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Lord Renton of Mount Harry: My Lords, it was not the noble Lord, Lord Renton, who said that; it was the noble Lord, Lord Renton of Mount Harry.
Lord Barnett: My Lords, perhaps I should apologise to the noble Lord, Lord Renton. I think he knows that I meant to refer to the noble Lord, Lord Renton of Mount Harry, but I am not sure whether he would agree with my argument.
Many on the Opposition Front Bench are unambiguous about what we should do about membership of the euro-zone. Some of them are even semi-detached to the European Union.
The Government have, in principle, agreed that they will join at some point. As the noble Lord, Lord Renton of Mount Harry, said, I hope that that
will not delay too long. The UK's concern, as we all know, is not about the economic case; it is about the related political problems. I hope it is accepted that the euro-zone and this country will be pretty convergent pretty soon, if we are not convergent already.In paragraph 137 of the report, the Governor of the Bank of England, who now likes to be known as Sir Edward George, said that,
- "on the basis of fundamentals it was difficult to understand the fall in the value of the euro".
One of the most serious criticisms of having a single currency is the fact that one interest rate has to fit all countries. That serious case needs to be answered. To an extent, that argument currently applies within the UK, because parts of the UK are very different from each other. Scotland, the North East and parts of the North West are very different from the South East, but they have to live within a single currency and manage to do so, although sometimes that does not work out too well. The argument seriously applies to the 11 member states in the euro-zone and, to some extent, it will apply even more when the 12th country, Greece, joins.
Lord McIntosh of Haringey: My Lords, Greece is already in.
Lord Barnett: My Lords, I am sorry, I am reminded by my noble friend that Greece joined on 1st January.
By now, having listened to some of the critics in relation to the subject of the single interest rate fits all, one would have expected to see, within nearly two years, some really disastrous economic positions. In fact, the situation has been anything but disastrous for those 12 states, 11 as it was, within the euro-zone. As we know, there are very different economic circumstances in each of the 11 states.
It is worth looking at what has happened. Table 1 attached to paragraph 36 of the report shows that on average--I know that there are wide variations within any average, but one must look at the average within the euro-zone--growth of GDP in the European Union 11 member states in 1999 was 2.4 per cent and in 2000, 3.4 per cent. It has been going pretty well. One can hardly say that the single currency has destroyed the situation or made it very difficult.
Indeed, if one looks at all the tables in Appendix 3, there is no stagnation so far. I say "so far" because one cannot make forecasts. Some economists try to make forecasts or projections but in practice it is not possible to make a forecast as to how the euro-zone or even the UK economy will be in two, three, four or more years. But certainly as of now one can say that the single currency in the euro-zone has not done any serious damage. Indeed, it has been positively helpful in some ways to which I shall refer.
Unemployment within the euro-zone is, of course, much too high. It is much higher, on average, than in the UK. But it is falling and within some member states in the euro-zone it is falling at a rate which is above the average. As I said, one must always look carefully at averages because they mask serious problems in some areas. Certainly in some countries within the European Union, or the euro-zone as it is called, the situation is far from that which exists in the best of those countries.
Inflation, as paragraph 39 of the report points out, was within the 0 to 2 per cent target range throughout 1999 and has risen slightly since. Again, averages mask wide variations. Reference has already been made to Ireland. Inflation has been 5.1 per cent in Ireland while it is only 1.6 per cent in France. So inflation rates vary within the euro-zone. One should not be too surprised by that.
Overall, by now, we certainly have not seen any of disasters forecast by the Eurosceptics because of the one size fits all problem. It is worth referring to--I always call him Eddie George--Sir Edward George, the Governor of the Bank of England. In paragraph 41, he is quoted as saying, "It is working pretty well". That is not bad coming from the Governor of the Bank of England, who can hardly be described as a Europhile.
I concede that problems will undoubtedly be created within the euro-zone. But we have a relatively successful euro-zone, as the report brings out. There will be difficult years here in the UK, as well as inside and outside the euro-zone. But the report brings out the tremendous advantages which will come to members of the euro-zone, as will be seen by any objective reader of the report.
The facts are clear. Paragraph 86 of the report says that membership has been helpful in other ways which have not generally been reported. It helps in withstanding shocks within a possible serious crisis. That is not unimportant.
But more than that, inward investment is clearly a serious matter. Nobody can dispute that. If it were not clear that we shall shortly be joining the euro-zone, inward investment here would be very seriously damaged. But there are enormous benefits from the removal of the exchange rate problems and the risks inherent in that. The noble Lord, Lord Renton of Mount Harry, referred to the 8 million holidaymakers. That will be a serious matter for them personally. But it is even more serious for businesses which are competing within Europe and which will no longer have the exchange rate problem and the risks involved with that. That will be much more significant for the UK.
Any objective observer will agree that the euro is working well so far. Of course, it is still a weak euro. The UK Treasury tells us--and I am not referring to its response to the committee but the evidence from witnesses--in paragraph 147 that,
- "one would expect a slow response to a new currency".
All in all, the facts in the report speak for themselves. I hope that the UK will be joining the euro-zone very soon.
4.6 p.m.
Lord Shaw of Northstead: My Lords, it is a great pleasure to follow the noble Lord, Lord Barnett. I am grateful, as I believe are all members of the committee, that he has taken part in the debate. When these debates take place, too often one hears people saying, "Oh, I was not a member of the committee so I did not feel that I needed to take part". Contributions from someone such as the noble Lord, Lord Barnett, who was a noble chairman of the committee for several years--we are much indebted to him for the work that he did for that committee during those years--helps to make these debates that much more worth while.
I am as firmly in favour of the European Union as the noble Lord, Lord Barnett, is. But while I have every hope that the euro will succeed, I have concerns about its future. Everybody must accept that the creation of the single currency has been an enormous step in the development of the European Union. Whether or not we should have joined the 11 countries, shortly to become 12, is not a matter for debate today. But the step has now been taken. Whether we are in it, whether we are to join it or whether we remain out of it for some years, it is in all our interests that the euro is a success. If it is a failure, it will hurt members of the euro and those who are not members of the euro.
Therefore, it is right that Sub-Committee A should continue to monitor the progress the euro is making. I have had the privilege of being a member of the committee for the past four years. I believe that its work is of value not just to this House but to a much wider audience. I add my thanks to the noble Lord, Lord Tomlinson, and to our splendid Clerk, who alas has now retired, Dr Elizabeth Hopkins. The report, its contents and its timing largely result from their great efforts.
My first reaction was to note the general satisfaction expressed by witnesses at the way in which the euro is working. That must be encouraging. For example, Dr Norbert Walter, of the Deutsche Bank Group, said that the euro was working very well. The Governor of the Bank of England also told us that the evidence is that the euro,
- "has been working pretty well".
I was particularly interested in the evidence from member states at paragraph 86 of the report that membership of the euro had helped them to withstand
shocks, as referred to by the noble Lord, Lord Barnett. The Belgian Government, for example, considered that their membership of the single currency had smoothed the shock of the recent crisis caused by dioxin contamination of part of the food chain. They said that,
- "had it not been for the euro, both the exchange rate and interest rates would probably have come under pressure and the consequences would have been felt far beyond the directly affected sectors".
- "The German Ambassador said that without EMU it was highly probable that the effects of the Russian financial crisis in August 1998 would have had repercussions in the money market 'and the normal course of events would have been that the German Mark would have gone up and other currencies of EU countries would have gone down'".
- "German trade unions had calculated that the effect on the labour market would have been the loss of about a quarter of a million jobs".
So the message is, "so far, so good". But EMU has set sail in very favourable economic conditions. Adverse conditions are bound to occur and even now may be starting to occur. They will often affect different members of EMU in different ways. The disciplines accepted at entry may well prove unacceptable, or at least politically contentious.
In paragraph 18 of our report, we state:
- "We decided to adhere strictly to our subject of how the euro has been and is now working, and not to allow ourselves to look into the future".
The significant point that I raise in this context is that Pedro Solbes, the economic and monetary affairs Commissioner, said that member states could not be allowed to pursue whatever tax and spending policies they wanted once they joined the euro. Yet Charlie McCreevy, the Irish Finance Minister, said that the idea of Brussels lecturing the EU's best performing economy would be greeted with amusement. There does not appear to be much agreement there.
Incidentally, Mr Solbes claims the authority for his action as being, not the Maastricht Treaty, but Article 99 of the EU treaties, which presumably already affect this country as well. I wonder whether the Minister agrees with his comments.
In my view, the position was well made by Mr Jim Power, the former head of economic research at the Bank of Ireland (paragraph 32), who said:
- "First and foremost EMU was a victory for politics over economics. It is a political project. The economic realities are not always logical. I think that is particularly the case for the Irish economy".
That leads me directly to paragraph 169 of our report, which states:
- "The will to create the euro was political. Its future must equally depend on the continuing political will to create success. The problems that will arise on enlargement and future changes in the Common Agricultural Policy are obvious difficulties which will test that will".
To my mind EMU and the single currency were started far too early. In a free society, a single currency has successfully been adopted by a number of states only after the necessary political cohesion has taken place. The history of the US, for example, has been much quoted. Yet such history sets no precedent for the creation of the EMU. In that case, former colonies with the same background of local government, the same language and the common political ties inherited from colonial days, formed a secure foundation for the creation of a single currency. However, in the case of EMU, the political will to achieve lasting success must overcome many more difficulties.
On the hopeful side, the evidence as to the continuing political will is reasonably encouraging. The Governor of the Bank of England said that in making their terrific--he used the word "terrific"--efforts to meet the criteria many countries had,
- "introduced a greater degree of discipline into their fiscal and monetary policies".
Ms Bettina Schulz, of the Frankfurter Allgemeine Zeitung, considered that in Germany the SGP had forced the government to reduce its deficit and its debt and had accelerated structural reforms; even labour reforms were started.
However, too often my experience of EU affairs has been that the difficult practical problems--the nuts and bolts--of any project are always swept under the carpet in favour of the big idea itself. I believe in travelling hopefully, but not blindly.
What are the tests that face a continuing political will to create a lasting EMU? First, one must establish just how far national sovereignty has to be sacrificed to secure a successful common currency. Secondly, the one-size-fits-all monetary policy of the euro-zone is only now being tested. The Irish situation is the first of many that will test the successful working of the system. Thirdly, there are substantial problems affecting the political relationships of member countries that must be resolved.
As our report makes clear, two of those problems are the terms of enlargement and the urgent need to change the CAP. In my view, a failure of will to meet those tests must seriously weaken the chances of a lasting success for the euro. The quicker that the Council of Ministers faces up to the solution of those problems, the greater will be the chances of that success.
4.18 p.m.
Lord Cobbold: My Lords, I want to add my voice to those who have commended this report. It is an excellent document, full of interesting detail. It contains a broad spectrum of views from those who gave evidence, combined with balanced conclusions.
As other noble Lords have pointed out, the essential dilemma, to which only the future will supply answers, is whether the one-size-fits-all interest rate can survive the effects of the inevitable future economic shocks without a central budget to counteract those effects. That is the main political risk. The business and financial market arguments seem to be unquestionably in favour of the euro.
The initial weakness of the euro, which surprised those of us who expected it to be strong--of whom I was one--is explained by the huge attraction of the economy of the United States in recent years and by the massive consequential capital flows into the US dollar that that has engendered. Such flows have delayed the balancing adjustments in international reserve portfolios that I and others believed would make the euro strong initially. But the weakness of the euro, as the noble Lord, Lord Renton of Mount Harry, has pointed out, has benefited the euro-land economies and has helped them to emerge from relatively sluggish circumstances and high unemployment, which a strong euro might have delayed.
Now the situation appears to be changing. The US economy is less attractive and the euro-land economies are showing reasonable, steady growth. As capital flows start to unwind, the euro is beginning to increase in value against the dollar. The government bond market in Europe is already larger than that in the United States, but the most exciting development has been the growth of a corporate bond market in euros. Although still much smaller in total than the US corporate bond market, and despite the turmoil of the past few months, the fact remains that, although down on 1999 levels, the volume of issues in 2000 was three times that of 1998.
The situation is much less rosy in equity markets, where rationalisation is still in full swing. Stock exchanges are fighting with the rapid advances in electronic trading systems and are uncertain how best to cope with the huge potential of the market for equities in euro-land. They are also battling with the still widely different regulatory environments that exist within the so-called single market. This is an area of great potential. Big changes can be expected and must take place in the coming months, especially as the focus of global investment is less concentrated on the United States and the attractions of euro-land become more real. As Europe's principal financial market place, the UK is rightly playing a very active part in this process. But our non-participation in the euro could increasingly work to our disadvantage, not to mention the huge extra stimulus to the development of the euro as an international currency that would follow from the inclusion of the pound sterling within the euro.
With the introduction of notes and coins, 2002 will be a critical year for the euro. Much will depend on how the citizens of euro-land react to the euro when it hits their pockets. I have French friends who still talk about ancien francs. Will the French consumers take to the streets and make euro bonfires of the new notes, or will they welcome the new currency and benefit from
the transparency that it will bring? Their reactions will be critical to the response of people in this country and to their appetite for joining.There is still a lot to play for, and there is much uncertainty and excitement ahead. However, as this admirable, interim report concludes, I believe that the euro has been a success so far.
4.23 p.m.
Lord Bruce of Donington: My Lords, when I first saw this report, I thought that the Select Committee would quite impartially have addressed the question whether or not we should join the euro, but would objectively have studied whether the existing euro set-up was working satisfactorily. It seems that I was unusually innocent in that thinking. Most of today's speeches have not followed the edict set out at the beginning of the report. As it is obvious that in some cases it has been forgotten, perhaps I may refresh your Lordships' memories. It states:
- "This Report does not consider whether, or in what circumstances, the United Kingdom should join EMU; it is intended rather as a contribution to the debate on whether the single currency has so far been--to use the Government's word--'successful'".
I turn to the report to illustrate the point that I want to make. It is no ordinary report. It consists of 222 pages, comprising approximately 100 pages of text and 127 pages of evidence. It contains a very large number of tables of statistics--43 in total--and no fewer than nine tables in the text itself, to which I may later refer. It is quite a formidable document. The noble Lord, Lord Renton of Mount Harry, said that the report would be clear to citizens, and my noble friend Lord Barnett said that the report would commend itself to objective readers, whatever those terms may mean--
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