Euro Area Crisis: EUC Report

Lord Maclennan of Rogart Excerpts

Monday 21st May 2012 Lords Chamber

[Lord Maclennan of Rogart]

My Lords, it has been a privilege to serve on the Select Committee and to participate in at least some of its deliberations on this subject. I thank the noble Lords, Lord Harrison and Lord Roper, for presiding over those deliberations at a time of great sensitivity and urgency to deal with these matters. The Select Committee’s report was published in the aftermath of the Prime Minister’s walk-out from the December seminar. Although that diplomatic mistake has had the lingering effect of diminishing Britain’s influence on decision-making by the European Union, I do not wish to rake over the failure to disclose to the committee the interests that the Prime Minister was allegedly seeking to protect. Suffice it to say that the reasons subsequently advanced by the Chancellor of the Exchequer in his letter to the chairman of the Treasury Committee of the House of Commons were wholly unconvincing. As that letter makes clear, significant levies on the financial sector,

“are subject to unanimity under the EU treaty”.

The Prime Minister was playing to a domestic gallery, not seeking to take forward the decisions that had been taken in principle by the October summit. It was a failure of the worst kind.

The Government’s response to the committee’s report has some positive proposals that I commend and welcome. In particular, the Government claim that they are “leading the growth agenda”. I think some of the remarks by the noble Lord, Lord Monks, about how we might lead it rather better should be taken on board by the Government. The answer to the report makes it clear that there are certain longer-term goals in respect of reforming the single market that could have a beneficial impact on our economy and some of those areas most under stress at this time. For example, in services there is huge overregulation in the domestic law of too many European Union countries, notably Germany. Digital union within the trade area is now likely to be achieved by 2015. That is a little way down the track, alas. The agenda also includes energy, which is a noticeably disrupted economy, with member countries taking very different views of it.

It is also good to notice in the Government’s reply support for a European research area and global openness via the EU free trade agreements with trading partners. These are positive. Although the December diversion from the urgent need to particularise and embed the principles agreed at the October meeting caused further delay in coming to grips with the euro area crisis, we are not alone in having been too tardy in responding. Indeed, the German and French attempt to water down the Basel III capital rules as they apply to Europe, even within the past month, must also be regretted. It seems clear that member countries of the Union have not faced up to the seriousness of the crisis in a coherent and constant way, with a direction set by their heads of government.

Major decisions are now required. One is on the Greek debt write-down. A second is on bank recapitalisation and the financing of the European Union rescue funds. These have been too long postponed. As the noble Lord, Lord Harrison, pointed out, the European Central Bank has been inventive in purchasing government bonds of euro area countries in financial distress from the secondary market; in coming together with the central banks from outside the area to help provide liquidity support; and in the long-term refinancing of operations—the LTRO—which provides 500 European banks with nearly €500 billion via three-year loans at very low interest rates. However, it is clear—particularly so because of the current Greek crisis—that this has not been enough.

It is worth noting in passing the evidence given to the committee by the former Prime Minister of Italy, Giuliano Amato, that although fully fledged Eurobonds were not part of Germany’s current thinking, mutually guaranteed project bonds for specific pan-EU projects, such as the development of the European power grid, should be given consideration. I should like to hear from the noble Lord, Lord Sassoon, when he winds up, whether the Government are giving serious consideration to that suggestion, which seems to be one that should be treated favourably.

Most commentators viewing the results of the Greek elections have considered that the Greek Government’s exit from the eurozone is now much more likely. The Greek opinion polls suggest that there is a growing recognition that the consequences for Greece would be disastrous. It is impossible to predict what may happen by 17 June. However, what is to be done now?

[Lord Radice]

My Lords, might the noble Lord also remark that well over 75% of Greeks who have been polled want Greece to stay in the eurozone?

[Lord Maclennan of Rogart]

I believe it is nearer 80%, which is an indication that the traditional parties might be worthy of greater support than Syriza, but it is not for us to comment on the internal politics that are leading up to the June elections in Greece.

I believe that it is not sensible to lecture Greece and still less sensible to lecture Germany from the sidelines about what they ought to do. Britain cannot take a holier-than-thou attitude. Some time ago, the Chancellor of the Exchequer spoke of the need for fiscal union, which we have heard repeated today even by the noble Baroness, Lady Noakes, to stimulate recovery and to make the eurozone a workable phenomenon. Others, including some German voices, have adumbrated steps towards banking and political union. But these, although sensible medium-term goals, will not be achievable in the amount of time available to set aside the crisis that faces us immediately.

Northern Europe is not ready to be tied to bailing out its southern neighbours, despite the probable adverse consequences, including slashed production in most European and many other countries. Nor could Germany take on the entire debts of the European region without calling into question its own credit worthiness. All EU Governments should be assembled in conference to work out an acceptable solution. Two-day meetings by heads of Government are not enough. Some 74% of the Greek Government debt is now held by Governments and the IMF, which poses a massive threat to taxpayers. There is no point in crying over spilt milk. Earlier restructuring would certainly have required more banks to be bailed out but that could have avoided the confidence-sapping sequence of crisis. Roughly €100 billion was paid to private creditors by the Greek Government before their bailout in February.

The European conference which I am proposing should aim further to write down Greek public sector debt, to fix a longer period in which to hit their fiscal target, to agree to second immediate expert personnel to work with the Greek Government and other Governments in difficulty, and to achieve delivery, including structural reform. There is also a need for liquidity support for solvent banks and Governments. The natural liquidity backstop is the ECB, which has been mentioned by speakers in this debate, including the noble Lord, Lord Monks. Lenders must be properly capitalised but that has been postponed time and again in the eurozone. The IMF considered that €200 billion was required last year but only €100 billion was agreed by the Governments.

The new European security mechanism would be a suitable institutional arrangement to sustain the illiquid Governments. The ESM could find itself short of funds, which might be overcome by allowing it to borrow from the ECB. That idea appears to be favoured by successive French Governments, including President Hollande. But insolvent Governments need to restructure their debts and illiquid Governments need credible plans to reduce theirs. There is also a need to introduce controlled resolution of undercapitalised banks. The stakes of shareholders have massively diminished in value. Bondholders could be bailed in to provide a buffer. Banks should be prepared to move to subscribing to such funds in due course.

It is expected that the EU Commission will produce its own proposals in June; they should be fed into the proposed standing conference of member states. Unless member countries of the European Union come together with appropriate expert support on a continuing basis, there is a grave danger that a Greek exit, leading to their Government’s default; contagious runs on banks in other countries; exchange controls being imposed; the new currency being devalued; and hyper-inflation being experienced in some countries and deflation in others, will be a highly predictable consequence. We know that Argentina and Iceland managed to turn themselves around, but such chaos as I have described in the euro area, the second largest economy in the world, with the largest banking system, needs to be treated as the paramount challenge to western democracies since the 1930s.