Others contend that this scenario is to be averted if at all possible; that there is a duty on all members of the European Union, including ourselves, to rescue the European Union from its present plight; and that the Union with all its accumulated funds can and must overcome its present woes. In all this, of course, our country is pivotal and is inevitably involved. As a convinced supporter of the European Union with all its blemishes—what institution does not have any?—I continue to believe that the previous Labour Government were right not to join the euro, but that cannot mean that we can be just a non-playing bystander in the whole enterprise.

Notwithstanding that we face global instability, we now need the EU and we should strive to make it a success. We should support Presidents Obama and Hollande at the recent G8 summit in their quest to concentrate much more on growth, on a stimulus package and on promoting employment. In other words, budgetary solvency and the maximising of growth must be our equal priorities. Unhappily, the policies of the coalition are bewilderingly confused. At home, we have a programme of strict austerity;

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abroad the coalition urges the acceptance of the Obama formula—ineptitude writ large—and vividly illustrated by its desire during the recent French presidential campaign to shun Hollande, who won, and support Sarkozy, who lost.

To desert the European Union, to quell revolt on the part of Conservative Back-Benchers, and to hector the European Union from the sidelines does not amount to a realistic policy. Surely no Lib Dem could support that endeavour. An increasing number of allies are now calling for economic growth. Of course, Germany finds it difficult to forgo its past, and we have to sympathise with that dilemma, but somehow the European Union must develop, grow and tackle the deficit. This is a conflict that we cannot afford to lose and I do not think that we will, despite the voices of gloom and despair.

6.10 pm

Lord Ahmad of Wimbledon: My Lords, my right honourable friend the Prime Minister has consistently maintained that in all matters European he will put British interests first, while recognising that we, as a fully fledged member of the European Union, will continue to play our part. The Bill is therefore good news. It is good for us and good for the eurozone. It gets the UK out of future liabilities that the previous Labour Government signed us up to, with the EU budget lying as a guarantee, and rightly replaces them with a permanent European stability mechanism that is guaranteed only by eurozone members.

This is right for the eurozone and, most importantly, for Britain. It addresses the urgent need for the euro area to put in place a regime that will provide collaboration and support, and that will make eurozone members take direct responsibility for the monetary union of which they have chosen to be part. Importantly, it means also that there will no longer be a reliance on others who chose to opt out to provide treaty-mandated bailouts when crises hit. However, it is just a small component of the crisis that the eurozone faces.

The rules must be adhered to because they are important. My noble friends Lord Lawson and Lord Lamont referred to the time that the single currency was born. Let us cast our minds back to that time. Economic tests were set. They were established as stringent criteria for qualification. Were they applied in reality? Sadly, they were not. It was clear to me, as it was to many others, that the euro had many flaws. Joining together in a monetary pact and without fiscal union 11 members with different economies in different states of development and with different industrial structures was setting up a currency zone on weak foundations. A one size fits all approach, as the then Conservative Government said and as the Conservative Party has maintained consistently since, does not work. I am glad that the Labour Government led by Mr Blair listened to their predecessor and did not join the euro.

Even if we entertain for a moment the notion that the criteria for monetary union were sensible when they were set, their practical application was not. Allowing countries to qualify on the basis of very loose interpretations of the criteria set up the currency to fail—and it is failing. At the time, those who predicted

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that during the good times the disparities between the economies of member states would not matter but that they would matter in harder economic circumstances when the currency would be tested, were dismissed as doomsday merchants.

Let us fast forward to 2010 and where we are now, as countries in the eurozone and outside it seek to scramble it out of its crisis. Reforms and austerity measures are essential if we are to succeed in restoring some sense of stability to both markets and the eurozone. However, the members of the eurozone cannot ignore their obligations. It is no good for Greece to say that it wants to remain in the eurozone if it cannot implement austerity measures. I do not agree with the premise that a lack of integration has led to the rise of extremism. It is forced integration, with national identities being lost, that has led to the rise of extremist parties throughout Europe.

If—and it is a big “if”—some of these infant steps work towards restoring stability in the markets, perhaps we can then look to and advise on other measures such as the issuing of Eurobonds, which is currently on the agenda with the election of the new French President. Today the euro crisis predicted by the “doomsday merchants” is upon us. Countries are struggling on the brink of implosion because of widely differing levels of indebtedness and competitiveness. The architects of the euro did not put that down as a major objective—far from it. Countries such as Greece are heavily indebted and pay heavy risk premiums. As we all know, its debt is unsustainable. Some suggest that the solution is to refinance the debt through Eurobonds. However, as other noble Lords said, Germany is the key player in this. Why would Germany, which is currently benefiting from the current rate of the eurozone, seek to devalue? It does not wish to, but compromise and consensus must be the call. If the eurozone is to survive, compromise will be necessary.

It was said in this Chamber and elsewhere that the introduction of the euro would mean Britain losing its influence; that our lack of participation would marginalise our status both in Europe and on the world stage; and, indeed, that our lack of membership would render the City of London second to Frankfurt. It did not. When our Prime Minister rightly stood up for British interests and threatened to veto any legislation that would tax the City of London, again it was said that that would marginalise the UK. It has not. Britain’s continued engagement and involvement in discussions on the creation of the ESM, our contributions through the IMF and our influence as an active and influential member of the G8 and NATO lay to rest the absurd suggestions that Britain lacks influence.

The Bill reflects the promise to put British interests first. It was a decision by the previous Labour Government, albeit at a time of crisis, which committed Britain to bailing out the eurozone even though we chose not to be a member. The Bill simply puts right that wrong. I therefore welcome the establishment of the permanent mechanism of the ESM but, in doing so, also welcome the fact that we no longer face the liability of bailing out a currency zone that we chose not to be part of, that we are not part of and that we should never be part of.

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6.17 pm

Lord Stoddart of Swindon: My Lords, the House is indeed fortunate to have present in this debate two former Chancellors of the Exchequer, who were able to impart their considerable experience over a wide area of matters, particularly in regard to the setting up of the eurozone. I am grateful to them for their speeches today.

Why are we hurrying this Bill? Why are we introducing it just a couple of weeks after the Queen’s Speech? There is no rush for it. Unless I am mistaken, the Irish are to have a referendum on the matter at the end of this month. The Germans will not ratify this policy until the autumn. I even noticed in today’s Financial Times that Geert Wilders has applied for an injunction to block ratification until after the September elections.

I heard the statement made by the noble Lord, Lord Howell, and others that a,

“healthy eurozone is important for the UK’s long-term growth”.

I put in there that that does not hold water, but that clearly was not robust enough because the noble Lord, Lord Lawson, described it, in much more stark terms, as “nonsense”. I think that that is a better description of it.

Lord Howell of Guildford: The issue of whether I was talking nonsense or not seems to have rattled through the debate. I think that we will all listen with fascination to the noble Lord’s speech, just as we listened to the excellent speech of my noble friend Lord Lawson. However, there was an error in that perhaps they did not hear my actual speech. I made it absolutely clear that stable progress in the eurozone states is vital to stable progress in the United Kingdom. That is not quite what the noble Lord seems to be accusing me of saying.

Lord Stoddart of Swindon: It was not an accusation because I thought that I was quoting him. I am most obliged to the Minister for clarifying what he did say. I really do not like getting across the noble Lord, Lord Howell, because I respect him very much and think that he is perhaps the only statesman that the Government have among their ranks.

Lord Lawson of Blaby: For the sake of clarification, I was not quoting what my noble friend said in his opening remarks, which were rather more careful. What I explicitly quoted is what appeared under his name on the Foreign Office website, and I quoted that correctly.

Lord Howell of Guildford: I appreciate that he was relying on a press release, but I had hoped that, as he is sitting here, he might also have listened to my speech.

Lord Stoddart of Swindon: Now that we have that out of the way, perhaps I can get on with my speech. There is no doubt, as other noble Lords have said, that the eurozone was a political construct, not a financial one, to create a single European state. Because it was made up of nations with diverse economies, it was bound to fail, as it now has. The noble Lord, Lord Radice, accused those of us who gave pause when the project was starting up of gloating because it has now

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patently failed. I do not gloat, and I do not think that others who warned of the consequences do so because the eurozone is now in difficulties. We believed that it was always going to be in difficulties; and for trying to point that out, we were derided and insulted. Indeed, the former Prime Minister, Mr Blair, said that we were unpatriotic. There is no gloating about this. We are extremely sad that the present situation has arisen.

As I understand it, the Bill allows the eurozone to further integrate and consolidate a failed system by attempting to shore it up through fiscal, economic and political union under central control by the large countries. I believe that the claim that the ESM cannot and never will apply to the United Kingdom is spurious and quite untenable. Article 16 expresses the aim that within the five years the treaty will be incorporated into the EU treaty framework, which presumably will include this country. Furthermore, we have heard all this before. Let us remember the famous Blair “red lines” over the EU constitution. All of them were eventually crossed and incorporated into the Lisbon treaty. We have to be careful when we are given assurances that certain things will not apply to this country.

I really must comment on the behaviour of the Prime Minister. He does not inspire confidence that the United Kingdom will not be sucked into this system. He seems to be suffering from EU schizophrenia. On the one hand, he opposed the setting up of the eurozone and has said that the UK will never join it; but on the other hand, he wants to dictate policy from the outside and has threatened the Greeks that if they do not vote in the right way, they will be thrown out of the euro. No wonder he is seen by the eurozone countries as a bully-boy shouting from the sidelines. He claims to be a Eurosceptic, yet demands more power for the centre.

I would like the Prime Minister to understand that the influential and decisive voices of the EU—for example, Mr Jose Manuel Barroso; Mr Herman Van Rompuy; Mr Wolfgang Schaeuble, the German Finance Minister; and Mr Olli Rehn, Commissioner for Economic and Monetary Affairs—and the shadowy group of Foreign Ministers and many others are calling for complete political integration under a European Government and the destruction or the sidelining of the nation states.

Why is the Prime Minister not shouting that very famous, “No, no, no”? Perhaps he is afraid of being stabbed in the back by the Deputy Prime Minister. The Prime Minister says that we will never join, but I remind him that others want the whole system to be extended into a single European state. This Bill will help those who wish to create a country called Europe, in spite of some voices this afternoon and in other debates who do not wish to see that happen.

6.27 pm

Lord Dobbs: My Lords, this afternoon’s debate has been thoroughly stimulating—and we still have a way to go—as was our debate on Monday. Perhaps I might be forgiven for spending just a few minutes trying to draw some threads linking Monday’s debate to what we are discussing today.

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Monday’s debate was thoroughly thoughtful, and two contributions in particular stuck in my mind. The first was the claim by the noble Lord, Lord Willoughby de Broke, who sadly is not in his place, that in real terms more has already been spent on bailing out the eurozone than was spent on reparations and reconstruction after the two world wars. If that is so—and I look forward to seeing the figures—it is a statistic and a reality that should give us all pause for very considerable thought.

There was also an emphatic contribution on Monday from the noble Lord, Lord Judd—who sadly is not in his place either, but his words echo on—in which he spoke of the “ethical commitment” to Europe based on lessons he drew from his experiences of World War II. He put his points with eloquence and great passion. The speeches of both noble Lords got me thinking about the historical perspective that they raised. Can history teach us any lessons, even though the crisis that we are witnessing and going through today is very different?

Ardent supporters of the European Union base their very genuine beliefs on an ethical view. The EU, they say, is the best way to avoid the extremism and intolerant nationalism that led us down the road to disaster in the 1930s. It is a very genuine view but there is a danger of taking too narrow a view of ethics and events. The ethical side of the debate in the 1930s—and it was a very black and white debate then, too—was claimed by the anti-war lobby, the appeasers.

When Neville Chamberlain flew back from Munich waving his little piece of paper, he was applauded by archbishops and moralists, and summoned by the King from Heston Aerodrome to Buckingham Palace, where he was brought out on to the balcony to accept the cheers of tens of thousands of grateful people. In October 1938, Neville Chamberlain was the most praised, honoured and seemed to be the most ethical politician of his day. It did not make him right of course. Indeed his strong and rigid ethical views, which he held most sincerely, ended up blinding him, and leading him and the entire world astray.

The point I want to make is simply that while I have enormous respect for the sincerity of those who support the EU as being the only alternative, I do not believe that they are right. I hope that does not make me swivel-eyed. For instance, in October 1938, Winston Churchill was hugely unpopular. The Conservative Party was planning to deselect him in 1938—not something that we talk about a lot nowadays but it is absolutely true. He was derided as a swivel-eyed warmonger and a man of the past. We heard similar claims from one or two noble Lords in Monday’s debate and mutterings about political reactionaries who apparently lurk at home wearing union jack waistcoats. I frankly thought that was a pity in what was otherwise a fine debate.

Then I began to think about what the noble Lord, Lord Willoughby de Broke, said and what happened after World War I and World War II. After World War I, we punished Germany with reparations and crippling austerity. The economic consequences were disastrous; the political consequences far worse. We should not be

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so naive as to think that such appalling outcomes are impossible today. Democracy is a delicate flower and in many parts of Europe the soils are thin.

Towards the end of World War II, a similar discussion about the future of Europe was held. In February 1945, the great leaders, Churchill, Roosevelt and Stalin, gathered at Yalta to map out the shape of post-war Europe. That summit too came desperately close to repeating the follies of 1919. Stalin wanted to tear the industrial heart of Germany, pack it up to the last bolt and rivet, and ship it back to the Soviet Union. He wanted to reduce Germany to a rural backwater. Roosevelt was of much the same mind and wanted to break up the odious German state into a number of powerless and pathetic provinces. However, the swivel-eyed, warmongering Churchill had a different vision. He was outnumbered and isolated at Yalta but he remembered the terrible mistakes of 1919 and fought furiously. Although Yalta was largely a disaster for the West, he was able to prevent Germany from being ripped apart and dismembered; although it was of course divided. It was a delicious irony that it was that old warmonger—the man who had stood out against the ethical orthodoxies of his day—who saved Germany and with it, eventually, free Europe.

Many of you will know the history of that time better than me, so I will come quickly to the conclusions that I want to reach and the lessons that I think we can draw. First, ethical values are not held simply by one side of this argument. Secondly, there is nothing to be gained but sorrows from pushing states too far down the road of blind austerity and crippling reparations. In 1919, and indeed in 1945, we talked of Germany; today we talk of Greece, Ireland, Spain, Portugal and Italy, but, for the moment, particularly of Greece. The ESM is a sticking plaster in that solution but it is not by any means a solution in itself. We all know that and I support it for what it is. However, I fear that sticking plaster that it is, there are few, if any, sticking places left. If—and, I suspect, when—Greece is forced out of the euro, whatever else happens we must not turn our back on the Greek people, any more than we turned our back on the German people in 1945. Otherwise, that fuse of extremism that we have heard so much about could all too easily be lit once again.

I would gently encourage—not lecture, I hope, but encourage—all the authorities in Europe, and particularly those in Germany, to remember the lessons of the post-Versailles period rather than naively insisting that all financial obligations should be met, no matter what. In the period between the wars, that policy proved to be no more than whistling into the teeth of the gathering storm, and the tune has got no better since.

I believe that the eurozone is set on a downward slope and cannot survive in its present form. There will be more pain but my final conclusion is yet one of hope. We have all been through worse than this, or at least our fathers have, and found the imagination not simply to survive but to flourish once again. Instead of sticking stubbornly to the premises and prejudices on which the creation of the eurozone was based, let us look forward to a different, more flexible, more creative and more tolerant Europe; a less bureaucratic, less

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centralised and less overmuscled Europe; a Europe that is so much more than a eurozone. Whether the ESM will play any part in meeting that hope, I know not. I can only keep my fingers crossed and my savings in sterling.

6.37 pm

Lord Davies of Stamford: My Lords, I do not normally agree very much with what the noble Lord, Lord Dobbs, says about Europe and I disagree with some of the things that he said today. However, I enjoyed his speech and agreed with several of the things that he said; notably, first, that fiscal austerity, though necessary, is not enough and should not be pursued excessively; and, secondly, with his quite wise statement that the ESM, though important to a solution, is not a sufficient solution to the instability we face.

I have no problem with this Bill. I enthusiastically endorse it. I am very much in favour of it and very happy with the transfer of the basis for this form of firewall from Article 122 to Article 48. My one considerable sadness is that we are not part of it or have not made a voluntary contribution to it, as Poland and Sweden did to the previous financial stability facility. My reason for that is, partially, solidarity—I believe in solidarity, although it always seems to be a very long-term self-interest—and because of our immediate self-interest. We all agree that we face a desperate crisis. We are on the edge of a precipice and so forth, and we hope that there will not be collapse. We desperately hope that this firewall will be effective, so we ought really to be contributing to it. In my view, it would be a good use of the nation’s reserves to make some contribution.

If one’s neighbour’s house is likely to burst into flame or if one fears that might happen, it seems sensible to contribute to the local fire brigade, instead of which there is the Prime Minister’s approach. I agree with Members on both sides of this House who have criticised that approach, which seems to be not to make any positive contribution at all but simply to stand on the sidelines criticising loudly what is going on. He reminds me of a man who might be on the shore when he sees people in trouble in the water. He is not willing to take any risks by trying to help them and does not even want to get his feet wet. He just calls for a loudhailer and shouts at them where he thinks they have gone wrong. The Prime Minister is the last person to give any lessons to our European friends and allies on this subject, because he has got his own economic policies so wrong. He inherited growth and has produced recession. In the first quarter of this year the eurozone, despite its well publicised problems, had a positive rate of growth overall and we had a negative rate. I do not think any more needs to be said on that subject.

It has been generally agreed in this debate that the ESM is necessary but not sufficient. There are actually six pillars required for a viable solution to this crisis. First, of course, there is fiscal deficit reduction. That has happened on the continent, as here, but it should not be pursued excessively and certainly not to the point where the reduction in gross domestic product as a result of recession more than undermines the positive effect of reduction in the fiscal deficit on the

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debt to GDP ratio. When there is any danger of that happening, it is a time for Governments to think again. That rule should apply everywhere. It should apply here. We should be thinking again, as Christine Lagarde has said, and we should be thinking again about Greece. I hope there will be some revision of the austerity programme in Greece and some reduction, or at least elongation, of the deadlines in the bailout package. I hope it will be available for the Greek electorate to take full account of it and therefore be able to make a proper democratic choice at their forthcoming election.

The second central pillar of progress is supply side reform. Immense progress has been made in this direction under the pressure of the crisis. I have said before in this context that very often in human affairs—it is certainly true of the history of the European Union—people do the right thing but do it almost too late under the pressure of a crisis. We all know how that happens. It happens in our private lives and in business lives all over the place. That is just a fact of life. I thought that the 30 January European Council produced some very important supply side measures. I hope they are going to be pushed through by this Government and other Governments. I salute the progress that has been made by Mario Monti in Italy in producing labour market reforms and pension reforms. I think Italy is now the only country in the world which has a pension system that is formally linked to life expectancy, so that when life expectancy increases the pension age is automatically increased. The Greeks and the Spaniards have been tackling their labour market issues with a vengeance, which they would not otherwise have done. Of course, they should have done it years ago, but at least they are doing it now. Therefore, supply side reform is very much in place.

The third pillar is firewalls. I have a suggestion to make which I made in this House some months ago. It should be within the powers of the ESM to lend money to sovereign Governments who would be subject to a bailout and whose debt is trading at below the bailout price. That is certainly the case of Greece at present. We have missed a lot of opportunities over the past year or so for the Greek Government to buy back their debt at a much better discount—it was at 80%—than the bailout discount, which is about 50%, and then cancel it. It has been foolish that there has been nobody able, willing or empowered to lend for that very sensible purpose. I hope that may be taken on board as a positive suggestion.

The fourth essential pillar is banking recapitalisation. Nobody has been making the point in the public debate or in the debate in the press that banking recapitalisation is very problematic and dangerous in the present circumstances. At a time when we want banks to lend more money and want demand to be relaunched, banking recapitalisation produces a disincentive for banks to increase their lending. The easiest way, and some banks in the present circumstances will say the only way, that banks can achieve better capital ratios is by reducing their lending and maintaining the same capital base. It is certainly true that they cannot be expected to go for rights issues with their share prices on the floor as they are at present and for that reason

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other forms of tier 1 capital would be prohibitively expensive to raise. They cannot cut their dividends in the present market conditions as that would really shoot the value of their shares to pieces, which would be extremely destabilising. So what do they do? The only thing they can do is to reduce their staff costs. Of course, an individual bank cannot reduce its staff costs because people would just walk out of the door. It can be done only by governmental action to impose some limitation on the staff costs of undercapitalised banks, and that has to be enforced throughout the European Union. I hope that that thought will be taken on board.

It sounds very draconian, but the present circumstances require draconian measures. Of course, some people will say, “Don’t worry”. When I have raised this matter previously in the House I have had that response from the noble Lord, Lord Sassoon, who I am sorry is not in his place to hear it once again. He always says that it does not matter because the Basel criteria for capital adequacy come into force only in 2018 or 2019. I have been on the board of a bank so I know perfectly well that if you are told that you have to achieve certain capital ratios in five years’ time, it is going to affect your lending decisions and your policies right away because you know you have to move on that trajectory. Therefore, that is not an answer to the problem. The problem is in fact very urgent. We need to make sure that banking recapitalisation is not pursued at the expense of a solution but actually contributes to one. I fear that in the present circumstances you cannot possibly get rid of these requirements because for Governments to go back on them would be very destabilising. Therefore, the only way through is the one that I have suggested.

The fifth essential pillar for a solution is the use of market mechanisms, allowing the price mechanism to work in the factor markets throughout the European Union and particularly in the eurozone. Where demand is less, demand conditions are much weaker and there is unemployment, factor costs should be allowed to fall and wage costs need to be allowed to fall in nominal terms. Where demand conditions are much stronger and unemployment is much lower, then the price mechanism should be allowed to work and nominal wages should be allowed to increase; indeed, real wages should be allowed to increase. That is precisely what is happening now, I am glad to see. The other day, as we all would have noticed, IG Metall came to a Tarifvertrag—a wage agreement—in Germany, involving millions of engineering workers with an increase of more than 4%. Equally, in Greece, wages are falling quite substantially in the public sector—by 20%—which is absolutely enormous. I saw the other day that in Spain over the past year wages had fallen by 1% in nominal terms, which of course means more than that in real terms.

That is already a considerable element of internal devaluation—or revaluation, in the case of Germany. I say to the noble Lords, Lord Lamont and Lord Lawson, that that is infinitely preferable to the kind of external devaluation which they always advocate. It avoids the great problems of external devaluation. It avoids the idiocy and distortion of changing every price of every good and service overnight by the same amount irrespective of demand for it, which is completely

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crazy. It avoids the inflationary impact, through import prices, of a devaluation. It avoids suffering from the enormously excessive swings of currency markets in times of uncertainty, so that you can be certain that the external devaluation or revaluation will be far greater than is required by the circumstances. Of course, it avoids completely the threat to the solvency of households, corporates or banks—this is very relevant in Greece—which happen to hold their liabilities in the stronger currency, in this case the euro, and risk having their assets and revenues translated into a weaker currency with great threat to their solvency. This kind of internal devaluation is infinitely preferable and it is the most sensible way to go.

Finally, we need a growth package. Austerity is not enough. That is the message which is coming through loud and clear. It is not a message which the Government seem to want to hear in this country, and not a message in which they therefore have any credibility when, in contradiction to their policies in this country, they convey it abroad. But, of course, it is necessary. I hope that we will have really good, dramatic news tonight. We need some news which affects psychology and confidence. I hope that there will be some good, imaginative thinking coming out of the informal European Council meeting which is taking place this evening.

I support the idea of increasing the EIB capital. That is a splendid move, but it does not go that far. I strongly support the idea of making sure that we are spending the unspent structure funds. It may be necessary in Greece, and I hope that this happens, to relax the co-financing terms of the structure fund programme. If Greece is under this fantastic fiscal pressure, where can it find the money to come up with even 10% of the investment cost of schemes that are being funded out of the structure fund programme? Of course, there is a good argument in most circumstances for co-financing, to avoid moral hazard and so forth. In the present circumstances, however, it seems sensible to reduce that to an absolute minimum or to find some other way, like appointing outside consultants to vet programmes to achieve that flow-through. Above all, I hope that there will be some new initiative, which I cannot anticipate but I hope will come out very quickly. That is necessary to make sure that there is a new boost to growth and demand, ideally through infrastructure spending, in the eurozone and particularly in those countries which have been affected most by the downturn: Greece, Spain, Portugal and Italy.

6.50 pm

The Earl of Dundee: My Lords, I join with most others in welcoming this Bill in its Second Reading. The introduction of a permanent stability mechanism is certainly timely. It also makes sense that the United Kingdom should not automatically have to take part. However, as a number of your Lordships have qualified, there will probably be occasions when on an ad hoc basis we and other states outside the euro area may want to contribute all the same.

Although in itself hardly contentious, the Bill throws up a number of matters with which inevitably its confined purpose is still associated, as already demonstrated in this debate. It is with a number of these that we may be

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much more exercised. Today I would like to touch briefly on three of them. First, there are certain further stability systems or mechanisms which now might usefully follow on. Secondly, there is the connected issue which seems to confuse and divide politicians and economists alike: in Europe, the balance that should be struck between measures of restraint and austerity and those to encourage growth, as indicated by the noble Lord, Lord Radice, and others. Thirdly, regarding the future political direction of Europe, there are the simple forms of guidance and leadership which this country and others should give. Indeed, today many of your Lordships have referred to the future scope of our influence.

So far, the success ratings of European systems and mechanisms may not have been too good. Previous attempts to enforce fiscal discipline in the euro area through the stability and growth pact came to nothing. This was because sanctions were not imposed for breaches of the pact. Yet at the moment perhaps a rather different attitude prevails all round. If so, that prospect would represent one of the silver linings to the cloud of current European economic adversity. Does the Minister believe this to be the case? If so, which adjusted proposals for fiscal discipline and macroeconomic stability does he consider would next benefit Europe and properly work?

The second issue is that of combined measures to achieve restraint and growth at the same time. The first task is to dispel some false dogma. This would claim that you either go for restraint or growth. You cannot achieve both together. Yet in discarding the notion that growth and restraint measures are mutually exclusive, it is perhaps a comfort to reflect that Harold Macmillan would almost certainly have refuted it as well in the same way in which, in his maiden speech in this House, he dismissed the parallel misapprehension that you either had to be a Keynesian or a monetarist. He implied that economists and politicians pedalling that intransigence had not helped him very much. For the future running of the country’s economy, much wiser counsel had instead come to him from his nursery and from his nanny. She knew that you used your common sense and struck a balance. You had to chop and change. Sometimes you fed a cold and other times you starved a fever.

This year, in helping to forge such a balance in Europe, our Prime Minister and the Administration are to be congratulated. At the March European Council meeting a number of important United Kingdom suggestions for growth stimulation have already been accepted. These include deepening the single market in services, tackling the regulated professions and opening up that part of the single market. There had been no reference to deregulation. Now references have been provided with corresponding sectoral targets. There had been no mention of completing the internal energy market. Now there is a deadline to achieve this by June 2014.

Rather curiously, there had even been no mention of trade itself, the key facilitator of economic growth. Now for the June meeting there will be a specific focus upon trade, including trade deals. These provisions, all led by our country, thus constitute a considerable step

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in the right direction. And they demonstrate how this particular recipe for economic growth comes to function alongside other measures already in place in Europe to achieve economic restraint.

Clearly, there are many more opportunities for growth stimulation. Which of these does the Minister identify for the next stages? As already indicated, the agenda of the March European Council meeting revealed an alarming lack of attention to the relevant details. It is fortunate that our country was able to come to the rescue. What guarantees are there that future agendas will be more focused and pragmatic in the first place? Regarding existing agreed measures and their timetables, what system of monitoring is in place so that the aims themselves do not fall short and there is no procrastination over their corresponding action dates?

This links to my third theme of useful political leadership that our country and others can offer Europe. The March European Council meeting may also have heralded a political breakthrough. It produced a new and unprecedented coalition. Along with us, it brought together Spain, Italy, Poland and many different states from all over Europe. It did not just comprise the usual, traditional allies from the north. Therefore, not only with these new partners but in association with France and Germany, there is a fresh opportunity for our continued advocacy and guidance of a constructive and balanced package of measures to attain both economic restraint and growth. Does my noble friend agree that we may now be particularly well placed to lead such measures and persuade other states of their efficacy? If so, what plans are there to widen our new political coalition to strengthen support for our European economic prescriptions?

Then there is the Council of Europe, on the Parliamentary Assembly of which I have the honour to serve. It is a coincidence that our current six-month chairmanship happens to end today, on 23 May. It has been a fruitful chairmanship, first, in brokering agreement on methods to improve the efficiency of the European Court of Human Rights without undermining its standards; and, secondly, on enhancing delivery to local democracy from within the Council of Europe. I pay tribute to my noble friend Lady Hanham, the Minister responsible for this task within our UK chairmanship. As a result of her efforts, a goodly level of consensus has been reached on ways and means, thus standing to benefit local democracy in the Council of Europe’s affiliation of 47 states.

A connected problem is the need for co-ordination and joined-up writing between the latter and the European Union’s smaller affiliation of 27 states. In Europe there is a great deal of good will towards our country and recognition of our ability to broker consensus and improve results. Does my noble friend agree that we should, therefore, now work towards a different and proper degree of co-ordination between the Council of Europe and the European Union in a variety of fields?

In summary, today’s Bill reveals sound logic and a counterbalance. For good reason, it removes our liabilities within the eurozone. Equally, through counterbalance and in wide context, it reflects our enormous commitments to Europe. However, these are not just commitments

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to obtain the recovery of its economy. Much more significantly, they are political resolves to protect freedom, democracy and good standards.

6.58 pm

Lord Hannay of Chiswick: My Lords, support for the Bill may come as something of a surprise to the government Front Bench from someone who has been generally critical of the coalition Government’s performance on European Union issues and remains so. I regard last year’s European referendum Act as a ball and chain around any future British Government’s negotiating position, and the decision last December to refuse to join the negotiation of a fiscal discipline pact as an unnecessary and self-inflicted wound. It may come as a surprise that such a person should wholeheartedly support the legislation before the House today, which is designed to enable this country to ratify a change to the treaty on the functioning of the European Union to which our Government have already agreed and which has already been approved by both Houses, as the noble Lord, Lord Howell, said in his introduction.

I give this Bill unqualified support, and not just because the failure of Parliament to do so would create an appalling precedent whereby a British Government’s word would no longer be seen as being as good as their bond, although that is surely a compelling enough reason. But the case for support runs rather deeper than that. It is based on a belief, which I have not heard mentioned in this debate, that the European Union for the foreseeable future will consist of both members within the eurozone—I am not speculating about how many of those there will be—whose currency is the euro and whose interest rates are set by the European Central Bank, and members outside the eurozone, such as ourselves but not only ourselves, who will continue to operate their national currencies and national interest rates.

I believe that it is crucial to achieve the maximum possible degree of solidarity and to reduce to the minimum the policy and institutional distinctions between those two groups. Only thus will we have any chance of ensuring that aspects of European policy as fundamentally important to this country as the single market and its further development remain firmly under the control of the European institutions and all 27, shortly to be 28, of its member states.

By enabling the operations of the European stability mechanism, which imposes costs on the members of the eurozone alone and not on us or those outside it, to be based firmly on EU treaty provisions, we are making another modest contribution to that solidarity. That is why I agree with the Government’s assertion that the ratification of this treaty change is in Britain’s national interest. It has to be admitted that that concept of solidarity is not much in evidence these days, particularly in debates on European matters in this country, even though our own future growth and prosperity is so closely bound up with that of the other members of the European Union—whether they are in the eurozone or not, or whether we are in the eurozone or not.

The emphasis is all on how to avoid solidarity and how to ensure that this country does not incur the slightest hint of a financial liability. In the case of the

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present treaty change, that issue does not arise, and I am not suggesting that it should. But I would suggest that it is an approach which is both short-sighted and misguided. The greatest financial risks to this country in the present circumstances arise from a possible breakup of the eurozone, not from its stabilisation and survival.

In the case of Ireland, we already faced and drew back from taking the dog-in-a-manger attitude which is so often commended in this country. Our rather niggardly approach to IMF replenishment—that criticism I am afraid applies to the Government and the Opposition—shows just how reluctant we are to recognise that need for solidarity. Yet, the awful example of the 1930s—I have heard some pretty odd interpretations for that decade in the debate so far today—when the countries of Europe and beyond definitively turned their backs on mutual solidarity and opted for protectionism, competitive devaluations and appeasement, are there to remind us of the possible consequences of such policies.

I confess that I was a little shocked but not the slightest surprised when at the briefing meeting on this Bill so helpfully organised last week by the noble Lord, Lord Howell, and his colleagues, the chairman of the European Scrutiny Committee in another place warned that the Bill was likely to run into major difficulties and opposition when it was presented there. I was not surprised because it is becoming ever clearer that a number of the Government’s supporters in the other place are determined to spare no effort to widen the gap between Britain and its European partners—indeed, to bring about an eventual parting of the ways between us. I say to those of that point of view that the eurozone crisis is seen as an opportunity, and not a challenge and a threat. They are frustrated that the Government do not seem to share that view, which is an opinion that has been expressed today sometimes rather eloquently but, in my view, not in a way that I could share.

As we are debating this Bill today, the leaders of the European Union are meeting in Brussels to consider how best to reconcile the policy objectives of fiscal consolidation and the need for growth in all our economies. Let us hope that our own Government are playing a full and constructive role in that wider debate and that in the next phase of the development of the European Union Britain can come to the table with ideas and not just with objections. That is surely the only way in which to make a success of Britain’s continued membership of the European Union and persuade the British people that that is the right course to take.

7.05 pm

Lord Risby: My Lords, I may not be able to cheer your Lordships' House up particularly, but I may do so by saying that this speech will be very brief. This Bill may not be ground-breaking or contentious, but it is worth reminding ourselves why it is of some value. All member states’ parliaments must approve the proposed Amendment 136 to the Treaty on the Functioning of the European Union, but legislation approved by an Act of Parliament last year, the European Union Act 2011, enhances our democratic oversight. This Bill does not

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involve directing powers from the UK to the European Union centrally, so no referendum is required. I hope, therefore, that all of your Lordships can reflect on how important last year’s legislation was, given the current turmoil in Europe and the real future possibility of substantial structural or even constitutional changes in the EU which will most certainly affect us.

We may be out of the eurozone, but we cannot escape our geography or the economic and other links with our continental neighbours. We have to respond carefully and thoughtfully to the political and economic crisis that has descended on our continent. We do not know how this will work out, given the current disagreement within the eurozone, and although I cannot foresee what constitutional implications there may be for us, at least now either our Parliament or, if necessary, our people, will have greater opportunity to take greater ownership of any such possible process. Meanwhile we have to encourage and even at times assertively suggest ways forward to our European neighbours to find a solution to their crisis. Agreeing to this short Bill would at least get us out of future direct liabilities and allow the eurozone members to create a larger mechanism: the European stability mechanism. It seems to me desirable for all the EU states, in or out of the euro, to put this change through our Parliament and all theirs. However limited in the circumstances, it is at least a small and partial although important responsible reaction to current difficulties.

In a speech two days ago in your Lordships' House my noble friend Lady Williams of Crosby reminded us of the hugely comprehensive and all-embracing process to fulfil the Copenhagen criteria for EU membership. Nothing remotely comparable was ever laid out for eurozone membership, and to the extent that there were national budgetary constraints they were almost immediately flouted. If, indeed, a new eurozone fiscal pact emerges and there is the inevitable reduction of national sovereignty, I hope that the use of referendums that enables us to debate this appropriately and seek voters’ approval becomes much more widespread. I say that because the Lisbon treaty, which finally emerged out of the constitutional convention, has not succeeded in dealing with the main injunction of the Laeken declaration, which is to try to close the democratic deficit which we now see under so much pressure in the European Union today.

In the end, politicians in all democratic European countries will make their ultimate judgments based on their own domestic constituencies. Mrs Merkel’s position is perfectly understandable; it accurately reflects the view of her citizens, who see themselves as being punished, potentially, for their frugality and economic success. We ought to remind ourselves that many Germans paid, within living memory, a very high price for the unification of their own country, and many of their citizens remember this. Ultimately, you cannot buck the market. You cannot have a single currency with each member state with very different levels of competitiveness all paying hugely differential rates to service their debts.

The economy of Greece, so badly managed, cannot charge its adoption of the euro as the basis of its problems. The problems were certainly internally generated. In order

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to resolve their problems the Greeks have to contemplate the possibility of leaving the eurozone. Of course that course presents difficulties but I suspect that it is the lesser of two evils.

The most important thing now is that all key strategic decisions should be taken soon as regards exactly who will remain in the eurozone—if that is to be the course—and what new fiscal arrangements are to be put in place. Frankly, as long as those problems remain unresolved, everyone in Europe will suffer. At least in Britain, however, any possible anger or frustration felt by our people about the impact from our neighbours will be offset by the fact that at least we know that we will have a say on any possible constitutional change. I suspect that many of our fellow European citizens would like eventually to have the same opportunity, at a time of febrile social tensions in many parts of Europe arising from this wholly predictable crisis which is affecting the lives of millions of our fellow Europeans. Regrettably, it has begun to shake the very democratic underpinnings of the European Union itself.

7.12 pm

Lord Anderson of Swansea: My Lords, because of an administrative error my name was not included on the list. So please add my name to the end of the list.

I disagree with the noble Lord, Lord Risby, in respect of referenda. Under the 2011 Act, even the smallest incremental change as regards moving power to Brussels will lead to a referendum—a referendum in which perhaps Mr Murdoch will have far more influence than ordinary British citizens. However, no referendum is proposed on far weightier constitutional change, such as that relating to the future of this House. I hope that the noble Lord will comment privately at some stage on the apparent contradiction in the Government’s position on those two matters.

Clearly any debate on Europe—however inconsequential or irrelevant, as the noble Lord, Lord Lawson, said—goes well beyond the confines of the Bill itself. We have had many historical analogies. We have heard from two former Chancellors, who sounded like elderly gentlemen sitting in deckchairs debating how things would have been so much better if people had listened to them. I remember the debate, for example, on the common or single currency. Things would have been so different had the common currency been accepted in the 1990s. However, the voices that were raised at that time were ignored, in part because of our lack of influence and the fact that we had marginalised ourselves.

It is also true, for those who are Europeans, that we should concede that a large part of the argument and the logic for the euro was politically driven; that it is extraordinarily difficult to have a single currency given the existence of so many economies operating at different levels; and that there is an inexorable move from that to political and fiscal union which one cannot ignore. Equally, I would hope that the opponents of Europe—the opponents generally—would concede that the European Union still has an enormous magnetism for those who are outside it, on its periphery. Perhaps they should ask themselves why that is so. Croatia is to join the European Union, and it will be followed by a number

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of the other Balkan countries. That is more likely than not to increase stability both within our own neighbourhood and within the Balkans. Other countries will want to evolve different forms of relationship with the European Union, despite its current difficulties. Those difficulties exist now but the period following the euro’s formation was one of relative prosperity when the euro was seen to be a success. Alas it has not been able to weather the economic storms—which are not, in fact, confined to Europe.

The Bill itself is of relatively minor consequence. Its parliamentary passage is therefore, pace the chairman of the European Scrutiny Committee in another place, likely to be speedy and non-controversial. We, in common with the 26 other EU countries, will thereby be able to ratify it so that it can come into effect, one hopes, at the beginning of next year. The message is that this is a formal change imposing no liability on the UK, although questions were raised about whether the result of the predecessors of this mechanism may indeed provide such a liability.

It is worth examining the Bill briefly in terms of its genesis and context. The European Union Act 2011 was, in fact, in part a genuflection to the anti-European pressures on the Conservative Back Benches. I have made my point about the referendum. Technically, there is no liability accruing to the UK. However, in view of the spirit of solidarity, surely it is important—because of the relevance of the health of the eurozone to us—to seek to make contributions as and when necessary in that same spirit.

An observer from Mars reading the Bill would be wholly unaware of the multifaceted crisis affecting not only Europe but the West generally. Perhaps one of the major criticisms of the Queen’s Speech was just how parochial it was. There was no mention of NATO or the Commonwealth, so beloved of the government Front Bench, save in the context of succession to the Throne and Jubilee visits. The truth is that notwithstanding this little Bill, there is a long-term crisis in Europe—the greatest since the Second World War. Even the Sunday Times, part of the Murdoch empire, wrote last Sunday about the need for federalism. We therefore have to ask ourselves whether we have now come to a 1957 moment when the country must choose.

I recall, when I was a junior diplomat shortly after that time, how desperately Britain tried to repair its failure to sign up to the Treaty of Rome. There was the cul-de-sac of EFTA; there was the wish to look for every possible means of joining with the six, using the mechanism of the Western European Union; and so on, until we were faced ultimately with the only logic—that it made sense for us to become full partners with the original countries.

There is in Europe today a social crisis—a crisis of unemployment, particularly of the young, leading to social unrest and migration from south to north, and possibly increasing levels of organised crime and terrorist networks. Politically, one sees the rise of nationalism, the lack of respect for the political class, the toppling of Governments and action of any sort against those in power—as happened even over the weekend in the Italian local elections. Clearly there is a vast challenge, and there are choices. No one seriously claims that the

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Queen’s Speech or this little Bill in any way recognises or rises to the challenge. The Bill tells us a little about the priorities of the Government—the Queen’s Speech even more. The Bill is not irrelevant, although it may be somewhat inconsequential. However, it perhaps gives the misleading impression that we can isolate ourselves from the troubles on the continent. We cannot. We must find bilateral and other means of assisting whenever we can.

There is no evidence that the Government, or indeed the population of this country, recognise the scale of the challenge. The foundations of Europe are being shaken and we need to confront that now. The speech of the noble Lord, Lord Dobbs, was on that theme. We need to confront these vast challenges—this, perhaps, 1957 moment—yes, in a spirit of historical understanding; yes, in a spirit of sensitivity to the problems of our fellow citizens of Europe in Greece; and yes, also with a readiness to look radically at solutions which we must ultimately face.

7.19 pm

Lord Reid of Cardowan: My Lords, I wish to make three simple observations in the gap. The first is that the recession and the problems of the eurozone may be related but they are actually distinct. The recession is a global challenge; the eurozone is a home-grown European problem because it is based on the wretchedly misconceived delusion that you can bring together 17 or more nations of varying productivity and competitiveness and so on and merge them by an act of sheer political will into an economic reality other than the one that exists. It is probably the biggest political misjudgment since Versailles and may lead to the same form of consequences. Incidentally, on that subject, not all red lines were abandoned by the previous Government, as has been suggested. One that was maintained was the demand for convergence before joining the euro, and it was maintained in bright red because it was a demand that could never be met in our lifetime, which is precisely why it was there.

The second point arising from that is that the problem is therefore chronic and not acute. It runs right through the eurozone itself. It is a fundamental problem and my great fear is that the cure will be worse than the disease. The noble Lord, Lord Dobbs, spoke of the treaty of Versailles and the economic consequences in Germany. However, it was not the economic consequences alone that led to the extreme social and political instability but the perception that they were being imposed from outside. Therefore, if the cure for the eurozone is further centralisation in Brussels, which is at the centre and is seen to be a frontage for Germany, it will not cure the problem. It was predictable and predicted that social and political instability would be added to financial instability, and that is precisely what is happening in Greece.

Thirdly and finally, it is not anti-European to point these things out. It is not anti-European to argue against the eurozone. It is not an act of friendship to encourage your friends to continue on a ruinous path which you believe will result in an even greater catastrophe for them. There is an old military adage, “Never reinforce failure”. If something is fundamentally flawed

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and failing, it is no act of friendship for us to encourage people to go in that direction. I wish that we had spent just half the money that we have spent trying to bail out the euro with every member inside it on something similar to a Marshall Plan—a really radical plan which recognises the fundamental flaw and then assists our European colleagues who have made the terrible mistake of joining the wretchedly misconceived eurozone to exit from it. So far as I am concerned, that would be a real act of European solidarity.

7.22 pm

Lord Liddle: My Lords, this is a small Bill consisting of two clauses but, as we have heard in this excellent debate, it is about the huge topic of the future of the euro. As the noble Lord, Lord Howell, explained to us with his usual clarity, the Bill is an enabling measure. We are legislating here not on the substance of the European stability mechanism but only on the enabling treaty change to allow it to happen. Labour recognises the need for this enabling measure. As the noble Lord, Lord Lamont, said, it is already priced into the markets. No one should kid themselves that the establishment of the European stability mechanism is a sufficient response to the crisis that we have now. There is an enormous crisis in Greece and a growing calamity of collective austerity. To that extent but not much more, I agree with my noble friend Lord Reid.

My noble friend Lord Giddens said that he had had enough of talking about being on the edge of precipices. Perhaps I may say what I think is at stake here. At stake is a crisis that threatens the success of the post-war settlement that we have seen in Europe and the stability and prosperity that the European Union has brought to Europe. That is what is at stake in this crisis. I disagree profoundly with the noble Lord, Lord Flight, and his parallel with the gold standard. The difference between the European Union and the gold standard is that it is a political union, and politics can do something about it. If leadership is shown we can avert a crisis that threatens to break up the post-war settlement.

What we need, as the noble Lord, Lord Hannay, said, is a bit more solidarity and a bit less emphasis on limited liability. How should we go about trying to save the situation? First, the firewall needs to be a lot bigger in scale and more flexible in operation. The existence of the stability mechanism cannot be a substitute for a central bank. The central bank must be willing and prepared to intervene decisively in the bond markets to stem self-fulfilling speculation and panic. I do not think that we will get eurobonds at this stage; I do not think that the Germans will agree to eurobonds until there is established a European fiscal authority. However, we could have a more flexible stability mechanism.

Secondly, the stability mechanism should be preparing now to act quickly on recapitalising the banks in Europe on a pan-eurozone basis. If responsibility for sorting out the banks remains with the national countries—the sovereigns—the problems of countries such as Spain can only get worse because sorting out the banks increases the fiscal problem; dealing with the fiscal problem involves a squeeze that makes austerity more severe; and the impact of this fiscal squeeze on growth ultimately also deepens the problems of bad

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loans and zombie banks. We have to deal with this on a pan-European level and the ESM is the body to do it.

Thirdly, we need a more balanced strategy—not choosing growth over austerity but a balanced strategy. François Hollande’s victory has changed the political weather in Europe. There is a growth plan under preparation in Brussels. We have heard about it in our debate—unspent structural funds to be used better, recapitalisation of the European investment bank and an experiment in project bonds. Put with that, the noble Lord, Lord Davies of Stamford, talked about the need for structural reforms and the need to revive the single market which Prime Minister Monti is so behind. That is a credible package. They are welcome initiatives but from our side we not think that they are enough. For one thing, their impact would take too long to work. Infrastructure schemes and renewable energy projects are rarely ready to go. Southern Europe needs stimulus to growth now.

Lord Davies of Stamford: I am grateful to my noble friend for giving way. He will be aware that in Greece the motorway building programme was stopped midstream because of the bailout conditions. Those projects are shovel ready—a lot of work has been done on them and they are all ready to go. Some financing there could affect demand very rapidly.

Lord Liddle: The noble Lord, Lord Davies, is absolutely right. In addition to infrastructure, I think that we need a more moderate pace of deficit reduction. The Commission argues that the fiscal compact gives you all the flexibility that you need in a crisis situation. That should be done. Secondly, we should be mobilising the structural funds to tackle the employment issues, particularly the fact that in countries such as Greece and Spain, getting on for half of young people are out of work which is completely unsustainable socially and politically. It is also the case that a major competitive weakness of southern Europe is the low skills level of its workforce. That must be addressed from Europe through the structural funds—a crash programme of social investment in human capital.

Thirdly, the eurozone needs more balance between the strong and the weak in the urgent competitiveness adjustments that it must make. Stronger countries such as Germany have room for manoeuvre. Noble Lords talked about higher wages for German workers, which are certainly affordable. German wages have gone up very little despite the country’s enormous export success. I am glad that there is now a consensus between the Social Democrats and Christian Democrats on the introduction of a national minimum wage. Germany would have to tolerate only a bit more inflation to help the south, which is suffering debt-trapped deflation. That would enable the ECB to meet and maintain its target level of inflation of around 2% across the whole eurozone.

Our hope is that the political ramifications of the Hollande victory will result in a wider and bolder set of actions to build a stronger firewall, recapitalise the banks, adjust the pace of deficit reduction, offer immediate help on jobs and increase demand in countries with

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surpluses. That will not get us out of the need to make harsh adjustments. However, if we continue with collective austerity it will lead to collective suicide.

What is the coalition’s view? Is it still backing Mrs Merkel’s priority of fiscal austerity, which has been its policy at home for the past two years? Or is it undergoing a latter-day Keynesian conversion to the need for growth in Europe? If the eurozone can have a plan B, can we not have one at home? That is what we need. It is very odd for a Eurosceptic Conservative Party to argue that it is all right to have additional public borrowing through the EIB and project bonds at European level, but that of course it would be a complete disaster to tolerate any flexibility in the public borrowing of the UK. I find this an amusing contradiction in the present situation.

That confusion and contradiction, with a sharp eye for public relations, have been characteristic of the Government’s conduct of their European policy. As the noble Lord, Lord Williamson, said, they treat the eurozone as a convenient whipping boy to cover their own failures. As we know, last year growth in the eurozone was higher than in the UK. I am interpreting what the noble Lord, Lord Williamson, said.

Lord Williamson of Horton: It was a rather broad interpretation: the size of the Atlantic.

Lord Liddle: I apologise to the noble Lord, but the point is surely valid. Growth last year in the eurozone was twice that in the UK. Therefore, to blame the eurozone for the present double dip is nonsense.

The big point that the Eurosceptics fail to understand is that we cannot avoid the consequences of the euro by being out of it. In or out, our future is deeply affected because of our exports and the interlinking of our financial system. As Robert Chote said, if Greece exits, who knows what will happen? We may never in the foreseeable future recover the level of output that we had in 2008. A policy of splendid isolation from the continent was never realistic for Britain, but in the world of globalisation and economic integration it does not work at all.

Nor is our isolation very splendid. We are losing influence and clout in Europe to a dangerous degree. I will give one telling illustration. The Prime Minister claimed that the reason he used the veto and walked out of the December European meeting was that his partners would not accept a set of proposals that he tabled at 2 am in order to protect the City of London. A couple of weeks ago, on the capital requirements directive, the Chancellor, George Osborne, and the British for the first time found themselves outvoted by 26 to one at ECOFIN on a key question of financial regulation. The Chancellor has now recognised that he has to go along with the majority. That is not an effective use of the British veto. It just shows how influence is draining away from us at the moment.

Lord Flight: I was under the impression that the Chancellor had eventually obtained agreement to his point, which was that there could be some flexibility in the capital ratio of banks, with a view to the UK being rather more demanding than the rest of the EU.

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Lord Liddle: I am sure that that is the Chancellor’s interpretation.

I recognise that there are some distinguished Members of this House who are long-term supporters of British membership of the European Union, but never believed that the euro could be made to work. We had wonderful speeches from the noble Lords, Lord Lamont and Lord Lawson, but I do not agree with what the noble Lord, Lord Lawson, said. He said that monetary union will work only if you have what the Germans call the coronation theory—the customs union first, the political union and then the monetary union to crown it.

I recognise that the euro was set up on a flawed basis. I thought that as the problems occurred they would be addressed incrementally and that reforms would be introduced that would make the system work. The trouble is that we have had a cushy decade of total complacency—it was a cushy decade for the UK as much as it was for the eurozone—in which the impetus for reform was completely lost. Short of federal union, if the eurozone took the kind of steps that Labour is advocating now it would have a viable future.

Lord Reid of Cardowan: Would my noble colleague consider that perhaps the problem was not complacency but precisely the assumptions that he has outlined to us: that as problems arose, incrementally we would go towards a central state in Europe and no one would ask the peoples of the nations of Europe? That is precisely the problem because what is being suggested now is one of these huge incremental steps. I promise him that there will be a reaction of nationalism in Europe because it will require not only centralisation but the imposition of austerity from the centre. We will create the very conditions that caused such resentment in Germany in the 1920s and 1930s.

Lord Liddle: I have the greatest respect for my noble friend Lord Reid, and in my life I have learnt an awful lot from him. However, his assumption that the only alternative to where we are now is a central state is fallacious. What have been lacking in the past 10 years are the incremental reforms of the kind that I have outlined that would have made the euro work.

I have gone on too long. I believe the consequences of a euro break-up, which some noble Lords seem to want to will on, would be horrendous. Eurosceptics make a fundamental mistake in thinking that for a country such as Greece, exit from the euro would solve its problems. A lot of British people think that it would be a classic devaluation, rather like our exit from the ERM in 1992. It would be nothing like that. Ordinary people’s savings would be wiped out as the Greek banks collapsed. There would be severe additional spending cuts, because with all borrowing cut off the Government would be unable to finance the deficit. They would have to cut welfare benefits and public pay. The new currency would plummet in value because there would be no private inflows of capital to sustain the balance of payments. It would be an economic disaster zone.

There would be huge social tensions between the better-off, who had already got their money out of the country, and the wage earners, the poor and the unemployed, who would have to live on the devalued

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drachma. We would see—here I agree with my noble friend Lord Anderson—the emergence of a failed state on Europe’s south-eastern flank, with incalculable consequences for relationships with Cyprus, Turkey and the rest of the Balkans. As my noble friend Lord Reid knows well, this is a part of the world on which we have spent blood and treasure over the past two decades to try to stabilise. Kick the Greeks out of the euro, and what are we going to do about stability in the Balkans? It is just too awful to contemplate. That is why the euro must, and can, be saved—if we adopt the right policies to do so.

The noble Lord, Lord Dobbs, spoke eloquently about his lessons of history. My lesson would be that a Greek exit would be followed by competitive devaluation, protectionism, a run on other countries, terrible contagion problems and an outbreak of nationalism. Conceivably, it could return Europe to the inter-war years, so I want Britain to play a constructive, committed and engaged role in trying to make this thing work, not a carping, hectoring and lecturing one. We need a rescue, we need the ESM, and that is why we need this Bill.

7.42 pm

Lord Howell of Guildford: My Lords, I congratulate your Lordships on the sweep of your comments and magnificence of oratory in addressing this very modest Bill. I have listened with something verging on pleasure to the expositions of the noble Lord, Lord Liddle. They were very eloquent, but whether they related precisely to the policy of Her Majesty’s Opposition I am not so clear, and whether they related much to the Bill I am not so clear about either. But it was good stuff and I thank the noble Lord for his contribution.

I want to emphasise that many of the issues have given us a marvellous opportunity to air in your Lordships’ House the bigger issues surrounding the whole story of the eurozone and how it fits into the European Union, as well as how the European Union is or is not evolving to meet the challenges of the 21st century. I am not going to take the centre stage about Europe, much as I would love to do so, but will merely concentrate on aspects of the Bill.

There is no illusion about this Bill and we do not see it as magic medicine. We simply believe that it will help to bring order rather than disorder whichever way things go, and who can tell? Experts say they know the answer. We have been told by my noble friend Lord Lamont that it has all been priced into the market, which is wonderful if that is the case, but sometimes the market can get things terribly wrong. We believe that the Bill can make a net contribution, perhaps quite a substantial one, to the pattern of order rather than disorder. I put it no higher than that and make no greater claims for it.

Perhaps I may remind noble Lords of why we have a Bill before us at all. It is because of the increased public and parliamentary control over EU treaty changes that we committed to in the coalition agreement—it was the coalition that put that forward—and delivered through the European Union Act 2011. Therefore, this treaty amendment requires primary legislation. The amendment has already been considered and was debated by Parliament and passed by both Houses last

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March; there was no opposition in the House at that time. The arguments for the treaty amendment were relevant then and, in a sense, as the bigger crisis has grown and the uncertainties confronting us have magnified, the case for making a move of this kind as a contribution to trying to steady the situation and stabilise an unstable pattern is stronger than it was even when we debated it 14 months ago.

As I explained at the beginning, in return for agreeing to the treaty amendment the Prime Minister secured that once the ESM is established, Article 122(2), on which basis the EFSM was established, should no longer be used for such purposes. Therefore, our liability for future euro area financial assistance programmes under the EU budget will be removed, and that is directly in our interest.

My noble friend Lord Lamont asked just how solid this Article 122(2) decision is. He is right that it is a political decision and not a treaty agreement, but the decision itself, under Recital 4, says very clearly that Article 122(2) should not be used. That was a unanimous decision of all 27 members of the European Union and it would require a unanimous decision to undo it. My noble friend Lord Lamont can still say that is not as good as the absolute of being locked into a treaty, but it is almost impossible to imagine how we would proceed with undoing a unanimous decision, which very clearly has been made in very good faith and is underpinned by the unanimity rule of the European Union. I hope that reassures him. It probably will not reassure him completely, but that is a very firm and clear position.

Secondly, as the European crisis has gone from bad to worse, this is plainly having a chilling effect on the economy. I do not quite see how anyone can avoid that obvious fact. As the Prime Minister, the Foreign Secretary and the Chancellor have repeatedly made clear, stability in the eurozone states—and I choose my words carefully—is directly in the UK’s interest. If there was growth in the European economies rather than the stagnation and indeed the shrinkage that are now being predicted, that would be one of the keys to growth in the UK economy.

We rely on the eurozone countries for a very large part of our trade—40% is the estimate; it is more for the total of the European Union—and it is only part of the picture. Restored, confident stability in the eurozone states is directly in our national interest, and the resolution of the eurozone debt crisis would be a major boost to confidence in the British economy. I do not know whether it is priced into the market; some people say that it is beginning to be so.

Those are my broad comments. I have not gone nearly as far as some of your Lordships in discussing the whole history of the scene, and there have been some fascinating speeches from my noble friend Lord Dobbs and many others about the past, but those are the immediate considerations that we are looking at with this two-clause Bill.

I will now turn to some of the points made. If I do not refer to every speech, it is not because I do not think that some of the speeches were quite brilliant but because they perhaps did not raise precise questions but merely added their wisdom to the general debate.

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The noble Lord, Lord Radice, began by saying that we should not stand aloof. I do not think that we are standing aloof. This Article 136 change alone is proof that we are not standing aloof and that we are providing not just comfort but a sound legal base for eurozone countries to go ahead with the ESM. Eurozone countries believe, although others would dispute it, that the ESM is one of the building blocks of the essential firewall to hold the eurozone together; or, as some speculate, if one country was breaking away, the ESM would hold it together even more firmly against further contagion.

I therefore do not think that the suggestion of aloofness stands, combined as it is with the more general view asserted by several of your Lordships that we are disengaged from our role in the European Union region. That is not true. My right honourable friend the Foreign Secretary and indeed the whole Government have argued, rightly, that the great growth is increasingly going to come in Asia, Africa and the emerging markets. We must therefore pay attention to those, but not to the exclusion of the fact that we live in a very vital and potentially dynamic area full of creativity and attractions, and that we must somehow see its revival.

I have before me a list here of some of the growth initiatives that the UK Government are currently pressing. For all I know, these things may be discussed around the dinner table at the informal European Council meeting tonight. We have pressed very hard on the completion of the digital single market, which we think would see a 4% increase in the EU GDP over a 10-year period, and want to see it completed. We want to see full implementation of the services directive, which could add a further 1.8% to GDP. We are pressing for the completion of all open bilateral EU trade deals, which would add another €60 billion to the EU economy. A deal with the US, if we can bring it off, would be bigger than any other free trade agreement. We want the Commission to commit itself to a much more vigorous, new programme to reduce the overall regulatory burden. Those are just some of the growth points we are pushing and I think we will make some progress on all of them. To talk in terms of aloofness is not to represent the situation as it truly is.

My noble friend Lady Falkner rightly said that the Greek default is not easy—people talk about the possibilities of Greek default perhaps a little cavalierly, without being entirely clear whether we are talking about a nation going gently downstream through some mild rapids or being pushed over Niagara Falls. It might be either, and one has to be realistically responsible in analysing that and understanding that possibility.

I have already mentioned my noble friend Lord Lamont in relation to Article 122 and pricing in the markets. He asked me a series of very important questions about the ESM, which I am not deliberately ducking. I have here some very elaborate notes answering those questions on the ESM treaty, but we are not talking about that tonight. That is an intergovernmental treaty between the eurozone countries. We are talking about the treaty change that we are undertaking in Article 136. I hope that he will forgive me, and that other noble Lords will understand, if I do not read out

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all the details about AAA securities and other aspects of the ESM treaty. I will write to him in so far as I can answer them, but they are matters for the eurozone and not for this Bill.

The noble Lord, Lord Giddens, whose speeches I always enjoy, came again to this familiar theme that somehow Britain is marginal. I must say that I find this whole concept of being marginal to the problems of the eurozone yesterday’s argument and very dated. Many people now see this island, the United Kingdom —or these islands—as a safe haven, into which money, investment and wealth are pouring at a considerable rate. What does he mean by marginal? One could argue that a harbour that is reasonably well protected is marginal to the storm outside. It is not—it is merely the safe place to which people are going to come. Of course, he is right that if we are going to see the new fiscal pact lead to major political developments in the eurozone—and there is obvious dispute in this Chamber as to whether it will lead that way or to further fragmentation—then we are getting an evolving and new kind of Europe. I hope everyone will contribute to the debate on how that new kind of Europe should be best organised to meet the challenges of the 21st century. That is what I would say to the marginalists who keep on about isolation and so on. I do not think that is a realistic view of the situation.

The noble Lord, Lord Lawson, and I had a good-natured hair-splitting about whether I was arguing one thing or another. I hope that I have made it clear that we are talking about the eurozone countries. The euro currency is another matter but he must concede, as I am sure that all your Lordships concede, that in the states that happen to be European states—including our great neighbours France and Germany—what happens to them and their economies clearly affects our country in a very big way. I do not think that that can be questioned.

My noble friend Lord Flight asked about the EFSM and whether it is cash. It is €48 billion of loans to Portugal and Ireland, at the moment, and the intention is that they will be repaid. We would be liable for 14.6% of anything that was not repaid but that would balloon up to the sort of figure referred to in the document that he mentioned only if every single one of the countries, except us, defaulted. It is technically true that we would then be liable but that seems to be so unlikely as to be on the verge of absurdity. Exposure to the ECB is only for a capital contribution for its operating costs, which is €58 million—not billions but millions. By the standards of these huge sums we are talking about, that is a fairly limited sum. Because we are a non-eurozone member, our liability does not go beyond that.

I think that my noble friend spoke about the EIB, which is a bank where there have been no defaulted loans at all. It has €43 billion of our capital and we would be in danger of exposure to that only if the bank itself was in danger, which it clearly is not. He may or may not have spoken about the EU balance of payments facility, which has been raised. It may have been raised in the document we talked about, but it is only for non-euro members. The liability arises with members who are not members of the eurozone, so it does not really arise in this case.

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The noble Lord, Lord Stoddart, then made a speech which did not surprise me. He is a valiant trooper and worker in his own seam and of his own view, which he has put over the years. I admire valiance and courage even when I do not agree with it. He asked why we were not having a referendum when the Irish were. Of course, the Irish are having a referendum not on Article 136 but on the fiscal compact, which is somewhat different.

My noble friend Lord Dobbs made an excellent speech which I thoroughly enjoyed. The noble Lord, Lord Davies of Stamford, began by saying that he was very happy, which alarmed me, but he soon got on to the unhappy part and seemed to be asking why we were not more part of this system. The implication was, “Why aren’t we in the eurozone?”. I do not think we need argue that out at the moment. We are very glad that we are not in the eurozone.

My noble friend Lord Dundee talked about co-ordination between the Council of Europe and the EU. His work on the Council of Europe has been marvellous and I see what he was getting at, but it does not directly arise from the actual Bill.

The noble Lord, Lord Hannay, is right that I was surprised and delighted—I think that is the phrase—that he gave support. I was all set to debate with him something he said the other night: that he did not understand the concept of network power. I will take him aside on another occasion and explain to him that this is a very important concept. I would like brilliant minds such as his to engage with it to realise how we handle the positions of this country in the future, which is not entirely by relying on the blocs and alliances of the 20th century but by moving on.

There were other excellent speeches, which I must be forgiven for not commenting on in detail, from my noble friend Lord Risby and from the noble Lords, Lord Anderson and Lord Reid. The noble Lord, Lord Reid, particularly echoed a fundamental view put so trenchantly by my noble friend Lord Lawson that this can never fly: that the eurozone is fundamentally flawed and will do nothing but bring more division and difficulty. That is a view but it is not the view of the Government, because we are not sure how things are going to work out. Anyone who claims that they are sure is misleading. We would like to see the eurozone system stabilised in one way or another. We think that there are great dangers for us all in not doing so. How that will be developed and what Mrs Merkel and the German Government will decide about the short-term question of their flexibility in relation to the Greek bailout terms are questions hanging in the air that I cannot answer from this Dispatch Box; and nor, I think, can anybody else. We believe that current events have demonstrated the importance of credible policy action to attempt to maintain and restore market confidence, which is clearly weak. We think now is the time to act. The eurozone has to take some kind of concerted action to sort itself out, and this legislation allows it to take a step in the right direction.

The treaty amendment is very much in this country’s interest. The establishment of the ESM by the eurozone member states will remove the UK’s liability for future

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euro area financial assistance programmes under the EU budget. Establishing the ESM, with the support of this Bill, will help eurozone member states find the path to the financial stability that in the end they must have. If they fail to have it, it will damage us all. That path to stability will have benefits for the UK and beyond. The ESM is only part of the way forward out

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of the eurozone crisis, but it is an important and valuable one. I therefore hope that your Lordships will share my views on this legislation.

Bill read a second time and committed to a Committee of the Whole House.

House adjourned at 8.02 pm.