Category Archives: Government

Banking, Britain, Economic, Financial Markets, Government

Brexit: Economic shocks can be positive

BRITAIN: ECONOMIC

A NO DEAL BREXIT would be an economic shock on the scale of quitting the gold standard for a second time in 1931, the 1967 devaluation of the pound and being ousted from the exchange rate mechanism (ERM) in September 1992.

But such shocks, if they trigger the right policy response, don’t necessarily have to be negative.

That is why it is fascinating that the Cabinet Office is now contemplating about what “Project After” Brexit actions should be.

It should come as no surprise, then, that both the Bank of England and the Treasury have similar thoughts.

In the immediate aftermath of the 2016 referendum to leave the EU, Mark Carney played a central role in shaping fiscal policy. Interest rates were cut by a quarter of a percentage point, a £60bn round of quantitative easing (QE) was launched and an emergency £100bn line of credit for the banking system was created.

In the event of a No Deal Brexit the Bank should be able to do more. Threadneedle Street is known to believe, however, that monetary easing becomes less effective with each successive episode.

Brexit poses more of a shock to the supply-side of the economy. That means fiscal and trade actions could be more effective.

The Government – and the Chancellor Philip Hammond – is in the fortunate position of having the fiscal space to act. The budget deficit has been dramatically reduced, but debt at 81.5pc of output, and falling, remains high. Compared to Italy, Japan and the US, it is far less threatening.

Post the financial crisis, markets are much more tolerant of debt, and low interest rates mean that it is more easily serviced.

What should the Treasury do? The case for speeding up infrastructure spending, particularly in the North, with HS3 across the Pennines a priority, is indisputable, as is the need for better and improved commuter routes into Manchester, Leeds and other northerly centres.

The most direct and easiest way of shoring up confidence would be to cut taxes. Corporation tax has already been reduced quite sharply to 19pc and is due to fall to 17pc in 2020. The reduction to 17pc could be made with immediate effect and it may be the opportunity to go even further, if not down to Ireland’s 12.5pc. Gaining a competitive edge is going to become increasingly prescient.

The best way of putting cash directly into the pockets of all consumers would be to lower VAT from the current 20pc back to 17.5pc, or even 15pc, on at least a temporary basis.

Most of the doomster predictions about Britain’s prospects post Brexit have related to international trade and shortages of vital imports such as pharmaceuticals.

 

DREDGING Ramsgate harbour might help. But within international commerce, money speaks the loudest. If Britain were to cut all tariff barriers and import duties to the bone, global enterprises would rapidly deploy their best logistical skills to make sure the shelves in NHS hospitals, pharmacies and supermarkets are fully stocked.

Such policies might seem extreme. One of the biggest concerns is that with parts of the economy already operating at near-to-full capacity, too much fiscal and monetary easing might unleash an inflationary bubble which would be difficult to burst.

Renewing and creating new infrastructure is the number one priority with new runways at not just Heathrow, but Gatwick, part of that.

But when, as Remain supporters like to say, the country is on a cliff-edge and social cohesion is threatened, it is important to think outside the box.

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Climate Change, Energy, Environment, Government

Energy security: Is there to be a next generation of reactors?

UK ENERGY NEEDS: SECURITY OF SUPPLY

EVER SINCE the Labour government under Tony Blair rebooted nuclear power some 13 years ago, successive British governments have been committed to new reactors to secure electricity supplies and by cutting carbon emissions. Yet, those ambitions have yielded just one project that is currently under construction – Hinkley Point C in Somerset.

The past three months or so have dealt serious blows to hopes for more. Toshiba scrapped its plans for Moorside in Cumbria and Hitachi has axed Wylfa. That means that a second Hitachi plant planned for Oldbury in Gloucestershire is also doomed. Together, these three projects would have provided around 15% of current UK electricity demand.

This must now raise the question: is it time to rethink plans for new nuclear, and focus on more renewables – or redouble our nuclear efforts?

The UK needs more low-carbon power. Coal and old nuclear plants are shutting, and tough climate targets are looming.

Environmental groups, such as The Green Party and Greenpeace, want to ditch nuclear in favour of more renewables, more energy efficiency, imports, batteries and other technologies. Most energy industry experts, however, think we still need nuclear. They say that if we try and rely on just renewables and storage, without carbon capture and storage or nuclear, then we will be looking at a very challenging transition and one that is costlier than a balanced mix.

National Grid’s four future energy scenarios all envisage some new nuclear, though the amounts do differ.

The main issue is that nuclear provides baseload power (or continuous electricity supply). But there is a school of thought that baseload is a 20th-century thing. Those who suggest such an argument might be right. It would, though, be a big call by government to suggest baseload won’t be a thing by 2025.

The government has already downgraded the amount of new nuclear it expects to be built. It assumes 13GW of new nuclear capacity by 2035 – or three more plants on top of the 3.2GW at Hinkley. There are now just two companies in the running, with plans for two new plants. French state-owned EDF, which is behind Hinkley, wants to build a carbon copy of that project at Sizewell, on the Suffolk coast, in 2021. Chinese state-owned CGN, is working on a Chinese-designed reactor for Bradwell in Essex, to be operational around 2030.

Hitachi’s withdrawal suggests the financing model used for Hinkley and proposed for Wylfa – a guaranteed price for the electricity generated for 35 years – is now dead. The alternative is the “regulated asset base” (RAB) model, where a regulator sets a fixed sum for the plant’s costs and fixed returns for the developer, paid for by energy bill payers or taxpayers. Critics say RAB loads the risk of construction delays – such as those seen in France and Finland – on to citizens. Returns would be paid for years before any electricity was generated.

Labour, which is pro-nuclear, has branded the approach risky and reckless, but has not put forward an alternative.

So, could Britain manage without nuclear? The answer is maybe, but it would take a lot more renewables. Filling the 9.2GW-sized hole left by Moorside, Wylfa and Oldbury would require 14GW of offshore wind power, according to the Energy and Climate Intelligence Unit. That is the equivalent to more than 20 of the world’s biggest offshore windfarm, which consists of 87 giant turbines.

Undoubtedly, that would mean spending a vast amount of money on saturating the UK with offshore wind – with enough turbines in enough different locations to replicate the “always-on” nature of nuclear. Large-scale batteries will help, but they won’t address the fact that electricity demand is much higher in winter than summer – or solve long windless spells.

The other big techno fix could be carbon capture and storage (CCS) systems attached to fossil-fuel power stations. However, years of government efforts to kickstart it have failed. Officials have been working on CCS gas for around 20 years and are nowhere near reaching a satisfactory outcome that are mainly due to cost considerations.

 

ALL sources of electricity face the same trilemma in the 21st century: carbon emissions, continuity of supply and cost. The British government has placed a big bet on nuclear power, but reactors meet only two of the three challenges. Nuclear power is low-carbon and a secure source of electricity – but it is hugely expensive.

While building nuclear plants and fuelling them requires concrete, transport and so on, the overall emissions are similar to wind power and solar power. All produce far less carbon than coal- or gas-powered stations.

Nuclear power also largely passes the security of supply test. The giant plants provide steady electricity 24 hours a day, but are incredibly complex, and technical problems can result in long shutdowns. They also need vast amounts of cooling water, causing problems during periods of droughts.

Nuclear power’s big problem is its price tag – building extraordinarily complicated plants and keeping them safe is extremely expensive. Solar and onshore wind power prices have plummeted and are now about one third of that of nuclear. How to deal with nuclear waste in the long term is another expensive, and as yet unresolved, headache.

The industry has hopes that “small modular reactors” could be cheaper and faster to build. But to fight global warming the world needs low carbon energy now, and no SMR is likely to be generating power in the next 10 years because of long and rigorous safety checks.

The government faces a difficult decision. It could persist with its nuclear dream, hoping that a way to finance new plants can be found and that they are then built on time and on budget.

Or it can pivot towards renewable energy, storage and interconnectors, potentially with gas plants that capture and bury their carbon emissions as a backup. That would mean overturning its antipathy to onshore wind and solar power and ramping up offshore wind.

Around the world only two nations are putting new nuclear plants into service: China and Russia. Overall, nuclear construction is at its lowest for a decade and global nuclear generation has been flat since 2000. Even France, that most nuclear of countries, is planning big cuts in nuclear power. If Britain persists with nuclear, it will be swimming against the international tide.

SUMMARY

. Britain’s old nuclear power stations supply a fifth of electricity supplies and are a significant part of the energy system. However, their share of the mix has been gradually shrinking as renewables have grown. Significantly, seven of the eight nuclear sites will have shut by the end of the 2020s as they reach the end of their economic lives, with just Sizewell B in Suffolk continuing to operate. The government has also committed to shutting the country’s last seven coal plants by 2025 at the latest.

. So far, the only nuclear project to get the go ahead is EDF Energy’s Hinkley Point C, a 3.2GW plant in Suffolk that will power around 6million homes. It is officially due to begin supplying electricity in 2025, but similar projects in Finland and France have run many years over schedule. EDF has warned the plant may not be generating until 2027. Originally there were plans for five nuclear plants to meet Britain’s new nuclear ambitions. But three – Moorside, Wylfa and Oldbury – have been shelved. That leaves Sizewell C, backed by the Chinese state firm CGN, and the 2.3GW, Chinese-led Bradwell B in Essex (in which EDF has a one third stake).

. The UK government negotiated a guaranteed price for power for 35 years with EDF Energy for Hinkley. Hitachi was trying to do the same, with the government taking a multibillion-pound stake, but could not make the numbers work.

Attention will now turn to a new method of financing known as the regulated asset base model (RAB). The UK government plans to give more details later this year. An RAB model is one in which the regulator sets fixed costs and fixed returns for a nuclear developer to overcome the huge upfront cost of constructing plant and the years-long delay for investors reaping a return.

. No new nuclear plants would pose a challenge to carbon targets, but it is unlikely to threaten energy supplies, given the speed with which gas plants and windfarms could be built. Offshore wind power could fill the gap, and more inshore windfarms and solar power would help. The intermittent nature of those technologies could be addressed to a degree by more batteries and other storage, imports and technologies that allow big energy users – and maybe homes – to reduce consumption at peak times in return for a financial incentive.

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Britain, Economic, European Union, Government, Politics, Society

The EU has a natural propensity to haggle

BREXIT

LONG before the people of the UK voted to leave the EU in the 2016 referendum, before the term Brexit had even been coined, it was Grexit that was preoccupying the minds of Eurocrats.

Greece came close to crashing out of the single currency on at least four separate occasions after a vast black hole opened up in the country’s accounts in 2009.

At one stage in 2012, the British banknote printers De La Rue was asked by the government in Athens to make contingency plans to print new drachma notes (Greece’s pre-euro currency) in preparation for what many called the “Double D” solution to the economic problems Greece was facing: default on the country’s debt and devaluation with the return of the drachma.

Today, Greece remains one of the 17 members of the eurozone – and this fact alone should lift the spirits of the UK negotiators. Armed with her newly acquired Parliamentary majority, Theresa May returns to Brussels seeking at the very least to put a time limit on the Irish backstop deal she signed up to.

Each time a Greek default loomed into view, threatening the stability of the eurozone and raising the possibility that Italy or one of the other member countries might also head for the exit, the main protagonists – the hard-line German-dominated European Central Bank (ECB) in Frankfurt and the European Commission in Brussels – caved in and authorised a bailout.

Last-ditch negotiations, usually conducted over a weekend when the financial markets were closed, would typically go into the early hours of Sunday morning.

Late-night deals were hatched against a backdrop of TV screens showing central Athens on fire and anti-austerity protesters ripping up flagstones in the capital’s Syntagma Square.

The first £38bn bailout was agreed in the dead of the night on April 23, 2010, by the troika of the ECB, the European Commission and the International Monetary Fund. It was one of several rescue packages for Greece, some of which required a change of government to get them over the line.

 

WHAT happened to Greece is typical of the Eurocrat tendency to fudge, to muddy the waters and eventually to seek compromise in a crisis situation.

Indeed, the history of the EU is littered with examples of Britain locked into eleventh-hour talks with eurocrats as the UK has sought changes in our terms of membership.

John Major worked through the night in 1991 to secure Britain’s opt-out from the social chapter of the Maastricht Treaty which would have dictated working conditions in Britain and could have undermined the labour market reforms pioneered by his predecessor Margaret Thatcher. Indeed, she herself was a fierce negotiator in organising rebates from Brussels from the UK’s oversized contributions to the EU budget. In 1984, in the imperial grandeur at the historic palace of Fontainebleau in France, European leaders painfully conceded the famous British EU budget contribution rebate – or as the French sarcastically called it “le chéque Britannique”.

And let’s not forget that in the teeth of his promise to hold an in/out referendum, David Cameron returned from Brussels in the early hours one day in February 2016 with draft reform proposals agreed by European Council President Donald Tusk which he claimed would give Britain “special status”.

In the event, the pledges made by Brussels were so anaemic that they failed to convince British voters that sovereignty could be maintained by voting remain – a huge mistake by the eurocrats who failed to recognise the strength of anti-EU feeling among large swathes of the UK population.

Both in national negotiations and in commercial transactions, reaching an accord more often or not comes down to the wire.

With the clock now ticking inexorably to March 29, the desperation of the leaders of the other 27 EU countries to avoid an economic and financial crisis at the very moment that Germany and the eurozone are facing the bleak prospect of recession may be Theresa May’s best hope. This is regardless of how unyielding Brussels negotiators have been to date and their willingness to play havoc with business confidence and financial stability by its brinkmanship.

 

THE potential loss to Brussels of a £39bn one-off payment to a Commission cash starved as it is following years of economic slowdown, could potentially be a bargaining chip for the Prime Minister in the last-chance saloon.

In the final analysis, the anecdotal evidence of what the late-night sessions in Brussels, Nice, Maastricht and other destinations should tell us, is that it’s Germany and, to a lesser extent, France which decide.

Besieged by increasingly hostile populist movements, neither Berlin or Paris will want to make political life tougher than it already is.

The politics of the EU, at their most raw, are little different to those of the bazaar. The natural tendency should be now to relish an aggressive haggle but then, eventually, to compromise.

. See also Should we really despair over Brexit? Europe is in a mess.

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