MoneyWeek roundup: Should Britain leave the EU?
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James McKeigue Nov 03, 2012
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This week Tory rebels and Labour MPs united to hand the coalition an embarrassing defeat in the Houses of Parliament. The issue, as ever with Tory rebels, was Europe. In particular, they’re annoyed about Britain’s contribution to the EU budget.
So in her blog this week, Merryn Somerset Webb, investigated how much the EU really costs the UK.
At present the political debate is focused on how much Britain pays into the EU budget, says Merryn. That currently stands at £15.8bn and is scheduled to rise by £19bn by 2014/15. But “the cost of the EU to the UK isn’t just about the EU budget itself”, says Merryn, “it’s about a great many other things as well”.
Indeed, if you include the extra factors, “the cost to the UK of being in the EU rather than being independent and having a free trade agreement with the EU, appears to be rather higher”.
Using figures from recent research from the UK Independence Party (UKIP), Merryn notes: “The UK is around 10% of GDP worse off as a result of its membership of the EU. 1% of the forgone GDP comes in the direct fiscal cost. Another 5% comes… from the costs of regulation.”
Another 3.25% comes from resource misallocation – for example the Common Agricultural Policy. Smaller costs are the rise in unemployment for UK-born people because of EU labour immigrants, benefit tourism, and “waste, fraud and corruption”.
Of course, admits Merryn, it’s impossible to know what the exact number is for these costs. 10% could be a “good ball park figure or an insane over estimate”. But just because “it isn’t easy to figure out doesn’t mean it can be ignored”.
Moreover it demonstrates that our politicians are missing the point. “Cutting the EU budget by a couple of percent in real terms probably isn’t going to make much difference.” For real change politicians “will need to think a little harder”.
As you’d expect, the topic led to a lively reader debate in the comments section below the piece.
‘Boris MacDonut’ jumped to the defence of the EU. “Cost? You mean value. 1914 to 1957 European deaths in war 50 million plus. Since the Treaty of Rome fewer than 20,000. It is worth every penny to just stop Germany and France trying to tear each other to bits.”
Other commentators also questioned the impartiality of a report on the EU coming from UKIP, an avowedly anti-EU organisation.
However, other readers agreed with Merryn that Britain could enjoy the benefits of Europe without being part of the EU. GFL says: “Free trade is a great thing, as is skilled immigration – but it is beyond crazy having laws and regulations imposed by a foreign organisation.”
It’s an on-going debate so if you haven’t seen the piece yet and want to have your say, click here.
Could money printing spark a revolution?
In Tuesday’s Money Morning, John Stepek warned that money printing by central banks “will destroy the world”.
The claim came from investment expert Dr Marc Faber. And while it may sound extreme, says John, “he might just be right”.
In recent decades, central banks “have slashed interest rates and blown bubbles” and led to massive credit hyperinflation, says John. So far this inflation hasn’t affected consumer prices, but it’s definitely pushed up asset prices.
And that suits the wealthy, says John, because they’re the ones with all the assets. This “has driven up wealth inequality to historic levels. Record numbers of Americans are receiving food stamps”, while at the other end of the scale, the top 1% of income earners are taking a larger share of total income since the 1920s.
And this inequality is at the root of Faber’s dramatic prediction, says John, because it is sowing the seeds for social turmoil.
“Central banks are aiding and abetting it by actively trying to encourage more inflation. They seem to believe that inflation can be controlled before it gets ‘out of hand’. The hope is that the likes of Mervyn King and Ben Bernanke, and whoever takes over from them, can conjure up 'just enough' inflation to make our debts go away painlessly, without ruining everyone in the process.”
It’s a nice idea, but given the central bankers’ poor record in predicting, or dealing with, the financial crisis, John doesn’t have much hope they’ll pull off their inflation trick.
If inflation does hit the man on the street, it could fuel more social unrest, says John. It would also wipe out a lot of investments. For example, government bonds would “be hammered by inflation”.
John’s got a few ideas on what assets should do well, so it’s worth reading the piece in full.
MoneyWeek’s banking expert, James Ferguson, also looked at quantitative easing in this week’s MoneyWeek cover story. So far James’s calls about QE have been spot but now he’s had a change of heart. If you’re a subscriber you can read it here: A bold step into the unkown - are we heading for hyperinflation? If not, get your first three issues free here.
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Profit from the Latin America building boom
This week also saw the launch of MoneyWeek’s emerging markets newsletter The New World. I must admit to a slight bias here as I am one of the contributing editors - it’s a great way to find out about breaking investment stories in Latin America and Asia.
This week’s inaugural issue was about the building boom in Colombia and Peru – two countries I have lived and worked in.
While both these countries have ‘colourful’ histories – they’ve completely turned the corner.
In Peru a lot of the economic success can be traced back to the country’s former president, Alberto Fujimori.
“The son of Japanese immigrants, Fujimori was a virtual unknown before his shock election victory in 1990. In ten short years he seized dictatorial powers, waged a war against neighbouring Ecuador, crushed the insurgents, returned the country to democracy before fleeing to Japan when a corruption scandal threatened to bring down his presidency.
“Unsurprisingly he’s a pretty controversial figure in the country – he's now in prison for directing death squads against the guerrillas. But one thing that can’t be denied is his economic success. He brought inflation under control and opened up the country's natural resources for investors. And that laid the foundations for a remarkable economic turnaround.”
Indeed, thanks to the work of Fujimori and his successors, Peru is now in better macroeconomic nick than the UK.
“Since 2003, the economy has grown at an average rate of 6.6% per year. The Peruvians used the good times wisely and the national debt has fallen to 22% of GDP, from almost 50% in 2003. In Britain, it’s more like 68% of GDP.”
Now Peru is busy spending its money, updating its creaking infrastructure to better serve its growing economy. And that’s where the opportunity lies for investors. Because while misconceptions about the ‘old Peru’ still abound, quick-thinking investors can invest in the burgeoning prospects of ‘new Peru’.
Given the tough economic path ahead for the indebted Western world, it makes sense to start thinking about how you can put your money in economies that aren’t saddled by debt. You can read the piece in full here: Two ways to play the Latin american building boom. And sign up to the FREE email here.
How to bag a 9.25% yield
Another newsletter writer with an interesting investment theme this week was Tom Bulford. Tom sends out his Penny Sleuth email twice a week, and in his latest edition he told readers how they could take advantage of the latest trend in corporate finance.
"I speak to many directors of small companies in this country and many of them have a good old moan about the banks. They just won’t lend any money, even for low risk propositions such as working capital for confirmed orders."
The fact is, says Tom, the banks “only know one way. Raise lending rates as high as they can, drop deposit rates as low as they can, make a fat margin between the two and desist from any new lending that might cause fresh damage”. But the failure of the banks is creating an opportunity for investors, says Tom.
“This has left a huge gap in funding, and others are moving to fill it. While the banks need wide lending margins to pay for the sins of their past, newcomers have no such historical burdens and can offer keener rates to borrowers and lenders alike.”
Now firms are looking to “crowd funding”. That’s where a finance operator pools small loans from lots of private investors and dishes it out to the company looking for a loan. Others are issuing bonds and lending out the proceeds to companies. And because returns on government bonds are at historic lows there’s no shortage of private investors willing to stump up the cash.
Tom has the details of various new schemes in his piece but one of the most exciting offers yields of 9.25%. I’ll let Tom explain how it works.
“You lend your money to 1PM (AIM: OPM), the Bath-based provider of finance to small business. 1PM will then lend your money to some carefully chosen borrowers. The security is provided by a specific pool of lease agreements. 1PM will then repay your capital plus interest of 8% or more over 36 equal monthly instalments.”
The only drawback with the scheme is that you need to have at least £750,000 to lend. But if you do think it sounds like something for you, you can find out more on their website.
If you want to read more on this, you can do so here: How to earn a 9.25% rate of interest and if you’ve not signed up to Penny Sleuth yet, click here.
Why Starbucks pays no tax
American coffee chain Starbucks is one of several multinationals to get a bashing in the press for not paying enough corporate tax in the UK. So, in his latest video tutorial, MoneyWeek deputy editor Tim Bennett, explains how easy it is for international firms to avoid corporate tax and talks us through three of the most common tax dodges. Watch it here: Why does Starbucks pay so little tax?
MoneyWeek wine tasting event
And a quick reminder about our MoneyWeek wine tasting evening on Tuesday, 20 November. Hosted by our wine expert Matthew Jukes and the MoneyWeek team, it promises to be a very special evening. Tickets are just £20, click here to secure your place.
• This article is taken from the free investment email Money Morning.
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