need more cash. Brian Lucey, professor of finance at Trinity College, Dublin, said the state needs to act now to prevent total collapse.

"Their shares are being hammered and this is going to continue until the Government steps in," Professor Lucey said. "It doesn't seem to know what to do."

The market reacted badly to news that Brian Goggins, chief executive of BoI, would step down in the summer. There was also speculation that the Bank of Ireland and Allied Irish could not wait for €2bn capital injections set for April.

"No one trusts the government's promises at the moment," said one trader.

Earlier, the Irish government was forced into a U-turn, abandoning plans to freeze the deposits of customers with accounts at Anglo-Irish Bank. The country's third-biggest lender was nationalised on Thursday after a "mini-run" of people withdrawing money.

S&P strips Spain of its AAA credit rating

Standard & Poor's has stripped Spain of its coveted AAA status in the first such move against a top-rated country since the global crisis began, reflecting the deep damage suffered by Spanish public finances as the debt bubble bursts.

By Ambrose Evans-Pritchard, Telegraph, 20 Jan 2009

The credit-rating agency's downgrade comes at a delicate moment for Euroland's weaker bloc. Several states already face difficulties raising money on the bond markets. The yield spreads on Spanish debt rose yesterday to a post-EMU high of 122 basis points above German Bunds, though still below levels for Italy, Ireland and Greece.

Explaining the downgrade, S&P cited the "structural weaknesses in the Spanish economy" and predicted a long recession that will raise public debt by 18pc of GDP and may entail a huge bank bail-out.

Brussels predicted that unemployment in Spain would reach 19pc by next year, pushing the jobless total to near 4.5m. Opposition leader Mariano Rajoy called on finance minister Pedro Solbes to step down as a "patriotic duty". "This is a man who has thrown in the towel. He's given up, he's got no ideas left and no clue what to do next," he said.

Myriam Fernández, S&P's lead analyst, said Spain's euro membership provided stability but also tied Madrid's hands as it tries to respond to the crisis. "It doesn't have control over monetary policy and lacks the flexibility to correct its current account by devaluation," she said.

Alberto Mattelan, an economist at Inverseguros, said the key risk over the next two years is Spanish companies' debt load. "They are very dependent on external credit. At 10pc of GDP, it's the highest in Europe. There won't be a real recovery until 2011," he said.

Spanish politics may not wait that long. Some 35,000 trade unionists marched through Zaragoza, in the county's north-east, on Sunday to demand "job protection" after a clutch of factory closures in Aragon's industrial hub. It was the first big labour protest against the Socialist government of Jose Luis Zapatero. "We're paying the bill for this crisis and we are not going to pay the bill any longer," said union leader Julian Buey.

Help Ireland or it will exit euro, economist warns

A leading Irish economist has called on Dublin to threaten withdrawal from the euro unless Europe's big powers do more to rescue Ireland's economy.

By Ambrose Evans-Pritchard, Telegraph Business, 19 Jan 2009

David McWilliams, a former official at the Irish central bank, has said that Ireland could withdraw from the euro if they are not given more help Photo: Rex Features
"This is war: countries have to defend themselves," said David McWilliams, a former official at the Irish central bank.

"It is essential that we go to Europe and say we have a serious problem. We say, either we default or we pull out of Europe," he told RTE radio.

"If Ireland continues hurtling down this road, which is close to default, the whole of Europe will be badly affected. The credibility of the euro will be badly affected. Then Spain might default, Italy and Greece," he said.

Mr McWilliams, a former UBS director and now prominent broadcaster, has broken the ultimate taboo by evoking threats to precipitate an EMU crisis, which would risk a chain reaction across the eurozone's southern belt, where yield spreads on state bonds are already flashing warning signals. The comments reflect growing bitterness in Dublin over the way the country has been treated after voting against the EU's Lisbon Treaty.

"If we have a single currency there are obligations and responsibilities on both sides. The idea that Germany and France can just hang us out to dry, as has been the talk in the last couple of days should not be taken lying down," he said.

Mr McWilliams cited the example of New York's threat to default in 1975. President Gerald Ford "blinked" at the 11th hour and backed a bail-out to prevent broader damage.

As yet, there is no public support for withdrawal from the euro. A Quantum poll published by the Irish Independent yesterday found that 97pc reject such a radical move. Three-quarters are in favour of a national government, an idea floated by Unilever's ex-chief Niall Fitzgerald.

"The economic disaster we are facing is unlike anything which has happened in my lifetime. It is a national crisis and needs a government of national unity," Mr Fitzgerald said.

Mr McWilliams said EMU was preventing Irish recovery. "The only way we can win this war is by becoming, once again, an export country. We can do what we are doing now, which is to reduce our wages, throw more people on the dole and suffer a long contraction. The other model is what the British are doing. Britain is letting sterling fall so that the problem becomes someone else's. But we, of course, have ruled this out by our euro membership.

"We are paying twice for the euro: once on the exchange rate and once more on the interest rate," he said.

"By keeping with the current policy, the state is ensuring that Ireland turns itself into a large debt-repayment machine. Is this the sort of strategy to win wars? " he said.

Monetary union has left half of Europe trapped in depression

By Ambrose Evans-Pritchard Sunday Telegraph, 18 Jan 2009

Events are moving fast in Europe. The worst riots since the fall of Communism have swept the Baltics and the south Balkans. An incipient crisis is taking shape in the Club Med bond markets. S&P has cut Greek debt to near junk. Spanish, Portuguese, and Irish bonds are on negative watch.

Dublin has nationalised Anglo Irish Bank with its half-built folly on North Wall Quay and €73bn (£65bn) of liabilities, moving a step nearer the line where markets probe the solvency of the Irish state.

A great ring of EU states stretching from Eastern Europe down across Mare Nostrum to the Celtic fringe are either in a 1930s depression already or soon will be. Greece's social fabric is unravelling before the pain begins, which bodes ill.

Each is a victim of ill-judged economic policies foisted upon them by elites in thrall to Europe's monetary project – either in EMU or preparing to join – and each is trapped.

As UKIP leader Nigel Farage put it in a rare voice of dissent at the euro's 10th birthday triumph in Strasbourg, EMU-land has become a Völker-Kerker – a "prison of nations", to borrow from the Austro-Hungarian Empire.

This week, Riga's cobbled streets became a war zone. Protesters armed with blocks of ice smashed up Latvia's finance ministry. Hundreds tried to force their way into the legislature, enraged by austerity cuts.

"Trust in the state's authority and officials has fallen catastrophically," said President Valdis Zatlers, who called for the dissolution of parliament.

In Lithuania, riot police fired rubber-bullets on a trade union march. Dogs chased stragglers into the Vilnia river. A demonstration outside Bulgaria's parliament in Sofia turned violent on Wednesday.

These three states are all members of the Exchange Rate Mechanism (ERM2), the euro's pre-detention cell. They must join. It is written into their EU contracts.

The result of subjecting ex-Soviet catch-up economies to the monetary regime of the leaden West has been massive overheating. Latvia's current account deficit hit 26pc of GDP. Riga property prices surpassed Berlin.

The inevitable bust is proving epic. Latvia's property group Balsts says Riga flat prices have fallen 56pc since mid-2007. The economy contracted 18pc annualised over the last six months.

Leaked documents reveal – despite a blizzard of lies by EU and Latvian officials – that the International Monetary Fund called for devaluation as part of a €7.5bn joint rescue for Latvia. Such adjustments are crucial in IMF deals. They allow countries to claw their way back to health without suffering perma-slump.

This was blocked by Brussels – purportedly because mortgage debt in euros and Swiss francs precluded that option. IMF documents dispute this. A society is being sacrificed on the altar of the EMU project.

Latvians have company. Dublin expects Ireland's economy to contract 4pc this year. The deficit will reach 12pc of GDP by 2010 on current policies. "This is not sustainable," said the treasury. Hence the draconian wage deflation now threatened by the Taoiseach.

The Celtic Tiger has faced the test bravely. No government in Europe has been so honest. It is a tragedy that sterling's crash should have compounded their woes at this moment. To cap it all, Dell is decamping to Poland with 4pc of GDP. Irish wages crept too high during the heady years when Euroland interest rates of 2pc so beguiled the nation.

Spain lost a million jobs in 2008. Madrid is bracing for 16pc unemployment by year's end. Private economists fear 25pc before it is over. Spain's wage inflation has priced the workforce out of Europe's markets. EMU logic is wage deflation for year after year. With Spain's high debt levels, this is impossible.

Either Mr Zapatero stops the madness, or Spanish democracy will stop him. The left wing of his PSOE party is already peeling off, just as the French left is peeling off to fight "l'euro dictature capitaliste".

Italy's treasury awaits each bond auction with dread, wondering if can offload €200bn of debt this year. Spreads reached a fresh post-EMU high of 149 last week. The debt compound noose is tightening around Rome's throat. Italian journalists have begun to talk of Europe's "Tequila Crisis" – a new twist.

They mean that capital flight from Club Med could set off an unstoppable process.

Mexico's Tequila drama in 1994 was triggered by a combination of the Chiapas uprising, a current account haemorrhage, and bond jitters. The dollar-peso peg snapped when elites began moving money to US banks. The game was up within days.

Fixed exchange systems – and EMU is just a glorified version – rupture suddenly. Things can seem eerily calm for a long time. Politicians swear by the parity. Remember John Major's "soft-option" defiance days before the ERM blew apart in 1992? Or Philip Snowden's defence of sterling before a Royal Navy mutiny forced Britain off the Gold Standard in 1931.

Don't expect tremors before an earthquake – and there is no fault line of greater historic violence than the crunching plates where Latin Europe meets Teutonia.

Greece no longer dares sell long bonds to fund its debt. It sold €2.5bn last week at short rates, mostly 3-months and 6-months. This is a dangerous game. It stores up "roll-over risk" for later in the year. Hedge funds are circling.

Traders suspect that investors are dumping their Club Med and Irish debt immediately on the European Central Bank in "repo" actions.

In other words, the ECB is already providing a stealth bail-out for Europe's governments – though secrecy veils all.

An EU debt union is being created, in breach of EU law. Liabilities are being shifted quietly on to German taxpayers. What happens when Germany's hard-working citizens find out?

The Rescue Plan has Failed

Liam Halligan, Sunday Telegraph 18 January (tailpiece of an article on the UK banking system)

As if all this renewed banking angst wasn't enough, yet another fear is now stalking international capital markets. Last week, any remaining hope the eurozone had escaped the worst of this crisis was blown out of the water. Economic sentiment is now at a post-war low. Even the European Central Bank, admirably restrained until now, could resist the political pressure no longer and cut its interest rate to 2pc.

This column has long questioned the eurozone's long-term survival. Now global markets are doing the same. At the start of last year, the average 10-year government bond yield among the weaker member states (Portugal, Greece, Spain, Ireland and Italy) was just 25 basis points above the comparable number in Germany. That spread is now six times bigger.

Credit default swaps (the cost of insuring against a government default) among the most feckless eurozone members have reached Latin American levels. Would French and German taxpayers bail out another eurozone member? The longer this crisis goes on, the larger that incendiary question looms.

S&P threatens to strip Spain of top AAA rating

Standard & Poor's has threatened to strip Spain of its coveted AAA rating as country's budget deficit explodes, offering the clearest warning to date that even wealthy states are running out of room to borrow.

By Ambrose Evans-Pritchard, Telegraph Business, 13 Jan 2009

Standard & Poor's has threatened to strip Spain of its coveted AAA rating as country's budget deficit explodes
The move caused fury in Madrid and revived fears in the currency and bond markets about the underlying health of Europe's monetary union.

Spanish officials are irked that S&P has placed Spain's debt on "CreditWatch Negative", a notch lower than the "outlook" alert issued on Irish bonds last week. It is the first time that a AAA country has suffered such a harsh verdict since the start of the global financial crisis.

Such a move typically precedes a downgrade within weeks but the finance ministry insisted last night this would not be allowed to happen. "There's not going to be a rating downgrade because we are taking measures to overcome the crisis," it said.

Trevor Cullinan and Myriam Fernández, the agency's analysts, said the housing crash had set off a downward spiral in Spain that would drive the budget deficit above 6pc by 2006, double the EU's Maastricht limit.

"We expect a substantial worsening in the Kingdom's public finances," it said, predicting 2pc contraction in 2009 and a long slump as years of credit excess are slowly purged.

Spain is discovering the limits of action within the eurozone. It can no longer let its currency take the strain, or follow the US, Switzerland, Sweden, Britain, in slashing rates. Indeed, Frankfurt raised eurozone rates last July at a time when Spain's housing crash was already under way. Unemployment has surged to 13.4pc, breaking the 3m barrier.

Michael Klawitter, from Dresdner Kleinwort, said Spain was now crumbling on every front. "Tax revenue is collapsing. There is a banking crisis and a massive deterioration linked to housing. It is arguable that Spain has already let matters go past the point of no return," he said.

"We are going to see fresh talk about the sustainability of monetary union and it is going to get messy. Spain is the most pro-EMU of the big states so there has not been any backlash against EMU, but who knows what will happen," he said.

Ian Stannard, a currency strategist at BNP Paribas, said Spain needs to raise €70bn (£63bn) this year on the bond markets, both to roll over old debts and to pay for a fiscal rescue package worth 1pc of GDP.

Europe's bond supply will reach €765bn this year, up 15pc from 2008. It is far from clear whether the markets can absorb so much debt. Although Spain's public debt is modest at under 40pc of GDP, this may not prevent a downgrade.

"The economy is less resilient than any other AAA state. It is more dependent on real estate and tourism, and there is very high corporate debt. Household debt is close to levels in Britain and the US," said Mr Fernandez.

The DM says: So much for the benefits of being in the Euro. Spain has no control over its interest rate, and is having to make do with one largely set to suit Germany. Export industries are prevented from getting the relief that a falling currency would give them.

Loosen Britain's ties with European Union, say two-thirds of voters

Almost two-thirds of voters want a significant loosening of Britain's ties with the European Union including an end to the supremacy of the European Court of Justice, a new opinion poll reveals.

By Patrick Hennessy, Political Editor, Sunday Telegraph, 11 Jan 2009

The YouGov survey for the TaxPayersAlliance and Global Vision, the Eurosceptic pressure group, shows that voters remain antagonistic towards the EU in the wake of the Lisbon Treaty, which increased the powers of Brussels at the expense of national governments, as well as towards the euro, despite recent falls in the value of the pound.

The survey – released exclusively to The Sunday Telegraph – also spells out the threat posed to the Tories by the United Kingdom Independence Party (UKIP) in elections to the European Parliament which take place on 4 June. Ten per cent of those who would vote Tory in a general election will back UKIP in the euro-election, the survey suggests.

David Cameron has been trying to "close down" Europe as a political issue amid fears that traditional Tory divisions on the subject could resurface with the possible return of Ken Clarke, the strongly pro-Brussels former Chancellor, to the shadow cabinet.

Overall, 16 per cent of voters want Britain simply to withdraw from the EU, while 48 per cent would like to see a much looser relationship, with the government taking back powers from Brussels and ending the supremacy of the European Court of Justice over British law.

Added together this makes 64 per cent in favour of weakening Britain's ties with the EU, compared with just 22 per cent in favour of keeping the UK's current full membership including the Lisbon Treaty, which was passed by parliament without a referendum.

Asked if they favoured joining the euro, in the wake of the slump in the value of the pound which at one stage brought it close to parity with the single European Currency, 64 per cent said No, with 24 per cent backing euro membership, a finding broadly in line with a BBC opinion poll earlier this month.

In the first study of voting intentions for the European parliamentary elections in June the Tories are on 35 per cent, six points ahead of Labour on 29 per cent with the Liberal Democrats on 15 per cent and UKIP on 7 per cent. Then come the Greens (5 per cent), the British National Party (4 per cent) and nationalist parties in Scotland and Wales (also 4 per cent).

Significantly, 10 per cent of Conservative voters at a general election would switch to UKIP in the euro-election, compared with 2 per cent of Labour voters and 1 per cent of those backing the Lib Dems. Conservative support could fall still further if Mr Clarke makes a front-bench return, using his position to make high-profile interventions on European matters.

Some 45 per cent of voters, meanwhile, believe none of the three main political parties adequately reflects their views on Britain's future relations with the EU, while 59 per cent of the population believes ministers should disregard the EU's VAT rules if they feel a further cut in VAT is necessary in this year's Budget. The current rate of 15 per cent is the lowest permitted by Brussels.

YouGov polled 2,157 adults between 6 January and 8 January.

David Cameron will need a delicate touch to defuse the Eurosceptic bomb

The looming European elections - and the possible return of Ken Clarke to the front bench - present the Tory leader with a dilemma, writes Iain Martin.

Iain Martin, Sunday telegraph, 10 Jan 2009

Isn't it good, the Conservative leader likes to say, that the Tories have not had many rows about Europe for the past couple of years. The subject that fuelled thousands of headlines about splits and ideological convulsion appears finally to have lost its power to trouble the party. It is difficult to blame David Cameron for wanting to avoid a return to the days of division.

Many of you will think that ending or altering Britain's membership of the European Union is the most important topic of our age. Beyond the need to save capitalism from the wave of corporatist interference and ineptitude currently threatening to engulf it, I am inclined to agree.

But Cameron's supporters make a good point: if you want a change in Britain's relationship with Europe, then first a change of government must be secured. Touring the country, standing on the back of a flatbed truck festooned with Union flags and shouting until you are hoarse that democracy is in peril from the EU, has produced limited electoral returns. Ask William Hague; in the 2001 general election campaign he was that man, on that truck.

As a consequence of these failed tactics, moderate Eurosceptics have continuously adapted their approach. An excellent new campaign, organised jointly by the Taxpayers' Alliance, which campaigns for taxpayer value for money, and Global Vision, which wants a renegotiation with the EU, is the latest stage of that evolution.

The campaign aims to give greater prominence to the drawbacks of the EU. Their research suggests that voters do not like hearing politicians drone on about democracy and the draining of power from Westminster, even though two thirds say they want to leave the EU or have a looser relationship with it. Voters are fatalistic about the prospects of the latter ever happening. However, they are inclined to listen when told how costly and inefficient the current set-up is.

The new campaign will thus be one of credit crunch Euroscepticism, highlighting waste and the ways in which EU decisions impact directly, in costly ways, on British lives. Just one example: the landfill directive from Europe is responsible for inadequate refuse collection by councils. The EU is literally leaving rubbish on your doorstep.

This should be useful to the Conservatives, who road-tested the rhetoric of robust scepticism to destruction and need to find a different tone. But the Tory leadership does not want to hear too much about Europe right now, as it is worried this might undo its good work so far.

By the mid-Nineties, enough voters to make a difference had concluded that the Conservatives had too great an interest in sectional infighting over the Europe issue. Combined with a sense that the party was tired, had mismanaged the economy and had governed too long, it was an explosive recipe for electoral obliteration.

And so Cameron set about trying to defuse the bomb of Euroscepticism, even though he is intrinsically a sceptic himself. In cold, purely political terms, denying oxygen to debates over European policy has possibly been Cameron's single best piece of rebranding. It has created the space in which he could emphasise other areas of concern.

But the EU never went away, and Brussels' appetite for power is undiminished. Ireland will be forced to have a second referendum on the Lisbon Treaty in October, having dared to vote "No" the first time. There will be a torrent of pro-Treaty propaganda from the EU ahead of polling day.

Before that, on June 4, Britain will vote in elections to the European parliament. As the YouGov poll published today in The Sunday Telegraph shows, one in 10 Conservative voters is planning at this stage to vote for the UK Independence Party, which campaigns for full withdrawal from the EU. This puts pressure on the Tory leadership to adjust its rhetoric, in an attempt to deter hard-liners from defecting. In doing so, would it drive away those with more moderate views? It is certainly a risk.

Steering a path through this tangle is a priority second only to the economy in the minds of Cameron, shadow chancellor George Osborne and Hague, now shadow foreign secretary.

At this point, enters a rotund and jolly gentleman who wears suede shoes and smokes a fat cigar. Ken Clarke, former chancellor, ornithologist, authority on ale, lover of jazz, and holder of extremely pro-European views, is being tipped for a return to the shadow cabinet in the looming Conservative reshuffle.

A recall for Clarke, or a rejection of the idea, is going to be the defining story when the Tory pack is reshuffled (unlikely to be this week but expected before the end of the month). The mooted return of Clarke is a consequence of the criticism that the shadow cabinet contains too few big hitters, that the Tories will need all their heavy firepower available to defeat Brown, and that "all good men" should come to the aid of their party.

A possible return for Clarke as shadow business secretary or shadow Leader of the House is Cameron's trickiest personnel judgment. Clarke has been surprisingly quiet on Europe of late and noticeably helpful to the Tory leadership, not least by delivering a robust endorsement of Osborne's handling of the shadow chancellorship (although Cameron was reminded of the risks involved when Clarke appeared recently to endorse the government's VAT cut before changing his mind).

The decision will hinge on Europe, and whether or not Clarke will promise to keep out of trouble. That is like asking him to stop smoking, says one fellow MP – although he has quietly given up being deputy chairman and director of British American Tobacco.

"Ken will have to sign in blood, his own blood hopefully, that he will not cause trouble," says a member of the shadow cabinet. This is a great test for the new model Conservative party. Whatever his limitations, Clarke has a reach beyond the Westminster sandpit. If his return is to be a success, he will need to place Conservative victory ahead of personal vanity, and the Conservative party will need to tolerate his milder eccentricities. In return, a signal will be sent to floating voters that the Tories are truly serious about winning again.

The decision will also tell Cameron's party much about their leader's ability to come to accommodations in the interests of balancing his team. If he pulls it off, it will be a great boon to the Tories. If it means only a return to infighting, Labour will quickly brand them "the same old Tories".

Either way, the Conservatives cannot postpone finding something clear and coherent to say on Europe. They must find a path between moderate Euroscepticism and "banging on about Europe".

The economic crisis has changed the world, and the resulting tensions in the eurozone are creating stress fractures that could easily force several countries to leave it this year. If that happens, it will transform the debate about the future direction of the EU and open up the possibility of a looser relationship for states that choose it. Some patience is required.

Until then, the new campaign by the Taxpayers' Alliance and Global Vision should guide the Tories. Best point out, calmly, how expensive the grand project of the EU is, at a time when there is so little money around. The Eurosceptic way to voters' hearts should this time be through their wallets.

Telegraph View: An itch for change

When asked about Europe, a majority of British voters would like our ties to be significantly loosened

Telegraph View, 10 Jan 2009

When asked about Europe, a majority of British voters would like our ties to be significantly loosened. So says the YouGov poll whose results we reveal today. Of course one may experience a natural inclination, once the Eurostar hits the warmer weather around Calais, to undo the collar button, but in this instance something more radical is called for.

The British body politic has had an overdose of Brussels, and is sending a message that nothing less than a sweeping wind of change will relieve its malaise. This sense that we are sick of the "great project" of integration is made more than metaphorical by the discovery, which James Le Fanu also reports today, that the euro is hazardous to your health. Handling the coins can cause dermatitis, because they release nickel onto the skin in concentrations wildly above the levels permitted by the EU's own stern directives.

As a symbol of the Union's internal contradictions, those brazen little quasi-sovereigns could hardly be more pointed.

The DM says: This is about the only argument against the Euro that we hadn't thought of.

Staying out of the euro has spared us a Spanish-style catastrophe

Half-built flats and soaring unemployment show that the boom has turned to gloom on the Costa del Sol. And it's a fate that could easily have befallen Britain.

By Jeff Randall, Telegraph Business, 9 Jan 2009

For a place that's called the Sunshine Coast, Spain's Costa del Sol was unusually wet and cold last week. Friday and Saturday were particularly miserable in Marbella, as the rain lashed across the main promenade, forcing restaurants to bring in tables and pull down shutters.

It was as though the weather gods had decided to reflect the country's economic outlook – which is becoming darker by the day. What many in Spain had regarded (foolishly) as an eternal summer of expansion, driven by a breakneck construction boom, has turned into a winter of plunging property prices, failing businesses and an epidemic of redundancies.

Spain's traditional new year greeting is próspero año nuevo. But even in this part of Andalucia, a favourite playground of wealthy sunseekers and golf fanatics, it is hard to find locals who are expecting prosperity in 2009. For a growing number of workers and small-business owners, anything better than a sharp decline in income will be greeted as a triumph.

Like the toros bravos that die in the corrida, Spain's bull market began with impressive vigour but ended up being dragged off through the dirt. Unemployment hit three million yesterday, about 13 per cent of the workforce (double the rate in the UK), the worst it has been for 12 years. Nearly one million of those without jobs have lost them during the past 12 months.

The speed of descent, from fiesta into crisis, has shocked the country's political class and commentariat. Inflation has dropped from 5.3 per cent to 1.5 per cent since the summer. According to the newspaper El Pais: "This situation was impensable [unthinkable] in July".

As historians begin to assess damage from the credit crunch, Spain will surely be singled out as a classic study for what can go wrong inside a monetary union when the policy requirements of its members become hopelessly misaligned. It is simply not possible to pursue the best interests of every participant when some nations are running trade and fiscal surpluses while others clock up huge deficits.

Ten years after it was launched, the euro is propelling Spain towards disaster. In giving up control of domestic interest rates to the European Central Bank, Madrid handed over a vital instrument of macroeconomic management. It is learning to regret that.

For the early part of this millennium, that loss of power seemed not to matter: Spain's outrageous (and in some cases illegal) construction frenzy hid a multitude of sins. At the peak, about 800,000 homes were being built annually on the basis that demand from foreign buyers was limitless.

That dream has vanished, along with the over-supply of cheap money that funded it. Drive down the E-15, the main motorway link between Malaga and Gibraltar, and you will see block after block of half-built apartments, connected neither to essential utilities nor to financial reality. They stand as temples to a religion that ceased to exist when the bubble popped.

The Spanish economy is weak; it needs lower interest rates and a softer currency. Such a prospect, however, doesn't suit Germany, the eurozone's dominant force, so Madrid has to sit and suffer while its people cry for help.

Discomfort is palpable in tourist centres where the purchasing power of British visitors and second-home owners has played a pivotal role in boosting local enterprise. Germans and Swedes have been important, also, but it is on the British that the leisure sector in southern Spain has depended most.

A quick scan of the exchange-rate charts explains why. In the summer of 2000, about 18 months after it was launched, the euro was out of fashion on the world's currency markets. At that time, £1 bought €1.75, making British travellers feel especially wealthy when holidaying in Spain.

Today, however, as the British economy sinks into recession, prompting the Bank of England to slash interest rates to 1.5 per cent (the lowest level in the central bank's 315-year history), it is sterling that looks like a six-stone weakling.

Many in the queue at Gatwick airport's Travelex desk last weekend were shocked to discover that the pound had fallen to below parity against the euro. For them, Spain has become an expensive experience. Old jokes about Costa Notta Lotta are no longer relevant, much less funny.

I was treated by a friend to a round of golf at Rio Real, a middle-ranking course, that is by no means among the priciest. He was charged £172 for two (no buggy). Dinner for three in a modest pizza joint came to £75. One must assume that hoteliers from Morecambe to Margate are cheering wildly.

Competing currencies invariably fluctuate on a daily basis, but not all in the City are expecting a swift recovery of sterling against the euro (even though it has picked up in the past few days). HSBC believes: "In the UK… a weaker currency seems desirable to policy makers… in our eyes all roads lead to a stronger euro."

If that analysis proves correct, parts of Spain will face devastation, and social policies that seemed generous during the go-go years will quickly become unaffordable. For example, in some instances the state pays 70 per cent of salary for up to two years when a worker is made unemployed. How will that be funded if, as some are predicting, Spain's jobless total reaches four million in 2010?

Adding to Madrid's woes is the extraordinary influx of five million immigrants, who boosted the population by about 15 per cent between 1998 and last year. It was always assumed that in tough times many would return home. But for penniless fruit pickers from Africa, life in Spain, even in the harshest economic climate, is often better than what they left behind. The number of foreigners claiming dole payments has doubled and there are mounting tensions as native job-seekers slip down the food chain.

Marbella is not used to life on a budget. Shopkeepers, newspaper vendors and bar staff seem baffled by the downturn in their fortunes. On Sunday, my family and I had dinner in a seafront bodega and were the only customers all night. "What has happened to los Ingleses?" asked the waiter.

The answer is that the United Kingdom never joined the euro. As a result, our government and monetary authorities are free to adopt policies that suit our needs. In today's circumstances, that means the freedom to live with a devaluing currency. This hurts those of us who can still afford to visit Spain, and is unfortunate for British pensioners living abroad, but is a small price to pay for the revival of our domestic industries.

Had Britain been locked into Europe's single currency, at an exchange rate far higher than today's, there is good reason to believe that we, too, would be suffering double-digit unemployment. You won't read this very often under my byline, but Gordon Brown played a blinder in keeping us out.

Europe's economy contracts at rates not seen since 1930s

Dire day for Europe as Spain's jobless blasts through 3m and German industry goes into "free-fall"

By Ambrose Evans-Pritchard, International Business Editor, Telegraph, 9 Jan 2009

Joaquin Almunia, the European economics commissioner, warned that the picture would turn "dramatically worse" this year. The eurozone's confidence index collapsed from 74.9 to 67.1, the lowest since Brussels started collecting the data in 1985.

"It makes truly dismal reading," said Julian Callow, Europe economist at Barclays Capital. "Industrial sentiment has never experienced such a rapid slump. There is an implosion of demand."

Spain lost almost 140,000 jobs in December, pushing unemployment to 3.1m or 13.4pc. The Labour Office said the country had shed a million in jobs in 2008 as the building boom collapsed. This is equivalent to 7m job losses in the United States.

The Labour Secretary Maravillas Rojo said she could not rule out a rise in unemployment to 4m this year. "We are in an unprecedented situation, and 2009 is going to be very difficult," she said.

Madrid now has its hands tied under the constraints of monetary union. It cannot slash interest rates or devalue, and it has already exhausted its scope for fiscal stimulus under the EU's Stability Pact. The one piece of good news is that euribor rates used to price almost all mortgages in Spain has dropped for 61 days in a row to 2.88pc.

Spain is now in company at last with Germany, where exports plummeted 10.6pc in November. The German economy is highly-geared to the global industrial cycle and is suddenly facing a vicious downturn as demand for machinery slumps in China, Russia, the Mid-East, and equally important as car sales crash in Italy, Spain, and Britain. The country's trade surplus has shrivelled by a third in one month.

"Industry is in free-fall," said Dirk Schumacher, from Goldman Sachs. Germany's industrial orders have plummeted 27pc year-on-year, heralding a drastic economic contraction this year. Berlin is mulling a €100bn fund to rescue companies in distress, on top of its €50bn Keynesian blitz over two years. The fiscal package includes tax cuts and infrastructure spending. Chancellor Angela Merkel's coalition has backed away from plans to `tough out' the recession after a fierce criticism from German economists and industrial leaders.

Berlin is now preparing the part-nationalisation of Commerzbank by taking a 25pc stake in exchange for a €10bn infusion of capital, helping to boost the bank's capital ratio as it digests Dresdner Bank. Commerzbank shares fell 14pc. France is also drawing up plans for a fresh €10.5bn capital injection for its banks.

Jacques Cailloux, from the Royal Bank of Scotland, said the pace of contraction in Europe is now disturbingly close to levels seen in the Great Depression. The eurozone bloc shrank by 3pc in 1930, 5pc in 1931, and 4pc in 1932.

By this count, 2009 could easily match 1930. The latest data points to 3pc contraction rate since late last year, with no improvement in sight. "Even the worst case scenarios people talked about now look too optimistic. But at least the authorities have done enough to prevent the vicious downward spiral from accelerating. We've haven't seen the sort of run on bank deposits or mass bankruptices that occurred in the 1930s. That is crucial," he said.

Elga Bartsch from Morgan Stanley said the European Central Bank may have to cut rates to 1pc and let its overnight EONIA rate drop to zero. It has already expanded its balance by 55pcc in a quiet shift to emergency stimulus, but may now have to go further than it wants to head off a "deflation trap"

The EU's role in our financial crisis

By Christopher Booker, 17 Dec 2008

As the Western world's banking system teeters on the edge of collapse, one crucial factor in this unprecedented crisis has gone almost entirely unnoticed - although David Cameron made a veiled reference to it on Tuesday.

At the heart of this catastrophe lies a drastic change made last year to banking regulations, which has led to the current freezing of the money markets. Without it, most of the banks that have collapsed, such as Lehman Brothers, might have survived.

Last December, a leading City economist, Professor Peter Spencer of Ernst & Young's Item Club, warned that unless something was done urgently to modify the new rules, the resulting paralysis of the banking system would "make 1929 look like a walk in the park".

Last week, as his prediction seemed to be coming true, the US was moving to change the rules. But in the EU they are enshrined in a directive which could take months, or years, to unpick.

In 2004, partly in response to the Enron debacle, the world's leading economic powers made an agreement known as Basel 2.

It proposed a drastic tightening of the so-called "fair value" or "mark-to-market" rules, whereby banks and other financial institutions define whether they are solvent and fit to continue trading. Brussels, which is fast taking over regulation of our financial services, embodied this in two directives, 2006/48 and 2006/49, known as the Capital Adequacy Directive.

Much of this lays down a complex "Risk Assessment Model", under which a bank at the end of each day's trading must produce a statement of its assets to show whether or not it is solvent. If not, the bank must declare this to the regulatory authorities, such as Britain's Financial Services Authority (FSA), and cease trading.

As informed observers pointed out at the time, this might not cause problems when property and share values were rising but when markets fell the banks would be put in a critical position.

Writing down their assets to the value they would fetch in a "fire sale", without allowing for underlying value or future recovery, their asset base might be so severely undervalued that it would be difficult for them to lend or borrow, freezing those deals which are the banking system's lifeblood.

At worst, though technically solvent, they would have to close their doors.

Since the credit crunch began last year, this is precisely what has happened. Another City economist, Professor Tim Congdon, warned in January that the "scientific precision of the Basel rules" had been shown to be "hocus pocus", explaining how this had already played a key part in the collapse of Northern Rock. As a "solvent but illiquid bank", wrote Prof Congdon, Northern Rock's only hope was to appeal for help to the Bank of England.

In former times, as the Bank's governor, Mervyn King, tried to explain to the Treasury Select Committee in September 2007, he could have sorted it out behind the scenes, in a rescue operation involving other banks - as had often been done before.

But Mr King was hamstrung by EU legislation, such as its directives on takeovers and "market abuse", as shown by Prof Congdon in a devastating pamphlet, Northern Rock and the European Union (published by Global Vision). The EU's role makes nonsense of the claim that Britain's financial regulation is a "tripartite" system - Bank, Treasury and FSA.

In reality it is quadripartite, with Brussels the fourth and in many ways most important player, as we saw when subsequent attempts to sort out the Northern Rock shambles fell foul of EU competition and state-aid rules.

As Ron Sandler, Northern Rock's chairman, said when it was nationalised, "the bank will have to operate according to rules set in Brussels". Because the EU's competition commissioner, Neelie Kroes, failed to grasp the difference between a loan and state aid, one of her first requirements was that the bank should sack 2,000 employees as evidence that it was being "restructured".

Thus the EU has become the gigantic "elephant in the room" of our financial services industry, on which a third of Britain's income depends. Nowhere is the effect more damaging than in those directives implementing the Basel 2 agreement (actively promoted by Britain at the time) that have reduced our banking and lending system to paralysis.

When Mr Cameron admitted last week that a "new international regulation" which "automatically downgrades the value of banks" was "making the financial crisis worse than in previous downturns", he did not dare risk inflaming his party's Eurosceptics by referring to the EU directly. He merely coyly suggested that "our regulatory authorities" should get together with "the European regulators" to "address this difficult issue".

He did not point out that, as the US Securities and Exchange Commission was abandoning the new rules (supported by the bail-out bill before Congress), all we have to look forward to is that Gordon Brown, after his "crisis summit" in Paris yesterday, will air this "difficult issue" at the European Council on October 15.

Even if they decide to follow the US lead, it would entail the tortuous procedure of the Commission drafting a new directive, which could take more than a year. Meanwhile Europe's banking system remains frozen, threatening no one more than Britain - for reasons that none of our politicians dare explain.

Research by Richard North of eureferendum.blogspot.com.

The Eurozone's weak links

Louise Armitstead, Sunday Telegraph Business 4 Jan 09

Enough idle crystal ball-gazing, here's one prediction that's being backed by millions of pounds. Hedge funds are betting on a disintegration of the eurozone and specifically that Greece, Italy, Spain and Portugal will pull out of the single currency.

The argument is that the euro was "fudged" in the first place with radically different economies being shoehorned together. Government debt levels as a percentage of GDP have soared and are still rising. Meanwhile, the euro, unlike all other major currencies, is not implicitly backed by a central store of gold in a Central Bank vault.

As one expert, Alex Allen of Eddington Capital, told me: "That's a lot of faith to have in mere paper." These "weak link" countries are not necessarily the weakest economies but the ones that may be first to pull out. It sounds dramatic but on the upside, holidays could become cheaper again.

Puny pound may help to restore growth

Patrick Hosking, Banking and Finance Editor, The Times 31 Dec

First the good news. Converting prices into pounds is now a doddle. A couple of years ago, when as little as 70p bought you a euro, weighing up prices in eurozone countries such as France, Spain, the Irish Republic and Italy required a modicum of mental arithmetic. Now, you just need to replace the € symbol with a £ sign. Et voilà!

Or perhaps the apposite exclamation is sacre bleu! For at a one-to-one exchange rate, prices for Brits visiting the eurozone or buying goods from its 15 countries are fiendishly high.

It was very different in January 1999 when the single European currency was launched. Then a euro cost only 71p. It got better: the new currency started to slide and by March 2000 a euro cost just 60p.

Since then the pound has gradually slid back and the fall has turned into a near-collapse in recent weeks. This is not about euro strength, but pound weakness. The pound is plunging against the currencies of almost all our big trading partners. It is hardly surprising. Among other things, a country's exchange rate reflects its economic prospects, and Britain's right now are lousy. Past dependence on growth fuelled by borrowing; a housing and commercial property bubble; overreliance on financial services (five of our ten biggest companies were banks before the crunch); an already heavily indebted Government - all suggest that Britain will be hit harder and will have fewer resources to claw its way out of the downturn.

Monetary policy is adding to the pound's weakness. With every cut in interest rates, Britain becomes a less attractive destination for the trillions of dollars in footloose money that sloshes around the world's financial centres in search of the highest returns. Base rate at 2 per cent is at its lowest since the Second World War. More cuts are expected, possibly next week.

The currency is in a vicious circle. The more that international investors dump pounds in favour of other currencies, the further the exchange rate falls, triggering more anxiety and more currency sales. Momentum is building, with many analysts predicting the pound has further to fall. Currencies can swing wildly from what are seen as equilibrium points.

There is no denying the pain caused by a weaker pound. Harold Wilson's risible claim when he devalued sterling in 1967 that it made no difference to “the pound in your pocket” became a byword for political disingenuousness.

But that does not make the weakening currency a bad thing. The exchange rate is the shock absorber that helps to soften the economic bumps. By making exporters and Britain's tourist industry more competitive, it helps to restore economic growth. By making imports more expensive, it helps to divert spending to home-produced goods and services. The puny pound is a symptom, but also part of the cure.

Britain's difficulties have triggered fresh calls for the country to re-examine joining the single currency. Certainly, being part of a beefy and more stable currency bloc has attractions in such turbulent times. But if anything, the crisis has strengthened the arguments of the “no” camp. Britain has the flexibility to slash interest rates to zero. There is no such option for weaker eurozone economies, such as Italy and Greece, nor for economies grappling with property boom and bust - such as Ireland and Spain. How those economies cope with the single currency may determine whether Britain eventually dusts down its own euro plans.

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