UKIP want Labour to win

Most commentators think that UKIP would prefer there to be a Tory Prime Minister and a European referendum campaign rather than a Labour PM. Not true.

The nightmare scenario for UKIP is that the Tories win, David Cameron wins some marginal powers back and manages to sell it to the country in the referendum.

In much the same way that the Scottish referendum was David Cameron's gamble in that would take independence off the table for a generation, UKIP think the same is possibly true about the EU.

Any way in which Labour win and deny us another referendum will further the calls for us to be out.


It's possible, though, that they could get us out of the EU sooner rather than later. Though, it would be a pretty big gamble on their part. In this scenario, they'd need David Cameron to win and hold the referendum. After a period of stability, we may be about to see a bigger Euro problem than we had two years ago.

EU interest rates are at rock bottom and it looks like there may be a period of deflation. At the moment inflation is 0.3% and looking to go lower. Growth is anaemic. Germany is faltering. France and Italy are sick. The ECB would have no options, it would be up to EU Governments to save their economies - difficult given their levels of debt!

Given this back drop we may actually see more convulsions than we did in sovereign debt crisis. If Britain can keep growing while the EU, including Germany, starts to really have difficulties then maybe the whole Euro and even the EU could be on the table. Maybe then we'd want to be out.

As I say, a lot of things have to happen for this scenario to occur. But you never know.

Squiffy.

The Eurobind

This morning there was news of the bailout for Ireland, and just now the Greens have decided to pull out of the ruling coalition in January and try to force a new election. There's a lot of comment in the newspapers about whether the Euro was to blame or not for Ireland's predicament.

It's my belief that the single currency is partly to blame for Ireland's position. The other reason being that similarly to the UK, Ireland also had too lax bank regulation which led their banks to allow lending to get out of hand. Both the UK and Ireland had too low interest rates during the boom period, for the UK only slightly too low, in Ireland they were far too low.

The Euro, one size fits all interest rate fed the Celtic Tiger its raw meat. The low rates allowed the Irish property boom to take hold and gather pace. Paid for by increased bank lending. The boom in Ireland was far too great but there was nothing the Irish Government could do about it, other than raise tax rates sky high - which would have caused a great amount of unemployment.

There are three main levers for macro-economics; Interest rates, currencies and fiscal management (tax and spend). The Euro takes away interest rates and currency management which meantfor Ireland that the interest rate was too low during the boom, too high now and there is no chance to independently devalue. In the UK we have nearly zero interest rates and an ability to devalue and print money!

The Euro was launched with a fanfare in 1999, and seemed to function well in the boom years. Especially for those countries which are now suffering. For Germany growth was a bit lacklustre and has meant they are in a better position now. They are getting resentful now that they are being asked to bail out for countries which are on the brink. The Euro has not worked out well for the strong economies or the weak.

Several things can happen now.

• Struggle on, propping up Ireland, Greece, Portugal and Spain.
• Allow the PIGS to withdraw from the Euro.
• Reform the Euro taking more powers to the centre.
• Fold the Euro and try to keep the EU afloat.

My feeling is that the ruling elite of the EU have too much at stake in the project to let it fall apart. They will try to take powers away from National Governments to set budgets and tax artes. Will the people of Europe allow it though? I think some, including Germany, will have major problems with it. Civil unrest and more Governments could fall.

Interesting times ahead!

Squiffy.