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Lord Taverne: My Lords, I echo the remarks made by others who have referred to the great pleasure of listening to the maiden speech of the noble Baroness, Lady McDonagh. It was a charming speech and she made a number of extremely important points.

I also echo the regret that my noble friend Lord Dykes was not able to introduce the debate. Instead, we had a very good introduction to the issues from my noble friend Lord Roper. It has been very useful to have a discussion of the euro as the last in the series of debates this week on Europe.

I believe it is generally agreed that, at this moment, the euro-zone faces a number of very serious problems, which are of considerable concern to us. I am glad that those who have questioned the euro and its advantages in the past have not gloated about its present predicament. The success and prosperity of the euro-zone is of very great importance to us, even if we stay outside it. It is our biggest market. We have always been strong champions of the enlargement of the European Union, and there is no doubt that what attracted the new members to the euro-zone, and continues to attract other states to apply for membership, is not only the attractions of political security, but also the strength and stability that the European Union has presented, with the core constituted by the euro-zone. Those states would also be greatly affected if the present malaise turned into a serious crisis.

It is perhaps suitable that we should look back at the history, the successes, the failures or the disappointments of the euro-zone in the past six or seven years since its formation. There have certainly been gains, as the noble Lord, Lord Peston, has pointed out, but, make no bones about it, there have also been considerable disappointments. The noble Lord, Lord Rees-Mogg, rightly focused the argument on whether a monetary union requires a political union.

The view of the Bundesbank, as well as that of the noble Lord, Lord Rees-Mogg, and a number of other commentators, has always been that one needed a political union to secure the long-term viability of monetary union. That was the argument not only of the Bundesbank, but also of Germany. That view may still be held as necessary, but I believe that the idea of a political union is more or less dead. The noble Baroness, Lady McDonagh, was quite right in saying that that requires a degree of trust and confidence in the institutions which simply does not exist. National agendas have been pursued, which shows that, at the moment, there is no public support for a political union of Europe.

It has also been argued by another school of thought—for example, by the very eminent economist of the European Central Bank, Otmar Issing—that monetary union is not required. One requires the co-ordination of fiscal and monetary policy, but that can be achieved without political union. As my noble friend Lord Roper pointed out, it requires three factors: the independence of the central bank, which we have; fiscal discipline; and labour and product market flexibility.
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An interesting and critical view of the record of the European monetary union has been undertaken by the Centre for European Policy Studies, in which some very important questions were raised by a number of eminent economists, including M. Daniel Gros. First, there is the performance of the central bank. I do not necessarily agree with the noble Lord, Lord Peston—with whom I normally agree—that that has been defective. It has maintained stability and low inflation and in those respects it has been a signal success. Whether it should ease monetary policy at present is, to some extent, a moot point. I agree with the report from the OECD that some easing is now required, but if it took a very relaxed view of monetary easing, that could endanger the view of the Union as such. I do not believe that the ECB is responsible for the present difficulties of the European Union.

The second requirement is fiscal discipline, hence the stability and growth pact which, of course, has been abandoned. In the situation in which we found ourselves, it was inevitable that the strict rules originally required for the stability and growth pact would be relaxed. To insist on rigorous fines for any excess over the 3 per cent limit would be quite inappropriate in the circumstances in which Germany, France and others may find themselves.

However, there was a lack of fiscal discipline. The snag was that that lack of fiscal discipline was evident at the top of the economic cycle when there should have been discipline and in fact attitudes were lax. National policies—often narrow, mistaken national policies—were followed. It has been argued that one did not need the stability and growth pact because the discipline of the market would have been sufficient. The discipline of the market is important, but it was not just national interest that should have been considered.

Within the euro-zone everyone stood to gain from a policy that also took account of the interests of the euro-zone as a whole, and unfortunately that was not evident. The result has been, as the CEPS study has pointed out, that instead of having the convergence of economies that one expected inside the European Union, one of the disappointments of the past six or seven years has been that the economies have diverged.

As the noble Lord, Lord Rees-Mogg, pointed out, the most signal case is Italy. Not only has there been a very considerable rise in unit labour costs, but Italy's real exchange rate has risen since the monetary union started by some 15 per cent.

I do not take the view of the noble Lord, Lord Rees-Mogg, who says that this is a basket case that will never correct itself. Of course, action will have to be taken, but in the past Italy has taken some very courageous steps. One should not forget the very important Amato and Dini reform of pensions, which will take a long time to work through. That was brave, courageous and very realistic. One cannot say that this is a basket case. It would be extraordinary if Italy were to leave the Union because that would be the worst possible case for the future well-being of Italy. The effect on government bonds would be absolutely disastrous.
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As my noble friend Lord Roper pointed out, the third element in the Otmar prescription, as it were—indeed, the general requirements of a monetary union if one does not have political union—is the flexibility of labour markets above all, as the noble Lord, Lord Peston, said.

One has to admit that so far the Lisbon agenda has failed. As the noble Lord, Lord Lawson, and others pointed out yesterday, essentially that is a domestic agenda. Its failure would have had an unfortunate effect on the economies of the euro-zone countries if there had been no euro. In fact, it is very doubtful whether any of the euro countries would be in a better position today if there had been no euro. There might not have been fiscal stability, but all the failures to adapt the structural reforms that are required were no more likely to have happened outside the euro than within the euro. There have been national failures.

One has seen a certain element of protectionism in Germany with its requirement for high minimum wages to keep out foreign labour and in France with the rejection of the financial services directive, objection to open borders and continuation of certain subsidies. As Robert Mundell pointed out, a collapse of the European Union is not likely, unless there is runaway inflation, in which case the low inflation countries, such as Germany, might wish to be part of it no longer. I do not believe we are likely to see that.

One should also not forget that Ireland is one country that has prospered enormously inside the monetary union. I do not believe that any members of the Irish Government would wish to leave the monetary union because of the troubles that it has had. Spain has prospered in the monetary union. The troubles of those who are not members of the monetary union are not due to the high interest rates, because historically the interest rates that Germany now faces are no higher than it has faced in the past. The answer lies with the OECD agenda, but we should bear certain things in mind when we may be tempted to turn to the European Union and say that if only it had followed our prescriptions it would be in a much better state and when come to the conclusion, as is now reasonable, that this is not the moment that we should join, it is an academic question in any event.

We should not forget the points made by the noble Lords, Lord Harrison and Lord Peston. The first is that the euro reinforces the single market. The noble Lord, Lord Biffen, apparently accepts the logic that the euro is a very important part of the idea of a single market. But, rather surprisingly, he seemed to reject the single market. He said that it was an impossible aim and if one tried to achieve it one would have a plethora of regulations that we must abandon. I thought that it was generally accepted in this country that the single market has been of enormous benefit to our economy and trade. I agree with the argument that there is a logic about a single currency and a single market. That is one of the reasons why the last thing we should do is rule it out. Free trade is furthered by a single market. One only has to compare the degree of
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the non-domestic trade of countries within the euro-zone with the degree of the non-domestic trade of Canada within the free trade zone of north America.

The second point made by the noble Lord, Lord Harrison, was that the current crisis is not a currency crisis, and I have made that point myself. It is the failure of the Lisbon agenda, that is, a failure of domestic action.

The third important point is that in the next few years important decisions will be taken by the euro-zone to deal with the problems that it now faces. They will be important decisions that will affect us as well as the members of the euro-zone. We will be completely excluded from those decisions. We should not forget that one of the important arguments for being a member of the euro-zone is that we would then have political influence and that our political influence inside Europe as a whole is diminished while we remain outside the inner group.

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