Previous Section Back to Table of Contents Lords Hansard Home Page

These figures are underpinned by productivity improvements in the first half of the year—up by 2 per cent, compared with an average rise of less than 1 per cent over the past five years. Since the euro-zone was created in 1999, some 7 million new jobs have been created and the employment rate across the zone as a whole has risen from 63 to 66 per cent. Looking at some of the countries within the euro-zone, rather

12 Oct 2006 : Column 402

than the aggregate of the whole zone, there have been some remarkable improvements.

Germany has been extremely interesting, because it has adjusted to euro-zone membership by having very low real-wage growth over the past six years, directly as a result of recognising that the country would be locked into a stable currency with its principal trading partners in Europe. That has produced a discipline that has enabled negotiators to rein in real wage increases. In turn, that has helped fuel a big rise in German trade and current account surpluses. Perhaps partly because of that long period of low real-wage growth, it is not surprising that confidence in the German economy was at a 15-year high when it was last measured.

In France, the picture has been more mixed. However, in June, unemployment was at its lowest level for four years and the stability and constraints that the euro-zone has provided have helped to turn the economy around. Of course, given that the euro-zone is a multifarious area, some successes are distinctive to the countries that have been able to achieve them.

The Greek Government recently announced a 25 per cent upward revision in GDP, because Greek statisticians realised that they has failed to take account of some fast-growing areas of the service sector, of which money laundering and prostitution were singled out in the popular press. One wonders what research was undertaken by the Greek statisticians that enables them now to measure those sectors of the economy with greater precision. One can only be grateful and pleased for Greece that its new-found wealth, albeit from surprising sources, means that it can bring its budget deficit below the 3 per cent GDP ceiling, as required by the growth and stability pact.

Given that we are discussing the economy and Europe, it would be mistaken to take the view that everything has been plain sailing and will necessarily continue to be so. I strongly agree on a political level with the support given by the noble Lord, Lord Harrison, to Monsieur Trichet for the independence of euro-zone institutions, so that there is no political interference to underpin the reasons for the key success of those institutions—keeping their eyes focused on a clear, non-political target; namely, the inflation rate. I remember that Monsieur Trichet made a speech here in London before the euro-zone was established about how he was a firm supporter of it, even though he was governor of the Banque de France, because it would impose discipline on the French economy and help reform—which it has.

That is the down side of the current situation, a general sense that reform has not gone far enough, whether in relation to taxes on business, labour costs as a result of social payments, or generally inflexible labour markets. There is an argument, with which I am not sure I wholly agree, that the euro-zone has created a false sense of security for its members in that they believe that, because they have the security blanket of the euro-zone, perhaps they do not need to reform as much as they might in those areas. However, failure to do so only slows down growth.

12 Oct 2006 : Column 403

But even taking into account those issues—and we see how reform is undertaken in a number of countries and remember how difficult it was to reform many of our own labour practices and the great rows that took place, particularly in the 1980s, over reforms that we now extol internationally—reform is taking place and pressure to reform is continuing. In the member states which have newly joined Europe and are struggling to reach a position whereby they can join the euro-zone—Hungary or Poland, for example—for different reasons there is a consensus that euro-zone membership would improve the management of their macro economies making it less likely that high, ongoing budget deficits are maintained and making those countries less vulnerable to international economic shocks.

As for the argument that the euro-zone might unravel because Italy, in particular, has difficulties from time to time, first, that is highly unlikely; and, secondly, does anyone really believe that the long-term interests of the Italian economy would be served by being outside the euro-zone? I think not.

In the UK, there are strong economic arguments in favour of being a member of the euro-zone, including that mentioned by the noble Lord, Lord Harrison, regarding the dollar. The key argument, which we should have been and, it is hoped, will be honest enough to address, is a political one about whether Britain wishes to be at the heart of Europe and whether it wishes to play a full part in moving forward the European economic reform agenda as a whole. So long as we are outside the euro-zone, we are simply not sitting in the meetings which would enable those reforms to take place. There is undoubtedly a big economic cost in not being in the euro but, in my view, there is an even bigger political cost.

2.10 pm

Baroness Noakes: My Lords, the enthusiasm of the noble Lord, Lord Dykes, for the European project is well known in your Lordships' House and he has not disappointed us this afternoon. It will not surprise him that I find it difficult to agree with anything that he said, and in that I feel somewhat alone among those who have chosen to speak in this debate.

The noble Lord’s Question refers to the euro-zone economy, but of course there is no such thing. Adding together the economies of the 12 countries that have committed themselves to economic and monetary union does not make them one economy. It is just possible that if the 12 countries had exhibited genuine and sustainable economic convergence prior to the creation of economic and monetary union, we could now be looking at something that resembled a single euro-zone economy. But the truth was that the politics of the euro were stronger than the economic facts, and so various wheezes and fibs allowed economic and monetary union to proceed on the basis of economies that were, in fact, very dissimilar.

We have seen the truth of divergence in the different economic performances post-economic and monetary union, with Ireland at one end of the growth scale and Germany at the other. That has been the case not just in terms of growth; it will also be found in workforce statistics and in income per person.

12 Oct 2006 : Column 404

The truth is that there is not one euro-zone but 12 economies moving in different ways. That is not just a comment on the smaller countries within the euro-zone; it is true of the core countries of France and Germany. For example, in the past few years, one has done startlingly well at increasing its exports in goods and the other has fallen back. One has a growing trade surplus and the other a growing trade deficit. That helps to explain why Germany has recently turned its economic performance around more than France.

This divergent performance throughout the euro-zone has, in turn, illustrated the fallacy of a one-size-fits-all instrument of economic policy—namely, the single interest rate tuned to a euro-zone-wide measure of inflation. That interest rate policy has, until recently, held rates at levels designed to suit the sluggish German economy. But of course the real impact has been an inflationary boom in other economies, such as those of Ireland and Spain, on the back of negative real interest rates. The overall statistics for the euro-zone never tell the truth for any individual country within it.

For several years, euro-zone growth has lagged behind that of the UK, the US and practically anywhere else you care to mention. There has been some good news on euro-zone economic performance this year, largely on the back of an apparent recovery in Germany. But a number of factors—for example, the World Cup effect and the imminent changes in VAT in Germany—have flattered those statistics in Germany. Yesterday, we had the news that business confidence in Germany had slumped dramatically. The noble Lord, Lord Newby, said that it was at a 15-year high, but I suspect that he did not read yesterday's news, which showed that it was again in serious decline. Indeed, yesterday's view from the European Commission was of lower, perhaps even zero, growth in the first quarter of next year. That rings true. A potential world economic slowdown on the back of high oil prices and a slowing US housing market, as the IMF has warned, will not bypass the euro-zone.

The relative lack of success of the euro-zone is not a Eurosceptic narrative. No less than the Conseil d’Analyse Economique, firmly rooted in the French Government, concluded in a recent report:

The only thing that is extraordinary about that quotation is that it is predicated on a belief that economic integration has, at some stage, in some way promoted economic growth, and I do not believe that there is a jot of evidence to support that proposition. The extraordinary thing about the report overall is that the solution to this failure is more economic integration, but of course there never has been any accounting for the French.

The plain facts remain that some of the euro-zone economies have avoided deep and meaningful reform, especially in their labour markets. We have to single out Germany, France and Italy as the principal culprits. French labour laws are Byzantine by any standards and they probably vie with Germany in

12 Oct 2006 : Column 405

their cost. The World Bank, for example, has estimated that in Germany it costs an average of 67 weeks’ pay to get rid of each worker. That does not promote flexibility in the economy.

Once upon a time, the failure of the single currency and the consequent implosion of the euro-zone was the prediction of only some Eurosceptics. For those, it was just one more reason why the UK should keep well clear of economic and monetary union. If the euro-zone fails to hold together, that will be messy and costly, not just for the countries concerned but also for countries that have significant trade balances with the euro-zone. That, of course, includes the UK, although we are not, by some margin, the country most affected. That is why the failure of economic and monetary union was not something that any UK citizen, Eurosceptic or not, could rejoice in predicting.

But those Eurosceptics have recently been joined by the distinctly pro-euro think tank, the Centre for European Reform. This think tank has concluded that the single currency now risks becoming a,

Italy may well be the closest to the edge in triggering a crisis but it is not alone, with Portugal, Greece and Spain joining it in the possible departure lounge.

I have a number of questions that I hope the Minister will deal with when he responds. First, does he agree that the countries within the euro-zone have not, overall, prospered from their membership? Economic performance within the euro-zone has been disappointing, with the one-size-fits-all policies harming rather than helping those economies. Secondly, and following on from that, does the Minister agree that the Chancellor's determination to keep the UK out of economic and monetary union has been a wise and sensible stance from the perspective of the UK economy?

Thirdly, and more importantly, will the Minister update the House on the Chancellor's current thinking on the UK and economic and monetary union? The likely move of the Chancellor to No. 10 at some stage when the Prime Minister finds it convenient makes this especially important. The Chancellor has strong Eurosceptic credentials and many of us hope that, if he is allowed to move to No. 10, he will take those credentials with him.

Fourthly, will the Minister remind the House when the next assessment of UK membership will be made and will he outline the terms of that assessment? The noble Lord, Lord Harrison, also asked that question. The timing of that assessment against the background of the Labour Party's succession struggles makes this an important issue. The way in which the assessment is carried out is also important. The right result was achieved last time but I am sure that I am not alone in thinking that an assessment carried out behind the closed doors of the Treasury is not a transparent and respectable way to conduct major government business. Will the assessment next time be a more open process?

Lastly, and even more importantly, will the Minister confirm that there will be no question of the UK joining the euro without a referendum, with the UK approving that move? Economic and monetary union

12 Oct 2006 : Column 406

has not been a success for the economies that are locked into it. Serious cracks are now appearing and, while we may well struggle on without an implosion, it is not a system that a successful economy, which I believe our economy broadly is, should want to join. I hope that the Minister will confirm that the Government continue to believe that the British people will be the best judge of that if the question ever arises again in earnest.

2.20 pm

Lord McKenzie of Luton: My Lords, this has been an interesting and useful debate, and I thank the noble Lord, Lord Dykes, for initiating it, and all noble Lords who have spoken this afternoon. There has been a spread of views—not an identity of view—on this issue, which is not surprising.

At the heart of our debate must be the assessment that despite Europe’s and the euro area’s current cyclical recovery, structural problems persist. Europe’s low growth in the past five years—2001-2005—coupled with a persistent lack of resilience highlight continuing structural policy weaknesses. To be fair, that is a different picture from that painted by the noble Lords, Lord Dykes and Lord Newby, and, to a certain extent, my noble friend Lord Harrison. If anything, the current recovery must be seen as a rare window of opportunity for Europe and the euro-zone to exploit the upswing and commit to making Europe a dynamic and knowledge-based economy capable of sustainable economic growth and creating employment.

The right policy response—to which several noble Lords referred—is therefore the continued pursuit of structural reform to raise labour participation, boost productivity and increase flexibility in labour, product and capital markets. Economic and monetary union puts a premium on structural economic flexibility, as to be successful in monetary union countries need additional flexibility to adjust to change and to unexpected economic events.

Alongside EMU, the challenges of globalisation and demographic change place additional emphasis on the importance of rising to the reform challenge. We are part of a rapidly changing global economy that brings significant economic challenges in terms of a changing balance of economic activity, increasing global integration and intensifying global competition. Declining birth rates and rising life expectancies are interacting to produce a dramatic change in the size and age structure of Europe’s population. If unaddressed this will markedly increase the dependency ratio in countries, with serious negative implications for trend growth and pronounced increases in public spending. To address this challenge Europe needs to review its pension, long-term care and health systems and aim to raise labour utilisation underpinned by an adequate and transparent macro-economic framework as well as sound public finances.

To improve its economic performance relative to the US and consistently match the recent growth rates of other successful developed economies, Europe must take urgent action to promote employment and boost productivity. The Lisbon programme of economic reform has recently been refocused by EU leaders on

12 Oct 2006 : Column 407

promoting growth and employment. They are the areas in which Europe most needs to succeed in order to compete in a global economy that puts a premium on skills, innovation and flexibility.

With regard to Europe’s current economic performance, which was the subject of a number of contributions, although it is currently undergoing a cyclical recovery and the majority of member states are performing relatively well, with strong out-turns, particularly in the first half of this year, Europe still needs to make up much ground in comparison with key developed economies, while unemployment remains relatively high and persistent. As the noble Baroness said, we cannot look at this in total; we have to unpick and see what is happening in individual countries.

The current recovery is still not sustainably entrenched, with greater uncertainty beyond 2006, while the recent economic stagnation highlights remaining structural problems. On the issue of growth, since 1996 annual average growth in GDP in the euro area has averaged about 1.2 per cent less than in the US. Indeed, in 2005, real GDP growth in the euro area was less than half that in the US.

Stronger growth in non-euro area countries, such as Sweden, the UK and also the new member states, boosted growth for the EU25 as a whole to about 1.75 per cent in 2005, compared to 3.25 per cent in the US. Europe’s growth rate still lags behind those of its main competitors. As a result, the gap in living standards between the US and the EU15 has widened back above 30 per cent.

Analysis suggests that Europe’s labour market performance explains about two-thirds of Europe’s gap in living standards with the US; the remaining third can be attributed to Europe’s lower productivity levels. Despite recent efforts to boost employment and marked success in some member states, particularly in raising female employment, inactivity rates remain high, with more than 90 million inactive people of working age across the EU25.

The employment rate of older workers remains especially low and well below that of major competitors like the USA and Japan. Moreover, at around 8 per cent, Europe’s unemployment rate is considerably higher than that in the US and Japan—and the UK—leaving 17.5 million people unemployed.

Raising productivity levels will also be crucial for Europe to improve its long-term economic performance and living standards. The euro-zone underperforms against the US in terms of both output per hour and output per worker, and the gap has been widening since the mid-1990s, reversing the trend of catch-up with US productivity levels during the three decades following the war.

Recent analysis suggests that the underlying causes are largely structural, reflecting in particular a failure to boost services productivity. The relatively small size of the EU’s “knowledge services” and ICT-producing as well as high-productivity ICT-using manufacturing sectors particularly present challenges. This points to a clear need for further action to promote the key drivers of productivity, increasing product market competition, enhancing the EU’s frameworks for innovation and enterprise, and upgrading the skills of

12 Oct 2006 : Column 408

both existing workers and new entrants to the labour market so that they can exploit the opportunities of new technology.

The advent of EMU is itself a driver for pursuing structural reform and enhancing economic flexibility, especially in the euro area. To be successful in monetary union, countries need even more flexibility to adjust to change and to unexpected economic events once the ability of countries to vary their interest rates and exchange rates has gone and the euro and the single European interest rate are in place. EMU membership therefore puts an additional premium on ongoing reform of EU labour, product and capital markets.

In this context, the Government continue to argue that employability, flexibility and stronger competition policies must be a top priority, so that EMU can be a sustained success. Enhancing the flexibility and dynamism of the European economy and building on the achievements to date are important if the full benefits of EMU are to be realised. This is particularly important as EMU expands to take in the new members that joined the EU in 2004.

Several questions were posed and I shall try to deal with them all. Perhaps I may start by reaffirming the Government’s policy. The Government’s policy on membership of the single currency is unchanged. It remains as set out in the Chancellor’s Statement in the House of Commons in October 1997, and again in the Chancellor’s Statement on the five tests assessment in June 2003. The Chancellor announced in Budget 2006 that the Government do not propose a euro assessment to be initiated at the time of this Budget and the Treasury will again review the situation at Budget time next year, as required by the Chancellor’s 2003 Statement.

In principle, we are in favour of UK membership of EMU, but in practice the economic conditions must be right. A decision on the membership of the single currency will be based on whether it is in the national interest to join and whether the case is clear and unambiguous. Overall, the Treasury assessment is that since 1997 the UK has made real progress towards meeting the five-year economic test, but on balance until the potential benefits of increased investment and trade, a boost to financial services, growth and jobs are clear, which addresses the point made by my noble friend Lord Harrison, we cannot at this point conclude that there is sustainable and durable convergence, or sufficient flexibility to cope with any potential difficulties within the euro area. Despite the risks and costs, which clearly exist, of delaying the benefits of joining, a clear and unambiguous case for UK membership of EMU has not yet been made and a decision to join now would not be in the national economic interest.

My noble friend Lord Harrison asked about the EPU. It maintains a network of experts with stakeholders as part of the regular programme of activities on EU preparations. The meeting with local authorities took place on 21 September and discussed European preparation issues of relevance to local authorities. There was a question about the separate

12 Oct 2006 : Column 409

budget for the Euro Preparations Unit. The costs of the euro preparations in the Treasury are met from within Treasury department expenditure limits.

Next Section Back to Table of Contents Lords Hansard Home Page