EU: Recent Developments

Lord Lamont of Lerwick Excerpts

Thursday 16th February 2012 Lords Chamber

[Lord Lamont of Lerwick]

My Lords, it is a pleasure to follow the right reverend Prelate. I think Thomas More might have been in favour of an ever closer union of peoples but it would have been of peoples, not of institutions and crowns—of that I am sure. However, I am grateful to the right reverend Prelate for making that observation.

I spoke in the debate in November on Europe and so I hesitated to impose myself on this House again. However, this is a fast-moving scene although we always seem to be in the same place. I wish to comment on four issues. The first is the so-called veto by the Prime Minister of the proposed treaty change. I would not have criticised the Prime Minister if he had not vetoed it. However, unlike some Eurosceptics and some Europhiles, I did not regard the veto itself as a seismic event. On balance, it seems to me preferable to have an intergovernmental treaty outside the main EU treaties because it lessens the read-across from the treaty to the single market and to the issues raised by financial regulation. It is true that, of course, a regime for financial regulation has already been agreed but it was agreed in different circumstances where there was a different relationship to the rest of the EU from that which there is now, when there is to be a fiscal union within the EU. That seems to me to raise profound issues for a pan-EU regulatory system.

At the subsequent Council, the Prime Minister took the advice of my noble friend Lord Brittan of Spennithorne and did not veto the use of EU institutions. However, as my noble friend Lord Howell has made clear, that is still an option that we have. Indeed, if the treaty is to be folded into the wider EU treaty, Britain still has a veto. Noble Lords on both sides of the House will take different views about this but whatever the rights and wrongs of the Prime Minister’s veto, the Financial Times got it right, when commenting on the drift and indecision that has characterised this crisis, when it asked, “Even if the Prime Minister made a mistake, what on earth has the eurozone done?”. Indeed, the summit was extremely disappointing in its outcome.

A number of noble Lords are worried that Britain will be isolated and will lose influence. However, we cannot be both in the euro and outside the euro: we have to make a choice. We have made a decision not to be in the euro. There used to be an old French joke that if an Englishman was asked whether or not God existed, he replied, “The truth is somewhere in the middle”. We must stick by the consequences of the decision that we have made not to join the euro, which I think was a sensible decision.

The second issue on which I wish to comment is the fiscal union itself as opposed to the veto of the fiscal union. It has long been said by many people that inevitably the single currency, if it is to work, would have to lead to a fiscal union. I must say I was a little puzzled by the enthusiasm of the noble and learned Lord, Lord Davidson, for fiscal union and the treaty. Noble Lords on that side of the House spend a lot of time criticising the Government for reducing the deficit far too quickly. I am not sure that they quite realise what the fiscal union treaty would imply. It is a treaty which actually abolishes Keynesianism. Although I am not a great Keynesian myself, I would fight for the freedom of the other side to be Keynesians and to implement their policies.

Mrs Merkel talks about a fiscal union, even a political union. However, I am sceptical that that is really what this treaty is. It seems to me that it is a much more beefed-up version of the stability and growth pact. The interesting point is that it does not use the word “growth”. That was true of the original proposed title of the stability and growth pact. Originally, the Germans wanted it to be called just the stability pact and then the French insisted that “growth” was added. This time the French have not even been able to get “growth” added. However, this is not real fiscal union in the true sense of the phrase—that is, having a harmonised tax system and a single treasury. It is a cloak for German-style policies—I do not mean to use that phrase in any sinister way—to be imposed on other countries in Europe. That is what it is, and is what led one German Minister, rather foolishly and rashly the other day, to say about the fiscal union, “Everyone in Europe is now speaking German”—a remark that was not universally well received, particularly in one country where someone remembered the Hapsburg Emperor Charles V, who said that he spoke Spanish to his court, French to women and German to his horse. That is perhaps how that remark was viewed in certain other countries. Of course, a real fiscal union, as the former President of Germany, Mr Herzog, has observed, poses profound questions of accountability and democracy. That observation was made by a former President of Germany, not a Eurosceptic.

The third issue I wanted briefly to comment on was the decision of the ECB to make available the three-year long-term refinancing facility for banks. This has been a bit of a game-changer, not for the reason that a lot of people have given. They believe that this is the buying of bonds by the back door, which the German Government—rightly in my opinion—are absolutely opposed to. No, this is actually safeguarding the banking system, making liquidity available to it, and in that way has separated the issue of the stability of the banking system from the issue of the finances of Governments. That has been a feature of the crisis—the ricocheting from sovereigns to the banking system, and from banks back to Governments. The actions of the ECB have managed to separate out those two things. However, the ECB has become an interbank market. It is the substitute for the interbank market. That cannot go on indefinitely. It is merely buying time, and at some stage the banks have to come back to the market and get commercial financing, or we are not living in a real world or a real market economy.

The fourth event or issue that I wanted to comment on were developments in Greece. Although I have always been opposed to the single currency, I have said that I thought it would survive for quite some time, and that it would survive its first crisis but probably not its second. However, that did not exclude the possibility of, say, one or two countries dropping out of it. At the beginning of this year, I took a bet with someone that Greece would still be in the euro at the end of this year. I am not sure that I am going to be able to keep my money. The question is: would it be better if Greece left the eurozone? It was the late Lord Butler—not the noble Lord sitting here but the late Lord Butler of Saffron Walden—who once said, “Politics is the art of the impossible”.

[Noble Lords]

Possible.

[Lord Lamont of Lerwick]

Possible. What I was about to say was that politics is more accurately described as choosing between the utterly impossible and the utterly incredible. That is the situation in which Greece finds itself. The package that has been proposed is extraordinarily far-reaching—a 20 per cent cut in public sector salaries on top of a 20 per cent cut previously, and a 22 per cent cut in the minimum wage. The Greek economy has contracted by 6 per cent in the past year. It has been in recession for five years. Yesterday, someone who described himself as the Minister for Public Order in Greece—a rather Robespierreian title, but I believe it was genuine—appeared and said that Greece was absolutely at the limit of what people could and would be able to tolerate. That seems very probably to be the case. It seems to me unlikely that Greece will ever be able to implement what it is being asked to do. Even if by some miracle it was able to achieve what is being demanded, it will get debt to GDP down to 125 per cent of GDP only by 2020, and so more austerity will be demanded of it, even after 2020. It seems a certainty that Greece will leave the euro. It would probably be more honest and dignified if that happened now, rather than later, after money has been lent to Greece. It will eventually have to make that choice. It will be very difficult in the short term, as it was with Argentina when it ended its currency link and currency board.

The point I want to conclude on is that Greece is not unique. Italy, Spain and Portugal are in a similar, not so bad, situation, but are two years in arrears. Italy, if it is to comply with the fiscal union pact, will have to run a primary surplus of 5 per cent. To get growth, Italy will have to lower its real exchange rate by 20 per cent to 30 per cent without being able to alter its nominal exchange rate. It will have to achieve levels of inflation 2 per cent below those of Germany. This is the prospect that faces Spain, Portugal and Italy. Greece, therefore, is not unique. It is an extreme example, but it is the canary in the mine. Members will remember that miners used to take down a canary into the mine as a warning of the dangers to come. I fear that what the eurozone faces is a very bleak future, and several countries will have to face unrest and discontent—as, indeed, Mario Monti has recognised. The sooner that that is recognised about the euro as a whole the better. Europe is not the euro, and the euro is not the European Union either.

[Lord Lea of Crondall]

Before the noble Lord sits down—

--- Later in debate ---

[Lord Wallace of Saltaire]

My Lords, in the context of a global recession, the Greeks would be facing a very severe run on the drachma and quite possibly also a default. As a number of people have remarked, the Greeks defaulted on a number of occasions over the past 120 years.

People talk also about a common European foreign and defence policy. When I am in Germany, politicians there often tell me they are deeply committed to it—and to a European army. However, they cannot explain the strategy, funding, structure or command structure that it would have. In practice, the United Kingdom contributes a great deal to a European foreign policy and to European co-operation in defence. The UK/France defence relationship continues to move forward very well. We are working with others to cope with the immensely complicated problems of the Syrian crisis. In Libya, we flew missions with our French, Belgian, Danish, Swedish and Italian partners. We have been working in Helmand with Estonian troops embedded in British battalions. When I went some weeks ago to the joint command centre at Northwood, I was briefed by a Latvian naval officer on the anti-piracy patrol. In practice we are very deeply embedded in co-operative defence and foreign policy in Europe.

We will have to work hard to defend liberalism in a recession. I mean liberalism in the broader sense of liberal societies, open markets and international co-operation. The noble Lord, Lord Judd, made a wonderfully liberal and internationalist speech. Nationalism, populism and protectionism thrive when unemployment rises and incomes go down. The noble Lord, Lord Monks, mentioned the problems in Hungary. The Commission is now in active dialogue with the Hungarian Government about the extent to which some of their new laws will fit with EU rules. I was fascinated to hear from my Finnish friends that there is now a sort of Eurosceptic International across the European Union, with Eurosceptics in Britain working with their Danish, Finnish and other colleagues internationally against internationalism, so to speak.

The problem of popular opinion across Europe is very severe. I suggest to the noble Lord, Lord Grenfell, that young people in Europe are often not immensely committed to internationalism. They take what they have for granted and they do not support the distant co-operation of elites through international organisations, which is what the European Union provides. It would be easy for us to give way to similar forces in the United Kingdom, in the belief that leaving the European Union would relieve us of international regulation. The demonisation of Germany is part of the way in which one finds easy answers to very complicated problems.

A number of noble Lords said that the fundamental underlying issue was that of Britain's place in the world. On my blog this morning, I came across references to a speech by Daniel Hannan MEP to the Conservative Political Action Committee in the United States, in which he praised Newt Gingrich and was in turn praised by Fox News. He made all the obvious references to Churchill and the Nazi threat, and suggested that Britain should leave Europe and blindly follow wherever the next American Republican Administration might lead us. Others would like us to become Switzerland with nuclear missiles or Norway without having to pay the very substantial sums that Norway contributes on a “voluntary basis” to the European Union. Our political leadership over the past 25 years, including the previous Labour Government, has failed to make the case for active engagement in Europe.

[Lord Lamont of Lerwick]

The noble Lord is enjoying himself attacking Eurosceptics right, left and centre. Is he going to answer some of the points in the debate? In particular, will he answer the questions asked by the noble Lord, Lord Kakkar, about the working time directive as it affects hospitals? Or will his answer be that it means different things to different people, or that it does not really mean what it says?

[Lord Wallace of Saltaire]

The coalition Government are clear that Europe is our firm base from which we look outwards. France, Germany, the Netherlands and Ireland are our closest neighbours and our natural partners, and with them we work to promote our shared values, economic and political, across the world.

Perhaps I may answer some of the points that have been made. The net British contribution to the EU budget was raised but, according to Treasury figures—which are, as always, entirely reliable—last year it was €7.4 billion and not the €10 billion that the noble Lord, Lord Pearson, suggested.