Select Committee on European Union Minutes of Evidence

Examination of Witness (Questions 148-159)




  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—

  A. Yes.

  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 any further?

  Chairman: No, let us stick to the questions.

Lord Taverne

  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.

  A. Yes.

  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 done—this is fact, is it not—has 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 flexibly—and this is in the spirit of the Amsterdam Treaty that we have under the heading of employment—we 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 model.

  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.

Lord Marlesford

  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 way—forgetting the 55 per cent of the responsibility—could 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.

Lord Sheldon

  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 be—and perhaps is—a 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.

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