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The EU medium-term balance of payments finance facility provides the opportunity for external financing from the Community. The facility allows the Commission to borrow on international markets and to lend the money on to member states in difficulty, often with support from the IMF. The Commission has worked closely with IMF staff in assessing situations in member states looking for assistance in producing programmes aligned to economic policy conditions and seeking financing for those packages. The Commission and IMF staff will also work closely together in monitoring the implementation with a view to stabilising the situation as soon as possible. Such financing is very important in the current climate. We need EU member states in positions such as those that a couple have encountered to be able to seek support to restore confidence and protect financial
stability in order to prevent contagion and protect the functioning of the single market. We welcome the recent decision to raise the ceiling on the EU financial assistance facility.
This is an extraordinary time in the UK and abroad. We have taken bold action in the UK to stabilise the financial system and restore confidence, and the UK’s lead was followed swiftly by our European partners.
Mr. Angus MacNeil (Na h-Eileanan an Iar) (SNP): Is the right hon. Gentleman concerned by the report in today’s Financial Times showing that in the coming year the UK’s unemployment rate will be higher than that of Iceland?
Mr. Timms: I have not read the report to which the hon. Gentleman refers. We are certainly seeing an increase in unemployment right around the world. I was Employment Minister a year ago, and for a period I was able to announce in successive months more people in work in the UK than we have ever had before. The position today looks radically different; that is why we are putting in place the measures that we have announced in the past couple of weeks. The key is to ensure that people who lose their jobs are able to get back into work as quickly as possible, given that there are still more than 500,000 vacancies available.
We took the right course of action in the pre-Budget report to support the economy with a fiscal stimulus, not least in view of employment considerations, along the lines outlined in this plan, as adopted by other EU and G7 Governments. This is a global crisis that will require a global solution, and we will continue to work closely with others for a co-ordinated approach. The EU is a key partner for us. The plan is a bold step in co-ordinating the response to the crisis for the benefit of all the citizens of Europe. I commend these documents to the House.
3.56 pm
Mr. Philip Hammond (Runnymede and Weybridge) (Con): The motion invites the House to take note of the Commission papers and to endorse the Government’s response to them. Hon. Members will have noted that the Financial Secretary told us that the Chancellor has already gone to ECOFIN to discuss them, so people will draw their own conclusions about the Prime Minister’s commitment to parliamentary government and how much our deliberations are valued.
There is much that we can agree on in the Commission paper: its analysis of the situation that we face; the focus on the need to deliver, at last, on the Lisbon agenda; the use of green taxes to drive demand for energy-efficient products; and, especially, the welcome commitment to open markets and free trade. However, if one reads these two documents together, one cannot avoid the impression that a significant part of the purpose in producing them is to claim ownership of the agenda—that instead of seeing a crisis for EU citizens, the Commission sees an opportunity to extend its competence and exaggerate the role that it has played. The Commission says:
“The EU was able to take collective action when the pressure on financial markets was at its most intense”
“national action inside a set of clear EU principles”
proved to be the right approach. I have to be fair to the Minister and say that the Government appear to be alert to this case of mission creep, because all they will allow in their response is that the Commission’s document is
“a helpful contribution to the ongoing debate”,
while emphasising that the challenges are very different in the UK, the EU and the international community. That is “Yes Minister” speak for “We’ve read your document and we intend to ignore it.” The Minister needs to be more robust, because the history of UK Ministers dealing with mission creep from the Commission is that unless they are very robust and clear in setting out their case, they tend to find that they get overruled in due course.
As the Minister said, the context of these issues is global. The problems that arise from this crisis must be dealt with by the world’s major economies working together in the G7, the G8, the G20 and other institutions. Britain’s focus must be multilateral and international, not merely regional. At least as far as the banking crisis at the heart of the current problems is concerned, London is not just another city within a member state of the European Union. It is a global financial capital in its own right, and on issues of financial regulation, the UK Government must protect the interests of London. Whether we like it or not, in the present circumstances, our private prosperity and the funding of our public services are heavily dependent on the prosperity of the financial markets based in the City of London, and will be for the foreseeable future. Of course, that means an enhanced system of financial regulation to replace the failed regime of 1997, but it must be a system that is designed for the challenges facing London and co-ordinated directly with the Governments of other major financial centres around the world, not one that is intermediated by the EU, the primary purpose of which is, quite properly, the internal regulation of financial services in the European market and not necessarily the promotion of London as Europe’s principal financial centre.
Mr. MacNeil: Does the hon. Gentleman share my concern about the Government bailing out banks when we subsequently read reports of the very same banks writing off loans to Russian oligarchs in the region of £2 billion to £3 billion? Does he think that that is a wise use of taxpayers’ money?
Mr. Hammond: None of us likes to read about bank write-offs on that scale, and we all recognise that some very poor professional judgment has been exercised. But I would say to the hon. Gentleman that it was no good the Prime Minister feigning shock and horror yesterday at the fact that British banks have been making loans to Johnny Foreigner. He was happy enough to claim the credit for London’s role as a global banking centre. Well, what does a global banking centre mean if it does not mean the lending of money across borders? He should not have been surprised, and I do not believe that he was surprised to discover that British banks have engaged in extensive international lending.
The UK Government cannot subcontract responsibility for the regulation of Britain’s biggest industry. To take the hon. Gentleman’s point, it is the UK taxpayer, not the EU, who picks up the bill if things go wrong, and the Government need to set out clearly the limits of any
EU-based system of financial markets regulation. The Minister cannot afford to assume that the first priority of everybody in the European Union when they wake up in the morning is ensuring the continued dominance of London in the EU’s financial market arrangements.
Mr. Redwood: My hon. Friend makes a very good point. Does he not agree that the problem was that the Government blundered in, making a big cash injection into the Royal Bank of Scotland without any due diligence, audit or professional inquiry, even though there were weeks between the general statement of principle and the final deal? Why on earth did they not do their professional job?
Mr. Hammond: My right hon. Friend is absolutely right. No effective due diligence was exercised, and we have to ensure that, as the Government get involved more deeply with the bank, they conduct an effective independent audit of the quality of the assets they propose to underwrite, so that the insurance they propose to put in place can be properly and fairly priced.
Kelvin Hopkins: What the hon. Gentleman says suggests to me that he supports the idea of public ownership, and not just that, but a high degree of public control of how banks behave, especially when billions of pounds of public money are going into them.
Mr. Hammond: I do not know which of my comments the hon. Gentleman has interpreted in that way. We had little choice in this situation but to inject public funding into the banks most at risk. The Government cannot allow the UK banking system to fail, which is why the official Opposition supported the action that the Government took in October. It is not something that we were happy about, but it was necessary in the circumstances.
Mr. MacNeil: Will the hon. Gentleman give way?
Mr. Hammond: No, I must make a little progress, if the hon. Gentleman will allow me.
The Government’s response needs to spell out more clearly and emphatically where there may be a role for the EU and where the challenges that have to be tackled should be tackled multilaterally by the relevant Governments. Of course, the Government have a competitive claim of their own, which the Minister set out. The claim is that the actions taken by EU members are to the credit of the UK Government—that the UK blazed the trail and the EU followed. The Commission claims that national Governments acted according to
“a set of clear EU principles”,
but the UK response sees it rather as
“action taken by EU Member States, that built upon the measures...that were announced initially by the UK”.
It is a diplomatic version of Punch and Judy.
Before I move on, I want to draw the House’s attention to something buried in the preamble to the first paper. The Commission states:
“The shocks hitting the European economy are expected... to reduce the potential growth rate in the medium term”.
That seems to me like a dose of common sense and realism, but it does not seem to be referred to anywhere in the Government’s response, and as far as I can see, it is not reflected in the UK 2007 pre-Budget report, which assumes recovery of growth to a trend rate of 2.75 per cent. If that trend rate of growth is not recovered, there will be significant implications for the UK economy and the size of the future fiscal deficit. If the Government disagree with the European Commission’s analysis of the likely future trend rates of growth and the impact of the financial crisis on those rates, why does the Government response not address that issue?
Mr. Cash: I am very much encouraged by the line that my hon. Friend is taking on whether the European Union or the United Kingdom should decide the regulatory framework. Would he therefore be good enough to rule out the idea of the creation of a European unified regulatory response to the credit crunch, and to urge that point of view in the shadow Cabinet, in case anybody else might have a different point of view?
Mr. Hammond: I thank my hon. Friend for his comments. This is an international crisis and it needs to be dealt with in collaboration with Governments around the world, but it is obvious to me that it would be a mistake to have a regional focus on what is an international problem. Of course we need to work with Governments and major financial markets across the world, but we should not be sidetracked on to a regional agenda when an international response is needed.
On the broader issue of the global response, the Commission paper is, again, focused principally on establishing a role for itself. It seeks to identify national, regional and international dimensions to the solutions that will be needed, although most external commentators appear to see national and international dimensions only. In the paper, the Commission makes an unconcealed grab for the power to negotiate on behalf of the EU’s G7 members. It says:
“The fragmented representation of the European countries and of the euro area should...be addressed to increase the EU’s overall effectiveness and influence.”
Once again, I say to the Minister that the Government need to be clear on their view—they are not clear about it in their response—on the appropriate extent of any EU involvement in what is essentially a multilateral process between the world’s major economies.
I want to turn to the section of the first paper dealing with the impact on the real economy and with the Commission’s recovery plan—the most important part of the package. It identifies financial markets, instability and lack of credit as the root of the problem and urges, as we have done, monetary action, a cut in interest rates and support for lending. It then proposes two key further areas of action. One is what it calls priority short-term action grounded in the Lisbon strategy, designed to help alleviate the effects of the recession in a way that contributes to the long-term, supply-side improvements that the Lisbon process identified as necessary for the competitiveness of the European economies. That is exactly the approach that we have urged in our double test for interventions by the Government in a recession; such interventions must help families and businesses that are struggling in the short term, but must do so in a way that strengthens, rather than weakens, our economy for the recovery to come.
Mr. Heathcoat-Amory: Has my hon. Friend detected any recognition in the Commission’s papers of the cost to the real economy of the continuing flow and volume of job-destroying regulations? Is he aware that, specifically, the passenger emissions regulations recently agreed show, according to the Government’s cost-benefit analysis, that the cost outweighed the benefit, even after taking into account the supposed environmental benefit? Will he commit himself to examining that burden of cost, which undermines our competitiveness, and that of Europe, in the middle of a global recession?
Mr. Hammond: My right hon. Friend anticipates what I was about to say. There is no recognition of the conflict with the principles and objectives of the Lisbon agenda that arises from the flow of damaging regulation. The Government’s response broadly consists of agreeing, as they have done before, with the objectives of the Lisbon agenda, but they need to focus on the problem of the continuing flow of regulatory burdens. The British Chambers of Commerce estimates that 70 per cent. of the cost burden imposed on business since 1998 flows from European Union regulations. If the Lisbon agenda is to be effective, the European Union has to address that issue.
I want to focus on the second part of the package, which is described in the Commission’s paper as
“a major injection of purchasing power,”
equivalent to 1.5 per cent. of GDP. Of course, as the Minister said, that is overwhelmingly a commitment to exhort the member states, not direct Community spend. The Government have seized on that part of the EU proposal to seek to justify their fiscal stimulus package, and the VAT cut in particular, which is now widely perceived to have failed. There is a legitimate debate about— [ Interruption. ] The measure is widely perceived to have failed, but if the Minister wants to take issue with me on that, I am sure that I can dig out numerous quotations.
Mr. Timms: Has the hon. Gentleman seen today’s inflation figures, which show a sharp and welcome fall in inflation, reflecting in large part, as the Office for National Statistics has said, the effectiveness of the VAT cut, as it is passed through to consumer prices?
Mr. Hammond: I am not sure that the consensus of economic opinion sees the rapid collapse in inflation as an entirely a good thing. We are heading rapidly into deflationary territory, with growth in the retail prices index below 1 per cent. and falling at the fastest rate since the early 1980s. The Minister is far too smart and well informed to think that that is entirely good news. It is good news if the increase in prices is moderating substantially, but having lower prices in the shops does not help people who do not have a job or any earnings with which to purchase things. I can see that the Minister is a “glass half full” man who sees joyous news in this morning’s inflation figures, but I am afraid that many people will see in them yet another measure of the calamitous collapse of demand in the economy and warnings of the problems to come, particularly in employment.
There is a legitimate debate to be had about the role of fiscal policy in rescuing economies from recession and about the behaviour of households and the extent
to which it is Ricardian, as the economists would describe it. A lively debate is taking place in the academic literature, with analysis of the experience of previous recessions. That debate has been contributed to by, among others, Professor Christina Romer, the chair of Barack Obama’s council of economic advisers, who identified monetary developments as largely responsible for the recovery in the US after the great depression and fiscal developments as contributing “almost nothing” before 1942, when the gearing up of wartime production provided a demand stimulus. Professor John Taylor of Stanford university, another former member of the council of economic advisers, concluded that effective fiscal policy should be limited to allowing the “automatic stabilisers” to operate freely and appropriately.
It is not my purpose today to rehearse the academic debate. It is sufficient to note that a debate is taking place. Each Government around the world and in the EU will draw their own conclusions, based on their history and experience, about the desirability and effectiveness of using a fiscal stimulus, and we have seen that debate taking place particularly emotively in Germany. However, the Commission’s papers, despite the Government’s attempts to spin them in a different way, do not support the fiscal action that the Government have taken, as the Prime Minister claimed that they do. In December, he said that
“the debate about the use of fiscal policy to stimulate our economy and to give direct support for families and businesses in Europe is resolved. Europe favours substantial fiscal stimulus alongside cuts in interest rates...This European set of announcements is the answer to those who...believe that fiscal policy has no role to play.”—[ Official Report, 15 December 2008; Vol. 485, c. 813.]
The European Commission’s papers, however, make it very clear that fiscal action must be constrained by the growth and stability pact. Page 7 of the recovery plan states that
“the budgetary stimulus should take account of the starting position of each Member State. It is clear that not all Member States are in the same position. Those that took advantage of the good times to achieve more sustainable public finance positions and improve their competitiveness have more room for manoeuvre now. For those Member States, in particular outside the Euro area, which are facing significant external and internal imbalances, budgetary policy should essentially aim at correcting such imbalances.”
There could not be a more explicit reference to the UK without specifically naming it.
The truth is that Britain simply does not have the fiscal room for a stimulus package. We entered the credit crunch with the biggest budget deficit of any major economy. In March 2008, the Government had to concede that, for the seventh year running, the outlook for the public finances was weaker than had previously been forecast. According to the Institute for Fiscal Studies, 16 of 21 comparable industrial nations have reduced their debts and 19 have reduced their structural budget deficits by more than the UK since this Government have been in office. The World Economic Forum has stated that Britain’s
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