Examination of Witnesses (Questions 80
- 96)
TUESDAY 13 JUNE 2000
MR JAMES
BARTY, PROFESSOR
IAIN BEGG,
MR ROGER
BOOTLE, PROFESSOR
WILLEM BUITER
AND DR
DANIEL GROS
Mrs Blackman
80. Is Laurent Fabius's recent pronouncement
that he wishes to bring forward proposals to strengthen the influence
of the policy making role of the Euro 11 welcomed by you or do
you have reservations about his intentions?
(Professor Buiter) Any scheme of coordination can
be used positively and negatively but, in principle, I think it
is a good move because we need the coordination of fiscal policies
to achieve effective demand management policy in Euroland and
we have not got it. The Euro 11 is the natural mechanism through
which to do that. If they can speak with one voice towards Frankfurt,
that would be the beginning of the informal, de facto,
cooperative mechanism that would allow Euroland to achieve a more
desirable mix. In principle, yes, it is logical and it is desirable.
81. You do not see any dangers of possibly straying
into monetary policy?
(Professor Buiter) You can stray into anything. Nobody
can stop politicians talking to each other about things that interest
them. They have telephones so they can do that in any case. This
will definitely be an issue. These are ministers of finance, a
subset of ECOFIN, that we are talking about in the Euro 11 and
I do not think they are going to talk about guns and boats.
Mr Davey
82. If the Euro 11 is developed further, while
yes, you can have e-mail and telephone conversations between various
finance ministers, if it develops as a sub-committee of ECOFIN
it is likely to get more civil servants working in the service
in a greater institutional role. Therefore, it is likely to be
a greater focus of economic policy making within the European
Union because some of the sins of ECOFIN will have a relevance
to Euro 11's deliberations. Does this not mean that, as Euro 11
develops further, Britain's influence on economic policy within
the EU will increasingly diminish?
(Professor Buiter) Undoubtedly. De facto, Euro
11, soon to be Euro 12, will usurp most of the functions of ECOFIN.
If you happen to be in ECOFIN but not in Euro 11 or 12, it means
that your influence will go down, yes.
83. What disadvantage do you see to the United
Kingdom economy if that happens, the policy makers being either
the MPC or the Chancellor?
(Professor Buiter) One of the things that finance
and economy ministers will talk about is the structure of financial
market integration in Europe as a whole. That is of key interest
to the City of London and indeed to the financial sector of the
United Kingdom as a whole, because we are not just talking of
the traditional derivative and equity markets; we are talking
about markets for consumer and business, commercial and financial
products, insurance, pension fund management, those kinds of things,
both retail and wholesale. That market is going to be transformed
in the years to come, as a whole legion of directives opens it
up for the first time. We have to get away from national, retail
banking towards Europe-wide. They are going to decide the rules
under which these markets will operate and the terms of entry
and play. Britain's role in that crucial debate about shaping
the financial structure of Euroland as a whole will be diminished
as a result of being in the 15 but not in the 11.
84. Mr Barty, from a City perspective, would
you be worried if the Euro 11 develops in this way and becomes
a stronger voice and really dominates economic policy making,
particularly in financial services, and Britain is effectively
left powerless in influencing that debate?
(Mr Barty) You have to distinguish between economic
decisions that are made for the Euro area and decisions that are
made for the EU as a whole. As far as the sort of financial services
changes that pan right across the EU, ECOFIN will take responsibility
for that. Where I see the Euro 11 having a bigger influence is
going to be in discussing and coordinating macroeconomic policy,
fiscal policy, across the Euro area. There is a very strong role
and a very necessary role for that to happen and the United Kingdom,
not as a member of the Euro 11, cannot take part in those discussions.
85. Would not you, representing a large City
institution, and some of your colleagues in the City, be worried
that the Euro 11 would arrive at the ECOFIN table with a block
vote and will be trying to shape the future of the European financial
services market in a way which suits the Euro 11, which may well
not suit the City of London?
(Mr Barty) It is possible but, because of the way
ECOFIN operates, I do not think it will be very likely.
86. You do not see it as a risk at all. You
are disagreeing, Professor Buiter?
(Professor Buiter) Yes. Formally, ECOFIN will be the
body where decisions are taken but you have these 11 chaps sitting
around and talking among themselves. Remember there is no need
for unanimity in decisions taken in the financial service field.
A qualified majority will do. The 11 or the 12 will have that
majority should they wish to use it. They can effectively, should
they wish to, bypass ECOFIN.
(Professor Begg) We should remember that Euro 11 only
came into being because ECOFIN was not able to fulfil the function
the Treaty envisaged for it through the British opt-out and the
continuing non-appearance of the Danes and the Swedes and initially
the Greeks. The risk for the United Kingdom is that the influence
will diminish. It may be that some of the major decisions will
still be taken at 15 level but it can only go in one direction.
We cannot win from this. We may lose. It is only a question of
the degree to which we lose.
Mr Kidney
87. Mr Barty, it is right, is it not, that there
is a pension time bomb ticking away because of over-reliance on
pay as you go pension funds and demographic changes that are happening?
(Mr Barty) It is clearly an issue that European governments
have got to address. Most of the estimates suggest that the current
pay as you go systems would not be sustainable later on in the
century as demographics take hold. I am not sure whether there
is an implicit question here but I do not think this is a real
threat for the United Kingdom participation. We have gone a long
way to solving that problem. What I think we are going to see—and
we are already beginning to see some signs of it with the take
off in the mutual fund industry across Europe—is more and
more people providing for their own pensions because they realise
that governments are not going to be able to provide in the way
that some of the arrangements currently stipulate. I think that
is something which will carry on and develop and I imagine that
many European governments will put in place facilities to enhance
that, enabling people to substantially contribute much more to
their pensions than they have in the past.
88. So more full funding is the answer?
(Mr Barty) Yes, and more individual funding, more
individual responsibility. It is the way the UK has gone, and
I think that other European countries are going to have to go
that way. The problem with pay-as-you-go is that you always defer
the liability into the future, and I think the advantage of fully-funded
schemes of one form or another is that you basically have to put
the money away now to pay the pension in the future.
89. But to meet the crisis which is coming,
is there also a need for the reactions which Professor Buiter
detailed earlier, about cutting benefits and extending working
lives. Is that necessary?
(Mr Barty) I think there needs to be a variety of
different approaches to this. The benefits have to be cut. Certainly
the pension provision probably cannot be as generous as it is
at the moment. They will have to skew the tax regime in order
to give people different incentives to save themselves, and I
think that need to face this. These are all things which politicians
across Europe have to face up to. These are all big challenges.
It is very easy, when you are a politician faced with a five-year
term and this is something which is a 20-year problem, to say,
"I'm not going to have to deal with this; someone will have
to do that later on." There are problems. If you look at
the situation in Italy, the government have tried to put in place
pension schemes, they have run into enormous difficulties and
some of them have had to be watered down. So it is going to be
a very slow process.
90. You said there is no problem for the UK
to survive this, but if the UK is a member of the single currency
and places like Italy do not make the changes they should, is
that a problem for the UK in the future?
(Mr Barty) I do not think so, because I cannot remember
the exact phrase in the Maastricht Treaty, but as I understand
it, we will not have to bear other countries' fiscal problems
which they have got. Italy will have to continue to move to meet
both the Maastricht criteria and the Stability Pact. Therefore,
if it does not address the pension problem, it will fail in those
areas, and then you come into the area of sanctions or whatever
which the UK has to put in place or the EU has to put in place.
So Italy and other countries know they have got to adjust their
regimes in future if they are to continue to meet the Maastricht
criteria and the provisions of the Stability Pact, so they know
they are going to have to change it. The question is, how quickly
they are going to do it.
91. Can I pose a different question which is
on the same point really. If a member of the euro zone does not
like the changes it has to make in order to avert the pensions
timebomb (to use the shorthand), it is right, is it not, that
it can leave the euro zone but stay a member of the European Union?
We know that because Romano Prodi told The Spectator that
at the end of May.
(Professor Buiter) We do not know that. Mr Prodi has
spent a lot of time backtracking on that particularly incautious
remark. As you know, there is no provision in the Treaty for leaving
any of the treaty obligations, so that is not an option. No, I
think these things will be settled by the usual round of political
in-fighting between the contributors, between the beneficiaries
and, indeed, between beneficiaries of other government programmes
which may be cut or other taxpayers who may pick up the difference.
Britain, I think, has probably not solved this problem, in the
sense that it now has the least generous unfunded public pension
system of any West European country. At the same time the country
has the lowest national savings rate, so one can foresee a lot
of poverty in old age which will no doubt create other demands
on the British budget, which currently are on the books in Euroland
but not here. So there are a lot of shifting between categories.
Anyway, simply extrapolating spending obligations and calling
it a liability is, I think, not terribly good economically. The
National Health Service in this country is unfunded. You do not
talk about the national health liability that the poor Italians
might have to bail out because they have a system which is funded
in a different way. So I think these are scare stories which are
told to make the children behave, but there are not any serious
economics and politics in it.
Sir Teddy Taylor
92. Professor, would you accept that, according
to the information which we had when we went to Germany, it will
mean substantial rises in taxation to pay the cost, and to suggest
that there is a pensions timebomb is of no significance?
(Professor Buiter) No, it is a very interesting distributional
decision and distributional conflict in Germany. Either they will
have to raise contribution rates—taxes—or they will
have to cut their benefit, or they will have to cut spending elsewhere
or they will have to raise taxes levels.
93. What do you think they will do, then?
(Professor Buiter) They will do a combination of all
these things, including extending the working age.
Sir Teddy Taylor: We shall look forward
to the day.
Chairman
94. That is what normally happens, is it not?
(Professor Buiter) That is what happens in this country.
95. Of course it does. In my 28 years' experience
in this House, that is always what happens. Professor Begg?
(Professor Begg) Could I make a very simple macroeconomic
point in relation to all this, which is that whether it is fully-funded
pensions, pay-as-you-go or any other pensions, it is a transfer
from those who create the wealth to those who are the recipients
of the pension schemes. If you operate through the private sector,
you have to raise interest rates or rates of return on capital
in order to get that transfer. If you do it through the public
sector, it is a different mechanism. However you configure it,
though, those who create distribute to those who receive.
Mr Kidney
96. Thank you. I forget how many times now we
have had predictions of the long-awaited correction in the US
in terms of stock market over-valuation of the dollar and its
current value and so on. Assuming that it does happen one day
in the not-too-distant future, what are the consequences for EMU?
Perhaps I could ask all of you to answer that.
(Mr Barty) It depends how it corrects. To some extent
you have already had a correction in the equity market in the
Nasdaq, which is the high tech market in the US, at one point
had fallen about 40 per cent from its highs and is still quite
a long way down from its highs. In terms of the correction to
the US economy, at some point the US economy is going to slow
down, savings rates will go up. If that can happen gradually in
the US economy, and it has a softening effect, that can influence
the euro area, and arguably the euro area should take up some
of the slack in terms of how you deal with the problem going forward.
The big risk for the euro would come if we had a hard landing
in the US, if for example, the Federal Reserve kept on raising
interest rates generating an actual stock market crash where there
was then a big correction in the US saving rate. Because then
you would have a situation where the US, which has provided something
like two-thirds of G7 growth in the last couple of years, would
trigger a major slowdown in the global economy. How bad this would
be for Europe is difficult to say. Clearly, it would be bad, because
the economy would be growing less strongly, but the ECB would
have it in their power to offset any appreciation in the euro
by lowering interest rates. So central banks do have the ability
to cushion shocks, and clearly we are all more hopeful that the
US will have a soft landing than a hard one.
(Professor Begg) I think we have entered a period
of economic management where monetary policy has become much more
pre-emptive in all the major economies than it was ten or 15 years
ago when it was reacting to crises. The expectation is that the
way Greenspan and his colleagues in the Federal Market Committee
orchestrated things, they will anticipate what is going on rather
better than might have been the case in previous years when we
have a crisis. So a soft landing is the more likely scenario,
if indeed there is a landing. There may well be upward pressure
on the euro—it will rise further—which will take it
up by, say, ten or 15 points, depending on the mix of exchange
and federal interest rates which apply, but I do not see any major
crisis for the EMU in this.
(Professor Buiter) I would agree with that. We do
not know whether there will be a soft landing or a crash. It depends
partly on the luck and skill of Mr Greenspan. He seems to have
had monetary green fingers for so long now that the markets are
probably more optimistic about a soft landing than maybe he would
like them to be, but it depends on how much "fluff"
you believe there is in the American stock market at current valuations.
If it is a soft landing, then it would be, on balance, beneficial
for the world economy, the euro would strengthen—but it
needs to strengthen, so that is nothing to be concerned about.
Any really hard landing would harm the world economy; it might
disproportionately harm the US. Nobody escapes when the US falls
hard, so one hopes that the kind of deceleration we appear to
be seeing now, in the latest employment and retail data, indeed
will show up, will continue to settle, because we need to take
quite a chunk out of US demand growth in order to get down to
anything which is sustainable, even if you are a real new economy
buff. They are still growing at rates that are barely sensible
and sustainable. So we will keep our fingers crossed.
Chairman: Watch this space. Thank you
very much for the way you have answered our questions and for
the length of time during which you have answered them.
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