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Following the comments of the hon. Member for Linlithgow and East Falkirk (Michael Connarty), I emphasise that the Liberal Democrats believe that the European Union has a role in addressing the financial crisis. The contamination of the banking sector and the
deficits faced by Governments in advanced economies are international phenomena, and the Government are right to work in the G20 with the Administration that will take over 21 minutes from now in the United States.
Of course, four of the seven members of the G7 are EU member states. Therefore, we have within the parameters of the European Union clear scope to try to work to our mutual benefit by addressing some of these common problems. The EU is, of course, also our biggest trading partner, and the United Kingdom is part of the single market and is, therefore, to an extent influenced by decisions taken within the overall European Union that impact on businesses and individuals in this country. The EU also has a greater critical mass than the UK. That is a particularly pertinent issue with regard to the banking sector.
The Conservative spokesman and others have raised the primacy of London within Europe in banking and the financial sector, and I greatly welcome that, but London is now such an international centre, and the scale of the investment—and, in many cases, the debt—held by institutions based in the UK, and often in London, is so vast, that in some cases it threatens to dwarf the ability of the UK Government to deal with, and, if need be, save such institutions. RBS, for example, is now 70 per cent. owned by the UK Government, and if what we read is true, its liabilities are about double the size of the total British economy. If we took on its liabilities and they were put on the overall public balance sheet, we would instantly go from being a country with growing levels of public debt—but levels nevertheless comparable to those of many other leading economies—to a country with much higher levels of public debt. The accountancy might not be done in that way, but the scale of such financial institutions in comparison with the scale of the British state and economy has changed markedly in the last decade, and that has a bearing on how governmental institutions have to regard the current situation. The scale is now completely different from Northern Rock and Bradford & Bingley; now, a few months on, the discussions we were having on them in this Chamber seem quite innocent. When we discuss RBS and Barclays, we are talking about big international institutions.
What conclusions can we draw from reading the documents put before us and from the debate we are having here in the UK? The first is that the bankers themselves have behaved without honour or shame, and many people would like to see greater contrition from them. Secondly, the UK banking sector, and the regulation of it, has been a failure, and the UK Government need to learn the lessons of that failure of regulation. However, we also need to look at the scope for wider European union and for global regulation. There is a balance to be struck, of course, but when institutions operate around the world and do not recognise national borders, there needs to be some regulatory recognition of that reality.
The Government need to know the liabilities that we—the taxpayers—are covering. I echo the sentiments that have been expressed, in this debate and elsewhere, that this is a difficult moment for our Prime Minister. We have got used to his lecturing other EU member states on how he brought an end to boom and bust and how they should follow our example in the UK, but we now find ourselves in a rather more humble position,
because although the EU may not be driving growth on a global scale, it is certainly not looking sickly in comparison with the UK.
The EU’s framework for action deals with the real economy, and that is the correct focus. There is a need for a fiscal stimulus across the EU to encourage consumer demand, and I do not share the Conservative party view that we should be seeking to choke back consumer demand at this point. Nor do I share—this follows on from the observations made by the previous speaker—the Conservative party’s paranoia with regard to the European Union. The shadow Cabinet is split on the Lisbon treaty, on membership of the euro and even on whether the British Government should be temporarily cutting the rate of VAT.
The Conservatives have not given us a clear answer. They may not like the Government’s policy on interest rates, but what do they think interest rates ought to be? The Conservative party is keen on telling savers that interest rates have been cut too low, but I understand that, having rescinded its initial stance of not having any views on interest rates, it now completely supports interest rates of 1.5 per cent.—a tenth of what they were under the previous Conservative Government. What does the Conservative party wish the deficit to be? It says that the deficit is far too high, but the party could give us a percentage indication. The previous Conservative Government ran a public annual deficit of 8 per cent. in the early 1990s. Is that roughly what the Conservative party has in mind at the moment, or is that figure too high or too low?
I can understand why the right hon. and learned Member for Rushcliffe (Mr. Clarke) has been brought back to mentor the Conservative shadow Chancellor. All I can say is that if the right hon. and learned Gentleman is offering a similar service to the Liberal Democrat shadow Chancellor, the answer will be, “Thanks, but no thanks,” because he does not need his hand holding in the same way. Does the hon. Member for Runnymede and Weybridge (Mr. Hammond) wish to intervene?
Mr. Hammond: After that rant and tirade I wonder whether it is worth the effort, but the hon. Gentleman did ask a question. The Opposition’s position is clearly that interest rate decisions are for the Monetary Policy Committee. If he were to look at the motion that we have tabled for tomorrow’s debate, he would see that we acknowledge that the reason why interest rates have fallen is perfectly understandable, as are the decisions of the MPC. We have sought to address the problems facing savers through the tax system—if he is able to turn up tomorrow afternoon, he will hear a little more detail.
Mr. Browne: I shall be in the Chamber tomorrow, because I diligently attend debates in this House. The Conservative party is very much giving the impression of being a group of politicians seeking to make this up as they go along—perhaps we will have some coherence from them tomorrow. Their instinctive hostility towards the European Union, as put forward by the hon. Member for Stone (Mr. Cash), the right hon. Member for Wells (Mr. Heathcoat-Amory) and others this afternoon, is not advantageous to the UK’s position.
The EU’s economic recovery plan offers some useful pointers to the way forward. One of those is the fiscal stimulus, which has been mentioned by the Minister and others. If it is co-ordinated, it will have added effect. The economies of Europe are interdependent to some degree, so there is scope for co-ordinating not only a fiscal stimulus but interest rate policy where that is applicable and likely to be effective. The immediate aspiration is to boost demand in a way that is advantageous to businesses across Europe. It is right to support viable businesses, including through measures such as aiming to speed up the payment of invoices.
I am very cautious about going down the path of propping up businesses that are simply not able to manufacture a product or supply a service for which there is sufficient consumer demand to make those businesses viable. The United States, for example, needs to be extremely cautious about going down this path to any great degree. There are other businesses that are essentially viable but have short-term cash-flow problems, and it is valid to give them the short-term assistance that they need to get over those pressures.
Mr. Hammond: The hon. Gentleman has made a point about US policy on specific industries—I assume it was an allusion to the car industry, in which I know the hon. Member for Luton, North (Kelvin Hopkins) has an interest—so can he tell us what Lib Dem policy is on support for the UK motor industry?
Mr. Browne: I am genuinely fascinated by what the hon. Gentleman infers. I have never been outflanked so far to the left in any debate in which I have spoken in the House. My position on the car industry is that companies that make cars that people want to buy should flourish, and that companies that make cars that people do not want to buy are unlikely to be successful. I am absolutely gobsmacked if the Conservative party’s view is that the taxpayer, rather than funding improved schools and hospitals, should support companies that make cars that consumers do not want to buy.
Kelvin Hopkins: Sadly, the hon. Gentleman is talking nonsense. There is a collapse in demand at the moment, and that is why the car industry cannot sell its cars—it is not because people do not want cars. As and when we recover, one hopes that people will start to buy cars again. If we allow the car industry to disappear in the meantime, it will not be able to produce those cars.
Mr. Browne: This is a widening of the debate, but the three big car-making companies based in Michigan in the USA have problems that go beyond this immediate economic cycle. Asian car manufacturers have located themselves in states of the USA, mainly in the south. They are producing cars within the domestic American market, and so not necessarily with cheaper labour costs, although they have probably negotiated better terms with their employees. They are producing cars at a cheaper price that more Americans wish to buy. I am afraid that the big three American car manufacturers have become bloated and complacent.
If we are to learn something from the 1970s, it should be that it is not in the longer-term interests of the economy for the state to continue to support businesses that are not competitive. I am making the distinction
between that and the provision of short-term cash-flow support for companies that are essentially viable but find themselves in short-term difficulties. It may sometimes be difficult to distinguish between the two, but it is not that hard in the case of the American car companies. They have problems that, in retrospect, may have been evident for a number of years.
The third matter identified in the economic recovery plan is infrastructure development, with crucial investment to be brought forward. That is important in this country, where for example the house building sector has dried up, but also right across the European Union.
The fourth matter is innovation, and what many of us call a “green new deal”. That is a matter on which the EU has provided genuine leadership in the global debate, and the high level of environmental consciousness in the EU and among its citizens means that there is scope for it to continue to lead on energy efficiency and greener transport, for instance by producing cars with lower carbon dioxide emissions. The American car-making market has not been sufficiently mindful of that, which is yet another example of the big manufacturers there being behind the curve and not anticipating changes to consumer demand. The EU can and should take the lead on such matters.
Yesterday, the Commission announced that only Iceland and the Baltic states will suffer a worse recession than the UK. Our economy is anticipated to shrink by 2.8 per cent., unemployment is set to rise towards 3 million in 2009, and the banks are awash with hidden toxic debts that the taxpayer is now having to fund. The Government’s own borrowing estimates are constantly being revised upwards, and I ask the Minister whether he or the Chancellor really believe that the UK economy will start to grow again this July. Does anyone in the House or in the country believe that any longer?
We must offer some hope and some optimism that Britain and Europe as a whole will emerge from this crisis, that we will learn the lessons about greed in the banks, which the hon. Member for Linlithgow and East Falkirk mentioned, and about inadequate regulation, and that we can build a better, greener, fairer and more decent society. I believe that that will be the case once we have got through the very difficult months and possibly years ahead.
4.54 pm
Kelvin Hopkins (Luton, North) (Lab): There is not much time left, so I shall try to be brief. I welcome this opportunity to debate the economic crisis and an EU response to it. We are seeing a series of national responses with some more words about co-ordination and solidarity, with the EU limping along behind and coming up with its own strategy. In reality, it is the national strategies that are being undertaken.
It is right that other countries are starting to imitate what Britain has done. We have yet to see whether it will be enough or whether it will work, but at least we have taken some strong action. Germany has now followed suit, although it was initially critical. It is beyond the EU’s ability to cope with the crisis, because its whole economic philosophy is inherently deflationist and the opposite of what is required, which is reflation.
The documents that we are considering show some interesting contrasts. The EU is still trying feebly to promote its neo-liberal clap-trap—the very policies on
liberalisation, supply-side monetary constraints and so on that have led the world to crisis. The UK Government’s response is more realistic and pragmatic and differs significantly in tone from the documents. I am pleased about that. I agreed entirely with the Conservative spokesman when he said that the British Government were a better judge than the European Union of what is best for the British economy.
Even the EU documents have changed their tone between October and November. By November, the supply-side words were still there—the usual nonsense—but the recovery plan had started to talk about swiftly stimulating demand, words that possibly have not featured in EU documents ever before. They perhaps recall the words of Keynes, who saw his way to creating an economic system that worked after the second world war.
Co-ordinated reflation was one of the slogans of those who, like me, long supported the alternative economic strategy, as it was called. Co-ordinated reflation is what we need now, but we will not get it if countries cannot indulge to an extent in some defence of their economies. If they are simply going to reflate and suck in imports, they will not benefit their economies. Some degree of protectionism, I think, will happen. It is already happening in America.
The word “protectionism” has been used as a hostile epithet for the common economic policies that I have supported in the past, but if one looks back to the 1930s, one sees that the depression was caused by deflationist policies, particularly in France and Germany. The hon. Member for Louth and Horncastle (Sir Peter Tapsell) has mentioned that in recent debates, and he is absolutely spot on. When countries reflated behind tariff barriers, it helped them to recover. That was particularly true of Britain. Another way of protecting one’s economy, of course, is to depreciate one’s currency. We came off the gold standard in 1931, and that helped us to stimulate the economy.
There is also the question of fiscal stimulus. It might be that in the 1930s America did not benefit quite so much from fiscal stimulation, but Britain certainly did. Let us consider Nazi Germany—I would not imitate everything that it did, but it built like there was no tomorrow. It built a massive arms industry and motorways and put all its people back to work. That was not done by monetary measures but by fiscal stimuli and public spending. The economics, if not the politics, were certainly right. I would have built hospitals rather than arms, but it did the right thing.
In the EU, a number of countries are going to suffer badly because they are in the eurozone. Ireland is a particular example. In contrast to what the Liberal Democrat spokesman said, a report in The Independent today suggests that Ireland will suffer most, with a 5 per cent. contraction, followed by Germany, interestingly. Germany has always been lauded as the great success in the past, but it is also a mirror image of us. We are a country with a balance of trade deficit, but the Germans have had a balance of trade surplus. That surplus is in serious danger because of declining demand in the international market. The Germans will have a serious problem. Keynes was absolutely right to say that big surpluses and big deficits were wrong and that countries should be able to appreciate or depreciate their currencies to deal with them. If we want stability in the world
economy, we have to allow countries to adjust their economies. Indeed, we must encourage them to adjust their economies to ensure that they do not get strongly out of line, as Germany is in one direction and we are in the other.
Spain has got problems, and how is Italy going to recover without withdrawing from the euro and devaluing? I think that Italy has to think seriously about its membership of the eurozone. There have been civil disturbances already in Greece, but I think that Germany has a very serious problem. I hope that the Germans are sufficiently intelligent to deal with it; I worry about disturbances in any country, but disturbances in Germany would be more worrying than most.
This has been a very brief debate and I am running out of time, but I suggest that we must think seriously about reconstructing the Keynesian world that we had between 1945 and 1970. It was regulated and stable, and it grew rapidly, with living standards rising faster than at any other time in our history. We must seriously consider reconstructing the world economy on that basis.
5.1 pm
Mr. William Cash (Stone) (Con): On a day like this, with Barack Obama about to make his inaugural speech as we engage in this debate, we must bear in mind the scale of the problem that my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond) identified clearly. In the context of this financial crisis, do we want more Europe, or less? I believe that the US wants us to have more Europe, and I have disagreed with that view—and with prominent members of my party on it—for a very long time.
My hon. Friend the Member for Runnymede and Weybridge was right to argue in the context of the City, for example, that it was essential for us to have our own rule-based system. I accept that we might need to share information and attempt to co-operate with EU member states and other countries around the world, but there is a difference between doing that and subjecting ourselves to the rigidities of a legal framework that is not in the interests of our economy or the City of London.
I turn now to the economic recovery plan. As the hon. Member for Luton, North (Kelvin Hopkins) noted, Europe as a whole is in recession at the moment. There is negative growth in Britain and in Ireland, which is in desperate straits, while Spain, France, Italy and Germany all face serious economic problems. For three decades and more, promises have been made about where the European economy would go as a result of the EU’s plans. I remember reading the Cecchini report in the 1980s, which set out all the promises and forecasts about how the euro would operate. All of them have been shattered; as I said in an intervention earlier, it is like witnessing the carnage of the Somme to see rules laid down as the paragons of virtue for Europe’s economy lying shattered in the dreadful crisis that we are debating today.
In fairness to the Minister, he said that there were differences between the UK and other countries. We know that Germany is deeply worried about how Nicolas Sarkozy, for example, is trying to push for more integration. He is doing that, of course, because France is so dependent on Germany, but the Germans themselves have a real problem.
The documents talk about the need to continue with the stability and growth pact. I remember arguing with my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) in November 1996 when, in a previous incarnation as Chancellor of the Exchequer, he advocated the pact. Now it is in pieces, and my right hon. Friend the Member for Wokingham (Mr. Redwood) was right to say that its rules have been stretched to a point that renders them completely untenable. The Treasury has admitted that the United Kingdom’s GDP deficit could well be 8 per cent., a figure which I know the Minister will confirm. On the figures that I suggested on 7 October in the fiscal rules debate and since, I would say unequivocally that the figure of £1 trillion is nonsense and that in fact the figure is much nearer £2 trillion and possibly £2.5 trillion.
If we take into account genuine financial obligations including public sector pensions and so on, we see that the figures are truly horrendous. I therefore strongly urge that we note the fact that the state aid rules are being stretched and that a change in the over-regulation inflicted on our businesses can be achieved only by applying the rule of the supremacy of Parliament, an amendment on which the Conservative party supported me during the passage of the Legislative and Regulatory Reform Bill, both in the Commons and the Lords. That requires the judiciary to endorse the decisions taken in this House and not at the European level, otherwise we will not get the repeal necessary to reduce the burdens on British business.
The Lisbon agenda does not work either, as Will Hutton indicated when he was a rapporteur in respect of the agenda. On every scale and on every item included in the economic recovery plan, there is no doubt that either the rules have been broken or the established policy does not work, all of which the Minister implicitly admitted by showing that we, like other countries, were having to go down different routes. Because the—
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