Economy: Credit Rating

Lord Marlesford Excerpts

Monday 25th February 2013 Lords Chamber

[Lord Deighton]

Interestingly, Moody’s has established that the outlook is stable. That means that it would not anticipate a further ratings change in the next 12 to 18 months—unlike the situation with the US and French economies, where the outlook is deemed to be negative because they are not perceived to have the same political will to drive down the deficit. The focus of the ratings agencies is much more to do with the management of our debt and driving down the deficit than directly with growth. Growth gives you the fuel to help manage down the debt, which is their primary concern.

[Lord Marlesford]

My Lords—

[Lord Howarth of Newport]

My Lords, is not the situation even worse than intimated by the noble Lord, Lord Higgins? We have a state of affairs in which the markets are totally confused by the position taken by the Governor of the Bank of England and the Monetary Policy Committee and in which the Chancellor of the Exchequer has been found abjectly wanting by the witness whom he most insistently prayed in aid. What prospect is there of the Government getting a grip on this sliding situation?

European Banking Union: EUC Report

Lord Marlesford Excerpts

Thursday 24th January 2013 Lords Chamber

[Lord Davies of Stamford]

My Lords, it has happened more times than I can recall since I have been in this House, nearly two and a half years, that I have had the pleasure of following the noble Lord, Lord Hamilton, or he has had the task of following me. Although I rarely agree with him about very much, it is a great pleasure to debate with him. However, I did agree with two things that he said this afternoon. First, I share his view that the ECB, in practice, is likely to have a dominating and increasing intellectual influence on the EBA. Secondly, I very much agree with his characterisation of the way the European Union makes progress as two steps forward, one step back. Although he probably would not agree, I think that is a very sensible, sound and prudent way of advancing in difficult territory, and I am very content that that has been and continues to be the process. Had he put the order the other way around, I would have very much disagreed with him, but his judgment and mine are very much the same in that way.

I want to add my own word of tribute to the noble Lord, Lord Harrison, and to everyone on the committee for having brought forward a very interesting and timely report. I want to address just two of the issues on which the committee focused in drawing up that report, and then to say a few words about the position of the British Government. First, I recognise that the testimony that the committee received was rather conflicting. A very important and fundamental issue is whether it is right to have the monetary authority—in this case, the European Central Bank—as the supervisory authority for the banking system. It seems to me that it is right. There is often said to be a conflict of interest between financial stability and monetary policy. I see it not so much as a conflict of interest but of objectives. It is not the sort of conflict that can be eased or solved by separation of responsibilities. On the contrary, it is the sort of conflict that can be made a great deal worse by the excessive separation of responsibilities, because if there is a problem and in difficult times the supervisory authority feels it necessary in the interests of financial stability to provide more liquidity to the market, for example, or to support a particular bank by replacing deposits that may be fleeing elsewhere, or otherwise, that decision would immediately have monetary consequences and could be implemented anyway only by the central bank.

The central bank needs to be brought in—inevitably, it must be brought in—and the earlier the better. What is more, the central bank is in a very good position because of its open market operations, because it can see to what extent banks are varying their levels of deposit with itself, and because it knows about any drawings through the back door by banks in its area of responsibility. It is in a very good position to see whether liquidity problems are emerging for institutions in their area. Therefore it seems to me extremely important that the supervisory authority and the central bank should work together anyway. The idea of having two different directorates within one institution—the ECB—responsible for stability and for monetary policy seems to me a very good solution. I personally have the greatest confidence that, if there is a difficult decision to be made—as there will be, inevitably—it should be Mario Draghi, a person in whom I have the greatest confidence, who has the responsibility of making that decision.

The other issue that I want to address, which was dealt with in the committee’s report at some length, is whether it is desirable or acceptable for the banking industry come in in stages. Only the first stage so far has been agreed. Of course, it cannot be certain that there can be any agreement with the second or third stages, the first stage being the supervision regime and the second and third stages being retail deposit insurance and resolution procedure and mechanism. Clearly, it is not ideal; it is not the way one would wish these things to be, but I think it is a reasonably acceptable situation on a temporary basis, and a good deal better than nothing. I am glad that we have the process going.

I have to say that I think the Germans are not being rational. Maybe the Germans, and the Dutch, are resisting a European Union-wide resolution and retail deposit insurance system simply because if there were a problem and a run on the banks in one member state because in that particular context depositors no longer had confidence in the credibility of the retail deposit insurance system, and if that confidence depended entirely on the credibility of the national Government, unsupported elsewhere in the EU, there would inevitably be a systemic crisis. Similarly, if it was necessary for a particular member state to recapitalise the banks, and that task was out of proportion to the financial resources of that particular member state, that would engender immediately a sovereign debt crisis for that country.

What is more, such a crisis would never be limited to one member state. There would be knock-on and systemic effects for the whole of the European Union. If Greece went down, we know that there would be effects elsewhere, or if Portugal went down again there would no doubt be strong effects in Spain. The consequences of that would be that German and Dutch banks—to take the examples of the two countries that are resisting the logic of the banking union, which I think they are—would find that they are making great write-offs of their assets that were exposed to these particular markets and deposits with those banks, and so on. They could be supported only by their own banks, which would have to be recapitalised by their own national Governments.

The cost of such a bailout would be enormous and vastly greater than any credible drawing in respect of one, two or three particular institutions on a retail deposit insurance scheme. I think that the Germans are being quite illogical about this. They are not looking at the matter in the long term or in the round. No doubt intellectually they might agree with me, but they find themselves under political constraints. I hope that with the various events that are in the pipeline in the coming months they will find that it is politically possible to do what I think is the rational thing to do.

I now want to say something about the position of the British Government in all this, which seems to be perfectly ludicrous, if I may say so. I understand that they see the banking union as a good thing for others but not for us. That immediately is a slightly suspect argument, and one wonders why it is the case. I looked at the committee report to see what the British Government’s analysis of the national interest was, and why it was not in our interests to join the banking union if it made sense for other people. There is no such explanation in the whole document. I shall read what passes for an explanation to the House. Paragraph 129 states:

“The Government have repeatedly stated that the UK will not participate in the banking union proposals, on the grounds that the measures logically flow from monetary union and are designed to secure the success of the single currency”.

That is a quite unconvincing argument. If someone buys a car, a pharmaceutical product or a piece or electronic gadgetry, he is not worried about who the product was originally designed for; he is worried about whether it is suitable for him, and whether it will work for him. That is the argument that needs to be addressed, but it has not been addressed by the Government at all.

[Lord Marlesford]

Surely what the noble Lord has just been saying is precisely the reason why the British Government do not want to join the banking union. They are saying that there must be mutualisation through the European Central Bank and the banking union of the debt of banks in the euro area. Is he really suggesting that it would be sensible for the British Government to share in that liability, and that if, as he described graphically, there were to be a run on one of the banks in Greece, we, too, should have our share in picking up the pieces?

[Lord Davies of Stamford]

Indeed, I am suggesting exactly that to the noble Lord and to the House. It would be very much in our interests to do so, for the reason that I thought I had explained. Perhaps the noble Lord did not follow my argument, which was that if there were a run on the banks in a member state, left to itself it could engender a systemic crisis that would be far more costly to us, because British banks would write off a very large portion of their assets as a result of collapses elsewhere. In order to restore those banks to financial viability, we would need to recapitalise and support them in ways that would be much more expensive than the likely cost of any contribution to the system. I do not want to detain the House for too long, but I believe that we should have interventions such as this, so I will give way to the noble Lord.

[Lord Marlesford]

In that case, why did the American banks not recapitalise the British banks that went bust?

[Lord Davies of Stamford]

It is obviously necessary, if we are going to get involved in any kind of obligation of this kind, to make sure that we come under the same supervisory authority and that everybody works according to the same rules. That is palpably not the case with us and the United States.

The position of the British Government is clearly that they are not interested in making a dispassionate and functional analysis of the national interest in this area. If they were interested in doing so, it would have been quoted in the report and we would all know about it. They have simply decided that on party political grounds, because of the need to conciliate the Eurosceptics in the Tory party—we know that this is the way the country’s foreign policy is now being run; it is being bear-led by the Eurosceptics—it is impossible to do the rational and sensible thing, so they have simply excluded a priori any possibility of our joining the banking union, even as a participant that is not a member of the euro. A large number of countries will join on that basis—almost certainly a good deal more than the four that have already announced they will. I expect that every east European country other than the Czech Republic to come into that category. As the noble Lord, Lord Kerr, very convincingly argued, that would cause great problems for us. It is absurd for the British Government to say that one of the major difficulties here is the voting system, because the problem would be resolved if we were part of the system, and at least one of a minority of nine or 10.

If we do not join the banking union, there are only three logical possibilities. I do not think that any Member of the House will want to argue with my logic, which is very basic and elementary. The first is that we have a supervisory system that in practice simply tracks that of the ECB; we will do exactly what the ECB does in its area of responsibility, for example in matters of licensing, authorisation, intervention and guidance to banks. That would mean that we were de facto part of the system, with the important difference that we would not be part of the decision-making mechanism and would not have the kind of influence within the system that otherwise we would have had.

The second possibility is that we adopt a supervisory system that is somehow stricter and more severe than that adopted on the continent by, for example, the Republic of Ireland under the ECB. That would mean that banks here would find that they were at a competitive disadvantage doing their business out of London as opposed to doing it out of Paris, Frankfurt or somewhere else. That would not be a very intelligent thing to do.

The third possibility is that we adopt a regime of supervision that is lighter and more complacent than that adopted by the ECB. In the short term, that might attract institutions that do not like the stricter regime on the continent, but in a crisis we would be much more exposed because we would have a lesser degree of credibility. It would be considered that our institutions and banks were less safe and sound than those across the Channel, or indeed across the Irish Sea. That, too, would be a bad day’s work for the country. We would face a situation in which either we would have no advantage at all, but the disadvantage of not having the influence that we ought to have and that is commensurate with the importance of the City, or we would be otherwise disadvantaged either in competitive terms or in our ability to withstand crises. That would be a profoundly bad day’s work for the country—and it is exactly the day’s work that this Government have done. I deprecate it very strongly indeed.

Financial Services Bill

Lord Marlesford Excerpts

Monday 15th October 2012 Lords Chamber

[Lord Marlesford]

My Lords, I will add my voice to support very strongly the amendment of my noble friend Lady Wheatcroft. I will do it in a short and simple way, by giving a reason and an example. The reason is that a very important function of auditors concerns hazards, and it falls into three parts. First, they must identify hazards; secondly, assess them; and thirdly, expose them.

My example comes from something that I have agitated about for a long while: namely, the level of credit card debt in this country. This is not the credit card debt that noble Lords may have, and which they pay off monthly, but that part of the debt that overruns and is therefore subject to very high interest rates, which very often the people with the debt have no hope of paying back. That level of credit card debt for the British banks is currently still more than £50 billion. The figures are from the British Bankers’ Association and the Bank of England, which both publish a series of monthly figures.

I have mentioned this over a long while in your Lordships’ House. When the previous Government were in power, at my instigation the noble Lord, Lord Myners, who as Treasury Minister fulfilled the role that my noble friend Lord Sassoon now fulfils, wrote to the chief executives or chairmen of the major banks, asking them for details of their credit card debt. The crucial question is: at what value do the banks hold this credit card debt on their balance sheets? Unless they have written it down hugely, the debt is unlikely to be paid and could be a serious hazard to the sustainability, liquidity and indeed continuing existence of those banks. This is the sort of thing that a narrative account by auditors would identify and reveal. I ask the Minister to refer to this example when he replies to my noble friend’s amendment.

[Lord Tunnicliffe]

My Lords, I will not take up the time of the House with detailed comments on the amendment. We have listened to the debate, and all noble Lords who spoke were most persuasive. I hope that the Minister will give careful consideration to their points. We will certainly listen with great care as we decide on the extent to which we may support the noble Baroness, Lady Wheatcroft, if she plans to take the matter further.

Financial Services Bill

Lord Marlesford Excerpts

Monday 8th October 2012 Lords Chamber

[Lord Sassoon]

My Lords, I completely agree about the importance of such warnings and clarity about what compensation schemes apply to particular bank accounts, which is precisely why it is already covered in the FSA’s handbook. As the noble Lord, Lord Davies of Oldham, may not be aware, section “Comp 16” of the FSA handbook requires precisely what the noble Lord requires. Firms from the EEA passporting into the UK are required to inform customers that they are covered by their home state’s scheme. Firms from outside the EEA are required to be separately authorised in the UK, so that they are covered by the FSCS. We completely agree on the importance of this and of raising consumer awareness of it. Again, lots of good stuff went on in many areas during the summer and this is another one. If the noble Lord and the Committee generally want to look at the press release, it was put out on 31 August and sets out details of the FSCS awareness campaign. The notes to editors in it make clear the different health warnings that have to be put down for UK branches of EEA banks and the precise form of words. I do not happen to bank with one of those banks; I bank with a British bank which now adds an extra page—it is not great for the environment, but the extra page sets out the details of the coverage of the FSCS and EEA banks are now required to do something similar.

The noble Lord makes a very good point, but I believe that we should leave it to the FSCS and the regulators to do what they are already doing, rather than writing inflexible requirements into legislation. The advantage of the current approach, as I am sure he will acknowledge, is that the regulator and FSCS can adapt their approach over time, but it is a useful matter for us to have spent four minutes on and I hope that the noble Lord is able to withdraw his amendment.

[Lord Marlesford]

May I just make one very small point to my noble friend? I declare an interest straightaway as a modest customer of the national savings bank. Along with many other people, I suspect, I assumed that if one had money in the national savings bank there was no way in which one would not be paid, however much money one had in it, in the event of any sort of default. When it transpired a couple of years ago that the national savings bank had put most of its money into the Bank of Ireland, certain fears were raised. It then became clear that the rules on the limit of compensation applied to money deposited with the national savings bank, just as they did to anything else. There was an implicit guarantee by reputation, as it were, on money put in the national savings bank, and the noble Lord’s point underlines the need for implicit guarantees to be cancelled by explicit denials of obligation.

[Lord Desai]

I add to what the noble Lord, Lord Marlesford, has said. As a depositor in the US, I had a cheque book and it said on each cheque that I wrote to what extent my deposits were guaranteed by the FDIC. It is all right for the FSA handbook to say something, but it would be much better if on my debit card or cheque book—although people do not use cheque books any more—it said to what extent my deposit was guaranteed. If it said that, it would be very good.

FSA Investigation into LIBOR

Lord Marlesford Excerpts

Monday 2nd July 2012 Lords Chamber

[Lord Sassoon]

My Lords, just to repeat: the SFO is actively and urgently considering the evidence to see what criminal charges can be brought. It expects to come to a conclusion by the end of this month. That is exactly where it should focus its efforts.

[Lord Marlesford]

My Lords, unlike the noble Lord, Lord Eatwell, I see much merit in a parliamentary inquiry, especially if, as has been suggested, it includes people of the talent and experience of my noble friend Lord Lawson. There are many from all sides in this House who can do this. It is an inquiry that needs, above all, practitioners and people from the financial world rather than lawyers, and it does not prevent further inquiries in due course.

However, four points of action were put forward by the Prime Minister under the heading of banking in his Statement. Three of them are quite clearly covered by the Chancellor’s Statement but one is not. That is a confusing matter and I would like enlightenment. In the four actions proposed by the Prime Minister, one was,

“increasing the taxes banks must pay”.

What was the Prime Minister referring to?

[Lord Sassoon]

I am grateful to my noble friend for confirming that a Joint Committee is the way to take this forward. We have already increased the tax on the banks by putting a special levy on them so that the big banks effectively do not take any advantage of the lowering of corporation tax, which other parts of industry have already benefited from. This tax on the banks is enduring and will raise far more than the one-off tax that the previous Government brought in. So we have already done that.

FSA Investigation into LIBOR

Lord Marlesford Excerpts

Thursday 28th June 2012 Lords Chamber

[Lord Sassoon]

My Lords, I think the issue here is that, whatever the law says about the way in which the banks have to operate, the behaviour that has been exposed in this case is that of naked greed, and that is completely unacceptable whatever the legal framework. It is at heart an ethical question as much as anything else, as I see it, and is quite independent of the legal framework around it. Whatever the requirements of the boards vis-à-vis shareholders and other parties, at the heart of this—as has been exposed very clearly by these extraordinary e-mails—were individuals behaving in a most extraordinary way.

[Lord Marlesford]

My Lords, is not one of the most serious aspects of this whole thing the potential economic consequences that are going to come from the reputational damage to the City of London, which is so important to the British economy? Would he agree that the only way of restoring reputation from malfeasance is to seek out and deal very publicly with those who are responsible? Does he remember—I remember all too well, as I declare myself to have been a victim of it—the malfeasance in Lloyd’s of London, which was never really sorted out because no one was held to book and certainly no one suffered any particular penalty that I can recollect. One thing that they seem to be able to do in the United States is to deal very severely with individuals who are found to have misbehaved from positions of great financial responsibility.

[Lord Sassoon]

My Lords, I completely agree with my noble friend Lord Marlesford that the reputational consequences here are very serious. I stress the point that this is not simply a London or a UK banks’ issue as it appears. The inquiries clearly cover other regulators and other banks and we will see where they go. However, it is precisely because of the significant reputational damage that the Chancellor has come forward immediately with his response, which I repeated this afternoon.

On the question of Lloyd’s of London, without repeating the tortured and difficult history there, it is worth saying that after a long and difficult period for that market, Lloyd’s of London is at the forefront again of the world’s specialist insurance market. It has a critical position and is, I believe, stronger than ever. While we certainly do not want to go through a long and difficult period, as Lloyd’s of London did, it does show that well-regulated markets in London are capable of leading the way in innovation and value-adding in financial markets.

EU: Euro Area Crisis

Lord Marlesford Excerpts

Thursday 24th May 2012 Lords Chamber

[Lord Sassoon]

My Lords, the key issue about Germany in relation to this Question is that we should be grateful that the German economy continues to grow. About 9% of the UK’s exports go to Germany. It is a very important market for us and it is critical both for us and for the eurozone that Germany and its economy continue to perform relatively strongly.

[Lord Marlesford]

My Lords, does my noble friend agree that countries which, for one reason or another, have to leave the euro area could well continue to use the euro as their currency rather than inventing a new currency, like perhaps the drachma, in which markets might have little or no confidence?

[Lord Sassoon]

My Lords, many people have been painting scenarios of which my noble friend sketches out one. This is not the time to talk about different scenarios. We want to see an early resolution of the Greek uncertainty, the ring-fencing of other vulnerable economies, the recapitalisation of the banks and work on European growth. That has to be the priority for the moment.

Euro Area Crisis: EUC Report

Lord Marlesford Excerpts

Monday 21st May 2012 Lords Chamber

[Lord Marlesford]

My Lords, both the noble Lord, Lord Monks, and my noble friend Lord Maclennan have warned us against advising or criticising other countries in these matters. It always seems to me that one advantage of the privacy of your Lordships’ Chamber is that we can freely give advice to the Government without much danger of it leaking out.

As the only other member of Sub-Committee A speaking today, I congratulate my chairman, the noble Lord, Lord Harrison, on his lucid exposition of our findings. I also tell your Lordships that in the ever-changing kaleidoscope of events in the euro area that we faced during our inquiry, his skill as a chess master enabled him to guide us through and sometimes even interpret the irrational, usually contradictory and often ill conceived moves of the euro area.

I am neither a Eurosceptic nor a Europhile. If I presume to symbolise anything at all, I would try always to use a pragmatic approach and describe myself if anything as a Euro-challenger.

Never has it been clearer that the first commandment for a leader is to identify and then face reality. That applies in politics, economics and business; it applies especially to bankers and, above all, to central bankers. Do not let us forget that one of the main architects of our misery is that shrunken giant Alan Greenspan, with his failure as chairman of the Fed to face—and still less to act on—the reality that he had, in fact, identified in the three years that led up to the summer of 2007, when it became clear that everything would unravel.

The former name for economics was political economy, which underlines the crucial links between economics and politics. Even when the economic realities are revealed, political forces often conspire to frustrate the hope of solutions. I intend to devote my own brief comments to the situation in Greece and suggest a possible way forward for that country.

I should perhaps declare a rather remote interest in that my great-grandmother was Greek and her uncle was Capodistrias, who after he had represented the Russian tsar at the Congress of Vienna was, in 1827, persuaded to be president of Greece—and for his efforts was assassinated in 1831 within five years of taking office. It was ever thus.

It is perhaps relevant to remember that the British Foreign Office argued strongly against the liberation of Greece from the Turk on the grounds that it would undermine the Ottoman empire and thus destabilise the Balkans. The words of the noble Lord, Lord Monks, “I told you so”, may be echoed by diplomats of today. Of course, it was Lord Byron and his friends who ensured that the advice of the Foreign Office was not taken on that occasion.

Noble Lords will remember that it was Plato himself who argued against Athenian democracy of the fourth century BC on the grounds that demagogues could use it to prevent sound decisions. His analogy was a ship controlled by ignorant and quarrelsome sailors who refused to believe that there was any such skill as navigation and would write off a mere helmsman as a useless stargazer. His solution was, of course, the philosopher ruler. Whether either Mr Papademos or Mr Venizelos is up to such a role is not perhaps for me to judge. However, at paragraph 133 of our report we draw attention to the outburst of anger on the part of Greek politicians at the suggestion that there should be a budget overseer for that country. It seems to me that the danger now is that the second round of elections may again result in a preference for the rather destructive demagogues in the extreme right Golden Dawn and the hard-left factions forming the Syriza. There are rather frightening echoes in these economics and politics of how Hitler came to power 80 years ago.

It seems to me most unlikely that Greece can, or should be, bailed out yet again. I think, therefore, that it must leave the euro area, but I certainly hope that it remains inside the EU. Then what? There are two choices. The first is assumed, and that is the re-creation of the drachma as a new Greek currency. I believe that this would be a disaster for Greece. It would be a currency that no one would wish to lend or to borrow. The markets would ensure that it would be rapidly devalued and the Greek central bank would have to resort to the printing press.

[Lord Davies of Stamford]

I agree with the noble Lord’s analysis entirely up to now. However, does he agree with me that if the drachma collapsed, as it certainly would, everybody would want to borrow in it and have their liabilities in drachmas and their assets in euros, and that that would be part of the problem?

[Lord Marlesford]

My goodness, the noble Lord is certainly a speculator.

If Germany is prepared to pay not the cost of bailing out Greece but the cost of redeeming the Greek euro debt which already exists, we have to think of something better than going into a Mickey Mouse currency such as the drachma. The solution would be for Greece to leave the euro area but to continue to use the euro. There are plenty of examples from past economic crises, such as Latin America using the dollar and Yugoslavia using the deutschmark after Tito died. The whole point is that using the euro with a new central bank for Greece would impose a discipline on the central bank and on Greece. Like anyone else, it would be possible for it to use only the currency that it could afford. It would not have any relation or connection with the European Central Bank. It would be paddling its own canoe but it might well have to have some help from the IMF. However, it might well produce a remarkable resurgence. Indeed, a noble Lord talked about the possibility of financing certain projects with eurobonds. This might be very possible if people could see sound opportunities in Greece and they knew that the currency being used was a proper international currency. I think that that would be a real help.

[Lord Lea of Crondall]

The noble Lord has painted a fascinating scenario, but how does he get out from under the problem he referred to whereby, in a sense, the demagogues fail to acknowledge that the real fall in living standards would be a lot greater in the drachma devaluation scenario than in the internal devaluation of taking more medicine in the eurozone?

[Lord Marlesford]

When Sub-Committee A looked at the bailout, we saw again and again that the figures produced as necessary to prevent a catastrophe became ever greater by magnitudes. There is the old cliché about “A billion here and a billion there—you are talking serious money”; we almost reached the stage where it was “A trillion here and a trillion there”. If the prospects are for bailout, and that just continues, whatever happens and however much worse it gets, it has been fairly conclusively proved that people will take advantage of a bailout. It is human nature. It was the present governor of the Bank who said that if there is a run on the bank, the sensible thing is to join it. Therefore, if the bank is prepared to bail you out, the sensible thing is to accept the money.

My solution is that you impose a requirement to earn the euros—but with some help through the IMF, eurobonds, or eurobond investments—and you are thus able to rebuild your economy. I do not see, from the point of view of people living in Greece, that there is much difference between perhaps starting off with saying, “We are going to recreate the drachma; and the drachma is equal to a euro”, and then finding that the next day it is worth only half a euro, or, as the noble Lord, who likes speculating on these matters, might think, the drachma would soon be worth only a quarter of the euro. It would be a great deal better to recognise that the flexibility of having to have the euros with which to buy and pay for things would itself generate a reality that, I believe, is lacking.

[Lord Hamilton of Epsom]

I am rather uncertain as to how, if the Greeks basically default but stay with the euro, they would raise new debt in euros.

[Lord Marlesford]

I do not think that they could do so as such, except that, as I say, you might have a euro project in which people would invest. It would perhaps be somewhat similar to the private finance initiatives that have been used by the British Government—not entirely with success, maybe, but on balance they have been a useful source of making things actually happen. If people could see a good return, they would invest in it. That is a perfectly sensible way of doing it and, therefore, Greece would not be able to raise euro debt as such, unless the markets thought that that was viable. That is where the self-discipline is. The self-denial of recourse to the printing press would be a solution. I suppose I am really saying that if we get this form of self-discipline, which reality should require, and if this were to work in the case of Greece, it could be an example to other countries either not to follow suit and to grasp the nettle for themselves, or to recognise that this would be a viable way forward.

Economy: Budget Statement

Lord Marlesford Excerpts

Thursday 22nd March 2012 Lords Chamber

[Lord Marlesford]

My Lords, the toughest challenge that politicians have is to face reality. I know of no one who has in his career been better at facing reality, both in business and in politics, than my noble friend Lord Heseltine. That is why I am so glad that he will be facing, and I hope telling us how to deal with, the reality of our own competitiveness. That is a crucial issue, but facing reality is actually a challenge for all of us. It is a challenge that the financial world failed massively, especially in the United States in the years of unsound lending to unsound borrowers that led up to 2007, and the inevitable financial crisis that has created a continuing problem for the world economy.

The Chancellor started his speech by referring to two major risks to Britain’s economy—the situation in the euro area and a further spike in oil prices. I will say a brief word on both before making some comments on the tax changes and suggesting one or two further possibilities for progress.

On the euro area, everyone would now agree that the fundamental design of the euro is flawed—a single currency without a single fiscal and budgetary policy. It is a flaw that the designers must have been well aware of. Indeed, some cynics even think that the intention was to have it as a means of forcing a crisis that would result in the integration of the EU economy in a way that was, and probably still is, politically unacceptable. The real problem with the euro area is the refusal to face reality. The powers at the centre of the EU still deny that Greece is bust and has defaulted on its debt. It is assumed that the ECB backed by Germany can bail out any euro country that is threatened with default. Bailouts lead to bailouts until eventually there is a country that is too big to bail out.

Even today, the EU Commission is producing some really dangerous, ill thought-out proposals, and I will refer to one—the financial transaction tax. Were it to be introduced, it would do immense damage to the City of London, which is the world’s leading financial centre, followed by New York and Hong Kong. Financial services account for some 10 per cent of the UK’s national income and 11 per cent of government tax receipts. Perhaps more relevant is that, as it has been designed, the FTT is actually unworkable. I hope very much that when the moment comes, Her Majesty’s Government will veto it.

On oil, the price will, over the coming years, certainly fall steeply due to increasing competition from oil and gas from shale and from the revival of nuclear power. However, as the Chancellor said, there is now a risk of a sudden price hike, which of course is the equivalent of a tax increase and is therefore strongly deflationary. The risk is almost entirely political and was very well debated in your Lordships’ House last Friday. The overall conclusion of that debate was that the problems of the Middle East can now be met only by diplomatic and economic policies. Military action in that area could be catastrophic for the world economy.

I turn now to the Budget. What a change there has been in the political backdrop to Budgets in Britain. That is epitomised by an article by Chris Mullin in Monday’s Times. I do not disagree with the word of that article. Twenty-five years ago, Mr Mullin was editor of Tribune and 30 years ago he edited Tony Benn’s Arguments for Socialism. Now he writes:

“As for the Lib Dems and their ludicrous talk of mansion taxes and tycoon taxes, these are simply gimmicks”.

He ends his article by saying:

“Polls tell us that most people favour increased taxes for the rich, but that is because people tend to favour taxes they won’t have to pay. In any case, simply increasing taxes on top earners does not begin to raise the sums needed. That can only come from the middle classes. It is time politicians plucked up the courage to say so”.

That is another example of the need to face reality.

In four years, from 1975-76 to 1978-79, when the noble Lord, Lord Healey, was Chancellor, we had a top marginal rate tax of 98 per cent. That cut in at a threshold of £24,000. In today’s money, that would be £110,000. Those were the days when there was mass emigration of some of the most talented in Britain—the so-called brain drain. Had I qualified in any respect, I might well have been part of that. Yet today, the argument on all sides of the political spectrum is whether the top tax rate at £150,000 should be 50 per cent, 45 per cent or 40 per cent.

I remember very well sitting in the Press Gallery in the House of Commons in 1988 when the noble Lord, Lord Lawson, announced a top tax rate of 40 per cent. The opposition Benches exploded with anger. It is the only time in history when the House of Commons has had to be suspended in disorder during a Budget speech. However, that top rate of 40 per cent lasted more than 20 years, right through the Labour Government, and the 50 per cent rate was one of the bequests of Mr Gordon Brown to this Government.

As the excellent New Statesman, which I read every week, had on its cover last week, it is truly “the end of socialism”. Socialism was a casualty of reality—of the determination and energy of human beings, the recalcitrance of human behaviour and the inability of Governments to run business.

None of that means that further tax changes are not needed, and I have time to suggest only one. It is absurd that council tax—a well designed and efficient tax—should be allowed to get hopelessly out of date through administrative inertia. There are many houses, particularly in London, worth well over £1 million, which are not even in the existing top band, which comes in at a value of £320,000. We do not need extra bands, but the thresholds of the eight existing bands should be changed. At the moment, band A has a value of up to £40,000. That could become £100,000, with subsequent bands at £150,000, £200,000, £300,000, £500,000, £750,000, £1 million and £2 million. The differential in the rates of council tax could be changed as well if it was thought that owners of the more expensive houses should pay a reasonably non-proportionate tax. Yet the 1 per cent levy over £2 million suggested by Mr Cable is merely, to borrow from Mr Mullin, a “gimmick” to which I am afraid I would add the adjective “vindictive”.

The key to introducing such a system would be to do it only when a property changed hands. That would be administratively simple. Transfer prices have to be reported to the land registrar anyway, and stamp duty—I welcome the new rates—would continue to be payable. It would merely be a matter of reporting the change in ownership to the local authority that levies the council tax. Thus the buyer would know exactly what rate of council tax he or she would have to pay. There would be no hardship for existing occupiers. The two banding systems would exist side by side. Of course, it would take a generation before every house was in the new band. That might have some temporary depressing effect on the price of some houses, but that could be an added attraction.

Finally, I will add one other word on fairness. In my book, it is immoral to give state handouts to those who do not need them at the cost of not having enough money for those who do. For those at the bottom, a large part of their income has to be in the form of a social wage, but there are many benefits that could and should be taxed. The winter fuel allowance is an obvious one. Meanwhile, I am all in favour of getting more people at the bottom out of the tax range altogether. The Budget takes a major step in that direction.

EUC Report: Economic Governance

Lord Marlesford Excerpts

Thursday 16th June 2011 Lords Chamber

[Lord Marlesford]

The noble Lord, Lord Harrison, had a very steady hand as the crisis migrated through Sub-Committee A, and we are grateful to him for that. Both the euro and the euro area are in crisis; they are both in a critical condition and need intensive care. The euro is, in my view, wildly overvalued and several of the member states are, as we know, on the brink of default. The European Central Bank is so loaded up with toxic debt that it is in danger. The Irish Finance Minister, Noonan, recently asked the IMF to get a haircut for the AngloIrish debt; that would not be very wise or safe for the ECB.

What I find astonishing is the undertaking given at Seoul at the G20 by several Finance Ministers, including my right honourable friend George Osborne, that there would be a guarantee of European sovereign debt up to 2013. We asked a number of our witnesses about it, and no one was able to spell that out. I really think that the Minister has a wonderful opportunity to enlighten us in that regard. Given that Her Majesty's Government are a part of it, we should know exactly what the commitment means and how it would work. Nobody appears to know.

The Government are absolutely right to say that the UK will not sign up to the EU permanent crisis mechanism. I congratulate the Government on setting up the Financial Policy Committee, with its twin remits: first, to reduce systemic risks and, secondly, to enhance the resilience of the UK financial system. Systemic risks, of course, cover both the fault lines in the financial system infrastructure and the cyclical threats from unsustainable levels of leverage, debt or credit growth. That is our solution and we are in that playing an important part in dealing with further threats to this country.

As so often, the EU's reach is greater than its grasp and Mr Trichet’s proposal for a European ministry of finance is such an example. He said that,

“a ministry of finance … would exert direct responsibilities in at least three domains: first, the surveillance of both fiscal policies and competitiveness policies, as well as the direct responsibilities mentioned earlier as regards countries in a ‘second stage’ inside the euro area; second, all the typical responsibilities of the executive branches as regards the union’s integrated financial sector, so as to accompany the full integration of financial services; and third, the representation of the union”—

the EU—

“confederation in international financial institutions”.

Personally, I do not think that really is a runner—certainly not as far as the UK is concerned. However, Mr Trichet is perfectly logical and having identified the fundamental flaw in the concept of the euro, he is sensibly putting forward what could help.

Personally, I believe what should happen is that individual euro countries should be enabled to leave the euro area without having to leave the EU but should be able to continue to use the euro, if they wish. It would probably be sensible for them to do so. Nobody is going to be prepared to buy recreated Mickey Mouse currencies. Finally, if China and the US, particularly China, are to be the world's economic locomotives we have to try to see that northern Europe, at least, can prosper and sustain those unfortunate countries in the south, which are going to suffer greatly from the inevitable deflation.