Hello world. Today’s read touches on a poignant issue and that is the property market in the UK. I’ve previously touched on this issue here where I spoke about the dramatic effect gentrification is having on London. This piece has similarities. The report is from Transparency International UK and they make suggestions that could deter potential criminals laundering their dirty money into the UK property market.
Property in London is a secure investment as the price rarely drops due to excess demand and limited supply. Moreover, if precaution is not applied then inflationary pressures will force most Londoners to look elsewhere for properties which is the reality that most people in London now face, the capital is too expensive for most to afford and it does not help when London is such an attractive place for wealthy foreigners who view properties as secure investments. Market forces do not have to consider morality as they are not actually doing anything wrong from a business perspective; but caution should be applied as the social ramifications could lead to disillusionment from many Londoners, especially those on lower incomes.
This is a special piece about the SNP’s attempts for a Currency Union with the rest of the UK. It is flawed and the implications could be drastic. All patriotic rhetoric aside, the Scottish people should be careful of what they wish for.
Without question the potential breakup of the United Kingdom of Great Britain and Northern Ireland is a monumental and truly unique event. The Scottish people have been granted their request for the right as Scots to self-determination. This would result in much greater powers shifting away from Westminster and into the Scottish Parliament.
From an emotional and patriotic perspective their cries for independence are fully justified and understandable; the fact is Scotland was an independent nation a very long time ago. Most people in Scotland do not consider themselves British and feel disillusioned with the decision making process over four hundred miles away in Westminster. This is not a matter of mere geography, the distance purely emphasizes the point that they are culturally their own people.
It is this reason why the SNP have completely sold the Scottish YES campaign short by seeking a currency union with the England. If we analyse this call for ‘independence’ how independent can independence be if your currency; the common factor and medium that binds the market based society together, is determined by the same people you are claiming to want to leave? Surely that creates a more dependent nation than before?
Currency union is what the Eurozone is based on. Because the ECB (European Central Bank) controls all monetary policy (interest rates & supply of money) across the entire region. Nation states are rendered somewhat useless to self-determination when it comes to economic planning, specifically fiscal policy (government spending and taxation). Therefore, the ECB must always factor in contrasting economies when deciding what interest rates will be. Think of large economies such as Germany and France and then smaller economies such as Portugal and of course Greece.
Hypothetically, the ECB may raise interest rates across the Eurozone in order to curtail an economic boom. This could help the nations that are booming at a higher rate. Booming in the sense of higher and more potent economic activity. This is certainly possible when you look at just how different the economies are in the Eurozone. Some nations may benefit from higher rates of interest, whilst some may suffer. It will help some nations and hurt others.
This is a very realistic scenario for Scotland. All patriotism aside and let the facts dictate. Several businesses such as RBS, Lloyds, Standard Life and others have all stated they are in unwavering support of the Union and will leave Scotland if they get their independence. Firms such as Next and John Lewis suggest that Scottish versions of their stores could have to increase prices in order to maintain price stability with the rest of the union. Can you imagine Scottish people driving to Northern England just to save money for the same goods and services? This could boost England’s economy and deplete Scottish business in the long run.
There is a simple and rational solution and it is a genuine surprise that the SNP have not considered a fully independent Central Bank and Currency. Rather than seeking a currency union with the UK why not create your own? This is what a truly independent Scotland deserves. This hybrid, this poorly choreographed collaboration between two neighbours is not independence. It is dependence. This top-heavy relationship is highly unlikely to work for Scotland. As the evidence suggests for currency union in the Eurozone, (Greece, Spain, Ireland and Portugal) without fiscal AND monetary union determined by one single body tailored to the needs of your own economy there will ALWAYS be an imbalance. Mark Carney accurately described a currency union as “incompatible with sovereignty.” The SNP have however suggested a fiscal framework to avoid a Greek and Spanish like currency imbalance situation but it simply does not go far enough. The Union have made it clear what their view is and they want Scotland to remain. They have no obligation to make special arrangements for Scotland.
For true, unaltered and FULL independence Scotland require full control over both fiscal (government spending) and monetary (interest rates) policies. Without control over both Scotland need to ensure they have enough of a thriving and stable market to ensure their economic activity does not stray too far from that of England if they want to use the Pound Sterling. It will be very difficult to maintain that balance however, especially considering the unwavering stance from the Union.
Being Scottish is of the heart and mind and not necessarily of the ballot. Of course officially being an independent nation and having full national recognition is something to savour and for Alex Salmond, he gets to write his name into history forever. It should be approached with caution because the SNP’s approach lacks the real vision and authenticity the Scottish people deserve. If the Scottish economy does not create enough well paid and productive jobs in both short and long-run, if it does not open itself for real and beneficial investment then Scotland will suffer.
Good luck to the people of Scotland no matter what the outcome.
London is undergoing rapid transformation. It has been the case since the mid-1990s and it shows no signs of slowing down. With this upsurge of development are qualities lost in the areas that are developed? Are the newer traits and trends in developed areas better than what was there before?
Savilles
London Mayor Boris Johnson has been a stark proponent of inviting wealthy foreign investors to London. In October he suggested that VAT and import tax should be relaxed for our foreign neighbours in order to encourage Foreign Direct Investment (FDI).
“VAT and import duty – those it seems to me are classically things that can be resolved by growing trade and co-operation between London and China, London and Beijing. We need a proper, thoroughgoing free-trade agreement. If the EU won’t do it we can do it on our own”
If this were to occur, many non-domiciles would be spending even more of their wealth in London. The idea of facilitating foreign wealth on new enterprise opportunities in London is one fully supported by the Mayor and several other politicians, including Chancellor George Osborne. The video below outlines some of Johnson’s plans for London. When you combine the Right To Buy scheme proposed by the Government it could be suggested that both the London and National government are looking to create another property boom.
The idea of new business, new stylish housing developments, newer communities and a new beginning for those who concur with the Mayor strike a positive cord. The fact that a prosperity bomb if you like, can explode and a plethora of new businesses can suddenly replaces older ones surely translate to a better, more profitable society. The fact that bigger businesses seek to expand to areas that are ripe for development ensures that plenty of jobs will be created, more of us will work and in a macro sense the economy will grow. Surely this is what we desire….
Or is it the case that newer developments and everything associated with it impose a revised culture that virtually replaces the existing one. Ensuring that this newer culture, this different way of life that imposes itself on existing residents is cohesive with the established culture is not usually a priority for developers or investors. In fact you could suggest that their priorities take precedent because their interests are deemed more important and their main priority is profit maximization. Much of the rhetoric is aimed at what is coming, what the future holds; new developments rarely acknowledge the qualities that the area had or look to uphold or maintain some of the non-monetary merits a community had. So residents that reside in areas that are listed for development are often left marginalised because the rate at which they usually have to adapt is relatively quick and it could be suggested that they no longer feel they are part of their community.
London is undergoing rapid transformation, many people welcome the new age of “prosperity” and many view it as an inevitable outcome of what our society eventually leads to. Nevertheless, there is a growing concern that the rate of change tends to strip away some of the qualities some communities once had, qualities that cannot be monetized, nor measured, nor necessarily tangible, but certainly potent and very much real.
This movement of people towards inner city London is peculiar because it tends to be to areas that were written off by several, deemed not fit for purpose by some, but home to so many who are now marginalised. What is even more striking is the fact that property prices, both rents and house prices are increasing. So demand is inelastic, in the sense that it is relatively unresponsive to a change in price. Therefore if you are a landlord or a developer the profits are virtually guaranteed due to this wave of perpetual inner city London demand.
New Dwelling house pricesNew Dwelling house prices
Both graphs illustrate the rise and rise of property prices and the second graph clearly highlight the disparity between London and another large economic area: the North West.
According to the latest Census, Newham (East London) lost 38% of its white British population. This does suggest that many of its residents are opting for areas such as Essex to reside. On the contrary, between 2001 and 2011 Brixton, an area that used to be associated with a predominately Caribbean demographic has seen ten continuous years of increases. The same is noted in areas such as Hackney, Wandsworth, Camden and Islington. Moreover, Stoke Newington and Dalston have had increases from 15% in 2001 to 26% in 2011. What this highlights is that inner city areas ( mainly Zones 1 & 2 on the Tube map) have gradually become more accessible and more appealing to many.
My qualm lies with the fact that this movement of people inflates prices of rents, property, goods and services and it leaves existing people, many of whom have lived in that area for a long time financially constrained. Should more be done in order to reduce the negativity associated with prices you can no longer afford? Or does the onus lie with the individual? Clearly, this conundrum is not a priority for a government, especially this Tory led coalition that favours individualism and self-sufficiency. They have not hid the fact that they are looking more people to buy their homes. Perhaps they are merely continuing a legacy they prospered from so it is a continuation of what they believe in. It should be noted that I personally believe in helping yourself and becoming self-reliant, but helping each other is critical to upholding what is left of any community. This does seem to be eroding rapidly however. If you can unite and help one another, you are helping yourself whilst helping others and that is the current that binds a community. But this new wave of social cleansing and this message sent out by property developers and the government of profit over people gears our society for something that we are just at the beginning of. The future of London seems to be gearing towards only those that can afford it and prices do not seem to be going down. It will be a shame if the vast majority of London transforms into a city where only those with enough money can afford it. The way government policies are aimed, market power is structured and consumption trends are there only seems to be one outcome. The next twenty years will see the London demographic rapidly transform.
In my previous post I began by drawing some similarities between the EMS currency crisis of 1992-3 and the current Euro zone crisis today. This piece is a continuation of that discussion. I shall be elucidating further details on the EMS and shedding further insight on how the damage from the current crisis could have been reduced significantly.
The Cypriot banking system not fared well throughout this episode.
The Delors report draws similarities to the Werner Plan[1] of 1969. Both proposals advocated for the idea of a united European union that would allow the movement of capital and labour to move with considerable ease, which in turn would be facilitated by the adoption of a common currency. Both documents are therefore imperative to the realization of the EMU. The current crisis in the Euro zone highlights some of the shortcomings of the proposals. Some of the recommendations that were encouraged in the Delors report could be viewed as potential reasons as to why the Euro zone is in a precarious position today. Firstly, the Delors report suggested the establishment of a European System of Central Bank (ESCB). Although it was and remains an exogenous agent of the European economic system, the similarities of other central banks stops there. Arguably, one of the most critical features of most a central banks is the fact that most central banks are the lender of last resort. The current Euro zone crisis has highlighted what can now be viewed retrospectively as a limitation within the Delors proposal. French monetary authorities have argued that the current Euro zone crisis could be aided significantly if the ESCB could buy Euro zone debt.
“The best way to avoid contagion in countries like Spain and Italy is an intervention or an announcement that a lender of last resort could intervene.” (Baroin 2011)
German authorities are notoriously opposed to debt monetization because of the inflation and therefore potential hyperinflationary pressures it could bring to the common currency. Therefore, the current crisis is a reflection that the ESCB do not have enough monetary control the deal with a crisis of this magnitude.
Both monetary and fiscal harmonization was not only a goal; it was a necessity if European ministers were to achieve their aim of a closer economic zone. If one is to critically assess the Delors report, it could be argued that there may have been too much of an emphasis on monetary integration and evidently not enough focus on fiscal integration. The Maastricht Treaty[2] however identified the need for fiscal stability within Europe and the Stability and Growth Pact (SGP) made several recommendations in order to promote both monetary and fiscal stability. Dimitri Syrrakos suggests that the SGP would prevent nations from needlessly resorting to certain monetary policies that could undermine the creditability of the common currency
“Once the countries were eligible to participate in the single currency they would not resort to policies based on monetary laxity, as this would damage the credibility of the new currency.”
The intentions of the SGP were understandable; any union that would amalgamate several contrasting economies needed a stringent fiscal framework in order for it to function appropriately. If we analyse the current EMU crisis, the authenticity of the SGP is in question because strict sanctions were to be imposed on any nation who did not adhere to the ‘strict’ conditions set by the EU. If this were the case then several nations including Germany, Italy and Greece in particular would have been punished appropriately for their fiscal mismanagement. Former UK Prime Minister John Major speaking to the Financial Times in November 2011 suggests that:
“Southern states over indulged on low interest-rates and racked up debts. When Germany and France over-stepped the criteria without any penalty by the commission, the criteria became toothless.”
It is fair to suggest with hindsight that sanctions on nations who had failed to abide by the framework set by the EMU would have almost minimalised the severe economic damage that has beset the Eurozone today. Had sanctions been imposed some ten years ago, or even five, then the severe problems that appear only to be appearing now could have been dealt with then.
GDP to debt ratio (%) 2007-2010
Nation
2007
2008
2009
2010
Germany
65.2%
66.7%
74.4%
83.2%
Ireland
24.9%
44.3%
65.2%
94.9%
Greece
107.4%
113.0%
129.3%
144.9%
France
64.2%
68.2%
79.0%
82.3%
Spain
36.2%
40.1%
53.8%
61.0%
Italy
103.1%
105.8%
115.5%
118.4%
Portugal
68.3%
71.6%
83.0%
93.3%
With regards to the realization of the EMU, the SGP was implemented in 1997, ten years before the data range in the table. Despite a prerequisite of national debt being less than 60% of GDP levels, the table highlights the inability of Euro zone members failing to deal with nations not following the fiscal framework. This tacit failure to impose sanctions on members allowed certain members continue to let national debt to grow until it became an apparent and uncontrollable problem, hence, the systemic failure of the system itself. Clive Cook is one of several commentators who have critical views on not only the SGP, but of EU governance in general,
“Remember the EU’s vaunted Stability and Growth Pact of 1997, which supposedly put limits on public borrowing — and which Germany, by the way, violated? The same syndrome is evident today. Write a new rule now, worry about enforcing it later. This has been the hallmark of EU governance.”
Moreover, this has been a consistent theme that has underpinned EU and Euro zone governance. Despite apparent mechanisms being in place to prevent severe economic shocks, Euro zone nations appear to have repeated the same systemic errors, the only difference with the EMS crisis of 1992 and the current crisis is the severity, the current crisis however appears to be of a much greater magnitude.
The fundamental aim of the EMU was to integrate several economic zones, politically and more importantly economically in order to reduce exchange-rate uncertainty and provide a zone of cohesion as opposed to a network of conflicting monetary and fiscal interests. A solution to the current Euro zone crisis is not only the desire of policy makers, but it is a fundamental requirement because if the Euro zone were to collapse, the consequences would be catastrophic. Fiscal harmonization is required if the current Euro zone crisis is to be resolved, this was the case following the collapse of the EMS. The EMU may be politically viable because it has increased European integration, economically however it may appear no more than a ‘utopian’ idea. Dinan suggests the necessity of EMU was “debatable on economic grounds.” (Dinan 2005). Following the failure of the EMS, ministers appeared to recognize the errors that had damaged the economic system, and, policy appeared to identify the errors that had damaged the European economy. What is ironic about the current crisis is that there are a number of policy issues designed to prevent the problems that realistically could destroy the entire EMU or even the EU. Had the SGP rules been implemented, the problems that have only come to fruition in the last two years or so would have been tackled. The Euro zone crisis is an extraordinary economic crisis, whatever the outcome, European economics will never be the same again.
[1] The Werner Plan could be seen as the prerequisite of the Delors report of 1989. They share similar themes and raise a number of concurrent issues, however, the adoption of the Werner plan’s proposals and subsequent dismissal in 1973 does suggest that Europe was not ready to adopt such proposals.
[2] The Maastricht treaty was based on the Delors Report and the main objective was to complete the market integration with the creation of the common currency.
The Conscience Blog 