Do you believe in Merkels? | FT Alphaville

Do you believe in Merkels?

At first sight, this looks mad. Lending to the UK government, in charge of the clapped-out British economy, now returns less than lending to Europe’s most successful country.  Worse still, the yields on gilts are measured in sterling, a chronically weak currency, so not only does your money earn less, you’ll be repaid in something which history says will have been devalued by the time you get it back. Oh, and by the way, inflation is 3 per cent above the yield, making the internal devaluation painful, too.

Something is seriously awry here, and two events this week offer clues to why German government 10-year paper yields more than the equivalent UK stock. On Wednesday the markets were spooked by the failure of an auction of 10-year German debt. Those in this arcane world struggled to understand what it meant, so there’s little hope for the rest of us. It’s either bad news, or very bad news, probably depending on whether you’re short of German bonds.

Within minutes, confusion was worse confounded by a Barroso bomb. The latest wheeze from the president of the European Commission has a splendidly Titanic-like quality. As the good ship euro lists alarmingly in heavy seas, the captain’s contribution is a proposal to design another boat. Without conscious irony, the proposal is dubbed “stability bonds” – debt backed jointly and severally by all the member countries in the euro zone. These would require promises of fiscal continence from every government. Presumably the promises would be even more binding than the binding promises made by, say, Greece, when it joined the eurozone in the first place.

Captain Barroso seems not to have noticed how dire the position is. “It is important to show to public opinion and to international investors that we are serious about stronger governance in the euro area, both in discipline and in convergence,” he said, unveiling his latest wheeze. If only. His crew had been asking for a 5 per cent spending rise. Discipline is for others, clearly.

He might as well have sung “I believe in miracles”, and the Germans were quick to knock him down, but the damage had been done. The combination of Barroso’s fantasy and the bund auction failure has caused investors to ask what exactly they are getting when they buy any euro-denominated paper.  UK gilts are obligations on the British government, which has the longest record in the world of meeting them, albeit in devalued pounds. The euro depends on a disparate collection of highly variable European countries, some of which are clearly in no state to honour any obligation.

It’s highly unlikely that the Bundesbank will fail to make payments when they fall due, but this week has exposed a qualitative difference between a true sovereign currency, and one designed by committee, held together by ideology and political sticking-plaster. This uncertainty has bred the euro discount, and the result is the bizarre spectacle of cheaper money for the UK government than for the Germans.

A diet for fat cats

We’re all in this together (except for the top 1 per cent). It’s hardly the most compelling political slogan, but it’s a fair description of our current slough of despond, as the Chancellor delivers his first Budget where he can’t plausibly bang on about it being Labour wot landed us in. Next Tuesday’s statement will contain plenty of dire news, courtesy of the OBR, an organisation too young to have been corrupted by the Treasury machine into taking dictation.

The misery can be eased, and the populace comforted, if only Mr Osborne could find a way of making the fattest cats pay more. He underestimates the depth of feeling against this thin layer of full-fat atop the skimmed milk the rest of us are on at his peril. Pay rises to FTSE100 directors, bonuses for bankers at loss-making rescued banks, and rewards to departing failed executives (in both public and private sectors) all fuel the resentment. Austerity is bearable if everyone is paying. If some are seen to escape, then the likely result is something much worse than a few tents outside St Pauls.

The shareholders in large companies have proved incapable of restraining executive pay inflation. This is understandable, since indignant protests from individual shareholders are easily brushed aside. The people with the votes are not real shareholders at all, but fund managers who are themselves paid similar, life-changing sums, often regardless of performance. They have no incentive to stop the gravy train, since it’s not their money that’s being spent, but that of their semi-captive clients and policyholders.

So here’s a modest proposal: amend the law so that no contract with a director can be binding on a company until it has been approved by shareholders in a general meeting. It would be simple to implement, and would immediately chill the more egregious demands of incoming senior executives. The fat cats with the votes would be forced to justify why they were not voting against the magnificent package for an incoming chief executive. In practice, of course, the directors will have squared the deal with the biggest voters ahead of the meeting, but the change would at least rebalance the odds towards the company in the negotiations: “Of course we think you’re worth every penny, but the shareholders just won’t wear it, old boy.”

Don’t say green, say “affordable”

The surest sign that some high-profile initiative is going wrong is when it’s rebranded. We’ve finally noticed that green energy production is basically subsidy farming, and we’re paying the subsidy. So the fanatics in the Department of Energy and Climate Change (slogan: We want more of the first, and less of the second. Or is it the other way round?) have ditched green energy for “affordable” energy.

This is a dead giveaway. It’s in the same category as the security man asking “Can I help you?” when he means the opposite. Affordable green energy may exist one day, but not any day soon. Poor old Hapless Huhne may still be in the driving seat at the department, but his assertion that his green-about-the-gills energy policy will deliver bills “lower than they otherwise would have been” is claptrap.

Green energy is hugely expensive, so its advocates at the IEA have been reduced to selling it as a diversification of sources. The fact is, as Reuters’ John  Kemp points out, that “Political will to tackle climate change by curbing greenhouse gas emissions, never very strong, has all but disappeared across much of North America and Western Europe in the last twelve months.”

It only persists in isolated pockets, including inside Huhne’s head, as he desperately tries to square greenery with reality. He might read Nigel Lawson’s response to his latest policy announcements for a better perspective. The lights in the UK will be kept on by shale gas, either found indigenously, or imported at low prices, reflecting the emergence of massive supplies elsewhere. If our dear Energy Secretary would only grasp that gas is part of the solution, not the problem, he may yet save us from 100,000 windmills, and himself from the chop.