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Lord Peston: My Lords, setting up the European monetary system is the greatest economic achievement of the European Union. As a currency union comprising 12 countries and a population of 300 million, and in the process of becoming larger still, it represents a
 
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remarkable step forward in economic integration. Much to my regret, although I understand why, we were not in at the beginning and have engaged in continuous sniping since. As kibitzers, we should not wonder that the real players do not take us seriously at all. Certainly if there are aspects of the euro area that we do not like—there are several—we have only ourselves to blame. I shall not go over the "I told you so" stuff connected with the CAP as well, but it is the same story written over a much longer period.

In that sense, I congratulate the noble Lord, Lord Dykes, on winning the ballot and choosing the subject. Like all noble Lords, I hope that he will make a quick recovery from illness. I also thank the noble Lord, Lord Roper, for introducing the debate. Having said that, deep down I believe that we are wasting our time. It is apparent that the Government will not join the EMS over any realistic time horizon—by which I mean my life expectancy. The Official Opposition seem to be content to stay precisely that for at least the same length of time. Even if eventually—goodness knows how long "eventually" is for them these days—they did become the government one day, they too say that they would not join monetary union. For those of us who wish to see our country at the heart of Europe, that is all deeply saddening.

That is especially so if we accept what the noble Lord, Lord Lawson, said on Tuesday; I apologise to him as he leaves. It must be difficult for him to be congratulated from both sides of the House, but he said that the rationale of the European project had always been political, not economic. I agree totally. The reason that, in a sense, our economic analysis in the debate is somewhat irrelevant is precisely because we do not follow his correct dictum that we really ought to discuss the politics, not the economics. Having said all that, and having said that we are wasting our time, I have another two and a half pages of notes and naturally I have no intention of not reading them. I want therefore to look at the achievements. Inflation has been kept low and stable, which is the primary function of the ECB. Exchange rates between member countries have, ex definitione, ceased to vary. The external value of the euro has obviously varied, notably against the dollar. But even after the recent fiasco on the referendums on the new constitution, the euro has not weakened to any great degree.

The overall balance of payments in the euro-zone is in surplus largely due to the enormous surpluses of Germany and France. Short-term interest rates in the euro-zone are lower than in other countries and have been falling. An even more important point that we should not ignore is that capital markets have become much more integrated and will continue to do so.

However, more important than any of those issues is that at the simplest level the single currency has been a success; namely, it has worked in precisely the way a currency is supposed to work. It operates with no difficulty whatever as a medium of exchange or as a store of value—precisely what Adam Smith would have said was the real pre-requisite for judging this situation.
 
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Bearing in mind all the prophets of doom, we should not ignore how amazingly, straightforwardly and simply it was introduced and has worked.

I must admit that even though I was in favour, I expected infinitely more difficulties. The so-called Europhobes, who want a free-trade area rather than a European Union, should understand that a common currency is a vital prerequisite for an efficient system of free trade. It provides exactly what is needed; namely, financial stability. And, for the more profligate, it prevents the easy but only temporary way out of economic difficulties; namely, it stops you inflating your way out of trouble and it stops you devaluing out of trouble.

In that connection, I am astonished that Italy, of all countries, should have any leading public figure saying that it would be better off outside monetary union. It would be idiotic, indeed insane, for the Italians to believe that they would be better off if they left the euro. Referring to what was said by the noble Lord, Lord Rees-Mogg, I can assume only that whichever Italian would say that must literally have forgotten the mess symbolised by the behaviour of the lira over many decades. Many of us who in our younger days travelled to Italy could never remember what the lira was worth from day to day, let alone over any reasonable period. If one country is going to gain by not pursuing the path of unsound public finance and an unwillingness to address the real problems which the noble Lord, Lord Rees-Mogg, rightly pointed out, it is Italy.

Before coming to the problems of the European monetary system, let me add that I am not one of those who believes that the evidence supports the proposition that the introduction of the euro has led to a rise in average prices. Even if one or two economists believe that, the numbers we are talking about are small indeed. But the euro has one other marvellous function: it provides a convenient whipping boy for anyone who wants to allocate blame for whatever is going on in the economy—notably the odd price change and so forth. It reminds me very much of the early days of decimalisation when any price increase, whatever the true cause, always attracted the comment, "We should never have decimalised".

Referring to an earlier remark on the exchange rate, I wish that critics would make up their minds whether the problem with the euro is that it is too strong or too weak. Perhaps their position is that whatever its value, it is wrong. That is a state of economics that even I do not have the imagination to work through.

What are the true problems of the European monetary system? The obvious one is the difficulty of adjustments in nominal wages. If overall inflation and public finances are held in control, short of a productivity miracle, which is pie in the sky in practice, excessive wage rises must lead to greater unemployment and recession. There is no way around that. On the supply side, goods and services cannot be sold profitably and on the demand side prices will rise to some extent so demand will fall, too. Clearly, one has to face the wage or the unemployment and recession problem.
 
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Secondly, even without wage pressure, competition, not least that deriving from productivity differentials both at home and abroad, also necessitates structural adjustment. Labour mobility between industries and their locations has to increase, even though it may lead to disruption in people's lives. In addition, however, retraining and the acquisition of new skills must become the norm.

But there is nothing special about euro-zones. Taking the Longbridge example, if we cannot produce decent cars at a profitable price, unfortunately, a particular industry and the demand for the skills of decent people diminishes. The response to that is not to devalue and, in my judgment, not to throw skilled men and women on the scrap heap and to pay them social security indefinitely. It is precisely to do what Italy and everyone else needs to do—we have to retrain and guide people towards new forms of work. In other words, structural adjustment becomes of the essence. Furthermore, even though we need to look carefully at the whole public finance structure and the nature of the stability and growth pact, whatever you do about it, you do not get away from the problem of structural adjustment. There really is no easy way out.

My last such comment, before making one or two slightly controversial remarks, concerns the behaviour of the ECB. Here I echo some of the remarks of my noble friend Lady McDonagh. If we are to learn one lesson from the EU constitution mess, it is that we live in a world where ordinary people expect to be taken seriously. They no longer accept that something is right because this or that great figure says so. The ECB, whose head is a person of outstanding merit, does too little to take into its confidence the people it is meant to serve. It still wishes to retain the aura of a traditional central bank, with its emphasis on secrecy.

That was particularly true when, according to the Financial Times, M. Trichet refused to say whether they even considered thinking about an interest rate adjustment. It reminds me—and one or two noble Lords present will also remember—of when in the 1960s Harold Wilson issued a diktat that no one in the Treasury was supposed to admit that any thought had been given to devaluation. If asked, they said, "No, we never discuss that sort of thing". I was very young then, but a number of people rang me and the only subject they wanted to discuss was devaluation. Therefore, I would have thought that Harold Wilson had failed in that. The idea you can pretend that delicate, sensitive matters are not debated and therefore you will not talk about them is preposterous.

I conclude as I began. The construction of the euro area has been a great achievement. One or two Members in the debate on Tuesday used phrases such as "failure of the euro" or "the currency has not worked". That is preposterous: the euro is not remotely near to being a failure and, importantly, it has worked infinitely better than any of us would have anticipated. Full success requires many more economic reforms and, in my judgment, it requires full UK participation.
 
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