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Lord Howell of Guildford: My Lords, like other noble Lords, I am extremely sorry to hear about the illness of the noble Lord, Lord Dykes. I hope that he recovers soon. I am very grateful to the noble Lord, Lord Roper, for giving us the chance for this short debate. I would go further and say that I thought his speech was admirably realistic, as the noble Lord, Lord Rees-Mogg, said.

I derive faint amusement from the fact that it seems now that we have all become what were called "Euro-realists". Even the Chancellor has joined the group, although—this is a superb touch—it turns out that although he is saying exactly the same thing as many of us have said for many years, when he says it, it is now called "pro-Europe realism". It is a truly Mandelsonian touch: saying what everyone else has long been saying and pointing out but giving it a special branding. I do not care what they call it or what label they put on the jar. If we are going to have European realism at last, it is extremely welcome.

The euro, which we are here to discuss, has been paying the price for all the political bickering. It has dropped a sharp number of cents in recent days from its very high level. That was what the noble Baroness, Lady McDonagh, pointed out in her excellent maiden speech, which was commendably brief, marvellously well focused and thoroughly enjoyable. I congratulate her on it. If the Euro-constitution has capsized—I think it has sunk, though some bits of it will be salvaged—are we allowed to ask whether the same fate could happen to the Euro-currency? I am reassured by the noble Lord, Lord Peston, that, despite the efforts of Harold Wilson, they went on discussing devaluation in the Treasury in his day. So perhaps it is a permissible discussion even though, obviously, one must handle it in careful terms.

Before the whole idea is dismissed as unthinkable, it has to be remembered—as the noble Lord, Lord Peston, also pointed out—that the euro was originally introduced not as a monetary scheme but as a political
 
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one. It was depicted—there are many quotations to support this—as a giant step forward towards political union in Europe and towards the emergence of one integrated European bloc that would be a rival to the almighty dollar and to American hegemony. All this was said a hundred times and all this will be pointed out a hundred times. The euro was, and remains, a political construction.

As I recall it, from the start—and I was one of two English representatives on Giscard d'Estaing's committee for monetary union—there were going to be three pillars. The first was monetary cohesion, which was to be provided by the European Central Bank. The second was budgetary and fiscal solidarity, which in the first phase was to be provided by the so-called "stability pact", rechristened "the stability and growth pact". The third pillar was to be the eventual political cohesion and integration of the EU member states, with the implication of a single government of sorts, as the noble Lord, Lord Rees-Mogg, also pointed out.

The first pillar remains in place. We have discussed the European Central Bank. It has a difficult task, but it is very much in action and it is operative. The second pillar, of course, has crumbled, as several noble Lords have pointed out. Budgetary discipline has been abandoned in Italy and could well be discarded in Germany itself. It is obvious that several states in the zone find it intolerable that their public spending, and the borrowing necessary to finance it, should be limited by rules which seem to them unnecessary, onerous or just plain politically embarrassing or impossible to sell to their electorates. New and much laxer rules for budgetary limits within euro-zone states have now been devised with conditions which seem to be so extensive that they allow almost any pattern of behaviour. There is certainly very little discipline.

Yet it was this stability and growth pact which was supposed to be the rock on which the whole thing rested pending the arrival of full political union in Europe. I remember going to see the then chairman of the Bundesbank, Mr Hans Tietmeyer, before the arrival of the euro and asking him how it would work if there were no political union. Chancellor Kohl had said many times that there had to be political union for it to work. Mr Tietmeyer said that it would be all right because the stability pact would hold everything together. That was the structure on which the whole system would rest. But now that structure has begun to wobble; indeed, it has come apart completely.

The third pillar, political union, has not arrived. Moreover, as noble Lords have said, the prospects for it have been very severely shaken by recent events and by the French and Dutch referendums.

So the outcome, which we can all see, is that the euro, which until recently looked remarkably strong, suddenly looks in financial markets to be a riskier proposition. If one adds to that the strains that already existed, of trying to impose a single interest rate on 25 highly diverse economies, one can see why the financial community is getting increasingly uneasy about the whole thing. Indeed, the other day, the OECD—not at all a critic of
 
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the euro-zone—stated that it now sees the euro-zone as a zone of "widely divergent" economic activity. That is a challenge to those who hoped that by now there would be a harmonised and uniform pattern of economic activity.

As we have heard from noble Lords who speak with enormous expertise, the Italians are finding it very irksome indeed. An Italian Minister has spoken out calling for the return of the lira. Lombard Research told us yesterday that its Italian informants believe that the euro is "asphyxiating" the Italian economy. As the noble Lord, Lord Rees-Mogg, so graphically described, Italy no longer has the opportunity to find an outlet, a steam-release valve, in devaluation. For many years, it has not had the political strength to resist public spending growth or to impose swingeing internal cuts.

Meanwhile, the Dutch have also complained loudly. They have said that they should have followed the British policy and stayed well clear of the euro-zone. There have even been rumours from Frankfurt of all places, the heartland of financial prudence, that all is not well with the euro.

The irony in all this is that the main alternative in international markets to the euro, namely the US dollar, has been looking far from healthy itself. Very recently, the central banks of China, Japan, South Korea and other Asian nations, which over the past few years have been patiently accumulating enormous dollar reserves to prop up the dollar and finance American consumption, were just beginning to switch some of their holdings into euros. That is why the dollar had been sagging and why the euro had been rising so amazingly high.

Suddenly all that has changed. The euro's longer-term future no longer looks so good, so we now hear that some of the Asian central bankers are having second thoughts. Of course, the outward and visible sign of that is a very sharp drop in the euro/dollar exchange rate.

So where now for a currency which was born with high hopes but which now has not only not a single government behind it but no hope that such a government will ever come into being? One obvious point is that the British will, I imagine, be reinforced, including this Government, in their determination to stay well clear of the euro-zone and therefore clear of the very sharp swings between the euro and the dollar which have added to international instability. We have always been told that the euro was going to increase stability; of course it has done the opposite.

Another likelihood is that the recent new entrants into the EU from central Europe will be a little more cautious before they commit themselves to the euro-zone and give up their own denominations. On talking to some of them recently, it seems that they will probably favour a kind of semi-fixed relationship with the euro, not unlike what went on under the old deutschmark zone. That system existed exactly so that a number of smaller European countries could keep their currencies roughly in line with the then all-powerful deutschmark.
 
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That is all right for those which have not joined. For those which are in already, as has rightly been said, the exits are not nearly so easy. In fact, if Italy tries to disengage, the immediate effect would be to make its borrowing very much more expensive. Furthermore, a very large number of people in western Europe, including politicians, have invested heavy political capital as well as personal commitment in making the single currency work.

All that suggests to me that while the euro may lose some of its shine, it will probably survive for some years in a more modest form, possibly within a currency union covering France, Germany, Belgium, Spain and maybe Italy if it can get a strong enough government to impose reform. It will be a zone of relatively slow growth and weak competition, possibly protecting itself increasingly with barriers against rising Asian challenges and other cold and unwelcome trade winds.

Eventually, of course, that will lead to falling living standards and impoverishment. But—one must be realistic—the process could take many years. In the mean time, all those countries will remain very pleasant and delightful places to visit and in which others can holiday and in which the euro currency can be used in an atmosphere of tranquillity, free from the cold winds of Anglo-Saxon competition and other unwelcome outside forces.

I end by saying that if that is the way these once great European nations wish to manage their decline, who is to say that they are wrong to choose it, if they so wish? All I would add is that it is not for us.

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