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.

Loans to Ireland Bill

Lord Lamont of Lerwick Excerpts

Tuesday 21st December 2010 Lords Chamber

[Lord Davies of Stamford]

My Lords, I begin by asking the Minister a question. I would have intervened on him earlier, but since I was hoping to speak in the debate I did not want to interrupt him unnecessarily. I think I heard him say that this potential transaction by which we lend three point something billion pounds to the state of Ireland will not increase our borrowing, because the Irish have an obligation to repay. I see the Minister shaking his head, so perhaps I misheard him. If I misheard him, I apologise. Clearly it may not increase net borrowing, because we have a corresponding asset—the Irish obligation to repay—but government borrowing figures are always stated on a gross basis, otherwise they would not be positive at all, because we always have substantial net assets. I thought that there was some confusion about that one phrase that the Minister used, but perhaps he will deal with that in his response. I am grateful to him.

I am very much in favour of the Bill. It seems to me to be absolutely the right measure for two reasons. One reason, which the Government seem rather to dismiss, is that Ireland is a neighbour, a great friend for all the reasons that the noble Lord, Lord Bew, set out, and a member of the European Union. I believe in the notion and the value of solidarity among nations, as in other branches of human affairs. I believe in soft power as well as hard power, in friendship and in good will. I believe in the value of these things, in the value of creating and maintaining them and that it is a mistake if you throw them away. That is an important consideration and I shall come, in a moment, to what I think of the Government’s attitude on that subject.

Secondly, I approve for the reasons that the Government appear to approve of it, which is that we have a very specific, practical and concrete interest in avoiding the kind of systemic crisis which could well be generated by a default by the Irish Government on their bond and other financial obligations, or, indeed, a default by the Irish banks, which are currently being guaranteed by the Irish Government. One default could well trigger another. Clearly, that would create a very difficult situation for us.

My regret about the Bill, how it has been brought before the two Houses of Parliament and the way in which the whole issue has been conducted by the Government is that the Government have given away a lot of the good will that might have been achieved by this gesture by an extremely grudging approach to this transaction. As my noble friend Lord Liddle pointed out, we deliberately decided that we do not want to be part of a collective solution; we want to do these things individually and bilaterally. The Government’s is a rather strange gesture to make, a rather strange signal to send. The Chancellor has been at pains to make clear that he was not responsible for Alistair Darling's agreement that we should join the stability mechanism back in May. Indeed, the Chancellor said in another place:

“I am doing everything I can to ensure that the UK is extricated from the commitment that was entered into, and we are making good progress”.—[Official Report, Commons, 15/12/10; col. 944.]

He said elsewhere in that debate that we will certainly not be part of the permanent mechanism when that is established.

I regret all those things for two reasons. The first is the practical and concrete reason of hard financial national interest; the other relates to my point about good will. In the first instance, there may well be other crises in future. It would be idiotic to exclude the possibility of our need to take part in such support operations in future to avoid some systemic crisis. It is always foolish in life to give up any flexibility. You want to maintain flexibility to respond in different ways. Excluding the idea of being part of a collective mechanism in the EU makes no sense. The other reason, as I said, is that it sends quite the wrong signal, and to my mind reduces the good will created by our decision to support Ireland in this way.

All that reflects an uneasy compromise in the coalition Government. I suspect that the Lib Dems in the Government very much take the view that I take and would have been in favour of this whole operation instinctively on principle in the first place, would then have wanted to negotiate details with our EU partners jointly, and would have had no inhibitions about doing that because they are European partners or members of the eurozone.

I suspect that the advice that the Government received from officials in the Foreign Office was that it would be disastrous, particularly after the centuries of Anglo-Irish history to which my colleague, the noble Lord, Lord Bew, referred—many incidents that are very much to the shame of this country. If we were the only major EU country that declined to take part in the support operation, it would have the most appalling effects on our relationship with Ireland. I imagine that the Foreign Office took that line—at the official level, at least. I imagine that the Treasury and the Bank of England were concerned with the potential systemic crisis and therefore urged the Government to take part.

I suspect that, against that, there were the Tories who, for Eurosceptic and chauvinistic ideological reasons, were reluctant to become party to this transaction and were certainly very keen to ensure that it had nothing to do with our European Union membership or the existence of the eurozone.

That uneasy compromise is reflected in the very grudging way in which the money has been advanced and the very grudging statement that I have just cited from the Chancellor, which I very much regret. I am sorry that I cannot come up with entirely effusive, uncompromising congratulations for the Government on this move, but I am glad that they have taken the right decision, however grudgingly, and I shall be delighted to support them if there is a vote on the subject, which I doubt that there will be.

I have a couple of remarks to make about the general context. So much complete nonsense, and dangerous nonsense, has been talked about the relationship between the euro, the banking crisis and the sovereign debt crisis that we have faced over the past year or two that I feel inspired to comment on it in this debate. It has been said openly and frequently in the Eurosceptic press in this country and by a number of Conservatives in the House of Commons that it shows the weakness of the euro system. It has also been suggested that the solution would be the break-up of the euro and that the countries with substantial debt should leave the eurozone. I regard both those comments as either completely incompetent, if people really do not understand what the logical consequences would be of the actions that they are urging, or frankly irresponsible and unpatriotic, because they do not take into account the interests of this country or are willing to sacrifice the interests of the people of this country for purely ideological, emotional or symbolic reasons.

Of course, the euro had nothing whatever to do with the banking crisis or the sovereign debt crisis. In fact, the sovereign debt crisis would almost certainly have been worse if the euro had not existed. I should be the first to admit that the fiscal rules in the Maastricht treaty—the maximum 3 per cent fiscal deficit unless there was the consent of the Union, and so forth—have not been enforced sufficiently strictly. We all know that now, and we need a tougher and tighter regime with proper monitoring and sanctions in future. Nevertheless, if that regime had not existed at all, people would have had even greater deficits. There is no doubt about that.

There was possibly some accounting fraud in the case of Greece, but if there had been no rules, constraints or restrictions at all, the situation would have been a great deal worse. The euro, far from contributing to the crisis, might—albeit too modestly to have greatly affected the outcome—have had a benign influence. As for the idea that the solution lies in breaking up the euro, my noble friend Lord Liddle has already commented on that. I thoroughly agree with him that that would be an astonishingly self-destructive, and therefore I say advisedly irresponsible and unpatriotic, view.

Undoubtedly, if the countries that are affected by the sovereign debt crisis—Spain, Ireland, Portugal or Greece— were to leave the euro, their currencies, whatever they might be, the successor drachma or punt No. 2, would suffer the most tremendous devaluation. As their liabilities are largely denominated in euros, they would find it completely impossible even to begin to meet the burden of that indebtedness. The result would be defaults or a massive restructuring that was far greater than any restructuring that might take place in an orderly fashion in the context of agreement within the EU or the eurozone. That would mean that our banks would have to write off substantial assets, reduce the size of their balance sheets and reduce their credit creation in this country; that the economy would suffer; that jobs would be lost; and so forth. That would be a deeply regrettable state of affairs and it is thoroughly irresponsible to wish that to happen.

I trust that people will be guided by a rational assessment of the national interest rather than by an emotional desire to see the eurozone collapse irrespective of the consequence for either our partners in the eurozone or us. There is no doubt that the euro is not a part of this crisis. It is not a part of the problem and it is not a contributor to the problem. It has been at least a minor reducer of the scale of the problem. It must be an essential part of the solution.

[Lord Lamont of Lerwick]

I do not disagree with much of what the noble Lord has said, but I think he is slightly overstating his case. It reminds me of when I went to Brussels and the European Commission told me that absolute disaster was going to follow when the rouble broke up into individual countries. The Commission sounded just like the noble Lord. However, let us leave that aside.

The noble Lord slightly overstated his case. Does he not think that the convergence of bond yields within the eurozone was a contributor to what happened, because the bond markets ceased to look at countries individually and the convergence of yields encouraged countries to spend too much and to borrow too much? The failure of the markets to distinguish between countries and that convergence of bond yields, which came from the view that Germany would ultimately bail out the other countries, was a contributing factor.

[Lord Davies of Stamford]

I agree entirely with the noble Lord’s indictment of the financial markets and a lot of lenders. I should say that I was a banker myself and sat on the board of a bank, Morgan Grenfell, which had a considerable lending book as well as being an investment bank at the time, and frequently sat on the credit committee meetings we had. I am appalled by the mistakes made by professional bankers in not wanting to look at the nature and unravel the packages of a class of asset—securitised debt packages, essentially, which were becoming very important as a class of their assets. I equally quite agree with the noble Lord that the bond markets were failing to price risk correctly in exactly the way that he describes. The rating agencies bear a tremendous part of the failings, the fault and the guilt for creating this crisis. Many bankers’ excuse is, “We thought we were buying paper with an AAA credit rating and in fact the credit agencies weren’t doing their job properly in unravelling these packages and seeing that what was in them was absolutely rubbish”.

I agree totally with—I think of calling him “my right honourable friend”—the noble Lord in what he said in indictment of the financial markets. I think that is the problem. It is not an indictment of the currency in existence at the time any more than you can say that the enormous failings of the American banking markets, the American bond markets or the American rating agencies were the fault of the fact that they have a currency called the dollar.

[Lord Lamont of Lerwick]

I hesitate to remind the noble Lord, but I remember him making speeches telling us that if only we were in the euro, we, too, could enjoy these very low bond rates.

[Lord Davies of Stamford]

Undoubtedly had we been in the euro—and I totally agree with the noble Lord that I was, and remain, a partisan of our joining the euro—as a result we would have had to adopt tighter fiscal policies. The noble Lord may feel that the result of that might not have been entirely unfortunate for the future history of the country. Nevertheless, we would have done, and the counterpart to that would have been that we would have had lower nominal and real interest rates throughout that period. I happen to think that that would have been a good thing as well.

Comprehensive Spending Review

Lord Lamont of Lerwick Excerpts

Monday 1st November 2010 Lords Chamber

[Lord Lamont of Lerwick]

My Lords, I welcome the comprehensive spending review. The noble Lord, Lord Myners, made a point of saying that there were choices open to the Government. Indeed there were. I particularly welcome the choice that they made to stick more or less to the ratio of 75 to 25 per cent in the balance between expenditure cuts and tax increases. I believe that the emphasis had to be on public expenditure cuts in order to correct at least part of the overspending of recent years.

Undoubtedly this was a bold set of announcements, for which praise is therefore due. Bold it may have been, but the idea that this was the biggest fiscal consolidation since the dissolution of the monasteries seems somewhat overdone. We are cutting spending by 7.4 points of GDP, which, as the noble Lord, Lord Bilimoria, said, compares with what Canada did in the early 1990s. Sweden, after its banking crisis in the early 1990s, reduced expenditure by nearly 15 per cent, as did Finland. Spain and the Netherlands at the same time reduced spending by much the same amount as the Government are reducing it today. The early 1990s were not at that time a benign environment internationally. Indeed, there had been other fiscal consolidations, such as that of my noble and learned friend Lord Howe in the early 1980s, of a similar magnitude. In this country, from 1993 onwards, we moved from a deficit of 7 per cent of GDP in five years to a surplus. All these fiscal consolidations were achieved without Armageddon arriving.

Of course there are risks, but there are risks also in not acting. The Government were for several reasons right to move more quickly than the previous Government to reduce the deficit. First, the sovereign debt crisis in Europe has altered the balance between the merits of delay and the merits of action. Secondly, as the Minister said, Britain has one of the largest structural deficits in the world. It is true, as the noble Lord, Lord Myners, said, that we compare quite well with other countries in terms of the stock of debt, but the size of our annual deficit means that we are adding considerably to the stock of debt each year. Indeed, the predictions have been that this would top off somewhere at 80 or 90 per cent of GDP. However, if we go on adding at a rate of 10 per cent—or, if it is modified, at a rate of 7 or 5 per cent—we shall increase it considerably, at great risk.

As the Minister said, debt interest is taking an increasing proportion of total public expenditure. After the CSR, there will be savings in debt interest payments, but debt interest is to go on rising during the whole of the expenditure period. With an uncorrected deficit, we would see more and more public expenditure silted up with interest payments. Ken Rogoff, the former chief economist at the IMF, has argued that the relationship between interest rates and debt is not a linear one. Interest rates can rise quite suddenly when a country hits its debt ceiling and he has demonstrated in his work time and again that, when a stock of debt reaches a certain point, it is a dampener on the growth of that economy. We have been running a deficit that is something like one and a half times the level of deficit run by Franklin D Roosevelt in the 1930s, which his own Treasury Secretary at the time confided to his diaries had not done much good or made much difference.

These cuts will not come into effect until next year and they will take four years in total to implement. How long do noble Lords opposite think we can take? What are their criteria for when we should act? One answer that is often given is that we should act when the economy is showing signs of recovery and that recovery is firmly established. It is not easy to say what “firmly established” means, but so far the economy has recovered remarkably quickly. Growth in the past three quarters has been 0.4 per cent, 1.2 per cent and 0.8 per cent, which surprised the markets in general. The ONS has said that the difference between the first and second quarters in underlying growth was much the same, implying that the economy is growing at an annualised rate of 3.2 per cent, which is above its long-term trend rate of growth of 2.35 per cent as found by the previous Government. I am the first to say that there are risks to this growth rate—it may well slow down—but the recovery is faster than that following the recessions of either the 1980s or the 1990s. We have recovered 40 per cent of the loss between the first quarter of 2008 and the third quarter of 2009.

An answer that we sometimes get to the question how we should judge when it is appropriate to tighten policy is that we should wait until the output gap is closed—that is, the difference between output as it is now and where it would have been had there been no recession and the economy had grown during that period at the long-term rate of growth. But how does anybody know what the output gap is? It is a concept that is extremely difficult to measure precisely. Also, it might take years to close the output gap, in which case we would go on adding to the structural deficit by 10 per cent or 5 per cent, or whatever the chosen rate was each year.

There is much concern, understandably—the noble Lord, Lord Myners, referred to this—about the loss of 490,000 jobs in the public sector. That is to be spread over four years but it also has to be seen in the context of a labour market of nearly 30 million people. That labour force increased by over 315,000 in the period between December/February and June/August. If the economy continues to grow—and of course there are risks and huge uncertainties in this—there is every prospect that this sort of redundancy in the public sector can be absorbed.

The noble Lord, Lord Myners, seemed to see the cuts ideologically as part of the desire for a smaller state. Indeed, there have been a lot of headlines about rolling back the state. However, they seem somewhat wide of the mark when one realises that public expenditure in money terms is going to go on rising every year to the end of the survey period and that, at the end of that period, spending in real terms will be where it was two years ago. Spending as a proportion of GDP is going to fall from 47 per cent back to 41 per cent, where it was for much of the 1980s and 1990s. With all due respect, that does not seem to be a radical restructuring of the state but rather a common-sense reversal of part of the overspending that we have seen in recent years.

The right reverend Prelate talked about fairness. There never will be consensus on fairness; fairness is in the eye of the beholder. Some noble Lords opposite think that the entire burden should be shouldered by the better-off, but any objective person will see that the Government have laboured long and hard to try to spread the misery and the pain around. Any cuts proposed in welfare would lead the Opposition to say that this was unfair. Perhaps they should remember what James Purnell said when he was Secretary of State for Work and Pensions, specifically about housing benefit, which was that he wanted to consult in order to see that

“people on benefits do not end up getting subsidies for rents that those who work could never afford.”

This has been a difficult package to assemble. I believe that it will gain acceptance by having been assembled by a coalition Government of two parties and that the exercise of doing it has strengthened the coalition. I welcome the CSR. After a decade of recklessness, the Chancellor of the Exchequer and the coalition have laid the foundations for a decade in which we could earn our prosperity in the future rather than borrowing it.