Economy and Finance

Viscount Chandos Excerpts

Thursday 9th June 2016 Lords Chamber

[Viscount Chandos (Lab)]

My noble friend Lord Haskel eloquently introduced what is the third debate on the economy in this House in the past three months. In doing so, he made a compelling case for your Lordships returning to this subject. If a week is a long time in politics, a month is an age in the global economy, even before considering the agonising feeling of time dragging as the EU referendum campaign grinds its way towards a conclusion.

The referendum to be held two weeks today is an inescapable factor in considering the prospects for the UK’s economic and financial prospects. The powers that be have not had the chance to discourage me or a number of other noble Lords from making this a central part of our speeches. In the short term, the referendum itself has clearly had some effect on confidence levels, leading to delays in investment and some consequential slowing up of economic activity. In the longer term, however difficult it is to forecast even one scenario let alone two, the decision that will be taken in two weeks’ time is highly likely to have a significant impact on the economy’s path. The protagonists on both sides have framed their arguments substantially, though not exclusively, around the economic implications of Brexit or remain.

An unexamined life is not worth living, so I do not believe that our membership of the European Union should have been exempt from critical scrutiny. Indeed, even though the great Groucho Marx was American, I think the Groucho principle of not being sure you want to be a member of any club that will have you represents the best form of British scepticism—though I am even more attracted to one of the graffiti seen in Paris in May 1968:

“Je suis Marxiste, tendance Groucho”.

I commend that to others, from the supporters of Bernie Sanders to some members of my own party.

Reform and clarification have been, and will continue to be, needed; and the agreement reached to exempt the UK from ever-closer union and to ensure that non-members of the eurozone should not be discriminated against are important, both symbolically and practically for the UK and other members of the EU. None the less, it is difficult not to feel that these and other reforms could not have been achieved without the cost and uncertainty involved in the referendum, as opposed to considerations of party management and electoral tactics by the party opposite.

Yesterday’s Financial Times carried a measured but powerful article by Douglas Flint, the chairman of HSBC, based on his conversations with the bank’s mid-market UK corporate customers—the very SME sector to which the noble Lord, Lord Leigh of Hurley, referred . He concluded:

“Leaving the EU risks dismantling the very apparatus that has enabled UK firms to compete, while distracting them from the priority of growing their business and creating wealth”.

He also said that these companies felt,

“a frustration over the lack of a clearly defined alternative to Britain’s current EU membership”.

In this context, perhaps Boris Johnson’s amusing, but economically illiterate, quip:

“My policy on cake is pro having it and pro eating it”,

is an illuminating explanation of why the Brexiters believe that the UK could have all the benefits of the single market and none of the obligations and costs.

The decision on our membership of the EU is being taken against a background of huge uncertainty and challenges both in the global economy and domestically, such as: low growth in productivity in many major economies, all the more baffling for its occurrence during a period of rapid technological innovation and implementation; the challenge of moving from the current, exceptional monetary policies to more normal ones; and in the UK—and at least as much in the eurozone—an incomplete reconstitution of the banking system, which constrains the supply of capital to business.

There is evidence that quantitative easing and other monetary policies in response to the financial crisis have not been the sole, or even the principal, cause of the unprecedentedly low level of interest rates. Ben Broadbent, the deputy governor of the Bank of England, has spoken on this, which has been taken up in turn by Martin Wolf in the Financial Times. Whatever the other causes may be—the declining rate of productivity growth, an exaggerated level of caution in the system, a generally low level of business confidence—the effect has been to keep the cost of equity capital high, even while the risk-free rate has fallen so far. The equity risk premium is twice the level that it was at the turn of the century.

These challenges should not obscure the strength and competitive advantages that we have in this country: an education system which, despite the stresses and strains of past decades, at its best still helps turn out outstanding scientists, engineers, entrepreneurs and managers; global leadership in a range of manufacturing and service industries; a budding technology start-up sector; and generally efficient and, as my noble friend Lord Haskel told your Lordships, increasingly sensitive capital markets. How, therefore, can we best protect and enhance this base of excellence and growth? The noble Lord, Lord Leigh of Hurley, suggested that we should look to the undoubtedly successful business owners and managers whom he cited for a lead. However, a lead in the opposite remain direction is given by innumerable other successful entrepreneurs, particularly at the cutting edge of new technology, whether in IT, drug discovery, FinTech or AI.

In economic and, I believe, social and cultural terms, there is a decisive argument in favour of remaining in, and continuing to work to improve, the EU. I fervently hope that in 15 days’ time we will find that every part of our economy and society are still able to benefit from that membership.