(13 years, 12 months ago)
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The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, with permission, I will repeat a Statement made by my right honourable friend the Chancellor of the Exchequer.
“Mr Speaker, I would like to make a Statement regarding financial assistance for Ireland. I hope Members will understand that an announcement had to be made at the weekend, ahead of markets opening this morning. Last night, I spoke to the chair of the Treasury Select Committee and the Shadow Chancellor to keep them informed of the latest developments.
The United Kingdom, alongside the International Monetary Fund, the European Union, the eurozone and other member states, is participating in the international financial assistance package for Ireland announced last night. We are doing this because it is overwhelmingly in Britain’s national interest that we have a stable Irish economy and banking system.
The current Irish situation has become unsustainable. Its sovereign debt markets had effectively closed and had little prospect of reopening. While Britain’s market interest rates had fallen over the past six months, its had risen to record levels, and Ireland’s banks had become completely reliant on central bank funding to maintain their operations. In the judgment of the Irish Government, as well as the IMF and others, this situation could not go on.
Members will understand that it would not have been appropriate for us in recent weeks to engage in public speculation about whether Ireland should request assistance from the international community. I can now report that we have been engaged in intensive private discussions with the G7, the IMF, the EU and the Irish Government on plans for the eventuality that Ireland would request support. At the G20 meeting in South Korea two weeks ago, I was one of the European Finance Ministers who issued a joint statement that provided a brief respite. At the ECOFIN meeting last Wednesday, my colleagues and I discussed the Irish situation with Finance Minister Brian Lenihan, with whom I have also kept in touch directly. Following meetings in Brussels, the Irish Government committed to engage in a short and focused consultation with the IMF and the EU. On Thursday, a joint mission arrived in Dublin, and in the last few days I engaged with my counterparts in the G7, the euro area and the EU about the way forward.
Following intense work over the weekend between the Irish and international authorities, last night Ireland’s Prime Minister, Brian Cowen, made a formal request for assistance. This was followed by statements from the G7, the IMF, the Eurogroup and European Finance Ministers to,
“provide the necessary financial resources for Ireland to implement its fiscal reform plans and stabilise its banking system”.
The statements made clear that there were two components to the rescue package. The first puts beyond doubt Ireland’s ability to fund itself. The international assistance package will support an ambitious four-year fiscal strategy, which the Irish Government will set out later this week. This will see a fiscal consolidation of €15 billion by 2014, of which €6 billion will be implemented next year, as part of a strategy leading to a target budget deficit of 3 per cent of GDP in four years’ time. The second part of the assistance package is a fund for potential future capital needs of the banking sector. This will support measures to promote deleveraging and ensure restructuring of its banks, so that Ireland’s banking system can perform its role of supporting the economy.
Let me turn to how the package will be financed. This is a joint programme, with funding from both the IMF and the EU. The amount of money involved will in part depend on the IMF analysis of what is needed, and Prime Minister Cowen has said he expects it to be less than €100 billion. The international community is working on the rough assumption that the IMF will contribute around one-third of the total. The total European package will provide the other two-thirds. Based on the significant reform of the IMF agreed by G20 Finance Ministers last month, the IMF is well placed to play a leading role in this international effort.
The UK, of course, is an important shareholder of the IMF and we will meet these multilateral obligations. I would like to reassure the House that the IMF is currently well resourced and able to meet the cost of the package for Ireland. The European element of this package will primarily come from two sources of funding agreed in May before this Government came into office: the €60 billion European financial stabilisation mechanism and the €440 billion European financial stability facility. The balance between the European mechanism and the eurozone facility will be determined in the coming days.
The United Kingdom is not a member of the euro—and will not be a member of the euro while we are in government—so we will not participate in the eurozone stability fund. However, the previous Chancellor of the Exchequer agreed to UK involvement in the European mechanism two days before I took office. I made it clear at the time that I did not believe he should make that commitment. But it operates according to qualified majority voting and so we cannot stop it being used, and to exercise that vote at a time like this I judge would be very disruptive. So the EU will lend money to Ireland on behalf of all 27 member states and the UK must accept its share of this contingent liability, which would arise in the unlikely scenario that Ireland should default on its obligations to the EU.
On top of this, I have agreed the UK should consider offering a bilateral loan to Ireland, as part of the IMF and European package. I judge this to be in Britain’s national interest. Let me explain why. We have strong economic relations with Ireland. Ireland accounts for 5 per cent of Britain’s total exports abroad. Indeed, we export more to Ireland than to Brazil, Russia, India and China put together. Ireland is the only country with which we share a land border, and in Northern Ireland our economies are particularly linked, with two-fifths of its exports going to the Republic. Just as our two economies are connected, our two banking sectors are also interconnected. I should stress that the resilience of our own banks, which are now well capitalised, means that they are well placed to manage any impact from the situation in Ireland, but two of the four largest high street banks operating in Northern Ireland are Irish-owned, accounting for almost a quarter of personal accounts. The Irish banks have an importance presence in the UK. What is more, two Irish banks are actual issuers of sterling notes in Northern Ireland, so it is clearly in Britain’s interest that we have a growing Irish economy and a stable Irish banking system. By considering a bilateral loan, we are recognising these deep connections between our two countries and, crucially, it has helped us be at the centre of the discussions that have shaped the conditions of an international assistance package that is of huge importance to our economy. Of course, this is a loan and we can expect to be repaid. In fact, Sweden has also deemed it in its national interest to consider a bilateral loan to Ireland.
Now that the Irish Government have requested assistance, a lot of the detailed work of putting together the package can take place. I understand that Members are keen to hear the specifics, such as the rate of interest on the loans, the repayment periods and the contribution from each of the various elements of this package. I will keep the House informed. Later this week, the Secretary of State for Northern Ireland and my honourable friend the Financial Secretary will be in Northern Ireland to discuss the situation there. I will ensure there is a specific discussion in the House if there is a bilateral loan, as we will need to take primary powers. Finally, let me say something about the future of the various European support funds, which are being discussed later this year. Both the Prime Minister and I are very clear that when it comes to putting in place a permanent eurozone bail-out mechanism, the UK will not be part of that.
This is a situation of great difficulty for Ireland, and it is a tragedy when it did so much to improve its competitiveness with low taxes and flexible labour markets, but the truth is that it had hugely leveraged banks and a badly regulated financial sector—a pattern that we have had to deal with in our own country. In addition, because Ireland is a member of the euro, exchange rate flexibility and independent monetary policy were not tools available to it when the financial crisis took hold. The arguments against Britain joining the euro are well-rehearsed, not least by me, but while “I told you so” may be correct, it does not amount to an economic policy.
When this coalition Government came into office, Britain was in the financial danger zone. We have taken action to put our own house in order. Whereas we were once seen as part of the problem, we are now part of the solution. Ireland is a friend in need, and it is in our national interest that we should be prepared to help it at this difficult time. I commend this Statement to the House”.
My Lords, that concludes the Statement.
Lord Eatwell
My Lords, I am most grateful to the Minister for repeating the Statement made by the Chancellor of the Exchequer in another place. I welcome the Statement on the provision of financial assistance to the Republic of Ireland. It should be clear to all noble Lords that this is in the best interest of the British economy. After all, not only is Ireland one of the UK’s most important trading partners, more important, as the Statement acknowledged, than Russia, India, China and Brazil put together, but British financial institutions have substantial exposure to Ireland. Can the Minister confirm that the exposure of UK institutions to Irish banks exceeds £50 billion and that the overall exposure of the UK to Ireland exceeds £100 billion? In these circumstances, providing support is a price well worth paying to assist in the economic recovery of our neighbours and friends and at the same time to secure the position of our own financial institutions.
The story of the financial pressures brought to bear on Ireland in the past few weeks should be a salutary lesson to Her Majesty’s Government—the lesson that careless talk costs confidence, and loss of confidence spells economic disaster. As is now well known, careless talk by Chancellor Merkel, suggesting that extra costs should be borne by bondholders, was the last straw that broke confidence in the Irish markets. However, this was against the background of continuous deficit hysteria, promoted not just by the traditional deficit hawks in Germany but also by Her Majesty’s Government. Instead of promoting deflation, will Her Majesty’s Government learn from the Irish experience and, as well as developing a sound growth strategy at home, promote growth strategies abroad?
There is some confusion in the Statement as to which part of the UK’s assistance is a contingent liability—that is, a guarantee only to be drawn in the event of default—and which part is to be up-front money. Will the bilateral loan that is contemplated be a contingent provision or an up-front loan? Once the funding is agreed, how and when will the provision appear in the Government’s accounts? Will this unexpected expenditure alter the Government’s declared objective of reducing the deficit to zero in four years? What measures are being taken to recapitalise the Irish banks—key measures such as those that were instituted by Mr Darling so successfully for Britain’s banks?
The big question that arises directly from this Statement is: if the Government can afford to commit substantial funds to the Irish recovery, why cannot extra funds be found to promote the recovery of British industry? A national investment fund of equivalent size would transform the financial circumstances of Britain’s entrepreneurs. It would be a timely boost to confidence and would ease the financial logjam that is holding Britain back. If there is money for Ireland, why is there not money for Britain?
Finally, is the noble Lord aware that if Britain were on the brink of bankruptcy, the Government would not be making the Statement we have heard today?
Lord Sassoon
My Lords, I am grateful to the noble Lord, Lord Eatwell, for confirming that the Opposition are in support of the proposed package, and I appreciate that support.
He asked about the claims that the UK has on Ireland. The latest numbers I have seen state that on 30 June this year, total UK banking-sector claims on Ireland were $131.6 billion—ranking second only to Germany’s banking-sector claims on Ireland. Indeed, they are substantial. However, as I said when repeating my right honourable friend’s Statement, we in the UK have a well capitalised banking sector that is capable of withstanding any pressures from Ireland and elsewhere.
The noble Lord refers to growth. Of course this is absolutely critical; it is part of the Irish Government’s plans and is part of the plans in the UK, which we have already discussed at some length this afternoon. Indeed, I can confirm that of course the Government are very much engaged through the Europe 2020 discussions, and in other ways, to make sure that we promote healthy growth within Europe and globally.
The accounting for any bilateral loan that may be put in place will be a matter for the Office for National Statistics and the Office for Budget Responsibility, but my understanding is that, with a loan on one side and a matching asset that we will have in our claim on Ireland, there should be no effect on the size of the deficit, because this would otherwise be just a contingent liability. As I said when repeating the Statement, we would expect any loan that is made to be repaid.
As to why, if we are lending money to Ireland, there should not be other loans, this is an exceptional situation. Ireland is our closest trading partner which takes a high percentage of our exports. We are contributing to a European package and to a multilateral global effort through the IMF. By supporting the package for Ireland we will support the very many businesses across the United Kingdom that trade with Ireland. That is one of the critical reasons why it is in the national interest that we support the package.
Lord Reid of Cardowan
My Lords, I thank the noble Lord for repeating the Statement. I wholeheartedly believe that the Minister and the Government are correct to extend their assistance and solidarity to Ireland at this time, not least because of our closeness as neighbours and trading partners and because of our mutual interests on the island of Ireland itself. It is understandable that the noble Lord and the Government maintained their silence on discussions up to an appropriate point.
Will the Minister ensure that, while everyone understands that extended assistance of this nature will require discipline and considerable restraint on the part of the Irish, the British Government will never lose sight of the fact that ultimately it will be growth that will take Ireland and many other nations out of the position in which they find themselves? Therefore, any constraints placed on the Irish as a condition of the loans and the assistance that we give them should not, if we can help it, constrain that growth to the detriment of Ireland's success.
Lord Sassoon
I am grateful to the noble Lord for his remarks. It is important to remember that the IMF is very much involved in the negotiation of the terms of the loan and brings to the party very considerable experience of putting together loan conditions in similar situations. From its previous experience, it will be well seized of the need to see the Irish economy—along with other economies that have this problem—growing in future.
Lord Skidelsky
My Lords, perhaps I may draw the Minister's attention to Wolfgang Münchau’s statement in today's Financial Times. He wrote:
“At a time of extreme fiscal tightening, moderate monetary tightening and weak global demand, I fail to see where Ireland will grow”.
Perhaps the Minister will explain how he sees that Ireland will grow, and how its programme of accelerated fiscal austerity as a condition of the bailout will encourage growth in the Irish economy.
Lord Sassoon
My Lords, I am not going to provide a commentary on the Irish economy. As I said when I repeated the Statement, Ireland will come forward with its own budget. It is for the Irish Government to explain their own economic policies in this difficult situation, and for the conditions of the loan to be appropriate to the circumstances.
Lord Newby
My Lords, we on these Benches welcome the Government's decision to support the bailout. I am depressed but not surprised that the Chancellor feels that if he is giving support via a European fund, that is not to be welcomed, whereas if he is signing the cheque directly from the British Exchequer, that is great. However, no doubt that is politics. Perhaps I may take up the question of the noble Lord, Lord Reid, and the Minister's response, on the subject of the IMF and conditionality. As the Minister said, the IMF has a long track record of conditionality on the loans that it has made. Sometimes the conditions have been extremely contentious. What can the Minister say about the loan conditions that are being discussed? For example, have the partners who are making the loan pressed Ireland on its tax rates?
Lord Sassoon
I am grateful to my noble friend for his questions. In response to his first observation, I point out that the Government do not accept the general principle that we should participate alongside eurozone members in bailing out eurozone countries. When it comes to putting in place the permanent bailout arrangements that will be discussed in Europe in the coming months, it is the intention of the coalition Government that we should not be part of any such arrangements. The normal process should be that the eurozone is responsible for its own processes. I cannot go into any more detail of the terms of the package which is being negotiated, but my right honourable friend the Chancellor has said that he will come back to another place when he has more to report.
Lord Higgins
My Lords, it is very reassuring to hear what the noble Lord has just said. However, the Chancellor has made a very sound case for why we need to participate in addition to the help provided by the IMF and the European Union. When we are borrowing heavily, it is rather strange to be lending to Ireland. We shall need to look very carefully, as suggested, at the terms of the loan. The Chancellor says that the matter will be raised in another place. Will we have an opportunity to debate it in this House as well, given the expertise which exists here?
It is difficult to avoid the view that this is something of a sticking plaster, leaving a number of other issues unresolved. Ireland is still in the eurozone, and the interest rates that are determined by the European Union and the exchange rate give it very little scope. Has not the eurozone grown too large and are we not in danger of this kind of situation occurring not simply in Ireland and Greece but also in other countries? The whole system is formulated in such a way that it is not possible for members to withdraw when it might be better for them to do so, rather than get into the kind of situation that we have seen here. Despite the fact that this is clearly not something that would be welcomed in Brussels, and given that we have an interest in the matter along with those in the eurozone, should we not consider whether a more flexible arrangement is becoming essential?
Lord Sassoon
My Lords, any bilateral loan, as my right honourable friend the Chancellor has said, will require primary legislation. So it will go through the normal processes, including those of this House. It is in the UK’s interest to ensure that there is a strong eurozone. The present difficulties have brought to the attention of eurozone members—and of those of us who wish to see a strong zone but who are not in it—the fact that there are a number of defects in the architecture, of which the need for a permanent bail-out arrangement is one. We will work constructively with our partners in Europe to ensure that the eurozone is better able in future to withstand any buffeting of individual economies such as we are seeing at the moment.
Lord Pearson of Rannoch
My Lords, have Her Majesty’s Government yet understood that the euro was always designed for disaster? Do they not see that the longer the political class props it up, with its single interest and exchange rates and its lack of a federal budget, the greater and more ruinous will be the crash when it comes? Are they also beginning to get an inkling—just an inkling—that, behind the euro, the project of European integration is also designed for disaster, as I have often pointed out in your Lordships' House?
To be constructive, instead of throwing billions upon billions of good money after bad, why do they not spend a fraction of it on returning their currency to the PIIGS, Portugal, Ireland, Italy, Greece and Spain? Would that not be just one small step away from the insanity that is the EU?
Lord Sassoon
It is always good to have the noble Lord with us on these occasions to share with us his big picture vision, even if it is not one that I or the Government share. We are where we are with the eurozone at the moment, and we must be constructive partners to make it work. It is clearly regrettable that articles of the European Union treaty, such as Article 122, which should have been used for such things as natural disasters, has been enabled to be used for a mechanism in which the UK was committed to be a contributor by the previous Government. There are certain things that we must get straight going forward so that the treaty is used for the purposes for which it was intended. There are a number of lessons, to which I have referred, but I repeat that it is absolutely in our interest to see a strong eurozone because, among other things, that is where 40 per cent of the UK's exports go.
Lord Elystan-Morgan
My Lords, does not the Minister agree that the statements made by the German Chancellor and the French President at Deauville a month ago and thereafter were singularly unhelpful? I refer to the declarations in relation to the rate of interest and to tax levels in the Republic of Ireland and the demand that bondholders should bear a substantial part of the loss. Her Majesty's Government should be congratulated most warmly on having abjured any temptation to trespass on or to demean in any way Irish sovereignty and to accept those realities of geography, history and commercial intertwining which bind our two countries so closely together.
Lord Sassoon
I am grateful to the noble Lord for his remarks. I shall not criticise other countries for the running commentary that they have given on certain aspects of the developing situation, but the noble Lord gives me the opportunity to confirm that the UK believes in tax competition in Europe. We certainly have not been and will not be a party to some chorus telling the Irish how they should set their levels of corporate taxation, any more than we would want people to lecture us on how to set it.
Lord Inglewood
My Lords, I must first declare an interest, because the price of the beef cattle I sell has fallen by about £100 a head because of the turbulence in Ireland. Does that not show that this is not merely a matter of politics and economic theory; it is an episode which has a real bearing on the prosperity of people in our country? That should be at the centre of the Government's thinking about how to respond to the circumstances in which we find ourselves.
Lord Sassoon
I am very grateful to my noble friend and completely agree with his sentiments. It is always good to be reminded that our economy has an important agricultural component to it and that that is part of what the Government’s possible contribution to this package is helping to protect.
Lord Martin of Springburn
My Lords, I welcome the help that is being given to Ireland. I am mindful of the fact that, in the city where I was raised, many sons and daughters of Ireland came to be our teachers, to look after our elderly and to be our doctors. Many of the large construction projects, such as the hydro dams, were built by Irishmen who worked so hard and were away from home.
The Minister said that the interest rates will be worked out, but for every point on the interest rates there will be more hardship for the people of Ireland. When the Chancellor announces the interest rates, will this House and the other place have a say in them?
Lord Sassoon
Interest rates and the other terms of the package will be negotiated between the Government of Ireland, the IMF and those leading the European side of the negotiations, so they will not be the subject of discussion in your Lordships' House, except that any bilateral element in the package from the UK will be subject to primary legislation, so there will be an opportunity to consider the terms of any bilateral loan.
The Lord Bishop of Chester
Can the Minister help me resolve an ambivalence that I detect in his answers? He seems to be saying that it is vital to our national interest to support the eurozone and equally important to our national interest not to be part of it.
Lord Sassoon
That is precisely what I am saying. As was confirmed by my right honourable friend the Chancellor in another place, the Government are not going to take this country into the eurozone and, indeed, we are not going to make any preparations during the course of this Parliament to take us into the eurozone. I think that it is completely compatible with playing our part as an important part of the European economy to make sure that the eurozone is stable. I may be being thick, but I fail to see the contradiction in those two positions.
Lord Foster of Bishop Auckland
My Lords, the Government have done the right thing, and we support them, but now that they have become enthusiastic supporters of growth being a fundamental part of the solution in Ireland and in Europe as a whole, will they give a great deal more thought to how they can stimulate growth in the United Kingdom, as the new secretary of the CBI requested?
Lord Sassoon
My Lords, we have been giving it very considerable attention, which is precisely why the first series of actions of this Government was around convincing the world that we had a plan to deal with our deficit so that we did not find ourselves remotely in the position in which Ireland has regrettably found itself. That is the way that we have managed to keep interest rates low and the foundation of our growth policies. We have then gone on, whether in tax, capital expenditure through the spending review, the economic infrastructure, the attack on regulation or in other areas, to build a strong series of growth policies in this country.
Lord Kilclooney
My Lords, Ireland broke away from the United Kingdom and gained sovereign control over its taxation, interest rates and currency, but all these things have been thrown away. Even interference in its budget is now a requirement. There is now a great economic crisis in the south of Ireland, and that is bad news for us in Northern Ireland and in the United Kingdom. I therefore welcome the bilateral grant that we in the United Kingdom will be giving to support the present dire distress in the south of Ireland. However, one thing that worries me in a broader sense—it is not specifically about the Republic of Ireland—is whether when other countries in the eurozone get into economic difficulties, as has already happened in Greece and in southern Ireland, we are still going to be required to support them financially.
Lord Sassoon
My Lords, as I have explained in repeating the Statement, we take the situation in Northern Ireland extremely seriously, which is why my right honourable friend the Secretary of State for Northern Ireland and my honourable friend the Financial Secretary will go there later this week. As to the question of support for other countries in Europe, I will not give a running commentary on other countries and their economic conditions. But, as I have made completely clear this afternoon, the situation of Ireland is very different from any other country and our response has been commensurate with that.
Lord Brooke of Sutton Mandeville
My Lords, if it is true that relations between our two countries are the best that they have ever been, does my noble friend regard it as a happy conjuncture that we are in the situation where we can make the Statement we have made today in the interests of the old saying that a friend in need is a friend indeed? Will he also give any report on the behaviour of the Spanish and Portuguese markets during the course of today?
Lord Sassoon
My Lords, as I said in repeating the Statement, we have given our support for a possible contribution to a package based on a very hard-nosed assessment of what is in the interests of the UK economy. That it coincides with the fact that we have had a long history with Ireland is important, but it is purely on the assessment that it is in the interests of the UK economy that we have contributed to the possible package. As to what is going on in the other markets, I am afraid that, because I have been detained throughout the afternoon in your Lordships’ House, I have not been looking at them.