hms iron duke

hms iron duke

Thursday, 30 October 2014

EU Rules, Damned Rules and Statistics

Alphen, Netherlands 30 October.  In 1906 Mark Twain wrote: “Figures often beguile me particularly when I have the arranging of them myself in which sense the remark attributed to Disraeli would often apply with justice and force: “There are three kinds of lies: lies, damned lies and statistics””.  The same can be applied to EU 'rules' because as this past week has attested everything the EU does is political and nothing the EU ever does is purely ‘technical’.  That is why the European economy is today in a mess and in danger of taking much of the rest of the world down with it.  

Proof of politics and indeed Twain’s truism was all too evident this week in three ‘technical’ rulings by EU institutions: the imposition of a huge retrospective super-tax on Britain and several other EU member-states by the European Commission; the approval by the European Commission of the 2015 French and indeed Italian budgets; and the publication of the so-called “stress tests” on Eurozone banks.  

The imposition of a huge €2.1bn (£1.7bn) retrospective tax on Britain was met with howls of protest in London.  The European Commission insists that the demand was a ‘normal’ adjustment built on an impartial analysis based on figures supplied by London’s own Office for National Statistics.  And yet one week on from the demand the Commission still refuses to reveal the methodology or mechanism by which it arrived at this figure.  Even the finance minister of the normally supine Dutch said that he wanted to know just how the figures were calculated.  My own contacts reveal the sum demanded of Britain is very much a maximalist interpretation of the ‘rules’ for calculating national wealth which were adjusted back in 2010.

This same week the same European Commission ‘approved’ the 2015 French and Italian budgets in spite of the French deficit standing at 4.3% of GDP or 1.3% above the ceiling established under the Eurozone’s European Growth and Stability Pact.  Miraculously Paris said it had found the money to cut the deficit next year and by €50bn by 2017.  Equally miraculously a significant part of that money is due to France getting a rebate under the self-same ‘technical adjustment’ that hammered the British and being asked to pay lower than expected contributions to the EU budget.  Now, there’s a surprise.  Or, to put it another way the Commission has applied to France a minimalist interpretation of the ‘rules’.  

However, it is the third ‘technical’ announcement that is perhaps the most political and most dangerous.  This week in Rome in a lecture I said the greatest threat to NATO was neither Russia nor American disinterest/over-stretch.  It is the risk of Eurozone deflation and the crippling impact it would have on European growth, demand, consumption, taxation, public national debt and eventually public expenditure.  The still insufficiently shock-proofed European banking sector is particularly vulnerable to deflation.

On 27 October the European Central Bank and European Banking Authority announced the results of the so-called “comprehensive assessment” (stress tests) of the strength of Eurozone banks.  Although deflation is already eating away at the Eurozone’s peripheral economies the ‘test’ failed to even consider the impact of possible deflation on Eurozone banks.  And yet the IMF says that deflation in the Eurozone poses one of the greatest threats to the world economy and in public that there is a 30% chance of deflation in Europe.  Privately the IMF puts the likelihood of deflation in Europe much higher.

And yet, in a breathtaking public statement of politics dressed up as technical strategy ECB Vice-President Vitor Constancio said, “The scenario (deflation) is not there because indeed we don’t consider that deflation is going to happen”.  Interestingly and revealingly, whilst Italian banks were particularly hard-hit by the assessment similarly vulnerable French banks were given a very soft ride.  The dangerously vulnerable German Sparkassen savings banks were not even assessed.  Why Italy?  Rome simply lacks the political clout of Berlin and Paris.

Danish Prime Minister Hell Thorning-Schmidt said this week: “I respect that the UK wants to discuss this (the retrospective super-tax) amongst ministers but these are the rules that must be kept.  Countries must follow the rules as they are”.  The problem Mrs Thorning-Schmidt as this week has shown all too clearly is that the European Commission does not even follow its own rules.  Rather, it uses maximalist and minimalist interpretations of the ‘rules’ to reward powerful ‘friends’ and punish ‘enemies’. 

This tendency towards favouritism has nothing to do with the old Commission as some suggest but everything to do with the new.  Indeed, Jean-Claude Juncker’s fingerprints are all over at least two of these ‘rulings’ and reflect four principles to which he has adhered all his political life: get your revenge in first; avoid political transparency at all costs; get someone else to take the blame; and divide and rule by rewarding friends and punishing enemies.  By the very nature of Jean-Claude Juncker’s political appointment as President the European Commission is about to become an awful lot more political.  The past week is just the beginning.

So, why are the British in particular being singled-out (as they are)?  Some months ago Prime Minister Cameron managed to engineer a cut in the EU budget for the first time in its history.  The European Parliament from whence Juncker hails is packed full of Members that simply want the EU to remain a massive wealth redistribution mechanism.  Saving taxpayer's money is anathema to these people.  The Commission also refuses to do little or nothing to combat the huge waste and corruption which year after year sees the EU budget ‘signed off’ by the Court of Auditors only with what it calls deep reservations about “deep errors”.  Consequently, the EU demands ever more taxpayer's money for ever more, ever-less transparent, reasons.  

For the Commission this is a delicate balancing act to perform because the essential need is to soak the taxpayer’s of the formerly-rich EU member-states, both Eurozone and non-Eurozone, so that the day can be delayed when the fundamental structural and potentially catastrophic economic, fiscal and financial contradictions at the core of the Euro must be confronted.  To be fair to the Commission that is because most Eurozone states simply do not want to face this reality and want other people's sound money forever for nothing.  

However, it is a balancing act further complicated by the golden rule of the Commission; under no circumstances confront France or Germany.  That is why in within the EU politics forever trumps strategy and that is why Britain is singled out for ‘special measures’.  It is also why the EU is fast becoming the world’s greatest ever Ponzi scheme.

So, with respect Mrs Thorning-Schmidt don’t be so naïve.  This time Denmark has been marginally rewarded by the Commission precisely to prevent a counter-bloc of non-Eurozone states emerging.  Next time you will be in the firing line precisely because EU ‘rules’ are all about politics and have little or nothing to do with strategy or ‘rules’.  As for statistics - they are all about interpretation.  

Indeed, if Mark Twain were alive today he would have understood this long week of politics all too well; there are EU rules, damned ‘rules’ and EU statistics...and they are political not technical.

Julian Lindley-French

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