Euro Area Crisis: EUC Report

Baroness Noakes Excerpts

Monday 21st May 2012 Lords Chamber

[Baroness Noakes]

My Lords, the noble Lord, Lord Harrison, and his committee have produced an excellent report on the most critical issue facing the European economy since the start of the EU. They are to be congratulated on it.

Given all that has happened—and indeed has not happened—in the eurozone since the report was published in February, I am sure that the noble Lord, Lord Harrison, is not expecting all speakers to stick rigidly to the report and the Government’s response. I hope I may be forgiven for straying a little outside the narrow confines of the report.

However, I shall start with the report. The committee was rather exercised about the December 2012 European Council and the circumstances surrounding the Prime Minister’s use of the veto—it seems rather a long time ago now. Unlike the committee, I have never been curious about who said what to whom before the veto was deployed. The most important thing was that the UK demonstrated that we can—and will—use the veto to protect our national interests, and I was extremely proud of the Government that day.

I am well aware that some noble Lords have criticised the UK’s veto as an isolationist strategy which will harm our role in Europe. I am quite sure that some in Europe are extremely vexed by our stance on the crisis and the chatter in Brussels may well be negative. The European project has never liked independent thought or action. However, I have seen no evidence of extra harm since last December and would certainly trade some unpopularity within Europe for a clearer understanding that the UK’s own interests are paramount.

The Government’s position on the eurozone, which I completely support, is that it is for the eurozone countries to sort out their own mess. When the euro started life, we could see that our economy was so unlike those on mainland Europe that we were more likely than not to be damaged by being tied into policies not designed around our needs. We could also see that the countries which became eurozone economies were insufficiently convergent for the one-size-fits-all interest rate to be good for the whole euro area.

It is now plain that the low interest rates within the eurozone, which suited Germany’s economic strategy, have done massive harm in terms of inflation and asset price bubbles to other eurozone economies. The euro arrangements lacked any instruments or incentives to require economic reforms, so southern Europe remained unreformed. But entry was voluntary and those volunteers must now find their own solutions.

As noble Lords are well aware, I am a confirmed Eurosceptic—sceptical about the whole project and about the euro—but I take absolutely no pleasure in seeing the current problems in the eurozone. The UK’s economic success is still too closely bound to that of the rest of Europe for problems across the channel to be any source of joy. My great regret is that the UK has tied its economic fortunes so closely to Europe and hence is vulnerable to economic success or failure there. We depend on European markets for roughly 40% of our exports. Our history as great exporters is in the past. Somehow, we have let the emerging markets grow without us, and it is shameful that we export more to Belgium than to India and China combined. Lessening our trading exposure to the eurozone should be a government priority.

I turn to the position of Greece, which dominates the headlines. Greece lied and cheated about its economic affairs and, at one level, there is a certain satisfaction that it is now getting its comeuppance, but the medicine that has been forced down the throats of the Greek people by the German-led eurozone group is more than tough and more than painful for them. The imposition of an unelected Government was a particularly shocking development and it is no surprise that the Greeks now reject austerity and what is demanded of them. Greece needs devaluation, and it simply cannot get that within the euro. It seems to me obvious that Greece cannot survive within the euro and should be encouraged to take an orderly exit. The longer that the European core tries to hold Greece in while imposing impossible economic conditions, the more likely it is that an exit will be disorderly. The signs are not good.

In the past few months, there has been deposit flight from Greece. Corporates routinely sweep any cash out daily. Anecdotal evidence suggests that wealthy Greeks have been transferring large sums of money to other, safer eurozone territories—in particular, Germany—or beyond the eurozone. Now ordinary Greeks seem to think that keeping their money in the banks is not a clever thing to do, and a real bank run could bring the Greek problem to a head.

I am sure that a lot of work has been done throughout Europe to model the consequences of a Greek exit, with best, worst and intermediate cases. I know that my noble friend cannot give market-sensitive information, but I would be interested to hear what he feels that he can say about the impact on the UK of a Greek exit.

Of course, the bigger danger is contagion. Cyprus and Portugal might well be early casualties—the former because it is so intertwined with Greek banks and the latter because it is a weak economy. They, too, could probably exit with few repercussions. The real problems lie elsewhere, as the noble Lord, Lord Harrison, said. We have seen the cost of borrowing in Spain and Italy rise towards levels which could easily be unsustainable. The cost of credit default swaps are also, unsurprisingly, rising for those countries. Those are the judgments of markets. Financial markets have judged that the actions to date have failed to deliver a sustainable solution. For example, last week’s overdue recapitalisation of the Spanish banks was nothing like enough to deal with the underlying problems, which is why Spanish bank yields continue to rise.

Markets want comprehensive solutions. Common issuance eurobonds would probably be a popular solution with markets, because they would involve a common commitment to a long-term economic solution. The committee examined that. Markets need Germany’s financial commitment to the whole eurozone, not just to economic policies, but Germany cannot or will not deliver that at present. If eurozone leaders come up with more half-baked packages which depend on extraordinary feats of austerity or are based on wishful thinking about growth measures, markets will reach their judgments and other weak countries in the eurozone will be exposed.

The G8 summit last weekend failed to do anything to reassure markets that the euro crisis will be dealt with. If the position of Spain or Italy within the euro becomes untenable, the consequences would be severe for Europe as a whole, including the UK. That is why I support the efforts made by my right honourable friend the Chancellor to urge the eurozone countries towards fiscal union.

I certainly would not have started with fiscal union. Indeed, I would not have started with the euro at all, but there is no example of successful currency union without fiscal union, and if that leads eventually to greater political union—the dream of the European federalists—so be it. It is a fact of life that the euro exists, so breaking it up is going to be very painful and it is therefore in the British interest to push the euro to its logical conclusion. The Government’s first priority is to protect Britain’s interests, and Britain’s interests will be protected if the euro does not go into a disorderly break-up.

If there is closer fiscal and political union within the eurozone, that will at least lay to rest the question that seems never quite to go away about whether we should join the euro. It will at the same time throw into sharp relief the whole nature of our relationship with the rest of Europe. I am not optimistic that the distinction between the internal market, which we will want to participate in, and the economic governance of the eurozone, which we will not, will stand the test of time. It seems that the eurozone will be driven more closely together, and that that will drive the UK and the other “euro out” countries away. The EU as we know it almost certainly could not survive a break-up of the euro.

As we have had a trade deficit with the EU for a long time, we should not get paranoid about those problems. The eurozone countries need our markets more than we need theirs, so we should be able to achieve our trading aims without the need to conform to every directive or regulation designed by the eurozone countries.

Of more immediate concern is the direct financial exposure of the UK. I congratulate the Government on bringing to an end our liability to the European financial stability mechanism, which the party opposite committed us to after it had lost the general election but before it conceded defeat. It will be important to avoid any further commitment. My noble friend the Minister was only partly reassuring on this front when he answered a Question from the noble Lord, Lord Empey, last week. He refused to say in unequivocal terms that the Government had no intention of providing further funding for the euro bailout. I hope that he can be clearer today. The question is: will the Government rule out providing any further financing to bail out the eurozone? It is a simple question and requires only a simple yes or no answer.