Genuine Economic and Monetary Union (EUC Report)

Lord Desai Excerpts

Wednesday 2nd July 2014 Grand Committee

[Lord Desai (Lab)]

My Lords, I, too, join all other speakers in congratulating my noble friend Lord Harrison and his committee on publishing an excellent report. I want to concentrate on an analysis of what has not happened and what has gone right in this economic and monetary union. Perhaps I should say that when a perfectly good phrase such as “economic and monetary union” acquires the adjective “genuine”, you really have to worry. What is that “genuine” going to do to me that did not happen before?

I recall that when we were discussing the Maastricht treaty in your Lordships’ House, it was quite clear—to me at least—that the single currency was a deflationary union. That became clear in the way that the duties of the central bank were described. Economists used to refer to inside and outside money and there was no outside money in this thing. The money could be generated only by private economic activity because Governments were not allowed to monetise debt. People who signed up to this were blinded by the reputation of the Bundesbank and the success of German economic policy, not realising that that was the result of lots and lots of hard work. They had a tough economic regime, which was never Keynesian. Germany never adopted a single Keynesian policy throughout its post-war development. Quite a lot of the rest of us have been relying on the state to print money here and there in one form or another, and bail us out.

Given that this was the difficulty, you almost have an economic and monetary union that is like the gold standard, but without any guarantee that gold will come in and out. Countries really have to deflate their internal domestic cost to keep pace with the most economically efficient country, which is Germany. Clearly, that has not happened and, as far as the eurozone is concerned, we will therefore be in a continuous deflationary position. I do not see any small way out from that. Where the problem with economic and monetary union arises is that the governance mechanism which is available is not adequate to the ambitious task that the programme has set itself. Again, economic and monetary union is probably feasible when you look at having an EU 12, or maybe an EU 15. With an EU 28, however, the governance mechanism is very slow moving and a lot of it requires consensus, which is difficult to establish within a system that has a great diversity of economic circumstances within its countries.

What we have therefore seen is that in a crisis such as we have just been through, the system has a certain ability to respond. Although we have had no agreement on Eurobonds being issued with debt mutualisation, we have a stability mechanism that has some ability to issue bonds. That came as a result of responding to a crisis and, after various acronyms such as EFSF, EFSM and so on, we finally have some small ability to issue bonds. Similarly, the European Central Bank—the one body in the economic and monetary union which does not have to rely on continuing negotiation and consensus— has been able to act quickly and innovatively. Indeed, the eurozone was saved solely by the ECB being able to act on its own without having to go to the Commission, the Parliament or the Council.

“Okay, whatever it takes”, are some of the most powerful words in the history of the economic and monetary union. As the noble Lord, Lord Lamont, said, once a banker has said that, he does not have to do anything. The fact that he gave a guarantee that he will do it calms the markets down and no one comes to borrow any money from him. In a sense, the European Central Bank has proved to be a pivotal institution to the economic and monetary union because it can speedily respond. I know that there are differences within the governing council of the ECB. The Germans, obviously, are constantly worried that the deflationary mechanism might be diluted. But it is remarkable that it has proved to be the most flexible and innovative institution.

However, we have a problem: the decision-making procedures between the Commission, the Council, the Parliament and so on are not fit for the purpose of achieving a harmonious economic and monetary union any time soon. We all know that we need a system of fiscal transfers but that will not be easy to achieve. It is not quite clear how one can aggregate the political will of the citizens apart from the political will of their Governments. One great problem of the system is that there is no direct involvement of the wider citizenry of Europe in the European political framework. They are engaged in their own national Parliaments and they elect European parliamentarians. I do not know who my MEPs are or how many there are. I consider myself a quite politically conscious person.

One thing that may have to be done in the long run is holding more direct elections of the more important positions, such as the European Commission President. We have just gone into battle about whether the Parliament or the Council has a right to elect. Obviously, the Parliament electing is a more democratic procedure than the European Heads of Government electing or negotiating over dinner. Again, it is not a transparent process. If, for example, the President has to compete in a Europe-wide election in which all the citizens vote, the whole process would have greater legitimacy than it has now.

We may not be able to construct a system of fiscal transfer yet but no one has proposed even a mild expansion of the budget. The European Union budget is one of the smallest budgets imaginable. I think it used to be 1.27% of European GDP but I think it has now gone down. Why does no one propose that it should be increased to 2%? That would allow a little fiscal room for transfer, which currently is not available. If we think of the United States and the full-blown federation, it took the US several decades, a civil war and a great depression before it became an integrated federal union with some fiscal transfers and so on.

It may be that the European Union is on the path, over the next 100 years, to achieving an economic and monetary union but it is not going about it in a fast way. For example, the conclusion of the four Presidents’ report in Box 1 says that the idea is to quickly implement the single market. In 1992, when I was young and innocent, I thought that the Cecchini report had told me that, if a single market was implemented, Europe would be richer by several million dollars. Here we are 22 years later, still talking about implementing the single market mechanism. So something is clearly wrong.

As and when we come to the next report of this brilliant committee, I think that we ought to find out whether we can learn anything from the history of the United States. It is the only comparable body where a federation was created from a diverse political union, albeit that it was a 13-member federation. I think that we have a lot to learn from the United States.

I want to make a final short comment on what my noble friend Lord Liddle said about the single currency that is the sterling area and why there are these problems of unevenness between the London pound and the other pound. If you think about it, the current dissatisfaction in Scotland is not about the currency; it is about fiscal transfers. The currency is all right; the disagreement is about whether the fiscal transfer system is adequate. We really ought to advise the European Union, “Whatever else you do, don’t devise a fiscal transfer system that eventually encourages people to leave the Union”.