Bank of England (Economic Affairs Committee Report)
Lord Lamont of Lerwick Excerpts(2 weeks, 4 days ago)
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Lord Lamont of Lerwick (Con)
My Lords, I congratulate the noble Lord, Lord Bridges, on his excellent speech and this very good report. I was not a member of the committee but I am most impressed by the report and agree with all the conclusions. I will concentrate on recommendations 10 to 13, which deal with forecasting, the alleged lack of diversity, and groupthink—subjects mentioned by the noble Lord, Lord Bridges. I want also to look at the Bernanke report, which we now have.
In discussing forecasting, it is important, as I think the noble Lord, Lord Macpherson, suggested, to demythologise the subject. First, contrary to what many people believe, policy is not dependent on forecasts. Secondly, we do not, and should not, elevate forecasters into some priestly caste examining the entrails and telling us whether the gods will look favourably on a particular action. The gods are often deaf. Forecasting responds to a deep human need but, alas, the forecasts are often wrong.
There are several reasons why forecasts are fallible. One, which we should welcome, is that human beings are not machines or computers. They do not always react as they did last time. Another is the limits of government statistics. I do not think I should be saying this, but do we really believe that we can add up all activity in the economy month by month and measure changes to the last month within a fraction of a percentage point? Inevitably, government statistics are continually revised. Recessions that once undermined confidence and spread doom mysteriously disappear years later. Then there are exceptional events. You cannot forecast a pandemic. You may know that one is likely, but you do not know when. These are exceptional events but, unfortunately, history is exceptional events.
In his response, Dr Bernanke made some constructive suggestions for improving the Bank’s forecasting capacity to do with staff, software and hardware, but I suspect that these are all at the margin. They will always be subject to the limitations inherent in forecasting that the noble Lord, Lord Macpherson, referred to, and one cannot escape the need for an element of judgment.
The governor, Mr Bailey, pointed out that the Bank has not one model but several, but that invites the aphorism: all models fail but some are useful. Dr Bernanke makes this very point: a forecast can be inaccurate and still be useful in enabling us to understand why the policy was wrong. Forecasts make a central bank more transparent and accountable, particularly if a policy has been consistently applied but the outcome is not as forecast.
Dr Bernanke’s comments on the Bank’s forecasts are, interestingly, somewhat milder than the newspaper headlines. He points out that the Bank was in the middle of the pack of central banks when it came to inflation and output. Its belief that inflation was transitory was one shared by many central banks, but that merely poses another important question: why did so many central banks get it so wrong? Was it a case of groupthink? Interestingly, Dr Bernanke defends the Bank of England against accusations of a lack of diversity in the MPC. Surprisingly, his view is that there is more diversity than in other central banks, and some of the witnesses, including Charles Goodhart, agreed, so it will be interesting to have the Minister’s comments.
Too much diversity of thought for the sake of diversity itself can push a committee towards artificial consensus in which no one believes. This is where the fan charts, so loved by the Bank of England, have been so convenient. Who can disagree with a fan chart covering so many possible outcomes? As in an oriental dance, a fan can be used to conceal as well as to reveal. For that reason, Dr Bernanke recommends getting rid of the fan charts and substituting conditional forecasts, which he terms “scenarios”. This might help to deal with the problem of exceptional events, but will it contribute at all to forward guidance?
What about groupthink between central bankers themselves? There may be value in forecasts that are wrong, but there is a difference between predicting the right trajectory with errors and predicting a completely wrong trajectory. Many central banks thought the pandemic would continue to be deflationary, hence the resort to a huge injection of quantitative easing. At the time, a number of commentators, including Paul Tucker, the former deputy governor of the Bank, questioned why central banks wanted to stimulate aggregate demand just as aggregate supply was closing down. It was almost as though there was an assumption that QE ought to be the default response to every crisis. That would surely be a mistake.
Dr Bernanke is a disciple of Milton Friedman. I was therefore surprised that he did not address the point made in conclusion 11 of the report that the MPC did not seem to have had any detailed discussions about the money supply or made any analysis of monetary aggregates and their effect on inflation. To be fair, the governor denied that this was the case, but Roger Bootle said in his evidence:
“Over the past few years … we have gone from a situation in which economic policy … was governed entirely according to … a certain definition of the broad money supply”—
that was the policy in the early 1980s—
“to one in which, apparently, the Bank took no notice of monetary aggregates at all”.
I was particularly interested in this, for the very reason that the noble Lord, Lord Macpherson, kindly mentioned: in 1992, when we introduced a new framework for policy, namely inflation targeting, the target was accompanied by target ranges for monetary aggregates. The regime of inflation targeting was continued and carried through to Bank of England independence by Gordon Brown, but the ranges for monetary aggregates were discontinued. Inflation targeting is not a perfect policy. It can be criticised for being backward-looking and a rear-mirror policy. But monetary policy, as Dr Bernanke reminds us, operates with time lags and therefore enables policymakers to focus on not just the current rate of inflation but what we expect inflation might be in two years’ time.
The report makes the point that the Bank has too many secondary objectives to which it is asked to have regard. Many of these objectives are not really affected by the instruments available to the Bank. This must be true of climate change. The Government ought to be clear that tackling climate change is a matter for the Government. To expect the Bank to lead on that makes no sense. I quote the governor himself, who said that climate change
“is not really an issue of monetary policy”.
In addition to the inflation target, the Bank is also charged with supporting the Government’s objectives on growth and employment. A major change was introduced in 2013, when George Osborne gave the Bank a new remit in which the MPC was tasked with setting out the trade-off when deciding how long it would be before an above-target inflation rate came back to target. As the governor said, these changes gave the Bank much more flexibility over how quickly it could bring inflation back to target. This considerable latitude, which is welcome in one sense, may be another reason why the Bank was so slow to raise interest rates and get inflation back towards target—and we are not there yet. As things have demonstrated in the United States, the last furlong may still prove difficult. Indeed, one former central banker said to me that, if we get inflation back to target without positive real rates of interest, it will be the first time this has ever happened. Let us hope that the optimists are right and that we are heading back towards target.
As my noble friend Lord Bridges said, the Bank is very different from the one made independent in 1997-98. It has expanded its discretion and the tools it uses. Its credibility matters. So it is important that it is robustly scrutinised and challenged, precisely as this report and this debate are doing.
Spring Budget 2024
Lord Lamont of Lerwick Excerpts(2 months ago)
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Lord Lamont of Lerwick (Con)
My Lords, as the noble Lord, Lord Macpherson, has said, the Chancellor faced a very difficult set of conflicting challenges. Having myself delivered one Budget on the very eve of a general election, I particularly appreciate the almost intolerable pressure that was on the Chancellor—although I think he delivered a Budget that was both responsible and constructive.
In the recent past we have been fed an unremitting diet of gloom, which has caused a certain outbreak of schadenfreude in some quarters. But this Budget contains some modest rays of hope. There are definite grounds, as the Minister said, for believing that we are turning a corner. Fifteen months ago, the Bank of England was forecasting that the economy would contract by 4.1% last year. The OBR was saying much the same. If we had been told then that both of them were going to be proved wrong, that growth would pick up this year, that inflation would be expected shortly to reach its 2% target and that the government deficit and debt were now expected to edge down over a five-year horizon, I think we would have been both sceptical and rather pleased.
Growth may be modest, as has been emphasised already, but so it is everywhere in Europe. Now, as the Minister said, the UK is forecast by the IMF to experience faster growth than any major European economy over the next five years. GDP per capita, which the noble Lord, Lord Eatwell, chose to concentrate on, is forecast to increase by 1% to 1.5% per year, way above the figures he was quoting. That is better than the economy has achieved over the last five or 10 years. Even Bloomberg, hardly an enthusiast for the post-Brexit UK, declared, “Britain Isn’t a Basket Case After All”, and its chief economist announced that Britain might surpass the official forecasts this year.
The centrepiece in the Budget was the reduction in national insurance contributions. It was a bold decision, of course, to cut a tax not paid by the retired, but I think it was the right one because of the overriding need to incentivise work.
History, as we all know, consists of a series of exceptional events. But, when contemplating our present discontents, people are inclined just to dismiss or forget as excuses the extreme exceptional events of the last five years, which have been referred to in this debate. Covid resulted in a drop in GDP of some 10% and consequent expenditure of £500 billion on supporting the incomes of people through the crisis. After the energy price hike, it was always inevitable that living standards would fall for a period. If I have a criticism of the Government, it would be that they did not make that clearer at the very beginning.
Our situation is not different from those of other countries. Living standards have fallen in Germany and in Italy in the last few years. Some critics complained that the Chancellor in his Statement was not bolder and should have announced larger tax cuts. Anyone who advocates such a course needs to explain how they would deal with what the IFS has called the most challenging fiscal situation for 80 years, with our debt just below 100% of GDP, and debt interest which not so long ago reached a figure of £100 billion a year. Tax cuts do not automatically pay for themselves—although I do not entirely agree with Lord Eatwell about the Laffer curve.
If you spend £500 billion—50% of one year’s tax revenues—on Covid measures supporting people’s living standards, it is almost inevitable that the tax burden will increase somewhat. Our tax burden after this involuntary forced increase is still below those of major European countries. Of course it is still too high, but it is not a decision the Government made easily, willingly or with great enthusiasm. It does not mean that living standards cannot in time begin to recover, as we are seeing. Wages have risen by 10% in the last two years, and the national insurance reductions have cut in half the effects of freezing tax thresholds up to this point. We have been through a tsunami but we have weathered the storm, and I hope that, geopolitics permitting, calmer waters might lie ahead. Sustained growth does not come from turbocharging demand: experience teaches us that turbocharging usually ends badly. Sustained growth has to come from the supply side, from being more competitive, including competitive taxes of course, alongside innovation and an adequate labour supply.
On that point, a major challenge for the economy is the degree of economic inactivity. Some 9.3 million people of working age are currently economically inactive. The tax measures in the Budget and other measures increase the labour supply over the survey period by the equivalent of nearly 200,000 full-time employees. But these figures, impressive though they are, are dwarfed by the increase in the number of incapacity benefit claimants, up from 2.5 million in 2019-20 to 3.1 million in 2022-23. Two-thirds of claims for incapacity benefit now involve mental and behavioural disorders. I do not want to cause any offence, but I think the Prime Minister was quite right recently to ask: is the country really three times sicker than it was a decade ago? Can the Minister say what action the Government will take to tackle this crucial issue? I read in the newspapers that the Secretary of State for Work and Pensions is examining the capability assessments and thinks that, over time, this might release several hundred thousand people on to the labour market. I would be grateful if the Minister could give us some details of this.
A very significant further measure in the Budget was the productivity plan for the NHS. It is appalling that the UK public sector is less efficient than it was in 1997. The Chancellor believes that by investing 3.4 billion, the plan could unlock £35 billion-worth of savings in the NHS, 10 times the original sum. This, in theory, makes a lot of sense. Pouring an increasing amount of money into a broken system is pointless, as Wes Streeting has said.
I know that this is not a PR stunt but a serious initiative on which the Cabinet Office Minister has been working for some time. However, can we be absolutely sure that the Government really can deliver these productivity gains on the stated timeline? The Government’s record on productivity-enhancing IT systems is poor. If the productivity gains fail to materialise, the Government’s spending projections —already very tight—will become unrealisable and unaffordable. It is vital that these targets are met.
I welcome this Budget. It achieves the right balance in a difficult situation and gives a modest boost to the economy. I commend it to this House.
Bank Accounts
Lord Lamont of Lerwick Excerpts(10 months ago)
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Lord Lamont of Lerwick
To ask His Majesty’s Government, in light of the recent assurances from the Economic Secretary to the Treasury, what action they intend to take to ensure that no person’s bank account should be closed for political reasons.
Lord Lamont of Lerwick (Con)
My Lords, I beg leave to ask a Question of which I have given private notice. In asking this Question, I declare that I have a bank account with NatWest.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, the Government unequivocally support the right to lawful free speech and consider it unacceptable for banks or other payment service providers to terminate contracts on these grounds. Earlier this year, the Government launched a call for evidence which included questions on the issue of payment account terminations and freedom of expression. We will soon set out plans for enhanced requirements applying to the termination of payment accounts.
Lord Lamont of Lerwick (Con)
My Lords, I am grateful to my noble friend for confirming that it is the Government’s view that no bank account should be closed for political reasons. Does she therefore agree that it is not for a bank to judge whether someone’s personal or political views accord with the so-called “values” of the bank and that that is not a reason for closing an account? Equally, does she agree that it is not for a bank to judge whether someone’s views are out of tone with wider society and then use that as the pretext for closing an account? Is this not a fundamental issue which ought to concern everyone of every party—left, right, centre or flat earth—who might all be the next person to suffer under what is happening? Will my noble friend ensure that the number of cases that have been reported recently, which, prima facie, seem to indicate that accounts may have been closed for political reasons, are referred to the regulator and investigated? Will she confirm that this a fundamental right of free speech in a free society?
Baroness Penn (Con)
I absolutely agree with my noble friend and reiterate once again that the Government unequivocally support the right to lawful free speech and consider it completely unacceptable for banks or other payment service providers to terminate contracts on these grounds. We issued a call for evidence that covered these issues and will consider all evidence as part of that. As my noble friend noted, I am sure that the regulator will also want to consider these matters.
UK Economy: Growth, Inflation and Productivity
Lord Lamont of Lerwick Excerpts(10 months, 3 weeks ago)
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Lord Lamont of Lerwick (Con)
My Lords, I thank the noble Lord, Lord Eatwell, for initiating this debate. It is always very interesting to listen to him; he always makes very thoughtful contributions.
I hope he will forgive me if I do not follow him on the long-term issues he outlined. This is because I want to concentrate on one part of what he talked about: inflation. The immediate problem this country faces is extremely serious. This is not because I want to ignore growth, but because I believe we cannot have sustained growth without first getting on top of inflation. Stability, sound finance and low inflation are preconditions of growth.
It is possible to be too downbeat about the UK’s economic growth. In 2020 and 2021, the UK had the highest economic growth of any G7 country. The eurozone is in recession, as is Germany. It is true that the UK has not recovered to its pre-Covid level, unlike several major European countries, but these are tiny differences in very small numbers. Some people talk about economic growth as though they are the first people ever to have thought of the idea—“With one bound, Jack will be free”. Of course, growth must be the ultimate objective of economic policy, but it cannot just be conjured into existence by politicians snapping their fingers.
Sadly, I do not believe that we can return from the present situation to inflation at 2% without a contraction—not a recession, but some contraction in activity—to realign demand with weaker supply. Of course, we have also to do what we can to increase supply. We need to bear in mind that, in this situation, the UK has a very tight labour market, with unemployment at 3.8%, 1 million vacancies and rising wages. We have a level of wage demands and wage increases that is incompatible with the 2% target set by the Bank of England.
Largely as a result of Covid and Ukraine, we have taxes that are far too high—and borrowing, for the same reasons, is also far too high and leaves little fiscal room for manoeuvre. Some suggest that the alternative to present policy is to seek a return to higher real incomes through economic growth and targeted tax cuts—again, with one bound Jack would be free. The hope that tax cuts and growth, if it materialised, would moderate demands for higher pay in the tight British labour market seems to me plainly illusory. If such an approach could ever have been on the cards, it plainly now cannot be after last year’s mini-Budget. Challenging the current approach risks upsetting market confidence.
As the noble Lord, Lord Eatwell, said, the latest inflation figures were extremely disappointing and, not to put a fine word on it, bad. Not only did inflation stop falling but core inflation actually increased, as did services inflation and the increase in wages. The UK is now an outlier in inflation, as the noble Lord said. We have a domestically generated element in our inflation. The Bank of England has responded by putting up rates by half a percentage point, and mortgage rates had anticipated that development and already risen in line with the market.
The changes in the mortgage market to more fixed-rate mortgages means that the impact of interest rate changes takes much longer today. The Resolution Foundation calculates that two-thirds of the impact of rising rates since 2021 still has to come through. Some 1.3 million people have fixed-rate mortgages expiring in the 12 months from 1 July. These figures have led to talk of a mortgage catastrophe impacting on the economy but, with a little flexibility and help from the banks, it need not be so. So far, mortgage holders have been remarkably resilient. This generation of mortgages were lent out far more cautiously than in previous cycles; the mortgage affordability tests imposed by the Bank of England mean that many borrowers already have a decent margin to cope with shocks.
Some voices have called for a government mortgage rescue package, but it makes no sense for the Bank of England to bear down on inflation by raising interest rates if, at the same time, the Government are to subsidise rising interest rates. Nor is it equitable to ask those not owning houses to subsidise those already on the ladder. Many renters pay a higher percentage of their income on rent than home owners do on mortgage payments. Regaining control is urgent, the best way to support home owners and essential for getting back growth.
Obviously, I support the independence of the Bank of England, and I supported it when Gordon Brown made that move, but the credibility of the Bank of England is on the line today. In the recent past, it has not sounded or acted as though it was determined to defeat inflation. In the summer of 2021, the Bank refused to halt the quantitative easing programme unleashed during Covid, even when it became inappropriate as prices accelerated and distortions in asset prices were obvious. In November that year, with inflation three times its target, the Bank was content to leave the base rate at 0.1%. If the Bank is to regain the confidence of investors, it needs to focus hard on this one core objective.
In recent years we have been through an extraordinary series of exceptional events. It is hardly surprising that growth, not just in this country but in many countries, has been slower than in the past. Some want to peddle illusory easy answers but, as the Prime Minister said, people know that if something is too good to be true, it is not true. Difficult as it is, I believe that the Government are on the right track, and I urge them not to be diverted.
British Banking Sector
Lord Lamont of Lerwick Excerpts(1 year, 2 months ago)
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Baroness Penn (Con)
My Lords, I emphasise to people at home the words of the Governor of the Bank of England that the UK banking system
“remains safe, sound, and well capitalised.”
The situation is different from 2008. Over the last 15 years, the Government and the Bank of England have taken robust action to strengthen the regulatory system and the resilience of the UK banking system. Specifically to the right reverend Prelate’s question, we have put in place a resolution regime to ensure that the failure of a bank can be managed in a way that minimises the impact on depositors, the financial system and public finances. I note that the resolution solution found for Silicon Valley Bank last week involved no UK taxpayer money whatever.
Lord Lamont of Lerwick (Con)
My Lords, is the implication of the right reverend Prelate’s question not a policy that would make banks far riskier than they already are? It is an extraordinary policy for him to advocate. I understand from the press that the Government were involved in the actions taken to save Credit Suisse and merge it with UBS, but a certain amount of disquiet has been caused by the preferential treatment that appears to have been given to shareholders rather than bondholders. Can she explain why this situation has arisen? Is the implication of that not rather disturbing for bondholders in other banks?
Autumn Statement 2022
Lord Lamont of Lerwick Excerpts(1 year, 5 months ago)
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Lord Lamont of Lerwick (Con)
My Lords, it is difficult to imagine a more difficult set of circumstances in which any Chancellor has had to frame a financial Statement to Parliament. Whatever the decisions, inevitably there will be predictable criticism from all sides: taxes are too high, borrowing could be a bit more, spending greater or less, according to taste. The Chancellor could not escape the shadow of the mini-Budget. It meant that, above all, he had to satisfy the markets that the national finances were sustainable.
Much public reaction to the Statement concentrated on the fall in living standards, which is indeed alarming and unprecedented, but it has been obvious, alas, for some time that a fall in living standards was absolutely inevitable because of the rise in imported energy relative to the price of exports. Sadly, no Government can protect all their citizens in circumstances such as these. I would argue that the Government have done a huge amount, spending over £100 billion supporting families and raising disposable income above where it would otherwise have been, but, alas, there is still a drop in living standards.
The Chancellor had to choose how much consolidation came from taxation and how much from cuts and expenditure, and he chose a balanced approach of 50:50. Given that many departmental budgets are under pressure because of inflation at this time, it seems improbable that he could have gone further, like cutting spending more. With inflation at 11%, protecting programmes in money terms, which the Chancellor has said he will do, means real cuts for certain departments.
The Chancellor was advised from many sources that you cannot raise taxes going into a recession. That, one might point out, flies in the face of historical evidence, such as the Budget of 1981, but leave that aside—that is in fact not what the Chancellor is doing. We are not tightening fiscal policy going into a recession. Most of the fiscal tightening falls in the latter part of the survey period, by which time, I hope, the recession will be over.
In the short term, borrowing actually increases, up by more than £64 billion this year and more than £40 billion the following year. The Chancellor raised taxes as a percentage of GDP by just over 1% during the survey period to their highest level since the war. Understandably, this leaves many of my noble friends very unhappy but the reason that tax as a proportion of GDP is at its highest level since the war is that spending as a proportion of GDP is at its highest level since the Second World War. Borrowing as a proportion of GDP is also approaching the same level, its highest since the war. All three are because of Covid, the secondary consequences of the Covid and the war in Ukraine.
Much of the increase in expenditure as a percentage of GDP—the measure of the so-called size of the state—over the survey period has come from indexation. The increases in both benefits and the triple lock increase spending-to-GDP ratios as indexation itself outstrips nominal GDP growth. Those who argued that we should take advantage of our second-lowest debt-to-GDP ratio in the G7 should look at what has happened to debt interest and why our previous financial position was, in many people’s opinion, an accident waiting to happen.
The noble Lord, Lord Fox, referred to debt interest but rather understated the problem. Debt interest has doubled from £56.4 billion last year to £120 billion this year, just slightly less than what we spend on the NHS. Much of this surge in debt was caused by indexed debt, which has nearly quadrupled from 6% of the stock of debt in 2001 to 22% this year. That process is part of the reason why, earlier this year, we saw some alarming predictions of how, in a few years’ time, debt in this country might begin to approach the levels in Italy or Japan.
Some people argue that the answer to all these problems is to go all out for growth through tax cuts, and that growth will float all these problems away. Unfortunately, however, we have another problem: severe inflation threatening to become embedded. At this moment, going for growth at all costs is likely to exacerbate inflation and probably end up exactly as the Barber boom did.
We use the phrase “cost of living” and realise the huge problems that there are for people, but we do not talk enough about the process of inflation itself. We need not just to protect people now but to prevent the situation becoming embedded and getting worse year after year. We need not just to stun the snake of inflation but to kill it. There is a real danger, as gas prices may come down, that we will end up living permanently—or for a long time—with a relatively high rate of inflation that does not go back to the 2% target where it ought to be.
Getting inflation down must be a top priority. We are in danger of forgetting, because it has been so long, the poison that inflation can inject. Getting on top of inflation is a job primarily for the Bank of England, which has not distinguished itself in recent years, but Governments also have a role to play. It is important that fiscal policy and monetary policy point in the same direction. Of course we also need growth, but we will not have growth if we do not get inflation down first. As Jim Callaghan reminded us,
“inflation is the mother and father of unemployment.”
Growth is not something that happens abracadabra because Governments will it or snap their fingers. Governments do not create growth but they can prevent it. What we need is a strategy to remove the obstacles to growth—a battery of non-inflationary supply-side measures, including training, infrastructure, deregulation and, most importantly, planning reform in the field of housing.
This Autumn Statement, against the background of a massive world crisis, makes some unavoidably tough decisions that are bound to be unpopular. However, in a very difficult situation, I believe that the Chancellor’s decisions are realistic and sensible. I commend them to the House.
Defined Benefit Pension Funds
Lord Lamont of Lerwick Excerpts(1 year, 6 months ago)
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Baroness Penn (Con)
My Lords, the Pensions Regulator and other regulators have said that they will want to look at what has happened and learn lessons. I also understand that the Work and Pensions Committee in the Commons is looking at this issue, including any changes to the Pensions Regulator, for example, that may need to be made. The Government look forward to reading the results of its findings.
Lord Lamont of Lerwick (Con)
My Lords, is the potential booby-trap in LDIs not the liquidity mismatch between the time it takes to sell the assets of pension funds and the demands of the hedge, which requires the margins to be met on the same day in cash? Is that not a strong argument for the liquidity buffer to be increased? Does it not also pose the question: to what extent did QE force people more and more into these assets?
Baroness Penn (Con)
My noble friend is absolutely right about the liquidity mismatch. My understanding is that there was a certain amount of flexibility shown in that; none the less, the Bank of England’s intervention was directed to address that specific problem. As for the QE policy, my noble friend will not be surprised to hear me say that that is for the Bank of England and I will not comment further on it.
Greece
Lord Lamont of Lerwick Excerpts(8 years, 10 months ago)
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Lord O’Neill of Gatley
My Lords, while I am sure an offer of Russian help could appear, it is within the aspirations of both Greece and its European colleagues and friends to solve the outstanding challenges between them, whatever is offered from Russia.
With respect to the further questions of the noble Lord, Lord West, we should be careful about what specifics we suggest we may offer until we see further evidence of what may emerge from the discussions tonight and tomorrow. As the Chancellor has said, we should be prepared for the worst but should actively seek to be in a position to help the Greek people and, of course, to protect our own economic interests.
Lord Lamont of Lerwick (Con)
My Lords, while it is true that the Syriza Government have made some bad policy decisions and have at times been very provocative, is it not also true that on one fundamental point they are right—in 2010 there should have been a much more extensive write-off of the Greek debt? If we are to have a sustainable situation in Greece, it requires, as the IMF has now said, a substantial further write-off of debt because the debt is not sustainable. This continuing extending and pretending is only shoring up more trouble in the long run.
Lord O’Neill of Gatley
My Lords, as my noble friend says, these opinions have been offered by many people, including in the past week or so, according to media reports, the IMF. It is not of great help in resolving issues today to reflect on what might or might not have happened in 2010. However, in the discussions that take place this evening and tomorrow, all sorts of options and ideas will be pursued to, I hope successfully, bring these growing economic risks and challenges under better control.
Genuine Economic and Monetary Union (EUC Report)
Lord Lamont of Lerwick Excerpts(9 years, 10 months ago)
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Lord Lamont of Lerwick (Con)
My Lords, I am a bit of an interloper in this debate, not having been a member of the committee. I congratulate the committee on the report and congratulate the noble Lord, Lord Harrison, on having chaired the committee. The report is useful and interesting. For those of us who try to follow what is happening in the eurozone and the EU, it is a good volume to have telling us all about the things that are going on.
I do not wish to follow the noble Lord, Lord Harrison, in all the directions that he went down, least of all his remarks about the goings-on relating to the nomination of the President of the Commission. I said to him the other day that I had worked with Mr Juncker. Although I found Mr Juncker helpful during our negotiations, it was absolutely right to oppose his nomination because of the important principle of the power of the European Parliament, which was threatening to usurp the decision. Giving that power to the European Parliament was a significant transfer of sovereignty and for that reason I think that the Prime Minister’s tactics in handling the situation were 100% right.
The noble Lord has on various occasions bemoaned our loss of influence. I am always puzzled by the argument about the loss of influence. Of course, if you are not part of something, you do not have so much influence. We do not have a lot of influence on the Federal Reserve Board. If you are not part of something such as the ECB, you lose a bit of influence with it. Although nobody other than my noble friend Lord Dykes speaks in favour of joining the euro today, the implication is always that we ought to join the euro, which is a bad thing, in order to have a bit of influence. Influence is not by itself an objective of policy.
The substance of the report, genuine economic and monetary union, is a puzzling concept, as the noble Lord, Lord Harrison, said. At Maastricht, the aim was always, as the report notes on page 11, to have a centralised monetary union and a decentralised economic and fiscal policy—what the report calls an asymmetry. But during the Maastricht negotiations and talks relating to it, whenever this was raised and whenever one said that surely the logic of monetary union was that there ought to be fiscal transfers, one was told that this monetary union was different. It would work on an entirely different basis; it would be like the gold standard. The impartial discipline of gold and the impartial discipline of the modern version of gold—euro budget surpluses—would ensure that this monetary union would work.
The concept of debt mutualisation, which features a lot in the report, was explicitly ruled out. It was a cardinal principle at the time, very much on Germany’s understandable insistence, that there should be no bailout mechanism. Of course, when the euro got into trouble, we had a bailout of both Greece and Ireland, which Madame Lagarde pointed out was probably illegal under the treaty because the treaty specifically prevented bailouts.
As regards mutualisation, the committee refers to Germany having different priorities. That is one way of putting it, but it is perfectly understandable that Germany always was and always will be cautious about its own money being at risk to bail out other countries. Equally, it was always explicit that there should be no monetary financing of deficits.
The noble Lord, Lord Harrison, concentrated on banking union, which is fundamental to a currency union, the resolution mechanism, deposit insurance and supervision. He is right that the resolution mechanism is suboptimal. Perhaps it should be more centralised. On supervision, subsequent developments have moved more in the direction of the committee, with the ECB supervising more directly the larger banks and national supervisors supervising the smaller banks. Germany is described as reluctant on deposit insurance, but the reluctance is extremely understandable. On page 39 of the report, someone from Germany is quoted as asking why Germany should pay to bail out banks that Germany has not supervised. I regard that as a historical legacy, which is how the Germans regard it.
A key to the future of the euro will be the asset quality review and the stress tests of the banks, but we have been here before. When stress tests were carried out previously, we were told that the banks were all hunky-dory and financially sound. However, several banks that had passed the stress test, including in Spain and Italy, got into deep trouble. It is important that these stress tests should be much more rigorous and credible. The monetary transmission mechanism in the eurozone is not working well, particularly for small businesses.
A lot of the argument in the report is about breaking the link between sovereigns and the banks, but the two are bound to be linked, even with the nirvana of debt mutualisation. I think that “nirvana” is rather a good word to describe debt mutualisation. I looked up what it means. Hindus say that nirvana means blissful egolessness, which seems a good way to look at debt mutualisation.
You cannot abolish the financial danger just by mutualisation. The European stability mechanism has limited resources. It can gear itself up, but who are the guarantors? The second largest guarantor of the ESM after Germany is France, whose own finances are in difficulty. The third most important guarantor is Italy and the fourth is Spain. Therefore, countries in debt, with deep fiscal problems, are guaranteeing themselves. Of course, behind them stands the economic colossus of Germany, but not even Germany could bail out Spain and Italy if they got into trouble together.
We are told that all that has gone. Outright monetary transactions, which are described on page 30, have taken care of all that. I think that Enoch Powell once remarked that a politician’s words were his deeds. He might now say that a central banker’s words were his deeds, because by just uttering the magic words, “Whatever it takes”, Mr Draghi certainly calmed the markets. He did not actually buy any bonds, but the acute phase of the crisis happened and it calmed markets. But did it calm them too much? We are now in a situation where 10-year yields on Spanish and Irish debt are lower than those of the United States. Yet the report says that it is important that the markets should not misprice sovereign risk. It also raises the danger that calming the markets in this way means that the impetus has gone out of structural reform. As it says on page 13, the air has escaped the balloon.
Now we have had the new measures that Mr Draghi has announced, but I suggest that the words are again very important—not the measures but the words. The words that we ought to concentrate on are three particular series of words: “The decision is unanimous”; “We are not finished here”; and “within our mandate”. The impression was given that all the tensions with Germany over committing funds, over mutualisation and over monetary financing had been put aside and that the situation was solved.
The negative interest rate was the first measure. I doubt whether that will have a great effect on the eurozone. Banks hold only €120 billion at the central bank at the moment. A 10 basis point cut will give them a charge of €120 million. I doubt whether that will transform the situation. Then we were told that there would be purchases with asset-backed securities, but that market is not really developed in Europe at the moment. It will take a long time before such securities, in securitised form, are available for the central bank to buy.
Then there was the targeted long-term refinancing operation—the LTRO, €400 billion-worth. Again, the effectiveness of that, which is modelled on the Funding for Lending scheme, will depend very much on the health of the banks and the results of the stress tests. Italy, for example, has €160 billion-worth of non-performing loans, which is why it has to pay 1.2% more for deposits than Germany. I do not think that the LTRO will transform things by itself.
Perhaps the most significant thing was when Mr Draghi said that the bank would be ending the sterilisation of assets that were purchased in order to ease the monetary transmission mechanism. That is almost a little bit of QE. The road to Delhi begins with a single step. Perhaps that is the measure that the Germans should worry a little about, but it will take time before there is an assessment as to whether those asset purchases can take place. None of this will produce a transformation of monetary conditions; none of it will weaken the exchange rate.
What triggered all that was of course the very low inflation figures for the eurozone and for Germany in particular. Without the flexibility of the exchange rate, the lower Germany’s inflation rate is, the more other countries have to cut their costs, cut unit costs and cut price levels to become competitive. I agree that some remarkable changes have taken place, but that has to go on for a very long period. The level of total indebtedness is 133% of GDP in Italy, 175% in Greece and 130% in Portugal. With that constant pressure on the price level—some see it as deflation; the Germans just see it as the periphery becoming more competitive—the outlook for growth in the eurozone is dismal and looks likely to remain dismal for a very long time.
I have always been an opponent of the euro, but I have never, ever said that I thought that it would break up soon. I have always had great arguments with my noble friend Lord Hamilton of Epsom about that. Of course, surviving and working well in the interests of the citizens of Europe are completely different things. It may be that the euro is a bit like a shoe that does not fit a foot. You go on wearing the shoe. Gradually, your foot gets distorted and you suffer pain; eventually, it completely alters its shape and you can get the shoe on. Perhaps the euro is like that and perhaps it will work in 30 years’ time. However, even if it did work in 30 years’ time, that certainly would not mean that we were wrong not to join.
Lord Kerr of Kinlochard (CB)
My Lords, it was a pleasure to take part in the work that led to this report. It was very enjoyable, largely because of the exemplary patience displayed by our chairman, the noble Lord, Lord Harrison, which produced a unanimous report, and because of the diligence of our clerk, Mr Stoner, who is extremely good at marshalling our arguments with rigour and, sometimes, imagination.
I take two texts for my sermon—I have a Scottish Presbyterian background. My first text comes from the Book of Job—that is, the Treasury. The Government’s response to our report states that,
“the government is clear that we are not joining the Euro”.
Yes, I think we got that. It goes on:
“Therefore it is right that we have said from the outset that we will not take part in measures designed to support full economic and monetary union”.
Yes, we have got that. It goes on:
“The Government has been clear that it will not participate in the Banking Union”.
There is a false logic there. It is perfectly possible that the banking union—although the impetus for it arose from the crisis in the eurozone—could be a good thing, irrespective of whether one was a member of the eurozone. Indeed, I notice that, of all the non-eurozone member states who are negotiating the texts of banking union, only the British and the Swedes are negotiating not on the basis that they intend to join.
If I were to dare to part company with the noble Lord, Lord Lamont of Lerwick, I would say that there was a moment in his speech when I thought that he was slipping into the error of equating banking union with economic and monetary union. As he rightly pointed out, our report, although entitled Genuine Economic and Monetary Union, was largely about banking union, because that was the key subject on the agenda. I would argue that it is not necessarily the case that non-members of the eurozone should decide that they have no intention of becoming members of the banking union.
On that, I would say that the committee was in a state of intelligent schizophrenia. It is intelligent because it is an extremely intelligent committee; it is schizophrenic because we all agree—the Government are of the same view—that the creation of an effective banking union, reducing the risks of future crises and making them easier to manage when they arise, is a good thing. We all agree with that. We on the committee felt, however, that it was hard not to acknowledge that the UK’s non-participation in banking union could have a deleterious effect on the City of London’s position as the transaction capital of Europe and one of the great three global financial centres. We felt that it was possible, over time, that that position could be eroded by non-participation in the structures of banking union. That is the point brought out in the passage of the report cited by the noble Lord, Lord Liddle, where we state, at paragraph 227:
“The Government may be ill-advised to assert that Banking Union is the sole province of the single currency for all time. It would be wise not to close the door on the possibility of some level of participation in Banking Union in the future, in particular as a means of further promoting and shaping the Single Market in Financial Services and the UK’s position within it”.
That is my view. However, I recognise that I will not persuade Job in the Treasury of that today and, perhaps, not for some considerable time.
Lord Lamont of Lerwick
Does the noble Lord remember that the Book of Job says, I forget in which exact chapter:
“There is a path that no fowl knoweth, and which the eye of the vulture hath not seen”?
Lord Kerr of Kinlochard
I cannot say that I think of that every morning as I arrive, but I will bear the noble Lord’s words in mind.
I want to make five minor topical, practical points arising from the report. First, in strict logic, the position that the Government take up—that banking union is nothing to do with us but is a matter for eurozone countries—could mean that the Government do not object to the proposal, much discussed in Brussels at the moment, that the heavily overloaded Commission’s single market directorate-general should be split, with banking and financial legislation moving to the financial directorate-general, the primary concern of which is of course for the health of the euro, leaving the single market directorate-general handling the classic single market agenda. That would be disastrous, from a number of points of view, not least from the point of view of UK interests. The British Bankers’ Association states:
“It is of utmost importance to maintain the structure of the relevant Commission services dealing with financial services so that their work is permeated with the priority of preserving the single market focus. We suggest that the UK Government should proactively defend the unity of DG MARKT and oppose any plan to move financial services out of it. It would be a mistake to move the work e.g. to DG ECFIN which has quite different priorities”.
I strongly agree and I hope that the Minister will be able to reassure us that we shall—to the extent that our current influence allows—work to ensure that that does not happen.
In my view, it is highly desirable and important that the current head of the single market directorate-general, the most senior of that very small and dwindling band of British personnel in the Commission, should stay where he is. I strongly agree with what has been said already today about the need to reinforce that. Retaining the unicity of the director-general is much more important than who is the single market commissioner—the issue that dominates the headlines. What matters is that it is the director-general and that he covers all the work that is of interest to the City of London.
My second point is also quite topical. I hope that the Government will, to the extent that their current influence allows, seek to discourage a second suggestion much debated in Brussels now, which is that the next finance commissioner should also be the next president of the Eurogroup, replacing Mr Dijsselbloem, the Dutch Finance Minister, when his term ends next summer. Combining the two jobs would be a prescription for serious schizophrenia, with a real risk that eurozone concerns might override single market integrity. This is not a moot point in the US sense. In our report we use “moot point” in the British sense, which means it is a key issue. In America, a moot point is a point so boring and irrelevant that it is worth discussing only in a moot court—a fine example of the difference between the two languages, as is “tabled”. If we said that our report had been tabled, people in Congress would say, “Oh, bad luck”, because it means shelved in America.
The moot point is that we have seen two recent examples of just what I am worried about—eurozone concerns overriding single market integrity. In the Cyprus crisis, when the eurozone imposed capital controls, that was a fundamental strike—which may have been necessary in the crisis—against a fundamental principle of the single market. It affected non-eurozone citizens. A British citizen with money in Cyprus could not move his money because of capital controls introduced by the eurozone. The result was that the case was quite rightly taken by the British Government to the Court of Justice against the ECB for its attempt to argue that clearing systems trading euro-denominated paper must be within the eurozone. That, too, is a clear breach of the single market and I applaud the Government for contesting it. It would be dangerous to see the two jobs of presidency of the Eurogroup and finance commissioner in the Commission combined. That may be difficult to prevent, given diminished influence, but I urge the Government to have a go.
Lord Lamont of Lerwick
Of course you can. You can be against transferring fiscal authority out of the UK but say that the only way in which you can make a monetary union work is for you to transfer it out of your country to a central organisation. There is no contradiction in that whatever.
Lord Davies of Stamford
I am sorry, I take a different view. It seems very contradictory to me. Either you should not have fiscal integration or you should. It is very important that politicians are coherent about these things and I do not think that the Eurosceptics are coherent, not least on the matter of democracy in the EU.
Incidentally, my noble friend Lord Desai made the excellent suggestion that we should have an election for the President of the European Union. I have always been in favour of that, and I quite agree that the EU lacks democratic accountability. You hear all the time from Eurosceptics that the EU lacks democratic accountability, but the moment you suggest any measure at all, whatever it might be—changes at parliamentary level, say, or the direct election of the President—that would supply much greater accountability, they are always against it. Again, there is a blatant contradiction running through their views on the subject. I have to say that if you pursue politics on a contradictory basis like that, you do not do great credit either to your reputation for intellectual clarity or to the good faith of your arguments.
National Savings and Investments
Lord Lamont of Lerwick Excerpts(10 years, 4 months ago)
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Lord Newby
My Lords, I think the correct analogy with NS&I is with a bank or building society, where common practice—this is what NS&I is moving towards—is that people get a statement on the anniversary of when they took out savings and that customers are able to look online for a comprehensive statement of all their various policies and holdings.
Lord Lamont of Lerwick (Con)
My Lords, although we all appreciate that exceptionally low interest rates have been necessary to shore up the finances of borrowers, particularly mortgage holders, does my noble friend recognise that this has been an extremely difficult time for savers? It is a great pity that during a period in which, until today, inflation has been above the Bank of England’s target, National Savings has withdrawn the inflation-linked savings certificate. Will the spokesman encourage National Savings to help to end that misery for savers and, at least for small savers, introduce some new products with rather better rates of interest?
Lord Newby
My Lords, as the House is aware, when we have very low interest rates, which have been necessary in the economic circumstances in which we have found ourselves, that helps very many consumers, households, mortgage holders and businesses and is on balance, in our view, beneficial to the economy. The downside, as the noble Lord mentions, is that savers get a lower rate of interest. I think it is unrealistic to expect NS&I to promote products with a higher rate of interest than market rates, because its remit is to get best value for money for the Government, but I am sure that the noble Lord and the whole House will welcome the news that inflation is down to 2%, which is the target level.