Euro Area Crisis: EUC Report

Lord Giddens Excerpts

Monday 21st May 2012 Lords Chamber

[Lord Giddens]

My Lords, I congratulate all noble Lords involved in writing the report, which is insightful, well reasoned and fairly non-partisan. The eurozone is on the edge of collapse into a precipice, and with it the world economy. However, it is important to recognise that the situation of the EU as a result of this has been completely transformed. There is no way that the EU can stay as it is. There is no way that the traditional cumulative method of building the European Union can be sustained in such circumstances. Federalism in some sense—including fiscal integration, as noted in the report—is the condition of the survival not only of eurozone but, in any essential sense, of the European Union.

The situation is dramatically affecting politics. I do not think that anyone has noted this, mainly because it is so blindingly obvious. Something extraordinary is going on politically across Europe. It is a Europeanisation of politics far beyond anything that has ever happened. This is true both where Governments have been replaced without elections, as in Greece initially and in Italy, and in countries that followed due electoral process, such as Spain and France. The same will certainly be true of Germany. The German election will be fought largely on European terrain. It is hard to overestimate what a massive transformation this is, although of course it occurs as a result of forces that are extremely difficult to manage.

It is possible that we will never go back to national politics in Europe. Of course, the eurozone could collapse, in which case there could be a reversion to the pre-existing system—but I think that that is very unlikely. Probably the whole scope of European politics has changed, and one could say that maybe national politics will never again hold the stage in Europe in the way that it did in the past. This is high drama by any reckoning.

The report rightly stressed that the fiscal compact and other planned budgetary disciplines would not be enough to resolve the crisis. My noble friend quoted the report, which stated that,

“ultimately the resumption of sustainable economic growth will hold the key”.

“Ultimately” at the moment is the wrong word because as we know, and as my noble friend mentioned, to some extent the report has been overtaken by events. The arrival of President Hollande and citizens’ revolts—if I may call them that—in Greece, Spain and elsewhere have already pushed growth back on the agenda, and President Obama nudged the eurozone in this direction at the G8 meeting.

The question of the hour concerns the relationship between austerity and growth—terms that I do not like very much. Rather than austerity we are talking about a version of economic sustainability; austerity is the wrong word. On growth, we have to ask what kind of growth, whom it will be for, who will receive the benefits and how it will be distributed in society. A resumption of growth that goes to only 0.05% of the population will not serve any social benefit.

While we talk about the relationship between these two elements, we should not offer facile solutions. At this juncture we need profound rethinking, mainly because there has been a generalised loss of competitiveness in the West which I would trace back for at least the past 25 years. This decline in competitiveness in relation to the large developing economies has been happening. In spite of everyone lauding the reforms that the Germans have made—I am happy with that because I was, in a marginal way, involved in some of them, especially Agenda 2010 and reform of labour markets—even Germany is not competitive in world markets; it is competitive because of the shelter of the euro. A very good paper has been written on what would happen if Germany withdrew from the euro, which is that large chunks of its industry would become uncompetitive overnight.

In contra-distinction to what the noble Lord, Lord Willoughby de Broke, said, this is not just a crisis of the eurozone. My noble friend Lord Monks put it well when he said that the generalised crisis of competitiveness in western economies has driven apart and revealed the frailties which were there in the euro project from the beginning. So the future of the euro, if I may put it this way, is not only a matter of the euro.

Let me make a few points about the relationship between austerity and growth. Although I said that I have strong reservations about the terms and would like them to be dropped, the Prime Minister was right to say that the two are not inconsistent with one another. The key difficult question economically is what is the relationship in the context of not only a national economy such as this one but in the context of the more generalised European economy.

My main objection to the Government’s programmes in this country is that they do not seem thought through. You cannot even say whether a cut is a cut unless you trace out the knock-on economic implications of whatever reductions have been made. This is quite close to home to me, working in the university sector, because the Government’s reforms of universities could produce a situation where there is less revenue coming in than there would have been if the reforms had been differently structured. This is partly because universities generate a lot of revenue anyway and partly because of the esteem with which they are invested on an international level. In many areas the Government have not thought through the knock-on implications of their programmes of cuts, and if you do not do that you cannot develop a sound plan for the future.

As has now come to the fore with the advent of President Hollande and Mario Monti in Italy, Keynesian-style infrastructure investment can make a difference if it is carried out on a European level, is funded by the European Investment Bank and is invested in sensible projects—not roads but, for example, the building of an integrated pan-European grid, with a fair chunk of renewable energy in it, would be a sensible and systematic project.

It is obvious that the debate at the moment is being carried on between, as it were, the neo-monetarists and the neo-Keynesians and I find it very inadequate. I do not think a Keynesian solution will generate the jobs and style of growth we need any more than a revamped neo-liberal position. We need something more basic and more innovative than that. In general, we have to think much more innovatively.

Even though one can talk about sustainable growth and growth in general and say that one is in favour of it, in current conditions it is extremely hard to achieve in any western economy. The US is finding it as difficult as the core European economies are, although this is disguised by the effects of the euro in the eurozone.

A good example of the difficulty is that one of the main arguments for generating new jobs produced in this country and in the European Union 2020 document is that the EU should be at the cutting edge of technological innovation. It could do this, for example, in the energy industry and keep ahead of competition from the large developing economies. However, this is not possible in any straightforward, facile way. You only have to look at the history of the German solar industry to see this. It is exactly the sort of industry one would expect to keep the German chunk of the European economy ahead of other parts of the world. However, the Chinese started constructing solar panels much more cheaply, with a higher level of technological sophistication than the Germans could manage, more or less undermining the German industry completely. The same thing has happened in the United States.

To me, this shows the scale of the task in front of us. In Europe we have a double task. We have to save the eurozone because, contrary to what has been said by some other speakers, flawed though it is, it is really the condition of some kind of stability, economic and otherwise, in the European Union. Therefore, it is imperative, but the task, if you link it through with a generalised loss of competitiveness, is truly formidable. As an academic, social scientist and economist, I think that we do not actually have the concepts and the ideas we need to break through the situation. Therefore, we are reduced to this rather stale confrontation of traditional economic orthodoxies.

--- Later in debate ---

[Lord Davies of Oldham]

My Lords, this has been a fascinating debate. I am sure that when the noble Lord, Lord Harrison, began his work with the committee on this report he scarcely anticipated that we would have quite such a wide-ranging debate. It has ranged from practical solutions for how we might emerge from the difficulties to the cataclysmic perspective that the game is up and we may as well fold up our tents and go home.

There are two dimensions to this debate to which I have the greatest difficulty in responding. I have great difficulty in responding to my noble friend Lord Giddens, not because I do not respect his analysis but because I cannot cope with the situation. He says that we, as politicians, do not have the intellectual machinery or concepts to get ourselves out of these difficulties. That may be so but I assure my noble friend that that will not stop politicians trying.

[Lord Giddens]

I did not mention politicians once. I was talking about intellectuals, saying that we do not have the capability to resolve the issues that face us at the moment. Therefore, it is not surprising that politicians are struggling, too.

--- Later in debate ---

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, I welcome this opportunity to discuss the European Union Committee’s report on the euro area crisis. I first thank the noble Lord, Lord Harrison, and the committee for its thought-provoking analysis, and particularly my noble friend Lord Roper for not only this report but all the other truly excellent work that the committee has done in recent years, which I am fully confident will continue at that excellent level under the chairmanship of the noble Lord, Lord Boswell of Aynho.

The House is aware that these are difficult and dangerous times for the European and the global economy. The ongoing crisis in the euro area continues to undermine confidence and growth right around the world. We have kept the UK out of that storm by taking decisive and resolute action to tackle our deficit, but it is in our vital interest that the euro area reaches a lasting and sustainable resolution to the crisis, and it needs to do so quickly—a point firmly emphasised by my noble friend Lord Dobbs.

As the noble Lord, Lord Harrison, reminded us at the outset, the Governor of the Bank of England said only last week, the difficulties in the euro area represent,

“the biggest risk to recovery”,

in the UK. So it is in the UK’s national interests that we work to resolve these difficulties.

Resolution of the euro area crisis requires three things: resolving the ongoing uncertainty about Greece; ring-fencing other vulnerable euro area member states; and properly recapitalising Europe’s banks. We should recognise that some progress has been made. Greece was given a second programme of assistance and the face value of its debt written down. As the committee also notes, banks need to be sufficiently capitalised to withstand the instability. At home we have taken the necessary actions and as a result all UK banks passed the recent European Banking Authority capital adequacy tests. However, recent events remind us that significant risks remain and the IMF rightly warns us all that the global economy remains very fragile. That is why we agreed to increase our contribution to the IMF by £10 billion on condition that the IMF supports countries not currencies, that other IMF members also increase contributions, as they have done, and that the Euro area increases its own firewall, as it, too, has done.

Noble Lords will be aware that the Government are taking forward legislation to ratify the EU treaty change that provides the legal basis for the European stability mechanism, and we will start to debate that on Wednesday. That means that the position will, I trust, be clear to my noble friend Lady Noakes and to others in this House: the UK will not be making further contributions to eurozone bailout funds under the EU budget. Ultimately, high deficit, low competitiveness countries need to confront their own problems head on. They need to continue taking difficult steps to cut their spending, increase their revenues and undergo structural reforms to boost competitiveness. I agree with much of what the noble Lord, Lord Giddens, said. This is about economic sustainability, in his words—or fiscal sustainability, as I would put it. He did not find another word for growth so I will continue to call it growth. His analysis was very interesting, although, of course—

[Lord Giddens]

I prefer the term “wealth creation” to growth. You can find other words and you probably need to break them down into various component parts to make sense of what people mean when they use “growth” in a generalised sense, which is not terribly useful.

[Lord Sassoon]

I am grateful to the noble Lord for those comments. I disagree with some of the fundamental aspects of his analysis of the Government’s prescription for the UK economy but I think that goes a bit beyond the narrow topic of today’s debate.

As we have previously said, the euro area must also put in place governance arrangements to deliver the greater collective support and responsibility that the remorseless logic of monetary union demands. We want the fiscal compact to work in stabilising the euro and putting it on a firm foundation. We support the decision of euro area countries in the fiscal compact to commit to clear rules on fiscal discipline which the UK agrees are needed to make the single currency work effectively.

Questions were raised about the ratification of the fiscal compact. Although I will not comment on the likelihood of that happening, I can update the House and report that so far Greece, Portugal and Slovenia have ratified the compact. The compact will come into force once 12 euro area member states have deposited their instruments of ratification. The ratification processes are significantly different in different member states, but that is where things stand.

As the committee report notes, we agree that eurobonds are another issue that deserves further analysis and serious consideration. I agree with the noble Lord, Lord Monks, on that. Of course, any steps that are taken towards closer integration must not be prejudicial to the single market. We agree with the committee that matters relating to the internal market must remain the preserve of all 27 EU member states. This is why last December the Prime Minister did not agree to measures the euro area wanted to pursue on further fiscal integration being part of the EU treaties without adequate treaty-level safeguards for the single market.

I am sure that my noble friend Lady Williams of Crosby will not be surprised—she may be a little disappointed, but I am sure not too disappointed because we have discussed this before—that there is not a lot extra that I can add. My right honourable friend the Chancellor deposited an answer with the Treasury Committee, which is on its website, that goes as far as is appropriate and consistent with the need to keep the details of negotiations confidential. However, I draw noble Lords’ attention, if they have not read it, to that document.

We also agree wholeheartedly with the committee that we all need to address Europe’s low productivity and lack of economic dynamism. The UK has been leading that charge and has formed an alliance with 11 other EU leaders to set out an action plan for jobs and growth in Europe, including completing the single market in services and digital—a point to which my noble friend Lord Maclennan of Rogart drew attention. He was right to do so.

The Prime Minister’s focus at the next informal European Council this month, and at the June European Council, will be on ensuring that the focus in Europe remains on promoting growth. The UK’s specific growth agenda includes the digital single market and the services directive, but also, importantly, completing all the open bilateral EU trade deals, which themselves could add €90 billion to the EU economy. A deal with the US would be bigger than all the others put together, but they are each important. Of course, we want the Commission to commit to a new programme to reduce the overall regulatory burden, following on from the current administrative burden programme that concludes in 2012. The Government will be pursuing that agenda very vigorously with our European partners.

Some other aspects have been referred to in the debate. Again, the noble Lord, Lord Monks, referred to the possibility of an increase in lending capacity by the European Investment Bank. That could indeed have a part to play, although I of course disagree with the noble Lord on his views on a European financial transaction tax. That is not the way to go.

My noble friend Lord Maclennan of Rogart also referred to project bonds, which are another possible funding mechanism, which, if the funding comes out of existing EU resources and is carefully designed to be consistent with the need to minimise EU expenditure, is certainly another option that merits exploration.

I should address one or two of the specific questions that were raised on Greece. I take as my starting point the fact that we must respect the Greek people’s choice in their forthcoming elections. That point was expanded on by the noble Lord, Lord Judd, but I certainly take as a starting point the fact that we have to listen to what they decide they want to do. The important thing for all of us is for Greece to find a way out of economic crisis in co-operation with its creditors and for it to get back to sustainable growth and sustainable wealth generation. This Government hope that Greece can agree a way forward on this as soon as possible.

Notwithstanding the encouragement of the noble Lord, Lord Harrison, I am not going to speculate on what may or may not happen in Greece or in any other EU member state. Various scenarios were painted by some noble Lords—my noble friend Lord Marlesford, the noble Lord, Lord Willoughby de Broke, and others—but I shall not comment on those. All I will say is that the Government are undertaking extensive contingency planning to deal with all potential outcomes of the euro crisis. As the House will recognise, given the sensitivity of this work both to the markets and to international relations we will not deviate from the normal response, which is not to divulge specifics of the Government’s plans.

My noble friend Lady Noakes specifically asked about the exposure of the UK economy to Greece. The numbers relating to the relatively limited direct exposure of the UK banks and the UK economy generally to Greece are published, but clearly there is a need for a convincing firewall, as we all know the step change that there would be if contagion spread. Therefore, although I do not recognise the construction that the noble Lord, Lord Davies of Oldham, put on Robert Chote’s remarks, I think we all recognise the very serious implications if these issues are not dealt with speedily and in all their dimensions.

I was asked about one or two other issues. The noble Lord, Lord Harrison, asked about the impact of the French elections and what changes there will be with the new President. Of course, as he should have been, my right honourable friend the Prime Minister was very quick to congratulate Monsieur Hollande on his election victory. France is an important partner of the UK. We look forward to the close co-operation on foreign and defence policy, as well as on other areas, continuing with the new Government. The Prime Minister and the President had a warm exchange in their initial call and they subsequently met at the G20 meeting at Camp David. They are working together closely and are looking forward to building on the close relationship that exists. Therefore, based on the discussions in recent days, I think that the impact can only be positive.

The last point I raise nervously but I do so for completeness in tackling the issues that came up in the debate. The noble Baroness, Lady Crawley, said that this was not the time to speculate about a possible referendum—words which I am sure her noble friend Lord Mandelson and the shadow Chancellor will very much take to heart if they listen to this debate or read it afterwards. However, I shall not go further than that.

In conclusion, these are indeed dangerous times for the European economy. It is vital that euro area Governments pull together to deliver a sustainable resolution to the crisis, tackling their deficits, forging closer governance arrangements, and boosting competitiveness and growth. On all fronts, the UK will work as a strong and positive partner with our European neighbours to restore prosperity right across the European Union.