Eurozone Crisis
Debate between Lord Monks and Lord Lawson of Blaby(12 years, 12 months ago)
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Lord Monks
My Lords, I am grateful to the noble Lord, Lord Lamont, for initiating this timely and important debate. Its title is rather wide; as has been said, it is about the UK and the euro, and my angle is going to be a little bit different from the one that the noble Lord opened the debate with. In the week of the Chancellor’s Autumn Statement, there have been yet more make-or-break meetings in Brussels. Yesterday there was a substantial public sector strike, just to underline the timeliness of what we are going to debate today.
No one should doubt that in the present economic crisis there are also the seeds of a considerable political one. The way that the international markets set strict rules for countries makes it fairly clear that many democracies are struggling to live within those rules, and to some extent that includes us.
When the banks were in trouble, everyone agreed that that moral hazard did not apply. Governments sprang to their defence and transferred the banks’ huge debts on to their nations’ balance sheets, splashing copious amounts of red ink over the national accounts. Yet when the individual countries were subsequently hit, moral hazard came in with the vengeance. The terms of the so-called rescue packages are very harsh—less Marshall Plan, more reparations.
It should now be clear, and I hope that it is clear in Brussels and in the IMF, that this is a road to depression and political crisis in the countries worst affected, not a road to recovery. The single way to cut deficits is to get people back to work. Then there are more tax revenues to be collected and more disposable income to spend. Looking after the deficit while hoping that unemployment looks after itself is self-flagellation or, worse, economic suicide, as Joseph Stiglitz has regularly termed it.
How did we get into this mess? There are many reasons for that, but one is that the world economy has changed fundamentally since the financial deregulation of the 1980s. This was carried through in the UK largely on the watch of the Treasury of the noble Lord, Lord Lawson, who inadvertently is leaving at the very moment that I have referred to him.
Lord Monks
Apologies for that. One effect of this, although there were others, is that the traditional constraints in financial services largely disappeared. Banks increased their leveraging and invented a bewildering range of new products, most of which in hindsight appear to have been more dangerous than beneficial, described as “socially useless” by the noble Lord, Lord Turner, currently chairman of the FSA or, to use another memorable phrase used by Warren Buffett about credit derivative swaps, “financial weapons of mass destruction” that we turned in on ourselves. Wall Street and the City nevertheless claimed to have developed sophisticated forms of risk management, a claim that we can now see was wholly fatuous. By the way, very few people anywhere saw the crash coming, and the economic crisis is now also a crisis of economics. The economists have quite a lot to answer for.
To return to deregulation, though, the effect was to increase private indebtedness to unsustainable levels, leading to rising inequality with totally unjustifiable rewards for people at the top—especially, but not only, in financial services. Even in this crisis, in the period of flat growth that we are going through, average executive pay of directors in the FTSE top 100 increased by 49 per cent last year. And just wait for the forthcoming Christmas bonus season in the City; on past form it will be an orgy of Bourbon-like self-indulgence and a two-fingered salute to the Prime Minister’s claim that we are “all in this together”.
In a debate here last Friday, it was suggested that Europe and the euro were to blame for the crisis by the constraints imposed on national economies. In fact, in my view it is not Europe that threatens national sovereignty. Properly led, though I accept that that is a fairly big qualification, it offers a chance at European level to enhance national sovereignty by creating an economic bloc large enough to influence markets and not be cowed by them.
As for the UK, the crisis has exposed the long-running problem that we have not been fully competitive for a long time with our neighbours across the North Sea: especially Germany, but also the Netherlands and the Nordic countries. We have not benchmarked our performance on a consistent basis against those countries in a way that others do—countries like Belgium and, to a degree, France. We have tended to muddle along using periodic devaluations of sterling, bolstered for periods by the bonanzas of North Sea oil and later by the boom in financial services. Now there are no more bonanzas in view, and the national task must be to move our economy in the same direction as our North Sea neighbours. We must be more long-termist. We must promote more investment, more manufacturing, social markets, greater equality and more multi-stakeholder governance on boards, including worker influence, as well as strong public services. That is the way those countries do it, and theirs are among the most successful economies around, not just for this year but for many years.
The noble Lord, Lord Heseltine, recently said that he had favoured the UK joining the euro because it would make us more like Germany. I believe that he was right, and he could still be right if the euro survives the present crisis. Soon Germany has a very big decision to make. In fact, I think Mrs Merkel is the only one who can win the prize of the noble Lord, Lord Wolfson, because she is the only one whose decision is going to matter. One of the interesting things about this debate is how marginal it feels to the debate about the future of the euro.
While we are talking about the German influence, I think that the reasons of the noble Lord, Lord Lawson, and the noble and learned Lord, Lord Howe, for pushing in the 1980s for the UK to join the exchange rate mechanism also rested on a wish to make the fundamentals of the British economy move in a more northern European or Germanic direction. I believe fundamentally that that remains the challenge today for the British Government of whatever hue, for employers—unions included—and for all sections of British society. Our North Sea neighbours have had continuous success, and we should resume our efforts to match them.