Examination of Witness (Questions 148-159)|
TUESDAY 1 JULY 2003
148. Sir Samuel Brittan, we are delighted to
see you. I am afraid that Professor von Hagen is not here, but
we hope he will be here soon. Anyway, we are pleased you are here.
I think you have got an opening statement to make to us.
(Sir Samuel Brittan) Yes, I have. I have
got copies of it. I had not originally intended to say anything
at first. I was originally just going to answer questions to the
best of my ability, but I do think that the inquiry needs to be
seen in a wider context. I have called my little note "Do
not make the ECB the scapegoat" and, without writing 18 volumes,
I have attempted a subjective assessment of the responsibility
for the sluggish euro area and especially German performance.
I have attributed responsibility to the policies and procedures
of the ECB at five per cent, the fiscal policies of individual
governments at 15 per cent, the difficulties of applying a "one
interest rate fits all" policies in an immature or premature
monetary union at 25 per cent and deficiencies of a European social
model at 50 per cent. I want to say one more thing as well. Inevitably
inquiries like this concentrate on the day to day policies of
institutions, but I do think we should pay tribute to the ECB
for the efficiency with which it introduced the euro. It was not
really very easy to substitute a new currency for about 12 national
currencies, and it was a much more successful operation in terms
of the general public than either decimalisation in Britain, or
the move to the new franc in France some decades ago. It went
over extremely smoothly but, above all, the ECB negotiated the
difficult transitional period when exchange rates were locked
together but there was no actual currency in circulation. Whatever
details we want to argue about today, I think we should pay tribute
to it for conducting this operation much more successfully than
I, for instance, expected.
149. Do you want to be questioned on the detail
of it, because that is what we are intending to do?
A. Yes, of course.
150. You want to put it in context?
A. I want to put it in context, yes. Obviously,
I am prepared to answer whatever the Committee wants, but I want
to put it in context, that is all.
151. The ECB should not be the scapegoat
Chairman: For criticisms of the wider project?
Lord Lea of Crondall: My Lord Chairman, is it
possible to ask a question about the 50 per cent before we go
Chairman: No, let us stick to the questions.
152. Can I ask one particular question? What
about the remaining five per cent?
A. Sorry, that is a deficiency of arithmetic
on my part. Just to please Lord Lea, I would put the extra five
on number 4: the European Social Model.
Lord Lea of Crondall
153. Right, that is 55 per cent.
Lord Lea of Crondall: I want to ask the question.
We all have our own value judgments, but this is very much where
the comparator is becoming focused and yet, in fact, what the
Social Chapter has donethis is fact, is it nothas
been to bring in pro rata rights for part-time workers. For example,
it has brought in equality legislation and that sort of thing;
in other words, not fundamentally changing the basis of the labour
market, but saying if we do want to have people employed more
flexiblyand this is in the spirit of the Amsterdam Treaty
that we have under the heading of employmentwe have got
adaptability and we have got equal opportunities, but also we
have got all this stuff about entrepreneurism. Is it not the case
that within the spirit of the flexible labour market, which is
the heart of the contention presumably, one wants to make sure
that a lot of workers can work part-time, that women can work,
they can go and have families and so on and so forth? Is that
not, in fact, what the Social Chapter has been doing? If that
is agreed to be the case, how can Sir Samuel attribute 55 per
cent? Is it not really the thing which is not mentioned, was Chancellor
Kohl's decision in 1981 to say one west mark equals one east mark?
The fact is that France has gone into East Germany with only one
quarter of the work that is needed, et cetera. Can I put that
to you, Sir Samuel? Sorry, for the length of it. It would not
apply in 1999.
154. I think what Lord Lea is saying is because
it was Germany, you have not taken into account the German unification
and they were exaggerating the deficiencies of the European social
A. On German unification, I suppose that comes
under 3: the difficulty of applying a "one size fits all"
monetary policy. This was a few minutes' thought yesterday evening.
The point is that whatever rate had been fixed, both for unifying
the marks and for German membership in the EMU, it would become
out of date. I would put it under 3, but if you want to make a
separate heading and redo the arithmetic again
Lord Lea of Crondall
155. That was not my main question.
A. No. Yes, but I have said the European social
model. I am happy to discuss the Social Charter if you like but,
as far as I am concerned, the Social Charter is only a small part
of it. The European social model, as I talk about it, and it is
often discussed in the literature, means the way in which European
labour markets on the Continent of Europe and, above all, Germany
and France are run, and the Social Charter is only a part of it.
I would be very happy to go further into specifics, but it might
take you a little bit away from the questions that the Chairman
and others want to ask.
156. Can I suggest, Sir Samuel, I accept the
thesis but, in a sense, is it not really the failure of 1, 2 and
3 to interrelate which has caused the problem? We have got this
immensely independent Central Bank with a rather limited means.
We have no real partner for economic and fiscal management for
it. We have the stability pact, which is arguably being very pernicious
in the changed situation as, indeed, the original remit of the
Central Bank has been in a changed situation. So really, in a
wayforgetting the 55 per cent of the responsibilitycould
not the others be put together to say that the structure had been
faulty in that it lacked the co-ordination for having a sensible
overall economic policy?
A. Yes, but I am not sure if I had been at Maastricht,
I am not sure I could have put it together better. I think the
difficulties lie inherently in the project at this stage, and
I do not think that a slight rewriting of the procedures of the
ECB, or of the risks of its relationship with the Growth and Stability
Pact, would be a vastly superiorly way of doing it. I am afraid
that for good or for ill I have written the words "immature
or premature" monetary union, and that accounts for a lot
of the difficulties.
157. So there is a fundamental internal contradiction?
A. I think in my view, yes.
158. I want to ask you a wider question and
it is right at the very heart, as I see it, of the European Central
Bank. It has not had a crisis yet. There is bound to be a crisis
in these matters at some stage in the future. Is the ECB ready
and able to deal with this crisis as it stands now, and what alterations
should be thought about in order to deal with the fairly potential
crisis of some financial matters that we cannot speculate on at
the present time?
A. In my view the dangers of crisis lie much
more with something that happened to financial institutions. I
do not see a great crisis on its interest rate policy. There is
a problem on what happens, say, if a European financial institution
gets into trouble and it is believed to create systemic problems
beyond the country in which the institution is situated. Now,
in the UK we have procedures for dealing with it. The Financial
Services Authority deals with the nitty gritty of individual institutions,
but if there is a systemic threat the Bank of England, the Treasury
and the Chancellor get together and there is machinery for dealing
with it. We may think those mechanisms are wise or not, we do
not know; it has not been tested in this country either. When
a financial institution gets into trouble, apart from the question
of whether it should be rescued and on what terms, there is the
question of who bears the burden, and that is much more difficult
with 12 governments than with one government. As I say, this is
all part of the difficulties of the project. I would put a lot
of emphasis on getting the lender of last resort facilities in
order and getting the financial machinery in order. Here is a
matter where there should beand perhaps isa lot
of liaison between the European Central Bank, the national finance
ministries and also with some of the institutions, which differ
from country to country, concerned with banking support.
159. I do not doubt that there is a question
there as to how far the European Central Bank, the financial institutions
and the governments will need to co-operate in such a big crisis.
Is there any mechanism for this? Would they just be doing it ad
hoc, or is there something else in the way of support?
A. There used to be a very clever Finnish executive
board member called Mrs Hämäläinen, who was in
charge of this aspect, and she always assured me that the machinery
was there, but maybe Professor Hagen will have more detail on
this. Until it has been tested, I find this all very doubtful.