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We believe that the powers described in Amendments Nos. 170 and 189 would go too far. They would undermine the responsibility of the services for dealing with complaints, and would set up a parallel system of redress so that some of the complaints were dealt with under the internal system and some under the commissioners. I have set out the basis on which we have put forward our amendments: an independent panel member where misconduct is an issue; a commissioner to ensure that allegations of misconduct are fed into the complaints system; and independent supervision of the system by the commissioner.

We in the Ministry of Defence take the lessons we have learnt from the Deepcut review very seriously. As I have said in this House, it is a matter that I, as a member of the ministerial team within the Ministry of Defence, personally take seriously. I hope that noble Lords feel that the safeguards I have described, together with the existing system, will work fairly and efficiently, and that the services should retain their existing role and responsibility for responding to complaints.

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Lord Craig of Radley: I thank the Minister for what he has said. I noted in particular that he was proposing to make amendments that would affect the amendment I tabled to Clause 332. On that basis, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Drayson moved Amendment No. 164A:

On Question, amendment agreed to.

Clause 332, as amended, agreed to.

Clause 333 agreed to.

Baroness Royall of Blaisdon: I beg to move that the House do now resume. In moving this Motion I suggest that the Committee resume not before 2.39 pm.

Moved accordingly, and, on Question, Motion agreed to.

House resumed.

Euro-zone Economy

1.39 pm

Lord Dykes rose to ask Her Majesty’s Government what assessment they have made of current developments in the euro-zone economy.

The noble Lord said: My Lords, there has not been a major debate on the euro as a subject for some time in this House, probably for over a year, so I welcome this chance to ask the Government to respond on some of the salient issues in this won’t-go-away debate. I am grateful to the Minister for giving his time and coming to the House today to respond.

It also noteworthy that there are very few European matters on our radar screens anyway—partly, no doubt, because of the French and Dutch referendums on the draft constitutional treaty. I presume that gradually there will be a revival of issues next year with the period of reflection and as the EP elections approach in 2009. But for many of us, and indeed for the country, how frustrating it has been that the Prime Minister’s reckless energies have gone into the disastrous adventure in Iraq, and now the disturbing and unplanned second phase of the war in Afghanistan. How depressing that a Chancellor of the Exchequer has rather narrow-mindedly totally discouraged any discussion of the euro as an asset for Britain. We need to seize these moments and press some important questions. After all, the famous five conditions, coupled later with the addition of the exchange rate, remain “back of the envelope” opportunism except as generalised objectives. Mr Blair went back on his solemn commitment to have a campaign on the euro and a referendum. He unwisely chose subservience to perhaps the most disappointing president in recent American history rather than a central role in the courageous creation of monetary union in Europe.

Incidentally, as the German and other leading economies are now recovering from sluggish growth rates, the British press are not crowing so loudly about the Anglo-American economic model being the

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only success in town. How right they are now becoming. Without a shadow of doubt, European monetary union, a momentous step of staggering bravery by the countries that launched it in 1999, has been a very great benefit to the euro-zone members, large and small. The UK Government sadly did not have the necessary courage to join in. The British Treasury, as we now know, was fearful that the British economy could not cope, even if we were able to devalue, perhaps modestly, before any entry. The German currency discipline model, as originally constructed, was introduced for the 12 member states and, even in these early stages, we can see the internal and external advantages emerging.

Germany was the only country giving up a highly successful strong currency. What has happened there since is vital because many Germans are understandably very nostalgic about the great deutschmark. The internal growth rate there is now accelerating, although most growth still goes virtuously into staggeringly successful high-tech exports on a very large scale. In contrast, we, unfortunately, have a very large trade deficit; they have a mighty surplus. Germany has managed a high level of public sector investment spending over a lengthy time span. Its infrastructure does not creak and groan precariously, as the England fans noticed in large numbers in the summer. Even modest Belgium, with an economy about 12 per cent of the size of Germany’s, is doing well in EMU, as its central bank governor, Guy Quaden, asserted in June, referring to the marked rise in the country’s business confidence indicators—a reflection of its close trade links with other euro-zone countries.

I am sure that if more and more members of the public here—individuals and families as well as some company directors and finance directors—calculate exactly how expensive it is for us to pay both much higher interest charges and outrageously excessive aggregate charges on bank and credit cards and bank account transactions between us and the euro-zone, resentment will build up against this myopic Government. We should think again about the main advantages of a strong, integrated currency representing a high-output single market. Not only are import prices kept lower, which helps domestic prices to remain low, but rates of interest remain very low, acquisitions overseas are facilitated, international confidence in the currency grows and internal transactions aid greater cohesiveness of the marketplace.

The euro is becoming one of the most successful world marketplace currencies without, like sterling, having to be propped up by artificially high interest rates to attract bond buyers for the Government. It is backed by an internal trading area of high exports and strong surpluses. If you take the seven or eight key criterion comparators that the experts take, the dollar and the euro are now roughly in pole position. In Austria, for instance, the effects on interest rates of joining on 1 January 1999 were striking. Nominal rates on the 10-year benchmark bond fell from 6 per cent-plus to 4.75 per cent. The level of real interest rates fell even more, from 4.8 per cent to around 3 per cent. This trend was seen in the whole euro area. Your Lordships will recall the hysteria in the Sun and other

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newspapers in Britain that Ireland could not possibly cope with the euro because of property inflation. What happened? The average Irish central inflation figure remained lowish but the greater Dublin property rate of inflation and the Cork property rate of inflation remained higher than this figure. So what?

Of course, in Austria the schilling’s setting in the high and strong currency syndrome simply carried on into the euro system, as was the case in Germany. This was easier for the strong currency countries than the transition for weak currency entrants. France is a halfway house example but on the plus side because its political leaders, with the exception of the communists and the National Front, have had the courage to sell the franc fort policy for many years prior to 1999 and 2002. So France is a very good example. The best example of a large country coming from a weak currency, like Britain’s, to a strong currency success is Italy. It is a spectacular example of a weak currency being succeeded by a hard euro.

In January 2004, the respected former central bank governor and then president of the republic, Carlo Ciampi, said that,

A month later in India he asserted that Italy had changed its old bad habits and could now use the euro as a source of strength. Just like the UK, Italy’s Ministers would regularly devalue the lira post-war to get out of a crisis and boost exports. But the entrepreneurs always told them that the advantage was temporary and shortlived. I recall that the debauchment of the pound and the lira against the deutschmark over those years was fairly similar.

The scare recently in the Italian press that price rises had been very sharp because of euro entry turned out to be wholly mistaken. The excess measurement covered only so-called boulevard prices—cafes, restaurants and fripperies. The average price rise in Italy remained modest. You will notice that if you read the research of Del Giovane and Sabbatini in the Bank of Italy economic research department report of May 2005. Then we had the hilarious suggestion from one eccentric Forza Italia Minister that they should go back to the lira after all. However, his colleague, Signor Siniscalco, the Finance Minister, said that that would add some €80 billion to the administration’s debt interest costs. Not surprisingly, the idea died away. Everywhere one assesses the euro effect, the conclusions appear to be judged as highly positive for the countries involved. Coming back to Ireland, the country has experienced very strong growth since 2002, with 2007 forecasts of 5 per cent-plus for GNP and GDP. It was described last year by the Governor of the Central Bank, Jean-Claude Trichet, as a “magnificent performer” in making the case for structural modernisation in the euro-zone economies.

The Paribas bank concluded in an in-depth study in March 2005 that the,

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and other negative factors had all helped the euro gain its position as an anchor reference point and a magnet of stability, helping the Union to escape the kinds of disasters such as Black Wednesday in the UK in 1992, and the crisis of leading EU currencies a year later, which was, incidentally, dealt with much more skilfully than by the Treasury and Bank of England’s clumsiness. Paribas also noted wryly that the euro’s weak post-launch start and its subsequent strong recovery in world money markets after 2003 were both criticised by the press here in exactly the same terms. The euro was being attacked not because it was weak or strong but because it was European and therefore wicked. Even the Independent—although I believe that this occurred only once—had a ridiculous article saying that the euro could not survive. However, as the Spanish central bank representative on the ECB board said in Malaysia in July last year,

Indeed, as Pascal Blanqué from Crédit Agricole stated,

Repeated studies have proved, as we know, that the euro has not caused sharp price hikes, quite the contrary, except in some property price eruptions in Ireland and Spain, for example. John Monks has repeatedly reminded us of the success of the euro in counteracting the adverse growth in household debt—as would have occurred in Britain, had Britain been a member—and of how Spain has done so well in resisting the excessive debt that we have experienced in this country.

There are other myths, as was shown in Charles Wyplosz’s excellent research in the compendium study on the consequences of saying no to the euro. I wish that I had time to go into them. Speaking in Mannheim before the summer holidays, Dr Axel Weber, president of the Bundesbank, dismissed hostility to the euro anywhere as absurd, described it as a monumental success and rejected as foolish the notion that rejection of the constitutional treaty in two countries was going to affect the euro, which is a truly bizarre idea. I await with interest and impatience the Minister’s response to those points.

1.50 pm

Lord Harrison: My Lords, I very much welcome the debate introduced by the noble Lord, Lord Dykes, and I thank him for that. I also thank him for the 50 Moldovan lei that he leant me last week to buy a drink on a parliamentary visit to Moldova. Unfortunately, I did not have any euros with me so I had to borrow some from him, but I will repay that debt with five euros after the debate.

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It is a timely debate. The euro-zone is prospering, and I note with interest that the recent oil price hike did not disrupt the euro, as has often been predicted by those who are opposed to it. I am not ecstatic about it now, as I was not despondent when the growth rate was flat, because the essential point of the euro is to service the single market. Prosperity comes from other reforms; labour market reforms, financial and product market reforms and of course the completion of the single market. On that point, the easy way to present the single currency to the British people is to remind them that the four countries making up the United Kingdom already operate as a single currency. Mind you, two countries of our Union are not able to use their notes here in England; but never mind.

Everyone agrees with a single currency operating a single market; the question is which one. The euro has been an outstanding success in its creation, its launch and the progress despite the gainsayers such as the former Prime Minister John Major, who likened those who advocated the euro to those dancing a rain dance in terms of the hope they had of success. Recently in the Daily Telegraph Ambrose Evans-Pritchard said gaily:

The fact is that it is secure and it will be secure for the future.

Nevertheless, there are issues about the future and the governance of the euro which need to draw our attention. I very much support Trichet as the ECB governor, and he must be supported in defending the independence of the ECB as opposed to some political moves by Juncker and others to interfere with that independence. Nevertheless, Monsieur Trichet should be reminded—as his predecessor Duisenberg possibly was not—that part of the statute of the euro was that once price inflation had been conquered and sustained there was the ability to do something about the exchange rate to stimulate job creation.

I possibly share the concern of others that the Commission used unaccountable inflexibility recently to bar Lithuania, which in every other respect has fulfilled the criteria to join, simply on the count that the inflation rate was 0.07 per cent above the requirement. Britain is outside the euro, but potential problems are being veiled by the outstanding success of Gordon Brown at the Treasury. Nevertheless, there are causes for concern. Take the yo-yoing pound against the dollar; $1.40 some months ago and now $1.85, but it could well be on the climb to $2 to the pound. That may be very good for British tourists going to New York to do their Christmas shopping, but it is not healthy for British manufacturing; neither the rate nor the uncertainty that is introduced by not being part and parcel of a bigger single currency area such as the euro. The pound sterling now lies uncomfortably on the fault line of the moving tectonic plates of the dollar and the euro. To avoid earthquakes and floods in the future, we need to be inside the euro. Gordon Brown’s success means that currently the euro is off the political agenda, which I regret. I am worried about this phoney war, and I am worried that all is too quiet on the western front for Britain bordering the euro-zone.

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I conclude with a series of questions for my noble friend. First, we are not inside the euro-zone, but we have to adhere to the broad economic guidelines. Will my noble friend report how successfully we are doing that, and perhaps incorporate an update of the situation with respect to our budget and debt criteria? Secondly, when will the next assessment be made by the Treasury of the five economic tests? Has the Treasury undertaken any kind of assessment of the cost of the United Kingdom remaining outside the euro? That work should be done profitably. Has there been an update of the 2003 national changeover plan? When you think of the changes that have happened in the way that the euro has established itself, it surely must be the case that there will have been changes to be reflected in that changeover plan that take account of what has happened in the interim.

I shall consider some other sectors. What about local authorities, for instance? I understand that on 21 September there was meant to be a meeting of the people who are managing the preparation plan and local authorities. Did that meeting take place? What was the result? I would be interested to know what was discussed. They will play a crucial role if the euro comes into play here in the United Kingdom. Why is there no separate budget for the Euro Preparation Unit under the Treasury budget as a whole? Is it not important? Why have its personnel been cut year on year from 17 full time equivalents in 2002, whittled down to nine? I regard that as unfortunate.

Have the 18 EMU studies been updated, developed and expanded? Why are there no analyses of certain sectoral areas? For instance, I have in mind the small business sector. Have we considered its worries and concerns, or those of the tourism industry? I do not just mean by that preparation for joining the euro. What has been the good or bad effect of staying outside the euro-zone? Apropos of that last question, does my noble friend agree that Britain’s banks are failing British business with the lack of a competitive euro banking service? That is alluded to in the euro preparation Managed Transition Plan under information on existing retail banking services.

I conclude with one example of where one business, namely Cash Bases Group Ltd, of Newhaven in East Sussex, employing some 230 people, is successfully negotiating being outside the euro. It seems to me from what it reports that it has difficulties to overcome, which would not be the case of a business in the euro-zone. I quote:

Good luck to it if it is able to do that; not everyone is able to do that. Here is an advantage:

It is my strong desire that the Government conduct a campaign to explain the advantages of being in the

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euro. It is good that British business is accommodating itself, but nevertheless it faces problems that incapacitate it in driving itself forward within the single market.

The time is coming soon that when Europe as well as America sneeze, Britain catches a cold.

2 pm

Lord Newby: My Lords, I congratulate the noble Lord, Lord Dykes, on initiating this debate. Not surprisingly, I absolutely share his general thesis that Britain would be better off within the euro-zone. However, I fear, looking at recent international events, raising that question is a bit like asking, “Should Beckham play for the England football team?”. It is clear that as long as we have the current manager, he won’t be. Equally, as long as we have the current Chancellor, who is a possible Prime Minister, the chances of Britain joining the euro-zone are almost as negligible.

The noble Lord, Lord Harrison, reminded us of the golden age in euro preparations, when a whole raft of committees were examining them. Euro preparation plans were produced every few months and there was a sense of real momentum. I feel sorry for those few remaining souls whose job is to work on euro preparation, because one wonders whether, when they go to bed or go home at the end of the week, they feel they have achieved something and are part of a great, positive enterprise.

The debate is not going to go away and, when it is revisited from time to time, our starting point will be whether the euro-zone has been a success in its own terms and whether the economies within the zone have done well out of it. There are a number of signal successes. The euro-zone has achieved one of its central purposes of maintaining inflation at a low and apparently sustainable level. The growth and stability pact that underpins the euro-zone, despite various vicissitudes, has undoubtedly helped to rein in what would otherwise have been unsustainable levels of public expenditure among a number of euro-zone members. As a result, that has avoided the kind of boom and bust in public expenditure with which we have associated some of those economies—and which may become a feature of our own economy.

Figures produced at the end of last month have even led to the suggestion that the euro-zone now enjoys a Goldilocks recovery—neither too hot nor too cold. Inflation across the zone in September was 1.8 per cent; growth in the second quarter exceeded that of the US and it looks as though that figure will be some 2.5 per cent over the whole year. A recent Eurostat survey showed that economic sentiment among businesses and consumers across the euro-zone was at its highest level for five years.

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