Grexit Gloom or QE Delight?

Dave


I haven't written for a while, sorry, I've had more important things on than saving your bacon. However, Europe is heading for the abyss again, and you might be able to use this to help, and in the process win a few brownie points.


The Greek situation and all the Grexit talk is all very 1930's to me. More politics than monetary or fiscal policy, it still has huge financial implications for all concerned, including us and not least my Portuguese holiday plans.


As we all know, the trouble has been caused by a single currency which has removed the ability of exchange rates to buffer an individual country against it's economic performance without tying their economies together in fiscal harmony. Germany has done extremely well exporting at an artificially low exchange rate for its currency, while the less efficient members of the Eurozone have suffered with an artificially strong currency relative to their own situation. Germany are obviously very pleased with the situation and keen to support the status quo while the others scratch around hoping for some fiscal largesse.


The most that Angela seems prepared to do is authorise some QE, to stave off deflation, so at least the debt of the poorer countries don't grow in real terms while they are struggling. A bit like taking your foot off the windpipe of a man you have parked your car on. What is needed is something more like the UK, where the lower performing bits, economically speaking, are supported by the rest, er, London. Clearly this would make Merkel turn in her groove, and so something more creative is needed.


It is my belief that there is a startlingly simple solution which may well be acceptable to all, and which is only possible thanks to modern technology, therefore it has never been tried or thought of as far as I know. To me, most of the current solutions seem to be out of the Great Depression, some, like QE, with a modern flavour, but they are still grapeshot in approach. What is needed is a more targeted effort and here's how it's done in a way in which QE solves the problems of the Euro as a single currency at the same time.


Put simply, create a new 'Euro' for each member of the zone, and create holdings for this in the ECB. Manage these national currency accounts like investment banking accounts, and include all sovereign debt, bonds etc. Each country's Euro should then have an internal exchange rate against the ECB central 'group' rate, using a formula based on underlying economic performance and designed to mirror the behaviour of a floating currency. Use this or any similar mechanism to inflate or deflate an individual economy as required, and use the imaginary QE money for the exercise. This targets the QE exactly where it is needed. Using modern technology it would also be possible to compute the flows of capital in and out of an individual member economy, and to use these alongside the currency performance formula to calculate the level of QE to be applied to the country account. Therefore if an economy performing badly would have been expected to suffer/enjoy a 20% devaluation of a free floating currency, increase it's euro holdings by 20% of the capital flows.


Of course, the reverse ought to also be the case, for high performing economies, but Angela will hate it and QE money will do just as well.


For Greece, this is not writing down of debt, or waiving bail out terms, it is simply restoring the spending power of the government/country to closer to what it would have been had they kept a floating currency, what it spends it on must be for negotiation, but clearly anything that restores competitiveness would be ideal, and could be spun as equalling an end, or part-end, to austerity. I'm especially thinking of corporate and even personal taxation reductions, to put money directly into the economy.


This is obviously imperfect in that it doesn't in itself make an economy more competitive internationally in a downturn, but it does provide the financial firepower for individual governments to make sensible (agreed) interventions in their own markets with that aim in mind. It therefore uses the QE to solve the Greek question (and the inevitable Portuguese, Italian and Spanish ones which would otherwise follow). And, although it doesn't give Angela much on the surface, it provides future stability for the Euro, and therefore keeps the exchange rate for the group as a whole artificially low in German terms, which is just what she really wants.


As the value of the overall currency holding of each member state can now float, the poorer ones will always have a mechanism to restore competitiveness, so the final caveat is obviously that a system needs to be designed to ensure that the targeted gains in each economy are captured, and not simply used as grant aid to bail it out. To this end, the ECB can, I'm sure, also build in balancing items which will move the interest rates and/or the absolute value of the debts in the member's accounts, according to how they use the largesse and the results that they achieve.


This will be complex to negotiate but once agreement is reached a trouble-free system is surely possible which removes some of the core disadvantages of a single currency when it is not accompanied by complete fiscal unity.


Best regards


Gareth

The note from Lord Heseltine

Yet again whilst trying to look busy you have fallen into the trap of asking for a review from someone who you thought would say what you wanted to hear. Lord Heseltine proposes many sensible things but the title of Leave No Stone Unturned is not really accurate.

 

The 'review' leaves many stones unturned and proposes little in the way of strategic change or innovation. Why, for once, can we not undertake an exercise which looks at where we need to be in, say, 50 years time, and plot a course to get there? In the Unofficial Big Society Green Paper I tried to vision out the path to a working, capitalist, big society and managed to come up with several innovations which would have the same effect as throwing cash around like confetti, as Lord H suggests, but would do so in a measurable, targeted and strategic way. The people would get it. They would understand that it is not just the same old big businesses and friends of the government to benefit and they would turn the economy around in just a few years.

 

There is simply nothing to be gained by delaying the inevitable. Old economics does not work in the current financial climate, capitalsim has been too successful. Tweaks and sticking plaster might produce some growth but they will not end the lurch from boom to bust. This arises as much from the policies of the two controlling parties, swinging from left to right every few years, as it does from international capital flows and recessions. Lord H's review, like all other advice you have conjured this far, does not deal with the underlying issues and they will not go away.

 

To really energise the people please let's have a proper strategic review, fully costed, and try and create something more than a platform to win the next election. Let's create 5G. A legacy for the next five generations based on a bold and innovative plan.

 

Memo to Dave

Yet again on my doorstep I see 'juicy' contracts awarded to purely commercial businesses against competition from social enterprise. I have written bids in both the socent and commercial sectors, and have evaluated bids and awarded contracts as a commissioner, so I know more than a little about this. Social enterprise is still being held back, and the social value bill will make little difference.

When constructing a bid, a commercial bidder will look at the base cost of delivering the service and do so from the point of view of minimum staff costs, stripping out all unnecessary costs and investments, and in taking their targeted profit. If they win the contract and the inherited staff or service levels do not support their profit requirement they simply throw out whatever is overweight to ensure that they do not lose out. Even if a social enterprise bid is measured on its promise of returning profit or investing it is unlikely to win against the purely commercial bid. A social enterprise will not plan to reduce service quality or to treat staff badly by moving their bases just far enough to make sure they leave but not far enough to require any help with resettlement. Instead, if a social enterprise thinks the contract comes with surplus staff it will cost in proper redundancies and include these in it's bid. There are many similar ways that the playing field is just not level.

In retail services, those sold direct to the public, social enterprises have even more difficulty, in that just about anyone can make themselves look 'social' if they want to and to make a true social offer takes a lot of marketing space. John Lewis is often mentioned as a social enterprise, and people trade with it because of its status, but I would argue that it is not social. Trading for the benefit of your employees is natural and welcome, but it does not make you social. Only trading for a wider community can do that.

What do we do about all of this?

One of the outcomes of the research which underpins my Unofficial Big Society Green Paper is that social enterprise needs a defining mark. I'm not sure that 'Society Profits' (the brainchild of Social Enterprise UK http://www.socialenterprise.org.uk/) is it, as who can use it, and how it is used, are the responsibility of an organisation to both create the rules and police it. To gain real public trust social enterprise needs a legally-defined state of existence marked apart from purely commercial businesses by a distinct company marker, like ltd and plc.

This would do three things. It would create public trust and would enable easier measurement of the size and impact of the sector. It would also enable a market to be made in purely social shares and provide a way for philanthropic individuals to easily invest in a range of businesses and measure the returns that they make and/or receive.

Obviously, any truly social enterprise would find it much easier to connect with its community if it could trade in this way and it would also help when bidding for contracts, as the return of profit and reinvestment promised in a bid could be part of a much more structured arrangement. I would also encourage all social enterprises when bidding for state contracts to construct two pricing scenarios. One the bare minimum cost, treat everyone badly, drop anything unprofitable offer that is common in the commercial world, and the other their own bid. This will show commissioners that they have considered where the cuts can be made, and how cheaply things could be done if the basic rules of a civil society are ignored, but that they will do it differently. It goes without saying that the closer together that the two costs can be brought, the higher the chance of winning the bid. All of the 'gap' however could be argued to be of social value, and by constructing two prices it will be easier to identify where the cost of that added value is. Explaining the cost of it, perhaps even making it an optional part of the bid, will help commissioners to justify awarding the contract even if the socent is not the lowest bidder.

The Government has of course done very little to help social enterprise. The sector is poorly defined, impossible to measure and yet it should be the cornerstone of the Big Society. The social value bill was not even a government bill and yet it is the only tangible support for the sector apart from a new 'bank' created by co-ercing money out of other banks. Although it would risk the ire of capitalism please be brave and give social enterprise a proper central place in society and it will repay you a thousand fold by making society big.

Budget Memo to George

A mañana budget is the only way to describe it.

The pre-budget hype, radical moves on pensions for example, is simply not matched by the way you seek to gently tinker with a failing system. Many of the changes in personal taxation are delayed until 2013, although the economy could do with a genuinely redistributive boost now, and an automatic future extension of the pension age means that people will eventually be completely stuffed by the system.

Funding state pensions from current day receipts is simply not sustainable. At the moment it is a struggle and already people have to work for around 50 years to enjoy perhaps 30 on a pension that is a tiny fraction of what they earn, or even contributed. In 15 years time, according to my rough calculations, around 22% more people will be drawing pensions than today, relative to those in work. Extending the age at which you can draw a pension to match increases in life expectancy will simply not plug that hole and unless you plug the hole now it is likely to be unpluggable.

The Unofficial Green Paper contains suggestions on ways to deal with this, but the budget is just another missed opportunity. Yet again a government seems to be slowly releasing cash to engender a feel good factor just around election time rather than genuinely planning for the long term.

There are three things that you should urgently do:

• Fully review the future of all pensions
• Fully review the future of health and social care funding (not delivery as in the current NHS Bill)
• Fully review the status of social enterprise and its capacity to support the above two categories of expenditure.

Once you have done this you should be open with people about exactly what they will get for their contributions for the whole of their lives. The Green Paper carries the full list of suggestions. This is urgent and matters hugely to the '99%' many of whom do not yet realise how much. Please do not leave it much longer.

Memo to Dave re Roads

Oops! Thinking out loud again by you and George has set the hares running. Perhaps that is what you wanted so that a watered down version of the plan to allow private business to tax us even more for travelling would not seem so bad when it is announced.

Yet again though the pronouncements miss the point and the fine words about having a strategy and taking a long term view are not matched by the ideas. I do agree that 20 years is a long time, but committing the taxpayer to pay private companies to build and run roads for four terms of government is not a strategy, it is a straightjacket.

The Unofficial Green Paper (www.bigsocietygreenpaper.org) proposes a national system of social enterprise and the roads could be a perfect test case for such a body. Why not create a national company, owned by the state pension fund but run by business people and give it the entire roads network as an asset? Give it the income from road tax as an income, targets for measurable outcomes and allow it to do the rest? It's all very simple and such a business would be hugely successful provided that its investment in new roads is properly measured for all outcomes, not just based on immediate financial return.

The new business could partner with private enterprise where appropriate but could also over time spawn hundreds, perhaps thousands of new social enterprises and new small British-owned businesses to provide the services that it would need.

This is all very simple and could be set up and announced within a few weeks. As always I am happy to help if needed!

Memo to Dave re Business Lending

The 'new' Loan Guarantee Scheme which is supposed to free up business lending is of course more PR than AU (actually useful). I haven't been able to find precise details of the scheme but a similar one has been in  existence for 20 years or more, when I was a lending banker actually trying to lend the things. The supposed 1% discount is a nonsense.

The traditional scheme has several weaknesses for business:

• It requires repayment over a relatively short term, 2-5 years, making it unsuitable for many large investments
• Banks can still require security for any unguaranteed portion of a loan
• Interest rates can be flexible, providing longer term risk to affordability
• The Loan Guarantee Premium is passed on to the customer adding further cost to the loan

There is insufficient detail of the new scheme to see what if anything is improved but the trumpted 1% saving on interest cost over a normal loan is simply not real. Banks will credit profile a customer through his application and come up with whatever rate they want to earn the profit they choose from that piece of business. It is pointless saying that if they would have lent at 7% they will now lend at 6%. Banks are far more devious than that.

And all of this slightly misses the point. Short term loans may help some businesses, but not that many. If I want to buy a piece of machinery to last 20 years I am unlikely to be able to afford to buy it over three years. Another flaw in the scheme is that the taxpayer now takes the risk on the banker's decision but gets none of the reward when it goes well. What is needed is a national investment scheme, preferably targeted at social enterprise but able to help all small and medium business which returns a share of any resulting profit to a central pot. This is proposed in the Unofficial Big Society Green Paper (www.bigsocietygreenpaper.org) and would really help business to create jobs whilst potentially helping to solve other problems.

Memo to Dave

On your return from the USA you will find that not much has changed. The unloved and scary NHS Bill mysteriously continues to win votes whilst alienating people. Social Enterprise continues to peck for crumbs around the capitalist feeding table that is public expenditure and the vast majority of people continue to look at all your 'reform' and 'change' and wonder why. Not why as in 'why are you doing it?', they're all reasonably convinced that you're doing it for your capitalist mates, but why as in 'where is the plan?'. They're wanting to know if it all fits together and if so, in what. Is it really an attempt at improving lives or is it fiddling while their Rome burns but someone else's Mammon is further gilded?

This is a valid question as it is becoming increasingly accepted that the current incarnation of capitalism has failed and yet you continue to prop it up. In a situation where your actions appear illogical people will naturally suspect impure motives. We have a short window of opportunity to produce a new world-class economic system from the rubble of 20th century capitalism. As Adam Smith might have said, the next system is unlikely to perfect, but with hindsight we should at least be able to make it better than the last one.

The Unofficial Big Society Green Paper (www.bigsocietygreenpaper.org) argued that social enterprise should be at the forefront of any new system. It contends that we should not try to change capitalism but force it to change itself, or die. We can very easily do this by the creation of a new social enterprise trading structure which measures social value and social return as part of the criteria for the award of any state contract. Christopher White's recent 'social value' bill goes half way to addressing this, but there remains a big gap and we allow too much capital to flow out of our system before it has reached all parts.

In addition, social enterprise is often a poor cousin to business, relying on handouts, grants and specialist funding to gain a foothold next to 'real' business. This is wrong and whilst there are many worthy attempts at improving access to funding and real contracts, these are always coming from the view that social enterprise needs a leg up because it is worthy or trendy. It's a bit big society, but apparently not interesting enough to be part of any formal policy. That needs to stop. Capitalism has become anti-social. It is anti-social enterprise and social enterprise needs to be seen as the purest form of Adam Smith's capitalism that currently remains. It needs to have pride of place in the pecking order before it is too late.

The next thing we need therefore is a social return bill, to go alongside the social value bill. An act that enshrines in law the obligation for any public body to measure the return of profit to a community from a social enterprise. This needs a very careful piece of legislation which defines social enterprise, gives it a structure within which to operate and ensures that all of its returns are key parts in the award of any contract. This will make anti-social enterprises think much more closely about how they operate and how they bid for business. It is not red tape, or an attack on capitalism, it is levelling the playing field between social and anti-social enterprise.

We have come some way towards it but have much further to go. The Green Paper also discusses ways that these returns can be co-ordinated to a much greater good, but more of that another day. I have just spent 5 years of my life battling against small p politics in a local setting, so I know how Steve Hilton feels, but don't give up on the Big Society if you really want one, just support it with a big plan. Soon.