Genuine Economic and Monetary Union (EUC Report)

Lord Lamont of Lerwick Excerpts

Wednesday 2nd July 2014 Grand Committee

[Lord Lamont of Lerwick (Con)]

My Lords, I am a bit of an interloper in this debate, not having been a member of the committee. I congratulate the committee on the report and congratulate the noble Lord, Lord Harrison, on having chaired the committee. The report is useful and interesting. For those of us who try to follow what is happening in the eurozone and the EU, it is a good volume to have telling us all about the things that are going on.

I do not wish to follow the noble Lord, Lord Harrison, in all the directions that he went down, least of all his remarks about the goings-on relating to the nomination of the President of the Commission. I said to him the other day that I had worked with Mr Juncker. Although I found Mr Juncker helpful during our negotiations, it was absolutely right to oppose his nomination because of the important principle of the power of the European Parliament, which was threatening to usurp the decision. Giving that power to the European Parliament was a significant transfer of sovereignty and for that reason I think that the Prime Minister’s tactics in handling the situation were 100% right.

The noble Lord has on various occasions bemoaned our loss of influence. I am always puzzled by the argument about the loss of influence. Of course, if you are not part of something, you do not have so much influence. We do not have a lot of influence on the Federal Reserve Board. If you are not part of something such as the ECB, you lose a bit of influence with it. Although nobody other than my noble friend Lord Dykes speaks in favour of joining the euro today, the implication is always that we ought to join the euro, which is a bad thing, in order to have a bit of influence. Influence is not by itself an objective of policy.

The substance of the report, genuine economic and monetary union, is a puzzling concept, as the noble Lord, Lord Harrison, said. At Maastricht, the aim was always, as the report notes on page 11, to have a centralised monetary union and a decentralised economic and fiscal policy—what the report calls an asymmetry. But during the Maastricht negotiations and talks relating to it, whenever this was raised and whenever one said that surely the logic of monetary union was that there ought to be fiscal transfers, one was told that this monetary union was different. It would work on an entirely different basis; it would be like the gold standard. The impartial discipline of gold and the impartial discipline of the modern version of gold—euro budget surpluses—would ensure that this monetary union would work.

The concept of debt mutualisation, which features a lot in the report, was explicitly ruled out. It was a cardinal principle at the time, very much on Germany’s understandable insistence, that there should be no bailout mechanism. Of course, when the euro got into trouble, we had a bailout of both Greece and Ireland, which Madame Lagarde pointed out was probably illegal under the treaty because the treaty specifically prevented bailouts.

As regards mutualisation, the committee refers to Germany having different priorities. That is one way of putting it, but it is perfectly understandable that Germany always was and always will be cautious about its own money being at risk to bail out other countries. Equally, it was always explicit that there should be no monetary financing of deficits.

The noble Lord, Lord Harrison, concentrated on banking union, which is fundamental to a currency union, the resolution mechanism, deposit insurance and supervision. He is right that the resolution mechanism is suboptimal. Perhaps it should be more centralised. On supervision, subsequent developments have moved more in the direction of the committee, with the ECB supervising more directly the larger banks and national supervisors supervising the smaller banks. Germany is described as reluctant on deposit insurance, but the reluctance is extremely understandable. On page 39 of the report, someone from Germany is quoted as asking why Germany should pay to bail out banks that Germany has not supervised. I regard that as a historical legacy, which is how the Germans regard it.

A key to the future of the euro will be the asset quality review and the stress tests of the banks, but we have been here before. When stress tests were carried out previously, we were told that the banks were all hunky-dory and financially sound. However, several banks that had passed the stress test, including in Spain and Italy, got into deep trouble. It is important that these stress tests should be much more rigorous and credible. The monetary transmission mechanism in the eurozone is not working well, particularly for small businesses.

A lot of the argument in the report is about breaking the link between sovereigns and the banks, but the two are bound to be linked, even with the nirvana of debt mutualisation. I think that “nirvana” is rather a good word to describe debt mutualisation. I looked up what it means. Hindus say that nirvana means blissful egolessness, which seems a good way to look at debt mutualisation.

You cannot abolish the financial danger just by mutualisation. The European stability mechanism has limited resources. It can gear itself up, but who are the guarantors? The second largest guarantor of the ESM after Germany is France, whose own finances are in difficulty. The third most important guarantor is Italy and the fourth is Spain. Therefore, countries in debt, with deep fiscal problems, are guaranteeing themselves. Of course, behind them stands the economic colossus of Germany, but not even Germany could bail out Spain and Italy if they got into trouble together.

We are told that all that has gone. Outright monetary transactions, which are described on page 30, have taken care of all that. I think that Enoch Powell once remarked that a politician’s words were his deeds. He might now say that a central banker’s words were his deeds, because by just uttering the magic words, “Whatever it takes”, Mr Draghi certainly calmed the markets. He did not actually buy any bonds, but the acute phase of the crisis happened and it calmed markets. But did it calm them too much? We are now in a situation where 10-year yields on Spanish and Irish debt are lower than those of the United States. Yet the report says that it is important that the markets should not misprice sovereign risk. It also raises the danger that calming the markets in this way means that the impetus has gone out of structural reform. As it says on page 13, the air has escaped the balloon.

Now we have had the new measures that Mr Draghi has announced, but I suggest that the words are again very important—not the measures but the words. The words that we ought to concentrate on are three particular series of words: “The decision is unanimous”; “We are not finished here”; and “within our mandate”. The impression was given that all the tensions with Germany over committing funds, over mutualisation and over monetary financing had been put aside and that the situation was solved.

The negative interest rate was the first measure. I doubt whether that will have a great effect on the eurozone. Banks hold only €120 billion at the central bank at the moment. A 10 basis point cut will give them a charge of €120 million. I doubt whether that will transform the situation. Then we were told that there would be purchases with asset-backed securities, but that market is not really developed in Europe at the moment. It will take a long time before such securities, in securitised form, are available for the central bank to buy.

Then there was the targeted long-term refinancing operation—the LTRO, €400 billion-worth. Again, the effectiveness of that, which is modelled on the Funding for Lending scheme, will depend very much on the health of the banks and the results of the stress tests. Italy, for example, has €160 billion-worth of non-performing loans, which is why it has to pay 1.2% more for deposits than Germany. I do not think that the LTRO will transform things by itself.

Perhaps the most significant thing was when Mr Draghi said that the bank would be ending the sterilisation of assets that were purchased in order to ease the monetary transmission mechanism. That is almost a little bit of QE. The road to Delhi begins with a single step. Perhaps that is the measure that the Germans should worry a little about, but it will take time before there is an assessment as to whether those asset purchases can take place. None of this will produce a transformation of monetary conditions; none of it will weaken the exchange rate.

What triggered all that was of course the very low inflation figures for the eurozone and for Germany in particular. Without the flexibility of the exchange rate, the lower Germany’s inflation rate is, the more other countries have to cut their costs, cut unit costs and cut price levels to become competitive. I agree that some remarkable changes have taken place, but that has to go on for a very long period. The level of total indebtedness is 133% of GDP in Italy, 175% in Greece and 130% in Portugal. With that constant pressure on the price level—some see it as deflation; the Germans just see it as the periphery becoming more competitive—the outlook for growth in the eurozone is dismal and looks likely to remain dismal for a very long time.

I have always been an opponent of the euro, but I have never, ever said that I thought that it would break up soon. I have always had great arguments with my noble friend Lord Hamilton of Epsom about that. Of course, surviving and working well in the interests of the citizens of Europe are completely different things. It may be that the euro is a bit like a shoe that does not fit a foot. You go on wearing the shoe. Gradually, your foot gets distorted and you suffer pain; eventually, it completely alters its shape and you can get the shoe on. Perhaps the euro is like that and perhaps it will work in 30 years’ time. However, even if it did work in 30 years’ time, that certainly would not mean that we were wrong not to join.

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[Lord Kerr of Kinlochard (CB)]

My Lords, it was a pleasure to take part in the work that led to this report. It was very enjoyable, largely because of the exemplary patience displayed by our chairman, the noble Lord, Lord Harrison, which produced a unanimous report, and because of the diligence of our clerk, Mr Stoner, who is extremely good at marshalling our arguments with rigour and, sometimes, imagination.

I take two texts for my sermon—I have a Scottish Presbyterian background. My first text comes from the Book of Job—that is, the Treasury. The Government’s response to our report states that,

“the government is clear that we are not joining the Euro”.

Yes, I think we got that. It goes on:

“Therefore it is right that we have said from the outset that we will not take part in measures designed to support full economic and monetary union”.

Yes, we have got that. It goes on:

“The Government has been clear that it will not participate in the Banking Union”.

There is a false logic there. It is perfectly possible that the banking union—although the impetus for it arose from the crisis in the eurozone—could be a good thing, irrespective of whether one was a member of the eurozone. Indeed, I notice that, of all the non-eurozone member states who are negotiating the texts of banking union, only the British and the Swedes are negotiating not on the basis that they intend to join.

If I were to dare to part company with the noble Lord, Lord Lamont of Lerwick, I would say that there was a moment in his speech when I thought that he was slipping into the error of equating banking union with economic and monetary union. As he rightly pointed out, our report, although entitled Genuine Economic and Monetary Union, was largely about banking union, because that was the key subject on the agenda. I would argue that it is not necessarily the case that non-members of the eurozone should decide that they have no intention of becoming members of the banking union.

On that, I would say that the committee was in a state of intelligent schizophrenia. It is intelligent because it is an extremely intelligent committee; it is schizophrenic because we all agree—the Government are of the same view—that the creation of an effective banking union, reducing the risks of future crises and making them easier to manage when they arise, is a good thing. We all agree with that. We on the committee felt, however, that it was hard not to acknowledge that the UK’s non-participation in banking union could have a deleterious effect on the City of London’s position as the transaction capital of Europe and one of the great three global financial centres. We felt that it was possible, over time, that that position could be eroded by non-participation in the structures of banking union. That is the point brought out in the passage of the report cited by the noble Lord, Lord Liddle, where we state, at paragraph 227:

“The Government may be ill-advised to assert that Banking Union is the sole province of the single currency for all time. It would be wise not to close the door on the possibility of some level of participation in Banking Union in the future, in particular as a means of further promoting and shaping the Single Market in Financial Services and the UK’s position within it”.

That is my view. However, I recognise that I will not persuade Job in the Treasury of that today and, perhaps, not for some considerable time.

[Lord Lamont of Lerwick]

Does the noble Lord remember that the Book of Job says, I forget in which exact chapter:

“There is a path that no fowl knoweth, and which the eye of the vulture hath not seen”?

[Lord Kerr of Kinlochard]

I cannot say that I think of that every morning as I arrive, but I will bear the noble Lord’s words in mind.

I want to make five minor topical, practical points arising from the report. First, in strict logic, the position that the Government take up—that banking union is nothing to do with us but is a matter for eurozone countries—could mean that the Government do not object to the proposal, much discussed in Brussels at the moment, that the heavily overloaded Commission’s single market directorate-general should be split, with banking and financial legislation moving to the financial directorate-general, the primary concern of which is of course for the health of the euro, leaving the single market directorate-general handling the classic single market agenda. That would be disastrous, from a number of points of view, not least from the point of view of UK interests. The British Bankers’ Association states:

“It is of utmost importance to maintain the structure of the relevant Commission services dealing with financial services so that their work is permeated with the priority of preserving the single market focus. We suggest that the UK Government should proactively defend the unity of DG MARKT and oppose any plan to move financial services out of it. It would be a mistake to move the work e.g. to DG ECFIN which has quite different priorities”.

I strongly agree and I hope that the Minister will be able to reassure us that we shall—to the extent that our current influence allows—work to ensure that that does not happen.

In my view, it is highly desirable and important that the current head of the single market directorate-general, the most senior of that very small and dwindling band of British personnel in the Commission, should stay where he is. I strongly agree with what has been said already today about the need to reinforce that. Retaining the unicity of the director-general is much more important than who is the single market commissioner—the issue that dominates the headlines. What matters is that it is the director-general and that he covers all the work that is of interest to the City of London.

My second point is also quite topical. I hope that the Government will, to the extent that their current influence allows, seek to discourage a second suggestion much debated in Brussels now, which is that the next finance commissioner should also be the next president of the Eurogroup, replacing Mr Dijsselbloem, the Dutch Finance Minister, when his term ends next summer. Combining the two jobs would be a prescription for serious schizophrenia, with a real risk that eurozone concerns might override single market integrity. This is not a moot point in the US sense. In our report we use “moot point” in the British sense, which means it is a key issue. In America, a moot point is a point so boring and irrelevant that it is worth discussing only in a moot court—a fine example of the difference between the two languages, as is “tabled”. If we said that our report had been tabled, people in Congress would say, “Oh, bad luck”, because it means shelved in America.

The moot point is that we have seen two recent examples of just what I am worried about—eurozone concerns overriding single market integrity. In the Cyprus crisis, when the eurozone imposed capital controls, that was a fundamental strike—which may have been necessary in the crisis—against a fundamental principle of the single market. It affected non-eurozone citizens. A British citizen with money in Cyprus could not move his money because of capital controls introduced by the eurozone. The result was that the case was quite rightly taken by the British Government to the Court of Justice against the ECB for its attempt to argue that clearing systems trading euro-denominated paper must be within the eurozone. That, too, is a clear breach of the single market and I applaud the Government for contesting it. It would be dangerous to see the two jobs of presidency of the Eurogroup and finance commissioner in the Commission combined. That may be difficult to prevent, given diminished influence, but I urge the Government to have a go.

--- Later in debate ---

[Lord Lamont of Lerwick]

Of course you can. You can be against transferring fiscal authority out of the UK but say that the only way in which you can make a monetary union work is for you to transfer it out of your country to a central organisation. There is no contradiction in that whatever.

[Lord Davies of Stamford]

I am sorry, I take a different view. It seems very contradictory to me. Either you should not have fiscal integration or you should. It is very important that politicians are coherent about these things and I do not think that the Eurosceptics are coherent, not least on the matter of democracy in the EU.

Incidentally, my noble friend Lord Desai made the excellent suggestion that we should have an election for the President of the European Union. I have always been in favour of that, and I quite agree that the EU lacks democratic accountability. You hear all the time from Eurosceptics that the EU lacks democratic accountability, but the moment you suggest any measure at all, whatever it might be—changes at parliamentary level, say, or the direct election of the President—that would supply much greater accountability, they are always against it. Again, there is a blatant contradiction running through their views on the subject. I have to say that if you pursue politics on a contradictory basis like that, you do not do great credit either to your reputation for intellectual clarity or to the good faith of your arguments.

National Savings and Investments

Lord Lamont of Lerwick Excerpts

Tuesday 14th January 2014 Lords Chamber

[Lord Newby]

My Lords, I think the correct analogy with NS&I is with a bank or building society, where common practice—this is what NS&I is moving towards—is that people get a statement on the anniversary of when they took out savings and that customers are able to look online for a comprehensive statement of all their various policies and holdings.

[Lord Lamont of Lerwick (Con)]

My Lords, although we all appreciate that exceptionally low interest rates have been necessary to shore up the finances of borrowers, particularly mortgage holders, does my noble friend recognise that this has been an extremely difficult time for savers? It is a great pity that during a period in which, until today, inflation has been above the Bank of England’s target, National Savings has withdrawn the inflation-linked savings certificate. Will the spokesman encourage National Savings to help to end that misery for savers and, at least for small savers, introduce some new products with rather better rates of interest?

[Lord Newby]

My Lords, as the House is aware, when we have very low interest rates, which have been necessary in the economic circumstances in which we have found ourselves, that helps very many consumers, households, mortgage holders and businesses and is on balance, in our view, beneficial to the economy. The downside, as the noble Lord mentions, is that savers get a lower rate of interest. I think it is unrealistic to expect NS&I to promote products with a higher rate of interest than market rates, because its remit is to get best value for money for the Government, but I am sure that the noble Lord and the whole House will welcome the news that inflation is down to 2%, which is the target level.

Bank of England: Monetary Policy Committee

Lord Lamont of Lerwick Excerpts

Tuesday 9th July 2013 Lords Chamber

[Lord Newby]

My Lords, on the first point, the Government updated the remit of the Monetary Policy Committee at Budget 2013 to give it greater powers to clarify the trade-offs that are involved in setting monetary policy to meet a forward-looking inflation target. That is what the governor and the Monetary Policy Committee will do over the coming months. On exchange rate policy, as the noble Lord knows, the previous Government did not have a policy for an exchange rate, and this Government do not have one, either.

[Lord Lamont of Lerwick]

My Lords, perhaps the Minister will comment on one aspect of the asset purchase scheme—quantitative easing—about which there has been some argument. When the original document setting up the asset purchase scheme was signed, and it was made consistent with the Bank of England Act 1998, was it set down that increases in the scale of the asset purchase scheme required the agreement of the Government, and that while day-to-day monetary policy may be the responsibility of the Bank of England, an increase in the scale of quantitative easing would require endorsement by the Government? Is that correct?

Economy: Growth

Lord Lamont of Lerwick Excerpts

Tuesday 29th January 2013 Lords Chamber

[Lord Lamont of Lerwick]

My Lords, I join with other Members of the House in congratulating the noble Lord, Lord Deighton, on his maiden speech from the Front Bench. Like other noble Lords on this side, I am delighted to find that he is not entirely still under the spell of his former distinguished teacher.

Growth ought to be the natural state of an economy. Most economies tend to grow over time. Financial crises, bad harvests and various other factors can, of course, delay or obstruct that growth. But growth is the natural order over time, because human beings have a natural instinct to make two blades of grass grow where one grew before and a natural instinct to innovate. Growth, it is worth remembering, does not come from Governments; it comes from individuals.

What, then, should our reaction be to the figures which were released last week and showed a 0.3% drop in GDP in the final quarter? The figures can always be sliced in many different ways. One can portray them, as indeed the noble Lord, Lord Eatwell, did, as saying that four out of the last five quarters have been negative; that the economy was flat all last year; and that the economy is still below the 2008 peak. On the other hand, you can formulate them a slightly different way: the economy grew by 0.3% in the last six months; although the economy is below the peak of 2008, if you exclude North Sea oil production it is only a whisker below that peak, and North Sea oil has been in dramatic decline with interruptions to production. The fact that there has been no growth last year is the same as in France, while the 0.3% drop in GDP in the last quarter compares with a drop of 0.5% in Germany; and, collectively, the whole of the eurozone is currently in recession. What I draw from all that is that when the dust settles and this is all in the history books, I suspect we will find that almost all the countries in this part of the world had a broadly similar experience, whichever way one tends to look at the figures at any particular moment.

We heard a lot about the views of the IMF, but we have not actually had the views of the IMF; we have had the views of Mr Blanchard. Christine Lagarde, the director-general of the IMF, has been extremely supportive of the Government’s strategy and we will only officially hear the views of the IMF in May, when we hear the results of the article 4 consultation. The noble Lord, Lord Eatwell, talked a lot about the multiplier effects. Interestingly, there was a report in the press at the weekend that the IMF has concluded that the multiplier effects, both of austerity or of any deficit spending, are extremely slight in the case of the UK. No doubt we will hear more about that when the article 4 consultation takes place.

There is no doubt that the figures for the last quarter were extremely disappointing, but the idea that some extreme excess of austerity is holding back the British economy seems to me very much open to question. The Government have shown that they are prepared to be flexible in their deficit reduction programme. They have relaxed the programme twice and put back the date at which they expect, and are aiming for, a fall in the total debt-to-GDP ratio. As my noble friend Lord Forsyth said, the difference between the Government and the Opposition is much exaggerated by both sides for the purposes of both sides. I do not think that the noble Lord, Lord Eatwell, is right in saying that the capital expenditure planned under the last Government was higher than that of this Government; in fact, the cuts that Alistair Darling put forward were bigger than those of this Government, some of which have been reversed. Can the Minister comment on that precise point?

Despite the small differences between the planned reductions in expenditure, it is true that if you compare the outcome of expenditure with the original Darling plan for reductions in expenditure, the latter was much tighter and more austere than what the Government have implemented. If you compare our austerity programme to that in other EU countries, it is difficult to argue that these cuts are savage or that this fiscal consolidation is sudden and dramatic. At the beginning of this crisis we had a deficit to GDP of around 12%. That was almost exactly the same as Greece’s. I am sorry to say that today Greece has a considerably lower deficit than the UK’s. Italy, France, Ireland, Portugal, and Greece all have lower deficits than we do. These have not been caused by growth—a solution somehow magicked out of the air by the party opposite. That is not how they have reduced their deficits. They have done so by making more savage cuts and far severer fiscal consolidations than we have made.

With a debt-to-GDP ratio of around 70% to 80%, which is where it is expected to peak out, if we go on adding to that overall stock of debt at the rate of 12%, as it was when we started off, or 7% or 8%, because the annual deficit is the amount that we add to it each year, we would soon get to a situation in which a debt-to-GDP ratio would be 100%. As economists such as Reinhart and Rogoff have argued, that is the level at which the overall stock of debt becomes dangerous for the long-term growth of an economy. They would argue that that is why Japan has had such a bad time for such a long period. If deficits really solved long-term economic growth, Japan would not have been stranded in the situation in which it has been for such a long time.

If deficits of 7% to 8% per annum have left the country not growing, is it credible that one of 10% or 12% will suddenly cause the economy to leap into life? We hear about the multiplier effects, but never about what is going to happen when these so-called stimuli are withdrawn. Anyone who thinks that this would be the real world experience of deficits ought to read the diaries of Mr Morgenthau, President Roosevelt’s treasury secretary, who expressed his disillusionment with the deficits being run in America in the 1930s. He wrote that all the United States had to show for it was unemployment at much the same level and no increase in production. In the UK today we are running deficits that are considerably higher than those run by the Roosevelt administration.

[Lord Skidelsky]

The noble Lord mentioned a point of history. Of course, American unemployment fell very rapidly in the 1930s, so if he wants to leave the House with the impression that it did not fall, I must say to him that that is just wrong.

[Lord Lamont of Lerwick]

No. President Roosevelt initiated back to work programmes—that is true—but the private sector, the economy, was not generating growth. If the noble Lord, who is a very eminent historian, wishes to doubt that, just let him read the Morganthau diaries, because they are full of deep disillusionment about the pointlessness of the programme that he himself was implementing and the effect that it was having on the growth of the economy.

I am not arguing that deficit financing can never be of use or play a part in taking up the slack in the economy when the private sector is unable to borrow, but we are in a position where both public and private finances are under pressure at the same time. It is a much favoured parlour game to decide what Keynes would have thought of doing in this scenario today. Of course, the House is very fortunate in having the eminent historian, the noble Lord, Lord Skidelsky, who knows more about this subject than anyone else, to tell us. Indeed, we also have the noble Lord, Lord Eatwell, a most distinguished Cambridge economist—a university that is profoundly affected today by the shadow of Maynard Keynes. I am sure that the noble Lord, Lord Eatwell, remembers Milton Friedman’s comment about Cambridge academics and their theories, which have applications within 25 miles of Cambridge University.

This recession is indeed different from a normal cyclical recession. It is, as the noble Lord, Lord Skidelsky, said, a balance sheet recession, but it is a recession that has followed a severe banking crisis. As economists such as Rogoff and Reinhart have shown, I think quite tellingly, such recessions tend to last much longer than normal, cyclical recessions, and are much deeper.

So what can be done to stimulate growth? I believe that there are things on the supply side that can do this—training; lifting and relaxing planning controls, as the Government have done; infrastructure spending, very much as the Minister outlined, although if infrastructure spending is to be financed by cuts in current spending, that will squeeze consumption further, which has been one of the problems of the economy, because inflation has not come down, and it has been inflation that has been squeezing consumption and living standards.

However, the real problem of the economy, I believe, is not fiscal policy but the lack of credit in the economy and the failure of the banking system still to make credit available. The risk is that the new businesses that drive innovation and produce the new products will be strangled because of the lack of credit. The Government have introduced the Funding for Lending scheme. It is too easy to say what the effects of that are, but if it has a good effect, maybe it ought to be expanded further. However, they have been piling regulation upon regulation on and demands for more capital from the banks, and that, in the last analysis, is incompatible with more lending and makes more lending more difficult and more expensive for the banks.

The Government have said that they want to see new entrants into the banking sector, which I think would be highly desirable, but I am not sure that that message has got through to all parts, particularly the lower parts, of the Financial Services Authority. I noticed that the chairman of Metro Bank said the other day that if he had known what was involved in starting a new bank in the UK, he is not sure that he would do it again or would have done it in the first place.

We await the arrival of Governor Carney, and there are great expectations of him, but he will not exactly be a man on a white horse, and I think it would be unfair to regard him as that. He has talked a lot already about central banks doing more to promote growth. I hope, however, that the Bank and the Government will be cautious about more quantitative easing. There is in this situation, even now when we do not have growth in the economy, a danger of creating more asset bubbles. We have seen the consequences of the “Greenspan put” in the past, where central bank action has been taken to keep the financial markets buoyant and the result has not been that we have avoided a crisis but that the crises have got successively worse. When I look at the level of the stock market, which of course can be interpreted favourably in one sense, I wonder whether it is reflecting the prospects for the economy or the consequences of quantitative easing.

The Opposition have inevitably been very critical and the Government inevitably are in a difficult situation. I think it was Boileau, the French writer, who once observed that those who come to tell the people they are not well governed will never lack a welcome. The only surprising thing is that those who are telling the people they are not well governed are those who were in charge five minutes ago and helped to create the situation we are in. It is not an easy situation and, most of all, I think what we need are what Tolstoy called those two grand old warriors—time and patience.

Financial Services Bill

Lord Lamont of Lerwick Excerpts

Monday 11th June 2012 Lords Chamber

[Lord Sassoon]

My Lords, I am a little surprised by this discussion, not because I do not think it is an important debate but there have been one or two interventions from noble Lords who unfortunately were not here to hear this point addressed during the debate.

First, this was not a decision of mine. I will do whatever the House wants. I was not asked whether I wanted to do it one way or another and I see arguments for doing it either in Grand Committee or on the Floor of the House. This was discussed through the usual channels. I have not seen this sort of discussion in anything I have been involved in. I believe that the usual channels go through these things very carefully, and they came up with an agreement on this that I certainly am prepared to accept.

I also heard the noble Lord, Lord Eatwell, and the noble Lord, Lord Barnett, who is not in his place at the moment, arguing during the debate that the Grand Committee was a better place to take this legislation. I think the noble Lord, Lord Eatwell, referred to the detailed scrutiny of the Bill establishing the Office for Budget Responsibility, on which I had the pleasure and the responsibility of leading. Indeed, that Bill was given very thorough, detailed scrutiny. It was a Bill of great importance—not as big as this Bill but it showed in a related area how effective the Grand Committee can be.

The Welfare Reform Bill can hardly be said to have been an unimportant Bill. What Bill of greater importance has this House considered in the past two years? Everything I have heard suggests that the scrutiny it got in Grand Committee actually worked extremely well, notwithstanding the understandable doubts there were about it.

I do not want to withdraw the Motion. It has been agreed by the usual channels, in which all these matters will have been debated, and I believe that we should stick with what the usual channels have agreed.

[Lord Lamont of Lerwick]

My Lords, I ask my noble friend to think again about this. This may have been agreed by the usual channels but it is not the usual channels that should entirely count on this; it is the will of the House. Almost all the people who have spoken in the debate are present now and a large number of them have expressed the view that this would be an unsatisfactory way of proceeding. The view has been put that this is comparable to the OBR. With great respect, I suggest that this is a much, much more important measure than the OBR.

Secondly, the Grand Committee is a much more restricted form of scrutiny in that you cannot actually vote on amendments; you cannot have a Division. I know that it is the practice of the House that we do not have too many Divisions in Committee on the Floor of the House. None the less, the pressure on Ministers to give a clear explanation to pointed amendments when there is a threat of a Division is much greater and it makes for a much sharper and more lucid Committee when there is the possibility of a Division. Just to have debates in which there are no Divisions and there are many more Divisions on Report does not seem the best and the most satisfactory way of proceeding. I strongly urge the Minister to reconsider.

[Lord Foulkes of Cumnock]

The Minister has said that he personally does not mind whether the Bill is dealt with on the Floor of the House or in Grand Committee, which is very helpful. He founds his argument principally on an agreement through the usual channels—and I have great respect for the usual channels. However, I fear that, because of the recess, the usual channels may not have worked as efficiently and effectively as otherwise. If the Minister were to agree to withdraw the Motion, which would be preferable to a Division, we could have a few days to have further discussion and consultation. By that time, the groups will have met; the Cross-Benchers will have had an opportunity to meet; and we can consider this matter again. All we are doing is suggesting that this matter be postponed for three or four days.

Financial Services Bill

Lord Lamont of Lerwick Excerpts

Monday 11th June 2012 Lords Chamber

[Lord Lamont of Lerwick]

My Lords, it is a great pleasure to follow my noble friend Lord Sharkey. He made extremely important points about the availability of finance to the economy, which is crucial. We look forward to seeing how he pursues the issue in Committee, as he said he will.

I speak on the Bill with some hesitation because I have not taken part in the extensive consultation process and nor was I a member of the Joint Committee. Many people who are present today have done sterling work in that respect. I welcome the Bill, which is necessary and sweeps away the discredited, fractured, tripartite system that failed its very first crisis. Instead, we are to have two new arms of the Bank, which will handle both macro and microprudential supervision, so that a single institution is in charge of keeping the system safe. At the same time, we will have a free-standing, independent consumer body, the Financial Conduct Authority.

My main point this afternoon relates to what several noble Lords have said and the relationship of the macroprudential side to the current regime of inflation targeting. As Chancellor of the Exchequer, I introduced the inflation objective for the Bank of England in 1992. That was broadly the same framework that was carried forward when the Bank became independent, although two changes were made at that time. Originally, the inflation target was defined in terms of the retail prices index. Thus, it gave greater weight to housing—rather an important difference. Secondly, the inflation target that I set up was accompanied by a requirement for the Bank to monitor different definitions of the growth in the money supply. This was later removed and the inflation target was much more narrowly defined to give less weight to housing and asset prices.

Inflation targeting received quite a good press in general, although I took trouble to say that I did not believe that it was the end of monetary history. Indeed, before 2008 I went out of my way to say in various speeches that we were not paying enough attention to asset prices and the growth of credit, and that the Bank was concentrating on too narrow a definition of inflation. Therefore, in light of that and what subsequently happened, it is right that the Bank should be given a specific and enhanced stability objective. Of course, writing it down is one thing. As the noble Lord, Lord Myners, reminded us, Gordon Brown, as Chancellor of the Exchequer, talked a lot about stability and each year we saw a huge, glossy tome called the Financial Stability Report. Having stability as an objective is one thing; making it happen is another.

I am not entirely convinced that the new, separate Financial Policy Committee is the best way to achieve financial stability. It might be better if macroprudential responsibility was handed to the existing MPC, which would then have a broader remit to stabilise the economy, not just consumer prices. After all, interest rates are an important tool for stabilising the economy. They are important for controlling leverage and the growth of credit. Other tools, such as how far the banks could use their buffers of capital and liquidity, could go to the MPC rather than the FPC. Other duties of the FPC, such as making the financial network safer, could be carried out by the Prudential Regulation Authority.

Views on stability will often have implications for interest rates. Having two committees whose views might go in completely divergent directions does not seem the most obvious way to achieve stability. The fact that the governor sits on both committees, as has been referred to by several noble Lords, underlines the point. Only one committee can ultimately take the interest rate decision and some body at some point—not just the governor but the MPC—has to measure the trade-off and balance stability and the inflation objective. My noble friend Lord Lawson said that perhaps the three committees should become two. I would say a similar thing, although I would choose a different two from the two that he chose.

I hope the fact that we are to have a separate Financial Policy Committee does not mean—this is one reason why I chose to go in the direction that I did—that we are going all the way back to the 1950s with more emphasis being laid on quantitative controls of credit. That would be a step backwards. Interest rates are the most flexible and the best way to control credit and leverage.

In some ways, the Bill recognises the problem by laying down some extremely detailed provisions about how one regulator must consult another. Acres and acres of the Bill are about the PRA consulting the FPC, the FPC liaising with the PRA and one giving orders to the other. One could be forgiven for forgetting that they are meant to be parts of the same organisation. These provisions remind one of Burke’s dictum that,

“laws reach but a very little way”.

As the noble Lord, Lord Eatwell, said, regulation is not just about structure; it is about culture and judgment.

Many noble Lords will remember that a previous deputy governor responsible for stability said in front of a Select Committee of the House of Commons that it was not his job to look at the accounts of financial institutions. I am not making a criticism of him. Of course, he was quite right. That was how the system was set up. But it shows how the macroprudential and the microprudential sides are intertwined.

As several noble Lords have said, the Bill has great implications for the Court of Directors of the Bank of England, which will have to change. At the moment, the Court of Directors is what Bagehot would have called the dignified rather than the efficient part of the constitution. The directors are to be more involved in the stability objective than they are in the current inflation objective. Perhaps I may remind the House that the Bank of England’s website currently says that the court’s,

“functions are to manage the Bank’s affairs other than the formulation of monetary policy, which is the responsibility of the Monetary Policy Committee”.

We will now have quite a different stability objective relationship for the court. Clause 3, which will insert new Clause 9A into the Bank of England Act, states:

“The court of directors must … determine the Bank’s strategy in relation to the Financial Stability Objective”.

As the noble Lord, Lord Turner, said, there is no symmetry between the relationship of the court to the inflation objective and the relationship of the court to the stability objective.

It must be remembered that the Financial Policy Committee is exactly what its name suggests. It is a policy committee and not a regulatory committee. That has implications for where it should be accountable and to whom it should be responsible. Undoubtedly, the Bill requires the direct involvement of the Court of Directors, which will be in a way that has not been the case in the past. That will require very different sorts of persons to be directors of the Bank. If the Bill comes out as presently structured, it will require real banking and financial experts.

The Joint Committee suggested that the court should be replaced with a supervisory board, which I am sure we will consider in Committee. The Bank needs to be accountable but it seems to me that it should be accountable in a different way for its regulatory activities. There must be an appeals procedure and it must be subject to regular scrutiny. Its policy work needs to be done by an independent bank, but to be accountable in a retrospective and periodic way to the House of Commons.

One important aspect of the Bank’s role will be representation in Europe, where the regulatory regime seems likely to alter very quickly. I assume that the PRA will represent the Bank at the European Union’s banking and insurance authorities. Perhaps the Minister will confirm that the FCA will deal with the European Securities and Markets Authority. It is vitally important at this of all times that the Bank has heavyweight representation in the European Union. Many people outside are calling for the PRA to set up practitioner panels in the same way as the FCA will be required to do. That is a sensible recommendation, which I am sure will be discussed further in Committee.

I support this Bill, subject to two qualifications. First, it must be emphasised that the Bill must have regard to international competitiveness. I know that the chief executive of the London Stock Exchange has suggested that that should be written into the Bill. Secondly, we must pay due and careful regard to the overall cost, because as well as the new twin peak system adding to costs, costs on financial institutions are already going up very quickly, not least due to contributing to the Financial Services Compensation Scheme. No one organisation has responsibility under the Bill for reviewing the cumulative impact of these costs.

Subject to those provisions, I support the Bill and hope that we will never again see the paralysis and confusion that did so much harm in 2008.

Finance: Eurozone

Lord Lamont of Lerwick Excerpts

Tuesday 19th July 2011 Lords Chamber

[Lord Sassoon]

My Lords, the Government are not the least complacent about the very serious situation in the eurozone, as evidenced by not only the continuing discussions around the next stage of the programme for Greece but also the situation of Italy as regards the capital markets and its interest rates recently. The most constructive things we can do are, first, to make sure, as the FSA and the Bank of England are doing, that the UK banks are subjected to stringent stress tests; and secondly that they continue to build up, as they have done satisfactorily so far, their capital liquidity positions. In his discussions with the eurozone, my right honourable friend the Chancellor has made it quite clear how supportive the UK is not only of the short-term measures in which we are not directly involved—the Eurogroup discussions around Greece—but also through ensuring that Europe presses ahead with the structural adjustments that are needed to bring sustained growth to Europe. At the same time, we also make it abundantly clear that it is for the eurozone itself to finance further bailouts and that the UK, as has been agreed in the context of Greece, is not going to be a direct participant in these bailouts.

[Lord Lamont of Lerwick]

My Lords, is it not clear, as the noble Lord, Lord Barnett, has pointed out, that while we all obsess about Rupert Murdoch and News International, there is a much more serious crisis actually brewing on the European continent? Is it not clear that two paths are open to the eurozone? One is to recognise a default by Greece now; or if that is judged too risky to the banking sector, for the eurozone then to come up with what it has always promised, which is to do whatever is necessary to stop the bickering among the 17 Governments, to stop the arguments for the European Central Bank and to come up now with a comprehensive solution rather than delay it until the autumn, which will be immensely damaging to Italy and not least to other countries both inside and outside the eurozone?

[Lord Sassoon]

I certainly agree with my noble friend about the relative seriousness of different crises that are going on at the moment, and I repeat that the crisis in the eurozone is extremely serious. As to prescriptions and questions about what the eurozone would do, my noble friend speaks words of wisdom. However, it would not be appropriate for a UK government Minister to lecture the eurozone as to what to do. We shall look with considerable interest at what the meeting of eurozone leaders over the next two days comes up with. It is important that they make further considerable progress.

Greece: Default Contingency

Lord Lamont of Lerwick Excerpts

Monday 20th June 2011 Lords Chamber

[Lord Sassoon]

My Lords, I am not sure that I entirely accept my noble friend’s starting premise. The position is that Greece is a member of the eurozone, and the eurozone will continue to be the eurozone. We want to see the strengthening of fiscal and economic discipline within that zone. When the IMF put together and led the programme that Greece signed up to—which had elements of fiscal consolidation, structural fiscal reform and wider structural reform—it was done precisely in the context of Greece continuing to be a member of the eurozone, and that is the continuing position. The package has been put together and the new Government have some decisions to take. The IMF is coming up to its regular review before the next drawdown of the package, but that is entirely in the context of Greece being able to finance itself on an ongoing basis within the eurozone.

[Lord Lamont of Lerwick]

Has my noble friend seen the extraordinary anti-German graffiti and the slogans being shouted by the crowds in Athens? Does that not illustrate what Professor Martin Feldstein, the Nobel prize-winning economist at Harvard, has always said—that the euro, far from bringing countries together, increases tensions between them? Can my noble friend also explain what sense there is in Ireland and Greece borrowing more money to lend to Portugal, and Ireland and Portugal borrowing more money to lend to Greece?

[Lord Sassoon]

My Lords, I have not been on the streets of Greece or seen what is going on in Athens, but clearly it is regrettable if anti-German sentiments are being expressed on the streets there. However, I have not been following the detail of the riots. The main thing is that we need to support the Greek Government and encourage them, as the eurozone Ministers have done in their statement today, to progress their package and enable the IMF to complete the upcoming assessment. As for the second-order effects of who needs capital where in order for loans to flow, my noble friend reinforces the point that this is a very interconnected system and the ongoing work on the short-term and medium-term stability of the eurozone has to be mindful—as we have been reminded already this evening—of the interconnectedness of the systems at every level.

EU: Financial and Monetary Co-ordination

Lord Lamont of Lerwick Excerpts

Monday 6th June 2011 Lords Chamber

[Lord Sassoon]

I preface my answer by thanking the noble Lord and other noble Lords for their participation in the recent report of your Lordships’ European Union Committee on the future of economic governance in the EU, which provides an excellent commentary and analysis on these matters. The UK has submitted what we were required to submit as part of our national reform programme, and that will be the subject of the next round of debate along with all the other members of the EU 27. Critical to the whole construct and its various strands is ensuring that there is much greater transparency throughout the fiscal architecture. The UK will play its full part in ensuring that we not only contribute to getting the architecture right and submitting the data that are required but, equally, are clear that any budgetary information that we submit comes here to Parliament first and that we are not held to sanction, as are members of the eurozone.

[Lord Lamont of Lerwick]

Does my noble friend agree that, as well as greater co-ordination, greater observation of the existing rules would also be welcome? Does he agree with the statement by Christine Lagarde, the French Finance Minister, that the first bail-out mechanism violated the rules of the EU treaties and, if so, that this would mean that Britain was dragged into supporting the euro by an illegal mechanism? Does he also agree that if the rules had been observed in the first place, Greece would never have joined the euro?

[Lord Sassoon]

My Lords, the Government have secured a very clear agreement with the European Council. Whatever the analysis of Article 122 has been in the past, the Council of Ministers has been completely clear that Article 122 will not be used in the future. That is the critical thing. It is probably not right to go on raking over decisions about who was not in the eurozone in the first place. We have to make it work now, and one way of doing that is to get a proper interpretation of all the relevant articles in the treaty.

European Financial Stability Mechanism

Lord Lamont of Lerwick Excerpts

Thursday 12th May 2011 Lords Chamber

[Lord Harrison]

My Lords—

[Lord Lamont of Lerwick]

My Lords—

[Noble Lords]

This side!

[Lord Lamont of Lerwick]

My Lords, does my noble friend agree that there is widespread surprise that the original financial stability mechanism was allowed to be established under Article 122 of the European Union treaty, which deals with natural disasters such as earthquakes and floods, not sovereign defaults, and that that was done despite Article 125, which specifically prohibits sovereign debt bailouts? Although my noble friend is absolutely right that the new stability mechanism is to come into place, that requires unanimity. If that is not achieved, is it not possible that Britain may be dragged into bailing out not just Ireland, for which there was an argument, but Portugal and Greece? If those provisions of the treaty are going to go on being ignored, surely the only result will be more scepticism and cynicism about the way in which the EU operates.

[Lord Sassoon]

My Lords, my noble friend embedded a number of questions in what was apparently one question. As to the use of the different articles, another key part of the agreement at the European Council in December 2010 was that Article 122 would unequivocally not be used in future for these purposes. Without going into the debate about whether Article 122 should ever have been used for this sort of operation, it will not be used in future—that is agreed. As to Article 125, that is used for loans for medium-term financing under things such as the balance of payments facility and quite other purposes, and that will continue. As to the UK’s participation, the new mechanism has been agreed by the Council. Its resolution is completely clear. A treaty amendment will bring in the new mechanism. That position could not be clearer. As to Portugal, my right honourable friend the Chancellor has made it completely clear that as the negotiations go forward to completion, the UK will not participate in any bilateral loan to Portugal. Ireland was a special case, and the same considerations do not apply in the case of Portugal.