The Bruges Group spearheaded the intellectual battle to win a vote to leave the European Union and, above all, against the emergence of a centralised EU state.

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Bruges Group Blog

Spearheading the intellectual battle against the EU. And for new thinking in international affairs.

Freedom of Movement and the Cruelty of the Euro

To escape the damage caused by the euro, and the resulting problems of mass migration, Brexit is essential for the UK

9th January 2017
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Summary

 

1.      The euro prevents EU countries with weak economies using currency exchange rates to adjust their competitiveness within and external to the EU.  The EU therefore has a policy of  ‘rebalancing’, or ‘internal devaluation’.  Rebalancing relies on the failure of uncompetitive industries.   The result is unemployment, lower wages and lower prices together with austerity justified by high levels of sovereign debt.  These pressures on the population are intended to force the creation of competitive trading industries and reduce non-trading activities.

 

2.      Regional EU payments are bureaucratically allocated and managed.  They are inadequate, inappropriate and inefficient compared with simple and automatic floating exchange rate adjustments.

 

3.      Freedom of movement theoretically reduces the unemployed population by moving labour to stronger economies that have labour shortages.  This is the reason for its importance to the Euro model.

 

4.      Rebalancing involves severe dislocation and widespread hardship.  The relief of hardship by EU welfare provision is inadequate and counter to the desired pressures to bring about rebalancing.  The EU policy of rebalancing is entirely unethical, repressive and manipulative.  It is a cruel policy reminiscent of Stalin’s forced 1930/40s population transfers.  Moreover, in practice it does not work and therefore nor does the euro. 

 

5.      By contrast, Brexit is ethical and traditional in seeking to develop local economies without dislocation and with whatever support is needed.  It incorporates normal exchange rate adjustments and acceptance of skilled persons of any origin through controlled immigration.  Many who voted for Brexit voted for jobs and standard of living.  The characterization of controlled immigration through Brexit as racist and discriminatory attempts to disguise the cruel nature of EU internal ‘rebalancing’.

*    *    *

Freedom of Movement and the Cruelty of the Euro

 

1.      It is a false accusation that the UK’s wish to control immigration is racist and discriminatory.  That accusation is intended to disguise a vicious and cruel EU policy.  Freedom of movement is asserted by the European Union to be a privilege and great benefit.  That is not true.  Its fundamental purpose and the reason for the EU’s insistence that the UK accepts it as a condition of market access following Brexit is to enforce use of the euro.

 

2.   It is well known that prior to adoption of the Euro the weaker economies of Southern Europe, such as Greece, were able to maintain rough competitiveness with the stronger states such as Germany by currency exchange rate movements.  After adoption of the Euro this was no longer possible, either within the EU or in relation to countries outside the EU.  The IMF, ECB and European Commission therefore adopted a policy of ‘rebalancing’.

 

3.      The rebalancing or ‘internal devaluation’ model assumes that when competitive trading differences arise between countries, the less competitive industries will fail.  There will be unemployment, less demand and a consequent fall in wages and prices.  Austerity is a tool to reinforce this process.  Where these conditions occur, the countries affected must develop more competitive production methods and move resources from non-trading activities to trading production.   Those persons made unemployed by this process or who cannot find work should be able to emigrate to EU countries that are more competitive and where there are labour shortages. This is the reason why freedom of movement is essential to the EU.  It reduces the economic pressures that are desirable for rebalancing. 

 

4.    Unemployment, euphemistically called ‘labour shedding’ is regarded as essential to rebalancing.  The ECB at present purchases company debt to sustain the financial markets since even negative interest rates and money printing have failed to give growth.   The EU regional funds that are given to Greece and Spain for social and economic purposes are inadequate, inappropriate and are inefficiently bureaucratically allocated and managed.  In practice they do not materially reduce the pressures for rebalancing/internal devaluation.  The only large scale assistance offered is more debt, additional to the debt that is a major part of their economic problems in the first instance.

 

5.    The traditional simple and automatic rebalancing of competitiveness by exchange rate movements involves little or no drastic economic reorganization or social disruption.  That is not the case within the Eurozone.  Eurozone rebalancing is driven by closure of industries, unemployment and migration.  The creation of new competitive industries is merely an aspiration.  The notion that competitiveness can be equalized between Greece and Germany, for example, by these means is absurd.

 

6.      The simple unemployment rate does not, of course, reflect the quality of employment taken up by employees from failed industries.  Their first option will be to take whatever employment is avalable, which will probably be at a lower income and living standard.  This is part of the ‘rebalancing’ process.

 

7.      The closure of uncompetitive industries with theoretical development of new competitive industries is euphemistically called ‘structural reform’.  In the real world, uncompetitive industries within the Eurozone definitely close; in competition with Germany and other Northern states, competitive industrial development of the southern EU states definitely does not and can not occur.  This is the source of the present imbalances within the EU.

 

8.      Apparently, the EU rebalancing policy has developed from a United States model.   If so, it is wholly inappropriate.  The United States is homogeneous for language and culture.  Even so, unacceptable within-country imbalances have occurred as they also have in the UK.  It is these that have given rise to the protest votes for Donald Trump and Brexit.  The EU is not homogeneous for language, culture and many other factors.  For these reasons, Europeans are much more attached to their locality of origin than Americans. 

 

9.      In any country, a major rigidity is that the unemployed usually have low skills.  They cannot afford to move or are unwilling to leave an uncomfortable but manageable situation where housing, family and familiar support networks exist and move to another country having a different language where there are great uncertainties.

 

10.  Persons who are skilled and have money will regard freedom of movement as beneficial, for holidays, or retirement for example.  Many of these would wish to relocate for career reasons in any case.  They would be welcomed by receiving countries, as the UK welcomes such persons from any country and would do so following Brexit.  Young persons with qualifications and without family will also emigrate readily, although their loss disadvantages their countries of origin.  It is evident however, that those often older persons who are displaced from failed industries will be least able or willing to emigrate.  This is what can be seen in practice.

 

11.  Adoption of the euro has therefore generated economic imbalances that will not be rectified automatically.  Worse, the rebalancing policy based on the euro has created hardship for millions of people in Southern Europe and the Republic of Ireland.  It is a cruel policy that ignores human welfare and rather than encouraging prosperity, is indifferent to the pain that it causes. 

 

12.  The human cost of the EU’s rebalancing policy, that is driven by industry failure and unemployment, has always been known to the institutions of the EU but they have chosen to ignore it.  The UK’s Brexit is based on positive policies to create employment by assisting existing industries and developing new ones with, of course, exchange rate adjustment of external competitiveness.  Not only is the EU’s rebalancing policy an ethical disgrace, the attempt to disguise its true nature and purpose by labelling those who do not accept it as racists is despicable.

 

13.  Together with these considerations, many EU states have very large public and private debt that will never be repaid.  This requires separate consideration but, briefly, debt permits control by the EU central institutions, particularly the ECB and IMF.  Its most obvious outcome is the sale of state assets, further weakening states that are undergoing ‘rebalancing’ stress.  It is these destructive debts knowingly given by the banks and underwritten by the ECB and IMF that provide the rationale for austerity.  Austerity is intended to reinforce ‘rebalancing’.

 

14.  There may be said to be four broad groups of people affected by Brexit:

 

i.                 People who are aware that they are suffering, or at least are not benefiting, due to EU policies.  They tend to support Brexit because their local industries have vanished and they want jobs and a reasonable living standard.  They are often not well educated and do not understand the technicalities of the Euro or how the EU functions.  Although not articulated in these terms, their views contain implied strategic factors as well as self-interest.  They identify uncontrolled immigration as evidence that the UK no longer controls its own economy and their destiny. This enables pro-EU activists to label them as ignorant, racist or espousing ‘the politics of hate’.

 

ii.            Educated and well-informed persons who understand that the EU is undemocratic, administered by a super-rich elite with dependent politicians, a large dependent bureaucracy and a dysfunctional currency.  They understand that the BIS, ECB and banks generally control the EU.  They might know, for example, that Mario Draghi came from bankers Goldman Sachs, achieved Presidency of the ECB and after his term of office returned to Goldman Sachs.  They might know that Goldman Sachs conspired with Greek politicians to hide Greece’s debts in order to obtain EU entry, so laying the foundation for the present economic misery of the Greek people.  They may view the EU to be on the path to tyranny, which would not be unusual in some EU countries.

 

iii.            Usually middle class persons who support the EU and believe that it is beneficial because their jobs depend on EU trading, are publicly funded or EU funded.  These apparently do not understand how the EU operates or do not care. Their evaluation is based on their immediate interests rather than whether  the EU system is democratically legitimate or benefits the UK. 

 

iv.             The rich and high level executives in international companies, banks, the ECB and IMF who understand the EU.  They will fight to retain the euro because it is they who have designed it in their own interests to make them richer and to give them political control of the EU through its economy.  This group believes in ‘realpolitic’ rather than democracy and will support tyranny as it has in the past.

 

13.  Because it is clear that the existing banks are hostile to Brexit, a priority for Brexit planning must be to organize a banking system independent of the ECB and the existing big banks.  Ideally local mutual units would be best for SMEs with a large central unit for major development and export finance.  The role of the Bank of England needs close examination.  The recent actions of the Royal Bank of Scotland in asset-stripping vulnerable SMEs indicates where the interests of all bankers lie.  It is noteworthy that Richard Branson who cultivates his image as ‘a man of the people’ has recently publicly opposed Brexit and is financing an opposition group.  The EU operates for the very rich.

 

14.  Those who designed the EU’s euro ‘rebalancing’ policy view people as theoretical economic units without human needs, feelings and attachments to family and locality.  Theoretically, it is not desirable to give welfare to because this would lessen the economic pressure that is essential to rebalancing.  In any case, the levels of welfare assistance would be impossibly large for the EU to accept.  This neglect of welfare is to the extent that in Greece large numbers of people are homeless and actually starving and in Spain youth unemployment is 45-50 percent.  ‘Rebalancing’ is not based on a democratic, egalitarian view of society.  It is a policy of repression and manipulation without any ethical content.   For this reason the euro does not work and nor does the EU.

 

15.  The creation of the EU and Euro is a far development from the Common Market that the UK joined.  The Common Market has moved from national directly elected parliamentary democracies to a centralized bureaucracy managed by a political and economic elite.  This elite, most visible in central banks, the ECB and IMF has little if any connection with or responsiveness to the immediate needs of the population.  It is not at all clear that the first priority of the EU is the welfare of its population.

 

16.  Brexit has a democratic and ethical foundation based on centuries of trading, economic development experience and the democratic development of society.  It will be traditionally designed to give benefits with the minimum of dislocation possible, to develop local skills and industries and to welcome skilled workers from all other countries.

 

17.  It is the writer’s view that on present trends, full EU integration based on the euro and supremacy of the banks over the public interest can only be achieved by political repression and a police state, that is, tyranny.  That is a form of government that often occurs in Europe.  The EU and UK parliament have permitted the spying and financial infrastructure of tyranny to be assembled under the guise of fighting terrorism.  The democratic Brexit decision is now being labelled ‘tyranny of the majority’ (John Major) and ‘populism’.  It is a bad sign.

 

By Christopher King MSc DipM DMS

 

Most of the following are discussion papers, not official ECB or IMF papers.

Official IMF report 2015 http://www.imf.org/external/np/pp/eng/2015/110915.pdf

http://voxeu.org/article/rebalancing-eurozone-internal-adjustments-won-t-be-enough )

http://www.imf.org/external/pubs/ft/sdn/2014/sdn1407.pdf

https://www.imf.org/external/pubs/ft/wp/2014/wp14130.pdf

http://www.economonitor.com/blog/2013/11/europe-the-failure-of-internal-devaluation/

 

 

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Will Donald Trump save or kill the Euro?

The EU's single currency, the Euro, is being unbalanced by the strength of the German economy. The undervalued Euro is used by Germany in a beggar-thy-neighbour policy to expand its exports; hurting not just the other members of the Eurozone but also countries further afield, including the United States. If the USA forces Germany to abandon this policy, it will mean Germany leaving the Euro. This will either be the end of the single currency experiment, or its salvation.

4th January 2017

During the election campaign Donald Trump highlighted a structural flaw in the US economy, namely, the country’s huge structural trade deficit, which he claimed is hurting many Americans.  Trump’s message was very simple: if instead of importing products the US exported them there would be more highly paid jobs in the US. Trump claimed that not all of the US’s trading partners are trading fairly with the US.  The implication being that some countries are taking US jobs unfairly.  Angela Merkel was clearly worried about this rhetoric.  Although Trump did not name Germany, she is clearly concerned that Germany will be exposed as having an unfair trading advantage with the US because it is benefitting from an under-valued Euro. 


Although no one would claim that Germany abandoned the Deutschemark in favour of the Euro in 1999 to gain an unfair trading advantage, this is undeniably what has happened.   As can be seen from the following table this has increased Germany’s current account surplus with the rest of the world.


Germany’s exports are now 30-35% cheaper in US dollars than they would have been if the country had retained the Deutschmark. This calculation is based on the assumption that the Deutschmark would have maintained its value against the Swiss franc.  And, it ignores the fact that Switzerland has intervened in the foreign exchange markets from time to time to depress the value of the Swiss franc against the US dollar and other currencies.   The Euro has become a disguised form of protectionism for the German economy, by making its exports cheaper and imports more expensive. Moreover, this is not a problem that is likely to disappear. The longer the Euro exists, at least in its current form, the greater the problem will become.  The question is what, if anything, will the new Trump Administration do about Germany’s unfair trading advantage and its ever growing current account surplus with the US. 


Under the Obama administration, the US enacted the Trade Facilitation and Trade Enforcement Act 2015. One of the purposes of this Act is to identify those countries which are trading unfairly with the US. This Act focusses on individual EU member states rather than on the EU as a single entity.  Title VII focuses on currency manipulation (sections 701-2).  Section 701(a)(2)(A)(ii) seeks to identify any major trading partner of the US that has:

(1) a significant bilateral trade surplus with the US (economies with a bilateral goods surplus of at least $20 billion (roughly 0.1 percent of U.S. GDP) are regarded as having a “significant” surplus);

(2) a material current account surplus (current account surpluses in excess of 3 percent of GDP to be “material”); and

(3) engaged in persistent one‐sided intervention in the foreign exchange market (net purchases of foreign currency, conducted repeatedly, totalling in excess of 2 percent of an economy’s GDP over a period of 12 months to be persistent, one‐sided intervention).[i]


In its October 2016 report, the US Treasury Department identified seven countries as satisfying the first criterion (China, Germany, Japan, Mexico, Korea, Italy and India), four countries as satisfying the second criterion (Germany, Japan, Taiwan and Switzerland) and two countries satisfying the third criterion (Switzerland and Taiwan).

Germany satisfies the first two criteria because it has a bilateral goods surplus with the US of $71.1bn, which represents 9.1% of its GDP, well above the thresholds of $20bn and 3% respectively.   Germany would only fall foul of the third criterion if the ECB sold Euros on a persistent basis in the foreign exchange markets.   Germany would fail to satisfy the third criterion even if the Euro conferred a much greater advantage to the Germany economy than it does today.  This is because the Obama administration has adopted the definition of currency manipulation which is used by the IMF.  This definition predates the formation of the Euro zone.  It assumes that the only way in which a country is able to artificially reduce the value of its currency to gain a trading advantage is by intervening in the foreign exchange markets.  This fails to recognise that another way of achieving the same objective is to join a currency union, such as the Euro. What is important is not how a country achieves an under-valued currency, but rather whether it has one, or not.


Ideally, the IMF would take the lead in addressing the deep seated structural problems of the Euro zone, and the serious threat which the Euro zone will ultimately pose to the global economy. Unfortunately, this is a problem that the IMF is unable to view objectively.  This is because European countries enjoy a disproportionate share of the votes on the IMF’s board.   This is illustrated by the fact that the IMF is currently headed by Christine Lagarde, a former French politician, and the previous ten managing directors of the IMF have all come from EU countries, with many being former politicians.


The new Trump administration, namely, Steven Mnuchin (Treasury Secretary), Wilbur Ross (Commerce Secretary) and Robert Lighthizer (US Trade Representative) cannot expect any help from the IMF in addressing the unfair advantage that Germany has in its trading relations with the US, and other countries. This is most unfortunate because it means that if the US wishes to address this problem it would have to take unilateral action on what would be a politically sensitive subject with an important European ally. However, if the new Trump administration is able to show beyond any reasonable doubt that Germany is benefiting unfairly in its trading relationship with the US from being part of the Euro zone it will have the moral authority to take action.  In such circumstances, Donald Trump is also more than capable of highlighting the shortcomings of the IMF in not addressing this problem.  The question is: what action could a new administration take to address this problem? 


An obvious answer is for the new administration to change the definition in the third criterion of section 701(a)(2)(A)(ii), so that it captures any country that is benefiting from a persistently under-valued currency against the US dollar.  If this change were made Germany would fall foul of all three criteria.  In such circumstances the Act states (section 701(b)(1)(A-D)) that the “President, through the US Treasury Secretary, shall:

(A) urge implementation of policies to address the causes of the undervaluation of its currency, its significant bilateral trade surplus with the United States, and its material current account surplus, including undervaluation and surpluses relating to exchange rate management;

(B) express the concern of the United States with respect to the adverse trade and economic effects of that undervaluation and those surpluses;

(C) advise that country of the ability of the President to take action under subsection (c); and/or

(D) develop a plan with specific actions to address that undervaluation and those surpluses.”


If the US is unable to persuade Germany to take steps to address this problem the President is able to take the following limited action under the Act (section 701(c)(1)(A-D)), and in particular (C) and (D):

(C) instruct the US’s Executive Director of the IMF to call for additional rigorous surveillance of the macroeconomic and exchange rate policies of that country and, as appropriate, formal consultations on findings of currency manipulation, or

(D) instruct the US Trade Representative to take into account, in assessing whether to enter into a regional trade agreement with that country or to initiate negotiations with respect to a regional trade agreement with that country, the extent to which that country has failed to adopt appropriate policies to correct the undervaluation and surpluses described in subsection (b)(1)(A).


As mentioned, the new US administration cannot expect any assistance from the IMF in this matter.  The subject of Germany benefitting from an under-valued currency could be another reason for the Trump administration not signing T-TIP, as to do so would undermine its bargaining position on this subject.  


More generally, if both President Trump and Congress wished to escalate this dispute they could take the ultimate sanction of increasing duties/tariffs on German goods to counter the benefit which this country is receiving from an under-valued currency.  Although the President and Congress do not currently have the requisite authority to take this action they could acquire this authority by passing the necessary legislation.  It has been suggested that the US might target currency manipulation by imposing a countervailing duty. Germany and the EU would no doubt complain to the WTO about the US’s action, but such disputes tend to take a long time to resolve.  Furthermore, there is some ambiguity as to how such a dispute would be settled.


If the Trump administration were to focus on Germany’s unfair trading advantage it is likely to negotiate in a tough, but realistic manner with Germany and the EU.  They know that Germany and the EU are unable to solve the problems associated with the Euro zone overnight.  They will no doubt want Germany to make concrete proposals that will address the problem of the country’s every growing trade surplus with the US.  At present, the IMF is doing Germany’s bidding and only requiring the Club Med countries in the Euro zone to embrace structural reforms.  The US will no doubt want Germany to also make structural reforms, because its current economic policies are supressing domestic demand, which means that its economy is overly dependent on the demand from other countries such as the US.  It can be expected that the US will urge Germany to adopt policies to boost domestic demand.  Initially, Angela Merkel and Wolfgang Schäuble will no doubt resent the interference from the Trump administration into their domestic affairs and will find their proposals deeply unpalatable.  However, on reflection they will hopefully see these proposals as a constructive way of easing the tensions in their trading relations with the US, and also benefitting their EU partners.  Angela Merkel being a pragmatist will appreciate that the Trump Administration could force Germany to leave the Euro.  This could be achieved by either imposing a countervailing duty on German goods or by removing Germany’s most favoured nation status and imposing tariffs on German goods.  Germany would then be faced with a choice of either remaining in the Euro and suffering a duty/tariff on their exports to the US, or leaving the Euro.  In either event, Donald Trump’s intervention on the issue should be welcomed as addressing an unsustainable structural flaw in the global economy.

 


[i] https://www.congress.gov/114/plaws/publ125/PLAW-114publ125.pdf (Trade Facilitation and Trade Enforcement Act 2015)

https://www.treasury.gov/resource-center/international/exchange-rate-policies/Documents/2016-10-14%20(Fall%202016%20FX%20Report)%20FINAL.PDF (Foreign Exchange Policies of the Major Trading Partners of the United States, Report to Congress, US Department of the Treasury Office of International Affairs, October 2016)

 

 

Recent Comments
Robert Oulds
Germany has been amongst the biggest distorters of world trade unbalancing the Euro, even breaking the EU's rules in their search ... Read More
Thursday, 05 January 2017 13:12
Robert Oulds
You are right, Germany (Angela Merkel) complains about him. She is trying to position herself as the last line of defence against ... Read More
Thursday, 05 January 2017 19:35
Robert Oulds
Thank you
Monday, 30 January 2017 09:32
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The Obsession with Regulation

The European Commission does not just propose regulation affecting its own internal market but also aggressively seeks to export its rules beyond its own borders

15th November 2016
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The European Commission predicted that the once much-heralded Transatlantic Trade and Investment Partnership (TTIP) will boost EU GDP by 0.5% which will annually add €120 billion to the economy.[i] The gains seem significant but they represent little more than a rounding error in the calculation of economic output.


The speculative benefits are unlikely to be realised. TTIP is effectively dead. Its future looked bleak even before Bernie Sanders rose to prominence in the United States, acting as the bête noire of corporate interests, and long before the election of Donald J Trump. It was EU intransigence on regulatory issues that caused the gridlock and not the public’s overwhelming opposition to the Investor State Dispute Settlement (ISDS); the courts where nation-states can be sued and punished for policies detrimental
to corporate interests.


The fact that agreement on regulation and the precautionary principle was never reached caused the TTIP to be cast aside; another casualty of the EU’s obsession with regulation. Now that there will be a new President who was elected, not just on a ticket of opposition to trade agreements that export US jobs, but also, on a platform of removing job destroying regulation, the gulf is now wider than ever. A President Trump aims to achieve the proverbial bonfire of regulation.


Such promises, which aim to restore an economies competitiveness, are often made yet rarely delivered. An aspect of this is no doubt the international angle, an increasing amount of regulation comes from global bodies that are agencies of the United Nations. Repealing them will require a country to breach international agreements. Trump, however, is prepared to do this. The EU, however, will not.


There is an
international dimension at work and remains behind the initiation of many EU rules. There is a plethora of UN sponsored standard setting agencies which produce proposals for legislative standardisation across continents and beyond. An increasing amount of what we know as EU legislation is originating above the EU.[ii] The EU recognises as part of the case law underpinning the workings of the European Union recognises that international law is to be incorporated into EU law which therefore, via Brussels, becomes the law of each and every member state. The legal decisions of the European Court of Justice which confirm this are: Case 104/81, Kupferberg, Case C-192/89 Sevince and Case C-277/94 Taflan-Met.


Whilst the EU does passively receive some from upstream global sources such as the United Nations Economic Commission for Europe. The EU is not just a passive receives of diktats from the international organisations that sit above Brussels and are incidentally even more opaque than the arcane workings of European institutions. Global UN bodies are not the only source of regulation. The EU is still a source of much red-tape woe. What is more, Brussels seeks to export its regulations beyond its own borders. Pushing them onto its neighbours, over-seas through free trade deals and up to the global bodies; spreading the anti-competitive drive.


The European Commission does not just propose regulation affecting its own internal market but also aggressively seeks to export its rules beyond its own borders. Instead of liberalising the Single Market the EU is looking to raise rivals’ costs. This includes the most important potential trade deal in EU history. Instead of allowing European businesses to innovate more freely the Commission was attempting to make the USA apply what is known as the ‘precautionary principle.’


According to Professor Ragnar Löfstedt the Director of King's College London Centre for Risk Management whenever a new endeavour or products is proposed the European Commission can decide to ban a product until its producer demonstrates that it poses no (or an acceptable) risk. This attitude is at the heart of EU regulation and largely responsible for the growing complexity and rigidity of European Union law. Its use has been upheld by the European Court of Justice in legal cases including Pfizer Animal Health SA v. Council 1999 E.C.R. II-1961.[iii]


The precautionary principle stymies innovation and harms economic growth. It is this well-intended in theory, but pernicious in practice, belief that is responsible for the march of health and safety legislation.
[iv]


The stubborn requirement for this and not allowing free access to goods which do not comply with the precautionary principle had the effect of scuppering the Transatlantic Trade and Investment Partnership between the EU and the USA. The United States of America has a different approach to risk-management which is more open to innovation.[v]


From the European Commission perspective, free trade agreements are not just to encourage the export of goods but also exist to export its regulations. A condition of tariff free trade access and the faster transit through customs is for the non-EU state to apply common technical and health and safety standards. Compliance with EU environmental rules and a commitment to ensuring that competition is not being distorted by state intervention is also mandated. As is the protection of intellectual property rights and that public procurement will be open to all.[vi]


Some even demand that in exchange for tariff free trade with the EU countries sign up to the EU’s human rights agenda. For the EU trade is politics by other means. There is a price to be paid for accessing the EU’s internal market from outside the EU. So what is the basis of this regulation and is it a burden on businesses?


A case can be made that common standards boost trade and make it easier for both service providers and manufacturers. Value is added to goods through an increasingly complex chain of production over many jurisdictions, with different parts and programmes originating in several countries. Global production, it is argued, requires global regulation. The Brussels bureaucracy is not the only organisation that promotes this position. It is even shared by some in the United States of America and is espoused by the influential US group the Council on Foreign Relations.[vii]


What is more, the setting of different standards in one country can be used as a protectionist measure that makes it more difficult for one country to produce products for the recipient’s market. This is especially the case if the exporter must pass costly and time consuming safety checks.


The standardisation of regulation will therefore remove these technical barriers to trade. Certainly, it is the case that supply lines are always improved if there is interoperability. The difference between domestic and export markets will also be reduced making it easier for businesses to operate in one environment.


The arguable increase in trade does not consider the probability that some businesses can reach agreement themselves making the regulation unwarranted. The desire for regulation also fails to consider that the costs of compliance. The level of interference has reached a point where it becomes excessive. Standardisation is also monotonous and impinges on creativity harming innovation.


There is substantial evidence which suggests that overregulation is holding back economic growth.
A report on the burdensome cost to business was commissioned by the pro-EU Prime Minster, Tony Blair, during his time in office. The 2005 report by the Better Regulation Task Force for the then premier estimated that regulation cost the British economy 10-12% of GDP. That amounts to approximately £150 billion per annum. This cost is divided between, administration which entails 'familiarisation, record keeping and reporting, including inspection and enforcement.' This accounts for around a third of the burden with the remainder coming from the 'costs directly attributable to the policy goal.' At least half of this regulation, and therefore at least half the costs, originate from the EU; with this amount steadily growing. Half the cost equates to £75 billion pounds per year.


Other arms of the state have, however, come to different conclusions with civil service impact assessments reaching a different figure. These have been analysed by the British Chamber of Commerce in their Burdens Barometer 2010 report. According to this the annual cost of EU regulation is £7.5 billion per year, still not an inconsiderable sum.[viii]

Who is correct?


The figure derived from the British civil service may well underestimate the costs of regulation. Their impact assessments have been criticised by the Better Regulation Task Force. This report argued that the evaluations by Whitehall are inadequate. They lack a full cost benefit analysis of how the regulation is to be implemented and enforced. What is more, the impact assessments do not include nor fully explore other, less costly, alternatives to regulation.


The EU also produces its own impact assessments on the advantages and disadvantages of its own regulations. Just as the EU regards that the appropriate level for law making is at the European level it also regards its rules as beneficial with affordable costs. The fundamental floor at the heart of EU impact assessments is the fact that the Commission, the body which produces the legislation, also conducts the cost/benefit analysis of the proposals.[ix]. The bureaucracy, which incidentally leaves implementation to the EU’s arm’s length agencies and the member states, are unlikely to consider their own ideas as defective.


What is more, the monitoring of the legislation once in force also rests with the European Commission, the same body that has the monopoly on introducing the directives and regulations.


The Roman poet, Juvenal, in his satires famously asked Quis custodiet ipsos custodes? This translates as “Who will guard the guards themselves?" Or "Who watches the watchmen?" When it comes to law making in the EU the answer is that the EU is its own guardian. The future of enterprise in Europe rests with the benevolence, or perhaps, malevolence of the European bureaucracy.


Even supporters of the EU and some senior figures in the European Commission have admitted that the overregulation of business is harming the economy.


Peter Mandelson, as Secretary of State for Trade, told the Confederation of British Industry conference on 8th November 2004 that the cost of EU regulation amounts to holding back GDP in the EU by as much as 4%.[x] He was soon to become the EU Commissioner for Trade, taking up that post just two weeks later. This regulatory burden did not decrease during his time at the centre of the EU.


Those in the UK that believe that EU regulation is seriously to the detriment of enterprise are not alone. The Netherlands has also concluded that the EU is bad for business. As long ago as 2002 the Dutch government estimated that the administrative burden of regulation alone, which they define as ‘the costs imposed on businesses when complying with information obligations stemming from government regulation’ cost them 3.6% of GDP.[xi]


Other Dutch reports have come to similar conclusions. In 2004 a report commissioned at the request of Gerrit Zalm, the then Dutch Deputy Prime Minister who also served at that time as the Netherland’s Finance Minister, estimated that the administrative burden on business in his country cost 3.7% of economic output. These conclusions were supported by the Organisation for Economic Co-operation and Development (OECD). In 1997 they predicted that regulatory reform in the Netherlands could boost Dutch GDP by 3.5%.[xii]


Like the UK, not all Dutch regulation, comes through the imposition of European Union directives and regulations. In the Netherlands, it is estimated that the EU element amounts to 40%. The proportion for the UK is higher, now as much as 60%.


On 10th October 2006 G
ünter Verhuegen, the European Commissioner for Enterprise and Industry and a Vice-President of Commission stated that,

"Many people still have this concept of Europe that the more rules you produce the more Europe you have. The idea is that the role of the commission is to keep the machinery running and the machinery is producing laws. And that's exactly what I want to change."


Verhuegen’s bid for reform was, however, blocked according to the Commissioner by the EU’s administrative culture.[xiii] Even the Vice-President could not stop the legislative avalanche.


G
ünter Verhuegen also estimated that the annual cost of EU regulation across the EU amounted to €600 billion per annum (around 5.5% of GDP), while the benefits of the Single Market amount to only €160 billion: therefore the costs exceeded the benefits by a staggering €440 billion.[xiv] Later, in a letter from Commissioner Verhuegen to Bill Newton-Dunn MEP, on 18th June 2007, the Commissioner gives the overall figure of just the administrative burden of EU level legislation as costing 3.5% of GDP for all member states and this sum would be similar for the UK.[xv] What is more, the figure of three and a half per cent actually excludes the costs that directly relate to the policy goal making the final figure much higher.


It appears that even these, now former, Commissioners have a better recognition of the harm that EU rules have on competitiveness than British civil servants whose analysis of the costs of regulation in their impact assessments clearly underestimate the burdens that are being placed on businesses. Yet they could stop the ever-growing amount of EU rules. If the EU has not changed this damaging practice after more than a decade of governments recognising there is a problem what hope is their of change now… ?


All measures of the cost of EU regulation show that there is indeed a significant price that business and therefore consumers have to pay as a result of EU rules. Across the EU enterprise, production and entrepreneurship have been replaced with regulation, inspection and compliance. Even the Confederation of British Industry mentioned in a report on the European Union that, The EU has moved too far from ‘adding value’ to ‘adding functions’, resulting in ‘mission creep’ in several areas.’[xvi]


Yet why at this difficult economic time is it still in place and continually being added to? Or, more specifically, cui bono; who benefits from the EU?


The reasons for EU regulation

Apart from the precautionary principle there are also other factors that have led to the growth of regulation.


Sir John Robert Seeley, the historian and writer on religious affairs, in his 1883 book the
Expansion of England wrote of the British Empire that we seem, as it were, to have conquered half the world in a fit of absence of mind.’ The Empire of the European Union, a realm of regulation, has conversely been deliberately established. It is not a free trade area that has been on an accidental legislative binge. The higher authority of the EU uses law to achieve its goal; that is the building of a monolithic system of political control that is aimed, rightly or wrongly, at reigning in the excesses of the nation states. By implication the nationalist passions of the citizens of its member states are also kept in check. Or so the thinking goes. Building Europe requires the establishment of a body of law known as the acquis communautaire. A new political power cannot be said to exist unless it is an active law maker. The European Commission recognises that its political governance cannot be established in an absence of law.


Whilst the EU is largely immune to influence from national democratic institutions it is very much open to lobbying for new legislation from both environmental groups and multi-national businesses alike. Small and medium sized enterprises, who suffer most from red-tape, do not have the finances the time nor to defend their interests. This is not surprising; since 2010 there have been
3580 new EU rules on business that would take 92 days to read.[xvii] Naturally the bigger the business the greater the resources it can spend on both being consulted by Brussels on future legislation and on lobbying for laws that are in their interests. This can include regulations that add costs on to competitors. Despite the apparent quest for harmony between the people of Europe, EU law making can also be manipulated to raise the costs of a rival country.[xviii]


The City of London and the UK’s financial services industry has borne the brunt of this assault. Recent regulations concerning; Credit Rating Agencies, and the establishment of the European Systemic Risk Board, the European Banking Authority, the European Securities and Markets Authority the European Insurance and Occupational Pensions Authority are prime examples. As is the Alternative Investment Fund Managers directive.


The expansion of the EU is also another factor. The accession of the once Soviet dominated states did not lead to a new European paradigm where excessive regulation would be resisted. Far from leading to a liberalisation of the EU the eastward expansion became another excuse for yet more law making. In the opinion of the Commission the former communist states of Eastern Europe had insufficiently developed law for a capitalist free market. Apparently their economies were in need of stewardship by the EU. The standardisation that followed led to even greater EU interference.


The former President of the Czech Republic, Václav Klaus, said, during his time in office that, "every time I try to repeal some Soviet-era directive, I'm told that whatever I am trying to scrap is a requirement of the European Commission."


The European Commission is not the only EU institution that is adding to the legislative morass. A member of the Commission Legal Service blames another branch of the EU, the European Parliament. ‘The European Parliament, under the co-decision [ordinary] procedure, is allowed to propose uninformed, irrational, impractical amendments, safe in the knowledge that they have no responsibility for implementation.’[xix] Other EU institutions are also part of the problem as any ambiguity is clarified by the European Court of Justice who inevitability add evermore complexity to EU law; which once in place is extremely difficult to repeal.[xx] EU rules resemble the complicated financial devices bankers use like their debt swaps and derivatives. Few in the banking sector understood how they operated in practice let alone the risks involved. Complex EU law is equally economically damaging.


Excessive EU regulation is a cost too far. The European Union is most definitely in relative, if not actual, economic decline largely because of excessive regulation.


It is only fair to leave the last word to the EU. According to a report by the European Commission titled Global Europe 2050 in the year 2000 the EU accounted for 25% of world economic output. However, by 2050 its share of global GDP will be ‘as low as 15%.’ The EU’s own report goes onto say that,
By 2050, Europe’s share of global economic product may be lower than it was before the onset of industrialization, hardly a trend leading toward global economic dominance.’[xxi]

This article was in Commerce Review

 


[i] http://ec.europa.eu/trade/policy/in-focus/ttip/

[ii] North, Dr Richard, The Norway Option: Re-joining the EEA as an alternative to membership of the European Union, the Bruges Group, 2013, pages 10 - 28

[iii] http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:61999A0013:EN:HTML

[iv] Mason, William, The Costs of Regulation – and How the EU Makes Them Worse, the Bruges Group, 2008

[v] http://www.truthabouttrade.org/2013/07/03/u-s-eu-trade-agreement-and-the-precautionary-principle

[vi] http://ec.europa.eu/trade/policy/countries-and-regions/agreements/#_europe

[vii] http://www.cfr.org/trade/better-regulation-freer-trade/p28508

[viii] UK-EU economic relations – key statistics, House of Commons Library, SN/EP/6091, 13th February 2013, page 6

[ix] http://ec.europa.eu/governance/impact/index_en.htm

[x] Financial Times, 8th November 2004

[xi] Regulation - Less is More: Reducing Burdens, Improving Outcomes, A BRTF report to the Prime Minister, 2005 http://www.bis.gov.uk/files/file22967.pdf

[xii] Review of the Dutch Administrative Burden Reduction Programme, World Bank Group, 2007 http://www.doingbusiness.org/~/media/FPDKM/Doing%20Business/Documents/Special-Reports/DB-Dutch-Admin.pdf

[xiii] http://euobserver.com/economic/22610

[xiv] http://www.worldcommercereview.com/publications/article_pdf/66

[xv] http://www.publications.parliament.uk/pa/cm200607/cmselect/cmeuleg/519/519we10.htm

[xvi] CBI, Our Global Future: The business vision for a reformed EU, November 2013

http://www.cbi.org.uk/media/2451423/our_global_future.pdf

[xvii] http://www.freebritain.org.uk/_blog/Free_Britain/post/newrules/

[xviii] http://www.brugesgroup.com/SpeechByRolandVaubel2010.pdf

[xix] Bellis, Robin, “Implementation of EU legislation. An independent study for the Foreign & Commonwealth Office, 2003,

[xx] Mason, William, The Costs of Regulation – and How the EU Makes Them Worse, the Bruges Group, 2008

[xxi]  http://ec.europa.eu/research/social-sciences/pdf/global-europe-2050-summary-report_en.pdf

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The Challenge to George Osborne and £350 million to the EU each week?

EU membership is the biggest risk to the public finances. In these two films young people explain what our politicians have failed to grasp.

Paulina and Ben plus Emma and Jo
18th June 2016
Type text for SEO (example Bruges Group : Image Title)

Paulina and Ben (15) challenge George Osborne on EU sovereign debt and how a Remain vote will leave them liable for massive payments.

Mr Osborne - if you think we are wrong come and explain how we are safe. That is our challenge.

Vote Leave claim we send £350 million to the EU every week - but do we? The Bruges Group's young expert, Joe, and Emma give you the full SP.

With all the financial risks associated with the EU, £350 million per week looks like a gross underestimation!

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The UK’s liabilities to the financial mechanisms of the European Union

The UK’s potential exposure to the EU is over £80 billion.

Bob Lyddon
16th June 2016

Independent research, commissioned by the Bruges Group from acknowledged expert in this field Bob Lyddon, shows that the true extent of the UK’s potential exposure to the European Investment Bank (EIB), European Central Bank (ECB) and EFSM (European Financial Stabilisation Mechanism) is over £80 billion. If the crisis in the Eurozone continues this already high figure could increase massively.

The UK carries huge financial liabilities as an EU Member State, liabilities that could translate into calls for cash far higher than our annual Member cash contribution. These are created through various funds and facilities of the EU itself, and through shareholdings in the European Investment Bank and the European Central Bank. Each of these bodies engages in financial dealings on a large scale, with the Member States acting as guarantors for sums borrowed. The main recipients of funds are the Eurozone periphery states: Italy, Spain, Greece, Portugal and Ireland.

The UK, being one of the largest and most creditworthy of the Member States, is looked at as one of the guarantors most able to stump up extra cash as and when demanded, demanded, that is, by a Qualified Majority of Member States with no unilateral right of refusal. Such calls can be expected if another crisis blows up in the Eurozone.

The UK’s leaving the EU would relieve us of these considerable risks and liabilities. This independent research shows that Britain should leave the European Union.

Jim Mellon, billionaire investor and well known specialist in sovereign risk, described this research as,
“An excellent, incisive and important work. The European Union is a millstone and we have a once in a life time opportunity to be free of it.”

Losses would be claimed by the EU institutions and added to the UK PSBR and therefore to the national debt, except that our current paid-in capital in EIB (€3.5 bn) and the ECB (€0.1 bn) have already been paid in and are already part of the UK's national debt.

Event UK cost in £ Cost per household
UK loses its capital in the European Investment
Bank and the ECB
32,560,000,000 £1,185
Loses through the European Financial
Stabilisation Mechanism
48,000,000,000 £1,747
TOTAL 80,560,000,000 £2,932

Number of UK households = 27,468,000

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