EU: Euro Area Crisis

Lord Harrison Excerpts

Thursday 24th May 2012 Lords Chamber

[Lord Sassoon]

My Lords, within what needs to be tight discipline—tighter than has been exhibited in recent years—over the overall European budget, certainly these ideas of targeting funds better within the existing budget envelope need to be looked at very hard.

[Lord Harrison]

My Lords, when the noble Lord appears next on the BBC “Today” programme, will he remind listeners that stability bonds are not mini-Eurobonds? What is the Government’s view of stability bonds, which could be part of the growth agenda that we so badly need in the eurozone area and in the EU as a whole? Would we be prepared to join in?

[Lord Sassoon]

My Lords, as I said this morning and on other occasions in the past week, we are prepared to look at ideas. Those that are being floated include increasing the lending capacity of the European Investment Bank and issuing project bonds. We will look at these ideas as they develop.

Euro Area Crisis: EUC Report

Lord Harrison Excerpts

Monday 21st May 2012 Lords Chamber

Moved By

[Lord Harrison]

That this House takes note of the report of the European Union Committee on the euro area crisis (25th Report, Session 2010–12, HL Paper 260).

[Lord Harrison]

My Lords, I am delighted to have the opportunity to introduce the debate on this report. Sadly, I am rather less delighted by the circumstances that required the report to be written and that make today’s debate so urgent and topical. The report was a joint effort based on work undertaken by the Sub-committee on Economic and Financial Affairs, which I chair, and the main Select Committee, which was chaired by the noble Lord, Lord Roper, to whom I offer a fond farewell, and which is now chaired by the noble Lord, Lord Boswell of Aynho, to whom I extend a warm welcome. The sub-committee focused on the economic and financial aspects of the crisis, while the Select Committee focused on institutional aspects and was responsible in particular for the chapter on the proposed treaty. I thank all the witnesses who contributed to both elements of this complex inquiry.

The committee began its inquiry in October 2011 and the report was published in February 2012. Noble Lords will be well aware that the situation has become even more serious since then. One challenge that we faced, and continue to face, was the sheer speed of developments in the crisis. Even though events have moved on since our report was published, it may be useful if I briefly remind noble Lords of the political context in which the inquiry was undertaken. Many issues that we considered remain to be resolved by the EU’s leaders.

On 26 October, a key EU summit—already twice delayed because of the difficulties in reaching agreement—struck a three-pillar deal that included the exploration by private-sector banks of a haircut of at least 50% to Greece, an increase in the funding available to the EFSF rescue fund to €1 trillion, and a requirement on the European banks to raise €106 billion in new capital by June this year.

However, in November the crisis escalated dramatically. Amid mounting turbulence in the financial markets, both the Greek and Italian Prime Ministers were forced to resign and were replaced by non-party political figures—the former governor of the Bank of Greece, Lucas Papademos, and the former European Commissioner, Mario Monti. After a general election there was also a change of Government in Spain, whose own bond yields were coming under intolerable strain.

So pressure grew on European leaders for a more fundamental response. The ECB complemented its programme of purchasing sovereign debt in the secondary markets with a major operation to provide long-term loans to European banks. Then, at the Brussels summit on 8 and 9 December, euro area nations agreed to a new fiscal compact that moved towards a fiscal stability union, including the adoption by national Governments of a fiscal rule to achieve balanced budgets and stronger Brussels oversight of national budgets. EU leaders agreed that some of these changes should be achieved through a treaty, but the United Kingdom Government, later joined by the Czech Republic, would not agree to amending the EU treaties. This resulted in the adoption of a separate international agreement on stability, co-ordination and governance, which I shall refer to as the fiscal compact treaty.

Our report sought to reflect on each of these serious developments. In the economic and financial context, we expressed deep concern about the extent of uncertainty that remained in the crucial area of bank recapitalisation. How would it be achieved? How would banks be prevented from reducing their debt ratios by deleveraging and hence reducing lending? How much damage would a sustained restriction on credit do to an already struggling European economy?

We also concluded that because of the risk of contagion there was an urgent need to establish a credible and well financed system of rescue funding. We acknowledged that the primary responsibility for this must lie with the euro area countries, but given the global implications we stressed that it was also necessary for the international community, including the United Kingdom, to play its part, in particular through the IMF.

Although we highlighted the need for rapid progress on the Greek debt write-down, bank recapitalisation and the construction of a firewall, we recognised that such steps were unlikely to prove sufficient on their own. We noted the unprecedented steps already taken by the ECB and found that, although we could be cautious about regarding the ECB as a panacea, additional intervention was likely to prove essential. We also urged European leaders to consider the case for the introduction of so-called eurobonds.

We concluded by considering the longer-term issues, although we recognised that long-term planning will be irrelevant if the current crisis is not overcome. We concluded that improved budgetary discipline is necessary in order to make progress in resolving the crisis, but ultimately the resumption of sustainable economic growth holds the key, both in general terms across the European Union and in facilitating attempts to resolve the serious imbalances between different countries in the euro area. The committee argued that it was of great concern that the potential of the single market to enhance economic growth had faded from view during the crisis. We suggested that the focus of policymakers now needed to turn to policies to support economic growth that could be implemented effectively during a time of budgetary austerity.

Subsequent events have shown how relevant this analysis has been as the situation has deteriorated dramatically. Once again, we find ourselves in a phase of escalation and of deep uncertainty. Noble Lords will be only too aware of the significant recent political and economic turbulence in France, Spain, Germany, Ireland, the Netherlands, and above all Greece, where a second election in a month will shortly be held. Moreover, the parties most opposed to the austerity programme are expected to make further gains.

The financial markets are in renewed turmoil, with substantial falls on major stock markets. As recent developments in Spain have demonstrated, the European banking system is coming under severe strain. Economic growth in the euro area remains anaemic and would probably have been non-existent had it not been for Germany’s recent strong performance. Indeed, the contrast in economic outlook between Germany and the euro area members under most pressure, such as Spain, Portugal and Greece, grows ever more acute.

Nor is the United Kingdom immune from all this. Not only has the economy fallen back into recession, but last Wednesday the Bank of England cut its growth forecast for the current year from 1.2% to 0.8% and stressed that the biggest risk to recovery in the United Kingdom stems from the difficulties facing the euro area. The governor, Sir Mervyn King, has said, somewhat intemperately, that Europe is,

“tearing itself apart without any obvious solution”.

Last week, the Prime Minister stressed the importance of the very issues that this report highlighted, saying:

“Either Europe has a committed, stable, successful eurozone with an effective firewall, well-capitalised and regulated banks, a system of fiscal burden-sharing and supportive monetary policy across the eurozone. Or we are in uncharted territory which carries huge risks for everybody”,

including, one must conclude, the United Kingdom. The PM should explain why, if the euro area crisis is crucial to the United Kingdom, we remain so semi-detached in our engagement with our colleagues. In the midst of such a gloomy economic picture, the election of the new French President, François Hollande, on a platform of economic growth, has heightened debate on the fiscal compact treaty and the austerity agenda that it is perceived to entail, even before it has come into force.

On the new treaty itself, the Government said that they went into the December European Council thinking that the optimum outcome would be an agreement by all 27 EU member states, with the interests of the United Kingdom, particularly in relation to the financial services sector and the single market, being protected. As we all know, the Government did not get the safeguards that they say they wanted, so they refused to join the negotiations to draw up the treaty. The committee was strongly critical in its report of the Government’s failure to keep Parliament properly informed about a decision that may have huge long-term ramifications by sidestepping releasing the text of their prior negotiating position.

I hope that the Minister will be able to give the House a full account tonight of the Prime Minister’s intended approach to the informal gathering of EU leaders taking place this Wednesday. I also hope that the UK’s preparatory work, in building alliances with other member states, is rather more effective at this and future meetings than it was in December.

The key measures in the treaty are on budgetary discipline, and they must be translated into national law,

“through provisions of binding force and permanent character, preferably constitutional”.

It should be stressed that only the euro area countries will actually be bound by the key requirements of the treaty, although it appears that other signatory countries are eager to adopt these rules.

The committee considered that the euro area states must be free to take the steps they consider necessary to defend the euro, including the key area of fiscal integration. However, the committee emphasised that matters relating to the internal market must remain the preserve of all 27 EU member states.

The speed with which the treaty was negotiated, and the fact that it is outside the EU treaty framework, has left several important questions unanswered, including its relationship with the EU treaties and the laws made under the EU treaties, and the proper role of EU institutions such as the ECB in relation to the treaties. Some of the difficulties would be resolved if the proposed treaty was integrated into the main European Union treaty framework, once the review of experience with implementation suggested in Article 16 of the fiscal compact treaty has taken place.

I note that the Government’s response to the report, for which we are grateful, states that they are not opposed to the incorporation of the treaty into the main EU treaties in due course, provided that there are safeguards to protect the interests of all 27 member states. We hope that our own analysis of the treaty has been found to be valuable to other Parliaments. I was very pleased to be invited to Dublin in April to give evidence to an Oireachtas committee inquiry into the implications of the treaty in order to inform the decision to be taken by the Irish people on 31 May.

Given the speed of developments since the report was published in February, and the Government’s response in April, the committee looks forward, as I am sure the whole House does, to the Minister’s explanation of the Government’s current position. I ask the Minister to include the following points in his reply. In our report, we noted that national Governments and EU institutions have struggled to keep up with the pace of events. I think the point may have now come when Europe’s leaders have run out of road, and that hard decisions now need to be taken about whether the euro will continue to exist in its present form. I look forward to hearing from the noble Lord, Lord Sassoon, the Government’s assessment of the current situation. What do the Government think is the most likely scenario for Greece?

Shortly after our report was published on 20 February, the Prime Minister and 11 other Heads of State or Government sent a letter to President Barroso and President Van Rompuy setting out an agenda for growth. The European Council at the start of March came up with some sensible conclusions about developing the single market, and at the G8 summit at the weekend there were encouraging messages on growth. My next question is: what specific progress has been made on the implementation of the growth agenda set out by the EU at the start of March? What does the Minister expect to be on the table for the June European Council to agree, and what is his assessment of the impact of the election of President Hollande?

My final question concerns the status of the fiscal compact treaty. Do the Government still think it is likely that the treaty will be ratified by 1 January 2013? What contact have the Government had with the new Government in France, and would they support further discussions about the text of the treaty?

This is a hugely important issue. I am very pleased to have introduced it. I thank Stuart Stoner and Jake Vaughan, as well as Laura Bonacorsi-Macleod, who acted as policy adviser for this important piece of work.

--- Later in debate ---

[Lord Harrison]

My Lords, it may have seemed at times that we were walking through a cloud of unknowing in the debate that we had on the euro area crisis, but I thank all colleagues who have contributed so well and so widely to what I hope and believe will be a beneficial debate. If I were creating an image of cloud computing and tried to find one word that might sum up the tenor of the debate and my own hopes and aspirations, it would be the reference to showing solidarity with others suggested by the noble Lord, Lord Judd. That is imperative and something that should help us to find and forge solutions to this tricky business in the next few months and years. I hope in that solidarity that the United Kingdom will play its proper and vital role. I thank noble Lords very much.

Motion agreed.

Finance: Credit Rating Agencies

Lord Harrison Excerpts

Wednesday 14th March 2012 Lords Chamber

[Lord Harrison]

My Lords, I know that the Minister has read closely our report on the sovereign credit rating agencies, which was published last November and is available to Members of the House, but does he share my concern that the three major credit rating agencies are American? Does he also share our concern, as expressed in the report, that to generate an agency from within the European Union would not be well received by the markets and that it is therefore essential to ensure that there is open, free and fair competition to establish markets for new players to come in and compete with the existing three?

[Lord Sassoon]

I am certainly very happy to commend again the report, Sovereign Credit Ratings: Shooting the Messenger?, to which the noble Lord, Lord Harrison, referred. It is an excellent report, which said among other things:

“The criticism that credit rating agencies precipitated the euro area crisis is largely unjustified”—

so it offered a very proportionate and measured response to the criticism. I do not think that we should mind the nationality of the rating agencies; it is the competition that we want. In that connection, the Government believe that it would be wrong to create a public European credit rating agency because that would just serve, among other things, to crowd out the competition.

International Monetary Fund

Lord Harrison Excerpts

Thursday 24th November 2011 Lords Chamber

[Lord Sassoon]

I very much agree with my noble friend. The IMF’s lending programmes are indeed conditional on programmes of that kind.

[Lord Harrison]

Given the fact that we help our fellow European countries in the contribution that we have made to Ireland, the IMF and the EFSM, what is the philosophical and practical difference between contributing to the EFSF—which is not wholly confined to the euro 17—and contributing to the future EFSM or, for that matter, any other acronym that may come along to help?

[Lord Sassoon]

It would be unproductive to be drawn into the history of the arrangements that the previous Government committed this country to, but we could go into that if noble Lords want to. This Government are completely clear: we will support the IMF on a bipartisan and all-party basis, as we have always done since its inception. It must be for the eurozone countries to put in place their mechanisms for future support.

Sovereign Credit Ratings: EUC Report

Lord Harrison Excerpts

Tuesday 15th November 2011 Lords Chamber

Asked By

[Lord Harrison]

To ask Her Majesty’s Government what is their response to the Report of the European Union Committee on Sovereign Credit Ratings: Shooting the Messenger? (21st Report, HL Paper 189).

[Lord Harrison]

My Lords, I bring to the House’s attention Sovereign Credit Ratings: Shooting the Messenger?, a report of the European Union’s Sub-Committee on Economic and Financial Affairs, and International Trade, which I have the honour to chair.

As noble Lords will be aware, credit rating agencies have had a very high profile since the banking crisis erupted in 2008, in relation to which there has been widespread and, in the committee’s view, deserved criticism of their role. When the banking crisis hit, the rating agencies were revealed to have woefully underestimated the risk that complex financial products, such as mortgage-backed securities, posed. Thus we were told in the evidence that some securities that carried an AAA rating one day were downgraded to a CCC the next. Indeed, many commentators accused the rating agencies of contributing to the severity of the crisis.

In the crisis aftermath, many sovereigns, as well as the European Union, sought to sharpen regulation of the credit rating industry. In the European Union this led to the creation of the European Securities and Markets Authority, or ESMA. With the reputation of the credit rating agencies yet to recover, many people were quick to blame them for exacerbating the European Union sovereign debt crisis after it intensified in 2009. They were accused of failing to predict the crisis, and then of precipitating it by downgrading the ratings of euro area sovereigns too far and too fast. In the midst of this, the Commission in November 2010 launched a public consultation to discuss the need for further regulation in the credit rating industry and invited views on proposals to foster a European credit rating foundation which might challenge the oligopoly of the major rating agencies.

In April 2011, and in the light of these developments, our committee launched this inquiry, seeking to analyse the interaction between the credit rating agencies and sovereign debt, with a particular focus on the role of the CRAs in the euro area crisis. We took evidence during May and June from representatives of the “big three” rating agencies—Fitch Ratings, Moody’s and Standard & Poor’s; from representatives of the OECD and the International Centre for Financial Regulation; from Dr Wolf Klinz, the European Parliament rapporteur; and from the Financial Secretary to the Treasury, Mark Hoban. We also received a welter of additional useful written evidence, for which we are grateful. Our report was published in July and we are pleased that the Government’s response now brings this debate to the Chamber tonight.

The committee concluded that the rating agencies could not be accused of precipitating the euro area crisis. Their downgrades, in reality, reflect the seriousness of the problems that some member states currently face. Indeed, in most cases the CRAs followed, rather than led, market sentiment. We acknowledged that downgrades can, in certain circumstances, exercise a disproportionate influence on markets, exacerbating existing fragile situations. However, whether this happened in relation to the euro area crisis is more difficult to determine. Yet the committee did conclude that the credit rating agencies conspicuously failed to challenge the assumptions on which their assessment of the sustainability of sovereign debt was based in the years running up to the crisis. They palpably failed to identify risks in some member states which began building up long before the crisis hit. However, they were not alone in that misjudgment.

The committee has two central concerns apart from the ones that I have expressed. The first relates to the extent, or otherwise, of competition in the industry. We concluded that the credit rating agency industry is, at present, an oligopoly. The stranglehold of the largely United States-based big three has proved impossible to break. This is not for want of trying on the part of some. As I have already mentioned, the Commission has floated the possibility of the establishment of a European credit rating agency, whose start-up costs could be,

“wholly or partially covered by the public sector”,

although over time,

“public investment could … be phased out”.

The European Parliament Committee on Economic and Monetary Affairs raised the possibility of an independent, non-publicly funded European credit rating foundation. We concluded that there was a compelling argument for a thorough competition inquiry into the structure and regulation of the credit rating industry, but we also felt that the European Union should not fund, either initially or in the long term, a credit rating agency. An EU-sponsored credit rating agency would simply lack credibility with the markets.

Our second concern relates to the use of credit ratings. Sovereign ratings can play a useful role that contributes to the smooth, efficient working of the worldwide sovereign debt market. However, there is a compelling need to reduce the mechanistic role that credit ratings play in regulations, investment mandates and private contracts. This hardwiring of ratings leads to knee-jerk rating changes which can cause deleterious cliff-edge effects, herd behaviour among investors and systemic disruption. Indeed, there is an overwhelming imperative for investors to see sovereign ratings for what they ultimately are: subjective provisions that rely heavily on the personal judgments of rating agency staff. Investors should not follow ratings blindly but should view them as opinions that need to be balanced and confirmed by other market indicators. Responsibility for investment decisions ultimately lies with investors, and they should bear in mind the principle of “caveat emptor”—buyer beware—when deciding how much reliance to place on the judgment of rating agencies.

Where, then, do we stand today? We have received the Government’s response to our report and I am heartened that they agree with so many of the committee’s recommendations. I am sure that the Minister will want to elaborate on the Government’s position.

The question now turns to the Commission. Given that ESMA has only recently taken over the direct regulation of credit rating agencies, we argued in the committee that the new system should be given time to bed down and its effectiveness should be assessed before further changes are made. Yet Commissioner Barnier has pressed the case for further regulation of rating agencies for some time now and today—as if to prove the timeliness of this evening’s debate and the fact that he has obviously read our report—he launched the Commission’s latest proposals. Significant among them is the decision to postpone the proposal to suspend the credit ratings of sovereigns receiving funds. I would like the Minister to respond to that in particular. I underline the fact that, as I understand it, the suggestion is only to postpone the proposal. The Commission also has ambitions to reduce the overreliance on credit ratings, to improve the quality of the rating process and to promote the general obligation on investors to do their own assessment. I hope that the Minister will respond to those three ambitions.

There is also the question that ESMA might be communicated with by the credit rating agencies. That flies in the face of what we said on the committee—that 12 hours is a sufficient break and we do not require the three-day break that might confuse the markets even more because something might be said out of turn. We need more diversity and stricter independence of the credit rating agencies and, again, I ask the Minister to respond to the question of competition.

This is an important issue. Recently the credit rating of France was reduced from AAA, with deleterious effects on the markets. We need to be serious about this. I hope that we can have a good debate and that the Minister will be able to respond to the Commission’s proposals.

Global Economy

Lord Harrison Excerpts

Thursday 11th August 2011 Lords Chamber

[Baroness Kramer]

My Lords, these dark glasses are not for glamour but to prevent me sharing an eye infection. I very much agree with the Minister that the Government, and individuals, have no choice but to deleverage. Many of our large companies are not anxious at this time to invest or borrow significantly because they are doubtful about both the domestic and international economy. Surely, however, one sector has significant capacity to absorb new investment in the form of equity and debt: that of the micro-businesses and very small businesses, because they have been in large part neglected by our banking sector and our financial institutions for years. Would the Minister be willing to look at a programme that specifically targets those kinds of businesses which, culturally, our current institutions usually fail to serve, perhaps building off some of the schemes which are being looked at now to revitalise the high streets which were so badly damaged earlier this week?

[Lord Harrison]

My Lords, I am sorry that the Minister has had to break off his holiday reading of your Lordships’ European Union Select Committee’s Sovereign Credit Ratings report. I hope that he will return and study it when he is next on the beach, and reflect on some of the words from the noble Lord, Lord Oakeshott. These institutions exist but a healthier degree of scepticism might inform the City and, indeed, elsewhere to ensure that they are taken for what they are—an educated guess as to the future debt of sovereign nations.

Secondly, would the Minister consult his colleague on the business section about the regional growth fund, which I raised some months ago? I discovered and reported to your Lordships that it was unsuccessful at the moment, especially because of the £1 million bar required for small businesses to make application to that fund. My third point relates to the points made by the noble Baroness, Lady O’Cathain, in the European Sub-Committee B’s report on the single, internal market. Why do we not put greater effort into ensuring that the market comes to fruition, which would surely benefit UK companies perhaps more than any others within the 27 countries of the European Union?

[The Archbishop of York]

My Lords, I listened intently to the Minister but I did not hear in that Statement what the Government intend to do about inflation. The noble Baroness, Lady Thatcher, believed when she was in the other place that inflation was a danger to savings, to investment and to growth. Inflation is rising; what are the Government going to do to cure that particular problem and difficulty? Secondly, debt in the United Kingdom is not just government debt. The greatest difficulty we have is personal debt. When austerity measures are there to cure the national debt, is it ever wise to then encourage the ordinary person to go out and spend? How can that be right? They, too, ought to have austerity measures for themselves.

Finally, I have listened intently and what I constantly hear is that our difficulty is—and it comes again and again—the mess that we inherited from the last Government. Is that right? They certainly left a big debt, but it certainly was not just that. What about the role of the banks? They got us into a mess, and I never hear it said that the mess was caused not just by the last Government but by our financial institutions that left us in debt. Is it not time to put the blame not only on one foot but on both feet?

--- Later in debate ---

[Lord Sassoon]

If the noble Lord will be a little patient, I will get back to Europe in a moment.

It was nice to have confirmation from the noble Lord, Lord Radice, that we are all on the same side when it comes to wanting to strengthen the eurozone, even if he questions the motives of some of us in wanting to do so. It really is very important that this happens, and we should give it all our support.

On the other European matters raised by the noble Lord, Lord Pearson of Rannoch, his main questions were around the cost of this country’s contribution to Europe. He makes that contribution £25 million a day. I cannot calculate things that quickly, but the fundamental difference between that £25 million a day and the £120 million a day of debt interest that I referred to earlier is that the £25-million-a-day contribution to Europe buys us value for money. Of course we believe that Europe needs to get its budget in hand, that there needs to be much greater fiscal discipline in Brussels and that the proposals for a great expansion of the European budget are unacceptable. Nevertheless, we have to bring ourselves back to the main point that this country gets considerable value from its membership of the European Union, and that that is fundamental to making sure that we have good strong markets for our exports. Yes, there is a burden of regulation from Brussels, and we must make sure that Brussels starts to apply the disciplines that we are applying in this country before it brings forward yet more regulation.

A number of questions were asked by my noble friends Lady Kramer and Lord Cotter and the noble Lord, Lord Harrison, about access to various domestic and European funds. All I say as a general point is that I hear very loudly what is being said. The Government’s objective is to make sure that in direct lending by the banks and in other finance—the most reverend Primate reminded us that the banks are far from blameless in the situation that we are in, and my noble friend Lord Oakeshott and other noble Lords reminded us of the importance of the banks—there is a whole range of financing channels. We have the critical Merlin agreement and European funds such as the regional growth fund—

[Lord Harrison]

Would the noble Lord be kind enough to write to me on the regional growth fund and update the House on what has happened to it with regard to helping small businesses?

[Lord Sassoon]

I will take away the noble Lord’s question. Forgive me, but I cannot now remember when we are committed to making regular updates, and it may be that we should wait until the next regular update. I will see whether any more can be said, but maybe we should be patient. I understand that he would like a quiet bilateral discussion, but I cannot promise him early information. The important point that he and other noble Lords make is that we have to work very hard to ensure a suitable range of channels for access to both debt and equity finance.

Incidentally, on the other point made by the noble Lord, Lord Harrison, I was taken away from some European-related reading yesterday. I had just got to the chapter in Edward Heath’s biography on the first negotiations for our European entry, so I have a few years to go before I get to the latest report from your Lordships’ committee. If I am allowed to go back on holiday, I will get there as quickly as I can.

The most reverend Primate the Archbishop of York raised another critically important point, which was about inflation. Clearly, inflation makes an enormous difference to the spending ability of individuals and has a significant effect on the costs for businesses. As we have discussed in this House on many occasions recently, it is critical that the Monetary Policy Committee continues to have free rein and is not constrained by the Government in any way in meeting its mandate. I commend to the most reverend Primate the words of the Governor of the Bank of England in his latest report, issued this week, in which he acknowledges that inflation may go over 5 per cent in the short term but says that he expects inflation to moderate in the medium term and to come down to slightly below the target that the Chancellor has set of 2 per cent. As my noble friend Lord Oakeshott will know, in the context of that discussion the governor made some interesting remarks about the possibility of quantitative easing. No doubt when the MPC’s minutes next come out we will look to see what was discussed at its last meeting, but clearly this is a live topic.

My noble friend Lord Flight gave a perceptive analysis of the markets. I do not think that he asked me a question in that, but I agree with a lot of his analysis.

The noble Lord, Lord Lea of Crondall, raised questions about the UK and Germany and made reference to BMW. All that I would ask him is why BMW has announced in recent months a further massive investment, of hundreds of millions of pounds, in its car manufacturing in this country. I suggest that that is because the best of our manufacturing is at least as good as and in some cases significantly better than the best of manufacturing in Germany, fine manufacturing economy though it is. We have in this country—Mini exemplifies this absolutely—design skills that are second to none. If the noble Lord would like to fire off at me another Written Question or three, I will be happy to try to answer better next time his points on relative added value, but I do not think that we have anything to be ashamed of—far from it—in a comparison between the best of our industry and the best of German industry.

EUC Report: Economic Governance

Lord Harrison Excerpts

Thursday 16th June 2011 Lords Chamber

Asked By

[Lord Harrison]

To ask Her Majesty’s Government what is their response to the report of the European Union Committee on The Future of Economic Governance in the EU (12th Report, HL Paper 124).

[Lord Harrison]

The crisis in the euro area has rarely been out of the news over the past year. Therefore, my committee decided to launch an inquiry into EU economic governance, especially after EU member states banded together to provide financial assistance to Greece in early 2009. Since then the crisis has continued to spread. Indeed, while we were taking evidence Ireland received financial support. Since the report was published, yet another euro area country—Portugal—has asked for and received a loan package. In the wake of these difficulties, the European Union has pushed ahead with proposals to reform its economic governance. The proposals are likely to be agreed at ECOFIN next week, so I thank the Government for providing an opportunity for this timely debate.

The euro area crisis followed the worldwide banking crisis in 2008. The interconnection between sovereign debt and the banking sectors was one of principal elements that contributed to the current crisis. However, it was not the cause of the current problems in the euro area; it was merely the trigger. Our report details two more fundamental reasons for the euro area crisis. First, there is an endemic flaw in the architecture of the monetary union: while monetary policy is centralised, fiscal policy remains fragmented among member states and is inadequately co-ordinated. Secondly, the past decade has seen a build-up of macroeconomic competitiveness imbalances among euro area member states. Within monetary union, states can no longer devalue their currencies to regain temporary competitiveness or adjust their interest rates to take account of variations between different economies.

These problems have been exacerbated by a failure of the markets, and member states themselves, to understand how the monetary union worked. The markets treated the euro area as a single entity, and did not distinguish carefully or sufficiently between the financial health of individual member states. This has meant that for most of the past decade the interest rate on Greece’s sovereign debt has not been much higher than the interest rate on German sovereign debt. It should have been.

Our report focused on a series of six proposals published by the European Commission in autumn 2009, which were designed to address these problems. The proposals would monitor and co-ordinate more closely economic policies among the member states. In parallel with the Commission, the European Council established a task force to consider these issues under the chairmanship of the President of the Council, Herman Van Rompuy. With only minor differences, the task force’s recommendations echoed the proposals put forward by the Commission.

The proposals focus on two distinct aspects of member states’ economies. First, they aim to improve fiscal discipline among member states. The Commission has proposed amending the stability and growth pact to broaden its surveillance of member states’ fiscal policies and, to ensure better compliance, it has suggested strengthening the sanctions regime. In addition, a proposed new directive would incorporate EU-level fiscal rules into domestic fiscal frameworks.

Secondly, the proposals would create new mechanisms to monitor and correct macroeconomic imbalances, such as divergences in current account positions, in competitiveness or in credit and house-price bubbles. In addition to these six proposals, we considered the Council's proposals for a permanent crisis resolution mechanism for euro area member states. The European Council agreed to establish such a mechanism in March this year, although the details of the mechanism are still to be confirmed.

Before I turn to the committee’s view of the Commission's proposals, I should briefly say why the UK should be engaged. After all, we are not a member of the euro area and many of the proposals related to sanctions or fiscal rules will not be binding on the United Kingdom as a result of its opt-out from the monetary union. Our witnesses, however, were unanimous in stating that the health of the euro area directly impacts on the United Kingdom. In 2009, some 60 per cent of the United Kingdom’s trade was with the European Union, the UK financial sector has substantial investment in euro area countries and the Government recognised the UK's substantial interest in Ireland by providing a bilateral loan above and beyond their contribution through the European financial stabilisation mechanism and the IMF.

The Commission's proposals may not all apply to the United Kingdom, but we have a vested interest—a vital interest—in ensuring that they are appropriate and will successfully contribute to the future economic and financial stability of the European Union. In addition to these hard, economic reasons, we believe that the United Kingdom should play an active role for another reason: solidarity. The EU is founded on solidarity and we believe that the United Kingdom should consider and support where possible the interests of other member states. I say to the Minister that it is surprising how often solidarity turns out to be far-sighted self-interest.

I now turn to the Commission's proposals. Taken as a whole, the committee concluded that they are a step in the right direction although they do not go so far as to enact the full fiscal union that some of our witnesses thought was necessary for the future stability of the euro area. Closer economic co-operation is necessary to foster greater economic stability in the European Union, particularly for those countries that have bound themselves together into a single monetary union. The proposals relating to fiscal discipline and co-operation should make it easier for euro area members to arrive at a collective fiscal stance that stands as an equal to a centralised monetary policy. Likewise, the proposals for a new system of macroeconomic surveillance and co-ordination will help to detect and address at an earlier stage excessive imbalances that threaten to destabilise the monetary union.

We also support the establishment of a permanent crisis resolution mechanism. In particular, we concluded that the inclusion of collective action clauses, setting out a formal mechanism for restructuring debt is essential. We felt that these should clearly establish the principle that the private sector should share the burden of any restructuring of sovereign debt. It is only right that, as they share in the rewards, they should share in the risk. The Government's response indicates that private sector involvement will be on a case-by-case basis. I would be interested to hear the Minister say under what circumstances the private sector might be exempted from the restructuring, and a reassurance that this would be the exception not the rule.

While the Government have made it clear that the United Kingdom will not take part in the new permanent crisis mechanism, we believe that there may be times when, as with Ireland, it is clearly in the UK’s interest to participate in financial assistance to member states in difficulties. We welcome, therefore, that the current proposal will allow member states outside the euro area to contribute to rescue packages on an ad hoc basis if they wish to do so.

Our primary concern with these proposals is the likelihood that they will continue to be adhered to rigorously as time goes on. Previous efforts to enforce fiscal discipline among euro area member states have been regrettably ineffective. Under the proposals, the Council will retain responsibility for enforcing responsible fiscal behaviour through sanctions. We concluded that this was indeed appropriate given the sovereign nature of EU member states. Only time will tell, however, whether the collective will of member states is strong enough to ensure that the sanctions procedure is applied when required and when the crisis is over.

In his evidence, Mark Hoban MP stated that:

“The cost of the crisis in the eurozone is a reminder to us that we must make these processes work much more effectively”.

The current crisis must indeed be remembered as a reason why member states should enforce the rules set out in these proposals in good times as well as bad. The ultimate responsibility for this lies with the political authorities of the EU, and the committee, I am sorry to say, remained sceptical that they will have the collective political will to enforce them effectively.

I thank all my fellow members of the committee and Professor Iain Begg—our specialist adviser—Antony Willot and Laura Bonacorsi-Macleod for their sterling work in helping the committee steer its way through a difficult report. I hope that the Minister will come back to this in time because we need constant updates on a very tricky situation that is of huge relevance to the United Kingdom.

[Lord Wallace of Saltaire]

My Lords, we have a rather tight timetable. I remind noble Lords that when the clock says four they are into the fifth minute and should sit down.

EU: Financial and Monetary Co-ordination

Lord Harrison Excerpts

Monday 6th June 2011 Lords Chamber

[Lord Sassoon]

My Lords, I am grateful to my noble friend for what he says about the Government’s approach to these matters. It is indeed in the country’s interest to ensure that the eurozone is strong—it is, after all, where more than 40 per cent of our exports go—and we will continue to work constructively on ideas to strengthen the framework. At the same time, we want to make absolutely sure that it is understood, as the Council has recognised, that the UK stands in a special relationship to the eurozone and that we will not have the fiscal sovereignty of Parliament in any way infringed on these matters.

I agree with my noble friend that fiscal discipline is key to ensuring that we do not get into problems like this again, whether within the eurozone or without it, which is why it is gratifying to see that the IMF, in its assessment today, has stressed this very point in relation to the UK’s deficit reduction programme.

[Lord Harrison]

What information have the Government given under their obligation in the broad economic guidelines about sharing information with the 26 other EU members? Under the European semester, which concludes this month, what activity have the Government shared with their partners, again in terms of providing further information on economic and financial matters?

[Lord Sassoon]

I preface my answer by thanking the noble Lord and other noble Lords for their participation in the recent report of your Lordships’ European Union Committee on the future of economic governance in the EU, which provides an excellent commentary and analysis on these matters. The UK has submitted what we were required to submit as part of our national reform programme, and that will be the subject of the next round of debate along with all the other members of the EU 27. Critical to the whole construct and its various strands is ensuring that there is much greater transparency throughout the fiscal architecture. The UK will play its full part in ensuring that we not only contribute to getting the architecture right and submitting the data that are required but, equally, are clear that any budgetary information that we submit comes here to Parliament first and that we are not held to sanction, as are members of the eurozone.

European Financial Stability Mechanism

Lord Harrison Excerpts

Thursday 12th May 2011 Lords Chamber

[Lord Sassoon]

My Lords, we inherited the UK’s participation in the European financial stability mechanism from the previous Government. The decision was made between the date of the general election and the change of Government. We inherited that position. We have taken rapid action, and reached agreement at the European Council in December 2010 that the current mechanism will be replaced by a permanent mechanism by 2013 at the very latest, and that the UK will not participate in it. It is great to hear that the eurozone leaders, who the noble Lord quoted, are completely committed—as we understand they are—to supporting the eurozone. That is for them, and the UK will not be part of that future mechanism.

[Lord Harrison]

My Lords—

[Lord Lamont of Lerwick]

My Lords—

--- Later in debate ---

[Lord Sassoon]

I am very happy to clear up the matter; I thought we had done that a week or two ago. Let me be absolutely clear. The previous Chancellor, Mr Darling, took the decision—it was still for him and the previous Government to take that decision. He consulted the Opposition. My right honourable friend the current Chancellor made it clear that he did not agree with the decision. The previous Chancellor consulted him on the course of action that was proposed and, in the words of my right honourable friend, it was for the previous Chancellor to reach that decision. The previous Chancellor reached the wrong decision. That was his decision; he made it.

[Lord Harrison]

Once again, the Minister is providing inaccurate information. The EFSM, to which we contribute through membership of the IMF, and the ESM, which we will contribute to until 2013, will be conflated into the new European stability mechanism, which we will still be funding through our membership of the IMF. Will he make that very clear?

[Lord Sassoon]

The position as set out in the decision of the European Council is completely clear; it is that the new permanent mechanism will replace the current one. The current mechanism will cease to operate and the new permanent mechanism will deal with any matters that might arise after it comes into operation.

EU: Financial Management

Lord Harrison Excerpts

Wednesday 6th April 2011 Lords Chamber

[Lord Sassoon]

I am grateful to my noble friend, because he gives me an opportunity to refer to the joint letter in December, very much led by my right honourable friend the Prime Minister, to which Germany, France, Finland and the Netherlands were also signatories. That talks about the need progressively to tighten up on and limit the growth of payments into the EU budget in 2012-13 and makes important observations about the necessity for growth in the EU budget through the next financial perspective to be limited. That is a forward-looking set of proposals to which a significant number of member states are already committed.

[Lord Harrison]

Has the noble Lord read the Court of Auditors report, which demonstrates that: there is a welcome downward trend in infringements; 99.9 per cent of the infringements are of an administrative nature; 80 per cent of the spending is by European member states; and the most guilty member state is the United Kingdom itself? That can be examined in the Comptroller's recent evidence to the Treasury Committee.

[Lord Sassoon]

My Lords, it is the 16th consecutive year in which the Court of Auditors has been unable to give a clean opinion on the legality and regularity of the underlying transactions in the EU's expenditure, and that is an unacceptable state of affairs.