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That the Grand Committee do consider the economic situation of the United Kingdom, including the impact of the eurozone crisis on the United Kingdom and other non-eurozone members.
Lord Lamont of Lerwick: My Lords, I am very delighted to have the opportunity to introduce this debate. I ought to explain that this debate originated as a question put down by myself and the noble Lord, Lord Flight, intended for the dinner break, and was to be a debate entirely and only on the euro crisis. Somehow the Motion has metamorphosed into something wider, and the debate that was originally intended to be in the Chamber has now been relegated to the Moses Room. In view of the attendance here today and the importance of the subject, which can hardly be underestimated, perhaps it would have been more appropriate had it been in the Chamber in the first place.
I hope that noble Lords will forgive me if, despite the widening of the Motion, I confine my remarks almost entirely to the issue of the eurozone. Of course, I will listen extremely carefully to the points made by other noble Lords-notably, the noble Lord, Lord Eatwell, from the Front Bench, the noble Lord, Lord Myners, its other spokesman, and, of course, my noble friend Lord Wolfson of Apsley Guise, who is going to make his maiden speech during this debate. He is notable for many things, but one other notable thing that he has done has been to offer a very large prize-I shall not mention the exact sum of money-for anyone who can given him the solution as to how to dissolve a monetary union. During the course of my speech, I hope to name at least one candidate for the prize.
I will say just one brief word on the Autumn Statement and the position of the British economy. The critics of the Autumn Statement criticised the Chancellor and the Government yesterday for not having achieved their borrowing targets and for having increased borrowing, yet these were the same people who were urging them the day before to increase borrowing further. They seemed to believe that if we
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As the Chancellor of the Exchequer said the day before yesterday, you have only to turn on your television to see that everywhere in Europe other countries are reducing their budget deficits and taking drastic action to do so. Indeed, we are probably doing so less quickly than many other countries in the eurozone. The Government's starting point was the situation that our annual deficit as a proportion of GDP was equal to that of Greece, around 12 per cent. Of course, as is fairly, rightly and frequently pointed out, we had the advantage of a low stock of debt, but if you are adding to that at the rate of 12 per cent per annum, that advantage will quickly disappear. In today's world, the Chancellor was absolutely right to embark on the programme of fiscal consolidation that he has.
One reason for having a debate on the eurozone crisis by itself is that I believe it represents a large threat to our economy and that of the world. One commentator yesterday compared the Chancellor's task to that of a doctor treating a patient on board the "Titanic", and the approaching iceberg was the eurozone. If anyone doubts the seriousness of the situation, just look at the front pages of the newspaper, with Mr Van Rompuy and Mr Barroso sitting opposite the President of the United States in the White House; they were not invited there just to have a cup of tea. Indeed, the action by central banks yesterday to increase dollar liquidity and the liquidity of banks in other currencies via swaps was expressly done, according to the spokesman of the United States Government, to offset the effects of the eurozone crisis and the threat to the banking system.
Denial has been a theme of the eurozone crisis. Outstanding examples of denial have been the constant assertions that eurozone banks have adequate capital, a debt default within the eurozone could never happen and the break-up of the eurozone was unthinkable. We have had extraordinary suggestions from Commissioner Barnier-the noble Lord, Lord Myners, had some observations about him the other day-who went out of his way to suggest that credit agencies should be banned from expressing opinions on the economies of member states that had received financial assistance. It seems extraordinary that, in a European Union where we have Charter of Fundamental Rights that enshrines the freedom of speech, this should not extend to credit agencies expressing an opinion about the state of different European economies. We have had many hobgoblins, not just credit agencies. We have had short sellers, credit default swaps, hedge funds and derivative traders-all have been blamed for the increasing and exacerbating crisis within the eurozone.
This crisis has also been characterised by drift. Perhaps that is inevitable because of the nature of the eurozone. When the eurozone was first set up, many people argued that having a currency without a government was a strength; but, in fact, being a currency without a government has turned out to be one of its fatal weaknesses. Thus we have had a whole plethora of attempted solutions at the crisis. First, we had the Irish bailout, then the first Greek bailout, then the
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We have had lots of different versions of the EFSF. First, it was going to be leveraged; nothing much seems to have happened on that. Then we were going to have co-investment by other countries in it. Then, despite the extreme criticism of credit default swaps, it was going to be made into some sort of insurance mechanism doing exactly what credit default swaps do. Finally, de haut en bas, it was decided that the bailout should be funded by the Chinese-the richest countries in the world were going to ask some of the poorest countries in the world to bail them out. I think that there is an average income of $24,000 per annum in the eurozone compared with $5,000 per annum in China.
It is not just the policies of the eurozone that are the problem. One of the anxieties has been about the ability of the eurozone to execute any solution. Many weeks have passed since the first proposed 50 per cent haircut on Greek bonds was announced. The terms have still not been agreed by private holders, full interest is still being paid on Greek bonds, and the eurozone still wants to deny that there has been a Greek default because, of course, it wishes to maintain the myth that sovereign bonds in the eurozone are risk-free.
We all have different views about the euro and the eurozone and how it was set up, but there seem to me two fatal flaws in the eurozone that have received inadequate attention. The first was the German insistence on the no-bailout rule. That, of course, has been breached not once but several times, but it is still very dear to the German heart for reasons perhaps to do with their own experience of monetary union. It is something that they have surrendered very reluctantly, and it is, I believe, one reason why the German reaction at each stage of the crisis has been to do the minimum necessary in order to keep the euro afloat. For them, there will not be a big bazooka.
The second flaw, which has been pointed out by the economist Andrew Smithers and which again, I think, has received inadequate attention, is the misconstruction of having one central bank coexisting with 17 sovereign Governments. Normally, of course, a central bank must be able to print money. The Bank of England and the Federal Reserve board are owned by their Governments, whose bonds they buy and sell with no credit risk in their daily operations with the banking system. In a currency area, there should, of course, be local governments, but their borrowing should be tightly controlled from the centre, as it is in the UK, or they should be able to default, as is the situation in the United States. In Europe, the pretence is that the debts of the member states are without credit risk; so the European Central Bank is unable to avoid putting risks on its balance sheets in its day-to-day operations with the banking system. It is hardly surprising, therefore, that the Germans are so opposed to the European Central Bank being forced to buy more bonds. It is
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Until recently, talk of restructuring the eurozone, or of the departure of some members, or of the break-up of the eurozone, was unthinkable. That all changed, of course, at the Cannes summit, when some Greeks made it clear that they did not want to accept the terms of the write-down but wanted to remain within the eurozone. They were then threatened with expulsion from the eurozone-what was unthinkable suddenly became possible. We know that the Financial Services Authority and indeed the Treasury have been drawing up contingency plans. The FSA has been putting questions to companies about a change in the structure of the eurozone. I am not advocating or supporting a change in the eurozone's structure or saying that a country should depart, but it would be foolish not to recognise that this is now on the agenda and requires thinking about. It is not inconceivable that in a couple of years' time the shape of the eurozone could be different from how it is today.
We have seen currency unions that have been broken up before: the currency union between Britain and Ireland; that of Czechoslovakia; and indeed-often ignored-that of the rouble-zone, where one currency became five, six or seven currencies. It is clear that, in the currency union of the eurozone, financial integration has been very deep, and has accelerated exponentially in recent years. However, the issues that would arise if one country departed are clear. Some of those were outlined in a paper by Philipp Bagus of King Juan Carlos University in Madrid. My noble friend Lord Wolfson might care to both study his report and to bear it in mind for the award of his prize for someone studying how monetary unions might be adapted. He identified the issues of redenomination, the importance of keeping payment systems going if one country departs, derivative contracts, cross-border loans and the capital banks.
I entirely accept that, in the eurozone, the departure of one or several members would be highly complex and could be extremely expensive. However, while we hear a lot about the costs of breaking up or altering the shape of the euro, the costs of the euro remaining as it is are becoming astronomical and potentially disastrous. Let us start with the bailouts. The two bailouts of Greece cost, respectively, €109 billion and €110 billion. The Irish bailout cost €95 billion. The Portuguese bailout cost €75 billion. These come to a total of nearly €400 billion. If the EFSF reached €750 billion, Germany's part in that would be €211 billion. Where other countries get into difficulty and are unable to meet their obligations, Germany's share of that would rise. For this reason the EFSF looks a little like a pack of cards or, as one distinguished central banker called it, a gigantic Ponzi scheme. If it increased to €1.45 trillion-and given that the guarantee of Italy and some other countries in that situation would be worthless-Germany would have to guarantee nearly €800 billion, or 32 per cent of German GDP. If France were to lose its AAA status, the German share would rise to €1.385 trillion, or 56 per cent of German
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The European Central Bank has accepted Governments of the peripheral countries as collateral from the banks. If any of the eurozone Governments were to default, they would probably bring down with them part of their domestic banking system. The banks in that situation would be unable to repay the loans to the European Central Bank, which would be left with the collateral. Open Europe calculated Greece's 50 per cent haircut alone would cost the ECB between €44.5 billion and €65 billion-and that is just one country. Again, one can see why the Germans are reluctant to put more into the EFSF and reluctant also to let the ECB do what so many people have urged it to do: buy more and more bonds.
Which direction will the Germans go in? They talk of fiscal union, but do not mean what we in our debates mean by a fiscal union. We tend to mean a common treasury and tax system. The Germans mean simply more peer pressure and more supervision of national budgets. That is unlikely to work. So what is the German solution? It seems to be to do the minimum possible at each stage. Each country that is in difficulties is expected to deflate for long enough to become competitive with Germany and to put its public finances on a sound footing. However, given the dire state that some of these countries are in, I question whether that is a sustainable solution. The eurozone threatens to asphyxiate its members.
If there were a real fiscal union requiring treaty changes, it would of course be vital to protect our national interests. I would have no objection to the Government agreeing treaty changes that did not affect us, but it is vital that our national interests should be protected. I hope that the Minister will give us some assurance on that. However, I do not think that that is the route Germany will go down. I have said what I think it will try to do. With this minimalist approach, we can look forward-alas-to recurring crises. They could come every few months. They could go on, possibly for years. I think that it was Adam Smith who said,
There is probably a lot of ruin in several nations put together. Such a continuing crisis would be extremely damaging to confidence. It would sap it continuously and would mean that the already bleak outlook for growth would become even grimmer.
Such an approach may keep the eurozone and the currency afloat. However, the great risk is the possibility of an accident occurring in the mean time while adjustments take place. It could happen somewhere else in the financial system; for example, in the marking to market of sovereign bonds. We could see a major crisis in a major bank or in another financial institution. It is far better now to look at restructuring the eurozone and not to take it as a given that it must continue in its present form. The effect of delay will be simply that in the longer run the costs of adjustment will become greater. There is no painless solution, but let us hope
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Lord Monks: My Lords, I am grateful to the noble Lord, Lord Lamont, for initiating this timely and important debate. Its title is rather wide; as has been said, it is about the UK and the euro, and my angle is going to be a little bit different from the one that the noble Lord opened the debate with. In the week of the Chancellor's Autumn Statement, there have been yet more make-or-break meetings in Brussels. Yesterday there was a substantial public sector strike, just to underline the timeliness of what we are going to debate today.
No one should doubt that in the present economic crisis there are also the seeds of a considerable political one. The way that the international markets set strict rules for countries makes it fairly clear that many democracies are struggling to live within those rules, and to some extent that includes us.
When the banks were in trouble, everyone agreed that that moral hazard did not apply. Governments sprang to their defence and transferred the banks' huge debts on to their nations' balance sheets, splashing copious amounts of red ink over the national accounts. Yet when the individual countries were subsequently hit, moral hazard came in with the vengeance. The terms of the so-called rescue packages are very harsh-less Marshall Plan, more reparations.
It should now be clear, and I hope that it is clear in Brussels and in the IMF, that this is a road to depression and political crisis in the countries worst affected, not a road to recovery. The single way to cut deficits is to get people back to work. Then there are more tax revenues to be collected and more disposable income to spend. Looking after the deficit while hoping that unemployment looks after itself is self-flagellation or, worse, economic suicide, as Joseph Stiglitz has regularly termed it.
How did we get into this mess? There are many reasons for that, but one is that the world economy has changed fundamentally since the financial deregulation of the 1980s. This was carried through in the UK largely on the watch of the Treasury of the noble Lord, Lord Lawson, who inadvertently is leaving at the very moment that I have referred to him.
Lord Monks: Apologies for that. One effect of this, although there were others, is that the traditional constraints in financial services largely disappeared. Banks increased their leveraging and invented a bewildering range of new products, most of which in hindsight appear to have been more dangerous than beneficial, described as "socially useless" by the noble Lord, Lord Turner, currently chairman of the FSA or, to use another memorable phrase used by Warren Buffett about credit derivative swaps, "financial weapons of mass destruction" that we turned in on ourselves. Wall Street and the City nevertheless claimed to have developed sophisticated forms of risk management, a claim that we can now see was wholly fatuous. By the
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To return to deregulation, though, the effect was to increase private indebtedness to unsustainable levels, leading to rising inequality with totally unjustifiable rewards for people at the top-especially, but not only, in financial services. Even in this crisis, in the period of flat growth that we are going through, average executive pay of directors in the FTSE top 100 increased by 49 per cent last year. And just wait for the forthcoming Christmas bonus season in the City; on past form it will be an orgy of Bourbon-like self-indulgence and a two-fingered salute to the Prime Minister's claim that we are "all in this together".
In a debate here last Friday, it was suggested that Europe and the euro were to blame for the crisis by the constraints imposed on national economies. In fact, in my view it is not Europe that threatens national sovereignty. Properly led, though I accept that that is a fairly big qualification, it offers a chance at European level to enhance national sovereignty by creating an economic bloc large enough to influence markets and not be cowed by them.
As for the UK, the crisis has exposed the long-running problem that we have not been fully competitive for a long time with our neighbours across the North Sea: especially Germany, but also the Netherlands and the Nordic countries. We have not benchmarked our performance on a consistent basis against those countries in a way that others do-countries like Belgium and, to a degree, France. We have tended to muddle along using periodic devaluations of sterling, bolstered for periods by the bonanzas of North Sea oil and later by the boom in financial services. Now there are no more bonanzas in view, and the national task must be to move our economy in the same direction as our North Sea neighbours. We must be more long-termist. We must promote more investment, more manufacturing, social markets, greater equality and more multi-stakeholder governance on boards, including worker influence, as well as strong public services. That is the way those countries do it, and theirs are among the most successful economies around, not just for this year but for many years.
The noble Lord, Lord Heseltine, recently said that he had favoured the UK joining the euro because it would make us more like Germany. I believe that he was right, and he could still be right if the euro survives the present crisis. Soon Germany has a very big decision to make. In fact, I think Mrs Merkel is the only one who can win the prize of the noble Lord, Lord Wolfson, because she is the only one whose decision is going to matter. One of the interesting things about this debate is how marginal it feels to the debate about the future of the euro.
While we are talking about the German influence, I think that the reasons of the noble Lord, Lord Lawson, and the noble and learned Lord, Lord Howe, for pushing in the 1980s for the UK to join the exchange rate mechanism also rested on a wish to make the
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Lord Ashdown of Norton-sub-Hamdon: My Lords, I am grateful to the noble Lord, Lord Monks, for introducing this issue. Although it is perfectly reasonable to be discussing the economics of this country, it seems to me completely bizarre that we should be discussing, outside the circle around the fire, this 650-pound gorilla of what happens to the euro. For us not to have addressed or discussed that seems bizarre. Indeed, for us to be doing it in this Room today rather than in the main Chamber seems odd as well, and I am grateful to the noble Lord for mentioning that.
It is a privilege to follow the noble Lord, Lord Monks. I agree with so much of what he said, and I will come on to that in a moment. Although we talk about the economic crisis, I think that the real crisis is a deep political one, and perhaps we do not recognise that at our peril. Of course we must look forward, but it behoves those of us who argued, as I did, that this country should join the euro in 1997 to say a little word about the past and perhaps to justify that position.
I start by saying that I do not resile one iota from my belief that it would have been right for this country to have joined the euro at some time between 1997 and 1999, for reasons that I shall seek to explain. Those who argue to the contrary, that not joining the euro was the best thing that we ever did, seem to miss a number of points. First, they presume that the euro would have been the same as it is today had we joined; of course, it would not have been. We would have added substantially to those voices within the eurozone in favour of liberalised markets and greater competition, and the balance of the euro would have been different. Even those of us who argued, as I did, that it was illogical to create an economic giant controlled by a political pygmy might even have begun to win the argument within the eurozone that we had to create the instruments to ensure that the position we have now arrived at in the euro was at least less likely.
The second proposition is that somehow or other, if we had joined the euro, we would have been like Greece, Portugal, Ireland and Italy. I do not think that that is true. We are not a small southern economy without a manufacturing tradition but with a certain cavalier attitude to the rules. We are a northern economy, large and with a strong manufacturing tradition, and we respect those rules.
Those rules would have been very good for us. I reflect on the fact that by not joining the euro we left ourselves open to do what we have always done whenever we hit a problem: we do not tackle the fundamental problem, which is that Britain does not produce enough goods at competitive prices that the world wants to buy. Instead, we devalue our way out of trouble. It is what Harold Wilson did, for which he was excoriated, and it
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Instead of doing what we needed to do-produce competitive goods that the world wanted to buy-we devalued our way out of difficulty. Instead of acting like Germany, we decided to act as we always have done. Sooner or later this country must tackle its fundamental problem and produce goods that the world wants to buy at a competitive rate. However, not only did we take advantage of the ability to devalue and dodge the issue, but we decided that it was easier and more fun to behave like Italians and build up a massive amount of debt-in fact, not like the Italians, because their debt was 97 per cent of GDP in 1999 and is about 104 per cent now, while our net government debt is now two and a half times what it was.
We are now faced with the worst of all propositions. We have to make ourselves competitive because at last we must, and we must deal with a huge burden of debt as well. Is the position better than it would have been if we had been subject to the disciplines inside the euro? I do not think so. Let us compare our position to that of Germany or those of the other northern economies that are most like us. I take the position of Germany in particular, but one could find the same examples in Benelux, Austria, Finland and other countries. Between 1999 and now, Germany increased its debt by 20 per cent but doubled its growth. We increased our debt by 250 per cent and halved our growth. In which position would one prefer to be?
Of course, Germany has the problems of the euro to cope with. However, as an economy it has nothing like the problems that we now have to cope with and nothing like the difficulties that are ahead of us. I know which of the two positions I would much prefer to be in. It was a great pity that this country did not grasp the nettle and submit itself to those disciplines. I am very confident that if we had done, today we would not be in the economic position in which we find ourselves.
I will address the future in the three or four minutes that I have left. Here I find myself more in agreement with the noble Lord, Lord Lamont, than I had thought I would be. There are three options available to the eurozone. Option one is that the whole thing collapses. Of course, that would be a disaster and a catastrophe. I am very confident that it will not happen because the countries that run the eurozone have too much invested in it; they will not allow it to happen. For all that the noble Lord, Lord Lamont, told us of the costs of trying to save it, the costs of not doing so are even greater.
The second option is that somehow the euro of 17 survives. If I was asked to make a judgment on that, I fear I would say that it is unlikely for two reasons. First, I am not sure that the people of the nations that will have to face these austerities will all agree to do so. It may be unwise not to, because conditions for them will be far harsher outside than inside. However, with a frightened population it is unlikely that all of them will accede to the austerity measures necessary to maintain their position inside the euro of 17. Secondly-here the noble Lord, Lord Lamont, is right-the markets
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I do not predict it as a certainty. However, on the balance of probability the most likely outcome is a eurozone made up of Germany, Austria, Finland and Benelux. My guess is that Sweden would join under those circumstances. So might Denmark, which is tracking the euro. France, of course, would be in-perhaps not for economic reasons, but for political ones it could not be left out. The big question is whether Italy would be in. Again, it seems almost impossible to imagine that it would be, because I doubt that the German people would bail out Italy. However, if Italy is not, Germany will have to find a huge sum to bail out the banks-to recapitalise German and French banks-as a consequence. Somehow or other, that seems to be the position that we come to.
The question is: what should Britain do in these circumstances? If we had a core euro of that sort, the eurozone would be strong-in surplus, perhaps-and it would be deeply in our interests to join. Do I say that we should from this position? No, I do not. But being the only one of the outs, the only one of those not in the current eurozone that wants to go further out, while all the rest of them want to get back in would be disastrous. If we do not show a willingness to join if it is in our country's interests, then we immediately diminish our influence and our effect in the Councils of Europe. It is inevitable that the eurozone countries, whether a core eurozone or one of 17, will caucus together and work together to their advantage and, ultimately, our disadvantage. If we are outside that circle, we diminish the influence and voice of Britain catastrophically.
My position is very simple. Let me see if I may differentiate it from what I suspect is the position of the noble Lord, Lord Lamont. My position is very practical. Should it become in Britain's interests to join the euro we should do so. His position is likely to be that even if it were to be in Britain's interests to join the euro, we should not. A position driven by pragmatism seems to me to be the best position for our country. I believe that this will come sooner than we think. If this thing can be made to survive-and I believe in the end that it will survive-then, sooner than we think, we will have to address the question of whether or not it is in our interests to join. If it is, I say we should, whereas I think that many people, especially in the Conservative Party, still take the view that even if it was in Britain's interests to join we should not. A position driven by pragmatism is wise for this country; a position driven by prejudice is not.
Lord Williamson of Horton: My Lords, I declare an interest, as I spent a good part of my career in the United Kingdom in public service dealing with European affairs and a smaller part of my career in the European Commission.
I am very glad, like earlier speakers, that this debate has been arranged, because the serious difficulty that at least five eurozone members are having with the sale of state bonds to finance their public expenditure is already clearly having an effect on our economy, and, if events continue to deteriorate in the eurozone, it could have a much more serious effect. Despite some of the gloom around the Autumn Statement, the present Government are handling our economic problems well, with the consequent low interest rate on UK bond issues, at or about the level of German Bunds. But we must not be complacent. I do not accuse the Government of this, but complacency is implicit in some comment in the United Kingdom on the eurozone's problems. It is not just the eurozone's problem.
I wish to speak briefly on two issues. First, what are the eurozone countries likely to do-all of us here are speculating on it, but it is important-by way of treaty change or other economic or financial measures? Secondly, and most importantly, how should we best protect our national interests as the drama continues to unfold?
First, then, what are the eurozone countries likely to do in order to respond to the absence of a central bank or financial institution of last resort? The European Central Bank has recently purchased a very large amount of national debt from some eurozone countries, but it is under the eagle eye of the German constitutional court. I doubt that it could issue euro debt bonds of its own without breaking the Maastricht treaty. Such bonds could be only a partial substitution of national bonds, and the guarantee need not necessarily be full-it also could be partial. Stability bonds would be a valuable aid to the correction of eurozone problems.
Almost every day the Financial Times tells us that the European Central Bank must be more like the Federal Reserve, and sometimes the Financial Times is right. It seems almost certain that new powers will be taken in the eurozone, either by way of enhanced co-operation or by treaty change.
The United Kingdom has already made it clear-correctly, in my view-that it is benevolent but will not participate. So far, there has been a treaty change in March this year to put the European stability fund on a permanent footing, as well as other measures short of a treaty change in October. In September the Dutch proposed a new budgetary commissioner with the power to intervene in eurozone countries with excessive deficits, with potential sanctions. In October the Commission proposed closer monitoring of eurozone countries' budgets, including the right to ask a country to look again at its budgetary proposals, and envisaged developing options for eurobonds. The Commission believes that that could be done by an enhanced co-operation procedure with treaty change later. That is questionable. Currently, the position of the eurozone countries is that they are considering changes to strengthen monetary union, including possible treaty change, with an interim report this month and a final report in March 2012.
So it is all go, but, unfortunately, not many of the problems have gone away-rather the contrary. It goes without saying that other methods of increasing the resources available to the European stability fund or a
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However, I would like to say a word or two about the possible enhanced co-operation or treaty change that is under discussion in the eurozone. The Minister has an outstanding knowledge of finance, but it is possible that even he may have found the institutional issues somewhat labyrinthine-not, of course, a traditional Greek labyrinth but a grade one European labyrinth. If the eurozone countries wish to move quickly, as the markets clearly want, the procedure of enhanced co-operation under Article 20 of the treaty and the detailed arrangements in Articles 326 and 334 of the Treaty on the Functioning of the European Union is the quickest. Changes made in this way would, of course, apply only to those countries that agreed them, would not form part of the acquis and could not affect the single market. The Treaty on the Functioning of the European Union is extremely explicit on that point, stating that enhanced co-operation shall not undermine the internal market, that it shall not distort competition between member states and that it should not constitute a barrier to, or discrimination in, trade between member states.
In my view, eurozone countries could not legally introduce a financial transaction tax by this method, but that view may be contested-that is a point of importance for the United Kingdom. If action were not taken by enhanced co-operation of the eurozone countries, the treaty would have to be amended or we would just drift along. For a treaty amendment, there are two methods: there is the ordinary revision procedure -more accurately described as the complicated revision procedure, including a convention, an intergovernmental conference and unanimity of all member states. I think that that is one possibility which can be excluded. Or there is the simplified revision procedure under Part IV of the Treaty on the Functioning of the European Union, without a convention or an intergovernmental conference but requiring unanimity and ratification by member states. We would need to ensure that if the treaty changes applied only to the eurozone, our national interests within the European Union as a whole were not damaged. In my view, maintaining and strengthening our financial services should be the prime object of our attention.
If, as I assume, there were no transfer of powers or competencies from the United Kingdom to the European Union, a referendum would not be required in the United Kingdom. The highly important European Union Act, passed in the current Session but which seems to have had little public impact, embodies the principle of "so far and no further" by requiring referendums in the United Kingdom if there were any transfer of powers or competences but not otherwise.
The most effective response to the eurozone difficulties might well be stability bonds, with partial substitution of national bonds and some element of guarantee. But of course in order to pass the "no bail-out" hurdle currently in the treaty, a simplified treaty revision for the eurozone members would be needed in that case.
Lord Lawson of Blaby: My Lords, I join others in commending my noble friend Lord Lamont for having, by a somewhat circuitous route, initiated this debate and for his outstanding opening speech. I echo him too-he was perhaps slightly understated-as in my judgment it is an absolute disgrace that this debate is for only four hours and has been shunted off to the Moses Room rather than being on the Floor of the House. Much as I love the government Chief Whip-and it is not just her-on this occasion the House has been badly let down by the usual channels.
We have so little time that, like my noble friend Lord Lamont, I will confine myself entirely to the eurozone disaster. It was predictable and predicted. I was not alone in predicting it, but I think that I was the first Minister to explain the fatal flaw at the heart of this misconceived venture. I shall quote a speech that I made as Chancellor of the Exchequer at Chatham House on 25 January 1989, before European monetary union had come into being. It was even before the Delors report, the blueprint for monetary union and the eurozone, had been published, but by that time we knew what it was going to say. I said:
"Nor would individual countries be able to retain responsibility for fiscal policy. With a single European monetary policy there would need to be central control over the size of budget deficits and, particularly, over their financing. New European institutions would be required, to determine overall Community fiscal policy and agree the distribution of deficits between individual Member States. These are not technical issues.
The setting up of a European Central Bank or a new European institution to determine Community fiscal policies go to the very heart of nationhood. What organisation would really be the government? It is clear that Economic and Monetary Union implies nothing less than European Government-albeit a federal one-and political union: the United States of Europe. That is simply not on the agenda now, nor will it be for the foreseeable future".
That is what I said more than 20 years ago, and it was as true then as it is today. It was not meant to be a case for Britain not joining; in my opinion, there was no way Britain would join anyway. I was trying to persuade my European friends and colleagues that they would be ill advised to go down this calamitous route.
You might ask, "Why did it happen?". It happened partly because there are always ignorant worshippers in the church of Europe who believe that anything that is "more Europe" must ipso facto be a good thing-you do not have to work out the details, because if it is "more Europe" it is good. Of course, the main promoters were much more sophisticated than that. They knew that it could not work without full political union, and it was full political union that they wanted. This was never an economic venture; it was entirely political. It was a means to achieve a full blooded political union-a united states of Europe.
The motives of those who wished for that may have been commendable or noble, but they committed two unforgivable errors-and I could use a worse word than error. First, they showed complete contempt for democracy. That has always been one of the least attractive aspects of the European movement during my time. It was quite clear that you could not have a political union unless you could convince the people
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The other disgrace, which made this venture the most irresponsible gamble that any senior group of politicians has ever taken in the post-war era, is that it was quite clear that if the gamble did not come off, there would be a disaster, and that is what we have now. In fact, we have a doomsday machine. It is quite extraordinary that we are not asking how to dismantle this doomsday machine, but how to keep it going. "How do we go from bad to worse? Let us keep the doomsday machine going". It is nonsense. When you have a doomsday machine, you try to dismantle it, but they say, "No. How can we perpetuate it?".
So where do we go from here? This has both an economic and a political dimension. As I said, the economic dimension has to be the dissolution of the eurozone and a return to national currencies. It has to be done in as orderly a manner as it can. As my noble friend Lord Lamont said, there have been a number of cases in history where monetary unions have been dissolved. Incidentally, history also shows that, as with German monetary union in the 19th century, you have to have political union first, which Bismarck in Prussia imposed, before you can have monetary union. They had to solve the question of the political union first, and they could have monetary union only after achieving political union. I admit that it is not easy, but it is clear that it is the least bad solution. To continue with the doomsday machine would be very much the worst step-not just for us, but for the whole of Europe.
The other aspect of the economic way out is how we deal with a potential-and burgeoning-banking crisis. The consequences of impaired sovereign debt in the eurozone mean that we have a new banking crisis superimposed on banks that are already enfeebled by the banking crisis of 2008 to 2010. This is where the economic threat is coming from. There is no economic threat posed by the break-up of the eurozone because that would be a good thing. The economic threat-it is serious and I do not wish to belittle it-comes from the problem of a serious banking meltdown. But there are ways in which this can be addressed. I believe that the IMF has a key role to play, and as members of the IMF, obviously we will be contributors. The heart of the problem is impaired sovereign debt on banks' books and so on. I have some experience of this because the first thing I had to deal with when I became Chancellor of the Exchequer in 1983, along with my opposite numbers in what was then the G5-it had not grown to seven in those days-was the Latin American sovereign debt crisis. It was not quite as big as this one, but at the time people felt that there was a real threat to the world economy. It was handled pretty well by the IMF with the support of the finance Ministers and Governments of the G5 countries. I do not have time to go into it now, but it can be done.
Countries are then able to buy time, and that means that to some extents banks are able to do so as well. Banks need time to strengthen their balance sheets. Some banks may still need official assistance as well-assistance from the taxpayer, as it were-in order to prevent a serious banking crisis, but that is the responsibility of national Governments and Treasuries. It is absurd to think that there can or should be a European solution to that. The German Government will have to support German banks if they need support, the French Government will have to support French banks if they need support and so on, just as the noble Lord, Lord Myners-whom I see in his place-tried to support them. Perhaps he was too generous to them; the terms were not very good, and he did not strike a very good bargain. Nevertheless, he was absolutely right that there needed to be some taxpayer support for British banks in difficulty at that time. This is the responsibility of the national Governments around Europe. The idea that there should be eurozone bonds, as if the eurozone were a Government, is ridiculous. The idea that you put the European Central Bank, which is probably already technically insolvent, into an even worse state is absurd.
Lord De Mauley: My Lords, I do apologise to my noble friend. I respectfully draw his attention, and that of other noble Lords, to the fact that this is a time-limited debate. There is a confusion of clocks around the Chamber, but the one to keep an eye on is the one in front of each of us.
Lord Lawson of Blaby: However, I conclude by saying that, later on, we will have to address the politics, which means that we have to get our European partners to sit down around the table and say, "Look, the existing way that Europe works is disastrous". It has led to this. We have to have a proper constitution; not the Lisbon anti-constitution, but a proper constitution in which it is quite clear which are the competences of the centre and which are the competences of the member states, and to have them properly entrenched, as any self-respecting constitution does.
Finally-this is finally, I tell my noble friend-meanwhile, because we cannot wait for that, there is a threat to the City of London and to Britain as the great financial centre of Europe and the world from misguided European regulation, whether it is the Tobin tax or other things.
We have to say clearly that we will invoke the Luxembourg compromise. There is no way that we will allow ourselves to accept a majority vote on regulations that will be damaging to the City of London,
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Lord Myners: My Lords, before my noble friend speaks, I ask the Whip representing the Government whether we will all now be allowed, if required, 13 minutes. The Whip made very little effort to restrict the noble Lord, Lord Lawson. I personally would have liked the noble Lord to have had more time to speak because he has such rich and informed experience. The Whip allowed that to run for 13 minutes, and I hope that he will extend the same courtesy to people from the other side of the House if they so wish.
Lord Desai: My Lords, first I thank the noble Lord, Lord Lamont, for giving us this opportunity. I shall also heed what my noble friend Lord Monks said: this is not just an economic crisis, but a crisis of economics. I guess, as the first paid-up academic economist to speak in this debate, I had better take that seriously.
I want to talk simultaneously about the UK economy and the European zone, but I also want to include the USA. I see this as a crisis of the developed economies. I see this as an historic moment when the tectonic plates are shifting, and we are now landed with a geriatric capitalism. The young and dynamic capitalism has moved eastwards and southwards-indeed anywhere but to the old, developed economies.
It is not just that the eurozone is in crisis-and it not just an exchange rate crisis, it is a sovereign debt crisis. The United States is in a crisis of debt and deficit, and so are we. The question we have to ask is this: why is no one practising good old-fashioned Keynesian economics? We told the world for many years that we had the answer and that this would never happen again. Perfectly sane people-I presume they are sane-across many countries are finding that they are restricted by debt and they have to tackle deficits, but they cannot use the fiscal spending instrument that they thought they could always use. One answer is that we are all cowards, but I shall resist that.
There are a couple of things that are worth saying. A long-running cycle started in the 1970s, at which stage manufacturing began to leave the developed economies and migrate eastwards. That came about partly as the result of globalisation and partly through a profitability crisis in western countries. Our labour costs were too high and capital went in search of cheaper labour elsewhere. This happened not just in the UK, but by and large a group of developed countries had the same experience. There are one or two exceptions, but I will stick to this argument. We tried to find substitutes in the services sector, both in public services and in financial services. At the end of 40 years, we have finally come to the crunch. They are no longer a viable solution to our problems.
In the mean time, especially during the long boom from 1992 to 2007, probably the longest boom in the history of capitalism, we compensated for our lack of wealth-creating capacity by finding debt instruments. Both households and Governments were in debt before the recession hit. It is important to remember that both Germany and France broke the growth and stability pact not while there was unemployment but when there was full employment. Our debts started to go up while we still had full employment, as did our household debt. When we entered this recession, unlike any previous recession, we were already in a highly indebted position for both households and Governments. It is this which makes the application of the Keynesian solution somewhat difficult. First, there are large leakages due to imports since we do not make very many things. If you do spend money, there is bound to be import leakage. But it is also the fact that households, especially in the latest crash, feel compelled to deleverage because they have acquired debt and they now feel that they have to get out of it.
There is money in the private non-financial corporations. They are sitting on large surpluses. The puzzle is this: why is it that when interest rates are at historically low levels, private non-financial corporations are not investing? One obvious answer is that there is no demand. But if investment has to be for the long run, surely no one believes that demand is going to stay low for ever. There is an obstacle to private investment spending in the economy, and that is one of the things we need to tackle.
we are all in this together; all countries are tackling it. In the UK, it was quite clear before the election in 2010 that the problem of our debt levels had somehow to be tackled. There was almost an all-party consensus; the difference was on at what rate we should try to eliminate the deficit. My party took the view that within the Parliament we would eliminate half the deficit, and of course the coalition Government took the view that all the deficit should be eliminated. Now, if we are to believe the OBR, it will not be possible to do it within a single Parliament and will take longer. I reserve my judgment on that; it may be much too pessimistic a view but, for the time being, let us leave it.
Could something else have been done? That is the real question. Could a slower cutting of deficit have led to less of a drop in demand and employment? If so, would we still be suffering from the extra shock of the eurozone crisis-the inflation and all that has derailed the Osborne policy? There are two problems, and I am sure that the noble Lord, Lord Skidelsky, will speak on them. First, I am sceptical that the half-deficit elimination strategy could have been sustainable, especially when markets all around were going hysterical about sovereign debt. That is a matter of judgment and people will disagree. Secondly, even if it was possible to do it, the eurozone crisis and the inflation shock caused by the quantitative easing policy of the Federal Reserve and the Bank of England would have been there anyway.
The room we have for manoeuvre is quite limited. I only have half a minute. We need to develop a very different economy in which households restore the habit of saving and Governments restore the habit of balanced budgets. If we can do that-perhaps not by 2015 but in another decade or so-we might be able to restore western economies to a healthy state.
Lord Alderdice: My Lords, I start from the position of one who has been for many years, and still is, very committed to the European project, not just for reasons of political principle and doctrine but because of my experience in my part of the United Kingdom. It was the European project approach that inspired us as traditional enemies-unionists and nationalists-to meet each other across the table rather than across trenches, virtual or otherwise. It was that model of the institutions-cross-border and council of Ministers-that enabled us to find our way forward into practical political ways of co-operating east-west, north-south and within Northern Ireland. It was the European context that brought the United Kingdom and the Republic of Ireland together and produced a framework of relationships in which political leaders and civil servants were able to work together. However, I confess to having been profoundly disappointed by two approaches and three attitudes within the European project that have been profoundly damaging in recent times.
From the start, I wanted to see the development of a Europe of the regions, because it seemed the way for us to move beyond the nationalism that had been so damaging in the last century and towards a federal Europe. However, as time went on it became increasingly clear that political leaders were not terribly prepared to give up the national power of Governments and pool sovereignty sufficiently to make a Europe of the regions a serious possibility. That to me was finally made clear by the appointment, late in 2009, of Herman Von Rompuy and the noble Baroness, Lady Ashton-very fine people in themselves-which was a mark of the lack of preparedness of European leaders to appoint those who would really drive Europe forward. For many of those leaders, and for many of their people, the European project had become a vehicle for the accumulation of power and wealth, not the management of conflict.
The second was the debate between deepening and enlargement. It seemed that one had to choose one or the other. Many of my colleagues, particularly in the rest of Europe, disagreed. They said, "No, no. That is very old thinking. It is wholly possible to have deepening and enlargement at the same time". I always begged to differ. I could see value in both, but I could not see the possibility of both being done at the same time. That struck me again at Copenhagen in 2002, for example, when a number of new members were brought in who did not necessarily abide by the rules. I think particularly of the admission of Cyprus when it was quite clear that the Cypriot problem had not been resolved and that this would ensure that it would be impossible to resolve the problems not only of Cyprus but of our relationship with Turkey. Tragically, so it proved.
Those were not the only rules that were broken. Here I move on to the three attitudes. The attitude to the rules was defective, as the noble Lord, Lord Desai, mentioned. The stability pact was already being broken long before we ran into the recent economic problems. It seemed as though the project itself and its political dynamic were so important that one could afford to close one's eyes to the breaking of rules both by southern and northern countries for their own short-term purposes.
There was a second attitude that disturbed me. I wholly realised that the appointment of the Commission as an institution that could drive things forward when national interests would sometimes have held them back, was a necessary thing for the starting and development of the European Union. However, if it continued for too long, a tendency would develop in which European elites and bureaucrats felt that it was not really necessary to bring all the people along all of the time. Again, while I see the short-term requirement for the new Governments of Greece and Italy not to be properly democratically anchored, it is a very dangerous development that thoroughly undermines our capacity to turn to autocrats in other parts of the world and recommend the European project.
Finally, as time went on, the fundamental purposes of the project became lost and submerged. Increasingly, countries wanted to join the European Union not for the political reason of preventing a return to political instability and war in Europe but because they thought that it was a short-cut to wealth and comfort. Many countries joined without any real intention of finding a way to measure up to the kinds of requirements that were in place. At the same time, politicians saw the European project as a way of gaining a platform on the world stage, where they could compete with the United States, China and the developing powers. However, while that may have been their ambition, it was not the purpose of the project and was frankly not what Europeans themselves wanted. They were not interested in that kind of competition. They wanted peace, stability, reconciliation and economic progress in Europe.
As we move down this road, it has been extremely damaging to us within the European Union. Of course, the noble Lord, Lord Desai, is absolutely right. The economic problems we face are not solely problems for Europe; they are much wider. However, today we are concentrating on Europe. In appreciation of the noble Lord, Lord Lamont, I hope that this debate is the first instalment of a wider consideration of issues that are absolutely critical for our country and need further, longer discussion in your Lordships' House.
Noble Lords will not be surprised that, as a doctor, I will focus on diagnosis before coming to treatment. There are serious questions about whether the diagnosis of the economic dilemmas that we face has been correct. We were told from the start that it was a liquidity crisis. Then it was a problem of bank capitalisation. Then it was a recession, perhaps even a depression. All these things may be around but, fundamentally, what we face is a differential and massive correction. Some countries have simply been living within Europe way beyond not only their current means but any means that they are likely to be able to
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A solution was put forward by some of our colleagues. I heard Guy Verhofstadt, the former Belgian Prime Minister and a good liberal in many ways, make a diagnosis and treatment proposal that I had heard from him before. He said last week in Palermo that a state without a currency was possible but that a currency was not possible without a state to back it up-therefore, we need more Europe and a European federal state. My difficulty is not in thinking how we can find rules for such a thing to happen. As I said, the problem is in persuading people to live by the rules. Although I can understand that a fiscal union could be developed on a German model, I remain to be convinced that even if it is applied to Greece, the culture of Greek society would accept a German-style implementation of those kinds of rules. So I have difficulty in seeing not the theory but the political practicality of making it work. We need to go back to where we made some earlier mistakes.
If it is not possible for all the countries to maintain the requirements of staying within the euro, as seems to be the case, it may be unhelpful for us to insist that Europe moves forward with all those countries within the euro-unhelpful for them and for Europe. The interests of this country economically and politically require us to have a sensitive and nuanced approach to our European colleagues, not to try to press them in a direction that they cannot sustain. There are rules and debts have to be paid, either by the debtors, the creditors or the whole society through inflation or something else. However, if we do not find a new way in which to run Europe with a more variable geometry that allows all of us to remain together in peace and with variable but significant economic and political prosperity for all of us, I fear that, tragically, questions over the fundamental purpose of the European project-to maintain economic and political stability-may hove back into view. That prospect should make all of us shudder.
Lord Flight: My Lords, it is nearly six months ago that the noble Lord, Lord Lamont, and I at the same time asked for a debate on the eurozone's problems. It is interesting that they have been allowed to worsen since, whereas if measures had been taken a little earlier, perhaps the crisis would not be as grave. But I would like to congratulate the noble Lord, Lord Lamont, on his speech and the noble Lord, Lord Lawson, on his. It was a great pity that we could not hear all that he had to say; here we have two ex-Chancellors of the Exchequer who were in the eye of the needle at key times in recent history and who knew at first hand a lot of what went wrong at the time.
My very modest contribution is a great one for insomniacs. I wrote a book in 1988 called All You Need to Know About Exchange Rates. It focused on
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Kohl said to Mitterrand that you cannot really embark on a common currency until you have political unification. Mitterrand said to Kohl that that would take forever to achieve, but that if there was a common currency it would force political integration and unification. Much is said about that as a potential solution to our problems. However, I do not see the reality of that. An exercise was done that demonstrated that Germany would need every year to give something like 35 per cent of its GDP to the southern economies to keep them afloat. People forget that in America 30 per cent of federal taxes still go to keeping afloat the unsuccessful regions. Even in little UK, about £80 billion per annum is transferred from the more prosperous to the less prosperous parts. If you share a common currency where there are significant economic differentials, you need substantial transfer payments to keep the less successful economies afloat. However, the sort of long-term transfer payments that would be needed for Germany, Italy, Spain and Greece to share a currency are simply not realistic.
The German solution has been to say, "Come on, you economies, have an internal devaluation and be like us". Is it realistic to think that Italy would have a 35 to 40 per cent internal devaluation? There would be blood on the streets; it would be hardly practical to achieve. I cannot remember which noble Lord made the point but he was quite right; we do not want Versailles but perhaps a bit of the Marshall Plan. I read just the other day to my amazement that Germany only finished making its Versailles reparations a year or so ago. The total payment was the equivalent of about €350 billion-and look what that did to Europe in the 1930s.
A federated Europe is not the answer to the euro's problems. I cannot see that forcing massive internal devaluations is a solution, either. Hong Kong managed to effect a successful internal currency devaluation after the Asian currency crisis, but that was one of the few successful cases.
So where are we with the various proposals? The noble Lord, Lord Lawson, made the important point that you can perfectly well change currencies if you organise it well and in time. The risk is to the banking
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Contrary to what some on my side of the argument said, I support the concept of the ECB being able at least in the short term to buy government bonds, because there is a need to buy some time to work out arrangements for orderly currency reordering in the eurozone. I do not think I will win the noble Lord's competition, but it seems to me that the only other option to everyone going back to their historic currencies would be to have a soft currency for southern Europe and a hard currency for northern Europe. One could achieve that either by leaving the euro as the soft currency and bringing in a new, hard currency, or by doing it the other way round. From what one hears, there is a possibility that that may come to fruition because Germany is seriously looking by itself at bringing back the deutschmark. If that happened, Holland, several Benelux countries and probably France would endeavour to join the currency bloc. That is one solution. It is less painful than everyone going back to their individual currencies. It could be done, as occurred in 1893. It needs planning. Banks have to be closed and one has to work out who will bear what liabilities, but it is not impossible.
Keeping the banking system afloat is absolutely fundamental and again I am relieved that the US has come to the rescue. It seems to me that the management by the leaders of the eurozone over the last year has been pitiful. These problems were staring us in the face a year ago; people were writing articles and letters to the paper about them. It is not something that has just come and hit us from nowhere. The whole underlying problem has been understood as well. I just hope that it will get sorted in an orderly fashion and will not collapse in a chaotic fashion. Our economy is clearly in a precarious situation and chaotic collapse would be very bad news for this country. I am still in the camp that thinks that a hard/soft currency would work and I hope Germany will use its initiative to achieve that.
I will not presume to predict the denouement of the crisis in Europe. However, whatever path to stability is eventually taken, it is likely to take until at least 2020
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Given the likely period over which we can expect to see reduced growth elsewhere in Europe, it is clear that our own path out of recession is likely to be more challenging and slower than we had previously predicted. To use a hill-walking analogy, before the eurozone crisis we had hoped that we would be gently, if challengingly, climbing our way to the sunlit uplands in the next year or two-a pleasant hike up the South Downs, if you will. We are in a different reality now. Perhaps a better analogy might be a trudge up Ben Nevis-longer, tougher and exposed in places.
Just as there are several routes up Ben Nevis, there are numerous, sometimes competing, approaches proposed for returning to growth. The one I would like to focus most on today is investment in infrastructure. In this context I welcome the Chancellor's announcement of £6.3 billion in additional investment in infrastructure over this spending period, although this increment is modest compared with the cut in spending from the previous Parliament. The reduction in direct public investment makes it all the more important that the new approaches to funding infrastructure that he announced, such as the memorandum of understanding with pension funds, bear fruit. Investment in economically productive infrastructure shores the UK up for the long term, gives business the confidence to invest, and provides jobs.
I also welcome the review of the PFI model that Infrastructure UK begins this week. However, I would urge the Government to bring it to a prompt conclusion. Private investment will be essential to delivering the Government's new swathe of infrastructure projects as set out in the national infrastructure plan. However, each investment must be carefully thought through so that it delivers sustainable growth rather than quick fixes or botched jobs. We must be clear about the objectives of any project and the part played by the Government in achieving them. In this context I welcome the new Cabinet committee to be chaired by the Chief Secretary.
If we look at schemes introduced under the old PFI process, a key lesson is that you need an experienced and accountable client for them to deliver well. In practice, this means government clients must resist the temptation to overspecify or constantly tinker. It means standardisation of projects like schools and hospitals and it means being prepared to employ expertise that is not present within government. I appreciate that this runs against the grain of current thinking but there is a real risk of the Government being penny-smart and pound-foolish. Investors need certainty about what will follow from PFI and the Government need to be absolutely clear where accountability sits for the whole of any project, resolving planning issues, funding and financing, and getting the best possible deal for the public sector, otherwise we are in effect setting off without a map.
There will, of course, be many competing demands for infrastructure investment. Typically, investment in London's infrastructure shows a higher economic return than elsewhere in the country and the capital is some 30 per cent more productive than the rest of the UK. There is therefore a strong argument for supporting projects that will help London to lead the UK through the difficult times ahead. Some of these are within the City itself, such as desperately needed river crossings in east London or the extension of the Northern line to Battersea. These would have a rapid and positive economic impact. While I welcome the government support, I should like to see it accompanied by details of proposed user charges, clarity on sources of public funding and a timetable.
There will also be difficult decisions to be taken. Almost inevitably, given the nature of infrastructure projects, there is an inherent tension between economically productive investment and political antipathy. For example, it is becoming widely accepted that the UK needs an international hub airport with greater capacity than can currently be achieved at Heathrow; the Chancellor noted as much in his speech. The lack of hub capacity is stopping the UK from having the range of direct flights to BRIC and other growing countries enjoyed by European competitors, thus undermining growth and commerce. There is an obvious solution: build a third runway, where the planning application is ready, the financing is in place and services could be up and running within a decade. Ironically, that is the one conclusion that the Government have ruled out. Perhaps the chill winds of economic circumstance have yet fully to penetrate Downing Street.
Beyond infrastructure, and as the rest of Europe works its way back to stability, the competitive position of London will increasingly be challenged. Indeed, we are already seeing this in some of the financial regulation emanating from Brussels such as the proposed financial transactions tax, which has the potential to have a disproportionally damaging effect on London as Europe's financial capital. Likewise, when I look at the way in which some of our European competitors are forging transport links with emerging markets, I see a risk that we will be left quite literally waiting at the gate.
At the moment, the capital probably has the most successful and international professional and business services sector in the world. A recent report indicates that almost two-thirds of major international companies have an office presence in London. People come here to do deals because they know that the talent and structures are here. London is the natural launch pad for American businesses looking for a European base and vice versa, as well as a toehold for Far Eastern businesses.
Retaining those businesses and attracting more is vital for our future. As Europe is stagnating, so it is imperative that we raise our game in trading terms with the rest of the world. International businesses must see London as a strong and competitive place to do business, and that relies both on their perception of current policy and on their confidence in the Government's future plans. Above all, the UK must be-and be seen to be-open for business. Immigration policy needs to welcome productive workers and genuine students,
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I began by observing that the eurozone's path to stability was still uncertain. That being the case, it is all the more important that our own leaders demonstrate clarity of vision, certainty of direction and consistency of approach in how they address the challenges that this crisis has brought for our own country. That way, perhaps climbing the mountain ahead may feel a little more like a hike in the hills.
Lord Wolfson of Aspley Guise: My Lords, it is with great pleasure that I speak for the first time in your Lordships' House. I thank your Lordships for the extraordinarily warm welcome that I have received from everyone I have come into contact with here. It is a genuine inspiration and privilege to hear the quality of debates and observations in this House. I also thank the officials and staff for their never-ending patience, helpfulness and professionalism, which are such a great asset to this institution.
I thank my supporters: my noble friend Lord Leach of Fairford, who has been something of a political mentor to me, and my father, my noble friend Lord Wolfson of Sunningdale. I realise that not so long ago it would have been a contradiction in terms for a father to introduce his son. For me it was an unusual pleasure and an apt one. My father's incisive mind, his deep work ethic, his moral courage in both business and his political life and his philanthropic convictions have been an inspiration to me. I hope that they will remain so and that they will guide me. I am not just saying that because I am his heir, by the way, in case anyone was thinking that I was just creeping.
My father's qualities reflect some of the character of his uncle, the son of a Jewish eastern European refugee who founded a great business empire and went on to do charitable works. Those have been conscientiously carried on by his son. Indeed, it is his charitable works that are more of an inspiration. It is a lesson in capitalism that it is not necessarily the making of the money but the wise spending of it that is a testament to greatness in a capitalist society. It is also a remarkable testament to this country that my great-grandfather was able to count among his descendants within three generations, three Members of this House and a Baronet. It is an extraordinary reflection of the tolerance, openness and opportunities afforded by this great nation, and it is an honour, to serve in this House which, over the centuries, has done so much to shape and protect the laws and liberties of this land.
Today, we are talking not about protecting our laws and liberties, but protecting our finances. I worry about all the hard work that is going into propping up the eurozone at the moment. To use an analogy, it is
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The turmoil and problems caused by a collapse would be enormous, but I do not believe ultimately that the reason for it is anything to do with the financial markets; it is to do with the labour markets. It is to do with the structural problems that have caused these financial problems. The fact is that over the past 10 years, Greek wages have risen by around 30 per cent relative to German wages. Wages in Spain and Portugal have risen by 20 per cent more relative to German wages. That has locked them into a structural lack of competitiveness. Internal devaluation is simply not an option, because people have mortgages and debts. If they take a pay cut, they cannot take a debt cut. If they take a debt cut, that is a real devaluation; that would mean leaving the eurozone. What happens when countries leave the eurozone is the challenge I am most worried about.
The noble Lord, Lord Lamont, was kind enough to refer to a prize that I have initiated. I am hoping that, having heard this debate, there will be a Lords entry and we can pool our resources, although obviously I would not be part of the team myself. The big problem for me is not what happens to trade, because I think that it will sort itself out. I am a trader and I am used to dealing with big swings in the valuation of currencies. The major problem is the banks. The position that we in this country must worry about is the position of the British banks with subsidiaries in southern European countries, particularly where they have more loans and mortgages outstanding than they have deposits. I would be interested to hear the Minister's view on this. Do the Government have a clear view of what the exposure of British banks would be in the event that certain countries leave the eurozone? British banks could be left with an enormous exposure to debt that would have to be written off. The problem is that whatever view we have at this time of the size of that exposure, it can change. That was pointed out by my noble friend Lord Flight. It can change overnight, and indeed some £500 billion-worth of those deposits have already moved from the weaker countries to the stronger ones.
It is my belief that unless something is done urgently to control this flight of capital, the crisis that will eventually emerge will be far worse. We are facing a Catch-22 of enormous proportions. If the Governments of Europe begin to impose anything that looks like capital controls, that in itself will precipitate the end of the eurozone. If they do nothing, the end of the eurozone will be that much worse.
I finish by saying that, in my view, it is a far better approach to take the bolder of these two choices, and address the issue of capital flight now, before it is too
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Lord Hollick: It is a great pleasure to follow the maiden speech of the noble Lord, Lord Wolfson. He showed great humanity and insight, with a nice, witty touch. He is a man of considerable distinction in the business world and, as we have heard today, comes from a family of great distinction. He was the youngest CEO in the FTSE 100 when he was appointed as CEO of Next. He showed, as has been mentioned on a number of occasions, a great flair for promoting some of the causes close to his heart when he announced his £250,000 prize-no mean prize, that. Perhaps he might like to consider a more modest prize for Peers who can come up with an exit strategy from the current economic turmoil that we find ourselves in. Sadly, as he has pointed out, he will be unable to participate in that, as House rules would probably prevent him under a conflict of interests. I congratulate him on his speech, and we very much look forward to his contributions.
I am very grateful to the noble Lord, Lord Lamont. There are two debates here, one about Europe and one about the United Kingdom. I intend to talk about the United Kingdom, but obviously against the background of all that has been said on Europe. The OBR report was a truly sobering document. There has been an alarming deterioration in the public sector finances, with borrowing set to rise by more than £150 billion above last year's forecast. Growth has stalled for at least another 18 months, with all the risks on the downside. Household budgets, down by 2.3 per cent this year, are under intense pressure, particularly for the less well-off. This takes place against the existential threat of the disintegration of the eurozone, with all the consequences that have been colourfully and accurately made plain in this debate.
The Chancellor's key economic judgment in 2010 was that fiscal consolidation would promote growth, that private sector growth would replace the jobs lost in the public sector and that private sector investment would make up for the shortfall in public sector investment. That judgment has been shown to be wrong. If you peel away the rhetoric, the Chancellor is now admitting as much. He is now being urged by both the IMF and the OECD to consider a more flexible approach, with a staged approach to cuts combined with temporary tax cuts. The Chancellor, like his predecessor, has worked hard and successfully to maintain credibility in the financial markets. As we
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In March, the Government published ThePlan for Growth, with 137 measures. They have just published a scorecard on how they are getting on with these measures. The OBR judged at the time that the measures would have no significant impact on growth. So how does the latest package shape up? Is this apparently long list of rather hurriedly assembled growth measures likely to make any measurable difference? It will not, according to the OBR, until 2014-15. I would be grateful if the Minister could confirm that the Treasury also agrees that the measures will have no discernible effect over the next three years, when growth is most needed.
In our debate on growth in March, noble Lords on all sides of the House urged the Government to focus on infrastructure and SME financing. The Government listened and acted. The noble Lord, Lord Skidelsky, has long advocated an infrastructure bank, which I enthusiastically support. An independent specialist bank that can evaluate risk, access and finance projects and possibly take advantage of the Government's ability to borrow at ultra-low interest rates will be essential if we are to encourage pension funds to invest in infrastructure. Pension funds are indeed hungry for safe, long-term, inflation-proof returns. However, all the evidence suggests that they prefer to invest in established projects with proven cash flows, not in risky greenfield projects.
SMEs create jobs and bring competition to established players, to the benefit of productivity and the consumer. SMEs are now coming to the centre of the political debate. On the supply side, more rigorous competition needs to be stimulated in sectors such as banking, utilities and energy supply if new entrants are to be encouraged to enter the market. Of course, funding must be more readily accessible. Credit-easing initiatives are welcome, particularly after the poor experience of Project Merlin. However, the Treasury is still far too fixated on debt finance. Many of our SMEs are undercapitalised by international standards, in part because the tax system treats debt finance more favourably than equity finance. With insufficient equity, the SME owner pays a very steep price to the bank and has to pledge all his assets to raise a loan.
Instead of tinkering with minuscule tax reliefs for EIS or VCT schemes, why do we not tap into the considerable cash resources of entrepreneurs and the wealthy in our society and encourage them to invest risk capital in SMEs by allowing equity subscription to be written off against the marginal rate of tax? This would not only bring in much needed equity to SMEs but would make available the experience and knowledge of the investors. I can testify that the smart-investor model works well in the venture capital industry here and in Europe, and it is one of the key ingredients behind the successful level of business formation in the United States.
Why SMEs are not borrowing is apparently a mystery to the Treasury. The reason is simple: why should they take on more borrowing to increase capacity if there is no sign of an increase in demand? When Bob Diamond appeared recently before the Economic Affairs Committee of this House, he noted that since the start of the year more than 40 per cent of Barclays business customers had increased the level of their cash deposits with his bank because they saw no merit in investing at a time of weak demand.
If the Government are to deliver growth, they must stimulate demand. Now that the Chancellor is embracing a more flexible and interventionist approach, he needs to be bolder. He should borrow to finance infrastructure projects that generate cash returns, and should stimulate demand by lowering taxes such as VAT and the basic rate of income tax, which will feed directly through to consumption. He should provide much bigger tax incentives to invest in SMEs and to encourage employment and training. He has already identified a number of areas where taxes can be raised without damaging growth. I suggest that he should now bear down even harder on loopholes such as the stamp duty avoidance scheme on expensive properties and on the regressive structure of community charges. Now that he has at last embraced a new approach, he needs to turn this week's mish-mash of measures into a bold and coherent plan to promote growth through investment and demand management.
Lord Maclennan of Rogart: My Lords, it is a very great pleasure to follow the maiden speech of the noble Lord, Lord Wolfson of Aspley Guise. In Glasgow, where I was brought up, his family was regarded not only as distinguished but as one that aspiring young people ought to emulate. I had the privilege of meeting some of his family in that great city rather a long time ago. I enjoyed what he had to say, as I believe the whole Committee did, and we look forward very much to his future participation in our debates.
The euro crisis has been repeatedly cited as the external factor that has blighted Britain's economic recovery prospects. It therefore seems to follow that this country ought to do all that is within its power to assist in the resolution of that crisis. The attitude of the responsible Ministers has, I fear, been insufficiently supportive of the efforts being made by the other European Governments to avert the risk of sovereign default and spreading contagious bank collapses.
In the somewhat bullish report that the Chancellor of the Exchequer, Mr Osborne, gave to the House of Commons after the European summit of 26-27 October, he indicated that, although the IMF could use,
The situation has deteriorated in the past few weeks. Risk premiums on the bonds of the AAA-rated Austria and France rose to record levels. It was pointed out this week, on 28 November, that two decisions were made at the summit with damaging consequences that were not intended. I quote a report from Reuters Breakingviews:
"First, banks underwent a stress test that marked their sovereign bond exposures to market whereas previously regulators maintained the fiction that these positions were risk-free. This meant that lenders suddenly had to start holding capital to back their sovereign debt investments. Not surprisingly, they have become more reluctant to buy bonds. This, in turn, has made it harder for governments to fund themselves. Second, the summit decided to strong-arm the banks into agreeing to",
Despite these political problems, it does seem that there has been some good political news. The new Prime Ministers of Greece, Italy and Spain have all indicated their determination to cut debt and make their economies much fitter. None the less, they will have an impossible task if investors cannot be convinced that the euro is here to stay. Perhaps the central hope of restoring confidence lies with the European Central Bank. If it can devise support for Governments who are intent on restructuring their economies, that should be backed. It does not necessarily mean that it has to become a lender of last resort; however, that prospect has definitely been advocated by many in this country and elsewhere, although reluctantly considered by Germany. Germany should certainly consider ways and means by which the central bank could go further, to assist the problem of facilitating its greater involvement. Of course, Germany is afraid of the lack of adherence to the terms of the stability and growth pact in some of the peripheral countries-perhaps overlooking what it did itself in the earlier days, which has already been referred to in this debate.
This country should also back the central bank, although we are not part of the eurozone. It was rather surprising that the Government indicated that they would not contribute money to the IMF that might be contributed to Europe. That seems to me to be a bizarre position and certainly makes it more difficult to give credence to the thought that the present Government are actually trying to help the eurozone. The EFSF might be the recipient of loans from the European Central Bank to bring its firewall into effect. Given that the ECB is not at present committed directly to fund Governments, perhaps it could itself lend to the IMF, which in turn could lend to Italy and Spain.
The German recognition and requirement of fiscal discipline is rational and should certainly be embodied in the revised treaty, but perhaps that might be extended to form a debt union, with the mutualisation of debt
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Before Britain loses its reputation altogether as a concerned member of the European Union, it should seek to use its position to indicate ways in which the situation can be taken forward. Showing good faith rather than Euroscepticism can have a catalytic effect.
Lord Higgins: My Lords, for some weeks now I have been pressing the Government to allow us to have a debate on the crisis in the eurozone. Therefore, I am delighted that we have finally got one. It is extraordinary that we have not had one before. I share the surprise that it is taking place in the Moses Room rather than on the Floor of the House, but on reflection I think the reason for that is apparent: business on the Floor of the House is under intense pressure because the Commons continues, despite assurances to the contrary, to programme everything in sight automatically and therefore we are doing the job which the Commons is not doing although it ought to. Having said that, it seems even more extraordinary, given that the pressure is this end rather than the other, that the Commons has not had a large-scale debate on this at all.
My noble friend Lord Lawson has pointed out that many of us predicted right from the start that problems would arise in the single currency. However, it is important to remember that the problem has also been the fact that the area has got bigger and bigger, with more and more countries involved. Therefore, the stresses of having a one-size-fits-all exchange rate becomes greater and greater. With respect to my noble friend Lord Ashdown, if we had joined, I think it would have cracked up long since. I certainly do not think that that is something we should consider for one moment in present circumstances.
The real trouble is also that, while it may have broken up because of the inability to devalue, we have had on top of that a debt crisis, with the failure of the European Union countries to restrict their debt. Those two issues have been mixed up. If countries begin to leave, there will be tremendous problems in revaluing those debts as a result of the change in the exchange rate. It is one thing to say that the banks may take a haircut, but if they find that there is a devaluation on top of that, they will be skew-whiff. We need to take that into account.
The issue is whether it will now be possible to patch up the existing situation, or whether it will break up. There seems considerable resistance to having a European central bank acting as a central bank or issuing eurobonds, so we also have the prospect, if the eurozone does not break up, of countries such as Greece finding themselves locked into a perpetual series of austerity measures, perhaps ending up with total rejection on the streets of Athens, or wherever, and the increasing tendency for it to be dominated by Germany, which is becoming the paymaster for the rest of Europe. In terms of national sovereignty, that will cause great concern to the individual nation states involved.
I say in passing that I think it is absolutely right that the Prime Minister should have expressed views to the European community on this, whatever Mr Sarkozy may think. They may have created the problem, but
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I am mindful of time. I am only about one-third of the way through my remarks but it has passed half time. My message to the Minister is that it is crucial that we do all we can-our Government and elsewhere in Europe-to have proper contingency plans for the possibility that the eurozone breaks up. The people who created the eurozone were very careful to lock everyone in by the process of abolishing the currency. It is very important that countries which might leave should have available a stock of banknotes and coins which could be used in such a situation. Having said that, it is not simply a question of getting the banknotes and coins.
Noble Lords opposite may smile, but no one is going to get out of the eurozone, however desperately they need to do so, if they do not have alternative notes and coins. The other trouble is that the complexity of breaking up a currency union is great. We will almost certainly need a transitional period where there is redenomination of a currency and, subsequently, a devaluation of the currency. That will inevitably involve the exchange control. The experience we had of the sterling area after the war may give us some useful indications. These problems are immense. The prize offered by the organisation of the noble Lord, Lord Wolfson, may provide a solution. I hope desperately that the Treasury is giving adequate thought to this and has examined the mechanics of a country getting out of a monetary union. It is very complex.
Despite the lack of time, the one thing that I want get over is that it is important that we should have those transitional plans in place. Many of us have been involved in this area before. I was the Minister responsible for implementing decimalisation and my noble friend who moved this Motion had some problems with regard to leaving the ERM, but the problems involved in getting out of a currency union are vastly greater than either of those, so it is important that we do our homework on this issue. If there is one message that ought to go out from here, it is that we should do so.
This has been a remarkable debate already. I feel bound to point out that I do not think that we could have had the same debate in another place, and that of course is because we are appointed, not elected. There is not the expertise in another place that we have had today. Even though we are having this debate in the Moses Room, I get the impression that we are being broadcast-or, if not broadcast, at least recorded. If that is so, I hope that it will have widespread distribution because many of the arguments put forward today are of great importance.
Lord Liddle: My Lords, I, too, congratulate the noble Lord, Lord Wolfson of Aspley Guise, on his maiden speech. He shares with me a passion for the European issue. We might be coming at it from a slightly different direction, but none the less it is good that people care about Europe.
As British families experience more than a decade of frozen living standards and as the euro teeters on the brink, it is time that we stopped name-calling across the Channel and recognise that we are all in this together, in the familiar phrase. The achievement of the OBR's pretty dismal forecasts is qualified by its assumption that,
I looked at what the consequences of a doomsday break-up of the euro area might be, in a paper from the Bertelsmann Foundation website by a German economist called Ansgar Belke. He reckons that if the southern debtors secede, we can expect a 60 per cent depreciation in those countries, a 700 basis point rise in their cost of capital, a 50 per cent decline in their trade and a loss of GDP per head of 50 per cent. If the alternative happens of Germany and the stronger countries breaking away, he says that,
as a result of a likely 40 per cent appreciation; trade volumes would instantly fall by at least one-fifth across the euro area and, with the break-up of the single market and the rise of protectionism that would follow, the consequences could be even more severe.
It is a fantasy to think that Britain could isolate itself from these catastrophic shocks. The eurozone and Britain are inextricably bound together-in or out, our interests are gravely affected-yet, when it comes to the future of the eurozone, the past months have shown how small our influence is on a matter that is central to our prosperity. That is why some of us always thought that it was politically right for Britain to join if the economic conditions were right and why, if the euro surmounts this crisis, I think, as the noble Lord, Lord Heseltine, thinks, that we will be coming back to this issue at some point in future.
Is the euro going to survive? First, there is a German political determination that it should survive which has strengthened, not weakened, since the crisis started. Secondly, when we look at what is happening, we have to remember that it is in the Germans' interests to play a game of brinkmanship; they want to see market pressures on countries to introduce reforms, and they want the French to give way and concede a fiscal union. Thirdly, it is likely that there will be another European grand bargain in which, on the one side, there will be some form of fiscal union and, on the other, some German agreement to collective underwriting of debt.
The issue which the eurozone has not addressed, which concerns the British economy as well, is the sustainability of adjustment after that. On that, I would like to make three points, in areas where there are lessons for Britain. First, we have to recognise the need for fiscal austerity, but argue for a common-sense way in which it should be applied. Looking at Britain, of course deep cuts would have been made whoever had won the election in 2010, and the environment has deteriorated since then. We have to accept that. But Ed Balls has been proved right. We are in a worse position today because the coalition chose to cut too deep and too fast. Similarly, in the eurozone, the sovereign debtors have no alternative to austerity, but
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Secondly, we need a plan for growth. In Britain, the risk is that we do not have a plan: we have a public relations strategy of announcements and initiatives, not a serious commitment to mobilise the whole of Government behind a comprehensive strategy for growth. The truth is that both Britain and the eurozone can only compete with Asia now by putting innovation at the heart of our economic thinking. We need massive innovation in the way we live, in energy, in environmental technology, in housing, in urban planning and in public services in order to cope with demographic sustainability. This requires a strategic view on the part of Government about how different industrial sectors should develop, and it requires using intelligently the levers of single market and national regulation to send the right signals and incentives to the marketplace.
It also needs a lot of enterprise. But it is not about the deregulatory fantasies of the neo-liberal right. It requires an economic model of public and private partnership, that-for the first time in this country-puts finance at the service of industry, both to help small companies to grow and to mobilise the potential for huge private investments in infrastructure. Here the EU has a model which should be a lesson for the UK: the European Investment Bank, which can issue bonds and leverage private capital. We need to multiply these efforts. In Britain, we should have a national investment bank. This is not a party political point. I want to ask the Minister why it is that, institutionally, the Treasury is prepared to accept the logic of the European Investment Bank, but domestically is totally opposed, for ideological reasons, to the establishment of an institution in this country which would do so much good.
Thirdly, we are in an age of austerity, and this demands fairness and social justice in its application. We are almost where we were at the end of the Second World War in those terms. Of course, in Europe we have regional policy through the structural funds. That needs to be built on and made more efficient, but with inequality rampant, redistribution must come back on to the political agenda. By redistribution, I do not mean raising taxes on badly squeezed middle-income families; I mean formally tackling the new trends in gross excess in the accumulation of wealth through capital and property taxation. The possibility of a capital levy is being debated in many European countries, and we should join in that debate, because the proceeds of new capital taxation could be used to reduce public debt and to prioritise social investments with proven economic and social returns, such as improving life chances for children from disadvantaged families.
If we want Britain still to count at Europe's top table, we should be putting forward a plan that contains those ideas. We need a new economic paradigm. Only
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Lord Dykes: My Lords, it gives me particular pleasure to add words of congratulation and thanks to the noble Lord, Lord Wolfson of Aspley Guise, on his quite stunning maiden speech. I agreed with a lot of the details of his analysis and I look forward to him making not just the occasional speech, but many speeches in this place. He can rest assured that he will be listened to with great care. He mentioned the great Isaac Wolfson from the old days. Some years ago, in the Cholmondeley Room, I had the honour of hosting a fund-raising effort for the Wolfson Centre on the coast in Israel, which specifically helps poor Israeli and Palestinian families. It was expanding its facilities and we raised a lot of money on that night. It was a great honour to do that and I can assure him that his antecedent's name was mentioned on many occasions by subsequent speeches to mine. I thank him very much for his interesting suggestions. I suggest that the Lords would take a different competition, because what he is suggesting might be too demanding for other people, but I wish him well with that project. I would not necessarily agree with the conclusions, depending on which way they went.
I thank the noble Lord, Lord Lamont, very much for initiating this debate today, as others have done. In the early 1990s, he was driven out of the exchange rate mechanism, with a lot of searing pain, I am sure-it was a very deep and bitter experience, with which I have great sympathy; it was a very painful moment for the United Kingdom. At the time, I was chairman of the European Movement in Britain, working with other figures in the European Movement on the continent, including Francois Poncet, the son of the famous ambassador in France who built up reconciliation between Germany and France with Konrad Adenauer. I also worked with the chairman of the European Movement of the whole Community, Giscard d'Estaing, who had a reputation in the press in France and elsewhere for being very pompous as a head of state, but I did not find that at all. I found him very amusing indeed and we had many intellectual discussions, because he also used to write books that were very difficult to understand. We discussed whether it was Rousseau or Voltaire who had come out with the immortal utterance, which I always remember and use occasionally, "La superstition met le monde entier en flammes. C'est seulement la filosofie qui peut les éteindre". We decided it was Voltaire, and I think that is still right, but there is no bet on it.
The debate in Britain has been far too much on Europe and, because there is so much anti-Europeanism in this country, it is a poison that is cascading through many layers of this country, much to our detriment. There is too much superstition here and not enough philosophy and wisdom about our relationship with the European Union. I am very glad, none the less, that the Government have proceeded from the superficial triumphalism of a few weeks ago about the terrible woes of the European Union, "We told you so with
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It is always a pleasure to follow the noble Lord, Lord Liddle, who is an illustration once again of how Labour has become solidly pro-Europe, with the notable exception of Douglas Alexander, who, in his Guardian article of 13 November seemed to be talking about the repatriation of certain powers, but we will gloss over that for the moment. It is none the less a pleasure to agree with the noble Lord that the eurozone will get through this crisis, probably with a single euro intact. I notice that the noble Lords, Lord Lawson and Lord Flight, have previously promoted the idea of two different currencies-a soft one and a stronger one. That may eventuate, but I doubt it, because I think of the technical problems involved, the money transfers and so on. I think they will get through it. I have always been a European optimist and I think I am entitled to be on this occasion.
The press in Britain always give the wrong impression-some of the continental newspapers are beginning to do it as well-of the briefings they receive, including from the meetings of the last two days. The British journalists are getting briefed by British government officials on these matters, and they say that things are impossibly difficult after every meeting. That is not so. I believe that the eurozone Ministers on Tuesday and the ECOFIN Ministers meeting together for the whole 27 yesterday have made substantial progress in dealing with the German resistance, for reasons of the Bundesbank and the forthcoming German elections, in accepting the idea of combined policies to create a new syndrome in Europe, including with the ECB being given the additional powers that it must have to be the lender of last resort. That will come, but it takes time to get through these things.
British anti-Europeans always say that national sovereignty is sacred and the national interests-whatever that means; it is sometimes a meaningless phrase-are primordial. When the sovereign countries have to be carefully consulted in the European Councils as these painful matters are being discussed, they complain about the delays. There is bound to be a delay for a new experience where no Minister expected this to happen. I know that rules were allowed to be broken, but we are being wise after the event. This country has probably done that kind of thing on internal policies on many occasions and all countries do it. On this occasion, it was creating a new structure for the single
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I believe that the IMF and the EU will work together, coming up to the crucial talks that will take place on 9 December-the headlines say there are 10 crucial days to save the euro. We know that most of the "outs" still want to join the euro. It is amazing. We saw what the Polish Minister was saying just a few days ago. Britain now needs to support this process, as the member states support us in dealing with our own internal recession and our problems of the slowdown of the British economy. They are sympathetic to us. They helped us in the Falklands, too. When the Argentineans invaded, they all supported us through and through, including Italy and Spain, even though it was much more difficult for those two countries. Let us remember European solidarity. That way, we will achieve our aims.
Baroness Wheatcroft: My Lords, thanks to the efforts of the noble Lord, Lord Lamont, we have heard some fascinating insights into what has gone wrong in the eurozone. I share the views of my noble friend Lord Lawson that this was a fatally flawed project. The fault lines were there from the start. It was only a matter of time before it fractured. The challenge now is to try to ensure that the mess that this causes is limited. Efforts to glue it all back together seem to me to be doomed. What is required is an orderly restructuring, and I believe that in the end we will have a much smaller core eurozone.
However tempting it may be to rejoice that Britain is not in the euro, as noble Lords have said this afternoon it is in our interests that that restructuring should be accomplished as smoothly as possible and
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While the bitter chill of austerity has blown across the continent, it seems to have bypassed Brussels. It will not have escaped the attention of noble Lords that last month, after a long weekend of deliberations, the European Union's decision-makers decided that the EU's budget should rise by 2 per cent next year. This was seen as something of a victory for prudence. After all, MEPs, who obviously forget about the realities of life as soon as they board the train to Brussels, thought that 5.23 per cent would have been appropriate. The bureaucrats at the Commission were only slightly less spendthrift, aiming for 4.9 per cent. So a mere 2 per cent increase may be seen in EU terms as penny-pinching. It is not. It means that countries that are having to impose drastic cuts on the pay and pensions of their people are being asked to fund an EU budget of €129 billion for next year. And it will not stop there. There is a projected €550 million overspend from this year's budget. Remembering that Brussels is a city where surrealism flourished, I point out that the allowed spending commitment for next year is almost €20 billion more than the agreed budget.
We know that a significant amount of this money will be misspent. Last month, as the noble Lord, Lord Pearson, is fond of reminding us, the European Court of Auditors reported for the 17th year in a row that the payments made by the EU were,
It is little consolation to learn that in most areas of spending, the error rate is "stable". Overall, it has increased from 3.3 per cent in 2009 to 3.7 per cent last year. That amounts to €4.5 billion. I know that this is a time when debts are measured in trillions, but to me that is still a sizeable sum to go astray.
It is not just the money that goes to subsidise non-existent farms and the like that should cause concern. In this age of austerity, we should surely be querying every aspect of the way that Brussels spends cash. It is time to ask whether there really is a need, for instance, for the EBBAs. No doubt many noble Lords are familiar with the work of Donkeyboy and Mumford & Sons, but for those who are not-I confess that I was not-I shall explain that Donkeyboy, from Norway, and Mumford & Sons, from the UK, are both winners of the 2011 EBBAs, the European Border Breakers Awards. These are not handed out to those who successfully evaded passport checks; they are for musicians whose work sells outside their own countries. The European Music Office labours mightily to decide who should deserve such an honour and then stages a
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was a prize 2009 example. But it is trifling, of course, compared with the billions currently being spent on the Galileo project. This satellite scheme is now many years behind schedule and, at the last count, destined to cost €5 billion against an original budget of €1.8 billion. Surely it is time for us to ask if, apart from the 3.7 per cent of our money which goes astray, the rest is being well spent.
"The Court observed that the differences between planned targets and achievements were often not analysed ... and that the framework for reporting on effectiveness did not cover economy and efficiency of the spending".
An effectiveness review that does not involve finance is surely as useful as a book review that concentrates solely on the cover. In this age of austerity we need to know that our money is being spent effectively, so the Commission's reporting on its activities has to improve. We should also demand independent audits of some projects to highlight failings and procedures and produce blueprints for change. That would be money well spent. But we must go further. We should question whether we really want the European Commission to continue to extend its remit. Is what it does worth while? Do the member states themselves, facing years of cutbacks, have to continue funding the type of projects that Brussels embraces? That is not to say that we should withdraw from Europe, but we want a Europe that works-potentially, a smaller Europe. Britain should lead the way in demanding a review of what is being achieved by the high-spending bureaucrats, several of whom continue to be paid by the EU when they have left and found other employment. That is something that we might take a closer look at.
As a starting point, I suggest one obvious saving that could be made. The travelling circus that goes each month from Brussels to Strasbourg is a nonsense and is estimated to cost more than €200 million a year. It is hugely time-consuming and environmentally unfriendly. The travelling circus is a great generator of CO2 emissions. Even if there is merit in the move, which the majority of MEPs now question, we simply cannot afford it. The problems of the eurozone will not be solved more easily in Strasbourg than they will in Brussels, and the new age of austerity through which we are living has to start hitting Brussels too.
Lord Lea of Crondall: My Lords, I add my congratulations to the noble Lord, Lord Wolfson, on his maiden speech. He must find it quite appropriate to meet under the presidency of Moses. The noble Baroness, Lady Harris of Richmond, will forgive me, but I think that Moses is presiding up there with some dignity. On that point, I quite like being in this Room.
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Before I give a bit of current history, or my version of it, I should like to give a bit of a counterfactual, sparked by the advice of the noble Lord, Lord Lawson. The whole project was not proceeded with in the first place; it has disappeared. He said that it was his advice not to proceed with the project in the first place. Let us follow that counterfactual. When we got to 2008, the banks went belly up and we were rescued by Governments. What would have happened? Italy, Spain, Portugal, Greece, Ireland and the UK would have devalued against the deutschmark and the guilder et cetera. The deutschmark would have shot up in value, choking off German exports. The debate today would have been about the future not of the euro but of the single market.
Chancellor Merkel was recently criticised for making some general allusion to the history of the European project, going back to the outcome of the war with the cementing of good relations, no more wars and so on. It was grossly overinterpreted by people. Even the single market would have broken up, there would have been an indefinite cycle of devaluation and the pressures for protectionism would soon have reasserted themselves. There was of course some resentment at the UK's devaluation in 2008. Many others were doing it. Essentially, that resentment would have given way to anger.
I mention Chancellor Merkel and will make a prediction, putting my money where my euros are. People say that she cannot make a U-turn on the European Central Bank or find some other way of getting out of where we are now. I would say that that is not the correct question. She has a choice of two U-turns. She has to do that U-turn or a U-turn about the survival of the euro. I would put my money on her doing a U-turn on the ECB since she will not do one on the survival of the euro. That is where I would put my few thousand euros. In that connection, Chancellor Merkel does not need any lessons from David Cameron along the lines of, overall, being very tardy and so on. I agree with my noble friend Lord Liddle about how the German political dynamics move-the rate of them and so on.
Simply saying that we must protect the City of London as the Hong Kong of Europe sounds quite like special pleading. To extrapolate along those lines, there is China, which is a funny sort of democracy to be compared with. If you extrapolate the arithmetic of
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By the way, I saw in the Evening Standard the other day that many involved in the short-selling of the euro had had their fingers burnt so they are giving up on that. You might say that this is not the correct week to say that but I am not inventing it; you can look it up yourselves.
We have to recognise that we are all in this together, to coin a phrase. The noble Baroness, Lady Valentine, spoke about promoting London. I have to say that every speaker from the City should feel an obligation to say what their recommendations will do for the rest of Britain-for Burton-on-Trent; all the workers in the rest of Britain in the manufacturing sector, which does not have the export base that Germany has; the research and development which we need; and so on. Otherwise, that looks like special pleading just for London, which is what she is paid for, but that is what it is.
The noble Lord, Lord Lawson, made the point about a united states of Europe being still the mirage or the aspiration of many of us. I have the greatest admiration for the noble Lord, as he knows very well, but I do not think that that shibboleth should be used. The European Union has always been sui generis. It is a very unusual, unique animal. It does not even have four legs; I do not know how many legs it has got, but it is not like any other animal. There is something fallacious about comparison with any other animal. If President Obama finds it difficult to talk to it, that is just a problem with which we have to live.
In my last minute, I should like to talk about the reference made by my noble friend Lord Monks to contempt for democracy. "Hang on a minute", I say to myself, "do people want petrol tax?". They probably do not. "Do they want income tax?" They probably do not. "Would they vote for value added tax?" They probably would not. These are things for general elections because you have to look at the costs and the benefits. I am sure that the noble Lord, Lord Lawson, having run the Treasury, would agree. If one wants to play around with the word "democracy", who elected the merchant banks? If we want to throw around points of semantics-
Lord Lea of Crondall: Someone did. I apologise to the noble Lord, Lord Lawson. I know that the noble Lord, Lord Lamont, is not interested in democracy. I know that the noble Lord, Lord Lawson, is. Surely it is lazy thinking just to kick around the word "democracy". I want to know the answer to the following questions. Who elected the people who control British capitalism? Who elected the merchant banks? Who elected the hedge fund strategists? I think that noble Lords have got my drift.
Baroness Kramer: This is very intimidating company with so many speeches from people with experience, knowledge and wisdom on this issue. While I fully recognise the seriousness of the problems that the eurozone faces and those that it poses for an already difficult economic situation globally-I may say a few more words about that in a minute-we are at risk of slipping into some extraordinary melodrama in the way in which we have discussed this issue. Today may have been an illustration of that. I just thought, as others will have, how this debate would sound if it was taking place in Berlin, Paris, Madrid, Rome or even in Athens. Would we be hearing parliamentarians calling for exit from the euro and the dissolution and break-up of the eurozone? The noble Lord, Lord Lawson, mentioned democracy; what would we hear people calling for if we were out on the street in those capitals?
We are all very conscious that that is not the theme that we would be hearing. I do not think that anyone doubts that there has to be a resolution to this crisis. There has to be a process of change and a rebalancing, and part of the problem is obviously political. But I very much doubt that we are looking at a major collapse of the euro. Perhaps Greece might have to leave, but even that is in question, and I think that there will be a notion of hard currency and soft currency. Having all those variabilities is probably a very British viewpoint of a circumstance where we are outsiders and not in very good communication with the countries most engaged.
I accept-and the noble Lord, Lord Liddle, had it right-that Germany is playing a rather difficult game, encouraging and enforcing new levels of fiscal discipline in countries such as Italy, Spain and Greece, which have played the game badly and taken advantage of the past years of plenty in order to ignore the need to restructure and reform their economies. That I fully accept. I think that Merkel is playing a game of chicken, and it is a relatively dangerous one, as chicken always is. However, I think that we will eventually see the Germans, one way or another, allowing the ECB to play its role as lender of last resort. That will be a change-relationships will have changed within the EU-but it will be very different from a break-up. Looking back on this period in 10 years' time, I think we will see this as a period of reform within the euro and the eurozone but not as the collapse and final end of the eurozone, and we have to be conscious of that.
Two things have become incredibly apparent during these past weeks. The first is that we are dangerously distant from the conversations with our European partners. I am not referring simply to some of the snubs to David Cameron, which I think have been unfair, because advice has been offered in good spirit and in genuine concern. However, looking at how other countries work with each other-for example, the relationship between France and Germany-surely we need to start building something like that ourselves. We should do so not in order to become more part of the eurozone but to be in proper conversation with it, whether through joint Cabinet meetings or much more extensive engagement between Ministers. I am talking
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The other thing that has become apparent is how fully engaged our economy is within Europe and with the eurozone. Sometimes people say that we have a problem in that 40 per cent of our exports go to Europe, but the engagement goes much deeper than that. You will be hard-pressed to find a major British company that is not in some way deeply embedded within Europe and the eurozone. That may be because investment comes from Europe to a British company. Many companies that we think of as British are European-owned, or they are British companies with major European subsidiaries, or they are British subsidiaries of US or Japanese companies but we are part of their European portfolio.
The consequences for us of what happens in the eurozone are far more substantial than we would think from most of the superficial conversation that takes place. We need to look at the various charts and statistics published by the Office for Budget Responsibility this week to see the exposure of various banks within Europe to various European Governments. It is absolutely clear that British banks are heavily engaged not just at the superficial level that the chart shows but in layer upon layer: the exposure that we have to French or German banks is as a consequence of second-hand engagement just as much with Italian, Spanish-in fact, we are deeply in with the Spanish-and Greek banks as with others. Even the statistics here do not mention things such as credit default swaps and other mechanisms and derivative mechanisms that have led to incredibly deep engagement in Europe by our financial institutions. We have to resolve that. For me, probably the most alarming statement when the OBR report talked about the viability of its forecast was that the impact of the collapse of the eurozone would be impossible to quantify. That kind of uncertainty gives us a sense that we are dealing with circumstances that have a very big impact on us. What can we do? I believe that restoring and building communication, trust and understanding is going to be absolutely crucial as we move forward.
Secondly, as others have said, we have to look to our own economy. Again, others have talked of the importance of the new commitment to growth, infrastructure and to taking care of our own house, as it were, and making sure that we are underpinning our own future. This is not a debate about the autumn Statement but there are important things to be said in that a good part of our protection going forward is the kind of commitments we have seen for infrastructure and releasing the cash from our pension funds and major businesses to support our economic future. There has been support for the green investment bank. We had talk of a broader investment bank but the green investment bank is crucial because that kind of
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I end by saying that we are at great risk of a self-fulfilling prophecy. I remember seeing a play at the National Theatre of "Oedipus Rex" that was so desperately depressing that at the end all the actors came on stage covered in bells to jingle and sort of relieve the sense of depression. We have to start looking at the positives in our own and in the global economy before we manage to drive ourselves down into the depths. We have areas of manufacturing that are thriving. The German economy, believe it or not, is showing new confidence with strong manufacturing prospects. There are signs now, finally, of recovery in the US economy, despite the fact that there is political crisis there. Let us not always be about doom and gloom. Let us not always be about melodrama.
Lord Myners: My Lords, I, too, congratulate the noble Lord, Lord Lamont of Lerwick, not only on securing the debate but on an excellent introductory speech. I also add my words of congratulation to the noble Lord, Lord Wolfson of Aspley Guise. We have waited a long time for his maiden speech but it has been well worth it. We look forward to his future contributions to our debates.
I was due to speak immediately after the noble Lord, Lord James of Blackheath. He is with us in Grand Committee but is not going to speak. I am disappointed because he would have made a contribution of national significance to this debate. I propose to confine my remarks to the European dimension of the Motion. The Minister has had more than enough excitement, pushed by me to the point of agitation this week on the Autumn Statement, and I do not want to put him at risk of again losing his self-control. I shall limit my remarks to Europe.
The key in Europe now lies with Germany. It seeks to promote a transfer union linked to fiscal contracts-real and enforceable. Germany can move only at the pace that the German people will agree with. I am sure that the noble Lord, Lord Lamont, would have used the word "democratic" in talking about the limitations to what Angela Merkel can currently do. The German proposals will be accompanied by measures ultimately to bring productivity costs across Europe into a more harmonised relationship than they currently have, and only Germany can legitimise the ECB if it moves to take less conventional policy stances. In that respect, I particularly welcome today's cut in interest rates by the ECB. There is more that it can do within conventional mechanisms before it needs to consider doing the unconventional.
I also hold very firmly to the view that there are right and proper limits to what a central bank can do. Those apply to the ECB, as they do to any other central bank, and they are eloquently summarised in
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The Germans are also seeking to promote the European financial stability facility, which they want to see leveraged, and to provide a solid support for interventions that are necessary to help the eurozone through this difficult period. The EFSF is looking increasingly stretched; global funding support is clearly not available and there is nervousness about the lack of transparency and use of leverage. The increased slippage in the ratings of a number of European countries means that the burden of AAA support for the EFSF is increasingly dependent on Germany, which means that the size of the EFSF, even complemented by the available funds from the IMF, is probably not sufficient to meet the financing needs of Europe over the next three years. This is a very serious issue, which does not rest solely at the door of our own Treasury but is a matter on which it should take an active involvement in discussing.
The Germans are also seeking to secure a treaty committing eurozone nations to long-term budgetary discipline. There has been much talk about the ECB, either directly or via loans through the IMF and the EFSF, supporting Europe. But this primarily addresses the problem of liquidity. There is a liquidity problem, and it is very worrying to see the almost complete attrition of issuing unsecured bonds by banks over the past six months. The funding of banks is now becoming as difficult as it felt during the second and third quarters of 2008. Money market funds are withdrawing support for European banks-not British banks, but European banks. This is a moment of increasing nervousness. Europe needs without delay to significantly strengthen the capitalisation of its banks and banking system to absorb the inevitable losses that will come forward as a result of the write-offs of sovereign loans, while maintaining depositor and counterparty confidence.
The EU bank capital objectives announced last month by the EBA simply fail on three critical tests. They were too little; €106 billion is simply not enough. The IMF estimated the need for at least double that; my own personal view is that it would be more than treble that amount to get the banks to a position where people can say that is more than enough to cope with whatever might hit these banks in terms of write-offs. That is what we learnt in 2008; you need to go further than your advisers tell you to ensure that you have absolute comfort and security. Secondly, the EBA's
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The Bank of England has made it clear today that it believes that more can and should be done by our banks to increase their capital. Our banks are relatively well capitalised, but in my experience no bank can have too much capital in these sorts of markets. But banks do not cover their cost of capital, so it is very difficult for them to raise money from the markets. How can they address this? They have to cut back on dividends-very few of them are paying dividends, but those that are should not. They also need to stop paying bonuses. It is an absolute nonsense that an industry which cannot cover its cost of capital still pays huge bonuses. Why can this be? They have said that they have to remain competitive to protect the interests of their shareholders. However, the same shareholders own all the banks. Institutions such as BlackRock, Capital International, Fidelity and Legal and General own shares in almost all the banks. I encourage the Minister and the Treasury to take immediate action, to call these major institutions in and say to them, "We want you to write to these banks and say that, across the board, you expect them to adopt a wholly different approach to bank bonuses". That would be a powerful forcing mechanism which would stop the excuse that they have to pay bonuses to remain competitive. It would also take a lot of the heat off the Government, who bear a lot of criticism for bank bonuses, but, from my own experience, are quite limited in what they can actually do. I encourage the Minister to take strong and robust action on that point.
The Minister should also back up the Bank of England's suggestion today that the FSA should intervene to ensure that banks do not contract their balance sheets. The Bank of England's Financial StabilityReport is very clear that something needs to be done here. The Treasury needs to say to the FSA, "What are you going to do in response to the governor's report today?".
Lord Skidelsky: My Lords, I find myself agreeing very much with the speeches of the noble Lords, Lord Lamont and Lord Lawson, but that is because they
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But the eurozone crisis should not be used as an excuse for the failures of domestic policy. Of course, it is true that it has worsened the prospects of a swift British recovery, but in fact stagnation in our economy had set in before the European crisis exploded. At any rate, growth started to slow down in Britain almost from the moment the Chancellor announced his confidence-boosting programme of budget cuts in June 2010. It went from 1.1 per cent in the second quarter, to 0.7 per cent in the third quarter, to minus 0.5 per cent in the fourth quarter. According to the OBR the British economy will grow about 0.9 per cent this year; it is expected to grow 0.7 per cent next year, and then to pick up to 2.1 per cent in 2013, with a one in three chance of recession next year. Miserable though these figures are for the third and fourth years of a supposed recovery, I believe they are overestimates. Our growth figures are having to be revised downwards. For example, in mid-2010 both the IMF and the OECD forecast a British growth rate of 2.5 per cent in 2011, 2.9 per cent in 2012, and 2.8 per cent in 2013. As I have said, we will be fortunate to reach 1 per cent this year.
It is hard not to be sceptical of these forecasting models. A lot of them are pure bamboozlement and depend upon assumptions which are plucked out of the air. There are two systemic mistakes being made. First, I believe they underestimated the positive effects of the monetary and fiscal stimulus in 2009-10 in helping recovery. Secondly, today they underestimate the effects of the fiscal contraction in retarding it.
The direct effect of the government cuts is to take spending power out of the economy when spending power is exactly what a depressed economy needs. The continual shrinkage of demand increases the debt and devalues the assets of both banks and Governments. It is thus a direct cause of the financial crisis today, as indeed it was-I am talking here as an economic historian-in 1931, when the financial crisis spread from central Europe to London. The banking system is certain to crack if the economy contracts. That is why it is far more important to plug the hole in the economy than to plug the hole in the Budget. The Chancellor is at last showing signs of recognising this.
As the noble Lord, Lord Monks, said, this is not just a crisis in the economy but a crisis in economics. One of the problems of our arguments is the lack of any fundamental economic theory, particularly on the Government's side of the debate. Macroeconomics, as a discipline, has virtually collapsed. Finance theory is
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He ignored the fallacy of composition; it is as simple as that. I think that we are in danger of forgetting that one person's spending is another person's income. We must always remember that a Government have control over their spending but not over their income, as I am sure both noble ex-Chancellors will agree. If, by spending less, a Government cause the economy to fail, their own income or revenue collapses and they therefore will not be able to meet their targets. Already, the Government are having to borrow £111 billion more than they anticipated over the next five years; in my view, that is a direct consequence of the policy of cutting.
Critics of the Government's policy always face two charges. The first was voiced today by the noble Lord, Lord Lamont. He pooh-poohed the stimulus advocates by saying that their argument amounted to saying that if we borrow more money today, we will have to borrow less tomorrow. The implication was that this was a ridiculous remark: you reduce your borrowing by borrowing more. Nevertheless, the fact is that we are having to borrow more today as a result of trying to borrow less, because the economy is not growing. That is what missing your targets means. What matters is the level of output and employment in the economy and its growth. If you take actions to restore the growth, the deficit will automatically fall away-not completely by any means but certainly partially.
Secondly, the Chancellor claimed that the Government's deficit reduction plan has saved the taxpayer £21 billion by keeping the cost of government borrowing down. It is true that UK gilt yields, currently at 2.4 per cent, are among the lowest in Europe, even briefly dropping below German bonds. However, the savings pencilled in by the Government-that £21 billion figure-depend on sustained economic recovery. If the cuts continue, what little economic growth is predicted will surely disappear. As it did this Tuesday, the OBR will revise its borrowing figures upwards again, and the growing size of the deficit will negate any savings made on the rate at which the Government borrow.
Nor do I think that it is the deficit reduction programme that has kept the cost of government borrowing down. The fall in UK interest rates is entirely due to the danger of sovereign debt default by European countries; and the bond markets and pension funds know that the UK will not default. Of course you can say that they know that it will not default because of the Budget reduction policy. It is not that at all. We have tools, including the ability of the central bank to purchase gilts, which means that the danger of default has always been negligible.
I know that there are huge complications in applying Keynesian wisdom today, as the noble Lord, Lord Desai, pointed out. But we must start from some point of economic theory or we will simply be battered by day-to-day events. If we do not have some basic theory behind us, we are intellectually and morally adrift. I use the word "moral" because the choices made by the Chancellor are morally deplorable. They are consigning to the scrapheap millions of people who are able and willing to work. By destroying their spirit and their skills, he is creating the very bleakness to which we are now being asked to adapt ourselves. Policy should aim to build up, not cut down. The economy does not require the arts of bleeding, but an injection of vitamins.
Lord Davies of Stamford: My Lords, as I came into the debate this afternoon I was convinced that I was on the speakers' list, but I seem idiotically not to have pressed the right button on the screen. However, I am grateful for the four minutes that I now have. There are two approaches to the euro crisis and the EU crisis. The one is the Lamont-Lawson-Flight approach, which is to say that the whole venture was misconceived from the start, it was bound to end in tears and we predicted it all along. They remind me, if I may say, of those Marxists in the first three-quarters of the 20th century who, every time there was a banking crisis or a recession, said, "Ah, this is the final collapse of capitalism. We were right all along". The other view, which is my view, is that the crisis has been induced by too little integration and the solution is more integration. Indeed, as often happens in life, this crisis will force us to do what we should have done anyway in easier times. The solution here is what is normally known as fiscal federalism.
There are two ways in which things may pan out from now on. One is that the problematic countries carry out their obligations under the bailout programme. They reduce their deficits and, no less important, they carry out supply-side reforms. Those reforms can produce quite rapid results, as we saw from the Hartz reforms in Germany nearly 10 years ago or the Thatcher reforms here in the 1980s. If they fulfil those obligations to a level of commercial satisfaction, it is only right to lay on a system of eurobonds that would be jointly and severally guaranteed by all the eurozone member states, and therefore would be issued at a yield comparable with that of the yield paid by Germany today.
Interest rates are enormously important. If you look at the primary deficit of Greece, it is only 1 per cent of GDP, so reducing interest rates is going to be absolutely critical. On that basis, we shall be able to get through this. I do not think that the ECB should be involved at all. The Germans are absolutely right about this. You should never take risks with the solvency or monetary credibility of your central bank. That is essential.
I would like to make what I think is a novel suggestion. The European Financial Stability Facility and the subsequent mechanism should be allowed to lend in addition to eurozone countries with high debts where their bonds are trading at a price below or, if you like,
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So far as the euro is concerned, it is a fatal error to think in terms of abandoning it. That would be an act of self-destruction on an unprecedented scale. As has already been mentioned by my noble friend Lord Lea and others, it would immediately add a foreign exchange crisis to the crisis we already have. You would have the deutschmark or the hard euro parity rising to a level that would stymie growth in Germany. That has already happened with the Swiss franc. You would also have the other parities of the weaker economies going down the tube and causing high inflation. That is not the way forward at all. What is more, it would greatly increase the real value of the euro-denominated debts of these countries in terms of the drachma, the escudo or whatever successor currency existed. Again, that would be very foolish. Further, I would say to those who think that devaluation is a solution in that it would encourage competitiveness, it only increases competitiveness if it is accompanied by a programme of domestic austerity and restraining domestic consumption. Otherwise it just washes through the system like a dose of salts and produces a cycle of inflation and continuing devaluation. We had that in the 1970s and there no point in doing it at all. If you cannot deliver an austerity programme as part of the bailout, you will not gain any benefit from a devaluation, and that would be a great mistake.
Lord Eatwell: My Lords, like other noble Lords I am grateful to the noble Lord, Lord Lamont, for securing this debate, even though the topic has widened from that he initially intended. I also wish to congratulate the noble Lord, Lord Wolfson of Aspley Guise, on his witty maiden speech.
Despite appearances to the contrary, the debate has not been about economics. Instead, as the noble Lord, Lord Ashdown, pointed out, it has been about politics-the political choices made by Governments in the eurozone, most notably the Government of Germany, and the choices made by Her Majesty's Government. Indeed, the common theme that has run through much of the debate has been the severe austerity that Germany demands of the rest of the eurozone and the similar economic misery that the coalition is inflicting on Britain. It is now clear that the eurozone embodies fundamental design flaws. These have been addressed by the noble Lords, Lord Lamont, Lord Alderdice and Lord Higgins, my noble friend Lord Myners and the noble Baroness, Lady Wheatcroft. A successful monetary union requires a powerful and active central
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My noble friend Lord Desai was right to point to problems in the bond market as far as short-term financial stability is concerned, for it is the existence of an all-Union bond market that is crucial. Given that the eurozone economy is the largest in the world, any major bond fund must have significant exposure to the euro, just as it must have exposure to the US dollar and, to a lesser extent, to sterling. This can be obtained by holding any eurozone sovereign bond. Moreover, the exposure can be maintained by switching between different sovereign bonds with no foreign exchange risk whatever. Hence the huge flows between eurozone sovereigns that have produced wild gyrations in interest rates over the past few months as uncertainty and rumour have fuelled massive capital flight. The point was made by the noble Lords, Lord Wolfson and Lord Flight: it is like walking along a rocky path carrying a large amount of water in a shallow pan.
Compare this with the situation in the US. The state of California, which represents 13 per cent of the US economy, is bankrupt. This has no impact on the US Treasury bond market at all. Similar problems in Greece, which represents 2 per cent of the eurozone economy, have produced a wave of destructive contagion. The creation of a eurobond market equivalent to the market of the US Treasury-no bailout, no austerity, no ECB as lender of last resort-will bring durable financial stability. Of course, creating a eurobond market is a formidable political problem, but it is not impossible to imagine that this could be solved. It is not necessary to have a United States of Europe, as the noble Lord, Lord Lawson, claims. It is conceivable to have a powerful central bank, a central bond market funding a monetary union with a centre that is still politically weak relative to powerful member states. Indeed, that is a description of the most stable monetary union in the world, the Confederation of Switzerland. Clear identification of the design flaws of the eurozone that have resulted in such appalling financial instability should finally dispose of the illiterate comparisons often made between Britain's fiscal problems and those of the eurozone members.
Are the Government right to argue, as they do over and over again, that their austerity policy is necessary to maintain the confidence of the bond markets and keep UK interest rates low? Perhaps it is, but only because of their own political folly. The Government have repeated this mantra so often that the markets probably believe it by now, and in believing the Government's pro-cuts propaganda, they demand a redoubling of austerity. We have financial stability, but it is the stability of the grave. We are repeating Japan's lost decade in an economy that is much poorer and much more unequal. I warned at the time of the Budget that the Government's austerity policy risked creating a vicious cycle in which expenditure cuts and tax rises would lead to lower growth, which in turn
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