Comment, analysis and other offerings from Wednesday’s FT,
Martin Wolf: Time for Germany to make its fateful choice
“Perhaps future historians will consider Maastricht a decisive step towards the emergence of a stable, European-wide power. Yet there is another, darker possibility … The effort to bind states together may lead, instead, to a huge increase in frictions among them. If so, the event would meet the classical definition of tragedy: hubris (arrogance), ate (folly); nemesis (destruction).” I wrote the above in the Financial Times almost 20 years ago, says the FT columnist. My fears are coming true. This crisis has done more than demonstrate that the initial design of the eurozone was defective, as most intelligent analysts then knew; it has also revealed – and, in the process, exacerbated – a fundamental lack of trust, let alone sense of shared identity, among the peoples locked together in what has become a marriage of inconvenience.
Paul Johnson: Avoid 50p distraction to fix broken tax regime
The past week has seen much debate over the 50p rate of income tax. Tax debates often focus on these single, totemic issues – be it the basic rate of income tax, or the tax on a litre of petrol, writes Paul Johnson, director of the Institute for Fiscal Studies. But, important as these are, they are only small elements of a wider, flawed system. At a time when Britain’s economy badly needs a boost, much wider tax changes are now needed. The most comprehensive review of tax policy in 30 years, the Mirrlees review, published on Wednesday, argues the tax system has to be seen as just that: a system. It must be coherent as a whole, and the various bits need to join up if it is to be fair and efficient. Equally, it must be designed on the basis of evidence – one of the big problems about the debate on the 50p rate. To the extent that we can deduce from past experience, it seems unlikely the 50p rate will raise much. But in truth we simply don’t know.
John Kay: Taming the banks: long overdue or utter folly?
If you think, as many still do, that the core activity of banks is gathering savings to oil the wheels of industry, then you are sadly out of date, says the FT’s John Kay. Large businesses, overall, generate more than enough cash internally to cover their investment needs. Small and medium-size businesses badly need access to bank finance. They have been woefully short of it since the credit crunch. But the amounts they need are very small relative to the current scale of financial activity. The assets – and liabilities – of British banks exceed £6,000bn, four times the country’s income. Lending to UK businesses – to manufacturers and retailers, construction companies and road hauliers, accountants and farmers – accounts for about £200bn of that, about 3 per cent of the total.
Lex on the Ted-spread alarm
Welcome back, Ted. Four years ago, as the US interbank market came under stress, financiers learnt about the Ted spread – the gap between three-month Libor interbank rates and US Treasury bill yields. Usually negligible, the spread rises when banks start to lose faith in each other’s ability to repay loans. A great measure of trust, or lack of it, among banks, it is ignored at all times other than during crises. That Ted is back in conversation is alarming. With speculation spreading that European banks have problems accessing funds, the Ted spread is the clearest available measure of stress, just as it presaged the credit crisis in 2007. Europe’s Ted spread (using Bund yields and euribor) is clearly elevated, reaching 140 basis points on Monday for the first time since early 2009, when banks were still in deep crisis. But its US equivalent, which generated European banking stress four years ago, remains at only 33 bps. European banking stress has not yet caused transatlantic contagion.
Ray Takeyh: Seize the moment for a new golden age of coercive diplomacy
It has long been a truism among pundits that coercive diplomacy is imprudent and usually ineffective, writes Takeyh, a senior fellow at the Council on Foreign Relations. Diplomatic history suggests that it is nearly impossible for one country, however powerful, to compel another to change its values and outlook. The US may be stronger than Iran, but it would be wise to seek a negotiated solution to the nuclear impasse. The answer to the Syrian imbroglio is to craft a power-sharing arrangement between Bashar al-Assad and his detractors. Such sentiments ignore recent changes in the international system that now make diplomatic pressure and economic sanctions effective in disciplining adversaries. We may be entering an age where the US and its European allies can achieve their maximalist objectives in the Middle East without resorting to force.
Editorial comment: The Fed’s franchise
Democratic Congressman Barney Frank, co-architect of the Dodd-Frank financial reform act, is renewing his push to curb the influence of the regional presidents of the Federal Reserve system. He believes their votes are skewing Fed policy. He is partly right. The voting and appointments procedures are anachronistic and should be modernised. But it is a shame to embark on that reform by specifying in advance the decisions you want to emerge. Normally, 12 votes are cast in meetings of the federal open market committee, the Fed’s policy-making body: seven belong to the chairman and his board, one to the head of the New York Fed, and four, by rotation, to presidents of the other regional Feds. (At the moment the board has two vacancies, so just 10 votes are cast.) Mr Frank complains that the regional presidents are chosen by a flawed method, and that they have tended to be unduly hawkish on inflation.
Markets Insight: John Plender – Biggest test of central bank credibility is to come
Last week’s move by the Swiss National Bank to in effect peg the Swiss franc to the euro, together with the dramatic resignation of Jürgen Stark from the European Central Bank, underlines the huge risks that are now being taken with central bank balance sheets, writes the FT’s John Plender. For the Swiss, the SNB’s declaration of willingness to buy unlimited quantities of foreign currency to address the strength of the franc was an attempt to shed haven status in a sovereign debt storm. The same was true of Japan’s intervention in August to try to stabilise the yen. The risk is that if the markets decide to test the central bankers’ resolve, domestic markets will be flooded with liquidity, leading to asset price bubbles and/or inflation. At the same time the currencies of other havens such as Sweden, Norway and Singapore could come under increasing upward pressure, further raising the stakes in this potentially inflationary game.