The case for an independent Scotland retaining the pound in a currency pact with the rest of the UK is not clear, according to Treasury analysis.
As it was never envisaged that any country would leave the euro, the effects of such an exit would be felt worldwide
Deadlines have been set. Ultimatums have been delivered. The EU has given Cyprus until Monday to come up with €5.8bn to part fund its own bailout or have its financial lifeline cut off by the European Central Bank.
Unthinkable less than a week ago, the possibility of the eurozone losing one of its 17 members is now being discussed. Reuters reported that a meeting of eurozone officials openly canvassed the need to impose capital controls to insulate the rest of the single-currency club in the event of Cyprus leaving.
It was never envisaged that any country would ever leave the euro. There is therefore no template for an exit strategy that would prove painful for Cyprus and have potentially wide-ranging implications not just for the rest of Europe, but for the whole global economy.
The first stage of the process would involve the EU calling Cyprus’s bluff. At the moment, Cypriot banks are being supported by the European Central Bank’s Emergency Liquidity Assistance, which allows them to remain open for business. The moment the ECB pulls the plug, Cyprus’s banks will go bust. They have a €17bn cash shortfall, no equity and could raise only perhaps €2bn from forcing bondholders to take a haircut. The banks would shut and deposits would be worthless.
Stage two would involve the government in Nicosia re-introducing the Cypriot pound as legal tender. This would cause logistical difficulties, unless the government has stashed away piles of the old currency when it joined the euro five years ago. This seems unlikely, so the government would have to start printing new notes.
This would take time to organise and in the meantime the government would have to use euro notes re-denominated as Cypriot pounds. One way of doing this would be to over-print the notes in a distinctive way, as happened in Germany during its currency crisis in the 1920s. Nick Parsons, head of strategy at National Australia Bank said the capital controls on withdrawals from cashpoints would make this process simpler, since there would be fewer euros in circulation when the crunch came.
The government would then have to set an exchange rate for the Cypriot pound against the dollar and would probably set it at the level that existed before it entered the single currency. If the currency was allowed to float freely on the foreign exchanges, the pound would drop like a stone. If the authorities set a fixed exchange rate, the official value of the currency would bear not the slightest resemblance to its black market value. When Argentina abandoned its convertibility against the dollar in 2002, the peso depreciated by around 75% in the subsequent 15 months.
A plunging currency would lead to dearer imports, rising inflation and sharp cuts in living standards. The government would impose strict capital controls to prevent money leaving the country. It would also try to ensure that all transactions in euros ceased. Unofficially, the euro – along with other hard currencies such as the dollar – would circulate on the black market.
One additional problem would be whether contracts agreed in euros could be enforced. The concept of lex monetae means debts in euros would become debts in Cypriot pounds and settled at an exchange rate decided by the government in Nicosia.
So what are chances of this happening? Parsons says it is still unlikely but the risk is far greater than it was. He writes: “A few months ago I would have put the possibility of Cyprus leaving the euro at 1%. Today I would put it at about 30%.”
Proposed nuclear reactor in Somerset could be delayed by two years if competition directorate launches full-scale investigation
Britain’s planned nuclear reactor programme could be delayed for years, and the nation’s long-term energy policy thrown into turmoil, as European commission officials launch the first stage of a formal investigation into the use of taxpayer subsidies to support the development.
Sources in Brussels have indicated that Britain hopes to win approval for a multibillion-pound deal with French energy giant EDF at the initial stage, which usually takes two months.
But if after a preliminary investigation the EC’s competition directorate decides to launch a full-scale investigation, that would last at least 18 months and probably two years or more. Such an outcome is made more likely by reports that ministers and EDF are discussing a minimum or “strike” price for the nuclear-generated electricity of a little under £100 per megawatt hour – nearly double the current market rate. However ministers will be hoping that their regular meetings with EC officials will make it more likely that a full inquiry will be avoided.
Under the proposals, a nuclear power station – the first for a generation – will be built at Hinkley in Somerset, and the government will guarantee a minimum price for the electricity produced for 30-40 years, a deal which could cost customers a billion pounds a year or more.
News of the latest obstacle to the nuclear building programme comes before the expected announcement next week by the energy secretary, Ed Davey, of whether EDF has won planning permission for the 3.2 gigawatt Hinkley nuclear plant. He is widely expected to give the scheme the go-ahead.
Expectations are rising that Davey could also announce some details of the new contract, including the strike price, in what would be a useful counter to critics that the coalition is not doing enough to stimulate investment to boost the economy and tackle the UK’s threatened energy shortages.
A delay imposed by Brussels would cast new doubt on the £14bn project as it would be likely to make it harder for EDF to raise the capital needed until its contract with the government was fully approved. That in turn would delay the entire nuclear build programme, under which the government wanted 16 gigawatts of new nuclear power operating by the middle of the next decade.
“The government wouldn’t need state aid approval for nuclear if it wasn’t trying to subsidise a risky technology that could wind up costing more than the renewable alternative,” said Doug Parr, policy director for the anti-nuclear campaign group Greenpeace.
Maria Madrid, spokeswoman for Joaquín Almunia of Spain, the European commission vice-president in charge of competition, told the Guardian: “The commission is in contact with the UK authorities on this issue, but has not received a formal notification so far. We are discussing this issue. It’s confidential. We never communicate on preliminary discussions.”
The pound falls against both the dollar and the euro after figures show that UK manufacturing output fell by 1.5% in January.
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The owner of British Gas should be leading the debate on domestic energy security, not just relentlessly focusing on corporate enrichment
Centrica should have an important role to play in the debate over Britain’s future energy security but has disenfranchised itself in the eyes of the public by concentrating on short-term financial gain.
Its chief executive, Sam Laidlaw, says it is important that the group, which owns British Gas, makes a “fair and reasonable return” so that it can continue to make its contribution to society and to invest.
Quite so: but the balance is wrong, even accepting it is not always easy to marry up providing a public service – affordable energy – with need to retain standing with a City of London that measures everything in short-term financial gain.
Clearly the government does little to help by failing to provide a clear and detailed road map in the energy bill while refusing to accept that building a low-carbon energy network to keep the lights on and beat climate change is an urgent priority.
The defence industry gets £40bn annually from the Treasury, the rail service £4bn, yet 60% of the £4bn cash that the Department of Energy and Climate Change obtains goes into cleaning up old nuclear plants.
Is domestic energy security not as – if not more – important than building Trident submarines or having the destroyers to project British military power off the coast of Libya? Should not public money go into a national pump-primer, say a properly constituted green investment bank, if not – dare one whisper it – a publicly owned utility? There seems to be no objection to foreign state-owned businesses such as EDF of France working here.
Meanwhile the leaders of Centrica, which has a unique position as the old state gas company and one of the very few UK-owned suppliers, seem to look after themselves.
Annual profits, announced last week, rose 11% to £600m at British Gas and 14% to £2.7bn at the parent group just after Laidlaw came away with a potential pay and share award of more than £4m for 2011-12; Phil Bentley, the head of residential gas supply, will stand down with a £10m package of pension, shares and bonuses. All this while many of British Gas’s 15.7 million customers struggle to pay their bills.
Yet Centrica has also returned to investors more than £3.5bn in dividends over the past five years, at a time when it acknowledges the UK is in great need of that new lower-carbon infrastructure, and has put aside £500m for buying back its own shares – a move that even parts of the City regards as of dubious benefit.
The group is investing in the odd wind farm and North Sea gas field but it has also bowed out of new nuclear and vowed to build no new gas plants for at least four years, just days after the energy regulator, Ofgem, effectively warned of power blackouts unless extra power generation were brought on stream.
A series of fines from Ofgem has not helped the image of British Gas either. It is sobering to remember that more than 20 years ago the company was being accused of “sheer unbridled greed” by the Labour party. Things have improved, but some of the old arrogance remains. Pity. Centrica should be helping to lead a vital debate.
QE is the only show in town
Like a child handed a cream cake, manufacturers should be looking forward to the sugar rush that comes with the pound falling below $1.50. It happened on Friday for the first time since spring 2010. It could well keep happening: $1.45 could be just round the corner.
A low pound means UK exports will be cheaper to buy. A surge in sales to foreign markets could follow. Manufacturing could start to grow while the finance industry is circumscribed by new laws and rules, keeping its progress in check. The rebalancing of the economy that the government has so far failed to deliver could begin.
There are several Bank of England policymakers who will be popping the prosecco. Last week, they made a collective effort to talk down the pound. One of their number, deputy governor Paul Tucker, went so far as to suggest that the Bank could take the unprecedented step of introducing negative interest rates. Rather than pay high street banks 0.5% for keeping their cash in the Bank’s deposit account, it would charge, maybe 0.5%. This move is intended to encourage banks to lend their spare cash rather than make deposits in Threadneedle Street vaults.
More importantly, Tucker and his colleagues said they were still keen on quantitative easing. They could inject £25bn as early as Thursday after the monetary policy committee meets, adding to the £375bn the committee has already pumped into the system.
Not since last July has the MPC committed more funds to QE. After poor manufacturing output figures last week and data showing some of our big trading partners in deep and lasting recession – Spain in particular – they have every reason to act.
Yet the vote may be far from unanimous. Some MPC members may say the lower pound could be enough to give the economy a shot. Some are sceptical about whether more QE will be sufficient to entice high street banks to lend. But, in reality, with a chancellor sitting on his hands, QE is the only economic policy in town.
Disclosing corporation tax: it might just work
Remember the fuss when Barclays was forced by the Labour MP Chuka Umunna to admit it had paid just £113m in corporation tax in the UK in 2009, a year when it reported £11.6bn of profits? Umunna, now shadow business secretary but then a member of the Treasury select committee, obtained the figure after the then Barclays chief executive, Bob Diamond, appeared before the committee.
It caused a storm because banks were not required to disclose how much corporation tax they pay in the UK or in any specific geographic region. But it sparked Barclays to disclose that in 2011 it had paid corporation tax in the UK of £300m out of a total corporate tax bill of £1.6bn.
As it did so, it put forward the argument that trying to compare corporation tax across geographies is tricky, and trying to align a tax year with a financial year is close to meaningless. The argument, though, appears to have been lost.
Amid the fuss caused by the bonus cap being imposed by Europe, less attention has been directed at the requirement to disclose how much money banks make in each country from 2015. This is expected to be used as a lever to force them to pay more tax. It could be effective, as from January 2014 banks will need to report confidentially to Brussels how many people they employ in each country, along with their profits and the tax they pay.
As the reforms were announced, Tory MEP Vicky Ford said: “I believe it’s in the interests of banks to tell people how much they are paying in tax.” Indeed it is.
The government’s Work Programme, a multi-billion-pound scheme to help long-term unemployed people has performed “abysmally” according to Margaret Hodge.
See original here: VIDEO: Welfare-to-work scheme ‘abysmal’
Sterling continues to weaken against the dollar and the euro, with currency speculators betting the pound has further to fall.
More here: Pound falls against dollar and euro
The euro has risen against the pound and the yen as eurozone ministers prepare to discuss the currency’s recent strength.
Read more here: Euro rises as finance ministers meet