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US-China relationship marginalises Europe

A disunited continent carries little economic or political clout in the Chinese corridors of power, writes Peter Foster in Beijing.

Telegraph, 23 Sep 2009

When the Chinese premier Wen Jiabao travelled to Prague last May to address the EU-China trade summit, he spoke of the need for China and Europe to “strengthen confidence, deepen co-operation and continue to forge ahead hand in hand”.

Unfortunately Mr Wen’s diplomatic niceties could not mask the reality that Europe’s relations with China have deteriorated markedly over the past five years, with worrying consequences for Europe’s ability to project and defend its collective interests on the world stage.

Already strained by a mounting trade deficit, by the 2005 “bra wars”, in which millions of Chinese textile products were blocked at EU ports, and by human rights issues, the relationship reached its nadir last December when China cancelled the previous EU-China summit in protest at the French president Nicolas Sarkozy’s decision to meet the Dalai Lama.

The Chinese action, as a recent European Council for Foreign Affairs paper on relations with China observed, displayed the “diplomatic contempt” with which China now treats the EU, notwithstanding its status as China’s single largest trading partner.

As recently as 2003, when China released its first policy paper on Europe, the Chinese state media was talking of a “honeymoon” period with Europe, but over the past six years the hoped-for marriage of mutual interests has soured into destructive rounds of squabbling and recrimination.

Analysts point to several key events in the fraying of relations, starting in 2005 when Europe looked set to lift an arms embargo imposed after the 1989 Tiananmen Square massacre and then back-tracked at the 11th hour under pressure from the US.

The incident rankled deeply with Beijing and damaged Europe’s credibility with China, says Professor Feng Zhongping, head of the European section of the China Institute of Contemporary International Relations and a highly influential Chinese analyst on European affairs.

The row over the arms embargo also coincided with rising anti-China sentiment among Europe’s public and parliaments, fuelled by the flood of cheap imports and Chinese protectionism which created a trade deficit with China that Peter Mandelson, then trade commissioner, famously calculated was rising at “15 million euros an hour”.

In October 2006 discontent with China took on official form when the European Commission published an official “Communication” that included 21 demands for China to open its markets, improve human rights and become a responsible actor in world affairs.

“The Communication deeply antagonised Beijing,” says Professor David Shambaugh, director of the China Policy Programme at George Washington University, “and since then it’s fair to say that the atmosphere between China and Europe has not been good.”

The result, from a Chinese perspective, has been to view Europe as an increasingly divided and enfeebled entity, unable to negotiate with one voice and rapidly being overshadowed by a burgeoning US-China relationship. “Europe is obviously the original model of co-operation and has played a very important role since World War Two in world affairs, but Europe is in comparative decline now and on many key issues you can’t hear Europeans really contributing,” says Professor Feng.

“On many issues Europe only talks, but does not take much action. It’s not the EU’s fault because European soft power only goes so far. Europe is not its own country. It doesn’t have a military, a foreign policy or a president, and even if it did, it would not be the same as an American president. To say 'let’s work with Europe’ is really an empty slogan.’”

Faced with a divided Europe, China has in recent years focused its dealings on country-to-country negotiations, setting up a strategic economic dialogue with the UK, a status that France and Germany are also now seeking.

“Brussels is losing importance: we must go back to the capitals, who make the decisions, speak to member states, even on trade,” says Professor Feng.

Unfortunately, argue supporters of a more coherent engagement of China by Europe, the effect has been to weaken Europe’s collective ability to win concessions, whether on human rights or the perennial irritant of Chinese protectionism.

“Weakness at the European level allows the Chinese to pick off member states one by one,” says Professor Shambaugh, “To borrow the Chinese phrase 'yi yi zhi yi’, it’s a case of 'let the barbarians rule the barbarians’, or as the British say, 'divide and rule’.”

Division has also weakened attempts to get China to conform on human rights, an issue that provokes irritation and cynicism in Beijing, which sees European countries using the issue as a stick with which, selectively, to beat China. “Why was human rights not an issue for Chirac or Schroeder, but now for Merkel and Sarkozy it is?” asks Professor Feng, “One day Europe will realise that the Chinese human rights issue is improving every day and only China can improve the issue. The EU can’t help much in this.”

Despite all the official-level engagement – some 450 delegations visit China every year – the failure to win significant concessions is provoking an intense debate in the think tanks and chancelleries of Europe on how to revitalise the relationship. Supporters of the Lisbon Treaty argue that the creation of a European president and “High Representative” for foreign affairs are essential if Europe is to avoid being further marginalised by the US-China relationship.

The hope is to replace talk of a “G2” – America and China – with a “G3” in which Europe becomes a vital third-party in the shaping of a new, multi-polar world.

More hardline voices, who also support ratifying Lisbon, are calling for Europe to get tougher with the Chinese, adopting a policy of reciprocal – as opposed to unconditional – engagement, which would see Europe withholding access to markets and officials until China gave ground on fundamental issues.

Other suggestions include the creation of a European bond market to spur Chinese investment in Europe and the creation of a strategic policy framework to help Europe decide on how to manage the political implications of much-needed investment in Europe by the Chinese state and state-run enterprises.

Equally as important, say many analysts, will be massive Europe-wide investment in Chinese studies to make up for the EU’s comparative dearth of China expertise and language skills, which is seriously hampering the Commission’s ability to deal effectively with China.

But none of these suggestions can overcome the fundamental weakness in the EU-China relationship which was characterised by one think tank as a game of chess, with China on one side and 27 opponents on the other, all crowding the board and squabbling about which piece to move.

Sweeping new powers could see Brussels seize control of City

The European Commission has unveiled sweeping proposals for a trio of EU financial regulators that shift ultimate control over the City of London from the British authorities to Brussels for the first time, and may allow policy on bank bail-outs may be decided by EU vote.

By Ambrose Evans-Pritchard, YTelegraph Business, 23 Sep 2009

The plans disregard findings by the Lord's European Union Committee that a fresh treaty amendment may be required for such an increase in EU power. Both the Lords and German legal scholars say the EU may have over-stepped the mark by trying to push through the proposals under single market law (Article 95) by qualified majority vote, which strips states of their veto.

The three authorities are to cover banking; insurance and pensions; securities and markets. They will have "binding powers" to impose rulings on Britain's Financial Services Authority and fellow regulators, and will be backed by full-time staff with a budget of €68m.

The European Central Bank will head a new European Systemic Risk Board (ESRB) to provide early warning of financial crises. It will operate through "moral pressure", requiring states to "explain" reckless policies.

Charlie McCreevy, the single market commissioner, said the package of measures was rushed through at the "speed of light" in order to remedy serious flaws in Europe's banking system and to "prevent future financial crises".

The proposals require the assent of EU governments, by majority vote. City Minister Lord Myners said the UK would "study the proposals carefully" to ensure that they conform with the deal struck at the EU summit in June. Germany also has concerns about the creation of bodies with "binding powers".

Mr McCreevy, an Irish Thatcherite who has tried to rein in the more extreme demands from the French government, said there was likely to be "heavy discussion" by ministers and Euro MPs before the plans ever become law.

The think-tank Open Europe said the proposals give Brussels the final say on delicate issues such as the need to recapitalise banks or ban short-selling. The EU would have wide powers to take action in "emergency cases".

The voting structure would make it hard for any future government to defend the City against policies deemed harmful. "Key decisions will be taken on a "one-state, one-vote basis', meaning that the UK will have the same influence as countries which have barely any financial sector at all," said Mats Persson, Open Europe's director.

Britain's member on each body will be "under a legal obligation to consider only EU interests, not national or any other interests". While there is a "safeguard" clause allowing states to appeal if decisions "impinge on fiscal sovereignty" (budgets), rulings would be made by a vote of EU finance ministers. This raises the voting bar slightly, but Britain would struggle to find enough allies to stop proposals that might threaten the lifeblood of the UK economy.

Open Europe said the separate EU directive on hedge funds and private equity would cost up to €1.9bn for compliance in the first year, followed by about €700m each year thereafter. The UK would bear the brunt since it hosts 80pc of Europe's hedge funds. The UK has not conducted its own impact assessment, in breach of Treasury guidelines.

The EU is hardly value for money

Telegraph View: The increase in our contribution to the EU's coffers comes at the worst possible time, when tax receipts are falling and Government spending is increasing.

Telegraph, 22 Aug 2009

Thanks to some feeble negotiation by Tony Blair in 2005, Britain's net contribution to the EU – the amount we contribute minus the amount we receive in terms of grants and rebates – is going to increase by more than £2 billion next year. Having sworn that he would "not negotiate [the UK's rebate] away", Mr Blair proceeded to precisely that. His action was endorsed by the then chancellor, Gordon Brown. The justification for the deal was the one trotted out so often when Britain makes concessions to the EU: our partners would resent it if we did not give in, and if we did, they would reciprocate with concessions of comparable generosity.

In this case, the quid pro quo was supposed to be that the French would reform the hideously wasteful system of agricultural subsidies. Has that happened? No. Is there any evidence that it will happen? No. Britain, once again, appears to have been suckered into making unilateral concessions without any reciprocal gestures from other EU members.

Irish punters start to bet on "No" for Lisbon

Bookmaker Paddy Power has cut the odds on a "No" vote in a second Irish referendum on the European Union's Lisbon treaty after a flow of punters gambled on another defeat, a spokeswoman said on Friday.

Irish voters, representing less than 1 percent of the 27-nation bloc's population, will once again decide the fate of the charter on October 2 after their shock rejection last year delayed its reforms, which are designed to streamline the EU's decision-making and give it a stronger voice in world affairs.

The most recent opinion poll, published in early June, showed 54 percent of respondents backed the treaty but last year surveys also showed a majority in favour until a few weeks before the referendum.

"We have seen a shift towards the 'No' side in the last couple of weeks and it appears our punters think things could be just as tight second time around," Sharon McHugh, a spokeswoman for Paddy Power, said.

Germany is expected to ratify the charter before elections on September 27 but Poland and the Czech Republic have said they will wait until Ireland approves the treaty before they endorse it.

The Irish government is hoping that concessions wrung from Brussels, fears of isolation during a global recession and a vigorous "Yes" campaign will swing them the vote.

So far, much of the impetus for the "Yes" side has come from civil society and business groups with little government campaigning.

Opponents of the treaty, who include disparate groups from the left and right, formally launched their campaign earlier this week, arguing the charter would leave workers worse off.

Germany's rapid recovery might be a mirage

Europe has only delayed the pain, says Jeremy Warner.

By Jeremy Warner, Telegraph,14 Aug 2009

Forget the football pitch – there's nothing quite like quarterly growth statistics to bring out the latent nationalism of Europeans. News this week that the French and German economies grew by 0.3 per cent in the second quarter, against a contraction of 0.8 per cent in the UK, had Christine Lagarde, the French finance minister, positively crowing with delight.

Breaking short her holiday to pre-announce the news on the radio, she declared that "France is distinguishing itself clearly from its neighbours". In cautious, Teutonic manner, the German economics minister, Karl-Theodor zu Guttenberg, was less inclined to uncork the Riesling, yet even he could barely disguise his sense of national pride.

The two core eurozone nations seem to be confounding their critics by leading the developed world out of recession. Is this a final vindication of the European economic and social model, or a short-lived breakaway from the main body of the economic peleton, in which everyone ultimately grinds along at the same miserable pace?

I generalise grotesquely, but the Franco-German view of the economic crisis can be characterised as follows: reckless Anglo-Saxon traders in New York and London caused a breakdown in the financial system, which resulted in a collapse in confidence and a freezing up in world trade. The consequent "export shock" led to a global recession that affected surplus and deficit nations in equal measure. Yet this was always just a temporary aberration, which is why France and Germany put in place extraordinarily costly schemes to support key industries and workforces through the downturn. Eventually, things will stabilise and world trade will return to normal.

The latest GDP statistics seem to provide support for this view. After the extraordinary fall in the first quarter, as firms slashed their inventories, the German economy has come bouncing back, with France, which had a far less pronounced downturn in the first place, hanging on to its coat tails. Many of the problems in financing trade associated with the credit crunch have eased, and industrial production has resumed, helping economies such as Germany, which rely on exports. In contrast, Britain remains stuck in a mire entirely of its own making. Undue exposure to credit-fuelled consumption, financial services and an unsustainable housing boom means that the pain of the downturn necessarily has to be longer and more intense.

I said that this was a grotesque caricature, but there is plainly some truth in the analysis. Attempts by our leaders to paint Britain as somehow better placed to weather the storm, and their policy response as innately superior, always did look ridiculous. Yet the downturn has also exposed a weakness in the German model: its undue reliance on overseas markets.

It may be true that the US and UK economies have been grossly mismanaged. Unfortunately for Germany, it has been as badly affected by these mistakes as the countries that made them. It might be up at the moment, but the scale of the downturn in the first quarter was much deeper than in the UK and US. When all is said and done, the long-term impact of the recession on the major developed economies is likely to be broadly similar.

Furthermore, in attempting to revive growth, Germany relied just as heavily on the "crass Keynsianism" it mocked in others, with a fiscal stimulus which was actually bigger than Britain's. Fiscal constraints mean that many of Germany's measures – such as car scrappage and wage subsidy – must soon come to an end. And just as the "cash for clunkers" scheme may only have brought forward demand, rather than permanently boosting it, wage subsidy may only have delayed inevitable closures and job losses.

At least some of Germany's "recovery" may have been achieved at the expense of peripheral eurozone nations such as Italy, Ireland and Spain. In characteristically disciplined manner, Germany has used the downturn to make its industries more competitive, with real reductions in wages. Prior to the introduction of the euro, this enhanced competitiveness would have been countered by a stronger currency, but today there is no such relief mechanism. Germany has been free-riding on the back of a system of fixed exchange rates, which makes its own economy ever more competitive against its enfeebled, debt-fuelled neighbours. These tensions are by no means specific to the eurozone – they are symbolic of a wider divide between surplus and deficit nations underpinned by currency pegs. The trade and capital imbalances this generates are a root cause of the present crisis, yet little attempt is being made to correct them.

I don't want to over-egg the case against the surplus nations and make it sound as if it is all their fault. Germany's demographics perhaps demand a higher level of savings to finance an ageing population, as do Japan's and China's. Yet the process has gone too far. Just as the deficit nations need radically to reshape their economies to mitigate these imbalances, so too do the big surplus nations.

The interesting thing is that, despite its sins, Britain, with its more flexible labour markets and floating exchange rate, may stand a better chance of achieving the necessary adjustment.

Iceland's krona proves the magic wand as Europe ails

Iceland's krona is working its magic cure. Well-heeled Japanese tourists – once a rarity – can be seen these days sampling halibut at Reykjavik's Siggi Hall, or buying Gymur jackets at the 66°North store on Bankastraeti.

By Ambrose Evans-Pritchard, Telegraph Business, 26 Jul 2009

The krona has fallen by half against the euro since the `New Viking' trio of Landsbanki, Glitnir, and Kaupthing strayed out of their depth and brought down Iceland's financial system.

Nothing is cheap, but prices have come within reach. Reykjavik's cafés are packed with euro-youth, at last able to afford a taste of all-night dancing at this Arctic Ibiza.

Out in Iceland's Eastern fjords, Alcoa has raised aluminium production to record levels – and metal matters as much as fish for exports.

"The smelters are running full speed," said the new-broom finance minister, Steingrimur Sigfusson. So is Mr Sigfusson himself. Last week he launched three new banks on the ruins of the old. Normality is returning. "We are going to get through this better than feared. We're feeling real activity in the economy, and much of this comes from a favourable exchange rate," said Mr Sigfusson.

Iceland's great lurch towards casino capitalism over the last decade has a cultural logic. "We are a fishing culture: when the herring is there, we take it," said Andri Snaer Magnason, author of `Dreamland: A Self-Help Manual for a Frightened Nation'.

In one sense it was a terrifying shock for the 310,000 inhabitants of this Norse-Celtic outpost of lava rock to see their currency, banks, and global image crash in a single week last autumn. Yet nothing has really changed.

"Everything still feels normal. The services of the state are intact. The swimming pool is open. You can still have a decent heart attack in Iceland," said Mr Magnason.

"Friends who lost jobs in banking have already found new work, and you could say the krona has worked as a buffer for us. We all went down together, and that has led to healthier recession without mass unemployment."

The jobless rate has risen to 9.1pc. This is below the eurozone average of 9.5pc, and is stabilising much earlier.

Those who point to Iceland as a scarecrow exhibit of what happens to a small country caught in a financial storm without the shield of euro membership have the matter backwards, as will become ever clearer over the next two years.

The OECD expects Iceland's economy to shrink 7pc this year. This is much better than Ireland at minus 9.8pc, and recovery will come sooner. So next time you hear the Sacra Congregatio of the euro faith incant yet again that EMU saved Ireland from a terrible fate, know that they deceive only themselves.

You take your punishment early with devaluation, as Britain did on leaving Gold in 1931, or ending the D-mark torture in 1992, or now. You look a sorry sight at first, but sweet vindication comes later.

It is those caught in a deflation trap with fixed exchange rates that face slow asphyxiation, and deeper social damage. Youth unemployment is already 34pc in Spain, 28pc in Latvia, 25pc in Italy, 24pc in Greece, and rising.

At Iceland's central bank – mercifully, no longer listed beside al Qaeda as a terrorist body by UK authorities – Governor Svein Harald Oygard says currency therapy is working as it should. "If you lean back and look you can see that fall of the krona accentuated the shock at first, but it is also now working as a turbocharger for recovery.

"We've seen a strong hit on wealth and asset values, but the story for real economy is very different."

Devaluation is always double-edged. Some 13pc of households in Iceland hold mortgages in euros, Swiss francs, or God forbid, yen. Their debt levels doubled overnight.

Some 70pc of corporate loans are in foreign currencies. Exporters are hedged. Those that earn in krona are not, and a "large number" are now in dire straits.

The Governor is a Norwegian who cut his teeth in the Oslo banking crisis of the early 1990s. He was brought in as a troubleshooter after the last crew was literally banged out of the Sedlabanki by the Saucepan Revolution in February.

With justifiable pride, he showed me the latest trade figures. Iceland has defied the global shipping crash to eke out an 11pc rise in exports over the last year. Even China has seen a fall of 21pc.

Iceland will be back in surplus by next year, from a peak deficit of 25pc of GDP. You could say the same about Latvia, which has stuck to its euro peg under orders from Brussels. But there is a big difference.

Latvia is balancing its books by crushing demand. Exports are down 28pc, but imports are down even more. The result of this Stone Age policy is economic contraction of 18pc this year, and 4pc in 2010 (state data).

Icelanders have taken a hit, of course. Unions have accepted 'real' wage cuts of 10pc. Health care and welfare is being cut 5pc, education 7pc, and the rest 10pc. This is comparable to what is happening in Ireland, but again there is a difference. Dublin faces a Sysphean task as collapsing tax revenues force ever deeper austerity: Reykjavik is over the worst.

It baffles me why rating agencies still talk of downgrading Iceland's debt to junk. The country should emerge with public debt of 80pc to 100pc of GDP – much like Britain. Yet Iceland also has the world's best-funded pension system at 120pc of GDP. It is the two together that counts.

In their angst, Icelanders look wistfully at the apparent safe port of EU membership. The Althingi has voted to start entry talks. But the storm will have blown over well before an EU referendum is held in two or three years. By then the delayed cluster bomb of Europe's unemployment will have detonated. Try selling EU protection then.

Freeze Eurosceptics out of decisions, Hans-Gert Pöttering tells MEPs

Accompanied by a militaristic flag-raising ceremony and the strains of Beethoven’s Ode to Joy — the European anthem — the new members of the most Eurosceptic European Parliament gathered in Strasbourg yesterday to begin work.

Hans-Gert Pöttering, the outgoing President of the Parliament, urged MEPs to unite to freeze “anti-Europeans” out of the decision-making process for the next five years.

About a fifth of the 736 MEPs will be in groups that favour either less EU integration or withdrawal — including the 25 Conservatives, 13 UK Independence Party and two BNP members from Britain.

“I think it is very important that the pro-European MEPs co-operate well so the anti-Europeans cannot make their voices heard so strongly,” Mr Pöttering, said.

The former President, who is furious at David Cameron’s decision to leave the main centre-right group and form an anti-federalist bloc, told The Times: “[The Parliament] depends on those who are willing to unite Europe.”

References to the flag and anthem were removed from the EU
constitution to tone down its trappings of statehood when it was redrafted as the Lisbon treaty after it was rejected in referendums in France and the Netherlands.

That did not stop troops from the 1,000-strong Eurocorps garrison — consisting of soldiers from France, Germany, Belgium, Spain and Luxembourg — raising the gold-starred blue EU flag yesterday.

“Soldiers are part of the defence of our values of human rights, democracy and the law, and this is part of our value system of the European Union,” Mr Pöttering said.

“We do not want a European superstate — we want a European Union that is strong because no country alone can defend its interests.

“We respect the identity of our regions and our villages and counties and this makes Europe rich.”

Eurosceptics were unimpressed and members of UKIP sang the British national anthem during Ode to Joy.

Senior Conservative MEPs were dismayed at the prospect of the main centre-right group, the European People’s Party (EPP), co-ordinating with the main centre-left bloc to exclude Eurosceptics from key decisions.

Nirj Deva, a Conservative MEP, said: “What has distressed me is that the EPP is doing deals with the Socialists and the Alliance of Liberals and Democrats, rather than doing deals with us. On policy areas we should work together.”

In a ceremony last night to give medals to the 400 retiring MEPs Mr Pöttering said: “You were responsible for uniting the European people.”

The DM says: Note that Mr Pottering made no mention of respecting the countries of Europe - they are obviously old hat.

Europe digs its economic grave while the ECB answers to no one

The European Central Bank preens as the last guardian of virtue in a sinful world, yet its actions are devastating the public finances of almost every country under its care.

Without a radical change of strategy, the ECB risks pushing the weakest states into a debt-compound spiral that can only end in bond crises and/or the disintegration of Europe's monetary union – whichever comes first.

The International Monetary Fund says the eurozone will contract by 4.8pc this year, worse than the UK (-4.2pc) or the US (-2.6pc). The deepest damage will occur next year as Europe remains mired in slump, even as the rest of the world recovers. It is the length of recession that matters most for jobs, social stability, and public finances. I am not easily shocked any longer but I did sit up when Spain's budget chief Luis Espadas said the economic collapse could "easily" push Spanish public debt to 90pc of GDP by 2011. This is up from 36pc in 2007.

Nobody knows where the tipping point lies on public debt, though anything above 100pc of GDP in a currency union is courting fate. Some are already there. The European Commission says Italian debt will jump to 116pc in 2010. Greece is vaulting back to 109pc, Belgium to 101pc, France to 86pc.

Even German finances are falling apart. After screwing down spending to balance the books, discipline has broken down. Berlin says the deficit is heading for 6pc next year, taking debt to 82pc. This is happening all over the world, of course. But the ECB is compounding the effect, whether for reasons of politics, Bundesbank fetishism, or misjudgment. By refusing to join the US, Japan, Canada, Britain, and Switzerland in quantitative easing (QE) the ECB has allowed a contraction of private credit this summer. The M3 "broad" money supply has shrunk since February.

Ignore M3 at your peril. It flashed awarning signal in the US months before the collapse of Lehman Brothers last September; it is flashing the similar warning signals in Europe now.

Professor Tim Congdon from International Monetary Research said the eurozone money figures are "horrifying" and portend a serious crunch ahead. "My verdict is that the senior people in the ECB [and the Fed] have little organised understanding of the debt-deflationary processes initiated in late 2008," he said.

Ireland's M3 contracted at a 30pc annual rate last month, a death sentence for a hyper-indebted economy. The wreckage will be evident just in time for the Irish to vote again – under extreme duress – on the EU's Enabling Act in October. This should make for interesting political chemistry.

In Germany, the Mittlestand lobby (BVMW) says half its members are facing a liquidity squeeze, while the strutting finance minister, Peer Steinbrück, has assumed a ghostly pallor. "We must take seriously the threat of a credit crunch in the second half of this year," he said.

Mr Steinbrück has called for a suspension of the Basel II accounting rules in order to rescue banks, and even suggested that the German government undertake direct lending to boost credit. The regulator BaFin has already told us that bad debts are set to "blow like a grenade" this year. A leaked BaFin memo said "problematic" assets have reached €816bn (£700bn), led by Hypo Real with €268bn.

ECB experts think eurozone banks will have to write down a further €203bn by the end of next year. Yet ECB policy-makers seem unwilling to face the implications. Yes, they have injected €442bn in a one-year tender, but the money is not reaching the economy. Simon Ward from Henderson New Star said the ECB is repeating errors made in Japan when it first trifled with QE, relying on banks to pass on credit rather going for massive bond purchases.

Inevitably, Europe's politicians are taking matters into their own hands. They will not sit idly by as millions lose their jobs. If the ECB deflates, budgets must bear the strain, and that is exactly what Europe cannot afford with a birthrate of 1.53 per woman and the onset of demographic decline. The commission says the number of workers per pensioner over 65 will halve from four to two by 2040. Age-related costs will explode by 15pc of GDP in Greece, 9pc in Ireland, Spain and Holland. The populations of Germany and Italy will soon be shrinking.

Viewed strategically, Europe's mix of monetary deflation and rampant deficit spending by the states is nothing short of lunatic.

Needless to say, Britain faces it own colossal mess, but of a different kind. It is the Prime Minister who is taking the country over a cliff, not the Bank of the England. Voters will soon have the joy of sacking him. How do Europe's voters sack the ECB?

The DM says: This has always been the problem with the European Union. What the voters want has no impact at all on what the EU does.

Voters are getting in the EU's way

Telegraph View: Democracy is an idea that Europe's bureaucrats seem unable to understand

Government for the bureaucrats, by the bureaucrats. It is not a very appealing slogan, which may explain why it isn't used by advocates of ever-closer union within the EU. But it appears increasingly to be the fundamental principle that animates the "European project". The Eurocrats think politics is far too important for voters. Bureaucrats know best: only they should be allowed to decide the future of Europe.

Europe's class of permanent officials did everything they could to ensure that the new EU constitution was not submitted to the people for approval. Most of the few electorates given the chance to vote on it rejected it. Only the Irish were allowed to vote on the modified version – whose name had been changed from "a constitution" to "a treaty", in order to make it seem different – and they rejected it. The reaction of the Eurocrats to that defeat was to deny that it mattered. Their view was, and is, that the Irish people needed to be dissolved and replaced by one that would vote "Yes", and they believe they have now engineered that result. The Irish will be given another chance to come to the "right" verdict on the new constitution in October. If they do as the Eurocrats want, the new "treaty" will come into force, binding all members of the EU.

David Cameron has pledged to give the British people the chance to vote on the new constitution – a referendum which Labour promised, then denied to voters. Some members of the Tory party seem determined to prevent Mr Cameron from keeping his promise. We hope that they fail, and that, should he win the election, Mr Cameron has the courage to give the people the opportunity to decide the future of their own country. That, after all, is the essence of democracy. But democracy is an idea that Europe's bureaucrats, and their camp-followers in the Commons, seem simply unable to understand.

We can't have an election until it's too late

European Commissioners are obsessed with the need to keep David Cameron at bay until the Lisbon Treaty is ratified, says Daniel Hannan.

Telegraph, 20 Jun 2009

Lord Mandelson is destroying Labour for the sake of the EU. He is determined to prop up Gordon Brown until after the Irish referendum on the Lisbon Treaty, whatever the cost to his party. See how they operate, these Euro-zealots. They are like Richard Dawkins's selfish genes, not caring what happens to their host organisms once they have served their purpose.

This might strike you as a curious way to talk about the Business Secretary. After all, we keep reading that Mandy is a Labour man to his backbone, that the one fixed point on his whirling moral compass is dedication to the party. But his first allegiance, these days, is to Brussels. There is no other way to explain his behaviour over the past month.

No one can doubt that Mandelson kept Gordon Brown in office. When James Purnell walked out of the Cabinet on the day of the European elections, everything looked lost. Then Mandy hit the telephones, hectoring, threatening, schmoozing, cajoling. Say what you like about him, he hasn't lost his touch: he turned the Cabinet around. Brown was wedged in place, like one of those pickled Soviet leaders.

Why did he do it? You don't have to be a spin doctor to see what Gordon Brown is doing to his party's popularity. He has taken Labour to a share of the popular vote it has not registered since before universal male suffrage, when it was a tiny band of trade-union-sponsored candidates. Anyone – anyone – would make a more electable leader, even Michael Foot, if the old boy could be persuaded to come out of retirement.

True, the new PM would have to call a general election and the chances are that he would lose it. But at least Labour would avoid extirpation. By hanging on, the party is repeating the mistake of John Major's Tories in the mid-1990s, trying the patience of an angry electorate, purchasing each day now at the cost of a week in eventual Opposition.

The best course for Labour MPs would be to despatch their leader with the cold efficiency of so many abattoir workers, replace him with someone presentable, hope for a honeymoon and flatter the electorate with an early poll. Mandy, of all people, knows this perfectly well. So what the devil is he playing at? Viewed from the Westminster lobby, it seems an impenetrable mystery. From the perspective of Brussels, though, the answer is obvious. European Commissioners are obsessed with the need to keep David Cameron at bay until the Lisbon Treaty is ratified.

You see, the Conservative leader has promised a referendum on Lisbon – and, unlike the other two party leaders, he means it. He has even instructed his lawyers to draw up the Bill in advance, so that he could introduce it on his first day in office. Eurocrats are understandably determined to keep the Tory leader out until after the second Irish referendum in October. (There is a universal, if somewhat insulting, assumption in Brussels that the Irish will roll over this time.) Mandelson is their agent, their man in Westminster.

He may be a Minister of the Crown these days, but his heart is plainly in his last job. He likes to boast of his proximity to EU leaders, and recently floated the idea that Britain might join the euro. If keeping Lisbon on track means condemning his grandfather's party, he will do the necessary.

If my theory strikes you as fanciful, recall Mandelson's interview in The Daily Telegraph last week, in which he spoke of the likelihood of a new challenge to Gordon Brown in the autumn. Why, having seen the rebels off a few weeks ago, should he positively invite them to have another go after the recess? Because it won't matter by then. The Euro-constitution will be in force.

Euro-fanatical LibDems have made the same calculation. They want an early election, they say, but not quite yet: October would do nicely, thank you. Shirley Williams justified this piece of sophistry by arguing that a snap poll would inevitably be about parliamentary expenses. Well yes, Shirley, that would be rather its point. The House of Commons has been through the hubris and the nemesis, but the catharsis has been artificially stayed. No serious overhaul is possible until Parliament has a fresh mandate.

The trouble is, this doesn't fit with Brussels' plans. You see how the EU, as well as being undemocratic in its own structures, serves to vitiate democracy within its member states. British voters must be denied their general election so that Eurocrats can have their treaty.

It's an awesome phenomenon, this readiness of national politicians to place the EU's interests before their own. Think of John Major breaking his party over Maastricht. Think of Gordon Brown, who had been determined to present himself as an honest leader after years of Blairite spin, having to start by pretending that Lisbon was different from the European Constitution, the smoke billowing from his pants as he kept woodenly repeating the claim. Think of Nick Clegg, who had so wanted to make a good first impression, taking three opposed positions on the referendum in order to ensure that Lisbon went through.

Think of Bertie Ahern resigning as Ireland's Taoiseach so that the sleaze allegations levelled against him shouldn't prejudice the "Yes" campaign. Think of Belgium, which had been without a government since its election, cobbling together a ministry for a couple of weeks in order to ratify the treaty whereupon, job done, it went back to dissolving.

Herein lies what C S Lewis would have called the EU's hideous strength, its ability to make otherwise good people behave badly. The lack of democracy intrinsic in Brussels – the way it is run by unelected functionaries, the way it swats aside referendum results – has spilt over into its constituent nations. In order to make an undemocratic system work, they too must become less democratic.

The proof is before our eyes. Our system needs, and our electorate demands, an early election. Yet we must be denied one for the sake of a treaty that three other countries have already rejected in referendums. How cheap our Parliament has become. How diminished our nation.

Open Europe research finds that MEPs cost taxpayers five times more than UK MPs

Open Europe has published (June 09) a comparison between the cost of the European Parliament and the cost of the UK Parliament, which finds that the European Parliament costs taxpayers a staggering £1.8 million for each MEP per year. This is in contrast to the House of Commons, which costs taxpayers £364,000 for each member per year, and the House of Lords, which costs £208,000 per member per year.

Open Europe's comparison, based on the respective parliaments' budget allocations, also finds that while national MPs at Westminster on average claim up to £148,297 in allowances each year, their counterparts in Brussels can claim up to £363,000 per year. Furthermore, MEPs do not have to produce receipts to claim their allowances, in contrast with national MPs.

In addition, Open Europe found that 22 UK MEPs retiring this year will receive a share of a £20 million pay-off in pensions and benefits. Each will be paid up to two years' salary to help them to 'adjust' to their new lives and will share a £10 million index-linked pension pot. Of those 22 MEPs, three politicians are accused of misusing public money: Den Dover, Ashley Mote and Tom Wise. All will receive a "transition payment" of over £30,000, up to £55,000 to close their offices and layoff staff, and pensions worth between £175,000 and £235,000. (7 June Andrew Pierce on LBC, South Wales Evening Post, 4 June, Times Times 2 2 June

CBI tells politicians to 'get a grip' for sake of UK economy

Britain's prospects for economic recovery are being hampered by politicians who have become obsessed by their own problems, according to Richard Lambert, the director general of the CBI.

By Louise Armitstead, Telegraph Business, 12.6.09

The boss of the so-called "Voice of Business" speaking on Thursday at an annual CBI dinner, warned that policy-makers are worrying more about their own expenses scandal than "rising government debt to energy security, and fast-rising youth unemployment." He demanded that politicians "get a grip" and get back to tackling "the biggest economic, social and environmental challenges of our lifetime."

His renewed warnings follow a rising concern in the City that the European authorities are going to unleash rafts of regulation in response to the financial crisis. Bosses are worried that London's position as the global financial centre is not being defended properly because politicians are too distracted by domestic problems.

Mr Lambert was scathing of the government's plans to introduce electoral reform as a response to the current crisis engulfing parliament. He said: "Politicians are airily throwing around ideas for constitutional reform - ideas which may be desirable in themselves and will need serious discussion in calmer times - but which are a massive diversion at a time when so many urgent policy decisions have to be agreed and implemented."

The level of distraction in government could result in long-term and drastic damage to economy, he warned. "Britain finds itself at what you might call a burning platform moment," said Mr Lambert. "We can either take the bold steps that will be necessary to take us forward to a prosperous but different kind of future. Or we can pretend to ignore the need for change, and risk going down with the ship."

He added: "But instead of focusing on this big picture, politicians appear wholly preoccupied with what's going on within the Westminster village, and in doing what they can to strengthen their own positions over the short term."

The government denies it is distracted. A spokesman for the department of Business, Innovation and skills said: : "The Government will continue to lead the country out of recession. Many initiatives had been announced and more will follow in the coming weeks."

London's powerful private equity and hedge fund industry are particularly concerned after the recent European Commission directive that proposed radical legislation. Antonio Borges, chairman of the Hedge Fund Standards Board, described the directive as a "blatant attack on the UK and US financial systems by continental countries that neither have a tradition of alternative investments nor a proper understanding of them."

Philip Hammond, Shadow Chief Secretary to the Treasury, told The Daily Telegraph: "Mr Lambert's comments should come as a powerful wake-up call to Ministers who have been more worried about protecting their own jobs than saving other people's, and to a Prime Minister who refuses to acknowledge the extent of the challenges we face. It's clear the only solution is a general election."

Calls for Brown to go nuclear in City battle with EU

As Europe's leaders prepare to strip Britain of ultimate control over finance, insurance, and securities, defenders of the City have begun to talk darkly of the nuclear option – known in EU lore as the "Luxembourg Compromise".

Britain cannot veto the massive shift in regulatory power to Brussels now under way. Internal market laws are decided by qualified majority voting (QMV), and London has few friends in this fight.

What Gordon Brown can do at next week's EU summit it to play the Luxembourg card by invoking "vital national interest", if he is willing to risk a showdown with fellow leaders. This has no legal status. It is the political equivalent of a stamping bull, or a viper's rattle. It means back off, or we strike.

"This is an extremely serious crisis," said David Heathcote-Amory, former Europe Minister and now a key Tory MP on the European Scrutiny Committee.

"Once we lose of control over the City of London we will never get it back, and the consequences could be catastrophic. I think we are in 'Luxembourg terrritory'. If the City was in Paris you could be pretty sure that French would fight like tigers to save it," he said.

"The Continental countries have no interest in the health of the City, and some want to turn the tourniquet tighter. I fear the Commission is going to get its way since we have such a weak government," he said.

Downing Street has given no hint that Mr Brown intends to put up serious resistance. City leaders doubt he will go to the wall for the sake detested bankers. It is easier to claim a cosmetic victory on fiscal sovereignty, letting the killer detail go through.

One British minister admitted privately that UK strategy is to play for time in the hope that "other governments start getting cold feet about giving new powers to the EU". Some might, but our ally Ireland remained silent at a meeting of EU finance ministers this week, unwilling to waste political capital on Dublin's Canary Dwarf. It relies on EU favour to survive its own desperate crisis.

France's Charles de Gaulle was the last EU leader to opt for a showdown in the "empty chair crisis" in 1965, withdrawing his officials from Brussels after the commission pushed its luck too far. It led to the Luxembourg Compromise. No country since has ever pulled the trigger on vital interests. Disputes have always been resolved in time.

Lord Turner, the head of the Financial Services Authority, said in April that the banking crisis would either lead to "more Europe, or less Europe" since the current half-way house is unworkable.

Brussels has seized on events to offer more Europe. "It's now or never: if we cannot reform the financial sector when we have a real crisis, when will we?", said Commission president Jose Manuel Barroso.

While earlier talk of an EU super-regulator has been dropped, the same goal is being achieved by other means. The plan is to create three "authorities" with a permanent staff and powers to impose "binding" decisions on states. Appeals go to the European Court. There is to be a European Banking Authority in London, an Insurance Authority in Frankfurt, and a Securities Authority in Paris.

Lord Turner fired a warning shot on Thursday, questioning plans to bring London's securities houses under EU oversight. "Frankly, this is an area that when it gets Europeanized you sometimes get things that are not actually to do with good regulation. If one was absolutely confident that European supervision was going to be completely politics-free, in a neutral, technocratic fashion, we would be more relaxed," he said.

There is little doubt that Brussels is exploiting the backlash against finance to bring the City under its thumb. Its own Larosiere Report concluded that hedge funds were marginal players in the credit crisis. Yet that has not stopped it drafting draconian rules for hedge funds as well, with chunks copied from French law. What is the purpose, if not to hobble a successful British industry?

Christen Thomson from the Alternative Investment Management Association said 80pc of Europe's hedge funds are in Britain, supporting 40,000 jobs, and are already regulated by the FSA. "A whole galaxy of hedge fund strategies would be impossible under this law and it is not necessary. The FSA tracks the top 40 funds and knows the level of systemic risk, and it keeps the cowboys out," he said.

Britain has long fudged matters in dealings with the EU, hoping that common sense will prevail, as it often does. But the assault on the City may be a line too far. London has been the centre of global finance for three hundred years. Either the British government controls the City, or the EU apparatus controls it. This cannot be fudged.

Britain isolated as EU tightens grip on City

Britain has been unable to block plans for an EU regulatory machinery with binding legal powers, securing only a loose agreement at a key meeting of EU finance ministers that any proposals should not interfere with budget and taxation policy.

Alistair Darling, the Chancellor A joint statement yesterday said that legislation to be drawn up by Brussels this autumn “should ensure that such powers should not impinge in any way on the fiscal responsibility of members of states”.

The Commission aims to create three “authorities” with their own staff, full-time president and independent budget. If there is a dispute between regulators from EU countries over how to proceed, these EU bodies can “settle the matter” by binding mediation. The European Court would have final jurisdiction. The wording would appear to reduce Britain’s Financial Services Authority (FSA) to a subservient arm of the EU apparatus, limited to “daily oversight”. Britain does not have a veto since legislation that affects the “internal market” is decided by qualified majority vote (QMV).

While some East European states share British concerns, Mr Darling is largely isolated in trying to defend the interests of the City of London. EU leaders will grapple with the subject at a Brussels summit later this month.

There is widespread suspicion that Paris and its allies have seized on the financial crisis to rein in Anglo-Saxon capitalism and impose their Colbertiste ideology on the City.

Germany will play a pivotal role in any outcome. While Berlin favours tougher rules than the FSA’s “light touch” model, both the Bundesbank and the regulator BaFin are jealous of their own oversight powers. Finance minister Peer Steinbrück reportedly views the plan as “too ambitious”.

An EU diplomat said it was hard to gauge whether Britain can count on a blocking minority, since most countries kept quiet at the meeting. Finland’s Jyrki Katainen said a number of states may have concerns about the plan: “For instance, can the supranational body take decisions for the national supervisors?”

He backed calls from the International Monetary Fund and the US Treasury for a rigorous health check of Europe’s banks. “In order to restore confidence we need European-wide credible stress tests,” he said.

The idea was shot down by Mr Steinbrück. “European banks are clearly different from those in the US,” he said, adding that there was no need to probe or reveal the capital adequacy of each bank.

Labour slumps to historic defeat

Nick Robinson, BBC News , 8.6.09

Labour has suffered its worst post-war election result after it was beaten into third place by UKIP and saw the BNP gain its first seats at Brussels.

Labour's share of the vote at the European elections was just 15.3% - worse than party bosses had feared.

The Tories won with 28.6%, beating Labour in Wales but failing to increase their total share significantly.

The results have sent shockwaves through UK politics and led to renewed calls for Gordon Brown to quit as PM.

The BNP gained a seat in Yorkshire and Humberside and in the north west of England, where party leader Nick Griffin was elected - the first time the anti-immigration party has won seats at national elections.

Their result was condemned across the political spectrum, with both the Tories and Labour calling it a "sad day" for British politics.

Health Secretary Andy Burnham said: "The BNP is like the ultimate protest vote. It is how to deliver the establishment a two-fingered salute. I think largely it is a comment on Westminster politics."

But in his victory speech, Mr Griffin said he was "absolutely delighted," adding "it will be a huge change in British politics".

He said "The most demonised and lied about party in British politics has made a massive breakthrough. The public have had their say in a democratic election and we should respect that."

With results in Northern Ireland still to come, it is clear that Labour suffered one of its most abject results of all time.

'Dismal' result

Its deputy leader Harriet Harman conceded there had been a "big fall" in the Labour vote and it appeared Labour had been hit "much harder" by anger about MPs' expenses.

"It was a dismal result," she said. "We have to understand the concerns that people are expressing and address them."

But she backed Gordon Brown saying he was "resilient" and would sort out the economy and expenses.

Conservative leader David Cameron said he was "delighted" with the results: "The Conservative party were the clear winners in these elections.

"We topped the poll, we increased our share of the vote, increased our number of MEPs, we won in almost every part of the country and had some staggering results like topping the poll in Wales."

He said taken with last week's local election results it showed "an enormous gap opening up between Labour and Conservative" with the Tories "almost getting twice as many votes as Labour last night".

Other UK-wide Westminster parties effectively trod water on their 2004 European results, with the Lib Dems coming fourth and the Tories increasing their share by just over 1%.

This left the smaller parties to benefit - possibly from public anger over the MP expenses scandal.

UKIP, which campaigns for Britain's withdrawal from the EU, gained 17.4% of the vote and increased its number of MEPs to 13 - beating Labour into third place.

Leader Nigel Farage said his party's performance was a "hell of an achievement" which sent a clear signal to Gordon Brown.

"He has been beaten by a party that he mocked and derided as being on the fringes - so if we have beaten him, he has got to go," Mr Farage said.

In two English regions, the South-East and South-West, the Green Party beat Labour into fifth place.

Nationally, the Greens increased their share of the vote to 8.7% but leader Caroline Lucas blamed the electoral system for her party's failure to gain more than its current two MEPs.

"In the South East we have increased our vote by 50% and we are disappointed it has not translated into a second seat," Ms Lucas said.

William Hague says the results show "people clearly want change"
The Lib Dems saw their share of the vote shrink slightly on 2004, but leader Nick Clegg told the BBC that taken with last week's local election results, his party had a strong platform to make gains against Labour at a general election.

"On the European vote we held our own, we actually added an MEP - would I have liked to have done even better, yes of course but I think given the very volatile nature of the elections it was a solid result." He said Labour's 12-year dominance of British politics was over and the party "finished".

Turnout down

In Scotland, SNP leader Alex Salmond hailed a "historic" victory after the Nationalists hammered Labour.

Across Scotland the SNP secured 29% of the vote to Labour's 21%, comfortably achieving the target the SNP leader had set his party at the start of the campaign.

Welsh Labour also suffered humiliation in the European elections, with the Conservatives topping the poll.

It is the first time since 1918 Labour has failed to come first in a Welsh election, as its vote dropped by 12%.

Labour, Conservatives and Plaid Cymru won a seat each, as did UKIP, which will send its first Welsh MEP to Brussels.

The turnout, with Northern Ireland yet to declare, is around a third of the vote, down 4% from 2004, but that is largely down to the fact that some areas had all-postal ballots last time.

The results are likely to pile further pressure on Gordon Brown, who faces a crunch meeting of Labour MPs on Monday, which may decide his future.

British politics is turning Continental

After four weeks knocking on doors and talking to voters, Daniel Hannan believes the need for political reform is stronger than ever.

European elections: All politicians are now talking about 'returning power to the people'. But it can?t be done without recovering power from the EU.

We’re in the closing days now, and I’m campaigning on autopilot. “Yes, Madam, the Conservatives. No, ha ha, we can’t actually put canvassing on expenses. Oh, how very droll. Yes, I’m pretty cross about the whole business myself. Yup. Yup. Oh, far worse in Brussels. If I told you, you wouldn’t believe me. I know, I know. You will? Gosh: thanks for your support.”

According to the pundits, The Daily Telegraph’s revelations of parliamentary expense claims will bring about a Götterdämmerung for all the established parties. There will be a record abstention rate. Mainstream politicians, regardless of their guilt or innocence, will be swept away. “For He maketh His sun to rise on the evil and the good, and sendeth rain on the just and on the unjust”.

Hmm. That’s not how it feels on the doorsteps. People are talking about MPs’ expenses all right, but they’re voting about the economy. Or, rather, they are conflating the two issues: “I’m having to budget now to make sure I can afford pet food, and I’d love to be able to claim it back.”

My prediction? Tory gains on a higher-than-average turnout. No reason to listen to me, of course, except that, while lobby correspondents necessarily get their evidence second hand, I’ve spent four weeks knocking on doors, leafleting commuter trains, flirting politely with mums at school gates, molesting passers-by in high streets and haranguing people from soap-boxes. I reckon I’ve spoken to 500 voters properly, and come into contact with 10 times as many. And what they’re telling me is not what the pundits are telling each other.

Journalists, quite rightly, are interested in moats and beams. But not everyone has that luxury. Most of the people I’ve canvassed, even in my relatively prosperous Home Counties constituencies, are more concerned about their own mortgages than about MPs’ mortgages.

This is the first election since the economic crisis hit. Our deficit is now the highest in the world, our Treasury has been emptied, our credit exhausted. Yes, people are angry about MPs’ expenses – but what makes them really furious is the idea of subsidising the dolts who got us into this mess.

So what about the European Parliament? Isn’t it now a serious outfit, laying down everything from how long we are allowed to work to how our asylum rules operate? Aren’t I going to talk about what we MEPs get up to? Yes, but you can’t isolate Europe from our domestic discontents. When people complain that elections never seem to change anything, they are reflecting the reality that 84 per cent of our laws come from Brussels.

When they protest that their leaders are not listening, they remember that Gordon Brown cancelled his promised referendum. When they moan about parliamentary corruption, they know that things are worse in the European Parliament. When they complain about tax rises, they wonder whether we couldn’t find a better use for the £40 million we hand to the EU every day.

Let me put it another way. The epithets now being attached to our MPs – “on the gravy train”, “out of touch”, “parasites”, “won’t listen” – are those that, for years, have been hurled at MEPs. Britain’s political culture is being Continentalised. I say this in no jingoistic spirit. Like most Euro-sceptics, I love Europe. I speak French and Spanish, and have lived and worked all over the Continent. It’s precisely because I admire other countries that I value their independence and cheer their patriotism. This isn’t about Europe; it’s about democracy. How can we restore purpose to the ballot box when most of our laws come from foreign officials whom we don’t elect? How can we decentralise power in Britain while centralising it in Brussels?

I’m not sure, even a week on, that the magnitude of David Cameron’s proposals for constitutional reform has sunk in: open primaries; local control of education and housing; elected police commissioners; an end to the patronage powers enjoyed under Crown Prerogative; appointments through open parliamentary hearings; scrapping the Human Rights Act; a recall mechanism; legislation by citizens’ initiative; referendums.

In order to devolve power within the United Kingdom, the Conservative leader first has to get it back from Brussels. This was the central argument of The Plan: Twelve Months to Renew Britain, the book I co-authored with Douglas Carswell, which first suggested the agenda that David Cameron is now advancing. We want to repatriate powers from Brussels, not for the sake of it, but in order to push those powers further down, to local councils or, better yet, to private individuals.

If the EU confined itself to cross-border issues, none of us would have a problem with it. The trouble is that its tendrils curl into every cranny of national life. The closure of rural post offices is an indirect consequence of the EU’s Postal Services Directive. The move to fortnightly bin collection is driven by the EU’s Landfill Directive. The rigmarole involved in opening a bank account is mandated by the EU’s Money Laundering Directive. The centrepiece of the Home Information Pack is the Brussels requirement for an ecological survey of every dwelling. The ban on higher dose vitamin and mineral supplements? Brussels. Car seats for 12-year-olds? Brussels.

All politicians are now talking about “returning power to the people”. But it can’t be done without recovering power from the EU. As a first step, we need to have the referendum that all three parties promised at the last election. Yesterday, the Conservatives published a draft bill to give effect to such a referendum immediately upon taking office.

It is in this context that David Cameron plans to give the European Parliament something it hasn’t had in 50 years: an official opposition. As things are, every major political group in Strasbourg, from the Christian Democrats to the Communists, stands for political amalgamation, an EU constitution, a common foreign policy and so on. This monopoly gives federalists their greatest asset: the sense that, whether or not you support it, deeper integration is inexorable.

The Tory leader will break the cartel, putting together an alliance of respectable, free-market, Atlanticist parties that believe in national democracy. No wonder the federalists are planting risible stories about the Tories sitting with fringe parties. They know that, once Cameron plants his standard, Euro-federalism will cease to be inevitable and will simply become one among a series of competing ideas.

All the more reason to vote on election day. This isn’t simply an unofficial referendum on Gordon Brown: it’s a contest between two competing visions of Europe.

Tories oppose the centralisation of power in Brussels because they want decisions to be taken as closely as possible to the people they affect, and they intend to apply that principle at home, too. To be fair, there is a similar consistency of principle on the Labour side. Just as Brown has aggrandised the state in Britain, so he has swollen the powers of the EU. He plainly believes in more rules and more politicians. The legislative torrent rushing upon us from Brussels has been swollen by rivulets of domestic legislation. There are rules for everything, sapping initiative and turning every nurse, teacher and policeman into a form-filler.

Now the Prime Minister wants to subject Parliament, too, to an external quango. He may have caught the mood: plenty of people seem to be of the view that MPs should be housed in barracks, watched over by warders and made to account for every phone call.

Yet regulation is what caused the current crisis. It replaced a culture of conscience (“is this the right thing to do?”) with a culture of compliance (“is this within the rules?”).

On Sunday, the PM invoked his “Presbyterian conscience”. But a truly conscientious Presbyterian would understand that virtue cannot be compelled. He would no more want to be told what to do by officials than his fathers wanted to be told what to believe by bishops. The idea that the people’s right to choose their representatives should be contracted out to some external bureaucracy would have had the PM’s – and my – Presbyterian forebears hurling footstools and signing Covenants. Parliament already has an external regulator, Prime Minister. It’s called the electorate. When are you going to let it do its job?

If the EU seems intent on a putsch then UKIP should give it a shove

The European Union has slipped the leash of democratic control. It is one thing to advance the Monnet Project by treaty creep and stealth directives. It is another to put questions of sovereignty to a popular vote and then refuse to abide by the outcome.

Europe's elites have crossed a political line by reviving the EU Constitution under the guise of the Lisbon Treaty and ramming it through without referendums, after it had already been rejected by French and Dutch voters.

To continue a second time after rejection by the Irish – alone in voting – amounts to a putsch.

Without rehashing the Lisbon debate, remember that this text transforms the European Court (ECJ) into a fully-fledged supreme court, with jurisdiction over the rights charter and the broad reach of "Union Law" rather than just the narrow (Pillar 1) fiefdom of commercial law it holds today. This is a quantum leap.

Euro-judges will have the last say on areas of social policy, macro-economics, home affairs, justice, and arguably diplomacy.

I might add – apologies to law professors – that the crude difference between core Europe and Britain/Ireland is that Napoleonic law forbids unless specifically allowed, while Common Law allows unless specifically forbidden. This is the legal foundation of Anglo-Saxon scientific and commercial creativity, and perhaps the reason democracy has bedded better in the Anglo-sphere.

It is obvious that a text creating a full-time EU president and an EU justice department, and which gives Euro-MPs power of the purse for the first time, is an attempt to establish a unitary state. This is no longer a treaty club.

Personally, I will register my protest by voting for the UKIP, knowing that the number two on their list in my South East region is Marta Andreasen – sacked as the Commission's chief accountant for calling the EU budget "an open till waiting to be robbed". A strong showing for UKIP should be enough to put her on to the EU's Budget Control Committee, where she can exact revenge for all of us.

We know from an internal memo by the head of the Internal Audit Service what was done to her. "I would for no money have wanted to be in Ms Andreasen's shoes," it said, "recognising the unforgiving inclination of a bureaucracy once one is declared taboo by the powers that be, considering the collective firepower it can marshal to trash an individual singled out."

The Budget Directorate was in "persistent denial of the real nature and depth of problems". It had failed to sort out the "chronically sordid state of quality accounting", and rewarded staff if "they managed not to discover financial malfeasance". As the memo admitted, the EU relies on an intimidation culture where "might makes right".

So Marta has my vote. It is a nice twist that UKIP has enlisted a Catalan-Argentine, albeit one educated at an English girls school in Buenos Aires.

Yes, our own Parliament is mired in squalor too, but the expense scams of MPs have at least been brought to light, and the worst offenders are being driven from the Commons. We have democratic catharsis.

Nothing is ever really exposed in the EU system, where press coverage is tribal, and segmented by languages. MEP expense abuse runs even deeper, and involves greater sums. An Open Europe study found that MEPs garner £363,000 in expenses, including a £261 daily subsistence allowance and £45,648 in office cash (no receipts needed), and £41,641 in "transitional" payments. A quarter employ spouses as aides.

Nordics, Balts, and Club Meds can make a tidy sum booking travel at business rates per mile but flying discount, though this is at last being reformed. Jens Holm, a Swedish Left Party MEP, said that he been receiving €2,000 for each fare from Stockholm to Brussels though it costs €500. He gives away the difference. "The vast majority keep the money for themselves," he said.

There are different kinds of Eurosceptics. Some think the EU has been a Vichy stitch-up from the start. That is not my view. The Project was a triumph of joint US and European statecraft in the early days, bringing Germany back into the fold to help contain Soviet power.

Nor do I think that British membership has been wholly bad. The Single European Act, signed in 1986, owed as much to Margaret Thatcher as any other leader, and the EU's Competition Directorate is the spearhead of free market ideology – which is why France's Nicolas Sarkozy went to such lengths to the gut the competition clause in the Lisbon Treaty.

The risk of leaving in a petulant fit is that Holland, Denmark, Poland and others often on our side in an evenly-balanced power structure will tuck in behind the Franco-German axis, causing Europe to become what we wish to avoid. But geo-strategic sophistry leads to paralysis in the end.

Lisbon is not yet EU law. Irish voters may balk again, but it would take a brave nation to persist in defiance as they succumb to savage (EMU-induced) debt deflation.

Sadly, I think we must start planning to extract ourselves as gracefully as we can from this Project before it has the chance to abolish referendums for ever.

Act now to save the NHS

An EU directive is about to cripple the system

A catastrophe will overtake the National Health Service on August 1, the public was warned yesterday: after that date, patient safety will be on a knife-edge, surgeons will not be properly trained, hospitals will be closed and, soon, patients will die unnecessarily. This apocalyptic prediction was issued by none other than John Black, the president of the Royal College of Surgeons. The cause of the looming disaster? The European working time directive, which will bind all British employees to work no more than an average of 48 hours a week.

Mr Black is not attempting to justify working junior doctors to exhaustion, which no longer happens on anything like the scale that it did a decade ago. On the contrary, junior as well as senior hospital doctors are very worried about the imposition of "legislation dreamed up in Brussels… designed to protect Spanish lorry drivers or labourers working heavy machinery", as Mr Black puts it. Yet the Government declares itself powerless to act.

This crisis was entirely predictable. Indeed, this newspaper predicted it five years ago, arguing that the scheduled imposition of a 48-hour week in 2009 would cost the NHS the equivalent of 9,000 junior doctors. Now we are within weeks of the change, and the Royal College of Surgeons is "in despair" – its president's words – that there will not be time to train surgeons properly, that emergency rooms will be understaffed and that dangerously ill patients will be shunted off to distant hospitals.

It is true that some European countries successfully operate a 48-hour week in hospitals; but they have many more doctors per head of population. Other nations "sensibly ignore the directive", says Mr Black. But the British Government has a passion for implementing European law to the letter. Hence the refusal of Alan Johnson, the Health Secretary, to back the 65-hour week proposed by the Royal College after consultation with junior doctors, despite the provision for groups of European workers to opt out of the

The Government's lack of political will to address a damaging European directive should loom large in the minds of the electorate. Thursday's European elections are not just an occasion to register alarm at the situation at Westminster, but also an opportunity to vote for those candidates from mainstream parties who are prepared to challenge the establishment's supine, fatalistic attitude to bad laws made in Brussels that now endanger our physical as well as our political health.

MEPs are entitled to expenses and allowances of up to £363,000 a year

Open Europe has found that in total, MEPs are entitled to expenses and allowances of £363,000 a year, including a £261 daily subsistence allowance and £45,648 in general office expenses even though they are provided with offices in Brussels and Strasbourg. This equates to £1,816,250 per MEP over a five year term and no receipts are required. (Sun, 26 May; Times, 29 May; Open Europe blog) This comes on top of £83,282 in salary, £29,309 in pensions and £41,641 in transitional payments. In contrast, UK MPs claim up to £144,000 on average in expenses. (Telegraph, 31 March)

Swedish Left Party MEP Jens Holm has provided a candid account of how the current travel expenses system can lead to MEPs pocketing thousands of euros a year because no receipt is required to account for the actual cost of a journey. He said, "I know that until February this year, the European Parliament has paid me about €200,000 in travel allowances and I'd say that I have donated around €150,000 to charities and also to my own party." (Open Europe blog)

Under new rules, from June onwards, the travel allowance system will be reformed so that MEPs need to provide receipts for their tickets. However, for the majority of their expenditure (office expenses, daily subsistence allowance, staff allowances) MEPs will still not be required to produce receipts.

In the wake of the Westminster expenses scandal, Gordon Brown has ordered all Labour candidates for the European election to agree to publish all receipts for claims made under the MEPs' office allowance. Conservative MEP candidates have taken a pledge to disclose details of their expenses online but they will not provide receipts, while the Lib Dems have made a similar commitment to publish an audited breakdown of their MEPs' costs but also will not publish receipts. (FT, FT, 24 May)

However, it should be noted that none of the parties' manifestos mention publishing receipts. (Open Europe blog)

Meanwhile, it has emerged that more than a third of British MEPs are paying one or more relatives. The wives, husbands and children of MEPs are earning up to £40,000 a year to work as secretaries and researchers at a total annual cost to taxpayers of more than £700,000. (Times, 29 May)

Europe tightens regulatory noose on City

The European Commission has seized on the financial crisis to bring the City under closer EU control and clip the wings of Britain's Financial Services Authority, unveiling far-reaching plans for a new EU regulatory machinery with binding powers.

By Ambrose Evans-Pritchard, Telegraph Business: 27 May 2009

"It's now or never," said Commission President Jose Manuel Barroso. "If we cannot reform the financial sector when we have a real crisis, when will we?"

Three new bodies are to be created with a permanent staff and powers to impose decisions on member states: a European Banking Authority in London; a European Insurance Authority in Frankfurt; and a European Securities Authority in Paris. Each will be composed of chief regulators from the 27 member states. While they look much like the EU's existing "talking shop" committees, they are in reality executive agencies able to set binding standards and impose their overall philosophies.

The Commission said the new authorities would have powers to "settle the matter" by imposing a decision – in effect, stripping Britain and other countries of the national veto.

While the proposals fall short of a pan-European regulator, they may have a similar effect. The European Court of Justice is to have the final say over any appeal.

"This is exactly what I feared would happen," said Ruth Lea, director of UK think-tank Global Vision. "The EU is taking advantage of the crisis to extend its control over the British financial system. It is very threatening because it is almost impossible to repeal anything in the EU, however damaging it proves to be."

The Barroso plan will go to EU heads of state in June. Legislation will be drawn up this autumn and submitted to European MPs, already itching to ratchet up the text.

Klause-Heiner Lehne, a German MEP for the Christian Democrats, left no doubt that this is viewed as a chance to punish the City. "It's well-known that Gordon Brown has only the interests of London as a banking centre in mind and not the stability of financial markets. It must be clear to all of us that the role of the financial markets is allocating capital, not as a playground for gamblers making huge bets," he said.

Mr Barroso said the new machinery should be up and running in 2010, adding: "We are not taking away national supervisors' day-to-day role."

The plan includes an "early warning" body modelled on the US Federal Reserve's new system. Charlie McCreevy, the EU's single market commissioner, said national regulators were not aware of problems developing in other countries during last year's banking crisis until they read about it in the newspapers, an untenable situation given that 40 banks controlling the bulk of EU assets operate as cross-border institutions, affecting everybody.

Britain has few friends in this fight other than Luxembourg, which has its own financial centre. It hard for the UK to argue that its "light-touch" regime has been a great success after last year's banking debacles – although Europe's banks have yet to come clean on their own toxic debts.

Antonio Borges, chair of the Hedge Funds Standards Board, said the blizzard of EU proposals had been hijacked by political forces and were "out of control".

"There is little intellectual foundation to what they are doing," he said. "You would have thought that since 80pc of Europe's hedge funds are in Britain, and are already regulated, that the FSA would have a big say [on hedge fund proposals], but the FSA was marginalised. The reality is that a great deal of regulatory power is going to Brussels."

The DM says: Another example of how the European Union takes every opportunity to assume greater powers over nation states.

Lisbon Treaty: 82% want referendum in UK, even if all other countries ratify

A new Populus poll for the Times has found overwhelming support for a referendum on the Lisbon Treaty, even in a situation where it has already been ratified by Ireland and the rest of the EU. 82% of people agreed with the statement, "If Ireland and other countries ratify the Lisbon Treaty on the future of the European Union, Britain should hold its own referendum on the issue", with 52% strongly agreeing and only 14% disagreeing. 92% of Conservative voters, 76% of Labour voters and 85% of Liberal Democrats voters agreed that Britain should have a referendum on the Treaty. (Times, 13 May)

The poll also showed that 58% of voters believe that the balance of powers between Britain and the EU gives too much power to the EU, including a clear majority of supporters of all the main parties. 28% say the balance is about right and 6% say too little power has been given to the EU. In response to the question, "If the Lisbon Treaty goes through and the new post of President of the EU is established, the job should go to Tony Blair", only 34% of people agreed, and 63% disagreed. 51% felt that Britain benefits from its membership of the EU.

Meanwhile, a poll in Germany found that 70% of people want the Lisbon Treaty to be re-negotiated, and a separate poll found that 73% of Germans agree that "the EU takes too many powers from Germany". (Neues Deutschland, 15 May)

Germany is one of four countries that has yet to complete ratification of the Treaty - in addition to Ireland, the Czech Republic and Poland. German President Horst Köhler has said that he will not sign the Treaty into law until after the German Constitutional Court has given its opinion on whether the Treaty is compatible with the German Constitution, which it is expected to do after the European elections in June. (Focus, 5 May; European Voice, 6 May)

In Poland, President Lech Kaczynski is still to sign. Likewise, in the Czech Republic, the Treaty is awaiting the signature of President Vaclav Klaus, following the Senate's approval of the text by 54 votes to 20 on 6 May. (FT, Irish Times, 7 May) President Klaus has said that his signature is "not on the cards" until after Ireland holds a second referendum on the Treaty, expected in the autumn. The leader of the Liberals in the European Parliament, Lib Dem MEP Graham Watson, has attempted to pressure the Czech leader, saying, "Václav Klaus should now sign the document in blood - ahead of the EU summit in June." (WSJ, 7 May; Aktualne, 12 May)

Meanwhile, the Irish government is trying to fast-track work on the so-called 'guarantees' it plans to offer to Ireland in exchange for a second referendum on the Lisbon Treaty, reportedly in an effort to stop Czech President Vaclav Klaus, who is against the Treaty, from 'wrecking' an EU leaders' summit in June. Ireland hopes to persuade the other 26 member states to agree to the wording at a foreign ministers' meeting on 15 June, so that EU leaders meeting later in the same week can merely rubber-stamp the deal, without debate. In order to sideline President Klaus, the Czech government has decided that the EU leaders' summit will be chaired by the Prime Minister instead. (Irish Times, 14 May)

Irish Europe Minister Dick Roche has promised that the second referendum on the Lisbon Treaty in Ireland will not be on the same text, saying "we cannot and will not put the same package to our people later this year." (Irish Times, 5 May) However, in reality, it is extremely unlikely that Ireland will be able to make any actual changes to the Treaty, since any change to the text at all will require re-ratification of the text by every EU member state - including the UK.

Cameron warned over breaking European links

David Cameron is facing his first crisis in Europe after being accused of reaching out to extremists in the European Parliament.

The Tory leader has been told by European Union leaders that his decision to withdraw the 27 Tory MEPs from the federalist European People's Party and form a new eurosceptic group is "naive" and will leave him on the fringes of European politics.

Under fire from the Tory Right at home for moving to the centre ground, Mr Cameron has sought to balance that criticism by establishing impeccably Eurosceptic credentials.

During the leadership race, he courted the votes of the Right by promising to split with the EPP and join a more sceptical alliance in the parliament. But the idea is running into serious difficulty as he struggles to find acceptable partners for the new grouping and centrist EU leaders pile pressure on him to reverse his plans.

Mr Cameron's aides denied reports last night that Nicolas Sarkozy, the French interior minister and presidential hopeful, had told Mr Cameron that he would be seen as "weak" if he refused to reverse the withdrawal from the EPP.

Angela Merkel, the German chancellor has told Mr Cameron that leaving the EPP will weaken his voice on the European stage.

One EPP leader said: "David Cameron has three options. He can stay in the EPP, form a group with extremists or have his MEPs sitting alone in the parliament next to Jean Marie Le Pen and his friends. If he presses ahead he is naive."

This week William Hague, the shadow foreign secretary, travelled to Brussels to try to find partners for the new group that he hopes will devote itself to the defence of the nation state and free trade.

Forming a new group needs at least 19 MEPs from at least five countries. Unless MEPs are members of such an alliance they are deprived of privileges in the parliament, including speaking rights, funds for their groups and committee chairmanships. Mr Hague said there was no going back on Mr Cameron's promise.

City in danger of falling victim to EU wiles and becoming another Antwerp

The City of London is on borrowed time. Great banking centres can prosper for 40 years or so after the host country has lost industrial leadership but then some shock or political upset exposes the fragility of it all.

"There is an extreme stickiness in financial centres," writes Peter Spufford, a Cambridge historian, reviewing the rise and fall of Genoa, Florence, Venice, Bruges, Antwerp, Amsterdam and London over eight centuries.

The fall can be swift. Antwerp's arcaded "Beurs" was Europe's commercial hub in the 1550s. The tremors hit when the Spanish and French monarchies restricted debt payments to interest only, rolling over the principle. Then the Counter-Reformation queered the pitch, stifling free thought. Persecution of Portuguese Jewish financiers caused their flight from Antwerp to Amsterdam. Within half a century Antwerps' population had fallen from 100,000 to 40,000. It was hard to sell a house.

Amsterdam's demise was gentler but, by the late 18th century, Alexander Baring was shifting parts of his empire to London. So too was Abraham Ricardo, father of the economic theorist David. The coup de grace came from France. "The reason why Amsterdam eventually succumbed was political, the fear of what would happen to financiers when revolutionary Frenchmen were in charge," Ricardo said.

There was eerie resonance to last week when the EU unleashed its assault on Britain's hedge funds and private equity. Those behind this drive are well aware that hedge funds were no more than bit players in the credit bubble. The real villains were banks with 30 to 50 times leverage and we know from the IMF that Europe's banks were the worst with their off-books "conduits".

Given that 80pc of Europe's hedge business sits in Mayfair, the latest EU directive is a discriminatory political attack on the City and almost certainly the start of something broader and nastier. Powerful forces in Paris, Berlin, and the EU institutions have long held a repressed urge to break the City's hold on chunks of global finance, from bonds to currencies and metals. Some wish to shut "Le Casino" altogether. They at last have the chance to act on it.

Charlie McCreevy, the Irish Thatcherite in charge of the EU's market machinery, made a valiant effort to defang the hedge code but he will be gone soon. Gone too will be Commission President Jose Manuel Barroso, an Iberian reformer (of sorts), who placed free marketeers in the key posts of economic control in Brussels.As the tide turns against Anglo-Saxon influence, Britain will struggle to maintain its blocking alliance in the voting structures of the EU Council and the European Parliament.

East Europe is no longer in thrall to ultra-market Friedmanites in their 20s, siding eagerly with Britain against the Rheinland corporatists. The violence of economic collapse in parts of the ex-Soviet bloc may tarnish market capitalism for a political generation and it is fair to assume that the centre of ideological gravity will shift in Germany too as the economy contracts at 1931 rates. The Movement for Militant Resistance is already torching Porsches on Berlin's streets.

While it is true that Europe's Left has not been able to capitalise on the window-smashing, boss-napping, backlash against banks, this is chiefly because the Right has beaten them to it.

In short, Britain is about to discover that it cannot easily stop the EU apparatus doing "an Antwerp" to London.

One sympathizes with Poul Rasmussen, Denmark's ex-premier and head of the European Socialists, in raging at the locust raid on his country by the private equity pack of Apax, Blackstone, KKR, Permira and Providence. Their leveraged buyout of Denmark's telecoms group TDC was textbook provocation. They quickly extracted $7.6bn in special dividends, leaving the company and its workforce saddled with debt obligations going into the downturn.

I do not see why funds should be allowed to distort the market to their advantage in this fashion, nor do I see why any democracy should tolerate it. It seems blindlingly obvious that the City should stop this nonsense before it does any more damage to the reputation and interests of this country.

That said, our predators did not cause the global financial crisis. The ultimate villains are the central banks of the US and Europe, which set the price of credit too low for year after year, and Asian governments holding down currencies for export advantage. The banks, buyout funds and assorted miscreants were mere instruments of destruction, not causal agents. If we fail to see that, we have learnt nothing.

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

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.

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.

The DM says: The Conservatives might be persuaded to take a stronger line on the EU, but only if they fear losing votes. Make the European Elections our referendum.

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.

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

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

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.

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.

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.

Those EPP extremists and fascists in full

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?

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.

The DM says:There will be several parties supporting a referendum on Lisbon in the elections. Make the European Elections our referendum.

Sitting MEPs join Libertas for election campaign in France

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

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.”

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

The DM says: Why do we allow these people to have any say in our country, let alone rule it as they do. Make the European Elections our referendum.

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.

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

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.

The bill that could break up Europe

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

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?

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?

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

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."

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.

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

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.

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

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'

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

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.

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?

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

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 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

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.

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

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.

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

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.

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.

The Eurozone's weak links

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

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.

The pound may be in trouble but don't be fooled by the euro gloaters. Their bogus currency will never see its 20th birthday

This week marks the tenth anniversary of the euro - and every eurocrat in existence is hailing the single currency as an exquisite success.

According to European Commission president Jose Manuel Barroso, the euro has helped create 16 million jobs. The French finance minister Christine Lagarde hails it as 'a zone of security and stability'.

Joaquin Almunia, the European Commissioner for Economic and Monetary Affairs, declares that: 'The euro has become the symbol of EU identity and is protecting us against the tremendous external shocks that we have had to cope with since the summer of 2007'.

Meanwhile, there are many within the British political and business elite - among them Business Secretary Peter Mandelson and former Prime Minister Tony Blair - who secretly wish Britain was in the euro, and believe we made a terrible mistake when we refused to join in 1999.

Consider these statistics. Following yesterday's accession of the Eastern European state of Slovakia, there are now 16 members of the single currency, compared to a mere 11 in 1999. This means an amazing 330 million people now use the euro as their national currency - more than the population of the U.S.

No wonder, say the eurofanatics, that it has strengthened over the past few years and now stands at parity with the pound sterling - stronger than it has ever been.

Not merely that, there are also those who now believe that the euro will soon overtake the dollar as the world's reserve currency. Indeed, even the villain in the latest James Bond film, Quantum Of Solace, chooses to pay his debts in euros because, so he says: 'The dollar isn't what it was.'

But the truth is very different. As even its strongest supporters must admit, the new currency was mollycoddled during a decade of benign global economic conditions - and only now is being tested for the first time. And it is already showing signs of being unable to survive the strain.

Indeed, far from being the staggering success its supporters claim, the euro-zone is already inflicting huge damage on the nations within it. Many currency market experts believe that some of these struggling members may be forced to peel away from the euro - with devastating consequences for the rest of the world.

The greatest problems, in the short term at least, are in the four Mediterranean economies known as the PIGS - Portugal, Italy, Greece and Spain.

Euro Disaster

For each of these countries, the euro has already proved a disaster. Put simply, most of the PIGS are so heavily indebted that the market no longer believes they will be able to repay their borrowings.

Normally, if a country falls into too much debt, it can devalue its currency, essentially devaluing its debt burden - this is exactly what Britain has done over the past few months. In the euro-zone, however, the currency's value is set centrally.

This means the only way out for the struggling PIGS is to crash out of the euro, default on their debt and start again. At the start of 2009, this prospect is beginning to cast a huge shadow over the global economy, for the sums involved are huge.

Take the terrifying case of Greece, which was an economic basket case even before it entered the euro, and is even more of a shambles today.
Greek unemployment is soaring, and its current account deficit is a whopping ten per cent of gross domestic product (Britain's deficit is bad enough at three per cent).

But the largest problem is Greek government debt, which stands at a monstrous 94 per cent of gross domestic product - and rising fast.

Already investors have reached the obvious conclusion that there is a very high chance that the poor old Greeks will never be able to repay their debts. That is why the markets now demand to be paid an extra two per cent in return for lending to Greece compared to Germany, even though both countries denominate their debt in euros.

Will the Euro Survive?

The brutal truth is that if the markets really believed the euro was going to survive, Greek and German debt would cost the same.

But soaring debt is not the worst of Greece's problems. The economy has tilted into recession, and unemployment has risen. Greece desperately needs interest rates to fall - but the European Central Bank is refusing to cut them. The effects are being felt on the streets, and the past few months have seen the worst riots in Athens since the country was a military dictatorship in the Seventies.

There have not yet been riots in the other PIGS - but Portugal-Italy and Spain are all heading for trouble. Spain, thanks almost entirely to the misguided policies of the European Central Bank, is now an economic disaster zone.

In the early years of the euro, the ECB kept interest rates far too low - fostering an inflationary property boom which has ended in inevitable collapse.

Now rates are much too high for Spain's broken economy. The Spanish jobless figure, thanks to the country's membership of the euro, is already 13 per cent. It is expected to approach a truly unbelievable 20 per cent by2010.

Things are already bad enough in Britain, where the jobless rate stands at six per cent.

At least Spain's public debt is relatively manageable, but that is not true of the remaining PIGS - Italy's government borrowing is actually larger than its gross national product.

The truth is that all the PIGS are paying a terrible price for their membership of the euro. If they had kept their own currencies, they would be able to use the traditional tools of economic management. They would set their own interest rates and they could inflate or deflate their national currencies as circumstances demanded.

The Euro - Powerless Nation States

As it is, however, governments in the euro-zone are utterly powerless to do anything about the menace of joblessness and economic collapse. And to appreciate how damaging that is, one only has to contemplate the fate Britain would now be facing if had we made the mistake of joining a decade ago.

For starters: Greece is just the first of the four major Mediterranean economies to turn into an economic basket case
In the early years, we would have suffered the problems of the poor, hapless PIGS.

The interest rates set by the European Central Bank would have been far too low - meaning the credit boom of the past decade would have been even more inflationary and damaging than was actually the case.

And the recession would have bitten far deeper. Interest rates have stayed far higher on continental Europe, driving millions who would otherwise have a job out of work.

And our currency would have been tied to the strong euro, rather than being allowed to depreciate, find its own level, and give vitally needed assistance to exporters.

Bad though the recession already is, it would have been far worse for Britain had we - as Tony Blair so desperately wanted - joined the euro.

First, it will never reach its 20th anniversary. The drachma, the lira, the peseta and the Portuguese escudo (and the Irish punt - Ireland can be regarded as an honorary PIG) will all make a return as the PIGS plunge for the exit.

Second, the collapse of the euro-zone will not be a peaceful process. Expect the European political elites to fight to save their beloved single currency.
Eventually, however, their citizens will take to the streets and force their hands. In Britain we can thank our lucky stars we do not have to go through the same painful and bloody crisis.

Gordon Brown had a mixed record as Chancellor of the Exchequer, and bears a heavy share of the responsibility for the recession. But he did one thing for which we should all be thoroughly grateful - he kept us out of the European single currency.

Bruges Group EURO-CREEP BULLETIN #12:EU Centralisation Continues Apace

Here the Bruges Group exposes the policies that the EU wants to force on Britain over the coming year. These latest EU power grabs are the challenges that we must face in 2009 and are coming regardless of the fact that the EU Constitution/Lisbon Treaty has been rejected in three referenda and has not been ratified.

These plans include:
- Adding more costs onto business
- More EU control over financial services
- The EU and the nuclear industry
- More EU control over energy policy
- EU control over asylum and immigration
- An EU threat to consumer rights
- More EU control over transport
- More EU control over justice and home affairs

ADDING MORE COSTS ON BUSINESS

MORE UNCOMPETITIVE SOCIAL-MODEL ECONOMIC POLICIES

The EU plans to step-up its legislative agenda for a more ‘social’ Europe.
The European Commission is increasingly pushing for the agenda which it describes as ‘European values’ (as opposed to Anglo-saxon values) as powerful evidence of the EU’s commitment to the ‘social dimension.’

These policy proposals will make the economy of the EU even more uncompetitive in the global economy; and gives the lie to the claim that Europe is coming our way.

Commission Communication: Renewed social agenda: opportunities, access and solidarity in 21st century Europe COM(08) 412

EU TO FURTHER UNDERMINE FLEXIBLE LABOUR MARKETS

Trade union power to be expanded.
The establishment of European Works Councils will enhance the power of trade unions and will mean employers shall be further hamstrung by EU law. This will make the EU less attractive to investors and drive jobs out of Britain to more adaptable labour markets, particularly those in Asia.

This policy proposal comes on top Article 138 of the EC Treaty which lays down that the EU must consult with ‘social partners’ (trade unions) when making social law.

EU CONTROL OVER TACKLING THE FINANCIAL CRISIS

The European Commission is reinforcing its control over how the UK can handle the economic crisis.
The EU is bolstering its rules on how and when state aid can be used to include how rescuing and restructuring proposals are applied, managed and targeted. This means that there is not full UK democratic control over how financial institutions are rescued.

Commission Communication: The application of state aid rules to measures taken in relation to financial institutions in the context of the current global financial crisis COM(08) 6045

THE EU AND THE NUCLEAR INDUSTRY

EU CONTROL OVER THE MANAGEMENT OF NUCLEAR FUEL

EU proposals seek to force the UK to store nuclear waste underground; rather than reprocessing the spent fuel.
Britain may be forced to adopt the policy of geological storage of nuclear waste. This policy will undermine Britain’s reprocessing industry in favour of French style disposal of spent nuclear fuel. It will also lead to more EU control over Britain’s energy policy.

MORE EU CONTROL OVER NUCLEAR POWER

Nuclear security and safety will come further under the control of the EU.
Instead of being under the democratic control of the British government; it is proposed that the EU will take more power over the nuclear industry.

Commission Communication: Addressing the international challenge of nuclear safety and security COM(08) 312

MORE EU CONTROL OVER ENERGY POLICY

EU CONTROL OVER THE RESPONSE TO HIGH OIL PRICES

The EU is seeking to govern how the UK can respond to increased fuel prices.
The European Commission is against the cutting of taxes on fuel to offset high oil prices because they feel that this would ‘send the wrong signal’. Therefore, the EU wants member states to redistribute income, in particular to vulnerable groups who may be suffering from higher fuel costs, rather than reduce the price of fuel through the tax regime.

OPEC has recently announced a cut-back in production to again force up the cost of oil. Yet, these proposals will limit the freedom of movement of the British government to respond to future fuel shocks.

Commission Communication: Facing the challenges of higher oil prices COM(08) 384

EU CONTROL OVER ASYLUM AND IMMIGRATION

FULL EU CONTROL OVER IMMIGRATION

The European Commission is re-doubling its efforts to develop a common immigration policy.
The EU already has extensive powers over Britain’s immigration rules, but now wants to expand these powers. The European Union aims to;

take over the coordination of immigration
promote legal immigration into the UK
control the fight against illegal immigration
manage the security issues which arise from immigration
importantly the EU also wants to control how integration is handled
The EU also aims to beef-up the powers of FRONTEX, its border agency, to implement the EU’s policies.

Commission Communication: A common immigration policy for Europe: principles, actions and tools COM(08) 359

THE EU’s ASYLUM POLICIES

The EU aims to create the completion of a Common European Asylum System.
The EU already controls the minimum standards for the treatment of asylum seekers, the minimum rules for granting and withdrawing refugee status and the minimum standards for granting temporary protection. The EU also controls the database recording asylum seekers details. Now it wishes to grab more power which will allow the EU to:

establish a European Support Office to further control the policies of member states
determine who is a refugee allowing the EU to decide who should enter the UK
make asylum more accessible
grant more rights to those who qualify for subsidiary protection
make the system more responsive to gender and other ‘vulnerable groups’
create a single procedure across all EU member states, which will undermine the independence of the UK’s legal system in that area
The EU also wants to give refugees easier access to the labour market. This is bound to increase the number of fraudulent asylum applications and increase economic migration making unemployment in Britain even higher.

Commission Communication: Policy plan on asylum – an integrated approach to protection across the EU COM(08) 360

AN EU THREAT TO CONSUMER RIGHTS

MORE EU CONTROL OVER CONTRACT LAW

Under EU proposals the right of British consumers to reject defective goods and products that are of unsuitable quality and get their money back will be abolished.
Furthermore, the consumer would lose their right to decide whether sub-standard merchandise should be repaired or replaced; instead the EU wants this prerogative to be given to the trader. This will reduce the power of the consumer.

MORE EU CONTROL OVER JUSTICE AND HOME AFFAIRS

EU CONTROL OVER CRIMINAL RECORDS DATABASES

The EU proposes to take control over national databases of criminal convictions.
The EU will take possession of the criminal records databases of each member states. And will determine the encryption system and software when sharing the information with other EU member states.

Draft Council Decision on the establishment of the European Criminal Records Information System (ECRIS) COM(08) 332

MORE POWER FOR THE EUROPEAN COURT OF JUSTICE (ECJ)

The ECJ is set to gain more power over issues relating to visas, immigration, asylum, and powers to escalate judicial cooperation in civil matters.
It is proposed to allow all courts the right to appeal directly to the European Court of Justice. This shall mean that its decisions, often politically motivated, are more likely to reach into a greater number of legal cases; bypassing much of the British legal system.

Commission Communication: ensuring more effective judicial cooperation COM(06) 346

EU spends £2bn each year on 'vain PR exercises'

The European Union has been accused of spending £2 billion each year on 'vain PR exercises'.

New research by Open Europe, a think-tank that supports EU reform, has found that so-called European "information" campaigns are one-sided and boast a budget that is bigger than Coca-Cola's total worldwide advertising account.

One publication, entitled How the European Union works, described the EU as "a remarkable success story".

Another English-language "information" pamphlet claimed the EU "is delivering a better life for everyone" and described the single market as "a winning formula."

The researchers also found a European Commission document that admitted: "Neutral factual information is needed of course, but it is not enough on its own. Genuine communication by the EU cannot be reduced to the mere provision of information."

Lorraine Mullally, director of Open Europe, said: "Taxpayers should not be footing the bill for vain PR exercises to make us love the EU. The EU needs urgent and radical reform, not expensive campaigns to improve its image."

The research also found that projects, such as the EU's School Milk Scheme, come with propaganda strings attached.

"The scheme requires schools to display a European school milk poster which must be 'permanently situated at a clearly visible and readable place at the main entrance' of the school," finds the study. "It even specifies that the poster must be 'A3 or bigger, with letters 1cm or bigger'."

Other campaigns target young people. One project in late 2008 was themed "From Shakespeare to Euro Rap". Events included: "Poetry Slam competition - Europe: I have a dream".

Miss Mullally said: "People certainly need to know more about the EU, but the EU has proved unable and unwilling to provide neutral, factual information. This senseless spending on dubious PR projects has got to stop."

EU and European Commission officials have stepped up "information" campaigns following a series of referendum rejections over the last three years.

Recent Brussels polling has also deeply alarmed Euro-MPs by finding that only that only two per cent of Britons are aware that European elections are taking place next year.

A pre-Christmas Eurobarometer opinion survey found that the already low levels of interest in next June's elections were actually declining as the vote gets closer.

"The number of citizens who say they are likely to vote is less than it was six months ago," found polling published last week.

Going down the EU Tube: Brussels videos shunned

Robert Watts and Georgia Warren, Sunday Times 28 Dec 2008

The European Union’s answer to YouTube, the internet video sharing phenomenon, has backfired, with audiences shunning many of the clips intended to promote pet subjects in Brussels.

Eighteen months on from the creation of EU Tube many of the videos posted on the website have attracted only a few dozen viewers.

An EU Tube video entitled Controlling the Use of Chemicals in Europe has been watched 56 times. Another film, Better Rights for Temporary Workers, has attracted 70.

EU Tube’s attempts to adopt street language have also misfired, with ventures such as a three-minute “euro-rap”, which urges young viewers “you gotta be a part of” a united Europe.

“Get on our team, you know what I mean,” the rapper sings, surrounded by teenagers brandishing the EU flag. “It’s the return of the blue. See I’m going to move across from Germany to Paris, oui. We get united and take a stand in solidarity. I speak in all ’hoods.”

One visitor, Opaz, writes: “It’s like Nazi Hitler Youth propaganda with aggressive music. Be a part of what? The destruction of our nations, homelands and security so that the rich can own and control us. Overlords of EU go to hell!”

EU Tube also displays a bizarre 30-second animation featuring an amorous chess piece and a condom to illustrate safe sex. “Chess love – safe sex is a game for two,” the video concludes.

The channel was perhaps seeking to emulate the success of one of its most popular videos: a three-minute series of clips of people having sex, ending with the words “Let’s come together”. The video, intended to promote the Brussels film subsidy, received more than 7.1m hits.

EU Tube is funded out of a €207m (£196m) communication budget from Brussels. So far the channel has attracted 7,391 subscribers. The community has a population of 500m.

The website is one of dozens of examples of EU marketing documented in a 160-page dossier compiled by Open Europe, the eurosceptic think tank.

The report claims the EU is spending €2.4 billion a year on lobbying, press officers, advertising and other types of “propaganda” including scholarships. It also says the EU sends out more than 1m promotional brochures, balloons and pens each year.

— An event for young people on the Isle of Wight, justified on the grounds that students there might have below-average contact with their European peers: “This can make them seem insular and antiEuropean.”

— A film featuring young people waving EU flags to the tune of Breakfast at Tiffany’s, in support of the Young European Federalists.

— Funding of €7m to enhance public awareness of the common agricultural policy.

Lorraine Mullally, director of Open Europe, said: “Taxpayers should not be footing the bill for vain PR exercises to make us love the European Union.”

A spokesman for the European commission in London said: “This is not propaganda, we are simply providing information.” He added that the commission “did not recognise” the €2.4 billion figure.

EU PLAN COSTS UK £25 BILLION

Despite the EU holding the economy back, the latest plan uses the economic crisis to expand its power

Bruges Group: The EU’s CREDIBILITY CRUNCH

Last week, after the EU agreed its 'Economic Recovery Plan' José Manuel Barroso said “Europe has passed its credibility test”. Yet, the Bruges Group’s detailed examination of the EU’s economic policies in The EU’s Credibility Crunch finds that the European Union has been a major contributor to the economic malaise in Europe and is not a credible body to face the challenges of the downturn.

Nevertheless, the European Union is using the economic crisis to expand its power; particularly by using it as an excuse to push for the Lisbon Treaty to be ratified and even to re-start the debate in Britain on joining the euro.

Also in this paper, the Bruges Group sets out the policies that Britain must follow which including freeing-up trade, cutting taxes and government expenditure, and begin with leaving the shackles of EU control.

The EU’s Economic Recovery Plan

The Bruges Group’s analysis finds that the EU’s Economic Recovery Plan, agreed on Friday, 12th December, will cost Britain 1.5% of GDP which is £25 billion; a sum our debt laden economy simply cannot afford. That amount is equivalent to 6 pence off the basic rate of income tax for a year, or £417 per person in the UK.
The EU’s plans for recovery are either counterproductive or irrelevant to the present situation; being little more than an excuse to fund the European Commission’s pet projects, including money for environmentally-friendly cars and factories, expanding internet access to very rural areas, all irrelevant to the financial crisis.

The EU claims that the economic crisis is due to a lack of EU financial regulation, yet, the EU is the author of most financial sector regulation. Any faults in that legislation primarily belong to the EU.
All the EU banks that are having difficulties met their core EU regulatory capital requirements in their 2007 financial statements.
There is already an 8,000 page regulatory rulebook and 2,600 regulators at the Financial Services Authority alone. Better quality, and more localised, regulation is needed instead.
There are even moves for increased regulation of financial sectors that are not responsible for the downturn.
There is already a glut of international bodies facilitating the co-operation of financial service regulation.

The EU’s labelling of the economic crisis as a “US problem” is misleading. There is $2,520 billion of government support pledged to EU banks compared to $700 billion for US banks.

The ‘need’ for the bail-out in the EU has not been driven by losses incurred in the USA but from problems originating inside the European Union. It should be noted that the UK bank with the highest US exposure, HSBC, is regarded as the safest bank in the UK.

How the EU is damaging the economy

European economies would be better placed to deal with the downturn if EU membership did not weaken them.
The EU has grown considerably slower than the other advanced economies which are not within the European Union. This contradicts the well-propagated myth that the UK could not survive outside the EU; statistics show non-G7 developed economies outside the EU grew by 1.42% more each year than EU economies; such faster growth would benefit the UK by at least £18 billion per year including £6.6 billion of additional tax revenues.

The inability of member states to negotiate their own trade agreements has prevented pro-free trade states, including the UK, from expanding their markets. Since 2000, Australia and the USA have eliminated tariffs and created pro-growth new free trade zones covering hundreds of millions of people, whilst the EU has stood still.

Certain EU policies, notably on migration and the effective enforced ending of Dividend Tax Credits, are among the contributors to the damaging property bubbles arising in several member states.

Since 2000 the eurozone has been the slowest growing region of the major developed economies; the world economy has grown at a rate 98% faster than the EU area.
The euro is a “one-size-fits-no-one” policy. It is unsuitable for high growth economies; e.g. financially prudent Ireland is now in recession due to the euro’s uncompetitive exchange rate and high interest rate policy. However, members of the euro having made their currencies extinct have no short-term prospect of a White Wednesday rescue.
The European Central Bank has committed major mistakes in responding to the economic crisis. As recently as July 2008 it increased interest rates rather than cutting them to avoid the recession.

“The European Union’s approach to the recession is one of top-down instruction by the elites to businesses and individuals of Europe. However, there is no better time to note that the eurozone’s economic performance is the worst in the developed world and wake-up to the benefits of being a free-trading economy, free of the EU’s costs and shackles

“As growth in the overregulated and overtaxed economies of the European Union has consistently been the worst in the developed world there is a need to defend businesses and the taxpayer from yet more regulation and wasteful EU spending.”

“The EU is proven to have the low economic growth, damagingly high interest and exchange rates, regulation that weakens banks and a trade policy that isolates Europe from the benefits of globalisation. Yet, its Economic Recovery Plan is merely a wishlist for its pet projects that will cost each single UK resident £417. At a time, when economic management skills are key, the EU has a major Credibility Crunch.”

About the Author
Damon Lambert is the UK Corporate Tax Director of a major European Bank. Previously, he worked for 11 years in KPMG’s financial sector practice where he specialised in advising on mergers and acquisitions, primarily for financial sector multinationals. The advice he provided to clients included amongst other issues the impact of the EU and the ECJ on UK tax law. Damon is a qualified Chartered Accountant. He regularly writes on European tax matters and was a member of the working party on the Tax Reform Commission instigated by George Osborne, co-authoring the chapters on business taxation and tax reforms in other jurisdictions.

Ignore the europhiliac chorus – we need the pound now more than ever

The europhiliacs are on the march again. They have been pushing three arguments in favour of the UK joining the euro.

First, the recent fall in the exchange rate has taken the pound to a competitive rate which it would be advantageous to lock in.

The current rate is 15pc below that seen on the day the euro was created in 1999, 14pc below the rate ruling when the Treasury last assessed the five entry tests in June 2003 and 20pc below the rate of two years ago.

The Euro - a Safe Haven?

Second, the recent sharp swings in the UK's exchange rate have supported the idea that as a medium-sized economy, during periods of global instability the UK's exchange rate is always going to be susceptible to volatility. The euro would be a safe haven.

Third, the recent problems in the UK's banking system have highlighted the potential perils of having financial liabilities that dwarf the size of the economy.

The UK is like a gigantic hedge fund. If we were to adopt the euro, we would secure the backing of the European Central Bank and the fiscal power of the whole euro-zone.

There is something in all of these arguments, although not much in the last one. I cannot see other eurozone members being keen to pour resources into supporting the City of London in a banking crisis.

Moreover, there are two strong counter-arguments. First, joining the euro would require the UK to hand over the responsibility for setting interest rates and other forms of monetary policy to the ECB.

It sets euro monetary policy to achieve economic objectives for the eurozone as a whole, not for individual member countries. Our economy is very different from the eurozone average. Consequently, for much of the time, euro interest rates would be wrong for us.

Moreover, although the ECB has, on the whole, done a pretty good job, it has displayed marked characteristics which may be very unhelpful in current circumstances.

During its 10 years of existence, it has regularly been slower to respond to events than other central banks and less willing to change interest rates as aggressively.

The UK in the Euro?

And just think how bad things would be now if the UK had adopted the euro at its formation in 1999, as the europhiliacs then urged.

Our interest rates would have consistently been nearly 2pc lower than they in fact were. The result would have been an even bigger bubble in our housing market, leading to an even larger collapse and a deeper recession.

Second, it is all very well saying that the pound is now at a competitive level, but if we had already joined the euro the pound would not have been able to fall to this level.

And if we were to join it now, it would not be able to fall in future recessions – or to rise, if circumstances so required, as, believe it or not, some day they might. The simple fact is that there is no right exchange rate for all seasons. The key is to retain flexibility.

Without the recent 20pc fall in the pound, the UK's recession would be much deeper and much longer. The ability of a more competitive exchange rate to boost activity is even more crucial when the capacity of lower interest rates to stimulate demand is impaired by the banking crisis.

A Eurozone Disaster

Consider the plight of Italy. In time-honoured fashion, it has allowed its costs and prices to rise faster than the eurozone average.

The result has been a massive loss of competitiveness, both inside and outside the eurozone. Traditionally, Italy got out of this sort of mess by devaluing. Now it is stuck with having to grind its relative costs down through the effects of depression.

It is all very well saying that a lower exchange rate imposes no discipline and the virtuous path is to suffer. For Italy, the virtuous path could be the road to disaster. If we were in the euro, that could be our fate too.

The key reason why the UK emerged from the Great Depression of the 1930s earlier than most major economies was that it left the Gold Standard early, and subsequently enjoyed a significant boost from a lower exchange rate and lower interest rates.

Similarly, the UK managed to shrug off the recession of the early 1990s only because the exchange rate fell sharply and we were able to set our own interest rates after the pound was ejected from the Exchange Rate Mechanism in 1992.

The urge to throw in our lot with the continentals and let those nice, clever chaps in Brussels or Frankfurt manage our affairs strengthens whenever we experience one of our periodic bouts of national depression and loss of self-confidence.

The drive to join the EU in the first place originated in this way, and so did our membership of the ERM.

We are now passing through another cycle. Until recently, we suffered from national hubris – the end of boom and bust; our marvellous fiscal rules; our wonderful MPC; our outperformance of the continental economies leading to gross over-confidence, to the point where the Prime Minister took glee in lecturing our European friends on how to run their economies. Then disaster.

It is now surely clear that the Treasury, the Bank and the Financial Services Authority have made a gigantic Horlicks of managing our economy.

They, and we, are bound now to suffer from a deep depression of mood as well as economic performance. In such a frame of mind it is unwise to take radical decisions. The wise thing to do is to carry on until the mood lifts.

As one of those who was not taken in by the Brownian delusion of economic transformation, and has not experienced the associated yo-yoing of moods, let me say this: the eurozone is not going to have a picnic either.

Indeed, the strains will be intense and it is far from obvious that the ECB will be as imaginative and urgent as the Bank of England in seeking cures.

Grim though things will be here, eventually they will get better. Out of the debacle of the ERM exit, came a period of genuinely successful UK economic management and good economic performance.

Roger Bootle is managing director of Capital Economics and economic adviser You can contact him at roger.bootle@capitaleconomics.com

Bullying Germany gets a free ride with its beggar-thy-neighbour policy

For the first time in my life, I am starting to feel twinges of anti-German sentiment, writes Ambrose Evans-Pritchard.

By Ambrose Evans-Pritchard, Telegraph Business, 15 Dec 2008

This does not come naturally. My father insisted on German au pair girls during my childhood as his gesture towards post-War comity. I later did a stint at Mainz University dabbling in Kant (great) and Hegel (a fraud).

But even Teutophiles who think that Germany has played an enlightened role for 60 years are losing patience with the antics of the finance ministry and Bundesbank, and with the dictatorial turn in Berlin's EU strategy.

Put bluntly, Germany is pursuing a beggar-thy-neighbour policy. It is not fulfilling its responsibilities as the world's top exporter and pivotal power of Europe's monetary union. It is leaching off global demand, even as it patronizes Anglo-Saxons, Latins, and Slavs.

No doubt binge debtors in the Anglosphere are much to blame for this crisis. But Germany rode the boom too. It made those Porsches and BMWs driven by the new rich. Its banks are among the most leveraged in the world.

Nor should we not forget that the European Central Bank set interest rates at recklessly low levels early this decade to help Germany out of a slump. Can this be separated from the property bubbles in Club Med, Holland, Ireland, Scandinavia, and Eastern Europe now causing such grief?

Within the EMU, Germany has gained a competitive edge against France, Italy, and Spain for year after year by screwing down wages. In pre-euro days the North-South rift did not matter. The D-Mark revalued. Balance was restored. In monetary union it is toxic.

Germany now has a current account surplus of 7pc of GDP. It is hollowing the industrial core of Latin Europe. Yes, Club Med needs to pull its socks up, but the flip side of the coin is that Germany is in breach of EMU's implicit contract.

The rules of the game are that surplus countries should boost demand. The Gold Standard collapsed in the early 1930s because they – then the US and France – refused to do so. The burden of adjustment fell on deficit states, who had to tighten yet harder. The downward spiral dragged everybody into depression.

Germany and China are today's violators. Their trade surpluses over the last 12 months have been $283bn and $279bn, respectively. They are exporting excess capacity.

Peer Steinbrück, Germany's finance minister, seems in no mood to yield, preferring to mock the "crass Keynesianism" of the British.

Nobel Laureate Paul Krugman was so disgusted that he broke away from his Stockholm banquet to pen The Economic Consequences of Herr Steinbrück.

"The world economy is in a terrifying nosedive, visible everywhere. The high degree of European economic integration gives Germany a special strategic role right now, and Mr Steinbrück is doing a remarkable amount of damage. There's a huge multiplier effect at work; it is multiplying the impact of German boneheadedness," he said.

Meanwhile, the Bundesbank has been doing its bit for depression. Germany's two ECB members – caught in a 1970s time-warp – orchestrated the mad rate rise in July. They are now trying to head off cuts in January, saying the ECB cannot risk using up its ammo. Even Switzerland's uber-hawks have ditched that doctrine.

Worst of all is Germany's nefast role in dredging up the EU Constitution (Lisbon Treaty) after it had been rejected by French and Dutch voters. Having made one blunder, they are now making another by refusing to accept the Irish verdict as well.

Why are they so maniacal about this? Because the treaty establishes German primacy in the EU's voting structure. This is raw national interest – camouflaged, of course.

So Brian Cowen – already the most reviled Taoiseach since the creation of the Irish state – is bludgeoned into a second vote. This is what now passes for EU statecraft. A tactical case can be made, that fear will induce Irish voters to change their minds as GDP contracts by 4pc next year. Even if that proves correct, will it convince anybody that the European Project is advancing with democratic assent?

What if the Irish vote 'No' again? Will Germany carry out its threat to "suspend" them from the EU, and thereby risk a final revulsion against Europe and the unravelling of the post-War order?

One notes that Germany has acquired the taste for bullying small nations. Mr Steinbrück threatened to "take a whip" to Switzerland. The sooner Germans take a whip to Mr Steinbrück and all he stands for, the better. Otherwise the rest of us will have to start examining our options.

Flint 'patronises' the Irish by saying they misunderstood EU Treaty

The Irish electorate rejected the controversial European Union treaty in their landmark referendum mainly because they did not understand it, a senior minister has claimed.

By Rosa Prince, Political Correspondent, Daily Telegraph, 14 Dec 2008

Caroline Flint, the Europe Minister, was accused of "patronising" the Irish public after saying that no-voters had been suffering from a number of misconceptions about the nature of the Lisbon Treaty, the accord which replaced previous plans for a European constitution.

As the Tories attacked the Government for failing to allow UK voters a referendum, Miss Flint welcomed the prospect of a second poll in the Republic of Ireland, saying that she was confident of a yes vote.

The minister suggested that scaremongering by "no" campaigners had led to fears among Catholic voters that the Treaty would overturn the ban on abortion, and could see Irish youngsters being forced to serve in an EU army.

She told Sky: "There have been a number of studies in Ireland about how people voted and why they voted as they did.

"I visited Dublin about a month ago and met some people who told me directly that people sincerely thought - partly because of the campaign against the Treaty - that they would have their rights in a number of areas taken away, and that wasn't the case and isn't the case.

"If there is a way in which we can answer these questions that people had so they can feel reassured and the Irish want to have a second referendum, so be it.''

Brian Cowen, the Irish Taoiseach, last week secured legally-binding reassurances from the EU that the Treaty would not allow Brussels to interfere in tax and abortion policies, or affect the Republic's traditional position of neutrality.

A fresh referendum is now expected next year, with a yes vote meaning that the Treaty, which was held up as a result of the first poll, could finally be enacted.

Describing Miss Fint's comments as "extremely patronising, Lorraine Mullally, of the euro-sceptic think tank Open Europe, said: "Either she has no idea what is in the Treaty, or she is being deliberately misleading."

In a speech to the Bar European Group tonight[mon], Dominic Grieve, the shadow home secretary, will say: "The Lisbon Treaty is a document of profound legal importance yet the British Government and Parliament had absolutely no democratic mandate from the British people to sign up to it.

"Whether it comes into force will, unless we have an early general election, be up to the Irish electorate, not the British voter, who has had no opportunity to give any opinion on the matter at all.

Czech leader in shock after EU assault

A bizarre confrontation in Hradcany Castle confirms the inablilty of the Euro-elite to accept anyone else's opinions, writes Christopher Booker.

Christopher Booker, Sunday Telegraph 14 Dec 2008

Imagine that a Franco-German MEP, invited to meet the Queen at Buckingham Palace, plonked down in front of her an EU "ring of stars" flag, insisting that she hoist it over the palace alongside the Royal Standard, and then proceeded to address her in a deliberately insulting way. The British people, if news of the incident leaked out, might not be too pleased.

Something not dissimilar took place at a remarkable recent meeting between the heads of the groups in the European Parliament and Vaclav Klaus, the Czech head of state, in his palace in Hradcany Castle, on a hill overlooking Prague. The aim was to discuss how the Czechs should handle the EU's rotating six-monthly presidency when they take over from France on January 1.

The Lisbon Treaty - Czech Doubts

The EU's ruling elite view President Klaus, a distinguished academic economist, with a mixture of bewilderment, hatred and contempt. As his country's prime minister, he applied to join the EU in the days after the fall of Communism in the 1990s. But now Klaus is alone among European leaders in expressing openly Eurosceptic views, not least about the Lisbon Treaty, which the Czech parliament has yet to ratify.

Klaus was an outspoken dissident under the Communist regime, and he has come to regard the EU as dangerously anti-democratic. But he compounds this sin with highly sceptical views on global warming, on which he recently published a book, Blue Planet in Green Shackles. He likens the extreme environmentalism favoured by the EU to Communism, as a serious threat to democracy, freedom and prosperity.

So when Klaus was due to meet the MEPs, one of them decided this was a moment to display the Euro-elite's hostility to him. Daniel Cohn-Bendit, who is German born but lives in France, first came to prominence in Paris in 1968 as a student agitator. He is now leader of the Green MEPs. Talking loudly in the plane to Prague, he made no secret of his intentions, and brief French journalists on how to get maximum publicity for his planned insults.

I happen to know the splendid room in which the meeting took place, because I sat there myself with President Klaus in 2005, when he had arranged for a history of the EU I had co-authored to be published in Czech. As Cohn-Bendit was aware, the only flag that flies over the castle is the presidential standard (though the "ring of stars" is much in evidence elsewhere in Prague, flown outside every government ministry).

As described to me by someone present, President Klaus greeted the MEPs with his usual genial courtesy. Whatever his own views, he assured them, his countrymen would conduct their presidency in fully "communautaire" fashion. Cohn-Bendit then staged his ambush. Brusquely plonking down his EU flag., which he observed sarcastically was so much in evidence around the palace, he warned that the Czechs would be expected to put through the EU's "climate change package" without interference.

"You can believe what you want," he scornfully told the president, "but I don't believe, I know that global warming is a reality." He added, "my view is based on scientific views and the majority approval of the EU Parliament".

He then moved on to the Lisbon Treaty. "I don't care about your opinions on it," he said. If the Czech Parliament approves the treaty in February, he demanded, "Will you respect the will of the representatives of the people?"

He then reprimanded the president for his recent meeting in Ireland with Declan Ganley, the millionaire leader of the "No" campaign in the Irish referendum, claiming that it was improper for Klaus to have talked to someone whose "finances come from problematic sources".

Visibly taken aback by this onslaught, Klaus observed: "I must say that no one has talked to me in such a style and tone in the past six years. You are not on the barricades in Paris here. I thought that such manners ended for us 19 years ago" (ie when Communism fell). When Klaus suggested to Hans-Gert Pöttering, the president of the EU Parliament, that perhaps it was time for someone else to take the floor, Pöttering replied that "anyone from the members of the Parliament can ask you what he likes", and invited Cohn-Bendit to continue.

"This is incredible', said Klaus. "I have never experienced anything like this before."

After a further exchange, in which Cohn-Bendit compared Klaus unfavourably with his predecessor, President Havel, he gave way to an Irish MEP, Brian Crowley, who began by saying "all his life my father fought against the British domination [of Ireland]… That is why I dare to say that the Irish wish for the Lisbon Treaty. It was an insult, Mr President, to me and the Irish people what you said during your state visit to Ireland." Klaus repeated that he had not experienced anything like this for 19 years and that it seemed we were no longer living in a democracy, but that it was "post-democracy which rules the EU".

On the EU constitution, Klaus recalled that three countries had voted against it, and that if Mr Crowley wanted to talk about insults to the Irish people, "the biggest insult to the Irish people is not to accept the result of the Irish referendum". This provoked Crowley to retort angrily, "You will not tell me what the Irish think. As an Irishman, I know it best."

Everntually Pöttering closed the meeting by saying that he wanted to leave the room "in good terms", but it was quite unacceptable to compare himself and his colleagues with the Soviet Union. Klaus replied that he had not mentioned the Soviet Union: "I only said that I had not experienced such an atmosphere, such a style of debate, in the Czech Republic in the last 19 years."

This bizarre confrontation, which has been recounted and discussed with shock across formerly Communist eastern Europe, confirms the inability of the Euro-elite to accept that anyone holds different views from their own, on Lisbon, global warming or anything else. As we see from the way our own political parties are run, when it comes to "Europe", the system has no place for opposition. Everything must be decided by "consensus", directed from the top. There is only one approved "party line". Apart from a few little powerless dissidents round the edges, the EU is thus in essence a one-party state.

EU Referendum - Irish must Vote till they get the answer right

It was a sense of this that powerfully influenced the French, Dutch and Irish people, when they were given the chance, to vote against the constitution which will cement that one-party state into place more firmly than ever. And it explains why, last week, the European Council told the Irish that they must hold their referendum again, on the understanding that this time they will get it right. That is the way one-party states behave – as President Klaus, who lived under one for the first 50 years of his life, knows only too well.

Why Eurocrats believe that No to EU treaty is the Irish for Yes

For Euro-hirelings, Lisbon isn't about democracy, it's about their mortgages.

By Daniel Hannan, Sunday Telegraph 14 Dec 2008

This is becoming like the closing scenes of Terminator. However many times you kill the European Constitution, it keeps lurching to its feet again. Blam! Fifty-five per cent of French voters say "Non". Zap! Sixty-two per cent of Dutch voters say "Nee".

But the automaton keeps advancing, its flesh burned away, its charred metal skeleton stamped with the words "Lisbon Treaty". Then – pow! – 53 per cent of Irish voters vote "No". The machine is briefly swallowed by orange flames. Then, after a short lull, the red lights go on in its skull and, once again, it starts clawing its way forward.

Shortly before Ireland voted, the president of the European Commission, José Manuel Durrão Barroso, warned electors that there was no Plan B. Irish commentators innocently took this to mean that, if the treaty was rejected, it would be dropped. What Barroso in fact meant, as is now clear, is that Plan A would be resubmitted over and over again.

This is how EU leaders invariably behave after a "No" vote. They machine-gun out a couple of platitudes about listening to the people, then carry on regardless. For them, public opinion is an obstacle to tear aside, not a reason to change direction.

Their desire for a second Irish referendum next autumn isn't really to do with voting weights or numbers of commissioners or extensions of majority voting. Many of the provisions of the Lisbon Treaty can be – indeed, have been – implemented in anticipation of formal ratification.

For example, the European elections on June 4 will be fought on the basis of the number of MEPs that would have been authorised by Lisbon, not the ones provided for by the current treaties.

No, this is about keeping the project going – a project from which millions now earn their living. The EU employs more than 170,000 officials, on handsome and largely untaxed retainers.

And for every formal Eurocrat there are dozens of fellow travellers: the Europe officers retained by every local council, large corporation and NGO. Their salaries might not be paid directly by Brussels but their livelihoods depend on the process of integration.

For Euro-hirelings, Lisbon isn't about federalism or democracy; it's about mortgages and school fees. They realise, to borrow their favourite simile, that the EU is like a bicycle that will fall over if it stops moving.

And so they have convinced themselves that voters are suffering from what Engels called "false consciousness": that they secretly want their leaders to disregard their votes and push ahead with deeper integration.

If you think I exaggerate, consider these words, spoken to the Czech President last week by Brian Crowley, leader of Ireland's governing party, Fianna Fáil, in the European Parliament: "All his life my father fought against the British domination. Many of my relatives lost their lives. That is why I dare to say that the Irish wish for the Lisbon Treaty."

Disregard the curious way in which Crowley equates his father's campaign for national independence with his campaign against it. Ignore, too, the anachronism: since Crowley's father was born 13 years after independence, he can hardly have spent his life fighting "the British domination".

Focus, instead, on the extraordinary presumption: "the Irish wish for the Lisbon Treaty". So much for the referendum result. Crowley believes he knows the voters' desires better than they do.

Will a second referendum succeed? Irish politicians think so: they calculate that the financial crisis has changed the mood, that their constituents want to be part of a big bloc.

But Irish voters might remember the EU's aggressive attitude when their government sought to guarantee bank deposits. They might have spotted that euro membership exacerbated their crisis by artificially fuelling the boom. They might even notice that the people telling them to vote "Yes", in Dublin and in Brussels, are the ones who presided over the breakdown.

An opinion poll in The Irish Times last month showed the Pro-Treaty Forces (if I might use that loaded term in an Irish context) four points ahead. Then again, they were 18 points ahead at this stage last time, and still got thumped. Received opinion can be woefully wrong.

Two weeks before the last referendum, I urged readers of my Telegraph blog to bet their shirts on a "No" vote, at odds of 7–2. In the event, the "Yes" side was so complacent that the bookies had already started paying out the wrong way before polling stations closed.

I won't repeat that advice, for one reason. The consequences of a second "No" for Brian Cowen would be disastrous: he would have to resign, and would go down in history as the Taoiseach who wouldn't take "No" for an answer.

If, after the European elections next year, the polls are still looking dicey, my guess is that Cowen would find a way to push the treaty through by a combination of parliamentary ratification, executive fiat and judicial activism. But he won't abandon it: that would be unthinkable.

MEPs: Not too polite, not too bright, either

Here is an account of the bad manners shown by MEPs -- among them was Daniel Cohn-Bendit, known on the Marxist barricades of Paris '68 as 'Dany the Red' -- towards President Václav Klaus, the Head of State of the Czech Republic, at an official meeting last Friday in Prague. Thanks to the EU Referendum blog for getting its hands on the transcript:

Daniel Cohn-Bendit MEP: I brought you a flag, which - as we heard - you have everywhere here at the Prague Castle. It is the flag of the European Union, so I will place it here in front of you. [President Klaus refuses the gesture]. As for the Lisbon Treaty, I don't care about your opinions on it. I want to know what you are going to do if the Czech Chamber of Deputies and the Senate approve it. Will you respect the will of the representatives of the people? You will have to sign it.

President Vaclav Klaus: I must say that nobody has talked to me in such a style and tone for the past 6 years. You are not on the barricades in Paris here. I thought that these manners ended for us 18 years ago but I see I was wrong. If you are concerned about a rational discussion in this half an hour, which we have, please give the floor to someone else, Mr Chairman.

EU Parliament President Hans-Gert Pöttering: No, we have plenty of time. My colleague will continue, because anyone from the members of the EP can ask you whatever he likes. (to Cohn-Bendit:) Please continue

President Vaclav Klaus: This is incredible. I have never experienced anything like this before.

[Cohn-Bendit goes at President Klaus again, then Pottering calls on Brian Crowley]

Brian Crowley MEP: I am from Ireland and I am a member of a party in government. All his life my father fought against the British domination. Many of my relatives lost their lives. That is why I dare to say that the Irish wish for the Lisbon Treaty. It was an insult, Mr Presdent, to me and to the Irish people what you said during your state visit to Ireland.

President Vaclav Klaus: As for the Lisbon Treaty, I would like to mention that it is not ratified in Germany either. The Constitutional Treaty, which was basically the same as the Lisbon Treaty, was refused in referendums in other two countries. If Mr. Crowley speaks of an insult to the Irish people, then I must say that the biggest insult to the Irish people is not to accept the result of the Irish referendum. In Ireland I met somebody who represents a majority in his country [Declan Ganley, leader of the No to Lisbon campaign]. You, Mr. Crowley, represent a view which is in minority in Ireland. That is a tangible result of the referendum.

Brian Crowley MEP: With all respect, Mr. President, you will not tell me what the Irish think. As an Irishman, I know it best.

President Vaclav Klaus: I do not speculate about what the Irish think. I state the only measurable data which were proved by the referendum.

The Czech president was too polite to say more than that to the not-quite-up-to-it Mr Crowley. Just for the record, 'what the Irish think' was expressed in the result of their high-turn-out referendum on Lisbon earlier this year: 53.4 percent voted against, just 46.6 percent voted in favour. Though 'what the Irish think' - or any other European voters think - of MEPs behaving in such an ill-mannered way on an official visit to a head of state is anybody's guess.

No still means No

Brian Cowen, the Taoiseach, has told his fellow European leaders that he does not intend to take “no” for an answer from Ireland's voters. Instead he has committed himself, a second time, to seeking ratification of the Lisbon treaty that they rejected by 53.4 per cent to 46.6 per cent six months ago.

Mr Cowen could have disgraced himself more thoroughly by ignoring Ireland's first referendum on the Lisbon treaty altogether. But his decision to heed European blandishments rather than his own citizens' ballots still shows, as the leader of the Irish “no” campaign has said, contempt for the democratic process. It is also a grave and unnecessary indictment of the EU's current priorities, which in more outward-looking eras have unquestionably been a force for good. If a second Irish referendum on the Lisbon treaty does take place, it deserves to be resoundingly rejected once again.

Ireland's Constitution - and only Ireland's - requires EU treaties to be ratified by referendum: hence the first vote on the Lisbon treaty in June. A committee of Irish MPs has since decided that a second referendum would be legal. But the first was legal, too, and it does not take a committee to point out that Mr Cowen and the “yes” campaign have already mocked their Constitution and insulted Ireland's voters by holding a perfectly legitimate and transparent referendum and refusing to abide by its result.

Dick Roche, the Irish European Affairs Minister, has claimed that “from a constitutional point of view there's no other choice than a second referendum”. He could hardly be more wrong. The obvious choice of respecting the voters' first verdict is difficult but right.

What would it mean in practice? Unratified by Ireland, the Lisbon treaty would probably also remain unratified by Poland and the Czech Republic. It could not come into force, and the “streamlining” of European decision-making that its proponents promised would not happen.

There is no question that the EU's sudden expansion in the past four years has rendered it unwieldy as a global political player and poorly balanced as an economic unit. It is possible, though not obvious, that the Lisbon treaty's proposed shrinking of the EU's executive might have eased the path to consensus on apparently intractable issues such as climate change mitigation and co-ordinated fiscal rescue packages.

But Ireland's voters decided that the price in sovereignty and influence was too high. They worried that streamlining in principle would mean bulldozing in practice, especially on tax and social policies, and they did not relish losing a commissioner. Brussels' response to Dublin's lobbying since the June vote has been dramatic: José Manuel Barroso, the Commission's President, and Nicolas Sarkozy, current President of the European Council, have reversed themselves on the treaty's central proposal and promised every member state its own commissioner after all.

It is hard to imagine a more compelling proof that this treaty's supposed benefits are not essential. Meanwhile, Europe's - and Mr Cowen's - impatience with Ireland's voters have revealed a basic misunderstanding of democracy next to which the EU's other problems pale. Europe can and must thrive as a coaltion of the willing. That is not what the Lisbon treaty promises to build.

Financial Crisis: Who is going to bail out the euro?

Europe must pull together if it is to avoid further financial disaster, argues Ambrose Evans- Pritchard.

By Ambrose Evans-Pritchard, Daily Telegraph, 8 Oct 2008

A half-point cut in global interest rates may not halt the slide into a debt deflation, but at least we can hope to avoid the errors of the Great Depression. The slump – remember – had little to do with the 1929 crash. What turned the mild recession of 1930 into the sweeping devastation of the early 1930s was an entirely avoidable collapse of the banking system in both the US and Europe.

The culprit was tight money, made worse by beggar-thy-neighbour policies. The key levers of power in Western finance were held by the sorts of people who now think it is a good idea to drive our banks over a cliff.

Thankfully, wiser heads are in charge this time. Yesterday's move by the US Federal Reserve, the Bank of England, the European Central Bank (ECB), the Canadians, Swiss and Swedes – with Chinese help – is the first time in this sorry saga that the big guns have joined forces in monetary policy to arrest the disintegration of the credit system. The Fed and the ECB are no longer fighting. That alone is a massive change for the better.

However, the failure to offer a lifeline to distressed banks across the world earlier by cutting rates is unforgivable. The G7 bloc of economic powers is in recession or on the cusp, including Japan – where the Nikkei index fell by 10 per cent yesterday. American consumer credit is contracting at an annual rate of 7.9 per cent, the most violent squeeze on record.

The Baltic Dry Index measuring freight rates for shipping has fallen 70 per cent since May. The whole nexus of commodities except gold, now a super currency, is in freefall. Oil has fallen by 41 per cent from its peak, copper by 38 per cent, wheat by 50 per cent. Few with their finger on the pulse of global commerce now think the threat of inflation is remotely credible. Tesco's Sir Terry Leahy says food prices are now deflating at two per cent in his stores.

My view is that Washington has done what is needed to prevent the collapse of the US economy. It has taken over the entire credit system, after all, surpassing Roosevelt's New Deal.

The US has guaranteed the $3.5 trillion money market funds. It has nationalised the $5.3 trillion pillars of the mortgage market, Fannie and Freddie. The Fed is accepting any junk as collateral at its lending window. This week it went the whole hog after panic hit the $1.6 trillion market for commercial paper. It is now offering loans without any security at all. The US government has become a bank. Yes, this is US socialism. What is the alternative?

The $700 billion Paulson rescue plan should put a floor under the colossal dung heap known as "structured credit". It is a bad plan, since it does not target the money on the recapitalisation of the core banking system. But it will help refloat lenders by raising the price of beaten-down securities somewhere nearer their true "hold-to-maturity" worth.

An ugly recession is coming, as debt leverage kicks into reverse. The purge will be slow and punishing. Some 12 million Americans are already trapped in negative equity, but at least they can see where this might end. After much drama, the US institutions have risen to the challenge. The Fed, the Treasury, and Congress have managed to take some sort of coherent action. The jury is out on Europe, where the hurricane is now smashing the banking system.

Those such as German finance minister Peer Steinbruck – who thought the sub‑prime crisis was just an "American problem" – have had a rude shock. The collapse of Hypo Real with €400 billion of liabilities has made him face the unsettling truth that German banks have played a big part in this $10 trillion speculative venture undertaken by the whole global banking industry.

Europeans borrowed vast sums in dollars in the offshore money markets when dollar credit was cheap. This was leveraged by multiples of 50 or 60 to fund whatever craze was in fashion – Russia, Brazil, infrastructure. The credit crunch has left these banks floundering. They have to pay back a lot of dollars, yet the underlying assets are crumbling. They are caught in a self-feeding spiral of "deleveraging". Even those European banks that stuck to stodgy investments are caught in a vice, since many rely to some degree on three-month loans for funds. That market is jammed shut. They cannot roll-over their loan books. This way lies sudden death, as Hypo discovered.

Who in the eurozone can do what Alistair Darling has just done in extremis to save Britain's banks, as this $10 trillion house of cards falls down? There is no EU treasury or debt union to back up the single currency. The ECB is not allowed to launch bail-outs by EU law. Each country must save its own skin, yet none has full control of the policy instruments.

Germany has vetoed French and Italian ideas for an EU lifeboat fund. The former knows exactly where that leads. It is a Trojan horse that will be used one day to co-opt German taxpayers into rescues for less Teutonic EMU kin. One can sympathise with Berlin. But sharing debts with Italy and Spain was implicit when they agreed to launch the euro. A shared currency entails obligations. We have reached the watershed moment when Germany has to decide whether to put its full sovereign weight behind the EMU project or reveal that it is not prepared to do so in a crisis.

This is a very dangerous set of circumstances for monetary union. Will we still have a 15-member euro by Christmas?

Euro membership does not boost trade

The case for joining the Euro has been dealt a blow – with a study finding that membership has not boosted trade by as much as was claimed by its proponents.

By Edmund Conway, Economics Editor, Daily Telegraph Business, 7 Dec 2008

The long-held view that euro membership would as much as triple the trade in goods between its members has been demolished by a new paper from one of the US's leading economists.

It comes amid growing speculation that the Government may be quietly considering joining the single currency in the coming years as the UK recovers from the effects of the financial crisis.

One of the most important pieces of research used by euro proponents was a paper from Andrew Rose showing that countries which joined currency unions tended to see their trade increase by up to 200pc. However, a paper published by Harvard's Jeffrey Frankel has shown that, in fact, trade within the eurozone increased by just 10-20pc during the first four years of the currency. Moreover, the volume of trade did not rise any further thereafter.

In the paper, published by the National Bureau for Economic Research, Prof Frankel says: "The most surprising finding of this study was the absence of any evidence that the effects of the euro on bilateral trade have continued to rise during the second half of the eight-year history of the euro."

The paper underlines the question marks that still remain over whether euro membership would significantly boost the UK economy. A growing number of politicians and economists have argued that Britain should reconsider its refusal to join the euro, in the light of the pound's dramatic fall over the past year. European Commission Jose Manuel Marroso has claimed that Britain is "closer than ever" to joining, and despite Downing Street's insistence that there are "no plans" for membership, some cabinet members, including Lord Mandelson, are known to be behind such a plan. Some suspect entry procedures could commence imminently if Labour won the next election.

The prospective benefits to trade of euro membership were one of the chief attractions highlighted by a number of papers published by the Treasury in the run up to Gordon Brown's five tests in 2003. However, Prof Frankel's research shows that the promise proved somewhat greater than the reality.

The DM says: Even French economists have come to the same conclusion - the Euro has comprehensively failed to boost trade and jobs. Remind us again - what was the Euro for? Note that the so-called "people who matter" (see below), who want the Euro, are keeping very quiet about their plans.

EU to spend £27m on boosting vote turnout

European Union spin doctors are planning to spend £27.5 million on promoting Euro-elections next year.

By Bruno Waterfield in Brussels, Daily Telegraph, 5 Dec 2008

An internal letter seen by The Daily Telegraph has revealed top-level fears that June 2009 polls for the European Parliament could be a political disaster for the EU.

Margot Wallström, the European Commission's Vice-President responsible for "communication", expressed the concerns in a letter to the Parliament's President.

She wrote: "In next year's elections, the legitimacy of your parliament, and that of the Union as a whole, is at stake."

The Commission is intervening for the first time in the 30 year history of European elections because of a high risk that steeply declining voter turnout for the unpopular EU assembly will fall to an all-time low.

The turnout for the last European elections in 2004 dropped to 45 per cent, just 38.9 in Britain – rates that are almost a fifth lower than during the first poll held in 1979.

Officials are concerned that if participation drops further then EU institutions will be exposed as unpopular or irrelevant to voters.

Mrs Wallström has pledged budgets worth £14.5 million to be added to £13 million of Parliament funding earmarked for the elections.

Brussels funding will be used to "mobilise our European and local networks, NGOs and other organisations with whom the Commission works".

Money will also be used to "specifically" target "journalists of women magazines" and to "to support a blogging project with young journalists".

"I hope that through our collective actions we will be able to contribute to reversing the trend," said Mrs Wallström.

Nigel Farage, leader of the UK Independence Party said: "With this the Commission both throws down the gauntlet, and recognises, finally, that there are question marks over the EU's legitimacy as a political project. Well we in Ukip will gladly take up a challenge so defined."

Officials fear that the denial of referendums across Europe on the Lisbon EU Treaty combined with the Irish No vote and a deepening recession will prove to be catastrophic political mix.

"The rate of voter abstention as well as the Eurosceptic vote could be reinforced with detrimental consequences," admitted one document written by the Paris office of the European Parliament.

The DM says: Typical European Union solution - spend our money to try to persuade us that the European Union is not a disaster for us. EU Costs are high enough already without paying for all this propaganda.

Czechs leave Irish isolated on EU Treaty

Bruno Waterfield in Brussels at Nov 26, 2008
Posted in: Telegraph, Foreign Correspondents

There is only one group of people who can, and should, be trusted with deciding on political issues such as European Union treaties. It is the people, not the judges.

The Czech Constitutional Court ruled on Wednesday that the Lisbon Treaty conforms to national law, clearing the way for the country's parliament to proceed with ratification.

"The Lisbon Treaty does not run counter to the constitutional order," said Pavel Rychetsky, the court's chairman.

The Czech parliamentary route will not be easy but is pretty much assured, meaning that, barring technicalities or formalities (such as the country's President Václav Klaus signing it off), Ireland is all alone.

The quarantine, isolate and pressure strategy - aided and abetted by Gordon Brown - is running to plan. Dublin is expected to announce a second referendum in the coming week or so, backing a recommendation from the country's parliament, leaked here.

It is wrong for unelected judges to be involved in politics and Europe's constitutional judiciary has played a key role in railroading the Treaty though - in Denmark, the Netherlands and now the Czech Republic.

The issue of a referendum, or not, is a political not a legal or technical question. It is not up to judges or officials to decide if governments have broken promises, over EU referendums, or anything else. It is up to voters.

Unfortunately the constitutional role of judges in deciding on EU matters has been reinforced by some Eurosceptics, who are a litigious bunch.

No doubt some political cretins, if no one objects to the term too much, are still holding out hopes that German judges will sink Lisbon after the traditional challenge from the right wing Bavarian MP Peter Gauweiler. Get real.

The trend to hand over political decisions over to the experts - whether it is British judges and civil servants or European judges and civil servants - is the same tendency that has created the EU of the 21st century.

The DM says: The European elections in 2009 offer the only chance we are likely to get of something like a referendum on the European Union. Let's make sure the politicians get the message loud and clear.

EU condemned on tuna 'mockery'

Countries involved in the Mediterranean bluefin tuna trade have voted to maintain catches nearly 50% above what scientists say are "safe" levels.

Environment groups labelled the move, by the International Commission for the Conservation of Atlantic Tunas (Iccat), as a "mockery of science".

They put most blame on the EU which, they said, used trade issues to bully smaller nations into giving support.

Iccat's scientists had said next year's total allowable catch (Tac) should not exceed 15,000 tonnes; but on the final day of its annual meeting, Iccat members set a figure of 22,000 tonnes. Iccat has missed its last chance to save the bluefin tuna from stock collapse

They also rejected the scientists' call for a closure of the fishery in the spawning months of May and June.

The scientists had warned the commission that "a collapse in the near future is a possibility" given the high number of boats engaged in the lucrative trade.

"The spawning closure was probably more important than the Tac issue because actually the Tac was never respected," said Sergi Tudela, head of the fisheries programme at the environment group WWF.

"It was the one thing that might have stopped overfishing", he told BBC News from the Iccat meeting.

"The decision is a mockery of science and a mockery of the world; Iccat has shown that it doesn't deserve the mandate to manage this iconic fishery."

Earlier this year, an independent expert report branded Iccat's management of the tuna fishery a "disgrace", and put the blame on the shoulders of major fishing nations which, it said, routinely flouted the rules.

In 2006, Iccat scientists estimated that illegal fishing in the Mediterranean added about 30% onto the official catch figures.

The bargaining position adopted by the European Commission - which represents all EU members on Iccat - came as something of a surprise.

At the World Conservation Congress in October, Spain - the biggest tuna-fishing country - backed a suspension of the fishery, and Italy was reported to have gone further and called for a moratorium.

The EU's opening statement at Iccat acknowledged that "the situation of the bluefin tuna is critical", and that "urgent action is needed to ensure the sustainability of this emblematic stock".

The reasons why the European Commission decided, against this backdrop, to argue for catches considerably above the scientific advice are not yet clear.

Some conservationists at the meeting said the EU had threatened developing nations with trade penalties on goods such as bananas unless they backed the European position.

Conservation groups which have long lobbied Iccat members to adopt scientists' advice are now likely to take their fight to the Convention on International Trade in Endangered Species (Cites).

Numbers of the East Atlantic stock of bluefin have fallen so fast that listing it as a threatened species is a possibility. The southern bluefin is already categorised as Critically Endangered.

"The game is over - Iccat has missed its last chance to save the bluefin tuna from stock collapse," said Sebastian Losada, oceans campaigner for Greenpeace in Spain.

"It's time to take the fishery out of their hands and look to conventions like Cites to impose trade restrictions on the species."

The DM says: European Union policies nearly always achieve the opposite of what they intend, unless they are designed to give one country, usually France, an unfair advantage. This time it's Spain.

Best to leave the Euro to its own (de)vices

Joining the single currency would make our situation worse

By Ambrose Evans-Pritchard, Telegraph, 1 Dec 2008

The euro is on a roll. Icelanders are clamouring to join, as soon as they can get into the EU. The Danes seem ready to abandon their long rebellion and sign meekly on the line. A Danish referendum is pencilled in for March.

Eastern Europe's states are trying to engineer entry as fast they can to escape the hell of semi-fixed currencies. It was not such a good idea after all to take out euro mortgages in Budapest, Warsaw and Sofia – or Swiss franc mortgages, heaven forbid.

Everybody wants a safe port in this Force 10 storm. No matter if it is full of undetonated mines. No matter, too, that Denmark's travails stem from membership of the ERM, a half-way house that has forced them to raise rates twice – into the Copenhagen property crash.

Honesty from the European Union?

José Manuel Barroso, the Commission's chief, was a little too honest telling French TV that the people who count in Britain hanker for monetary union. What a slip of language. Is this a reversion to his Maoist youth in Portugal, or has he been drinking the EU waters for too long?

The people who count in British democracy are the voters. But let us not quibble. Mr Barroso is right to sense a shift in the undercurrents of British politics. This is a tricky moment for those who fear that total loss of control over our monetary policy would lead to even more destructive cycles of booms and busts than those we have already.

"I don't want to break the confidentiality of certain conversations," said Mr Barroso. "But British political leaders have told me that: if we'd had the euro, we'd be better off."

How, exactly, would we have been better off? Our current mess is caused by over-reliance on bankers (7·8 per cent of GDP), six years of incontinent spending by Gordon Brown and a housing/credit bubble that has pushed personal debt to 103 per cent of GDP.

Impact of the Euro on Britain

Joining the euro would not have prevented any of this. It would have made matters worse. The European Central Bank held rates at 2 per cent for part of this decade to help Germany out of the doldrums. Imagine what such rates – or anything near – would have done to Britain's property boom. You might as well have poured petrol on the fire, as Ireland and Spain can attest.

Events since the crunch began last year – and reached volcanic fury in September – entirely vindicate our refusal to give up control over our economy. Sterling has come down from silly levels, falling 30 per cent against the dollar and 21 per cent against the euro. Perfect. The economy has suffered an asymmetric shock: the currency has acted as the shock absorber. Our sympathies to well-heeled Britons in Aquitaine or Umbria living off sterling rents, but policy is not set for their needs.

The Bank of England botched the crisis at first, but it is now responding to emergency with stunning boldness. The 1·5 point cut in November – and what follows this week and beyond as rates fall to the lowest level since the Bank's creation in 1694 – may make the difference between recession and depression. Others that gave up their currency may not be so lucky.

Would you really want Frankfurt to decide your fate? The "people who count" in global finance – investors, economists and hedge funds – are increasingly in despair about the conduct of the ECB. It has misread events at every turn over the past year. It panicked in July when it raised rates to offset an oil and food price spike. By then, Germany and Italy were already in deep recession, and Spain faced a housing crash.

The "Shadow ECB", a panel of private economists from across Europe, last week called for immediate and drastic rate cuts, demanding to know what the ECB's strategy now is – if it has any at all. It would be going too far to describe the ECB's policy utterings as primitive gibberish – as two Nobel Laureates put it – but the bank is bent on a course of action that is at best very different from the reflation strategies of the Anglo-sphere, China and Switzerland, and risks repeating the errors of 1931 to 1933.

These are early days in this long, winding crisis. We cannot yet judge whether the euro is a force for stability, or whether it is workable at all – given the lack of an EU treasury and debt union to back it up. Monetary unions can create an illusion of calm for a while. They shield sinners from market discipline, but in doing so they let problems fester.

Will the Euro Fail?

Locking the currencies together was the easy part of EMU. Once the euro was off the ground, it was unlikely to face an existential test for at least a full credit cycle. But then it gets harder. The Latin bloc has allowed costs to creep up, while Germany has squeezed wages with relentless discipline. The gap has grown wider every year.

This is starting to matter. Investors are no longer willing to treat Greek, Italian, Irish or Spanish debt as interchangeable with German debt.

Nothing is pre-ordained in the euro drama. The chief reason for launching the single currency – before economies had properly converged – was to force the pace of political union. It may have to deliver on this agenda. Either the EU creates the machinery to needed cushion the bust on Europe's fringes, or EMU will drift into crisis. The ball is in the court of very reluctant paymasters in Germany.

Whichever of these two paths its chooses, there is no earthly reason for us to follow.

Could José Manuel Barroso's Euro statement refer to Peter Mandelson?

For José Manuel Barroso, the president of the European Commission, "the people who matter in Britain" think we should join the euro.

There speaks the authentic voice of the Euro elite for whom common-or-garden voters are an irritating irrelevance.

To whom could Mr Barroso possibly be referring? Could one of them be his former colleague in the Brussels Commission, Lord Mandelson, now returned, for the third time, to high office in the Labour Government?

There is a clue. The Business Secretary said at the weekend that he believed "that our aim, our goal, should be to enter the single currency".

It was the first time the euro has been mentioned by a Cabinet minister in years. Make of that what you will.

If the commission president does indeed regard the pro-euro Lord Mandelson as the arbiter of British policy, he is making an astute judgment.

For his lordship has been given exceptional latitude by Gordon Brown to let his writ run far beyond his own Whitehall department: his fingerprints seem to be on a great deal of what the Government is up to these days.

The Barroso theory is also supported by the tumbling value of sterling against the euro - down by close to 15 per cent since the start of the year. At this rate of descent, the two currencies will align around March 2010, the eve of the general election.

Could this prompt a fresh attempt to join the eurozone? Unfortunately for single currency supporters, there is a fly in the ointment. Under the Maastricht convergence criteria, successful applicants should have a debt/GDP ratio not exceeding 60 per cent.

The Treasury admits the ratio is heading towards 57 per cent, but that excludes PFI projects, pension liabilities and the bail-out of the banks. Add in those and our debt ratio is already double the limit. Even Lord Mandelson will struggle to finesse that away.

The DM says: some have suggested that, rather than having anything to do with our government reconsidering joining the euro, Barroso's outburst may be more of an attempt to bolster confidence among the eurozone's existing members. It comes amid growing evidence that some countries are finding the constraints of eurozone membership too limiting on their abilities to pursue necessary policies to pull their countries out of recession as quickly as possible.

In response to Barroso's claims, Downing Street has said that the government's position on euro membership remains "unchanged". But the EU and elements of our political elite still craven to such ideas of the past rather than open to opportunities of the future will miss no apparent justification, however spurious, to attempt to expand the EU's powers at the expense of democracy, economic flexibility and prosperity.

EU membership cost to British taxpayers will treble to more than £6 billion, Treasury says

Britain's payments to the EU will more than triple in two years to more than £6 billion under a failed deal to cut European farm subsidies.

By James Kirkup, Political Correspondent, Daily Telegraph, 2 Dec 2008

Treasury figures show that the UK government will increase its payments to European institutions even as ministers prepare to cut money for programmes including hospital construction.

In 2008/09, Britain's net contributions to the European budget are expected to be £2 billion. In 2010/11, the Treasury forecasts the price of EU membership will be £6.5 billion.

The payments could end up being even higher since the contributions are paid in euros and sterling has fallen to record lows against the single currency and continues to slide on currency markets.

The contribution figures were revealed in the footnotes of last week's pre-Budget report, which also sets out plans for huge borrowing to be repaid by tax rises and spending cuts starting in 2010.

Figures elsewhere in the PBR show that as part of the planned clamp on public spending, £1.2 billion has been cut from the Department of Health's capital spending programme for 2010/11.

In all, £37 billion will be cut from the Government's spending plans as a result of the PBR measures.

Yet even as domestic spending is squeezed, more taxpayers' money will be spent on EU institutions and aid programmes.

Britain is a major net contributor to the EU budget, but UK payments are reduced by an annual rebate, first negotiated by Margaret Thatcher in 1984.

Britain's EU contributions are rising as a result of a 2005 agreement by Tony Blair - with Gordon Brown's backing - to a staged series of cuts in the rebate.

The extra British payments were meant to be matched by cuts in the Common Agricultural Policy subsidies paid to farmers, which cost the average British family over £300 a year. But France is trying to renege on the agreement to review farm spending.

The Daily Telegraph last week revealed French plans to use the country's EU presidency to find ways of protecting the CAP from reform during negotiations in 2009. The issue may spark clashes between Britain and France at an EU summit in Brussels next week.

Ministers insist Britain's EU membership is good value, pointing out that the EU accounts for nearly 60 per cent of British trade, supporting 3.5 million British jobs.

Mark Francois, the Conservative shadow Europe minister said: "These figures show what a bad deal Gordon Brown agreed to when he and Tony Blair signed away billions of pounds of our rebate. With a falling pound these figures are now set to get worse.

"They gave away British taxpayers' hard earned cash but failed to secure anything concrete in return. That money is now badly needed yet Britain is still struggling to secure further necessary reform of the Common Agricultural Policy."

Ruth Lea, of the eurosceptic think-tank Global Vision, said the rising UK contribution "calls into question the affordability of EU membership"

She said: "With the French digging in over CAP reform, there will be no progress. It demonstrates the extraordinarily naÃ¯ve deal the Government struck in 2005. It was simply a giveaway with no guarantee of any quid pro quo from other European countries."

UK 'closer' to adopting the Euro

BBC News website, 1 Dec 08

The UK is "closer than ever before" to joining the euro, according to the European Commission's president.

Jose Manuel Barroso told French radio that British politicians were considering the move because of the effects of the global credit crunch.

Lord Mandelson said at the weekend that "our aim" should be to join the single currency - but Downing Street said its position on the euro remained the same.

In 1997 Gordon Brown, seen as less keen on the euro than Tony Blair, set five economic tests which had to be met before ministers would recommend UK euro entry and holding a referendum.

The key test is whether the UK economy is coming together with those of countries in the eurozone and whether this can be sustained in the long-term. The second test, linked to this, is whether there is sufficient flexibility to cope with economic change.

The remaining three tests assess the impact of joining the euro on jobs, foreign investment and the financial services industry.

Opinion polls have suggested that any vote on scrapping the pound and adopting the euro would be lost, and in the UK the currency has not been a significant political issue for years.

In his interview Mr Barroso acknowledged "the majority" of British people continued to oppose joining the eurozone.

But he said the recent economic uncertainty had made the currency a far more attractive option.

In the RTL radio/LCI television broadcast, the former prime minister of Portugal said: "We are now closer than ever before.

"I'm not going to break the confidentiality of certain conversations, but some British politicians have already told me, 'If we had the euro, we would have been better off'."

He said the current poor economic situation had emphasised the importance of the euro and the UK, but added he believed a move would not take place in the immediate future.

"I know that the majority in Britain are still opposed, but there is a period of consideration under way and the people who matter in Britain are currently thinking about it," he said.

The value of sterling compared with other currencies has fallen during the credit crunch, and the UK government has had to spend massively in recent months to try to support the economy.

During the interview, Mr Barroso highlighted the situation in Denmark - an EU state which voted against joining the eurozone in 2000, but is now considering holding a new referendum on the single currency.

In the daily Brussels briefing later an EC spokesman said "member states would benefit from a country like Britain being in the euro".

He said the euro could be "an anchor of stability in troubled times... the advantages are very clear".

He added that Mr Barroso's comments were "reflections" and added: "The British are very pragmatic. When they feel it is right to join the euro, they will join the euro."

A Downing Street spokesman said: "We have no comment on this. Our position on the euro is the same - it has not changed."

Business Secretary Lord Mandelson, a former European Commissioner, told Labour's Progress conference on Saturday: "I hold to the view that our aim, our goal, should be to enter the single currency."

He added that the government was "obviously not going to take on that challenge" in the current economic climate.

Shadow foreign secretary William Hague said: "It is extraordinary that certain politicians are whispering to the EU Commission about joining the euro behind the British people's backs.

"Keeping the pound is vital for Britain's economic future. We need interest rates that are right for Britain, not the rest of Europe. There are no circumstances in which the next Conservative government will propose joining the euro.

"If Labour ministers still want to get Britain into the euro they should come out and say so. We will be putting questions to the government to find out what conversations have been going on."

The leader of the UK Independence Party, Nigel Farage, said "the people who matter in Britain are the people, not the professional political class that Barroso is himself a member of".

The DM says: European Union leaders will never stop trying to get us to join the Euro. Inside the Euro we'd have a nice safe haven, just like the Irish - see below. The irish Finance Minister has blamed his countriy's economic problems on the Euro. If we Keep the Pound, we can set interest rates to suit the British economy, not the European one.

Irish house of cards comes down

A drop in building work has meant fewer customers for Dave's cafe
As the bacon rind turns a crispy brown colour, Dave Jones gives it a generous extra splash of oil.

The food at the Smithstown Diner, a small roadside cafe near Drogheda, is high on grease - the builders who come here like it that way. But lately business has dropped.

"It used to be really hectic in here. Now look," he says, gesturing at rows of empty plastic seats.

The Smithstown is popular with what the Irish call "breakfast roll man," building workers in white vans. This morning, there are just two.

"Times are hard, a lot of boys are being let go," says 40-year-old Robert Daley, who runs an aluminium fitting business.

"We do mainly big projects - developments of shops, offices and flats," he says. "We're just finishing one, so we're busy at the moment but there's nothing else coming up."

"We're really feeling the pinch for the first time, because you know there's nothing else out there.

"In the worst scenario I could go to England - but it's pretty quiet over there too."

Tony is not the only person in Drogheda talking about working abroad. A number of people mention Australia as a possible destination.

The Irish thought their Celtic Tiger economy had put an end to generations of emigration. It is not back yet, but the fact that people are talking about it again is a sign of how bad things have got.

Ireland is the first country in western Europe to officially fall into recession, defined as two consecutive quarters of negative economic growth.

During the unprecedented boom years, the population here grew by a third. Now, it is an unemployment black-spot - ringed by new developments with empty, unsold houses.

Giles Belton has been an estate agent here for 20 years. He took me to the Termon Abbey estate to show me the problem.

"This is quite typical of any of the new estates that have been built in the Drogheda area," he says.

"At the height of the market these properties were selling exceptionally well. A lot of people were buying second, and third, and fourth houses. There were record breaking prices."

The property collapse has combined with the global financial crisis to create what some see as a perfect storm hitting Ireland's banks - whose loan books are groaning with property-related debt.

Earlier in October, the government announced a scheme to guarantee deposits in the banks to prevent a run.

Now, Dublin is buzzing with speculation that this will not be enough - and that a British-style buy-out of top banks will be needed.

It is estimated that Irish banks need an additional 10 to 14bn euros and that some may have to merge.

Shares in the top four banks have tumbled, but at a banking conference in Dublin this week Finance Minister Brian Lenihan insisted that buying stakes in the banks was "the last option".

Last week it unveiled its biggest budget deficit in 20 years - despite the budget including tax rises and cuts in spending on education and health.

The latter included cuts in free health provision for the over 70s, and brought a huge revolt by backbench Fianna Fail MPs that led to a partial, but nonetheless humiliating, climb-down by the government.

Prime Minister Brian Cowen had his authority undermined - looking shocked and angry in parliamentary exchanges.

Taunted for being "cruel and callous" by the opposition, he shouted back: "You call me callous - call me any names you like. I'll continue to provide leadership in the solution of problems".

But the following day, despite the U-turn, 15,000 pensioners converged on parliament in a day of protest.

According to Ray Kinsella, professor of banking at University College Dublin, it shows that "the financial crisis can and does morph into an economic crisis".

"The ability to fund public services is undermined. The government have had to introduce a budget to cope with this astonishing turnaround, and we haven't had to do anything like this for a generation," he says.

The buskers in Drogheda know this. They line the high street, but do not have many coins in their hats.

Local senator Dominic Hannagan, from the opposition Labour Party, says the crisis does have international roots, but that the government is also to blame.

"The government relied far too heavily on the building trade. So when credit became difficult to get, when mortgage rates went up, that area suffered most. Because our economy was so heavily dependent on building, we suffered.

"We've been telling the government to diversify the economy for years. They didn't, and now we're suffering."

"That ruling elite would love to bounce us into the euro and will grasp at any straw to do so, for it's a step on the way to their dream and our nightmare, a federal superstate.

"We're told that some British politicians have said 'If we had the euro, we would have been better off'. Whoever these people are we need to hunt them down and explain some simple economics to them."

He added that if Mr Barroso wanted to test the mood in Britain "then he can call for a referendum on both the euro and the Lisbon Treaty so that the people of Britain can tell him where to go".

Britain should join euro says Hong Kong's Tsang

By Ambrose Evans-Pritchard, International Business Editor, Telegraph, 27 Nov 2008

Britain's efforts to hold on to sterling are doomed to failure in a global economy dominated by powerful currency blocs, said Hong Kong's leader Donald Tsang.

Tsang, an elder statesman of Asian finance, said open trading states must adapt to the realities of modern finance.

"I do not believe in the sustainability of a small floating currency. Look at the pound, it's being attacked," he said in interview with the Daily Telegraph.

"The euro is a good move. People have to abide by the Maastricht criteria, so it imposes discipline. Other options are less palatable if you really want to become a big strong economic union."

Mr Tsang, the chief Executive of the Hong Kong Special Administrative Region of the People's Republic of China, is a veteran of East Asia's currency crisis of the late 1990s and the SARS epidemic. As a Beijing loyalist, he offers clues into the current thinking of the Chinese leadership. His comments on sterling are a warning sign that China may ultimately prove reluctant to buy large amounts of UK Treasury debt in the future.

Mr Tsang, as always wearing his signature bow tie, said it will be impossible for the Far East to launch its own currency union until China makes the renminbi convertible. This is not yet remotely on the agenda.

"We have to mark our time. One thing is clear, this is not something you can impose. You have to work for it, with the market, and back it up with a solid banking system," he said.

The DM says: Here we go again. The credit crunch is the latest excuse for calling for the UK to join the Euro. Bank of England Governor Eddie Georg e called the idea of sterling in the Euro "The elephant in the rowing boat" - a large currency that would destabilise the Euro and eventually cause it to sink. Much better for it to sink without us.

Will Europe impose exchange controls to head off disaster?

Posted By: Ambrose Evans-Pritchard, Daily Telegraph Nov 23, 2007. Posted in: Business

The die is now cast. As the euro brushes $1.50 against the dollar, it is already too late to stop the eurozone hurtling into a full-fledged economic and political crisis. We now have to start asking whether the EU itself will survive in its current form.

It takes eighteen months or so for the full effects of currency changes to feed through, so the damage will snowball late next year and beyond into 2009. Although "damage" is a relative term.

As Airbus chief Thomas Enders warned in a speech to the Hamburg workers last night, Europe's champion plane-maker - the symbol of European unification, in the words or ex-French president Jacques Chirac -- is now facing a "life-threatening" crisis.

Mr Enders said the company's business model is "no longer viable", and "massive losses" are on the horizon. So much for all those currency hedges that analysts like to cite. Have they ever tried to buy a currency hedge? They would discover how expensive these instruments are. Hedges cannot protect a company with $220bn in delivery contracts priced in dollars, when the euro/sterling cost-base is leaping into the stratosphere.

Will the Euro Collapse?

The sudden rocketing in sovereign bond spreads this week between core German Bunds and Club Med debt - Italian, French, Spanish, Portuguese, Greek, as well as Irish, Belgian and Slovenian - is a clear sign that markets are starting to price in a break-up risk for the single currency, however remote. Italian spreads have risen beyond the danger point of 40 basis points. This is less than the 100bp or so seen in Quebec (viz Ontario debt) when it looked as if the separatists might prevail. But it is dangerous nevertheless.

Moreover, these bond spreads are telling us that liquidity is drying up and that monetary policy is now too tight for the eurozone, as it is across much of the developed world. Two-year bond yields are collapsing in the US, Britain, and the Anglo-Saxon states, a signal that markets are now discounting possible recession. The whole central banking fraternity seems behind the curve, spooked by residual (lagging) inflation - and prisoners of a defective economic model (Neoclassical/New Keynesian synthesis). This is how the 1930 recession metastasized, although one doubts that Ben Bernanke will allow Part II to unfold this time. He has spent half his life studying the blunders of the Fed in 1930-1932.

One thing is sure, President Nicolas Sarkozy will not let Airbus go bankrupt, nor see decimation of the French industrial core, without an almighty fight against those countries deemed to be engaging in a beggar-thy-neighbour strategy of currency devaluation - benign neglect in Washington, less benign in Beijing.

He will have allies soon enough, once the housing bubbles collapse in Spain and across the Med. Mr Zapatero will not be in power for long in Madrid. Mr Prodi is on borrowed time in Rome. A new political order will soon take hold in much of Europe, bringing in a new wave of prickly national populists.

So, how will they fight? Will Mr Sarkozy and his allies resort to 1970s-style exchange controls to stem the rise of the euro?

They certainly have the power to do so. Four years ago a little-known cellule at the European Commission wrote a report - on prompting from Paris - exploring the legal basis for measures to stabilize the currency.

After combing through the EU treaties and court judgments, it concluded that Brussels may impose "quantitative restrictions" on capital inflows.

"Should extremely disturbing capital movements endanger the operation of economic and monetary union, Article 59 EC provides for the possibility to adopt restrictive measures for a period not exceeding six months," it says.

It would be renewable each six months, so the policy would in fact become permanent.

Any decision would be taken by EU finance ministers under qualified majority voting. Britain would have no veto, even though the effects of such a move on the City of London would be catastrophic - and trigger the certain withdrawal of Britain from the EU (and good riddance, some might say in Paris).

This "disturbing" capital movement is occurring right now. Portfolio inflows into the eurozone reached a record EUR46.2bn in September. China, Asian wealth funds, Petrodollar sheikdoms, and now even Nigeria, have all joined a stampede into euros, utterly disregarding the underlying reality that Europe is in no better shape the United States itself. It is in worse shape, though this is disguised by the cycle. It is much worse in terms of economic dynamism and demographics.

Confidence has cratered in Germany, and the Netherlands, not to mention Belgium - which has not had a government for 165 days, and is now sliding towards disintegration. Since Belgium is a metaphor for the EU - an arranged marriage of squabbling tribes, speaking different languages, who do not love each other, and never did - this in itself amounts to a tremor for the EU system.

EU industrial orders fell 1.6pc in September. Spanish, French, South Italian, and Irish house prices are already all falling.

Spreads on the iTraxx financial index of 25 European bank and insurance bonds have jumped to a fresh record, worse than during the depths of the August crunch. The iTraxx Crossover of low-grade corporates is back to crisis levels above 400.

The European Covered Bond Council suspended trading in covered bonds this week because the spike in spreads had become disorderly, and three-month Euribor rates have gone through the roof again, and that is the rate that sets Spanish and Irish mortgages. Bond issuance in Europe is frozen.

France is in the grip of a national strike costing EUR2bn a day. The railways are paralyzed. The country's 5.2m public workers are staging walk-outs.

Is this a currency bloc that should be now be deemed the ultimate safe-haven, the repository of trust in a dangerous economic world? This hodge-podge of disputatious clans, lacking a central Treasury, government, debt union, and guiding philosophy - let alone the sacred solidarity of a nation?

Returning to the Commission cellule, it said that: "Among the actions that can be undertaken when a member state experiences serious balance of payments difficulties, Articles 119 and 120 EC provide for the possibility to reintroduce 'quantitative protective measures' against third countries."

The measures are of course exchange controls. This is the nuclear option, but Europe's politicians could equally invoke Article 104 of the Maastricht Treaty giving politicians the power to set fixed exchange rates (by unanimous vote) or a dirty float for the euro (by majority).

The document is annexed to the Commission's 2003 EU Economic Review. Nobody paid any attention at the time, just as the Commission had hoped - at least that is what one of the authors told me. This is the EU's Monnet Method, one silent fait accompli after another.

French President Nicolas Sarkozy certainly seems inclined to go this route. He has again invoked his ideas for "Community Preference" - ie, a closed trade bloc - in a speech this month to the European Parliament. Contrary to claims, he is not letting go of his mercantilist plans.

The ECB may or may not intervene in the currency markets to cap the euro. But this is a red herring. Europe's retort - if and when it comes - will be far more political, and far more dramatic. We are at one of History's "inflexion points".

One recalls the months leading up to the collapse of the Gold Standard in 1931. That was triggered first by Credit Anstalt in Austria and then by a British naval mutiny in Scotland.

Any bets on what will trigger the collapse of Bretton Woods II? I wager that it will be a decision by the Gulf states to break their dollar pegs, leading to a temporary surge of euro purchases. That will tip Mr Sarkozy over the edge.

The DM says: Some commentators are starting to argue that the Euro would be a safe haven for Britain in the current crisis. They never give up.

Germany gives chilly welcome to EU calls for €200bn fiscal boost

European Union plans for a €200bn (£165bn) fiscal boost to head off a severe recession have already begun to unravel as Germany and other Northern states dig in their heels over extra spending.

By Ambrose Evans-Pritchard, Daily Telegraph Business, 26 Nov 2008

Jose Manuel Barroso, the European Commission's president, said Europe is facing an "exceptional crisis" that calls for unprecedented measures. "If we do not act now, we risk a vicious recessionary cycle of falling purchasing power and tax revenues, rising unemployment and ever wider budget deficits," he said.

The package is worth 1.5pc of GDP of Europe's GDP, exceeding the 1pc plan unveiled by Britain's Chancellor Alistair Darling this week. It includes €30bn of direct spending by the EU's own institutions, amounting to a significant step towards the creation of an "EU treasury".

European Union Plans

Under the proposals - to be submitted to EU leaders next month - each country can choose its own mix of tax cuts and extra spending. Mr Barroso said those countries with budgets in good health - chiefly Germany, the Netherlands, and Scandinavian states - will be expected to make a "much bigger offer" in terms of overall stimulus than they have provided so far. "Those that used the good times to achieve stable public finances have most room for manoeuvre," he said.

German Chancellor Angela Merkel poured cold water on the plans yesterday and insisted that Berlin would not follow Britain's lead in cutting VAT. "We should not get into a race for billions. Germany is very strong," she said.

Berlin has dragged its feet over the calls for a fiscal boost, sticking to orthodoxy despite a blizzard of dire data. The economy is already in recession and may face the worst slump next year since 1949, according to the Bundesbank. Most of the Germany's €50bn "stimulus" comes from the private sector.

The slow response reflects scepticism in Germany over the value of Keynesian spending plans, but it has nevertheless caused heated debate in Germany itself. "The government still fails to understand the gravity of the situation," said Gesinde Lotzsch from the Left Party.

Volkswagen is mulling plans to shut its main plant at Wolfsburg for three weeks before Christmas, suspending 16,000 workers. "We have never before seen this type of crisis, " said Martin Winterkorn, VW's chairman.

BMW is laying off 8,000 workers worldwide. BMW's chairman Norbert Reithofer said his company was facing the "biggest crisis in its history".

Traders said it was disturbing that BMW had to tap the bond markets for €750m last week at a punitive yield of 540 basis points above benchmark lending rates. It is a sign that the firm is struggling to raise money from banks, and may have had to rescue suppliers frozen out of the credit markets entirely.

France is considering a cut on car sales taxes as part of a €19bn package to shore up the country's key industries. Paris is planning to use its firepower in a more focused way than Britain, fearing that a broad VAT cut will do little to nurse vital productive plant through the crisis.

Mr Barroso said the stimulus should be "targeted, timely and temporary". The `exceptional circumstances' clause of the Maastricht treaty has been invoked to permit states to breach the limit of 3pc of GDP on budget deficits -- up to a point -- creating leeway for Italy, France, and other countries pressing up against the barrier.

This will not lets Britain off the hook given that the UK deficit will soon spiral up to 8pc - the worst in the developed world.

"The measures member states are introducing should not be identical, but they need to be co-ordinated. It would be a complete mistake for the Commission to propose a harmonised response while there are different points of departure," said Barroso.

The plan includes €5bn for "green" cars from the European Investment Bank, the EU's project arm. The EIB is already the world's biggest multilateral lender. It will now expand its annual borrowing from €55bn to €70bn , even though it has already seen a sharp rise in its "Watchlist" of problem loans.

Crucially, Brussels is using a plethora of EU bodies to spread money around, in effect using these institutions for the first time as a tool for managing the economic cycle. This is a major new departure. The commission issued a €2bn bond under its own authority for the first time this week - using its Macro-Financial Assistance (MFA) programme.

It is clear that Brussels is now taking advantage of the crisis to greatly extend its role in macroeconomic policy, a shift that is likely to raise eyebrows in eurosceptic circles.

The DM says: The European Union is not yet the country it aspires to be, but it keeps trying.

France demands £7bn EU farm subsidies before talks begin

EXCLUSIVE: France is preparing to "stitch up" Britain by blackmailing the European Union into guaranteeing farm subsidies worth more than £7 billion a year.

By Bruno Waterfield in Brussels; Daily Telegraph 25 Nov 2008

President Sarkozy, who has bitterly attacked plans to cut Europe's farm spending, has summoned EU agriculture ministers to a special meeting to discuss 'the future of the Common Agriculture Policy' Photo: AFTP/ GETTY IMAGES
Restricted documents seen by The Daily Telegraph, show Paris will demand subsidies to French farmers are protected before agreeing to allow global free trade talks to take place next month.

The development threatens to break promises made three years ago when the former Prime Minister Tony Blair gave up a chunk of Britain's annual rebate from Brussels on the understanding there would be a cut in farm subsidies after 2013.

The recent meeting of G20 leaders called on the EU to come to a quick agreement on World Trade Organisation negotiations aimed at cutting farm subsidies and dismantling import barriers.

But diplomats say France, which currently holds the EU's rotating presidency, is using its position to hold the EU to ransom by linking protection for French farmers to the reopening of talks.

President Sarkozy, who has bitterly attacked plans to cut Europe's farm spending "while 800 million people are dying of hunger", has summoned EU agriculture ministers to a special meeting on Friday to discuss "the future of the Common Agriculture Policy" (CAP).

According to officials and diplomats, France is planning to take the issue to a summit of European leaders in 16 days time, even threatening to call heads of government back off their Christmas holidays on Dec 29 unless agreement is reached.

"It is a pretty transparent attempt to stitch up the CAP so France can carry on subsidising food and farms," said one diplomat. "It is alarming how much support the French have."

A classified internal French document praises the CAP as a "strategic asset" based on principles laid down in the Treaty of Rome over 50 years ago.

It goes on to urge that it should be continued beyond 2013, the date when a new five year EU budget period begins.

"It is necessary for the EU to continue to have after 2013 a common and sufficiently ambitious agricultural policy," state "draft Council conclusions".

By seeking agreement "on the CAP after 2013", France appears to be trying to ring-fence its lion's share of annual EU farm budgets worth £42 billion, spending that costs the average British household £322 a year.

Jim Paice MP, Conservative spokesman for agriculture and rural affairs, said: "When Blair gave up rebates worth £7 billion in 2005 it was on the basis that there would be substantial reform of the CAP."

British, Dutch and officials from other countries committed to CAP reform are particularly concerned that the French paper insists on retaining Brussels jargon such as "Community preference" and "market stabilisation".

This is wording that will preserve favouritism, price and production subsidies for EU farm products over agriculture imports from the developing world, trade barriers a new WTO deal aims to end.

Alarm bells have also rung over a demand for the EU to guarantee "the wholesomeness of its products for consumers by promoting ambitious health standards both inside and outside the Union".

This move and the language used is widely regarded as spelling a new form of protectionism that will limit imports by demanding that non-European food producers in Latin America, Asia or Africa abide by all the EU's health, environment, workplace and animal rules before food can be exported.

To get the measures through, Mr Sarkozy will need to win over the German Chancellor Angela Merkel who he met with yesterday.

In 2002, the former French President Jacques Chirac did a deal with Chancellor Merkel's predecessor, Gerhard Schröder to maintain the high levels of CAP spending.

Six years later, amid a recession, say diplomats, Germany, the EU largest economy and budget contributor, is not enthusiastic about guaranteeing subsidies that benefit French farmers.

The DM says: Back to business as usual at the European Union. These people are not our friends and allies - why do we let them rule us?

Irish Economy: Lenihan says mini-Budget may be necessary - Euro was major cause of Irish housing bubble

The Minister for Finance Brian Lenihan, warned on Tuesday that further cuts in public spending and tax increases may be necessary to get the Exchequer's Budget deficit under control. He conceded that what in effect would be a mini-Budget, is likely and he said that membership of the Euro system was the major cause of the Irish housing bubble.

Lenihan was in Brussels for a Eurogroup finance ministers' meeting, which coincided with the an announcement from the European Commission, that it would trigger a deficit procedure against Ireland for breaching the 3% of GDP (Gross Domestic Product) annual deficit limit.

EU Economy and Monetary Affairs Commissioner Joaquín Almunia, said that he had began the deficit procedure against Ireland because its budget deficit is expected to hit 5.5% this year and 6.5% in 2009.

Almunia said that Ireland's public finance position had "deteriorated very, very rapidly."

"There has been a very rapid deterioration in the Irish economy in the last year and the Commission have acknowledged that they have been taken by surprise by the rapidity of the deterioration. So you can't lay that at the door of the Government," said Lenihan when asked if Government policy was to blame for the housing bubble and the recession.

ITV Tonight Programme; 20 October 09

ITV's Tonight programme, hosted by Sir Trevor McDonald, staged an EU referendum in Luton, North London. Three thousand local residents voted 'Yes' or 'No' to the Lisbon Treaty, and whether to stay in or come out of the EU. The Democracy Movement' Marc Glendening led the 'No' side.

63% said they would vote against the Lisbon Treaty, with 27% in favour. 54% voted to leave the EU, with 35% voting to stay in. No wonder the politicians are against referendums.

According to ITV, 3.1 million people watched the programme - tremendous publicity for the case against today's EU. The result reflects major disatisfaction not just with the prospect of further decision-making being passed to the EU but also with the extent of the EU's current powers, its costs and the damaging effects of its activities.

There was a particularly notable contribution to the debate by Eddie Izzard, who said: "There is a chance for the whole world to work if the EU can work, then everyone can have jobs and security, and we won't have poor people. The EU is the future of human beings." It's difficult to know whether to laugh or cry.

The financial crisis could be the euro's death knell ... and even end the shambolic EU

At the very moment when Europe's banking system is teetering on the edge of collapse and national economies are in freefall, we might, perhaps, have expected the EU finally to live up to its more grandiose pretensions as the ' government of Europe'.

Yet what have we seen by way of the EU's response to what is undoubtedly the most testing crisis in its history? A few perfunctory fine words and empty gestures - and then the national leaders flapping off like so many headless chickens to pursue their own national interests, regardless of all those laws and principles which in easier times they were apparently so happy to sign up to.

Irrelevance of the Euro

Shambles: The EU members engage in more pointless talk. The shoddy body is riddled with corruption, red tape and national self-interest
The truth is that this massive banking crisis has exposed the hollowness, the impotence and the hypocrisy of the European Union like nothing before in its history. This present emergency is the first real ordeal that the euro - that supposed symbol of European economic unity - has had to face as a major international currency.

Yet, without a central united government to give it proper political clout, it has seemed strangely irrelevant to a financial meltdown that has seen all the 13 countries which use it more concerned about their own national economies than a supranational currency.

The fact is that when a crisis occurs, we are all concerned about our own nation - not our neighbours. But what is doubly worrying about the EU in the current crisis is not just the questions it raises over the single currency, but the spectacular inability of the whole creaking edifice to respond in any meaningful way.

First, last week, we saw Nicolas Sarkozy of France, as the EU's acting president, calling for an EU-sponsored bail-out of its banks, in pale emulation of the attempted bail-out of the U.S. banking system which was dominating the world's headlines - an empty political gesture which melted away almost as soon as he had proposed it.

Then we saw the Irish government, faced with the imminent collapse of its own major banks, pledging a 100 per cent state-backed guarantee of all customers' deposits. This was in flagrant breach of EU law, but it just happened that the Brussels commissioner in charge of financial services was Charlie McCreevy, an Irishman who cheerfully observed that he could see no problems with his country's scheme.

On Saturday, President Sarkozy invited Chancellor Angela Merkel of Germany, Prime Minister Silvio Berlusconi of Italy and Gordon Brown to Paris for an 'emergency summit' to discuss the crisis. 'It is of the essence,' said Mr Sarkozy, 'that Europe should exist and respond with one voice.'
This, in itself, was odd enough. Why were only these four governments represented - along with the president of the European Central Bank, the man in charge of the euro? What about the leaders of the other 23 countries making up the EU, many of whom were deeply disturbed at being excluded from this cosy get-together?

European Union Impotence

It was far from clear that anything emerged from Mr Sarkozy's summit other than their alarm at the precedent set by the Irish government in guaranteeing those bank deposits, which had already led to a drain of billions of pounds into Irish banks from countries which did not offer their customers such protection. And what happened next, when Chancellor Merkel scurried back to Berlin to find the German banking system on the edge of its own meltdown?

First, she shocked her EU colleagues by appearing to offer an Irish-style guarantee to all the customers of Germany's banks. Then, as Denmark and Austria jumped to follow suit, it emerged that Mrs Merkel was backtracking on her proposal. Chaos swiftly descended into farce.
So what on earth is going on? What does all this shambles tell us about the EU, the whole point of which was to set up a supranational government designed to allow Europe to speak with 'one voice' and armed with a mass of laws and treaties to ensure that nation states could no longer operate on their own to pursue their own selfish national interests?

The contrast has already been drawn between what we saw in America last week when day after day, amid the full glare of publicity, Congress agonised over whether or not it should pass that famous bail-out Bill. At least that was democracy visibly in action, as senators and congressmen were besieged by their constituents urging them to vote one way or the other.

All we could offer in Europe was the spectacle of four national leaders briefly huddled together behind closed doors in Paris, without even a proper communique to tell us what they had discussed.

As every day passes, it becomes ever more obvious not just that the much-vaunted 'European monetary union' system is wholly incapable of providing any solution to this crisis, but that the crisis might itself be the trigger to the cracking apart of the entire structure.

Astonishingly, it was only yesterday, when the EU's 27 finance ministers gathered for an emergency meeting in Luxembourg, that we saw the EU's first concerted attempt to respond to the crisis. And top of their agenda was a little-noticed issue which has put the EU in the hot seat as not so much a potential saviour but as having been itself a major contributory cause of the crisis in the first place.

Right at the heart of the paralysis which has gripped the banking systems of the Western world has been a new set of rules which came into force last year, drastically tightening up on the ability of banks to lend to each other - the very lifeblood of the banking system. It is this freezing of liquidity which more than anything has triggered the present crisis, as has been widely recognised in America, which is why last week's Congressional Bill approved the suspension of the rules which are creating so much havoc.

European Union Bureaucracy to the Rescue

But what did the EU ministers in Luxembourg agree yesterday? Well, they, too, agreed it was a top priority that these disastrous new rules should be suspended. But that is not enough to mean they will be suspended. No. First, the ministers' proposals will have to win the agreement of the full European Council when it meets next week and then they will have to go through all the tortuous procedures involved in changing the directives by which the new rules were made the law of the EU. The whole process could take months and meanwhile economies are collapsing.

While every other nation is free to pursue its own agenda, it seems that we are at the mercy of a secretive, cumbersomely bureaucratic system of government which is wholly incapable of mounting a flexible, effective response to the challenge. Those countries most passionate about creating a 'United States of Europe' established the euro ten years ago as the supreme symbol of their desire to weld Europe together in full 'economic and monetary union'.

As we face a crisis as serious as most of us have seen in our lifetimes, it might not be just the euro which falls apart, but that entire over-ambitious experiment in supranational government which the EU represents. Our banks might be tottering, but it might eventually be the EU itself which falls.

Financial Crisis: Where were you when Europe's leaders had their cosy little chat?

According to Nicolas Sarkozy, the leaders of the Big Four countries of Europe are "united" on the need to call all the leading nations of the globe together to "create a new financial world". Well, modesty has never been a big feature of European Union rhetoric. Mr Sarkozy's great world summit is to include, in addition to the G8, China, India, South Africa, Brazil and Mexico.

This enormous gathering, encompassing countries with wildly differing economic conditions and directly conflicting competitive goals, is somehow to reach agreement on the creation of a New Financial World, even though the Big Four of the EU were unable to agree on anything last weekend except an emergency slush fund (to be dispensed by, and accountable to, whom?) and the need to call another meeting.

They could not even agree in Paris on a bail-out package similar to the one that had just been approved in Washington, and the closest they got to co-operation on a new regulatory system for banks was Gordon Brown's proposal for something called a "college of regulators" - which, if it ever saw the light of day, would surely be one more job creation scheme for well-fed Eurocrats.

EU Voters Ignored

And the leaders of Britain, France, Germany and Italy managed to achieve this stupendous failure to agree on anything much at all without even the hindrance that faced the US Congress: the manifest and noisy involvement of the electorate.

Where were you and I during last weekend's Grand Day Out for the EU leaders? Who was listening to our views and arguments about the future of our savings and our investments, our employment prospects and our security?

If the dear leaders had managed to carve out a deal that determined the financial possibilities and constraints of every citizen of their respective countries, what power would any of us have had to counter it, or even to register our objections?

Where was the channel for public debate to influence their deliberations? In that bloody, partisan struggle that took place in America, which everybody in Europe is so anxious to avoid emulating, there was no question in anybody's mind whose opinion had to be won over before an agreement could be reached: it was the electorate, stupid.

US legislators were simply not prepared to hand over the tax dollars of their furious constituents, who were besieging them with protests, without a damn good fight. (One Congressman reported that his telephone callers were running about "half and half": half of them said "no" and the other half said "hell no".) So in the US they fought themselves to an exhausted standstill and in the end they got a result which may or may not work - but at least it was a course of action.

Even more important, the paralysis was a temporary, constructive phase that eventually guaranteed the complaints and the misgivings of voters would be taken into account. It was ugly and pig-headed, at times it was ludicrous, but it was also magnificent.

And it was all played out in full view of the voters, and the world.
But in Paris, behind closed doors, the negotiations failed (and make no mistake, they did fail) to produce anything of significance without any help from public outrage.

European Economic Union is a Myth

France, Germany, Italy and the UK could not agree on a single course of action because - as Mr Sarkozy effectively admitted in a characteristically irritable press conference performance - they all have different economic circumstances and needs. He described this as having "different cultures", but it adds up to the same thing: France and Germany do not have property-owning traditions that produce house-price booms and busts, the UK population has much greater credit liabilities than the French, etc, etc.
We are very different nations with very different economic habits and there will never be a one-size-fits-all solution to our economic problems. Which is what some of us have been saying all along about the impossibility (and danger) of imposing economic union on disparate countries.

Mercifully, in a crisis, they could all see the impossibility of a unified solution: when the chips were down, they were not actually going to jeopardise their own national economies for the sake of some phantasm called economic union. But that didn't stop them talking a lot of blather about co-operation and joint action.

The joint action they seemed to relish most was the threat of some fiendish punishment for Ireland and Greece who had had the temerity to behave "unco-operatively" by offering guarantees to savers which would have the effect of sucking capital out of the banks of their European partners. Well, whatever next? An elected government puts the needs of its own national economy first in a world crisis.

The EU Four warmed themselves cosily with the prospect of preventing countries from "acting unilaterally" to guarantee bank deposits in a way that would hit their neighbours' economies - only for Germany to do exactly the same thing last night.

And what is meant by acting unilaterally? Engaging in competition so that the would-be investor has a chance to protect himself? Rather than agreeing to plunge over the cliff in collective camaraderie with your neighbour states? Would you as a depositor like to have the option of moving your savings to a safer banking regime or would you prefer a deal to be done on your behalf by the Big Four that might or might not support your home banking industry? You might feel that there are arguments for both these possibilities, but nobody asked you before or during the Paris summit, did they?

European co-operation in this case, as in so many, seems to amount to conspiracy between the political classes of EU countries to prevent individual citizens from making choices that might jeopardise - what? Why, European co-operation, of course - which is a good in itself, even if it works against the interests of the individual or even all the individuals of a nation.

I cannot remember a time when the absurdity of the concept of economic union has been made so demonstrably clear, or when the democratic deficit of the EU - the way it does business with utter disregard for the opinions of its populations - has been so palpable if only by vivid contrast with the awkward, vulgar thrashing out of public policy that characterises the robust mass democracy across the pond.

Within the foreseeable future, we will know which of these governing philosophies was able to produce the economic goods. But if neither of them produces an immediate working solution, I know which one is more likely to have the flexibility and the popular support to adapt and survive.

The DM says: The European Union has never been a democracy. The sooner we leave it the better.

Germany takes hot seat as Europe falls into the abyss

We face extreme danger. Unless there is immediate intervention on every front by all the major powers acting in concert, we risk a disintegration of global finance within days. Nobody will be spared, unless they own gold bars.

Investors will learn today whether the Paulson bail-out - fattened to $850bn (£480bn) by Congress - can begin to halt the death spiral in the credit system. So far, the response looks terrible.

Germany is now in the hot seat. The collapse of a rescue deal for Hypo Real Estate on Saturday threatens a €400bn (£311bn) bankruptcy that nearly matches the Lehman Brothers debacle for sheer scale.

Chancellor Angela Merkel has been forced to pull her head out of the sand, guaranteeing all German savings, a day after she rebuked Ireland for doing much the same thing. Reality intrudes.

During the past week, we have tipped over the edge, into the middle of the abyss. Systemic collapse is in full train. The Netherlands has just rushed through a second, more sweeping nationalisation of Fortis. Ireland and Greece have had to rescue all their banks. Iceland is facing an Argentine denouement.

The US commercial paper market is closed. It shrank $95bn last week, and has lost $208bn in three weeks. The interbank lending market has seized up. There are almost no bids. It is a ghost market. Healthy companies cannot roll over debt. Some will have to sack staff today to stave off default.

As the unflappable Warren Buffett puts it, the credit freeze is “sucking blood” out of the economy. “In my adult lifetime, I don’t think I’ve ever seen people as fearful,” he said.

We are fast approaching the point of no return. The only way out of this calamitous descent is “shock and awe” on a global scale, and even that may not be enough.

Drastic rate cuts would be a good start. Central bankers still paralysed by a misplaced fear of inflation – whether in Europe, Britain, or the US – have become a public menace and should be held to severe account by our democracies. The imminent and massive danger is now self-feeding debt deflation.

The lesson of the 1930s is that any country trying to reflate in isolation will be punished. The crisis will ricochet from one economy to another until every one is crippled. We are seeing it play again in this drama as our leaders fail to rise above their narrow, parochial agendas.

The European Central Bank – which raised rates into the teeth of the crisis in July – has played a shockingly destructive role in this enveloping slump. Its growth predictions this year have been, and still are, delusional. Neglecting its global role, it has vastly complicated the fire-fighting efforts of Washington.

It could have offered “cover” to the US Federal Reserve this spring when Ben Bernanke was forced by events to slash rates to 2pc. It could at least have signalled an end to monetary tightening. That is how an ally ought to behave.

Instead, it stuck maniacally to its Gothic script, with equally unhappy consequences for both sides of the Atlantic, as well as for China, Japan, and India. The euro rocketed yet further, which it turn set off an oil shock as crude metamorphosed into an anti-dollar with leverage.

The ECB policy was self-defeating, even on its own terms. It merely drove headline inflation even higher, while deeper forces of underlying debt deflation pulled the real economies of Germany, Italy, France, and Spain into a recessionary vortex.

Far from offering reassurance, the weekend mini-summit of EU leaders served only to highlight that nobody is in charge of this runaway train. There is still no lender of last resort in euroland. The £12bn stimulus package is risible.

Angela Merkel has revealed her deep limitations. It was she who vetoed French efforts to launch a pan-EU rescue package, suspecting that any lifeboat fund would prove to be Trojan Horse – a way of co-opting German taxpayers into colossal transfers of wealth to Latin Europe.

In that she is right, but it is too late now for dysfunctional EU political games. By demanding that those who caused the damage should pay for it, she crossed the line into caricature, or worse.

Her comments echo word for word the “we’re alright Jack” attitudes of Euro-pols during the first US banking crises in 1930-1931, until the storm hit Europe and the entire cast was swept away by furious electorates, or simply shot. Thankfully, this EU stupidity is at last drawing serious criticism.
“We have to make sure Europe takes its responsibilities, like the US: action must be taken quickly and in a concerted manner,” said IMF chief Dominique Strauss-Kahn.

As for the US itself, it has not yet exhausted its policy arsenal. It can escalate further up the nuclear ladder. The Fed can cut interest rates from 2pc to zero. If that fails, it can let rip with the mass purchase of US debt.
“The US government has a technology, called a printing press,” said Fed chief Ben Bernanke in November 2002. (His helicopter speech).

In extremis, the Treasury/Fed can swoop into any market to shore up asset prices. They can buy Florida property. They can even buy SUV guzzlers from the car lots in Detroit, and mangle them in scrap yards. As Bernanke put it, the Fed can “expand the menu of assets that it buys.”
There is a devilish catch to this ploy, of course. It assumes that foreign creditors will tolerate such action.

Japan entered its Lost Decade as the world’s top creditor, with a vast pool of household savings to cushion the slump. America starts its purge with net external liabilities of $3 trillion, and a savings rate near zero. Foreigners own over half the US Treasury debt, and two thirds of all Fannie, Freddie, and other US agency bonds.

But the risk of a dollar collapse is one for the distant future. Right now the world faces the opposite problem. There is a wild scramble for dollars as a $10 trillion pyramid of global lending based on dollar balance sheets “delevers” with a vengeance.

This is a “short squeeze” on those who have used the dollar for a vast global carry trade. International banks are facing margin calls on their dollar leverage. It is why the Fed is having to provide $1.25 trillion in dollar liquidity for the entire global system, according to estimates by Brad Setser from the Center for Geoeconomic Studies.

The crisis engulfing Europe, Asia and emerging markets, makes life easier for Washington. The United States is becoming a safe-haven again.
The Fed can now hope to pursue monetary stimulus “a l’outrance” without being slapped down by the currency, debt, and commodity markets. Take comfort where you can.

The DM says: The Euro has always been a risky experiment for political reasons - to promote a federal Europe

Financial Crisis: So much for tirades against American greed

Ambrose Evans-Pritchard says it is ironic that European banks have turned out to be deeper in debt than their US counterparts.

It took a weekend to shatter the complacency of German finance minister Peer Steinbrück. Last Thursday he told us that the financial crisis was an "American problem", the fruit of Anglo-Saxon greed and inept regulation that would cost the United States its "superpower status". Pleas from US Treasury Secretary Hank Paulson for a joint US-European rescue plan to halt the downward spiral were rebuffed as unnecessary.

By Monday, Mr Steinbrück was having to orchestrate Germany's biggest bank bail-out, putting together a €35 billion loan package to save Hypo Real Estate. By then Europe was "staring into the abyss," he admitted. Belgium faced worse. It had to nationalise Fortis (with Dutch help), a 300-year-old bastion of Flemish finance, followed a day later by a bail-out for Dexia (with French help).

Within hours they were all trumped by Dublin. The Irish government issued a blanket guarantee of the deposits and debts of its six largest lenders in the most radical bank bail-out since the Scandinavian rescues in the early 1990s. Then France upped the ante with a €300 billion pan-European lifeboat for the banks. The drama has exposed Europe's dark secret for all to see. EU banks took on even more debt leverage than their US counterparts, despite the tirades against ''le capitalisme sauvage'' of the Anglo-Saxons.

We now know that it was French finance minister Christine Lagarde who begged Mr Paulson to save the US insurer AIG last week. AIG had written $300 billion in credit protection for European banks, admitting that it was for "regulatory capital relief rather than risk mitigation". In other words, it was underpinning a disguised extension of credit leverage. Its collapse would have set off a lending crunch across Europe as banking capital sank below water level.

It turns out that European regulators have allowed even greater use of "off-books" chicanery than the Americans. Mr Paulson may have saved Europe.

Most eyes are still on Washington, but the core danger is shifting across the Atlantic. Germany and Italy have been contracting since the spring, with France close behind. They are sliding into a deeper downturn than the US.

The interest spreads on Italian 10-year bonds have jumped to 92 points above German Bunds, a post-EMU high. These spreads are the most closely watched stress barometer for Europe's monetary union. Traders are starting to "price in" an appreciable risk that EMU will break apart.
The European Commission's top economists warned the politicians in the 1990s that the euro might not survive a crisis, at least in its current form. There is no EU treasury or debt union to back it up. The one-size-fits-all regime of interest rates caters badly to the different needs of Club Med and the German bloc.

The euro fathers did not dispute this. But they saw EMU as an instrument to force the pace of political union. They welcomed the idea of a "beneficial crisis". As ex-Commission chief Romano Prodi remarked, it would allow Brussels to break taboos and accelerate the move to a full-fledged EU economic government.

As events now unfold with vertiginous speed, we may find that it destroys the European Union instead. Spain is on the cusp of depression (I use the word to mean a systemic rupture). Unemployment has risen from 8.3 to 11.3 per cent in a year as the property market implodes. Yet the cost of borrowing (Euribor) is going up. You can imagine how the Spanish felt when German-led hawks pushed the European Central Bank into raising interest rates in July.

This may go down as the greatest monetary error of the post-war era. The ECB responded to the external shock of an oil and food spike with anti-inflation overkill, compounding the onset of an accelerating debt deflation that poses a greater danger. Has it committed the classic mistake of central banks, fighting the last war (1970s) instead of the last war but one (1930s)?

After years of acquiescence, the markets have started to ask whether the euro zone has the machinery to launch a Paulson-style rescue in a fast-moving crisis. Who has the authority to take charge? The ECB is not allowed to bail out countries under EU treaty law. The Stability Pact bans the sort of fiscal blitz that has kept America afloat. Yes, treaties can be ignored. But as we are learning, a banking system can implode in less time than it would take for EU ministers to congregate from the far corners of euroland.

France's Christine Lagarde called yesterday for an EU emergency fund. "What happens if a smaller EU country faces the threat of a bank going bankrupt? Perhaps the country doesn't have the means to save the institution. The question of a European safety net arises," she said.
The storyline is evolving much as eurosceptics predicted, yet the final chapter could end either way as the recriminations fly. Germany has already shot down the French idea. The nationalists are digging in their heels in Berlin and Madrid. We are fast approaching the moment when events decide whether Europe will bind together to save monetary union, or fracture into angry camps. Will the Teutons bail out Club Med? If not, check those serial numbers on your euro notes for the country of issue. It may start to matter.

Britons want looser ties with EU

British voters would back radical moves to negotiate a new, looser relationship with the European Union, a survey has shown.

The ICM opinion poll for Global Vision, the Eurosceptic campaign group, found that among people who want to remain in the EU, a majority would like Britain to opt out of political and economic union, and restrict itself to links based on trade and co-operation.

A British government seeking to achieve such an outcome could only do so by putting it to voters in a referendum. If there were a positive result, ministers would then need to renegotiate the terms of Britain's membership with all other EU member states – a policy currently held by none of the three main political parties.

The survey findings come days before Ireland holds a referendum on the EU's Lisbon Treaty, the only member country to vote on the issue.
If the Irish vote No on Thursday the treaty, which gives more powers to Brussels, abolishing dozens of national vetoes and creating the new post of EU president, cannot come into force in any of the 27 member states.
It would be another big blow to supporters of further EU integration, after the collapse of the Union's proposed constitution when voters in France and the Netherlands rejected it in 2005.

The Irish Government could, in theory, seek to hold a new referendum, and carry on doing so until it achieved a Yes vote. But recent surveys in the Republic have suggested that public opinion would be hostile to such a move.

Latest opinion polls yesterday showed a dramatic surge in the No vote. Those saying they oppose the treaty have doubled in three weeks to 35 per cent, with just 30 per cent in favour – a result that has shocked the government and the country's major political parties, all of which want a Yes result.

The Global Vision/ICM survey found that when British voters were asked about their ideal relationship with Europe, 41 per cent chose one based simply on trade and co-operation. Some 27 per cent wanted Britain to stay a full EU member while 26 per cent wanted to withdraw altogether.
If the "trade-only" option were offered in a referendum, 64 per cent said they would vote in favour. Asked what should happen if Britain sought to negotiate a looser relationship but other nations blocked the move, 57 per cent said the UK should leave the EU, while 33 per cent said it should stay in.

Ruth Lea, director of Global Vision, said: "A looser relationship, based on trade and co-operation, rather than full political and economic integration, is consistently the option of the British people."

Gordon Brown has said Britain will not get a referendum on the Lisbon Treaty, although the House of Lords will vote on this decision this week. Stuart Wheeler, the millionaire businessman and major Conservative donor, will make a High Court challenge, also this week, attempting to force the Prime Minister to call a public vote.

Meanwhile, tomorrow, Britain will come under pressure to pass an EU directive giving temporary agency workers the same employment rights as permanent staff. Britain has always opposed the directive because business leaders fear that it could cost 250,000 jobs.

Brian Cowen, Ireland's prime minister, embarked yesterday on a last bid to persuade voters to ratify the treaty, saying it was his "most important" task. Defeat would be a personal humiliation for him and would also set back – perhaps permanently – hopes for a reformed and more streamlined decision-making process within the EU.

Ireland has received huge economic benefit from EU membership and Mr Cowen has warned that it could suffer dire consequences, with a No vote interpreted in Europe as a rejection of the union. But the business downturn and public uncertainty over how the treaty will work in practice mean acceptance is not certain.

The DM says: A Referendum on the Lisbon Treaty and our relations with the EU would show that the majority of British voters want to go further and leave the European Union.

Martin rejects British group's poll on Lisbon

Minister for Foreign Affairs Micheál Martin today accused a British eurosceptic think-tank of interfering in the national debate on the Lisbon Treaty. Mr Martin said a poll, commissioned by Open Europe, was an outside interference in discussions on Ireland’s future in Europe.

“I would like to know what prompted a British organisation with a strong ideological bias to commission a poll into Irish attitudes to Europe at this time,” said Mr Martin. “Ireland’s future in Europe is a matter for decision by Irish people.”

He said the Government has commissioned a study aimed at exploring the reasons behind the No vote.

“This will provide an input into a national debate which needs to take place in the months ahead as we seek to find and agree a way forward that will serve Ireland’s interests. We will, of course, be consulting with our EU partners, but I do not believe that we have anything to learn from anti-EU bodies like Open Europe. Its views are not in tune with Irish interests.”

Neil O’Brien, director of Open Europe which commissioned the Red C poll, maintained that by appearing to bully the voters, EU politicians were driving lots more people into the no camp.

The poll suggested the Irish electorate would vote No by an even bigger margin if made to have a second referendum on the Lisbon Treaty.
Some 71 per cent of those questioned in the Republic opposed a second referendum on the Lisbon Treaty, with just 24 per cent in favour. Of those who expressed an opinion, 62 per cent said they would vote No in a second referendum, compared to 38 per cent who would vote Yes.
The Lisbon Treaty was rejected by 53.4 per cent to 46.6 per cent in last month's referendum.

The Dáil will be recalled early from its summer recess to establish an all-party committee on the Lisbon Treaty that can help plan a way forward. Labour leader Eamon Gilmore said today that the EU must accept that the Irish rejection of Lisbon cannot be solved simply by a second vote by the Irish electorate.

"There must be a period of reflection, where all 27 countries participate collectively in seeking to determine a way forward. It appears that the European election in June 2009 can only take place under the Nice criteria. The sooner this is accepted by the Irish Government, and communicated by the Taoiseach to the rest of the member states, the sooner progress can be made in looking to a broader solution in the future," he said.

Chair of the People's Movement and former Green MEP Patricia McKenna said: "Minister Martin showed no concern about outside interference prior to the vote on Lisbon, when he and other Government Ministers invited with open arms every political heavyweight in the EU to come here and urge us to vote Yes.

"There was no concern expressed about outside interference when the German Chancellor Angela Merkel, EU Commission President Jose Manuel Barroso and EU Vice President Margot Wallstrom came here to here to urge us to vote Yes. It's a bit late for Government Minister to be taking the moral high-ground now about outside interference."

Ms McKenna said the Government had never complained about polls commissioned by the EU political establishment. "But because other interested parties, who have a different agenda, commission opinion polls on our attitude to Lisbon it just not acceptable."

The DM says: If the Irish vote No again, there is the interesting possibility that the treaty will still be unratified when (or if) David Cameron wins the next election. He might then have to keep his promise to allow the British a vote on the Treaty, killing it off.

Growth slump may force Italy out of eurozone

Italy is sliding into a deep structural crisis and risks being forced out of Europe's monetary union as the region's economic downturn gathers pace, according to a new report by Capital Economics. Over the last decade, the country has failed to reform its labour product markets sufficiently to cope with the rigours of euro membership and is now caught in a spiral of decline as the working population starts to shrink. Productivity growth has slowed to 0.5pc a year.

"An ugly combination of weak GDP growth, poor international competitiveness, and rising government borrowing costs could lead to renewed calls for Italy to leave the euro," said the report, written by Julian Jessop and Roger Bootle. “As things stand, not only will Italy lose ground to the rest of the eurozone, it could soon start to do so at an even more rapid rate," they said.

Italy has lost roughly 40pc in labour competitiveness against Germany since 1995, according to Eurostat data.

Capital Economics said Italy - now on the cusp of its fourth recession this decade - faces a "demographic time bomb" as the workforce starts to shrink at an accelerating rate over the next 30 years, making it ever harder to finance the biggest national debt in Europe (107pc of GDP).

There is a risk that the spreads between German Bunds and Italian 10-year bonds could widen quickly from 58 basis points today to over 100 if the question of euro membership creeps back onto the table.

Italy set off a minor scare in mid-2005 when two cabinet ministers from the radical Northern League called for a return to the lira. It was suggested that the political pain threshold in a major economic crisis may be lower than widely assumed. The country regained momentum during the final upswing of the global credit boom, helped by Fiat's remarkable comeback. This has entirely faded. "Italy's upswing has unravelled at an alarming pace," said the report.

Business confidence has fallen to the lowest since October 2001, following the 9/11 terrorist attacks. The country is disproportionately hit by the high euro because it relies heavily on "mid-tech" exports that compete toe-to-toe with Asian goods.

Italy can at least take some comfort that other euro members are feeling the strain too, reducing the risk of EMU break-up. France's Insee consumer confidence plunged to a 21-year low in July.

The epicentre of the unfolding crisis is Spain, where the number of houses built this year is expected to collapse by half from the 760,000 constructed in 2007 at the peak of the bubble. Spanish unemployment is rising by almost 70,000 a month, touching 10.6pc at the end of the fourth quarter. However, Spain has a much smaller public debt than Italy.

Most studies on the risk of an EMU break-up conclude that it cannot occur because the costs would be too high. But this overlooks that markets could set in motion a chain of events that forces a country to leave.

The DM says: The Euro has always been the weak spot of the EU. Sharing a currency between two such different economies as Germany and Italy was always a recipe for disaster. If the Euro breaks up, what will happen to "ever-closer union"?

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