Eurozone Crisis

Lord Liddle Excerpts

Thursday 27th October 2011 Lords Chamber

[Lord Liddle]

My Lords, I thank the Minister for repeating the Statement that the Chancellor made in the other place. As my colleague Rachel Reeves acknowledged there, we on this side of the House welcome the agreement that has been reached, but we also believe that there are many crucial, unanswered questions; I hope that the noble Lord can help us deal with some of those today. The future of the eurozone is vital to our national interests. It has huge ramifications for British businesses and families and that is why we need to see on the part of our Government a policy of constructive and positive engagement, even though we are a “euro-out”.

On the recapitalisation of the banks, does the Minister believe that the deal announced is sufficient and that UK banks do not require any further recapitalisation? What estimate has he made of the exposure of UK banks to Greek, Italian, Portuguese and Spanish sovereign debt? What can he tell us about that? Does the noble Lord rule out any possibility that the Irish might at some stage ask for similar treatment to that of the Greeks? What would then be the impact on the UK banking system? What would then be the expectation of our partners as to our role?

On the expansion of the European Financial Stability Facility, does the noble Lord believe that the €1 trillion package is sufficient? Is it the big bazooka that the Prime Minister talked about so eloquently before the summit? Does he think that we are going to be back here discussing these issues in a few months’ time, which would add to the uncertainty that is undermining confidence?

Can the noble Lord explain in more detail—and I understand the difficulties here—how the leveraging of the EFSF will work? If it is not clear now, when does he expect it to become clear in terms of credit enhancement and special purpose vehicles? If the EFSF must also fund bank recapitalisation, will it be sufficient to give confidence to the markets, and will there be sufficient remaining funds to underpin the sovereign debt of member states in difficulty, such as Italy?

On the question of British contributions, paragraph 22 of the euro summit statement says:

“In addition, further enhancement of the EFSF resources can be achieved by cooperating even more closely with the IMF. The Eurogroup, the Commission and the EFSF will work on all possible options”.

Are we to interpret what the noble Lord said in the Statement as meaning that the British would oppose any such exploration and try to veto such efforts?

Is not the big thing missing from the agreement that has been concluded the lack of any plan for jobs and growth in Europe? Is it not the case that countries such as Italy are not conceivably going to be able to solve their debt problems without a revival of growth? Is this not a time when Britain should have been leading the charge with our partners to argue for a proper plan for jobs and growth in Europe? We need not simply collective austerity but a new drive to open up the single market, an investment plan using up unused structural funds—of which there are hundreds of millions in this country—and a greater role for the European Investment Bank, which has already played a considerable role in financing small businesses. We need to look at whether this can be extended to provide central support for privately funded energy and other infrastructure projects. Should we not be putting together that kind of European plan for growth?

However, is not the real problem that this Government cannot do that because unemployment is at a 17-year high, there has been no growth in this country for a year, borrowing is £46 billion higher than was planned and, by clinging desperately to an austerity plan that is failing here in Britain, as my colleague Ed Balls has so persuasively argued, we are nailing our colours to a mast of austerity when what we need is a comprehensive plan for growth? Is not one reason why the Government are being held back from putting forward a plan for growth in Europe that they are fundamentally conflicted on Europe, not really being able to make up their mind whether they want Britain in the room or out of the room?

On the arrangements for future decision-making that have been agreed, the agreement says:

“The President of the Euro Summit will keep the non euro area Member States closely informed of the preparation and outcome of the Summits”.

What does “closely informed” mean? Does it mean anything more than Britain simply being told by a letter in the post, as it were, what has happened in Brussels? What arrangements will be made to ensure that the British voice is heard loud and clear?

On the forthcoming treaty changes, which are mentioned, it is totally unclear where the Government stand. I understand that there was a report this morning from a No. 10 press briefing that any treaty changes were expected to be minor and certainly would not require a referendum in this country. In that case, how will they be a vehicle for the repatriation of powers and the renegotiation of Britain’s relationship with the European Union that the Prime Minister promised his Back-Benchers in the House of Commons earlier this week? The fact is that, as long as the Government fail to resolve these fundamental issues about their stance towards our membership of the European Union, our influence over the eurozone’s future is going to be minimal.

[Lord Sassoon]

My Lords, I congratulate the noble Lord, Lord Liddle, on asking, in my experience, the maximum number of questions in the minimum amount of time, which certainly gives me a bit of a challenge. He addressed some of the key issues that are left outstanding, which is very helpful, and I shall attempt to address as many of his questions as I can.

First, on the sufficiency of the bank recapitalisation, what is important here is that for the first time, unlike the somewhat obscure and clearly failed stress tests—failed in the sense that they were not nearly tough enough—we have a very clear direction about the hurdle of 9 per cent core tier 1 capital on the basis that sovereign debt is market to market and the European Banking Authority has done the calculations on that basis. That is materially different from the way that the assessment was made last year, which was woeful in its inadequacy. To be absolutely clear, through that process and through the ongoing process of the tripartite authorities—particularly the FSA in the UK—under this assessment UK banks do not need any new capital, as indeed is the case for banks in a number of other countries, including the Netherlands and, critically, Ireland.

The noble Lord asked about Ireland and I shall come back to that in a minute. He also asked specifically about the UK’s exposure to other peripheral countries, and it may be helpful to give the latest data on that. The information is set out on the Bank of England website, and the latest numbers that it gives are that UK financial and monetary institutions have exposures to the public sectors of the peripheral eurozone countries—that is, Greece, Ireland, Portugal, Spain and Italy—of up to $34 billion, the currency in which the numbers are reported. Twenty-five billion dollars of that relates to the public sectors of Italy and Spain, and a total of $9 billion to Greece, Ireland and Portugal—$3 billion to Greece, $4 billion to Ireland and $2 billion to Portugal. These are relatively modest numbers in most cases compared with those for other core European countries. They are much lower than the exposures of banks in France and Germany, for example, to Greece.

So far as concerns Ireland, as I just said, the first thing that came out of the statement overnight is that the Irish banks do not require further capital injections as a result of this package. I support the euro summit’s statement on Ireland—that it is making good progress on the full implementation of its adjustment programme. As we all know, it is clearly in our national interest that the Irish economy is successful and that its banking system is stable. Ireland accounts for some 6 per cent of Britain’s exports, and that is why we signed the bilateral loan agreement with it. As is clear from everything that has happened since then, the Irish Government have a strong commitment to programme implementation, and we very much welcome that.

A recently completed staff mission ahead of the fourth EU/IMF review of Ireland’s programme concluded that Ireland is indeed delivering its programme effectively and making substantial progress on deficit reduction, banking repair and structural reforms. The progress that Ireland has made is a positive lesson for other countries in Europe.

The noble Lord then asked whether the €1 trillion is sufficient. The critical point for now is that, although a lot of numbers have been bandied around in negotiating the package, we have gone up a step from €440 million to €1 trillion and that is a very significant increase. The first priority is to see to the details because, as the noble Lord, Lord Liddle, points out, important details have to be put in place. That has to be the next priority and there is a commitment that we should get the details on that by the end of November, which answers the noble Lord’s question. Otherwise, all I would say about indications of the sufficiency of the package is that the markets—whether the equity markets, the debt markets or the markets in European banks—have been positive today and although we should not set too much store by one day's reaction in the market, clearly that reaction has been positive, having looked at the statement and the package.

Turning to jobs and growth, of course we want the EU27, as well as the eurozone, to be putting in much more effort, as I have already said, to questions of structural reform, competition policy, external trade and so on. From the Statement it is clear that yesterday the Council was looking hard at these matters, not least in drawing attention to the Spanish plans for structural reform and the new Italian plan for growth. To be fair to the eurozone, both in the generality and in relation to two of the countries that wish to see speedy action, growth issues are certainly not forgotten.

On the noble Lord's jibes about the UK, I stress again that the approach of the UK Government is threefold: first, we must stick to the deficit reduction plan if we are to have the continued low interest rates which we need for sustained recovery; secondly, yes, there is room for monetary activism, as seen in the Bank of England's recent announcement on more quantitative easing but also in my right honourable friend the Chancellor's announcement that we are looking at further credit easing measures; and thirdly, yes, we need to continue to bring forward supply-side reforms, as we will do in and around the autumn Statement next month to underpin medium-term balanced growth.

The noble Lord asked about issues concerning the structure of the euro-ins and the euro-outs, treaty changes and so on. As regards what “closely informed” means, the best evidence is what happened over the past few days: the Prime Minister successfully argued that we needed to have a seat at the table yesterday for issues that concern the whole EU27 and specifically there was the bank recapitalisation. That was accepted; we were there; the other euro-outs were there and we were kept extremely closely informed about the deliberations within the eurozone. The best thing to look at is the evidence of how that worked over the past couple of days.

The eurozone Statement talks about possible treaty changes, so we must not jump the gun and say that there will be some. I do not have the wording of that paragraph in front of me, but it makes the point that they are not necessarily extensive changes—I forget the adjective.

[Lord Liddle]

Limited.

[Lord Sassoon]

I thank the noble Lord for that—possible limited treaty changes. We should not get excessively excited too soon about that but, if and when the treaty changes come forward, the first priority of the UK Government will be to ensure that those treaty changes are fit for purpose in terms of the better governance that we want in the eurozone, and the second is that we will take every opportunity at that point to see what advantage we can get for the UK out of the discussions around any package that may come forward. I hope that that rather briskly answers the noble Lord’s many questions.