Eurozone Crisis

Lord Sassoon Excerpts

Thursday 27th October 2011 Lords Chamber

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, I shall now repeat a Statement made in another place by my right honourable friend the Chancellor of the Exchequer. The Statement is as follows.

“Mr Speaker, I wanted to update the House as early as possible on developments in the eurozone and, in the absence of the Prime Minister as he travels to the Commonwealth Heads of Government meeting, report on the good progress made at yesterday’s European Council.

The crisis in the eurozone has caused instability in financial markets, has greatly undermined confidence around the world and is having a chilling effect on economic growth in many countries, including our own. It is in our overwhelming national interest that a coherent, comprehensive and lasting solution to the eurozone’s problems is found, for the decisive resolution of this crisis would provide the single biggest boost to the British economy this autumn, while the break-up of the euro would be the single greatest threat to our prosperity.

Our view about how to solve the eurozone’s immediate problems has been clear, consistent and forcibly expressed. The Prime Minister and I have set it out to the House on many occasions: reinforcement, recapitalisation and resolution. First, eurozone member states need to reinforce their bailout fund to create a firewall. Secondly, weak European banks need to be recapitalised. Thirdly, the unsustainable position of Greece’s debts needs to be resolved. But if the solution is to last, as I said many months ago, the members of the euro also need to address the logic of monetary union by pursuing greater fiscal integration within the eurozone, while at the same time we protect Britain’s interests.

We have to improve competitiveness—competitiveness in the peripheral economies of the eurozone as measured against the core economies like Germany, and competitiveness across the whole European continent versus the rest of the world. This is the solution of the crisis we have been advocating for months and the solution once again advocated by the Prime Minister at yesterday’s European Council.

Our view is that last night very good progress was made towards solving the immediate crisis—very good progress on all fronts. The deal put together is much better than was expected yesterday afternoon, but much detail remains unresolved. Having put pressure on the eurozone to get this far, we have to keep up the pressure to get the details completed. They have started down the road; now they have to finish the job.

Let me take each element of last night’s deal in turn, and say how it affects Britain. First, on recapitalising banks, we are pleased that the European Council agreed to the proposal hammered out by myself and other Finance Ministers at the weekend ECOFIN. All major European banks will be required to hold at least a 9 per cent core tier 1 capital ratio by the end of June next year, including marking to market all of their exposure to sovereign debt. The European Banking Authority, based here in London, assessed that achieving this target means banks will require an extra €106 billion of capital, and the Council yesterday confirmed that if this cannot be raised privately, then Governments will have to step up to the plate.

I can confirm to the House today that, in the assessment of the European Banking Authority and our own tripartite authorities, no British bank requires additional capital. This is an important expression of confidence in this country’s banking system at a time of global financial stress. EU member states also agreed to co-ordinate guarantees of term funding, should they be required. We have also ensured that state-aid rules will be properly applied, and European banks will be restructured if necessary, just as the European Commission demanded of the last British Government two years ago.

While some would have wanted an even tougher banking agreement, and even more capital going into Europe’s weak banks, we should welcome what has been achieved with this agreement. Unlike the totally inadequate stress tests of last year, we now have a commitment to significant extra resources for the European banking system. However, the UK and others insisted that that commitment from the whole of the European Union on banking be conditional on the two other key components of the solution to the crisis that I set out: a reinforced firewall and a resolution of Greek debt. These are both properly matters for the eurozone, not the UK—and both were matters on which progress was also made last night.

On Greece, a headline agreement was reached to reduce the Greek debt-to-GDP ratio to 120 per cent by 2020. The eurozone will contribute an additional €30 billion. Because the British Government have made sure that we are not part of the Greek bailout, none of that extra €30 billion will come from our taxpayers, while private holders of Greek sovereign debt will be asked to accept a nominal write-down of 50 per cent. A lot more work is needed to put this all into practice, including detailed negotiations with the private sector—but we said Greece’s debts were unsustainable and we are pleased to see a resolution in sight.

On reinforcing the size of the firewall, the eurozone has set out two options that could operate in tandem. One is to provide, from the bailout fund, insurance on new debt issued by eurozone countries; the second is to create special purpose vehicles that can attract resources from private and public investors. In their statement, they said that,

“the leverage effect of both options will vary”,

but they could be,

“expected to yield around 1 trillion euro”.

We have always believed that the role of the European Central Bank is critical and I welcome the positive statement made by Mario Draghi, the incoming ECB president.

Talk of special purpose vehicles has given rise to questions about the involvement of the IMF and major shareholders such as the UK. As I have said to the House on many occasions, Britain has always been one of the IMF’s largest shareholders and biggest supporters: we helped create the institution 60 years ago; the last Government agreed to increase its resources two years ago; and this Government not only ratified that agreement but helped to make the IMF more representative of the new world economy by brokering a deal last year that gave countries such as China and Brazil a greater say, while securing Britain’s seat on the board. The IMF has been an active participant in the packages put together to support Ireland, Portugal and Greece. It has also been active in extending flexible credit lines to Poland and Mexico—neither of which are in the eurozone, of course—as well as supporting other countries in central and eastern Europe such as Hungary, Romania and Latvia. Indeed, it currently has 53 lending programmes around the world, of which only three are in the eurozone.

Supporting countries that cannot support themselves is what the IMF exists to do, and there may well be a case for further increasing the resources of the IMF to keep pace with the size of the global economy. Britain, as a founding and permanent member of its governing board, stands ready to consider the case for further resources and contribute, with other countries, if necessary. Let us remember that support for the IMF does not add to our debt or deficit, and that no one who has ever provided money to the IMF has ever lost that money. But let me be very clear: we are prepared to see an increase only in the resources that the IMF makes available to all the countries of the world. We would not be prepared to see IMF resources reserved only for use by the eurozone. By all means, the IMF can use its expertise and advice to help the eurozone create the special purpose vehicle that it is considering. By all means, let countries with large foreign currency reserves such as China consider putting their own money into the eurozone’s special purpose vehicle—that must be their decision—but the IMF cannot put its own resources in; it can lend only to countries with a programme for adjustment.

Moreover, I can confirm today that Britain will not be putting its resources in either. We do not have a surplus; we have a very large deficit. We have had to use our own resources to recapitalise our banks and to stand behind our currency. An active member of the IMF? Yes. A supporter of the IMF, helping with advice and technical support? Yes. But the IMF contributing money to the eurozone bailout fund? No. Britain contributing money to the eurozone bailout fund? No. That is Britain’s clear position.

We expect the eurozone members to use the next few days—at most, weeks—to provide much more detail about their plans to increase their firewall and sort out Greek debt. We have made it clear that the sooner this happens, the better for the whole world economy. We must maintain the momentum.

This package will not on its own resolve the longer-term issues of how to make the euro work more effectively. Those longer-term issues were addressed yesterday, and they included proposals for greater fiscal integration and mutual control over the budget policies of eurozone member Governments. I said many months ago that this is where the remorseless logic of monetary unions leads, and it does involve a loss of national sovereignty for countries in the eurozone.

It is in Britain’s interest that the euro operates more effectively, provided that the interests of all 27 member states are properly protected in key areas of European policy like the single market, competition and financial services. We are insistent that our voice will continue to be heard and our national interests protected. We have found allies among the other 10 members of the EU not in the euro. An important marker was put down in Sunday’s European Council conclusion.

No one pretends that sorting this out in a satisfactory way will be easy, but it is a necessity. That is the context in which we should approach potential changes to the treaty. This coalition Government have already proved that they can protect Britain’s interest by getting us out of the last Government’s involvement in eurozone bailouts, holding down the European Union budget and putting into law the guarantee that no further powers or competencies can be transferred to Brussels without the consent of the British people in a referendum. Now this Government will protect Britain’s interests again as the discussions on a possible limited treaty change begin. We will seek to rebalance the responsibilities between the EU and its member states, which in our view has become unbalanced.

Finally, the euro will not find lasting stability until its peripheral members become more competitive. That means credible plans to reduce budget deficits—a commitment made in the very first section of yesterday’s agreement—but it also involves difficult decisions on pension ages, business tax rates, welfare reform and educational standards. Britain, thankfully, is not in the euro, but we are taking these difficult decisions because the ultimate lesson of this crisis is that unless you can pay your way in the world, and compete around the globe, then your country will be next in the firing line. I am determined that that country will never be Britain”.

My Lords, that concludes the Statement.

--- Later in debate ---

[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.

[Lord Newby]

Reverting to a question raised by the noble Lord, Lord Liddle, and the IMF, the Chancellor very helpfully pointed out in the Statement:

“Let us remember that support for the IMF does not add to our debt or deficit, and that no one who has ever provided money to the IMF has ever lost that money”.

Why, therefore, does he go on to say,

“But the IMF cannot put its own resources in—it can only lend to countries with a programme for adjustment”,

not least because I thought all the countries that we were talking about had a programme for adjustment? I cannot see why the Government are so averse to involving the IMF, particularly given that the eurozone Ministers are very keen to work with the IMF. Secondly, I ask specifically about tax co-ordination. The European statement says:

“Pragmatic coordination of tax policies in the euro area is a necessary element of stronger economic policy coordination … Legislative work on the Commission proposals for a Common Consolidated Corporate Tax Base and for a Financial Transaction Tax is ongoing”.

The implication is that the eurozone countries are considering imposing those taxes themselves. Is it the Minister’s understanding that they will be in a position to impose those taxes and that common tax base—with the UK out, under the outs—and, if they did that, what would be the Government’s attitude towards it?

[Lord Sassoon]

My Lords, first, I shall try to clear up what I think is a small confusion in relation to what the IMF can or cannot do under its own rules and what we would be prepared to be part of or not part of. Of course, the IMF is involved directly in the Greek package, as it is with two other packages within the eurozone. So three programmes out of the 53 in which the IMF is currently involved are indeed eurozone ones and that is perfectly proper and we support the IMF’s commitment in adjustment programmes of that kind. We would not support the IMF participating in some special purpose vehicle fund, but I do not believe that it has the ability to do that anyway and the UK certainly will not be involved in that. If China and other countries want to be involved, that is fine and that is their decision, but we will not be involved and we will not support any IMF involvement in that route. We will support the IMF's involvement in country adjustment programmes, such as it has done throughout its history. That is what the IMF is there for. There may be some confusion on that.

On tax co-ordination, first, the UK Government stick strictly to their position that we believe that taxation is, and should remain, a matter of national competency. It is up to the eurozone if it wants to propose some different arrangements within the eurozone consistent with the need for greater fiscal co-ordination in it. On the one specific proposal that has come forward so far—the financial transaction tax—first, we have said that there may be some basis for such a tax but only where it is globally applicable because if it is applied in Europe it will simply drive business away from Europe and, critically, away from the City of London, and that makes no sense. Secondly, in bringing forward that proposal the Commission was completely clear that the article under which it comes forward is one on which unanimity is required and therefore QMV could not force us into it.

[Lord Reid of Cardowan]

My Lords, I do not in any way want to belittle any of the efforts that have been made, but does the Minister accept that over the past 24 hours in Europe we have been arguing over the size of the sticking plaster on a corpse that has an underlying chronic problem? Did he not indicate the nature of that problem when he said that the eurozone will work only if the countries in it approximate towards relative competitiveness? Is not the key problem that that should have preceded the onset of a single currency? The delusion that you could politically impose a single currency on such variegated competitive levels inside 17 countries was always bound to end with the chronic problem that we are facing. In view of that, what is the strategic thinking of the Government? Do they now maintain that the present membership of the euro is an inviolate and irreducible minimum? If they do, do they therefore accept that it can exist only with the concentration of ever closer political and fiscal union inside the eurozone? Can the Minister explain how support for ever closer political and fiscal union inside the eurozone accords with the Government’s view of opposition to ever closer political union within the wider 27? If not a contradiction, is there not at least a very difficult paradox underlying the strategic position in which the Government now find themselves?

[Lord Sassoon]

First, it is probably not productive to rake over too much of the history of this. An awful lot of those who advocated the creation of the euro and the UK’s participation in it have been proved completely wrong by the way that events have unfolded over recent years. Therefore, arguing about whether competitiveness should have come before or after the creation of the euro is more for historians. That is why it was in my right honourable friend the Chancellor’s Statement that the competitiveness of the euro-periphery countries, vis-à-vis Germany as the benchmark of economic and industrial efficiency in Europe, is a critical issue that has to be addressed; and that the second dimension is the competitiveness of the EU as a whole in a global economy. I completely agree with the noble Lord that this has to be central to the solution going forward.

As to who should or should not be in the euro and what the size of it should be, that is for the euro to work out. The Government have no view on whether euro membership is inviolable. We simply say that that is a matter for the eurozone. What we want to see is these issues of competitiveness within and without the eurozone very high on the agenda. As far as dealing with internal competitiveness is concerned, that inevitably means a degree of closer fiscal co-ordination, the inevitability of transfer payments between members and all the logic that flows from that.

The competitiveness of the EU27 and the outward-facing euro are completely different matters that do not require similar questions of political union. We have a very good paradigm in which the EU27 can co-operate. It is just a matter of them focusing on the structural, market, competition and financial regulation issues, none of which requires any closer political union. They are technocratic, single-market trade and economic issues.

[Lord Higgins]

My Lords, I congratulate the Chancellor on the extremely active and skilful way in which he has defended British interests in the course of these very complex negotiations. As far as the possible costs of the operation are concerned, will my noble friend clarify the situation? Is he saying that under the arrangements that are now put forward there can be no cost to the UK taxpayer? It would seem to be true of the first part of the Statement. The position with regard to the IMF seems a little obscure because, if I understand it correctly, the Chancellor is saying that he is prepared to contribute more to the IMF but will not contribute if that money is going towards bailing out the eurozone or members of the eurozone. Will my noble friend say how that is to be achieved because, from my experience of the IMF, I am not at all clear?

As far as the banking side of things is concerned, my noble friend suggests that the Government may get involved in the process of recapitalisation if other methods do not succeed. Will he tell us what the likely or potential cost of that could be and, in particular, if we are going to contribute to the recapitalisation, is there any implication as far as ownership of the banks is concerned?

Finally, I shall pick up the point just made. At the end of the day, as far as I can see, none of these huge amounts of money being thrown around will make a significant difference to the competitiveness of, let us say, the Greeks. If the IMF is involved, then perhaps it will because it imposes very stringent conditions which, on the whole, have been enforced, but all this money is simply flowing around to bail out the Greeks. It is not making them more competitive. Indeed, is it not fairly apparent that the Greeks joined the eurozone at an exchange rate at which they were not competitive? As far as one can see, it is inconceivable that they will become competitive. These measures certainly do not do much to achieve that. In that case, are we simply delaying the day, sooner or later, when the Greeks have to leave the euro?

[Lord Sassoon]

My Lords, let me try again on the IMF because my right honourable friend and I seem to have failed so far to get this clear. I will have another go. There was a proposal under the previous Government, which was endorsed by this Government—and voted against by the Opposition in another place even though their party had previously put it forward—for the IMF to increase its resources to match the growth in the global economy. It has nothing to do directly with the eurozone but is to do with the size of the global economy and the IMF’s global mandate. We support that increase in resources.

I should say again that no member shareholder of the IMF has lost any money on the back of the IMF’s contribution to the many adjustment programmes that it has entered into for many years. In relation to Europe and the eurozone, the IMF is involved in the three eurozone programmes. We have no difficulty about the IMF being involved. That is what it is there to do, provided it is entering into adjustment programmes related to eurozone countries on the same basis as it has done to this point and as it would do with any other country. That is absolutely fine. However, the IMF should not contribute to some special eurozone fund—that is not what the IMF is there for—and I have no reason to believe it will do that. We certainly would not be part of any such special use of IMF resources.

It is not correct to say that there will be any UK contribution to the recapitalisation of the eurozone banks. If there is a contribution from the public sector, the taxpayers of Europe, it will come from those countries that have contributed to the ring-fenced fund, the EFSF, and the UK is not part of that fund. We have recapitalised our own banks. We are not contributing to the recapitalisation of the eurozone banks. I hope that that is also clear.

Greek competitiveness is addressed by the adjustment programme agreed with the EU and the IMF. The challenge is to make sure that, under the normal ongoing monitoring programme over the next few years, Greece is held to its commitments. But, critically, there are, in its adjustment programme on which its bailout package is conditional, all sorts of conditions aimed to increase Greek competitiveness.

--- Later in debate ---

[Lord Brooke of Alverthorpe]

I am grateful and I will be brief. I should like further clarification on the position of the IMF, which has been significantly involved with these negotiations. As I understand it, the IMF is already subscribing to three country adjustment programmes and will continue to do so. It has indicated that it may be required to look for more money from members of the IMF to put more cash into those programmes. I think that I am correct in my understanding of the Minister on that. If that is the case, we are therefore putting more money into the eurozone venture.

[Lord Sassoon]

My Lords, I will not repeat at length what I have said. It was the proposal of the previous Government, and endorsed by this Government, that we should support an increase of resources of the IMF to match its global commitments, which continues to be the situation. We will continue to be supportive of the IMF having resources in total commensurate with its global mission and mandate. That is quite separate from its contribution to EU programmes, which are looked at country by country in the same way as the IMF looks at the other 50 programmes that it has on the go at the moment, and other proposals that may come forward.

[Lord Maginnis of Drumglass]

My Lords, I thank the Minister for bringing the Statement to this House. Perhaps I may digress slightly from the euphemistic terms that he has used today to explain away a potential disaster. I have noticed that the Government bring domestic issues to this House in fairly radical terms instead of, perhaps, in succinct amendments. I am thinking of education, health and so on. How is it that the Government ignore the fundamental flaws in the European arrangements which have brought us to this state? How is it, for example, that we are prepared to accept in July 2012 the Republic of Cyprus taking over the presidency, when it is an acolyte of Greece that is probably £6 billion to £8 billion in debt, if one discounts the funny Russian money? How is it that we are prepared to allow from July next year for six months something that is bound to impede any efforts by the Commission to move the problem forward in the Greek situation?

[Lord Sassoon]

My Lords, I am answering questions on the eurozone crisis. The question of Cyprus has nothing to do with it. I am sure there will be other opportunities to discuss that.

[Baroness Falkner of Margravine]

My Lords, today marks the beginning of a profound change in our relationship with the EU. If we are going to have fiscal and political integration in 17 countries, leaving 10 outside, it is undoubted that we are going to have a different relationship. Winston Churchill said that the British nation was unique in wishing to hear bad news, irrespective of how bad it was. In saying that British banks do not require recapitalisation in the assessment of the European Banking Authority, can the Minister tell us when the authority made that assessment in the light of the fast-changing nature of the evolution of this crisis and the lack of transparency in the role of credit default swaps? The timing of when this assessment was made would be very useful to know.

[Lord Sassoon]

It made the assessment very recently. Indeed, the numbers are going to be reworked over the coming days and weeks to make sure that they are as absolutely up to date as they need to be for the recapitalisation to take place.