Euro Trash

The past few weeks have not been happy ones for that rare creature in the UK, the Europhile, a breed that will soon be put on the endangered species list alongside the corncrake and the greater horseshoe bat. If not endangered, anyone expressing pro-European sentiments in most pubs in England will definitely be a threatened species; indeed the Europhile may need police protection like that other type of 'phile' who is not allowed near schools.  In Scotland, Wales and any part of Britain where more people work for the state than private business, together with selected enclaves of London where the doors are all the same shadow of Farrow and Ball (mouse back) and everyone reads The New Statesman,  there are a few pro-Europeans left; but otherwise support for the European Union has collapsed to an all time low. How is it is that the Euro dream has turned to trash?

The Europhile - a rare species

Born of the very reasonable desire to stop Germany trampling over national sovereignty and insisting that everywhere be run like the Reich, the European Project seems to have come full circle to a point where Germany ignores national parliaments and keeps telling everyone what to do, in this instance imposing self-defeating austerity measures.  The Euro, the currency union without a state, has proved to be a catastrophic mistake on a par with the Captain of the Titanic's decision to steer his ship right next to the iceberg to restock his ice-bucket: it's just not worth the grief. Instead of promoting prosperity , shackling the turbo-charged Teutons to the work-allergic Greeks has created an infernal wealth destruction machine about as sensible as burning €100 notes for fuel. Mind you, if the crisis continues much longer, any Euro notes issued in Athens will be being going up in flames.

Back when the Euro was created, some of us, including yours truly, knew it was a stupid idea to pretend that the Portugese or Greek economy should have the same currency and interest rates as Germany. I arrived at this brilliant insight by not being a massively overpaid bond trader and taking a package deal to Crete. My conclusion was that Greece was a lovely place to take a holiday, but given that its citizens struggled to run a pedalo business on a crowded beach in high season and the country had a political class which made FIFA officials seem models of probity, it was not the wisest call to lend them billions. Or if you did, make sure you charged a sufficient premium for the risk or NBAARGCF rate (not being an anally retentive German control freak). Naturally, those clever bankers and bond traders decided to buy Greek debt at only a small fraction above German bonds. Yes, the more stories you hear like that, the more you feel a Lenin-style banking reform is in order: shoot a few 'pour encourager les autres'.

Unfortunately executing bankers, no matter how much fun it might be (especially if broadcast live as Who Wants to Shoot a Millionaire?) is illegal and against the European Convention on Human Rights. Those bloody Europeans again!  There is, however, much more to the Euro crisis than just money. It is really about who we want in charge and no one, not even the pro-Europeans, voted for the current situation where the European Central Bank is committing vast sums of money on behalf of member states whilst being accountable to no one.

The Hellenic Handshake 

The Greek government has taken huge loans at absurdly low rates, with no prospect of paying back the money, yet its people cannot chose the rational course of default and exiting the Euro. The Germans, were it not for war guilt, would have called time on this madness long ago; they too did not vote to work and save so that the Greek elite pay no tax and its civil servants retire at 55. Regardless if they get all the sun loungers in the Med, another €8 billon bailout is a bridge too far.

UBS has just published a report claiming the break up of the Euro would cost both Germany and Greece 40% of their GDP in the first year and 15% each subsequent year. This is the same bank whose trader just lost them €2billion in unauthorised deals, was fined $780 millon for helping US citizens avoid tax and lost the most of any Euro bank in the subprime debacle, a cool £14.4 billion to be precise. Maybe we can do without this kind of expert advice? The truth is that many countries including Iceland, Argentina, Mexico and Russia have bounced back after default and devaluation. It's the dirty secret that must not get out, sometimes not paying back what you owe works out fine.

Bizarrely even anti-Europeans are now suggesting the only way to save the Euro is full political union, which is an extreme version of the sunk money fallacy. A good example of this faulty logic is paying for expensive theatre tickets and sitting to the end of the show even though you hate it, because...well you want to get your money's worth. This seems to me explain why many of the audience remain to the bitter end of Lloyd-Webber's musical atrocities (and if even they wanted to leave, the coach won't be setting off to Birmingham until 10.30 p.m. anyway).

The truth is the money lent to Greece is gone, as is a percentage of the money lent to Ireland, Spain and Portugal, so why not accept it and move on? With capital controls and tight regulation of the financial markets, breaking up the Euro may end up saving us a fortune.  And forgetting the numbers for a moment, none of us voted for Angela Merkel, not even a majority of the German electorate. We're Brits, let's stick to our own home grown bunch of useless politicians.

Narrow Banking

In recent years, everyone who didn't work in the financial sector  had to learn a bewildering array of new terms such as CDS, CDO to discover why were all FCUKD. Financial armageddon threw up novel buzzwords like toxic debt which is actually a polite way of saying a 'piece of crap'. In fact one Goldman Sachs employee used that very phrase to one of his colleagues when describing a  Goldman's securitised debt product known as Timberwolf. This debt bundle is currently the subject of numerous lawsuits and now a probe by the Serious Fraud Office.  I imagine the buyers of Timberwolf wish they had bought actual wolf shit instead of American subprime mortgages.

So why mention all of this now? The ICB, the Independent Commission on Banking, is proposing that we split retail and investment or casino banking. To compare investment banking to casinos is a slur on casinos who are a lot more ethical and do a lot less damage to our collective wallets. Splitting regular retail or consumer deposit taking banking from exotic trades involving derivates is what is called 'narrow banking'  or 'common sense'. The banks don't like it, so David Cameron wants to water down the proposals. I'm probably being unfair in suggesting there is a relationship between the Tory party's funding coming almost exclusively from financial services firms and David Cameron's desire to neuter banking reform even after the worst financial catastrophe in British history. There's no link at all. I'm sure George Osborne is similarly independent. When he leaves government, I doubt that there will be any connection between his taking a  lucrative directorship in a bank and his opposition to structural reform whilst in government.

Banks don't like the split between retail and investment, because it reduces profits. It reduces profits in the same that forcing a ferry company to provide lifejackets reduces profits or putting fire exits into commercial properties hits the developers' margins. Sometimes you have to take a bit of small short term pain to avoid long term catastrophe.

If you think about this way, banking reform is a like a vaccination: putting up with one little prick, the BCG jab, to avoid a much bigger prick later on. In case of BCG, then it's tuberculosis, in the example of banking, the bigger pricks would be Bob Diamond, Lloyd Blankfein  and friends. Now I realise that comparing bankers who oppose reform to lethal pathogens such as TB is a little unfair. The TB bacterium is just doing what comes naturally. On its CV, its skills are just 'being a TB bacterium' and even if  it went down the job centre, not even Currys Digital would hire it as Saturday staff.

Bankers on the other hand have choices. Bob Diamond of Barclays, to pick someone entirely at random who said last year that banking bashing had got out of hand and also recently hoped the coalition didn't lose its nerve on cuts, whilst pocketing a £13 million pay cheque for moving other people's money around, that Bob could do other things, he has choices. I'm sure his CV includes a range of skills. He could - and this is just friendly advice - go for a really long walk and not bother coming back. (This is the same Bob who runs a bank that managed to pay only £113 million in UK tax on £4.6 billion profit, in 2009. So I guess he's good with numbers if nothing else).

Sadly she dies of anthrax in the next scene. 

Narrow banking matters if we want to vaccinate ourselves against financial epidemics. The new blockbuster Contagion takes as its premise a disease for which there is no known cure. It is a terrifying, depressing vision of future apocalypse with the only light relief being Gwyneth Paltrow's sudden death at the beginning of the film.  I predict a box office smash and suggest that producers introduce this plot twist into all of Gwyneth Paltrow's films; it's hard to think of one which would not have been vastly improved by her character's death within the first ten minutes. Same holds true for Keira Knightley.

But I  digress, the important difference between the fictional contagion and our affliction is a known cure exists: narrow banking.  Mr Cameron, please for once, try to do the right thing. Spike Lee seemed to think it was throwing a bin through a pizza parlour window, unless I missed the moral of that film. Don't throw anything through shop windows, we've only just got them fixed after the riots. Just let the Independent Commission on Banking be independent and do what they suggest.