European Semester

The Committee consisted of the following Members:

Chair: Jim Sheridan 

† Baker, Steve (Wycombe) (Con) 

† Barwell, Gavin (Lord Commissioner of Her Majesty's Treasury)  

† Connarty, Michael (Linlithgow and East Falkirk) (Lab) 

† Dakin, Nic (Scunthorpe) (Lab) 

† Gauke, Mr David (Financial Secretary to the Treasury)  

† Jamieson, Cathy (Kilmarnock and Loudoun) (Lab/Co-op) 

† Johnson, Gareth (Dartford) (Con) 

† Latham, Pauline (Mid Derbyshire) (Con) 

† Mactaggart, Fiona (Slough) (Lab) 

† Mann, John (Bassetlaw) (Lab) 

† Rees-Mogg, Jacob (North East Somerset) (Con) 

Shannon, Jim (Strangford) (DUP) 

† Wright, Simon (Norwich South) (LD) 

Matthew Hamlyn, Committee Clerk

† attended the Committee

European Committee B 

Wednesday 4 March 2015  

[Jim Sheridan in the Chair] 

European Semester

[Relevant documents: European Union Documents Nos. 15985/14, 15953/14 and 15988/14.]  

8.55 am 

The Chair:  Before we begin, it may be helpful if I remind Members of the procedure for European Committees. I will start by calling a member of the European Scrutiny Committee to make a brief statement about why it decided to refer the documents for debate. I will then call the Minister to make a statement, and that will be followed by questions. That will last up to one hour. The Committee will then debate the Government motion. 

Does a member of the European Scrutiny Committee wish to make a brief explanatory statement about the decision to refer the documents to this Committee? 

8.56 am 

Jacob Rees-Mogg (North East Somerset) (Con):  The hon. Member for Linlithgow and East Falkirk was nominated to make the statement on behalf of the European Scrutiny Committee, but he is not here, so I will do so. It might help the Committee if I take a few moments to explain the background to the documents and the reason why the European Scrutiny Committee recommended the debate. 

The European semester, introduced to strengthen EU economic governance, is an EU-level framework for co-ordinating and assessing member states’ structural reforms and fiscal budgetary policy and for monitoring and addressing macro-economic imbalances. The annual European semester cycle begins with an annual growth survey by the Commission, followed by a series of overarching and country-specific documents from the Commission, culminating in an examination of the overall and country-specific situations by the European Council. The annual growth survey is accompanied by a draft joint employment report, which is based on employment and social developments in the European economic forecast, commonly referred to as the EU autumn forecast. 

An element of the European semester process is the macro-economic imbalances procedure. That mechanism is designed to identify and, if necessary, correct harmful macro-economic imbalances across the EU, which were a key cause of the sovereign debt crisis. The first stage of the macro-economic imbalances procedure is the publication by the Commission of an annual alert mechanism report. Today, we are to debate the 2015 annual growth survey, the draft joint employment report for 2015, the alert mechanism report for 2015 and the 2014 EU autumn forecast. Those are the opening documents for the 2015 cycle and will be considered at the European Council on 19 and 20 March. The European Scrutiny Committee has suggested that Members might wish to focus in particular on the Government’s approach

to consideration of the documents by the various functional Councils and by the forthcoming March European Council. 

May I conclude by saying what a pleasure it is to serve under your chairmanship, Mr Sheridan? 

The Chair:  Before I call the Minister to make an opening statement, I remind colleagues that they can make no interventions during his speech. 

8.58 am 

The Financial Secretary to the Treasury (Mr David Gauke):  May I join my hon. Friend the Member for North East Somerset in saying what a great pleasure it is to serve under your chairmanship, Mr Sheridan? 

Members will be aware that publication of the European Union documents relating to the annual growth survey 2014, the alert mechanism report and the joint employment report represents the start of what is called the European semester, a process that brings together the reporting cycles associated with three interlinked EU-level economic strategies: the stability and growth pact on fiscal policy; the macro-economic imbalances procedure on economic and financial stability; and the Europe 2020 strategy on structural reform. Taken together, those processes are intended to promote growth and structural reform across the EU, to provide transparency and confidence on the conduct of fiscal policies in every member state and to allow us to learn from each others’ experiences. I should remind Members that, as a result of our opt-out from the euro, we are not subject to sanctions at any stage of the European semester process. 

Restoring growth and competitiveness is critical. The European Commission’s forecasts from February predict growth in 2015 of just 1.7% in the EU as a whole and 1.3% in the euro area. That stands in contrast to its forecast for the UK economy of 2.6% growth in 2015. Indeed, the UK was the fastest-growing major economy in the western world last year. Employment is at its highest rate ever; inflation is low; our public finances are improving. Our long-term economic plan is working. 

In 2010, we had a deficit of more than 10% of national income—the highest of any major economy. Now it has been cut by half, to 5% of GDP, but it is still too high. We need to eliminate the deficit, run a surplus in good times and get our debt down. Last week the OECD said very clearly that the UK must stick to its fiscal consolidation plans if it wants to secure economic recovery and avoid risks to stability. At the same time, the performance of the UK labour market is regarded by Angel Gurria as “remarkable”, with private sector employment having increased by almost 3 million since 2010. However, as the Chancellor said, there is no room for complacency, and the advice addressed to the UK recently by the European Commission, the IMF and the OECD all points in the same direction: the Government’s priorities are right, but we need to remain vigilant over potential risks to financial stability. 

In the alert mechanism report, the Commission makes a preliminary assessment of the presence of macro-economic imbalances in each member state. In the documents for the UK, the Commission raised concerns about the UK threshold value for Government debt, private debt and export market share variables. It is right for the Commission to ask such questions; indeed,

the whole purpose of the process is to be clear and transparent about where there are potential risks to future growth and stability and to give member states the opportunity to be clear in return about what action is being taken to mitigate any risks. I am therefore pleased that the Commission’s most recent and more detailed analysis, published only last week, was clear that those risks were declining. 

The Committee will have the opportunity to consider the new documents in more detail in the coming weeks. However, I should highlight the fact that, on the scoreboard variables, the UK country report concluded that household indebtedness remains high but continues to decline. It stated that the 

“likelihood of risks occurring is considered lower than in 2014 as the strength of the economy and resilience of the financial sector have improved.” 

It noted: 

“The external sector is no longer considered a macroeconomic imbalance that requires monitoring and policy action.” 

More broadly, it acknowledged that the UK 

“continued to grow briskly in 2014” 

and that the UK 

“labour market continues to perform robustly”. 

Taken together, the discussion and policy debate that the documents provoke across the EU can play a role in encouraging other member states to reform their economies, tackle low productivity, become more globally competitive and increase employment. It is in the UK’s interests for the European economies, as our closest trading partners, to grow and thrive, and any measures that can help to achieve that should be welcomed. 

I hope hon. Members will agree that structural reform is more important and urgent than ever, in individual member states and at an EU-wide level. Responsibility for implementing structural reforms lies with individual member states, and the UK will continue to lend its voice to those who support the EU returning to strong and stable economic growth. 

The Chair:  We now have until 9.58 am for questions to the Minister. I remind Members that these should be brief. It is open to Members, subject to my discretion, to ask related supplementary questions. 

Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op):  It is a pleasure to be in a European Committee once again. I will keep my questions brief. 

On the annual growth survey, I note the Minister’s implicit recognition in response to the documents of the importance of the single market to the growth prospects of the EU and the UK. Does he agree that the Government’s commitment to a referendum on EU membership is causing problems for business confidence in the UK? I would be interested to hear his views on that in the context of the annual growth survey. 

The Minister appears to agree with the joint employment report, in so far as it focuses on important issues such as youth employment and skills. He seems to be saying that effective policy solutions are best devised by individual member states. I can understand that point; however, while some progress has been made in reducing unemployment, the documents highlight the fact that many of the new jobs created—this is common across the EU—are insecure and poorly paid, with higher rates of self-employment, not as a specific choice but because people are perhaps unable to obtain other jobs. There

has thus been a fall in tax revenues. Does he agree that the UK, in common with other member states, has to do more to create the secure, high-skilled and well paid jobs that will boost tax revenues and invigorate the economy? 

My final point is about the European economic forecast. It was interesting that the Government, in their response to the documents, had the least to say about the document that is perhaps most overtly critical of the UK. Can the Minister say what the Government intend to do at member state level to create the well paid jobs needed to boost tax revenues and deal with the cost of living crisis? He will have noted the comment that the fall in tax revenues has been influenced by the timing of the pre-announced cut to the additional rate of income tax, which has allowed high earners to delay taking bonuses and delay filing tax returns in order to benefit from a lower rate. Does he have any comments on those points? 

Mr Gauke:  Let me try to deal briefly with those points. First, on a referendum on EU membership, we believe that it is time for the British people to have a say. This Government want to achieve reform for Europe so that it is more productive, more dynamic and deals with the UK’s particular concerns while enabling the EU to perform more strongly in future. I regret that the Labour party wishes to deprive the people of a say on that matter. As far as business confidence is concerned, business investment has increased substantially in the United Kingdom since we announced our policy on a referendum on EU membership. If we want a bigger threat to business confidence, I suggest that an anti-business, Labour-led Government would provide that. 

The hon. Lady was a little grudging when she said that there had been “some fall” in unemployment. There has been a dramatic fall in unemployment, and the performance of the UK labour market is very successful, as noted by the European Commission. Getting high-paid jobs in this country is a question of ensuring that the fundamentals are right. That means having the right environment for encouraging investment in the UK, improving our infrastructure and improving our skills and training. The Government are undertaking those measures as part of our long-term economic plan. 

An example of a policy that is likely to damage our ability to achieve the high-paid jobs and highly skilled work force we need is ill-thought-out reforms of tuition fees for populist reasons, which is unlikely to benefit the poorest in society and could leave higher education establishments uncertain about their financial future. That is an example of the wrong steps we could take as a country, and this Government are determined not to do so. 

Finally, I am sure that the hon. Lady will not have missed the encouraging signs that we have seen in recent months as far as tax receipts are concerned. It is becoming clearer, almost by the week, that the 50p rate of income tax was simply failing to raise revenue. Having a punitive rate of income tax that failed to make a contribution towards deficit reduction was only holding back productivity and investment in the UK. 

Steve Baker (Wycombe) (Con):  I would like to ask the Minister about the in-depth review. The European Scrutiny Committee’s report refers to a number of indicators about monitoring internal imbalances. It says that 

“the Government notes that the UK has been found to exceed the threshold for the same three indicators the 2014 AMR and will be subject to an IDR by the Commission.” 

Will my hon. Friend explain what the Government expect the European Commission to get out of the in-depth review and the extent to which we will be subjected to authority exercised by the European Commission? In particular, I note that the EU would like to shift the tax burden away from labour to types of tax that are less detrimental to growth, such as recurrent property, environment and consumption taxes. Do the Government expect the European Union to suggest, or even to require, such tax changes in the UK? 

Mr Gauke:  I refer to what I said earlier: we are a member state outside the eurozone, so there are no sanctions that the European Commission can place on the United Kingdom. A member state that is placed in an excessive imbalance position—to use the terminology—would have to submit a detailed corrective action plan setting out the policy actions it intends to take to address the excessive imbalances, including a timetable for those actions. I stress that there is no sanction available to the European Commission. Decisions on taxation are a matter for Parliament and the UK Government, not the European Commission or other European institutions. 

Michael Connarty (Linlithgow and East Falkirk) (Lab):  Following on from that last question, everybody obviously realises that we are outside the eurozone, so these are paper exercises in relation to the UK. However, does it concern the Minister that, under European Union rules, if we were in the eurozone, our deficit of 5.2% of GDP for 2014-15 would be driven down below 3%, which is what is happening in the eurozone, damaging our economy? We should therefore be grateful to my right hon. Friend the Member for Kirkcaldy and Cowdenbeath (Mr Brown) for keeping us out of the euro. 

Mr Gauke:  I seem to remember that quite a number of us on this side of the House campaigned very strongly against membership, and it is clearly to our national advantage that we stayed out of the euro. If we are going to attribute credit to people, my right hon. Friend the Member for Richmond (Yorks) (Mr Hague) also deserves a mention. 

Jacob Rees-Mogg:  I have two distinct questions. The first is on a general point. The annual growth survey is an extraordinarily complacent document. The first page says: 

“the EU has done a lot to create the foundations for more sound and sustainable growth in the future.” 

Lower down the page, unemployment in Greece and Spain is mentioned. The failings are so profound, but the EU thinks it is doing frightfully well. Does the Minister agree that this exercise in self-congratulation, when the economic situation is so bad in so many states, is ultimately self-defeating? 

On my second question, the Commission document says: 

“it appears that workers are not using the opportunities of free movement to the full.” 

Is it the Government’s policy to encourage further use of the free movement right, or do we feel, with immigration as high as it is, that we have had quite enough, thank you very much, and that we would rather that these rights were not used to the full? 

Mr Gauke:  First, on the EU’s overall economic performance, it is clearly a mixed picture. It is striking that the figures released this week show that the UK has the third-lowest rate of unemployment among the 28 member states. Clearly, a number of countries face very high rates of unemployment, and there is much more that member states and the EU can do to be more dynamic and enterprising in responding to the challenges of a globalised world. It is incumbent on member states and the EU institutions that we move more in that direction. The UK makes that argument strongly at the EU level, and we demonstrate the actions that we take in this country. 

On the free movement of people, I would point my hon. Friend to the speech made by the Prime Minister at the end of November last year, in which he set out our proposals to reform the welfare system so that it does not act as a pull factor, bringing people to the United Kingdom in part because of the generous benefits we offer compared with many other member states. Were people to come to the UK, they would have to wait some time before being able to access, for example, tax credits. That is a sensible reform, which addresses the concerns of many of our constituents. However, it would require reform at an EU level to obtain those advantages. A referendum at the end of the process will be necessary to strengthen our negotiating position, which is why such reforms are likely to be achieved only with a Government committed to a referendum on EU membership. 

John Mann (Bassetlaw) (Lab):  Professor Milton Friedman would describe the current UK economy as hugely unstable, and dangerously so. Would the Minister care to comment on two facts in this report? The first relates to gross national saving and gross private sector saving. On both counts, only Cyprus and Greece are in a worse position than the UK. Indeed, we are in a significantly worse position, with those two countries, than all the other 24 EU member states. 

Directly related to that, will the Minister also comment on the performance of UK exports of goods and services? Our growth trend now, as in the past few years, is matched only by the disaster of Cyprus. Will he confirm that, other than Cyprus, we are bottom of the European league table for growth in exports of goods and services? If he is struggling to find it, it is in table 47 on page 484 of the bundle. 

Mr Gauke:  I will make a couple of points about savings. First, the issue with our savings ratio is not entirely new. It has not suddenly emerged since 2010, although it is worth pointing out that it is not altogether surprising to see some of these emerging trends as the economy recovers. As a Government, we have taken action to encourage saving. One could look at our pensions reforms and the introduction of auto-enrolment, or the reforms to the savings rate of income tax announced

at the last Budget. Those are all designed to assist savers and encourage saving. However, it is clearly a long-term process and a matter that this Government are addressing, notwithstanding the short-term issues being faced. 

For a long time, this country did not do enough to boost its exports to some of the world’s emerging markets—the likes of China, India and Brazil. We are seeing fairly dramatic increases in our exports to those countries. However, we face challenges arising from the fact that our biggest export market—which of course is the eurozone—has, by and large, struggled in recent years. That does not help our export performance. We are doing more in some of the other emerging markets, albeit from an admittedly very low base. The Government have given considerable support to UK Trade & Investment to ensure a much louder message than ever before that the UK is exporting and wants to get goods and services out around the world. 

Michael Connarty:  I am sure that the Minister will come back to answer the second part of the question from my hon. Friend the Member for Bassetlaw. The description—to put it in simple terms—in the report that I think the Government agreed with is that the EU  

“notes the deterioration in market share of exports is above threshold value, but the rate of decline is falling.” 

It is still declining, so to say that it is increasing is, in fact, to misinterpret the facts. 

Another thing that we are criticised for is general Government debt. The Commission states quite clearly in the report that it 

“remains concerned about high government debt, as its growth has slowed recently”— 

once again it is increasing, but it has slowed—because it is “yet to peak”. In other words, the interpretation is that Government debt is going up, not down. As everyone knows, they are really failing—although they are trying to make a smooth picture for people—to bring down Government debt to the rate they said they would. 

Mr Gauke:  I have to say to the hon. Gentleman, we have been having a debate over the course of this Parliament where our position on this side of the House has been to say that it is necessary to take action to control and reduce our deficits, which means taking difficult action on public spending, whereas the Opposition have said, “No, you’re going too far, too fast. Don’t smother the recovery with an overly tight fiscal policy; this problem will solve itself in the end.” Essentially, they have been arguing that we should be prepared to borrow more. If we borrow more, our debt will increase more. I find it a bizarre criticism that an Opposition Member should be worrying about debt when they have spent the last few years arguing that we should worry less about debt. 

Michael Connarty:  On a point of order, Mr Sheridan. I am here on behalf of the European Scrutiny Committee, which does not split on party lines. The Government are being interrogated here by our Committee for things that were said by the Commission in its report. Mine was not a partisan point and—I do not mind saying so—it was not well answered by the Minister. 

The Chair:  The point of order has been noted. 

John Mann:  Given the lack of clarity we have had, let me ask the Minister my question in a different way. Why have savings on every criterion under this Government gone down every year since they have been in? Why has the growth in exports of goods and services from this country been halved from 2010 to now, putting us in the opposite direction of travel from everyone else other than Cyprus? 

Mr Gauke:  I would make the point to the hon. Gentleman, as I did earlier, that recent exports have been disappointing, but the total volume of goods exports under this Government has increased by 14.8%, while the volume of goods exported to the EU has increased by only 6% since the beginning of 2010. Goods exports to non-EU countries have increased by more than 30%. We face a difficulty with the fact that one of our biggest export markets is really struggling. That diminishes the issues that we face. 

When it comes to savings, the hon. Gentleman has to bear in mind the fact that the economy is moving through a more positive part of the business cycle and we are seeing rapid growth. During that period, it is not altogether surprising that the savings ratio will fall. The question is: what will the Government do about it? I point to the reforms set out in the 2014 Budget, in which we announced a number of policies to help savers—for example, the increase in the level of the individual savings account. 

Michael Connarty:  To continue with looking at what the Commission had to say about the position of the UK, it says that it 

“notes levels of private sector debt to GDP, although high are declining, helped by nominal growth”, 

which means that it is, in real terms, not necessarily declining. I link that to the other comment it makes that, 

“the regional variation in house price growth, together with high private indebtedness, suggests the housing sector could be vulnerable to shocks that may spill over to the overall economy”. 

I notice in a number of reports recently that even the Chancellor admits that we have a problem of dealing with the housing problem in this country. Linking that to indebtedness, all the schemes that the Government have been bringing in seem to push up both rent and mortgage costs, rather than increasing the amount of housing available. 

Mr Gauke:  I know that the hon. Gentleman is rather sensitive about this, and thinks that the fact that he is a Labour MP is somehow not relevant; but for a Labour MP to complain about concerns of housing bubbles and so on suggests a degree of amnesia. 

Household debt as a share of income has continued to fall over this Parliament—down to 145% from its pre-crisis peak of 169%. The most important development in this area is that this Government have undertaken reforms, including the creation of the Financial Policy Committee, which means that finally we have an institution that is looking out for threats in this area—for instability. 

The hon. Gentleman raises a perfectly reasonable point—that we need to be alive to these matters. Sadly, we were not alive to these matters in the previous Parliament. But the FPC has recently reaffirmed its

view that household indebtedness does not pose an imminent threat to financial stability, not least because underwriting standards are currently more responsible than in the past. So it is a question that we should be vigilant about, but I am pleased to say that we now have the institutional arrangements to ensure that there is an organisation that is charged with identifying such risks and dealing with them before we experience the catastrophic consequences of failing to do so, as we did in the last Parliament. 

Fiona Mactaggart (Slough) (Lab):  Perhaps the Minister would tell us what he is actually doing about the risk of regional variations in house-price growth, because my assessment is that this Government’s policies have intensified those regional variations. For example, as a consequence of the bedroom tax, homes are left empty in places in the north while the acceleration of house prices in areas like the one that I represent, outstripping by far changes in household income, has created huge indebtedness in relation to housing, not just home ownership. The Minister refers to the problems that happened in relation to past Governments, but he should also pay attention to the fact that the cost of renting housing is beyond ordinary families’ means and is inevitably having a consequence on the profitability of the UK as a whole. 

Mr Gauke:  Again I refer to the creation of the Financial Policy Committee, which has a responsibility to look at any risks arising from the housing market, and indeed it does. The Government have acted to give the FPC far-reaching new powers to control risks in the housing market through caps on debt to income and loan to value. The legislation was laid in Parliament on 12 February 2015. 

The Chancellor asked the Bank of England’s Financial Policy Committee to advise whether key parameters to Help to Buy—the price cap and the fees charged to lenders—remain appropriate. The FPC published the conclusions of its first review on 2 October 2014. Those were that the scheme does not present a material risk to financial stability, that it has not been a material driver of recent house-price growth, and that the key parameters remain appropriate. Recent data show that house-price growth is easing. House prices rose by 9.8% in the year to December 2014, and that is down from 12.1% growth in the year to September 2014. 

There is, of course, an important point about housing supply, and we have taken significant steps to boost housing supply. We are seeing the results of that, with both annual housing starts and planning approvals at a seven-year high. 

John Mann:  The Minister is not comfortable talking about the savings ratio—ours is better only than that of Cyprus and Greece—or exports, where our performance exceeds only that of Cyprus, so let us look at the consequences of this failure to grow the economy on a sustainable basis: poverty and deprivation. Can the Minister tell us the percentage of the population that is in severe material deprivation? How much has it gone up under this Government? Is it true that it has gone up, as a percentage of the population, every single year? 

Mr Gauke:  I do not know which figures the hon. Gentleman is about to quote. In reality, over the course of this Parliament we have seen rapid increases in employment and falls in unemployment. If we wish to deal with poverty, the best way is to have a strong, growing economy with jobs being created and sound public finances. All those objectives are being delivered by this Government. 

John Mann:  We are here to look at this report; we are paid to do so. When the Minister says he does not know, I am surprised. Will the Minister look at page 305, table 5.28? The column second from the bottom is one of the matters in front of the Committee: 

“Severe Material Deprivation Rate (% of total population).” 

Am I correct in saying, Minister, that that has risen from 4.8% to 5.1% to 7.8% to 8.3%? If that is correct, why is severe poverty in this country on the rise? 

Mr Gauke:  The truth is that the country is facing the after-effects of the biggest recession for many years. With regard to the numbers that the hon. Gentleman refers to, if he looks at the bottom of that table, he will see that there is a break in the time series. Therefore, these numbers are not particularly reliable or a fair test. However, if we are to deal with poverty in this country the best route is to create jobs and have a strong economy— 

John Mann:  On a point of order, Mr Sheridan. Would the Minister like to correct the record on his explanation, which is factually inaccurate and is not what the table says? 

Mr Gauke:  Flag b says that there is a break in the time series, so it is not factually incorrect. 

John Mann:  On a point of order, Mr Sheridan. That is not what this table says or what the notation to the paper refers to. Will the Minister stop misleading the Committee? 

Mr Gauke  rose—  

Jacob Rees-Mogg:  On a point of order, Mr. Sheridan. The hon. Gentleman—[ Interruption. ]  

The Chair:  Order. Let’s calm down. That is inappropriate language, Mr Mann. Apologise please. 

John Mann:  I certainly apologise. 

Mr Gauke:  For the avoidance of doubt, next to the 2012 number for severe material deprivation of 7.8, there is a flag b, which indicates a break in the time series. I am grateful for the opportunity to put that on the record. I maintain the point that if we wish to address poverty then a strong economy creating jobs is what we need, and that is what we are delivering, thanks to our long-term economic plan. 

Michael Connarty:  The Minister seems not to have listened to the “Today” programme this morning, when the Chancellor stumbled over only one thing, and that

was when he was quizzed on an IFS report about increasing poverty. Those at the lowest level of income in our economy have been getting worse—he did admit that, so maybe the Minister should check with the Chancellor before he tries to defend the indefensible. The Minister may not know, but we do from our constituencies, that a falling claimant count of 1 million does not mean 1 million in work; it means a lot of people on sanctions—not in the claimant count, but not employed. Fact: I checked with my local jobcentre this week and the sanction level—not the employment level—is going through the roof. 

There is a question I would like to turn to. Part of the reason for coming here is to talk about the European Union. We had a prior discussion and evidence session with the Minister. On page 3, paragraph 2.12 says in connection with priorities: 

“The Commission sees an investment gap of at least €230 billion per annum below the long term trend.” 

That analysis goes on about the state of the EU that we are part of. Basically, what is happening is that “recent downward investment trends” mean we do not have a boost in competitiveness. That is one of the problems that all the countries of Europe face. There is talk about the need to 

“strengthen the EU’s human capital” 

with unemployment levels at 59% among youth in Greece and very high in Italy and Spain; and about the problem of deteriorating physical infrastructure. 

We talked about the new investment plan for Europe, but it does not come to €230 billion. I always have the problem—the Minister knows this—that we are not in the euro; not only that, but we do not seem to feel we have a responsibility to be involved in dealing with it, because we opted out of giving to the fund that would help turn it around. We are smug about it and, sadly, the Government seem to lack direction when it comes to helping the rest of Europe get out of its problem, rather than just sitting back and saying, “Isn’t it wonderful that a past Chancellor kept us out of the euro?” 

Mr Gauke:  I am not sure I heard a question there. 

Michael Connarty:  There is a question; it was very simple: does the Minister think the investment plan will deal with that problem of a €230 billion deficit in investment at this moment? 

Mr Gauke:  I am grateful for the question. I think it will help: I think the Juncker plan is something we can support. The hon. Gentleman will be aware that the regulation setting it out is moving in the correct direction and focusing on genuine commercially attractive propositions; that there will be rigour in assessing the proposals; and that because the European Fund for Strategic Investments, which is the cornerstone of it, will be leveraged by private sector investment, there is the opportunity of a big return. It is after all a €300 billion fund; that is the objective. Clearly that is a help, and we can welcome it, particularly given the direction it appears to be going in. I believe that there is opportunity for the UK as well, as the hon. Gentleman is aware, because of our record of attracting infrastructure investment, signed off by the European Investment Bank. We have seen some recent numbers on that. 

As to the point about our being pleased not to have to pick up the bill—yes, we are pleased not to have to pick up the bill for some of the difficulties arising in the eurozone. That is in the interests of our constituents who pay taxes, who otherwise would be contributing to it. 

John Mann:  I understand the Minister’s reluctance to read out the figures on severe material deprivation rates. The 2010 figure of 4.8% of the total population is not flagged in the report. In 2011 it rose to 5.1%—also not flagged in the report. What is the figure for the last available year in the report, for the percentage of the total UK population facing severe material deprivation? 

Mr Gauke:  If the hon. Gentleman wants to play those games, I will join in. The report says 8.3%—[ Interruption. ] It is a game, the way the hon. Gentleman is playing this. That figure follows a year where there is a break in the time series, which is clearly relevant. We want to deal with material and severe deprivation, and the best way to do it is by ensuring that the country creates jobs and economic growth. We are reducing taxes on the low-paid. We have taken 3 million people out of income tax altogether. Pensioner poverty, for example, is falling significantly, and child poverty has fallen during this Parliament. All that could be at risk if we followed economic policies that would result in unemployment increasing and economic growth falling. 

The Chair:  Before I call Mr Rees-Mogg, I will mention that there appears to be a difference over the interpretation of the tables. Perhaps it would be helpful, Mr Mann, if you were to write to the Minister to seek clarification. 

Jacob Rees-Mogg:  I want to ask a further question on the tables. So far we have had a highly selective reading of the overall table. Remarkably, the Minister will see that there has been no change on the 2005 figure for people at risk of poverty or social exclusion, in spite of our going through one of the deepest recessions in our history. May I also bring to his attention the decline in the “at risk of poverty” rate during this deep recession? Perhaps most important, and most supportive of Government policy, is the correlation between the severe material deprivation rate and persons living in households with very low work intensity. The conclusion one would draw from that is that Government policies that promote employment are the greatest way of reducing the severe material deprivation rate. That fully endorses what the Government are trying to do. Would the Minister agree? 

Mr Gauke:  I would. I am grateful to my hon. Friend, who has sensibly set out some of the numbers in the documents to give a more balanced picture. 

The Chair:  If no more Members wish to ask questions, we will proceed to the debate. 

Motion made, and Question proposed,  

That the Committee takes note of European Union Documents No. 15985/14, a Commission Communication: Annual Growth Survey 2015, No. 15953/14 and Addendum, a draft Joint Employment Report from the Commission and the Council, accompanying the Commission Communication on the Annual Growth Survey 2015, No. 15988/14, and Addendum, a Commission Report: Alert Mechanism Report 2015 (prepared in accordance with

Articles 3 and 4 of Regulation (EU) No. 1176/2011 on the prevention and correction of macroeconomic imbalances), and unnumbered Document, European Economic Forecast, Autumn 2014; and acknowledges the priorities identified in the Annual Growth Survey of boosting investment and renewing commitment to structural reform and fiscal responsibility, and the contents of the Alert Mechanism Report.—(Mr Gauke.)  

9.41 am 

Jacob Rees-Mogg:  This whole package of documents is of the greatest importance, because it sets out what our major trading partners will be doing in their economies and how they will be guided through that. However, it is absolutely riddled with difficulties, complacencies and failures that will have an effect on the British economy. 

It is interesting that the documentation avoids what is at the heart of the problem. To see what that is, it is necessary to compare what has gone on in the eurozone with what has gone on in the United Kingdom. The United Kingdom’s success since 2010 in getting its economy right and rebalancing it has been primarily based on the ability to have a tightening fiscal policy and a loose monetary policy. That has ensured that businesses have remained in business and that households have remained in their houses. Unfortunately, the eurozone has had a tight fiscal environment and a tight monetary environment in the countries that were most at risk, because nobody wanted to extend credit to them, given that the credit risks appeared too large as against those in the safer eurozone countries. That fundamental, underlying problem in the eurozone has caused terrible, terrible deprivation. 

The hon. Member for Bassetlaw, who always makes interesting and important points, and who reads the documentation diligently, focused on what was going on in this country, but the documents mainly focus on what is happening in continental European countries subject to the eurozone. The terrible destruction of people’s lives and economic prospects there is set out in euphemistic phrases that do not really bring home the full difficulty of the situation. 

Page 45 of our documentation—page 13 of the Commission’s report—says: 

“Wage developments have started to accommodate rebalancing needs.” 

That means that people are having nominal wage cuts, which is a difficult environment for people to live in. That is a really harsh way of rebalancing the imbalances caused by the euro, which could have been adjusted much more easily through flexible currencies, as we discovered in 1992. Yes, if one is a desiccated calculating machine, one may think that having an absolutely solid, gold standard currency and making people’s wages go down is a good thing economically, and that may be arguable in the long term, but it is such a harsh political decision, and the European Union tucks it away in the euphemistic phrase, 

“Wage developments have started to accommodate rebalancing needs.” 

That means that people’s pay is being cut in nominal terms. 

We have discussed the problems of poverty in this country, but inequality has risen most among the poorest member states—in most of the southern member states,

which have been most afflicted by the brutality of having a single currency across fundamentally different economies. The European Commission is completely unwilling to deal with that; it will not begin to set out what the options might be if there were no euro, what might have happened had there never been a euro or what alternatives there may be to persisting with a relatively brutal approach that is holding down the economies of many member states. 

Perhaps the saddest bit is on page 52 of our documentation: 

“In some Member States, people in vulnerable situations and with low-income continued to experience difficulties in access to healthcare.” 

The European Union admits that this great political scheme is causing people to have their wages cut, a rise in inequality and a lack of access to health care. It is hard to believe that anyone could continue to defend the imposition that the euro has been on those countries. 

Steve Baker:  My hon. Friend is making a typically brilliant speech and I am listening carefully to it. One problem with these circumstances is that instead of feeling the consequences of their own decisions at the ballot box over many years, the people of countries such as Greece are able to reallocate the blame on to the European Union as the source of the imposition of these measures, which are causing so much real suffering. That is causing fundamental political problems, which has led to the rise of radicals in Greece. Would he agree? 

Jacob Rees-Mogg:  There is a strong element of truth in that, but I am afraid that it is worse than that. The European project is so strong and has such momentum that it does not matter who we vote for. Syriza was voted for, and within a fortnight it was bullied into doing what the European Commission and the troika wanted in the first place. There is no escape from this vice through democratic means, and we should be deeply concerned about that. 

I want to talk a bit more about the deep complacency of this documentation and its proposal that these things can be answered by more state intervention. The whole object is that economies will begin to recover if the European Union and its member states all give more instructions, insist on more training and work out which industries will be best for the future. We know that that is not true. We know that the most Governments can do is to create the conditions in which businesses can operate, rather than picking particular champions or directing in one way or another. 

The Commission is trying the methods used in the 1970s that were so well known to have failed. It then says that it is committed to deregulation and perhaps more Anglo-Saxon capitalism. I must declare an interest: my investment management business comes under some onerous European regulations. The alternative investment fund managers directive is a particularly bad set of regulations coming out of the European Union. I could speak at length about it, but will not on this occasion. 

On page 21 of the bundle, we see this call: 

“At EU level, this requires further deepening of the single market and avoiding unduly burdensome regulations”. 

However, that is just not what the Commission does. We know that all the regulations removed by this Government

domestically have been more than made up for by regulations coming from the European Union. It has to be said that some of the regulations we got rid of were splendidly obscure. We abolished the regulations that said that sturgeon belonged to Her Majesty, which counted as one of the “one out” regulations. I was rather sorry about that, as it was one regulation that I rather liked. 

It then says on page 25 of the bundle, in terms of improving the flexibility of product and services markets: 

“EU legislation provides a framework for modernisation at national level”. 

It does not; it makes things more deeply regulated. It confuses regulation. It bans things that people are perfectly happy using, such as light bulbs, and makes the business life of business people increasingly complicated. The approach of saying one thing while doing another is deeply hypocritical. I can accuse the Commission of being that, although fortunately no hon. Member ever is, which is a great relief to us all. 

I like box 4 on page 27. It is the only page in a European document that I have ever ticked, boldly thinking that it has got it absolutely right. It says that the EU should be doing what we have been doing, by trying to reduce public deficit more through reducing public expenditure than through tax rises. It also says that the tax rises have made the situation worse in eurozone member states. That gets to the heart of what I was saying about the imposition of the eurozone having led people to make the wrong economic choices.  

There is plenty in these documents that sounds perfectly nice and sensible to do, but the Commission is not doing it. It calls for improved efficiency in public administration. Everyone always calls for that, but the only person who has ever achieved it is my right hon. Friend the Member for Horsham (Mr Maude). Unless he can be cloned and sent round to every EU member state, it is just motherhood and apple pie. 

I am worried about the brutality of trying to make the eurozone work, which is the consequence of putting a political ambition above the economic reality. The truth, which the documentation shows, is that the UK has prospered because it has not suffered from that brutality. Our economy has recovered better than theirs because we are free to set a monetary policy that goes with our economic circumstances and has allowed the Government to tighten fiscally. That freedom, liberty and support for democracy has been important to what Her Majesty’s Government have been able to do for the past five years. The report shows that the Commission know that. They have in front of them the facts, and the commentary says it, but they have drawn the opposite conclusion. They concluded that they must do more of what they are already doing badly. 

This issue is very important to us as a nation, because our exports will find it hard to grow against a stagnant EU. It has an economic and a social effect on us, because the free movement of people will lead to large numbers of immigrants coming to this country from the European Union. It is therefore of great importance to how this nation develops. Although we wish the EU and the eurozone members well, if they carry on with these policy prescripts it is very hard to see how they will succeed. 

9.51 am 

Michael Connarty:  I agree with much of the previous speaker’s general analysis of the role of the eurozone and the disciplines applied to countries, although I do not necessarily take the same route when it comes to how we should deal with it. This support is about what I always think about when it comes to the eurozone. The first thing was the exchange rate mechanism, from which we were expelled—thank goodness, because otherwise we would be in the same disastrous position as many other European countries at the moment, having to deal with the banks’ failures that brought our economy down. It was a wider thing, but it was very damaging to us. We would then be in such a huge deficit position that we would be driven by the eurozone’s demands to bring down our deficit so fast that it would do what we have seen in many other countries. 

The hon. Member for North East Somerset made some general points; we have seen the reality. We went to Lithuania when it had the presidency. We talked to people from the chamber of commerce and we were told that, in that country, people are living on an average of €500 a month and that 40% of all transactions are now considered by the chamber of commerce to be under the table, without tax being paid. We came back from Latvia just two weeks ago, and we were told that in Latvia it is 25%. People are being driven back to behaviours that they were using when they were in the Soviet Union, when they could not live and had to undercut their costs by failing to pay into the system in a way that would revive their economy. We were told that the minimum wage in Latvia is €350 a month, and many people just cannot live on that. 

That is the problem: it is hitting people. It is hitting business, obviously, but as a Labour Member—I am proud to be a Labour Member, although I am here as a member of the European Scrutiny Committee—I worry about what happens to the people. [ Interruption. ] Perhaps if the Government Whip, who has been fiddling away with his iPhone, actually paid attention to what goes on in these Committees, he might actually make a useful contribution, rather than snide comments to the Minister across the table. I take this seriously. 

I think the eurozone is a disaster. The analysis in the documents forecasts economic growth of 0.8% in the eurozone and 1.3% in the EU. The documents acknowledge the damaging nature of being in the eurozone—that it stifles growth and harms people in a way that it should not. On unemployment, it states: 

“the unemployment rate is expected to be 11.6% in 2014 in the eurozone and 10.3% in the EU”. 

The EU figure, 10.3%, is frightening enough, but the fact that it is 11.6% in the eurozone shows again that the disciplines being applied are wrong. The macroeconomic imbalance procedure and the alert mechanism report are like the hound of the Baskervilles, hounding the poor people who are stuck in the eurozone into more and more economic tragedy. That is the reality of it. We talk about the levels of deprivation in our own country, but the levels of deprivation in the eurozone are massive—absolutely massive. 

We went with COSAC—the Conference of Parliamentary Committees for Union Affairs of Parliaments of the European Union—to debate these matters in Greece, near Piraeus, and, quite honestly, I could smell

the decay of the Greek economy. I left the fancy hotel that we had been put into, with its false lawn on the beach, and I went walking on what I thought was a public beach to see what had been, I was told, the biggest holiday resort in the area. All the buildings were empty and the plumbing had been turned off, but people were still using the plumbing, so hon. Members can imagine the smell. I got far enough away from the resort to find someone who was still managing to survive by running a bar, and he said that, when the wind was blowing in the wrong direction, his customers would remark on the stink from what used to be one of the biggest tourist beaches in the country. 

That is what happens in the eurozone. We might say that the behaviour of the Greek economy was the precursor to that country’s present situation, but when we visit country after country and each one is struggling—when they tell us about mass unemployment of their young people, lack of skills and lack of education—we have to worry about what is going on. This is all about pushing people into a fiscal and monetary arrangement that suits those who benefit from it. At the moment, it seems as though practically only one country is benefiting from it, because most other countries—even Italy and France—are having problems with their economies that are not helped by being part of the eurozone. 

For the UK, the reality is that the documents hold up a mirror that shows us that we also have problems. We still have a major problem with investment in this country. Among other things, I am a graduate economist, and I go along to meetings where people talk to us about the problems of financing for small and medium-sized enterprises and the lack of demand pull. In other words, businesses are afraid because of the terrible shocks that happened during the banking crisis, and the behaviour of the banks. In my constituency, banks have driven companies out of business so that they can sell their assets. RBS has been found to have done that to many companies. There is the problem of risk aversion in companies that could grow from 100 to 1,000. There is also the problem of supply: we do not have a regional system; we have far too centralised a system in this country. 

We have the freedom to design what we want to do, but eurozone countries do not have that freedom. Some would say that that is because of over-regulation, but I would say that it is probably just myopia. The Government say that they now agree with the Commission. The Commission, for some reason, says that solutions should be found on a country-by-country basis, but the Commission’s plan is one plan for everybody, and every country has to fit into the same rules and regulations. If we had to do that, we would be in trouble, with a deficit of more than 5%. We would have to drive that down by at least 2% to get to the magic figure of 3%. 

When we read the documents, we can see that the semester is just another form of discipline and regime that is driving people to a place where they do not want to go, but that suits the eurozone model. I had this fight—or this discussion, shall we say—with Olli Rehn when we visited him. The euro is killing the EU project—the project which was supposed to unite people around a common ideal of security. When we went to Latvia, it was clear that it is looking to the east. It has joined the euro recently for some reason, which I think it may

regret, but it wants to get closer and closer to Europe for security reasons, because of its 230,000 Russian citizens—actually, they are not even citizens; they are not given citizenship by Latvia because they refuse to send their children to Latvian-speaking schools or to speak Latvian. The Latvians are worried about what is happening in Ukraine and beyond. That is why they want to be in the EU, not for the disciplines that are causing their population to remain impoverished and not to grow. 

When we look at these documents, we should realise what they are: a series of analyses, reports and demands on the countries in the eurozone—and across the EU, but mainly in the eurozone—and countries can be fined and sanctioned by the Commission for, shall we say, misbehaving or taking a different view from the rest of the eurozone. 

The UK does have problems. We still hope to be able to fuel and re-grow our economy through people borrowing. The private debt level in this country is shocking, and it is going up, not down. We are told that people are getting out of recession, but they are getting out of recession by inflating their credit card bills and living in debt. We have talked about housing: 40%, 50% or 60% of a family’s income now goes on rent in London. Generation rent is being driven into impoverishment because the landlord sector is taking a vast amount of its earnings. That cannot be a good future for the economy, and the Government seem to be blind to it. I know that we are running up to the election and they have to tick the boxes and do little demonstrations of how wonderfully well they are doing, but the reality is that we are on very unstable ground. 

We still have a problem in this country. We do not have a mass, well paid employed population; we have a population that is underpaid, living with credits and transfers from the social welfare system to survive day to day. A mythology has been created about skilled apprenticeships—six months training in Asda or Big Mac is called an apprenticeship these days. I deal with the oil and gas industry and the energy industry, and 60% of all vacancies these days are for non-graduate technical skills. People are leaving INEOS in my constituency because of the way it treated the work force, so it is recruiting people from Wales because it cannot find skilled people in Scotland to fill the jobs. It is recruiting from Wales because of shutting down enterprises in Wales. It is not creating places for new people to fill or creating massive apprenticeships the way the Government pretend. 

We have major structural problems with our economy. We have the ability to do it differently, because we are not controlled by the alert mechanism and the macro-economic imbalances procedure; the whips do not need to hit our back. I hope that our Government will use that to do better than they are, but I hope also that we share some concern about what is happening in the rest of Europe. I really worry that there is a smugness about the fact that we are outside and we do not have to be bothered about that. I am bothered about the 59% youth unemployment in Greece and the fact that there is no training, education or future for many young people. 

As you know, Mr Sheridan, because you are in the Council of Europe, we passed a large document on a generation betrayed. Across the European Union and

beyond—all 49 countries—a generation is being denied a future. This is not the solution for me. It is a false direction, a cul-de-sac, to be in the euro. We should be fighting to support those people who want to fight back against it. Is Syriza the solution for Greece? Will it, as the previous speaker said, comply with what is demanded by the eurozone enemy? I hope not; I hope that the eurozone begins to realise that its tight control is destroying its own vision of a prosperous Europe. These documents show just how much it is controlling people. That is what the semester is about: it is a control mechanism for the European Central Bank and for the prosperous economies that are living on the damage that has been done, using the cheap labour—as we have—to fill the places that really should have been filled by training some of our own people. 

10.3 am 

Steve Baker:  When I arrived this morning, I was not sure whether I welcomed this debate. On the one hand, it is a delight to have three hours to criticise 511 pages of European Union paperwork, but on the other hand, having read the documentation, I feel that the debate gives succour to those who think that this scale of centralised, undemocratic interventionism is a good idea; they would like us to be having this debate. I therefore rather regretted that we were having it, but of course, having listened to my hon. Friend the Member for North East Somerset and the hon. Member for Linlithgow and East Falkirk, who made excellent speeches, I am very glad that we have had the debate. Once more, we have demonstrated that we are united in this House in being most concerned about the real human suffering that we see taking place across Europe. 

As I listened to the hon. Gentleman, I was stuck by two things in particular. He pointed out that the people of Latvia have needed to go back to the tactics they used under the Soviet Union. I would connect the dots and say that it is a remarkable thing that the European Union has driven people back to the tactics necessary to deal with Soviet socialism. It is the most astonishing failure, particularly when so much of this document is superficially free market, which is a point that I will return to. The second point the hon. Gentleman made that I wanted to pick up on was about the eurozone working for some nations but not others. 

A crucial part of the European project is the ambition to eliminate economic nationalism, because people realise that that is an important cause of war. Those of us who are Eurosceptics usually reply that it is NATO that has prevented war, not the European Union. I am sure that there is a strong argument for that, but a more sophisticated reading of history tells us that economic nationalism is an important cause of war, yet even on that most fundamental measure the European Union appears to have failed to end economic nationalism. Not only has it has failed within Europe, but, I would argue, when we look at the EU as a customs union, we see that it has raised economic nationalism to the level of the European nation state, rather than getting rid of it among the component members—but perhaps that is for another day. 

As I went through the documents, I found the large number of pages of data. We had an interesting discussion about one of the tables earlier, but I was reminded me of

an old aphorism attributed to John Cowperthwaite, the civil servant who made Hong Kong what it was. Apparently, he said that the best way to fight socialism was to 

“abolish the Office for National Statistics.” 

I certainly feel a ten-minute rule Bill coming on. One of the problems with such great screeds of data is the impression they create that we know what is going on in the world: that, somehow, the lives of half a billion people can be represented in coarse aggregates and create some means by which a wise European Commission can act and direct people to take appropriate actions can be created. 

This is all quite laudable stuff. Indeed, much of the bundle contains highly laudable sentiments. For example, the European Scrutiny Committee states on page 2 of its report that the Europe 2020 strategy was 

“aimed at promoting smart, sustainable and inclusive economic growth.” 

Who could disagree with that? It contains 

“broad guidelines for the economic policies of the Member States and the EU and guidelines for the employment policies of the Member States”— 

to create integrated guidelines, whose purpose is to monitor and address macro-economic imbalances. For those of us who are concerned about democracy and who think that political power should be held to account by the public in each member nation, it is most concerning that the European Union is setting out distinctly to address economic imbalances using these great screeds of documentation. Where is the democratic accountability? My hon. Friend the Member for North East Somerset made a compelling argument that this is a severe problem. 

The European Union seems to manage to be wholly unsatisfactory for people of just about any political persuasion. Page 5 of the annual growth survey has an informative little chart that gives the three pillars of the integrated approach: the structural reforms, which generally are liberalising; the fiscal responsibility area, which generally means austerity, although a special kind of austerity that promotes growth; and investment, which of course is state-guided. The survey talks about giving a co-ordinated boost to investment. To expand on a point my hon. Friend made, it is the purpose of entrepreneurs to invest and the purpose of the price system to give them the information they need to meet the needs of the public. This is why planned economies fail: without the price system, profit and loss, and particularly the loss motive, not just the profit motive, entrepreneurs cannot make the right decisions; but of course it is extremely easy for the state to use the power to tax to draw apparently private investors into investing in, for example, infrastructure projects that would never take place in a free market based on profit and loss. I think in particular of ideas such as creating an artificial island out in the Thames at a cost of tens of billions of pounds of subsidy, and perhaps High Speed 2, although that, too, is for another day. It is very easy indeed to give guaranteed returns to private investors to produce what Governments want. That is not free market capitalism. 

That brings me on to the second thing I was reminded of when I read the documents: “The Managerial Revolution,” a book written by that rare thing, an American communist, James Burnham, during the course of the second world war. What we see in these documents is the outworking of the managerial revolution that

took place in the first half of the 20th century. Capitalism, liberalism and the idea of a free society with institutional government died and were replaced by the belief that Governments should intervene to produce particular outcomes, whatever one wanted to call that. What we now see in the EU is that managerialism in its fullest development—and that is where I come back to the noble speech made by the hon. Member for Linlithgow and East Falkirk. That managerialism, in full flood, has taken the people of Latvia back to the tactics of the Soviet Union. This is a time when those of us of good intent, on both sides, should ask ourselves what has gone wrong. 

The Labour, left-wing tradition has many, many valuable features from which we would do well to learn, such as the idea of trade unions that protect people against unscrupulous employers, but do not, I suggest, try to produce a revolution in society. There is also the idea of mutuals and friendly societies, helping people to combine voluntarily in collectives to provide for themselves and others in a healthy way that creates incentives. Without wishing to diverge too far, I have read that doctors did not like being employed by working people, having their salaries and terms set by working people or, indeed, having to provide working people with what they wanted, whereas today one of our problems is that doctors can retire early and get state-backed pensions and high pay without having to do “on call,” as the public would have them do—but I diverge. My point is that the state can be captured, whereas what the left used to stand for, before the Fabians ruined the tradition of the co-operative left, was a set of institutions that were in working people’s best interests. When I look at all this stuff—this state-based, increasingly centralised and undemocratic nonsense for which the EU stands today—I think it is time for us to set aside many of our partisan differences and instead ask ourselves how we can reconnect public services and economic decision making with the public whom we evidently all care about. 

That is not quite what I meant to say, so I will return to my third point, which is about investment. In these documents and elsewhere we seem to go through agonies talking about productivity, wondering why we do not have the right investment and why productivity is not rising. I want everybody to be as productive as possible. The more productive we are, the higher our wages and the better our living standards. There is something profoundly wrong with contemporary mainstream economics. People say “capital” and “cost of capital” when they actually mean artificially cheap credit. We forget—quite often, people simply do not know—that banks produce credit when they lend. They do not need to lend prior savings; they just create credit. 

If we artificially suppress the price of credit in a system in which banks lend money into existence, we discoordinate the market for loanable funds. What do I mean by that? In any other market, such as the market for bottled water, if we were deliberately to suppress the price, the good would no longer be worth producing at the price set by authority and supply would therefore decline; there would be shortages. When prices in the market for credit are artificially suppressed, the supply of savings goes down—why save when interest rates are low?—and the demand for credit goes up. The unique

thing about the way in which banking works, with paper money, fiat money and electronic money, is that the banks can just create money out of nothing to paper over that gap. 

The result is that, whereas in other markets, such as for physical commodities, there would be shortages and obvious chaos with clear reasons, in a system of central banking and fiat money that is chronically inflationary—last time I checked, the supply of euros had doubled during the euro’s lifetime and the supply of pounds tripled under the previous Government—in which the banks are set up to discoordinate the market for loanable funds, we should not be surprised if we find ourselves failing to accumulate the means of production. Ultimately, the means of production, which make us productive and raise our real wages, are about a physical phenomenon in the real world. All of Europe, including the United Kingdom, is suffering today from a flawed system of economic thought that is highly interventionist, highly managerial and founded on wrong ideas about bank credit that are discoordinating the market for funds, discoordinating real savings and leading us to fail to accumulate the means of production, which would make people’s lives better. 

I have spoken about this subject many times, and I will not labour it further, but only when Europe comes to terms with the idea that only entrepreneurs, operating with prices, profit and loss, are capable of discovering the information they need to invest as they should, and only when we rediscover our faith in free markets, will we escape this system of managerialism—a system which, we agree across the House, is taking people back to the desperate times of Soviet socialism and the appalling measures necessary to cope with it. It is nonsense that we are continuing down that path. We should take a different path, and I encourage my party—this is not simply about the Government—to work extremely hard on reforming the European Union before putting an in/out question to the public, because it is in no one’s interests in Europe to continue with this managerialism and the despair it produces. 

10.15 am 

John Mann:  I am not sure there is quite as much consensus as the hon. Member for Wycombe suggests, although he hit on a critical point that emerges from the documents: what is described here and elsewhere as the productivity puzzle. Another theme that emerges is the incredible complacency on the Government Benches about the UK’s economic position. We have a modest recovery fuelled by cheap money—it is the cheapest it has ever been, and we are heading towards deflation, but not quite there yet—and we have had a huge reduction in the savings base. For productivity not to go up at that time is hugely dangerous for the future. That is why the export figures I highlighted and the failure to grow are so significant. It simply will not do to blame the UK export market’s failure to grow on problems in the eurozone. 

The problem is even deeper than that. One thing that the European Union and EUROSTAT do not do, and we do not do either, and that is not covered in these figures, is to look at who owns the asset base. The reason there is such a phenomenal regional imbalance in this country is that there is a huge inflow of investment into capital assets in London, but those assets are in

property. Although that gives the UK economy a boost in all the statistics, fuels temporary growth in construction and in the servicing of new buildings and creates economic activity in the short run, in the medium run, not the long run, asset owners will extract income. 

To use the simplest example, if large blocks of housing are built and they are owned abroad, the tenants in this country will be permanently making a profit for an overseas owner. Money will flow out of the country and there will be no ongoing productivity here, because the managerial base once the asset is created when it is property is minuscule compared with what happened during construction. That fundamental weakness also affects British industry, and it leaves us uniquely vulnerable. 

The real, underlying, long-term problem with the Government’s economic philosophy is precisely that. Our model of “anyone can own anything”, which is totally contrary, for example, to the German model—almost the polar opposite—means that, as economies develop, we will be uniquely disadvantaged because we have a constant outflow of income, as profits are repatriated by foreign owners. That demonstrates our fundamental flaws compared partly with the French economy, but in particular with the German economy, where the model is the most extreme in the other direction. It means that we are not going to be able to grow our exports. The industrial base of Germany has been maintained while the property base has lagged behind, and that will give the Germans a competitive advantage on exports that they have at the moment on a permanent basis. That leaves us at a huge disadvantage. 

Jacob Rees-Mogg:  I am grateful to the hon. Gentleman for giving way but I disagree with his economic analysis of foreign ownership of capital in this country. That brings foreign money into the country that we can then invest abroad. Very often we sell low-yielding assets to foreigners and buy high-yield assets for ourselves overseas. If that were to be cut off it would be enormously damaging to the UK economy. I confess, Mr Sheridan, that my investment background has been investing in emerging markets for the past 20 years using British pension funds very often to buy high-growth assets overseas. If we do not let them invest here, they will not let us invest there. 

John Mann:  The hon. Gentleman conflates high-value assets and property. The commercial property market in particular in this country has huge amounts of debt hidden behind it that have not been removed. It remains a bubble that has not burst. It remains a significant and fundamental problem that will hit this country at some stage. No one can predict when it will hit—whether it will be pushed off into the medium term or will suddenly emerge. A vibrant European economy will push that forward. Losing ownership of the asset base, in particular in relation to property, is a fundamental weakness that has created this imbalance in the UK economy. 

We are understandably a soft and safe haven for money from abroad, often for political rather than economic reasons, and that has fuelled the London economy. As that disparity spreads, Chinese investors, for example, seek out the property market in the rest of the country. That will leave this country impoverished in the medium term. That is the weakness in the European Union model, because that is obsessed, as the hon.

Member for Wycombe alluded to, with questions of nationalism. It is obsessed with removing economic nationalism. In its place, it has a concept that ownership is of no value. 

On a plan basis, it is the Germans who have refused to move from their industrial model—their co-determination model that anchors in German workers’ ability to stop the fire sale of their industrial assets. To a lesser extent that has been done in Scandinavia and France. It has not been as effective in France but is a pretty good model in Scandinavia. A northern European Germanic model anchors in their industrial base but also means that, when it comes to commercial and domestic property, they are not vulnerable to predators from outside. 

I put it to the Committee that this is the fundamental weakness. If we sell this country to the Russians and Chinese, we may pay a political price, but the economic price we pay will be far higher—a medium-term, not a long-term price. We are selling the assets of this country too quickly, too cheaply and often wrongly, and that should be addressed. 

10.24 am 

Cathy Jamieson:  I want to make a brief contribution to sum up some of the points that have been made. Perhaps I should have anticipated that we would have a lively debate, given the hon. Members present today. I will resist the temptation to read out any of the dry, technical detail in some of the reports, and I will instead sum up some of the points that have been made. 

We had some interesting, pointed questions to the Minister. I had not anticipated that the debate would range, for example, from the history of the Fabians in the Co-operative left, which I shall resist the temptation to digress into at this time—perhaps the hon. Member for Wycombe and I could discuss that at another point—to some interesting comparisons and differences of opinion on analysis of broader economic policy. I await with interest the Minister’s response to the hon. Member for Wycombe about the current analysis. 

Steve Baker:  I do not only blame the Fabians; I think my own party has been guilty of giving way and abandoning liberalism. 

Cathy Jamieson:  Much as I tempted to be drawn into that debate, I will resist the temptation. However, it is good to know that the hon. Gentleman has accepted on record that his party is guilty of something at least, if not perhaps all the things that I would accuse them of. 

One thing that struck me about today’s debate was the suggestion from both sides of the Committee that there is a self-congratulatory approach and a degree of complacency running the 500-odd pages of these reports. I do not want to spoil the consensus, but, in picking out things in the reports, the Government are to some extent in danger of taking the same approach in their response. The UK Government have acknowledged that certain things have moved and improved, but there is not the same level of detail in the Government’s response about what they are actually going to do. The Minister has again spoken of the importance of action being taken at a member state level when required—it is in his response, and this has been reflected by Members

this morning—but the proof of the pudding is in the eating. Are the actions that have been taken in the UK really dealing with all the issues highlighted in these reports? That is a question that we could perhaps spend another hour on at another time. 

The Minister talked about pensions reform. I do not want to go over old ground—he and I exchanged enough words on that in debates in the Taxation of Pensions Bill Committee—but we have gone from the Pensions Minister suggesting that people go out and buy Lamborghinis to the Minister now suggesting that perhaps they will want to “stay in bed” and not draw down their pensions quickly, because they might want to take time and make wise decisions. While I am talking about wise decisions, it would be remiss of me not to point out that there is still something of a chaotic approach to the Pension Wise scheme. At this stage, we do not know how many advisers will be in place, where they are going to be, what sort of training they have had or whether the scheme will be fit for purpose on day one when the new system comes into place. 

We heard some very useful comments from my hon. Friend the Member for Bassetlaw, who as always gave a thorough analysis, looking at EU issues in his own inimitable way. He helpfully pointed out the complacency from those on the Government Benches, and talked about the eurozone and the UK export market, which is important, as well as relating to the question of assets in London and in the regions. 

My hon. Friend the Member for Linlithgow and East Falkirk gave us a graphic account of some of the work being done by the European Scrutiny Committee. Some of that work largely goes unrecognised—I will not say “unnoticed”, because obviously we have the opportunity here today to discuss it. However, people sometimes get bogged down in the piles and piles of paperwork and statistics that come out. My hon. Friend did a fantastic job of relating that to the real lives of people in some of the countries referred to in the documents. That aspect perhaps does not get enough attention. He made very strong points about employment and low wages, the lack of proper apprenticeships, the skills gap and the danger that a generation of people will be denied a proper future. To bring this back to what is happening in the UK, there are still serious questions about whether we are doing enough to ensure that our young people have opportunities to get into employment; to promote proper apprenticeships; and to tackle the scourge of low wages, through, for example, raising the minimum wage, supporting those companies that are able to pay the living wage and ensuring that more can do that in the future. 

We have had various discussions this morning. We have had the opportunity to look at different economic analyses, and there were interesting contributions on the banks, their ability to create money and the impact of that. Indeed, I think that in the not-too-distant past that was the subject of a Backbench Business debate that generated interest and good support among hon. Members. 

I look forward to what the Minister will say in summing up. We have had a useful debate. We have had the opportunity to look at some of the detail in the documents, and screeds of figures were pointed out. I

was not entirely convinced by the notion that we should simply abolish the organisations that produce all the statistics, but I will end on this point. The facts and figures that are there should guide us. They are useful for monitoring what is happening. However, we cannot see them as an end in themselves. They should guide us towards policy development in exactly the way that my hon. Friend the Member for Linlithgow and East Falkirk talked about. We should relate them to the life experiences of real people in the countries across the EU and, of course, here at home. On that point, I hope that the Minister will be able to give us answers to some of the pertinent questions posed by hon. Members on both sides of the Committee. 

10.32 am 

Mr Gauke:  We have had a lively and wide-ranging debate. We have discussed everything from fractional reserve banking to the desirability or otherwise of an open economy. I will turn, albeit briefly, to those issues in a moment. Very interesting points were also made about the challenges that the European Union faces collectively as an economy. There is a remarkable range of performances across the EU. We can look at, for example, the growth rate of the United Kingdom, which I mentioned earlier and which is 2.6%, versus the European average of 1.7% and the eurozone average of 1.3%. We can look at the employment numbers. It is now clear that the UK has the third lowest unemployment rate in the EU. We are just behind Germany and Austria, but our rate is substantially below some of the higher levels. It is right to point out the challenges faced by economies such as Greece. We heard from the hon. Member for Linlithgow and East Falkirk about his experience of Latvia—an economy that, to be fair, is now growing strongly, but which contracted by something like 20% in the depths of the re-recession. That is an extraordinary contraction. 

My hon. Friend the Member for North East Somerset made a powerful speech and, as always, set out his case in a very articulate way. He highlighted some of the dangers that the eurozone faces and some of the great difficulties that continue to exist. In many respects, although they were not in agreement on every matter, there were some parallels with the speech from the hon. Member for Linlithgow and East Falkirk, who was also concerned about those matters. 

We heard a fluent and familiar speech from my hon. Friend the Member for Wycombe. He raised interesting issues about the history of socialism, capitalism, monetary and banking policy, and so on, not all of which were necessarily directly related to the documents; but I am sure that he will explain that they are none the less important and relevant. 

Steve Baker:  They are relevant, because if Europe is in a dreadful economic mess that has forced a nation back to the coping techniques of Soviet socialism, it is pretty important to understand the fundamental institutions that drove us to this point. From the documents, I see that all the things I discussed are at their fullest expression in the European Union and must be dealt with at their root causes. 

Mr Gauke:  I am pleased that I gave my hon. Friend the opportunity to reiterate that point. 

The hon. Member for Bassetlaw made an interesting speech, which sounded to me very much like an argument against an open economy. I would argue that the UK economy benefits from being open to investment; and indeed, we benefit from the opportunity to invest in other countries. That point was made well by my hon. Friend the Member for North East Somerset. 

I think that the Committee agrees, by and large, that there are continuing severe difficulties and that the 2008 financial crisis had a major impact on many economies in the European Union. The UK has in the past four years been the fastest growing major economy in Europe, but we certainly lived with the after-effects of the financial crisis. However, other members of the EU are living with them in a more significant way and are yet to make the recovery that we have made. 

Therefore, it is important that we continue to support the endeavours of anyone who provides the right messages on structural reform and growth, and that we encourage member states to address the strongly-worded advice about dealing with the most pressing challenges that the European Commission has provided—as have the IMF and the OECD. Many things need to be done in response to the challenges. In this country we pursued a fiscally responsible response and an active monetary policy. We also undertook structural reforms. We believe that that is the right approach for countries in addressing the issues that we all, to a greater or lesser extent, face. 

We must also be clear, in the context of the documents before us and the European semester, that although it is

appropriate for euro area member states to be subject to closer surveillance, which could ultimately lead to sanctions, the UK is not part of those binding arrangements or subject to sanctions at any stage. We believe that that is the correct position. 

Ultimately, a return to sustainable growth is the only way for EU member states to reduce their debts and exit from the current crisis. The UK Government are leading the EU growth agenda and making the case for ambitious EU reform. Member states need to undertake deeper structural reforms to move the EU towards that objective. 

Question put and agreed to.  

Resolved,  

That the Committee takes note of European Union Documents No. 15985/14, a Commission Communication: Annual Growth Survey 2015, No. 15953/14 and Addendum, a draft Joint Employment Report from the Commission and the Council, accompanying the Commission Communication on the Annual Growth Survey 2015, No. 15988/14, and Addendum, a Commission Report: Alert Mechanism Report 2015 (prepared in accordance with Articles 3 and 4 of Regulation (EU) No. 1176/2011 on the prevention and correction of macroeconomic imbalances), and unnumbered Document, European Economic Forecast, Autumn 2014; and acknowledges the priorities identified in the Annual Growth Survey of boosting investment and renewing commitment to structural reform and fiscal responsibility, and the contents of the Alert Mechanism Report.  

10.39 am 

Committee rose.