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Mr. John Butcher (Coventry, South-West): I am grateful to the hon. Gentleman for giving way because I know that he is about to conclude. I should like to ask him about political will, set against what is currently asserted perhaps by some public relations person at the Commission. A huge row is going on between France and Germany on the extent of the rigour to apply on the convergence criteria and the pact. The French want a political approach with majority voting in the bank, while the Germans want a mechanical approach that would be totally impartial and utterly ruthless. They are falling out
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over that central issue. How can a press release from the Commission make any assertion in those circumstances? I suspect that we are being expected to base an argument on the word of a junior official. This House, more than any other institution in Europe, should not depend on such arguments.
Sir Russell Johnston: If I attempted to answer all the issues raised by the hon. Gentleman, I should delay the House far too long. I shall say only that to describe the on-going discussion between France and Germany, which progressed the other day in Nuremberg, as a "huge row" is typical of the way in which our European debates are conducted. With respect to the hon. Gentleman, I am aware that others want in and I will terminate.
10.28 am
Mr. Quentin Davies (Stamford and Spalding): One of the great values of parliamentary debate is that it provides us with a wonderful opportunity to expose nonsense for what it is. In that spirit, I greatly welcome this morning's debate.
As the prospects of monetary union and of our being a part of it advance, it is only natural, given the strong emotions that exist on the subject, that its opponents should clutch at ever weaker straws. We have today a very weak straw indeed. I do not in any way resile from, or apologise for, the comments that I have made on the Select Committee report, which I have seen. I hope that, by the time I have sat down, the hon. Member for Birkenhead (Mr. Field) and other colleagues will understand why I held it to be entirely justified to make those remarks.
It is true that the level of unfunded pension liabilities on the continent--except in Holland--is higher than the level of unfunded pension liabilities in this country in the national insurance scheme and in public sector superannuation schemes. That is perfectly true--there is no question about that. I am happy to acknowledge also that nothing could be more disastrous than any suggestion that anybody should borrow now to pay pensions. On the whole, the pension debate in this country and on the continent has proceeded on the basis of a potential choice between funding pension liabilities and pay-as-you-go schemes. The idea that one might borrow to pay current pensions introduces an entirely third model--one that is horrific in its financial irresponsibility.
The third option is not to fund nor to pay as you go, but to disfund--to accumulate continuing financial liabilities to meet current pensions so that one places a bigger burden on future generations to pay back the money that one is paying out in pensions now plus interest, plus future pensions. Clearly, that is a horrific scenario. The only thing is that no one has ever suggested it, for precisely the reasons that I have set out. This is a windmill at which some colleagues are choosing to tilt in the best Cervantean tradition--it is an enemy that does not exist. The windmill might look like a fearsome animal advancing on us, but it does not exist. It is a figment of the imagination of some colleagues in the House.
Mr. David Shaw:
Surely the report from the IMF, which has been prepared by IMF staff, is not a figment of anyone's imagination. There have been numerous reports, including reports from the OECD and that on the Dutch
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Mr. Davies:
I am sorry to have to inflict this on the House, but I must briefly recapitulate what I have said. There are two perfectly responsible and classic methods of approaching the payment of pensions. One is the pay-as-you-go system, the other is funding--or placing certain amounts of money aside from current income and investing those moneys in assets that are expected to yield a future return in the hope that that future return will meet pensions when they need to be paid. That is perfectly clear, and the argument in this country ever since Lloyd George at the beginning of the century, and on the continent since Bismarck, has been between those two systems.
What has been suggested this morning is that there might be a third system, under which we do neither of those things but simply borrow money and accumulate debt when we need to pay pensions. That is not saving for future pension liabilities--it is dissaving--and there is no question but that it would have horrific economic consequences. However, it is such a mad idea that no one has seriously suggested it. Nor do I believe for a moment that anyone would, or needs to, suggest it.
Another element of unreality in the picture that has been painted this morning is that, although it is true that there have been, and remain, substantial unfunded pension liabilities on the continent, that has in fact been the case for many years. It has been the case in all of the countries of the present EU since 1945 and, in many of them, for longer. It is also true that, for a long time, very little was done to match actuarially the potential liabilities of the pension schemes on the continent to the power of the economy to generate the resources to do so. If we had had this debate 10 years ago, it would have been a good deal more pertinent than having it today.
I have listened in vain for any speaker this morning to mention that the past few years have been characterised by the unfunded pension liabilities on the continent being reduced by a reduction in the benefit system. Germany has increased the pensionable age from 65 to 67, but no one has mentioned that. Anyone who knows the first thing about pensions knows that increasing the retirement age by two years has an enormous actuarial effect on the solvency of the scheme. It is odd that that salient fact has not come up. No one has mentioned that, in the past few months, Belgium has followed suit. It is also odd, and perhaps significant, that this has not come up in the debate this morning. No one has mentioned that Italy, after--naturally and understandably--tremendous political controversy for several years, has completely got rid of the scala mobile, the indexation of Italian pensions. Again, no one who knows the first thing about pensions would dispute for a second that removing indexation has an enormous and positive effect on the actuarial solvency of any scheme. It is funny that that salient fact has never come up either.
Paris is not far away and, when Eurostar is working--I believe that it is again--colleagues can go there in less than three hours. I am going there tonight, although not unfortunately by Eurostar. Does the House know what our colleagues in the Assemblee Nationale have been
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We fail to notice that, in so far as there has been a problem with unfunded liabilities on the continent, it has existed for a long time. It is curious that no one in the Chamber thought to mention that this morning. The last few years have been characterised by a systematic, effective and--I think--courageous attempt on the part of our continental neighbours to address the problem. No one who has taken part in this debate has wanted to give them credit for that.
Mr. Davies:
Perhaps the hon. Member for Birkenhead, having been prompted by me, will now do so.
Mr. Field:
One hopes that a large number of people will be watching this debate elsewhere. In looking at the nature of the speeches from hon. Members of all parties, they will have noticed that the only person who has got steamed up about anything has been the hon. Member for Stamford and Spalding (Mr. Davies). The longer he goes on, the more he will be convincing people outside that there is a large problem--even if people are rather late in the day in coming to it. Some of them, who may have a little expertise, will know that the plans to which the hon. Gentleman has referred are merely proposals and have yet to be passed by the countries' Parliaments.
Mr. Davies:
I am reassured and even more confident in the line that I have been taking in the debate by the fact that the hon. Gentleman, to whom I was delighted to give way, chose to make disparaging remarks about my style, and did not in any way challenge the substance of what I have been saying.
When article 104b was drafted, it had to take account of the fact that member states would clearly be liable for specific guarantees that they had given for specific projects but, quite apart from the fact that pensions are not a project, it is absolutely clear that no such guarantees have ever been, or ever could be, given for other member states' pension liabilities. To suggest otherwise was a piece of special pleading that went rather further than the normal parliamentary licence that we allow ourselves when highly controversial matters are under discussion.
A further element of unreality in the debate was the suggestion that the convergence criteria in the Maastricht treaty are somehow wanting because they do not encompass the pension liabilities that exist in various member states. Evidently, I must take two minutes of the House's time to explain to certain hon. Members why the fiscal convergence criteria are included as criteria for monetary union.
If a member state were to default on its financial liabilities--if, for example the British Government defaulted on a gilt issue or the German Government on a Bund issue--that would clearly trigger a systemic financial crisis, because many investors, both private and, more especially, institutional, such as banks and insurance companies, hold that debt. If the debt had to be written off, those institutions would have to write off a portion of their capital and that would greatly reduce demand in the economy as a whole, producing a recessionary crisis. That is what is known as a systemic financial crisis.
Even if anyone had ever suggested--which absolutely nobody has--that either the Union or any individual member state should be responsible for another member state's pension liabilities, that possibility would be excluded by the article. My hon. Friend the Member for Dover said that there was a let-out in the reference to
"the joint execution of a specific project"
but he cannot be that naive; he has been in business for many years and knows about such things. The fact is that the reference is to infrastructural projects for which individual member states have given specific guarantees; for example, if a bridge were to be built across the Rhine, public sector authorities on either side might agree to guarantee the financing.
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