Britain's negotiating hand in Europe has never been as strong before

Events are moving very fast in Europe, overtaking the debate in Britain

By Ambrose Evans-Pritchard

9:55PM GMT 11 Dec 2013

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A one euro coin is pictured alongside a British one pound coin in London, UK
Some argue that Britain would be shut out of the single market, or forced into limbo for years. Quite why that should be so is rarely explained Photo: Bloomberg News


The case for British exit from the EU is diminishing. It is no longer self-evident that this country must withdraw from the EU Treaty structures to ensure self-rule and to safeguard our democracy.

Events are moving very fast in Europe, overtaking the debate in Britain. Advocates of the historic nation states - L'Europe des Patries - are gaining ground across the Continent. Superstate romantics are on the back foot almost everywhere. The Hegelians are hated.

"The time of an 'ever closer union' in every possible policy area is behind us," says the Dutch government. Its review of EU powers calls for swathes of policy, from social security to water management, to be left "more or less entirely to member states".

The Dutch are carefully shadowing the British, as well they might given that Geert Wilder's Freedom Party is leading the polls with calls to "control our borders, our economy, our currency". The cities of Rotterdam and The Hague have vowed openly to breach EU law on social security rights for Balkan migrants.

Over the past few months the eurosceptic floodgates have burst. French support for the EU Project has dropped from 60pc to 41pc since mid-2012, according to the Pew Foundation. This is in part the result of austerity overkill and double-dip recession, now threatening triple-dip, but also because the Franco-German partnership that has steered Europe for 60 years has finally broken down. It has become too unequal to defend fundamental French interest.

Germany's fateful decision to side with China and Russia against France (and the UK, Italy, and Spain) over Libya in 2011 - even after the Arab League had called for military action - was an inflexion point in EU affairs. Paris was shocked, for the diplomatic manouvering showed how little Berlin really care about a joint EU foreign policy - whatever it claimed - and how little it valued France itself. François Heisbourg, head of the International Institute for Strategic Studies, said Berlin had walked away from an ally trying to "stop another Srebrenica massacre". It is no surprise that the Franco-German military brigade launched with such fanfare in 1989 is to be disbanded on French orders.

My point is not whether the Libyan war was right or wrong (the aftermath is clearly a colossal mess), nor to suggest that Germany should have sent in forces (nobody expected that). My point is that it had profound effects on internal EU loyalties. The episode was repeated over Mali, when Germany refused airlift support. France and Britain worked in tandem as close allies in both theatres, as they have in spirit over Syria.

Prof Heisbourg, a pro-European, has since published La Fin du Rêve Européen (End of the European Dream) calling for the euro to be broken up to save the European Project. "The dream has become a nightmare. We must face the reality that the EU itself is now threatened by the euro," he said.

He proposes an orderly return to national currencies - "putting the euro to sleep" - arguing that everything changed when French and Dutch voters rejected the EU Constitution in 2005. It was clear from then on that there could be no popular support in any of the major EMU states for the sort of the fiscal union or European government required to make the euro work.

It looked for a while as if the euro crisis would force EU leaders to create a superstate machinery, though that would be to compound the folly. "You cannot create a federation to save a currency. Money has to be at the service of the political structure, not the other way around," he says.

Yet the great leap forward has not happened. The German elections have changed nothing. There are no eurobonds, no debt redemption funds. The EMU banking union is eyewash. There is almost no sharing of real risk. Sovereign states are still on the hook if their banks go bust, leaving them prone to the same vicious circle that threatened EMU implosion in July 2012.

The Dutch and French "No" vote in 2005 was indeed the watershed, though the elites tried to ignore the result and force through the Lisbon Treaty without popular votes by executive Putsch. Our own Gordon Brown refused to sign the treaty in public with the others, retreating to a private room.

Yet in reality, "Project triumphalism" peaked much earlier, a decade ago when the EU ultras ran amok, pushing for an EU army, intelligence service, diplomatic corps, justice department and supreme court, all spearheaded by monetary union. This was an assault on the nation state as the organising foundation of our democracies.

Since those were more or less the same the five years that I was the Telegraph's Europe correspondent in Brussels, it caused me to develop a visceral mistrust of those in charge. No Burkean can stand for such revolutionary attempts. Yet the danger has subsided. Perhaps naively, or prematurely, I am broadly persuaded that this atttack has failed. The threat has not disappeared entirely, but it looks dated now, a 20th century relic.

France is the pivotal country as the drama unfolds. All signs are that the Socialist leadership is deeply alarmed by the prospect of a perma-slump under a fixed-exchange system that offers no hope of cutting unemployment. They know that the Socialist Party itself could be destroyed, going the way of Greece's PASOK if it accepts its fate passively. Huw Pill from Goldman Sachs says France will have to endure a 40pc decline in relative living standards against Germany to rectify imbalances within EMU, a task that becomes much harder as the eurozone flirts with deflation. If he is right, I cannot see how Franco-German rupture can be avoided.

This is playing into the hands of Marine Le Pen's Front National, now leading the polls with calls for a return to the franc and economic self-rule, and pulling votes from Socialist working class bastions. A Polling Vox survey found that 42pc of French voters are willing to consider backing the Front National. She has shaken off the stigma.

Jacques Attali, a Socialist luminary and former head of the European Bank for Reconstruction and Development, lashed out at Berlin last week, claiming that contractionary EMU policies imposed by Germany were pushing France over the brink. He explicitly compared the state of French society with Germany in 1933 when the National Socialists took power.

This is hyperbole. A new book by Senator Jean-Pierre Chevènement, a former French presidential candidate, is closer to the truth when he compares the mood in France with the deflation years of Pierre Laval in 1934 and 1935 before the Gold Standard blew up, warning that unless Germany changes course, southern Europe will be forced to pull out of the euro to prevent their industries being hollowed out irreversibly.

The dam is bursting in Italy as well, a eurosceptic country these days, its people all too aware that they are trapped in a slump with an over-valued currency, youth unemployment of 41pc and a debt to GDP ratio that has jumped from 119pc of GDP to 133pc in three years despite harsh austerity and the biggest primary surplus in the developed world.

"It is a failed policy," said Romano Prodi, the former head of the European Commission and the man who launched the euro. He is now losing faith in the EU as a treaty organisation of sovereign peers. "Today there is only one country and only one in command: Germany. France, Italy, and Spain should together pound their fists on the table, but they delude themselves that they can go it alone," he said.

The "Five Star Movement of comedian Beppe Grillo has not gone away. It is still running at 24pc in the polls, and calling for a referendum on the euro. It is likely to join Britain's UKIP, the Front National, Wilder's Freedom Party and a host of radical groups from Austria, Scandinavia and the Balkans in sweeping the European Parliament's elections next May.

Italy's premier Enrico Letta fears a "disaster" as the firebrands seize the stage, and speak for the new Europe. Some would retort that it looks like a splendid outcome, a thundering slap in the face for elites who thought they had a teleological mandate to run ahead of their democracies.

It is in the midst of this maelstrom that David Cameron has threatened to pull Britain out of the EU. The first reaction of the old guard was to scoff at British suicide. Spain's foreign minister Jose Garcia-Margallo said the UK economy would be "reduced to rubble".

But as calmer heads prevail, the greater fear is that Europe's ideological edifice may be reduced to rubble. Germany's Wolfgang Schauble said a British exit would be a "catastrophe", asking how it would be possible to convince Asian leaders that the EU has a future when a key player is pulling out in frustration.

Brexit would play havoc with the EU's internal chemistry. The three-legged stool would topple over on just two legs. German hegemony would become overwhelming, a nightmare for German leaders who wants no such thing. France's loss of parity would become untenable, forcing it into a Latin bloc alliance that would ultimately split Europe in two.

Some argue that Britain would be shut out of the single market, or forced into limbo for years. Quite why that should be so when Tunisia has tariff-free access to the EU is rarely explained. I notice that nobody raises the identical point about Scotland, which would be in the much same position at first since it has to leave the EU before reapplying as a new state. 

But of course, everybody knows that the EU would in fact arrange matters so as to ensure that Scotland never missed a beat. Clever lawyers in the Commission's legal services would find a way, as they always do.

If the argument is that Europe would retaliate against the UK alone, it is hardly plausible given that Britain is the eurozone's biggest single market and the biggest net importer. Nor is it compelling as a campaign argument within Britain since it implicitly sells the EU case on the basis of fear alone, suggesting that we are locked into a bear hug with thugs, like poor Ukraine with Russia's Vladimir Putin. There is no mileage in such argument. Nor is it true.

Unless the events were grotesquely mishandled - always possible - France and Germany would bend over backwards to find a workable formula, keen to avert trade damage, and if possible to maintain the fiction that Britain that remains an EU member whatever the actual status.

Britain's hand in Europe has never been as strong as it is right now. This should not be abused. But it can be celebrated gracefully. We may be moving into a Europe of "multiple geometry" where integrationist elites no longer hold the whip hand, different groups of states cohere as they see fit, power flows both ways, and perhaps even where can take charge our own fisheries and farm

If that is so, it is surely an EU we can live with. I have never felt as cheerful before about our role in Europe


Is The Gold Market Manipulated? Part 2: From De-Pegging To De-Monetization

 
In Part1 I introduced the reader to the concept of market manipulation. I exposed the nonsensical definition offered by the CFTC and proposed my own alternative as follows:
 
Manipulation occurs when: 
A: A market participant buys and/or sells an asset or a derivative contract related to that asset in order to control its price. 
B: The participant does so in order to achieve some agenda other than directly profiting from the aforementioned trading activity.
 
I then provided irrefutable evidence, given these conditions, of manipulation of the gold market from 1961 through 1968 by a consortium of eight central banks through what is called the London Gold Pool (LGP, here on). I provided the reader with statements from central bankers, most notably Arthur Coombs, that show that there was an intent to manipulate the gold price so that it remained at $35/ounce despite upward pressures, and that show that there was, in fact, market activity designed to maintain the $35/ounce price level.
 
In what follows I walk the reader through the relevant points pertaining to the gold market and its suppression from the collapse of the LGP through the 1970s bull market in gold.
 
There are two primary issues at hand during this era. The first is that gold was viewed as a vital tool for wielding political and economic power by top U.S. officials. The second is that there was an attempt to undermine this power through what is referred to as "de-monetization" of gold: i.e. the use of political force or gold price suppression, in order to make gold less appealing relative to other fiat currencies -- the U.S. dollar in particular. Ironically the latter policy can only be adopted by acknowledging gold's political and economic significance: de-monetization tactics, discussed below, only serve to reaffirm gold's importance and omnipresence on the monetary stage.
 
In this vein the manipulation that concerns us here is more qualitative than quantitative, although there is circumstantial evidence of the latter. Unlike with the LGP, the manipulation thesis for this time period isn't handed to us in straightforward language. Documentation suggestive of the manipulation thesis is typically found in fairly vague language that is open to interpretation -- that is, it doesn't explicitly provide us with evidence of a particular intent to manipulate; rather it expresses one of three things: openness to the idea, concern regarding the potential for a rising gold price, or a general admission of the political or economic significance of gold.
 
At best one can make an exceedingly strong circumstantial case. Thus my intent here is not to provide documentation that unequivocally proves that the gold market was manipulated in the 1970s: if such documentation exists then it is not in the public domain, at least to my knowledge. Rather the reader should walk away convinced that central bankers and politicians were concerned with the price of gold over this time period, and that there is a likely connection between these concerns and manipulative market activities.
 
 
De-pegging
 
 
About two weeks before the collapse of the LGP in March, 1968, the Department of State sent out a secret memo, now declassified, essentially discussing the rapid drains on the LGP and the threat this posed to the United States' political power. While the text blames the drains on gold market speculators we know from Part 1 that the demand for gold was rising given the rise in the supply of dollars and the fall in U.S. gold reserves (i.e. the value of the dollar was dropping) -- we saw that the U.S.'s gold reserves fell from about 25,000 tonnes in the late 1940s to just under 10,000 tonnes in 1968, and that the M2 money supply rose from just over $160 billion in 1948 (the Fed doesn't have data on M2 money supply prior to this) to over $520 billion at the end of March, 1968.
 
Towards the end of the document (p. 5 paragraph 13), the author suggests that the U.S. wants to remain the "masters of gold," presumably meaning that top U.S. officials wanted to control the price of gold and its role in the global monetary system. Aside from insinuating the political and economic significance of gold in the global monetary system, the author's statement clearly implies that there is a serious threat to the United States' control of the gold market, and that this is a pressing issue not just for monetary authorities, but for political authorities concerned with national security as well.
 
The political significance of gold is reified in another de-classified document, this one circulated by the CIA a few months later in December. The opening reads:
 
We lose influence in world affairs whenever:
  • The dollar is weak in exchange markets;
  • There is a major outflow of gold; and/or
  • We are obliged to pressure countries into holding dollars or giving us payments assistance.

These statements clearly evidence that top U.S. government officials believed that there was a political need to control gold in order to retain political power: in essence these two documents give credence to the "golden rule": he who has the gold makes the rules. Of course there is a corollary to this rule: if you don't have the gold and you want to make the rules, then undermine the golden rule. The United States, and to a lesser extent those nations involved in the LGP attempted to do this by suppressing the price of gold so that the U.S. dollar would appear to be as good as, or better than gold.

But with the LGP out of business the United States and other interested parties played upon another corollary of the golden rule: if you don't have the gold then control who does: South Africa. South Africa produced roughly 3/4 of the world's gold in the late 1960s, and by controlling South Africa's gold sales the United States was able to maintain something akin to the price suppression scheme that was the LGP. This is a matter that I touched on in part one, and which is discussed in the above-cited CIA document. The United States tried to force the South African government to sell gold only on the London market in order to suppress that price, and to suppress the potential arbitrage trade whereby central banks could purchase gold in the United States for $35/ounce and sell it in London for a quick and (essentially) risk-free profit. As the following chart illustrates the arbitrage opportunity was rather substantial for much of the time-period from 1968 -- when the LGP collapsed -- to 1971 -- when the Bretton Woods agreement and the $35/ounce peg collapsed.
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South Africa stood pat despite the fact that it was losing revenues by withholding its largest export, and this is almost certainly due to the fact that the government of South Africa knew that the attempts to suppress the gold price were temporary.

The United States lost this game of chicken and in August, 1971 Richard Nixon closed the gold window. While he stated that this was a temporary measure never again would the United States trade its gold for U.S. dollars.


De-monetization


U.S. gold reserves were safe from foreign central banks, although they were heavily depleted having fallen from 25,000 tonnes in the late 1940s to just over 8,000 tonnes in 1971. However the United States still had major issues on which the two aforementioned documents shed light: holding gold was still crucial to maintaining political power, and a rising gold price would shed light on the diminishing value of the U.S. dollar, and by extension the diminishing dominance of the United States as a political power on the world stage.

These documents also allow us to properly contextualize future attempts to de-monetize gold, or to reduce its significance on the global monetary stage. Shortly after Nixon closed the gold window the gold price was trading at a multiple of the $35/ounce peg.



As the gold price was rising we find that its political significance remained intact. Furthermore, the desire amongst monetary officials to suppress the price of gold did not dissipate, as is evidenced by Paul Volker's memoirs, in which he maintains that it was a mistake not to intervene in the gold market in order to mask the declining value of the dollar. I should note that this decline was not just in terms of gold, but in terms of other fiat currencies, as this chart of the Dollar Index in the 1970s illustrates.



The decline of the dollar's value is more pronounced when measured in terms of specific currencies such as:

The German Mark



The Japanese Yen



The Swiss Franc (note that the chart is the U.S. dollar in terms of the Swiss Franc).



The shallow dip in the Dollar Index by comparison was mostly the result of a weak British Pound and a neutral French Franc.

Ultimately the world was entering a new economic era -- post-Bretton Woods -- in which the U.S. dollar's role on the world stage began to wane.

The United States would not let this happen without a fight.

The first threat came as the European Community began talks towards forming a different monetary system. While these talks didn't amount to anything top U.S. officials certainly felt threatened, as evidenced in a discussion between Kissinger and Enders on April 25, 1974. True to previous statements we have seen regarding the importance of gold in the global monetary system, Thomas Enders -- Kissinger's economic expert at the time -- reveals this importance to Mr. Kissinger as they discuss the best way to approach the potential for European monetary action independent of the United States:

It's against our interest to have gold in the system because for it to remain there it would result in it being evaluated periodically. Although we have still some substantial gold holdings-about 11 billion-a larger part of the official gold in the world is concentrated in Western Europe. This gives them the dominant position in world reserves and the dominant means of creating reserves. We've been trying to get away from that into a system in which we can control-

What this boils down to is that the "golden rule" was the political reality, and the United States didn't have the gold, and so in order to continue making the rules, the U.S. had to undermine the "golden rule." This would mean de-monetizing gold. There are three ways of doing this, and we have already touched on the first two. The first is through political force, which is what then Fed Chairman Arthur Burns would suggest to President Lyndon Johnson a year later. Burns points to a rift between the Federal Reserve and the Treasury. The latter accepted a free market approach to gold, while the former wanted to strictly limit the amount of gold that central banks were allowed to hold. Burns argues that the Fed's position is the correct one.

The second is to suppress the price: if the price of gold is falling against fiat currencies such as the U.S. dollar, then the latter gains legitimacy as money. This suggestion actually comes out directly later in the conversation, where Enders tells Kissinger that they should consider "raiding" the gold market.

The third way is to treat gold as a commodity rather than a currency. This was carried out as is evidenced by the fact that by the end of 1974, citizens who were once barred from owning gold, were once again allowed to own it.

While there is no documentation to back this up to my knowledge, I suspect that a reason for this decision was that if Americans are allowed to own gold it is on equal footing with other commodities that American's are allowed to own. If they are barred from owning it, the implication is that gold is "special" for some reason or another. True or not, gold needed to be just another commodity. Furthermore, at the same time, gold futures contracts began trading on the COMEX. Nowadays stock indexes, bonds, currencies, and other non-commodity assets have futures contracts, but 40 years ago futures contracts were for commodities.


(*As a side note I should point out that precisely when gold took on this commodity status (literally the last day of 1974), its price hit a crucial peak of about $200/ounce, and it underwent a correction that dragged the price down nearly 50% over a nearly 2-year period, and the price did not exceed $200 again until 1978.



While there is no evidence of manipulation, I find it extremely difficult to believe that there is a pure coincidence here, especially given Enders' aforementioned statement. Further reason for suspicion lies in the fact that suppression-thesis advocates often claim that the paper futures market is an integral tool used to suppress the price.)

Ultimately the effort to de-monetize gold was successful, but only insofar as the effort led to the largest holders of gold divesting some of their gold reserves: most notably Germany, France, Italy, Belgium, and the Netherlands. I should note that all of these divestitures took place in 1978 -- the year in which the gold price breached its 1974 peak (begging the question of how high gold might have soared had these divestitures not taken place). The IMF also divested a third of its gold from 1976 through 1980, and it even uses some of the language found in the above-cited Burns letter to Ford on its website today, viz. it was reducing the role of gold in the international monetary system.

De-monetization failed in that the market was not convinced that gold's role was diminished. This is clearly evidenced in the enormous price appreciation gold experienced in the 1970s despite the aforementioned (coordinated?) sales into the market in 1978. In fact the price would peak at roughly $850/ounce in 1980, although since we are not smart enough to sell at the exact peak, those who owned gold and who saw the bubble forming had plenty of time to sell at least $600/ounce, representing a 17-fold increase from the $35/ounce fixed Price.





Conclusión


Looking at this last chart it is difficult to come out with cries of manipulation: how can an asset that has climbed at least 17-fold in value be suppressed?

Two points must be made, and these will come into play during my discussion of the supposed ongoing suppression scheme. First, as I argue in Part 1, where I discuss my definition of manipulation, I make it clear that the manipulation does not have to be successful. We only have to show intent, which we get from comments from Elders, and market activity, which we see in the seemingly coordinated sales of five European nations and the IMF. Second, price suppression doesn't necessarily have lower prices as a goal.

Proponents of the ongoing manipulation argue that what we have now is a "managed retreat," which means that the goal of intervention in the market is to make sure that the price doesn't rise too quickly or generate too much enthusiasm amongst investors. Of course these same proponents suggest that the managed retreat is a way for manipulators to unwind existing positions, which were initially meant to suppress the price of gold. In the 1970s the six market participants that sold gold into the market were not unwinding positions that were initially put on to suppress the gold price.

One might also argue that what we saw in the 1970s was not price suppression, and that the sales were motivated by a desire to de-monetize gold. While we can infer that such a desire entails that the participants want to see a lower gold price there is nothing definite about this inference. In fact the only documentation to this effect is Ender's seemingly capricious comment about raiding the gold market.

Ultimately, as I suggest above, there is no definitive case to be made for gold price suppression the way that there was when the LGP operated. It is more important that the reader is able to see a continuity of the attitudes of political and monetary authorities between the LGP period -- when gold clearly was manipulated -- and the era of de-pegging and de-monetization, which I discuss here. The price action and market activities of central bankers differ markedly, but in both periods there is clearly a political and economic motivation to undermine gold's monetary role, especially relative to the U.S. dollar.