EU-UK Trade and Cooperation Agreement
Lord Davies of Stamford Excerpts(3 years, 3 months ago)
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Lord Davies of Stamford (Lab) [V]
My Lords, I think these two agreements lack two fundamental things without which they will be much poorer than they would otherwise be. First, there is no cost-benefit analysis at all, and there should be for any great venture of this kind. As we know, we left the European Union very much on the basis of very extravagant promises: we were going to have much more money, there were going to be enormous increases in the budgets available for the NHS, and so forth. Nothing has been seen of these promises since, and the fact that there is no cost-benefit analysis will, I am afraid, lead only to greater cynicism in this country about the political system.
The other thing that is extraordinary is that while there is a great deal about goods in this agreement, there is virtually nothing on services, although services are our great forte, representing nearly 90% of our GDP. That is an extraordinary order of priorities. I am aware, of course, that the Government have now entered into negotiations about financial services and the regulation and supervision of financial services companies on the basis of equivalence. I doubt that very much will come of this, because I think the continentals, quite reasonably and rightly—I think we would have exactly the same attitude if we were in their shoes—wish to use Brexit as an opportunity to encourage more and more firms currently working in this country to move their operations, their capital and their personnel to the European continent. If they want to do that, they are rather unlikely, it seems to me, to be prepared to accommodate us on the matter of equivalence.
Covid-19: Economy
Lord Davies of Stamford Excerpts(3 years, 10 months ago)
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Lord Davies of Stamford (Lab)
My Lords, the first thing that we need to do in a situation of this kind is to make sure that we do not deceive ourselves about the reality that we face. This recession will be twice as deep as the one in 2008-09, which followed the collapse of Lehman Brothers, and I think that it will go on for a great deal longer, quite simply because a high proportion of our fellow citizens have lost earnings, jobs, businesses and capital. Their great concern for a number of years will be trying to build up again their savings and net worth, of which they have felt reasonably secure in the past. That means that consumption spending will be very restrained. I am afraid that it is unrealistic to expect the state simply to step in and replace that.
Even as we have this debate, we are passing the grim milestone of a public debt to GDP ratio of 100%. Earlier in the debate, the noble Lords, Lord Horam and Lord Darling, reminded us that we had even higher levels of debt after the Second World War. What they did not mention is that we got out of that through inflation in the 1950s, the 1960s and, in particular, the 1970s. I do not think that they are recommending that solution this time, but that was how we managed to erode the value of that debt. If we had not run it through inflation, I am not sure how we would have done so.
We also have the problem that general taxation—that is, if we increase taxes while deep in recession—will make the situation worse. That makes life difficult. We also have a troubling background of a failure of productivity in this country, which makes our economy’s long-term prospects not very rosy.
This is, therefore, a time for radical suggestions. Let me make two. The Bank of England should start to reissue consols, which were once the basis of public sector funding. Now is the time to do that, while interest rates are low. Secondly, now is the time to take the National Health Service out of the structure of public spending and taxation. We need to spend more money on the health service, not less, and we cannot do that if it is constrained in the straitjacket of public spending policy. We should do what the continentals have done. We should set up a national commission or, like the Germans, we should have non-profit-making health insurance companies fund it. Money would still need to be raised but it would be a health insurance premium, not a tax.
Budget Statement
Lord Davies of Stamford Excerpts(4 years, 1 month ago)
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Lord O’Neill of Gatley (CB)
My Lords, I welcomed the broad spirit and nature of the Chancellor’s Budget, much of which was, of course, designed before the realities of Covid-19. It was focused on a policy to significantly boost investment spending, so-called levelling up and giving proper attention to the northern powerhouse, all of which I hugely welcome. However, there have been events. The rest of my speech will be a brief, adapted form of an article I posted on Monday on the website of Chatham House, which I currently chair.
Linked to the call that Robin Niblett and Creon Butler of Chatham House and I made the day before—Sunday—for a global response to the Covid-19 pandemic, the case for a specific dramatic economic policy gesture from many policymakers across the world is prescient. This should involve most, if not all, G20 nations and should certainly have the same force as that led by Gordon Brown in 2008. We need some sort of income support for all our citizens, whether employees or employers, for the next two months. Perhaps one might call it, as I have done, truly a people’s QE— quantitative easing.
Both so-called modern monetary theory, MMT, and universal basic income, UBI, essentially owe their roots to the judgment that conventional economic policies have not been working, especially since 2008, in the way we are all trained to believe. At the core of these views is the notion of giving money to people, especially those on lower incomes, directly paid for by our central banks printing money. Until recently, I found myself having many doubts about, or not much sympathy with, these views, but, as a result of Covid-19, I have changed my mind.
This crisis is extraordinary in so far as it is both a colossal demand shock and perhaps an even bigger colossal supply shock. The crisis epicentre has apparently shifted from China, and perhaps much of the rest of Asia, to Europe and the United States. We cannot expect policies, however unconventional by pre-2008 standards, including the dramatic monetary steps announced by the Federal Reserve Board and other central banks, to put a floor under this crisis. We are consciously asking our people to stop going out, stop travelling and not go to their offices—in essence, curtailing most forms of normal economic life. The only ones not impacted are those who spend their entirety in cyberspace but even they have to buy some form of consumer goods, such as food, and, even if they order online, someone has to deliver it.
To give a flavour of the kind of challenge that we are now in, data published at the weekend shows that on most measures the Chinese economy probably fell by about 20% year on year in February alone. That equates to taking off something close to $3 trillion worth of GDP in a month. We in the UK, and much of the rest of the Western world, are adopting or have adopted some version of that same policy in March. It would be not at all surprising if we did not do something bolder, and the economic consequences will not be so far different from those in China.
As a result, markets are correctly worrying about a complete collapse of economic activity and with it a collapse of companies, not just their earnings. In my view, an expansion of central banks’ balance sheets in the way that has been done since 2008 is not going to do anything to help to arrest this, especially unless we go beyond just trying to underline the security of our banks, although that is still important. What is needed in the current circumstances are steps to make us believe with high confidence that if we take the advice of our medical experts, especially if we self-isolate and deliberately restrict our incomes or have them deliberately restricted for us, then this will be made good by our Governments. As I have said, in essence we need smart, persuasive people’s QE and quickly.
Having discussed this idea with a couple of economic experts I know, I realise that there are of course some challenges in the implementation of such an idea. For example, I gather that in the US it is probably currently illegal for the Federal Reserve Board to directly transfer cash to individuals or companies, and that could be true here and elsewhere. In my view, though, that is easily surmounted by our fiscal authorities by issuing a special bond, the proceeds of which could be transferred in the manner that I have suggested to both individuals and business owners, and our central banks could easily finance such bonds. It is also the case that such a step may encourage both the perception and the actuality of central bank independence, but I now find myself among those who argue that central banks can operate such independence only if done wisely and when needed.
Others may argue, in the spirit of the equality debate, that any income support should be targeted primarily if not entirely at those on very low incomes, while higher earners or large businesses should be given none or very little. I can sympathise with such spirits, but in my view that ignores the centrality and scale of this particular economic shock. All our cafes, pubs, restaurants, airlines—where do you stop?—indeed, all our businesses are currently at accelerating genuine risk of not being able to survive, and of course all these organisations are enormous employers of people on any kind of income.
As I have tried to say, it is also the case that time is of the essence. We need our policymakers to act on something like this as soon as possible—ideally in the next 24 hours—otherwise many of the transmission mechanisms that we have become accustomed to for the whole of our lives are going to be challenged. We need some kind of smart people’s QE now.
Lord Davies of Stamford (Lab)
Is it not the case that what is really alarming here is that the collapse of consumer demand is likely to last for a very long time and that there is going to be a substantial negative-wealth effect, given that people will have been out of jobs while their businesses and indeed the stock market has collapsed? People will require years to build up their savings again to where they were before. That means that for a very long time there is going to be a substantial shortage of demand from the consumer sector.
Lord O’Neill of Gatley
My Lords, my frank answer is that I do not know, but the longer that we delay an imaginative and forceful response, the risk of what the noble Lord has just described will rise. The whole reason why I am suggesting such a very unconventional and dramatic policy approach now is to stop exactly the kind of things that he is suggesting. If we give all our people confidence that they can essentially have something close to an eight-week paid holiday, and there is no reason for any employer to lay any of them off permanently or for those employers to worry about their income, that should give the confidence for us to allow what has been done so well in Asia to be fully done here, and get this virus behind us.
European Union: Negotiations (European Union Committee Report)
Lord Davies of Stamford Excerpts(4 years, 1 month ago)
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Lord Davies of Stamford (Lab)
My Lords, the narrow nationalism of this Government has been deeply depressing for a long time. But the fanatical, pedantic ideology that the Government have displayed in the last few weeks is quite unspeakable. The Government have withdrawn from the European Aviation Safety Agency and from Euratom. They have withdrawn from the EMA, the European Medicines Agency, in the middle of a pandemic, without any idea of what they are going to put in its place.
We had a debate a few weeks ago in which I asked the Minister a series of questions about what might happen and the various possibilities for replacing the EMA. It is obvious that the Government did not have the faintest clue what they were going to do. You cannot build up a new EMA—or FDA, to use the American term—in just a few months, let alone in nine months. We literally have the prospect that any new compound coming from the world’s pharmaceutical industry—and that could well be a vaccine for the coronavirus—will not be registrable in this country, will not be registered, cannot be licensed and will not be available to British patients. This seems fantastic but is actually the case.
What does one do in these circumstances? Until that debate, which left me with a profound sense of concern and anxiety, I took the view that these negotiations were going to be very difficult, take a long time and that there would be a lot of posing, rhetoric and so forth but that, at the end of the day, between rational, reasonable people, and given the importance of trade, there would be some compromise. Indeed, I worked out what I thought could be a viable compromise in the area of the regulation of traded goods, or what is now known as the level playing field.
I do not mind telling the House what I worked out; it will not have any relevance and, for reasons I shall come on to, it will never be implemented. I had in mind that we would start off with regulatory alignment, and we would then have an understanding, or a rule, that any party wishing to introduce a new regulation or change an existing one would have to give three months’ notice to the other. This would provide time and opportunity for negotiation and possibly compromise. But if the party insisted on having his or her way, at the end of the three months, he or she could withdraw from the whole arrangement. It would be so unlikely that anyone would want to withdraw from an arrangement affecting the exchange of tens of billions of pounds or euros of goods every year that it would be very unlikely that it would ever occur.
But I then realised, particularly after the debate that I have referred to, that I had really got it quite wrong. It was a great mistake to look at this from the point of view of rational analysis. We are dealing with much more powerful emotions than that. If you ask—and I have done this—the members of the ERG, who are supposed to be dominating the Government, what regulations they would like to introduce, if they are going to introduce new British regulations, or about the regulations we currently have that they would like to get rid of, they have no idea. This is not about regulations at all; it is about something much more profound and deeply emotional—something which goes to the heart of the Government’s ability to continue with its nationalist and populist campaign and which has brought it such electoral success recently. It is all about sovereignty.
On the continental side, there are equally strong emotions. In my view, what drives the continentals is more important than pounds, shillings and pence—or euros—or the productivity gains that you can certainly achieve from international trade, or the wealth creation or employment creation. Those things are very important. They are very attached to them. However, even more important to them is the survival of the European Union and the protection of that great sense of solidarity that has been built up over the past 50 years: the cultural changes, the exchanges and the bringing down of barriers; the educational and scientific research programmes; the enhancement of security through things such as the common arrest warrant and Europol; and the economic benefits of the single market—very much so. Above all is the assurance that Europe would not go back to the international system of 1914 or 1939, in which we had a bunch of highly competitive, nationalism-driven states quarrelling from time to time about economic, ethnic and territorial disputes. We know very well to what appalling tragedies that led. These matters are far more important than they appear. I am afraid that I can draw the conclusion only that it is most unlikely that there will be any agreement on them in present circumstances.
I will take another example, which is that of equivalence in financial services—I only have time for two examples, but they are perhaps the big two potential deal breakers in this whole negotiation. Equivalence is not quite the same as the example that I have given about the level playing field, because the proposals on equivalence do not involve giving privileges not available to members of the union to someone who has been a member of the union but has left. That seems absurd and unjust—it is, of course—and would be a permanent source of resentment, bitterness and recrimination within the union. If we came to an arrangement similar to the one that I just proposed theoretically for the level playing field, I do not doubt that, within a day or two, Mr Viktor Orbán would come up with a demand for 200 more regulations to be imposed or removed, so as to show how absurd and unjust the whole thing was.
Equivalence is not quite in the same category because it is not having something better than what members of the union have: it would not be as good as what they have, because they have stability and confidence that the regime will continue in the future. Equivalence means that you are considered equivalent as of today. However, banking regulations change the whole time: you might not be equivalent after six months, most unlikely to be after two years and certainly would not be after five years. You will have no guarantee of it being renewed and do not know what new regulations might come in. You are not in a better position, although it is still a much better position than not having the right to deal in the markets concerned without setting up separate subsidiaries and fragmenting your capital base, which no bank wants to do.
Equivalence is valuable and important but not likely to be granted. There are perhaps three reasons for that. The first is very understandable, and I do not think that anybody should be shocked by it, because I do not doubt that we would be behaving in exactly the same way if the boot were on the other foot. The continentals have noticed that London has attracted an enormous amount of the wholesale banking business that can be so profitable in normal circumstances. Since you need only one capitalised entity in the EU to trade throughout it under present EU arrangements, most of those entities have been placed in London. I doubt that there is a general desire on the part of our continental former partners to ensure that our commercial advantage continues indefinitely; they may well feel that there should be a level playing field there too, and that they should put themselves in a position where they can attract that sort of business to their own financial markets. There will be an element of that, which you can call protectionism, but it is natural—it is human nature, really. As I said, I do not think that we should be particularly shocked about it. We should just accept it. It is a strong argument and there is no answer to it.
The second thing is precedent. All Governments are very concerned about precedents when they give a favour to anybody—we are talking here about a major favour. As has already been said, there has been a considerable extension of the idea of equivalence far beyond what was originally envisaged as a purely EU-US arrangement. The EU is currently locked in difficult negotiations with the Swiss on precisely that point. No doubt the Chinese, the Indians or all sorts of people would like to have equivalence, and they are people whom it is very difficult to refuse, but in this context it would have to be refused because they do not have the effective banking supervision and regulatory systems that would be required. The creation of yet one more precedent would be something that a lot of people in the European Union would want to resist.
Thirdly, there is a point that possibly will not be spoken about very frankly, but it plays a big part in this, and that is the attitude of the central bank, the ECB. All central bankers, before they go to sleep at night and when they wake up in the morning, have two great concerns: one is whether there will be a financial crisis; the other is, if there is a financial crisis, whether they have the instruments to deal with it satisfactorily. If you have a financial crisis, you have to give orders to the banking system—like the orders we gave to banks after the Lehman collapse to stop buying CDOs—and those orders have to be obeyed immediately. You cannot really have a situation in which somebody says, “But I’m British and I’ve got a special protocol. I don’t have to obey you. I want to go to arbitration and do this, that and the other and call in lawyers.” It does not work that way. Equally, central banks depend upon a situation in which the major bankers in their jurisdiction are very beholden to them. I speak as a former investment banker for 14 or 15 years. Latterly, I was a main board member and head of European corporate finance in a large investment bank. Anybody who has ambitions in the City in that field has to make sure that they do not cross the Old Lady—that they do not upset the Bank of England. It is not a question of breaking some specific rule, but you want be regarded as responsible and helpful, particularly in a crisis when it is necessary.
Christine Lagarde and her colleagues will almost certainly be asked by Monsieur Barnier about their views on equivalence—no doubt it has already happened. I doubt very much that they have said that it would be a great idea to have more people in this market based outside the European Union with the privilege of operating under the equivalence regime. I very much doubt they will be saying that. I think they will be saying that it is something they would be reluctant to see. There are serious reasons why in both these cases—and I described them both as potential deal breakers—we will not get what we want.
The Government are very optimistic. They are trying to up the ante the whole time—saying that the continentals have got to agree everything by the end of the year and they have to make substantial progress by May or June otherwise we will drop the whole thing et cetera. They have even, as has come out very clearly from this debate, broken the terms of the agreement that they made on Ireland, which will make it very difficult for a negotiation to succeed. I think they are doing this because they are extremely confident. They have always said that the continentals are much more dependent on us than we are on them because they sell much more to us than we sell to them. It is a wonderfully quaint, mercantilist idea from the 17th century. Most people dropped that idea with Ricardo in the early 19th century. We now believe that the benefit of international trade is the opportunity gains through the international division of labour, and the benefit is computed in terms of gross domestic product, not in bullion accumulated in the central bank as mercantilists believed, or perhaps still do believe.
Nevertheless, if we look at it from the point of view of GDP, it is quite instructive. We find that the reverse is true. Their dependence on us is much less than our dependence on them. Some 14% of British GDP is exports to the European Union. In no European Union country, with the exception of the Republic of Ireland—and the Netherlands, where there is quite a lot of entrepot trade through Rotterdam which perhaps falsifies the figures—is the figure for exports to this country greater than 4% of GDP.
Lord Davies of Stamford
No, indeed it is not. I am not saying that the benefit we get is accumulating bullion, because we have a balance of payments surplus. That is the mercantilist idea, and I can only describe it as quaint; it is curious that people still believe in it. Yet the Government evidently do—because that is what it means when people say, “We’re in a better position, because they sell more to us than we sell to them, so they’re more dependent on us.” In fact, the GDP figures show the reverse.
To complete what I was saying about the figures, no EU country, apart from the two I mentioned, has exports to this country greater than 4% of GDP. That means that, if there were a 10% reduction in our trade because we went over to a WTO basis after the end of the transition period, the continentals would lose 0.4%, which is within the annual fluctuations of national accounts, whereas we would lose a much more important 1.4%. If there were a 20% reduction, they would lose 0.8% of their GDP—still manageable, although it would be a difficult blow—whereas we would lose 2.8%, which would be cataclysmic.
For those who do not like elementary economics, I should add that one could ask a 12 year-old, “Who has the greatest leverage and influence: someone who speaks for a market of 500 million people or someone who speaks for a market of 60 million people?”, and that 12 year-old would give you the right answer. The Government have the wrong answer. The first step in wisdom is self-knowledge, and the Government should take that step before they get involved any further in these negotiations.
EU: Future Relationship
Lord Davies of Stamford Excerpts(4 years, 1 month ago)
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Lord True
My Lords, I take particular note of what the noble Lord says. I thank him for his kind remarks. I have the highest respect for his great service to this country. I remember watching from the sidelines in the early 1990s his extraordinary achievements. I think I said at one stage in these discussions that he was the Duns Scotus, the great scholastic who understood everything. I hope he will not regret having to deal with a Dunce Anglius here at the Dispatch Box who has a lot to learn. Look, the negotiations are just yet to begin. People will lay out their positions next week. Again, the noble Lord invites me to run ahead of the position. Each side’s position will be staked out by the appropriate people as the negotiations commence.
Lord Davies of Stamford (Lab)
Do the Government not appreciate that no one will invest in manufacturing capability in this country, the output for which will be dependent on demand from the single market to a considerable and possibly larger extent, in a climate of regulatory uncertainty where it is not clear whether at any moment our regulations might divert from those in the European single market? It seems to me that the Government either have decided to neglect or have never heard of one of the most elemental requirements of industry in the important area of investment.