Eurozone Crisis

Douglas Carswell Excerpts

Tuesday 15th November 2011 Westminster Hall

[Mr Baron]

That is certainly one option that should be explored more thoroughly. I referred to the Irish loans because the Government line to date has been that our liability to the eurozone crisis stops at the bilateral loan to Ireland and at our existing £6.5 billion contingency liabilities to the EFSM. That is simply untrue, given the additional contributions through the IMF.

Will additional IMF funding work? That will simply reinforce existing eurozone policy, which is itself fundamentally flawed. The existing policy simply does not address the core causes of the crisis, which are a lack of competitiveness and Governments spending too much. Debt is the problem, as I have said, not demand. We have had 14 or perhaps even 15 gatherings, conferences and summits to save the euro, but each has failed to address the core reason for the problem, which is a fundamental lack of competitiveness. Where are the swathes of cuts to regulation? Where is the introduction of measures to improve competitiveness? They simply have not been there. All that has happened, and all the concern there has been, is to put together more debt to solve an existing debt crisis.

[Mr Douglas Carswell (Clacton) (Con)]

The Government say that no one has ever lost money by lending to the IMF. Can my hon. Friend tell me whether the IMF previously lent money to make a debt crisis worse, as it is now doing? Previous IMF bail-outs involved a debt default or restructuring and devaluation, not more bail-outs and borrowing. Surely, putting the IMF in charge in that way is making things worse. Putting Christine Lagarde at the helm is a bit like putting a debtor in charge of a bank.

[Mr Baron]

My hon. Friend nearly stole one of the lines I was about to come out with. Fundamentally, I agree with him. The problem is caused by excessive debt: that is what makes this recession different from previous ones, yet the solution the eurozone leaders have come up with is to pile on more debt. That is not the solution. All it is doing is reinforcing failure and failed policies.

There are further reasons why this policy will not work. I cannot think of a monetary union in the economic history of this planet that has succeeded without fiscal union also being in place. Again, I call on the Minister to intervene if he can correct me. To pursue monetary union without fiscal union is a doomed policy. Can the Minister come up with one example of successful monetary union in a country where fiscal union has not also been present? As I say, I would welcome his intervention, but I doubt that he will have such an example.

As my hon. Friend the Member for Clacton (Mr Carswell) has suggested, another reason why this policy will fail is that it fundamentally ignores the importance of devaluation to recovering economies. Usually, there are three elements in an IMF package: reduced spending, increased revenue and the ability to allow the currency to devalue. That last bit is important because a currency that devalues helps to take the strain off the economy. If an economy is deemed to be, say, 25% uncompetitive compared with its neighbours, allowing its currency to depreciate to about the same extent will go a long way towards taking the strain. If we cut off that option, that 25% gain in competitiveness can really be brought about only by cuts to public services, salaries and pension funds. That is simply not an option, and for that reason it makes those austerity packages so much worse.

To my knowledge, the IMF has never lent to a country or put in place a programme in a country that cannot devalue, which is why the Government line that only three of the 53 IMF packages go to the eurozone is disingenuous. Can the Minister name one country, one package in those 50, where devaluation is not an option? That is the fundamental difference. In the three packages in the eurozone, devaluation is off the table, which will make the austerity packages worse.

Having asked the Minister several questions, I was hoping that a number of notes would have been passed to him so that we could get some answers. I am sure he has pre-empted my questions and has the answers in his brief. Again, I would welcome him intervening to name one of those packages outside the eurozone in which devaluation is not an option. They do not exist. Devaluation is terribly important when it comes to an IMF package, but we are not allowing that option in the eurozone. That is another reason why these IMF packages will fail.

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[Mark Field (Cities of London and Westminster) (Con)]

I thank my hon. Friend the Member for Basildon and Billericay (Mr Baron)—my very old parliamentary friend—for securing this debate. He talks with immense sense and, as a man who had a job outside politics before entering this place, immense experience. After 20 years in the financial markets, I suspect he has forgotten more about finance than many people who talk on these matters on all our behalves know.

Conventional wisdom dictates that high noon for the euro is imminent. The assumption is that the single currency will collapse or that the eurozone will be forced into a headlong rush towards full fiscal union. Nevertheless, despite all the euphoria of the past week about Italy, I suspect that we shall experience many more months of tottering along from market crisis to emergency meeting, to fully fledged conference and half-hearted bail-outs—the sort of disaster to which my hon. Friend has referred. Indeed, if—it is a very big “if” and no one seems to be focusing on it at governmental level—the global bond market remains relatively stable, the cheap price of Government debt provides little incentive to create a viable long-term structure for our ailing continent’s economies. There is a massive bubble in the bond market that no one is really talking about. The Chancellor prides himself on Britain being a safe haven; America, with its $13 trillion debt, is an even safer haven with rather lower interest rates, as is Germany. It is absolute madness when we are receiving 2.2% for getting our debt away and have inflation of 5.6%, and I am afraid that the bubble will burst at some point with, I suspect, disastrous effects.

Many purists will rightly bemoan that politics is being allowed to outweigh the economic realities, and that cannot go on for ever. What is so dangerous about the utter lack of leadership and vision among Europe’s leading politicians is that the longer this crisis continues, the more private sector confidence drains away and global markets begin to discount the entirety of Europe. More crucial still is that the two distinct problems that face many struggling European economies, solvency and liquidity, are becoming conflated in the minds of markets. The Greek issue is simply one of solvency, or rather insolvency. Greece must be allowed to default, from within the eurozone, I suspect. I support its creditors, who are predominantly EU banks, taking a substantial haircut. They lent the money at attractive interest rates, implicitly recognising the risks, and they must now take the consequences.

[Mr Carswell]

My hon. Friend talks about allowing Greece to default within the eurozone. Surely that is the worst of all possible worlds. Surely the way to handle the problem is not just to default but to decouple and set Greece free. Default within the eurozone is the worst possible option.

[Mark Field]

The only difficulty is how on earth it would ever borrow money again. Greece has been living in Alice in Wonderland economics for the past 20 years. We need to look at what happened in Argentina. That economy has struggled massively for the past decade, because it has not been able to borrow money in the international markets.

[Mr Carswell]

Does my hon. Friend not agree that today Argentina has a better bond rating than many eurozone countries and that that shows the way?

[Mark Field]

I suspect that that says more about eurozone countries than about the fundamental health of the Argentinean economy, but if my hon. Friend will excuse me, I will continue.

With the failure of European leaders and Finance Ministers truly to grasp the nettle, the liquidity problems faced by Portugal, Ireland, Spain and Italy are becoming ever more deep-seated. It is very difficult for Angela Merkel in Germany—as someone who has German blood running through his veins, I accept that. I appreciate that her domestic political position appears ever more precarious, because the EU’s economic powerhouse should have ceded control of the deepening crisis to the European Central Bank. The ECB’s mandate could, and perhaps should, be to provide market intervention to restore and maintain confidence on behalf of all solvent eurozone economies, but in her actions to date, Mrs Merkel has indicated that the politics are just too difficult for her nation, which remembers the days of hyperinflation during the early part of the Weimar Republic. Furthermore, all this requires, as ever within the EU, bypassing democratic safeguards, and it potentially involves unfathomably vast quantities of central bank support, with potentially hazardous medium-term economic consequences.

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[Stephen Hammond]

My hon. Friend is right, and my hon. Friend the Member for Basildon and Billericay made exactly that point. I will not go on, but it seems simply ridiculous. If the eurocrats of Europe think that saving the euro is more important than working out the solution to the economic crisis, progress will be, at best, tortuous.

From a UK perspective we must be interested. The idea that we are not interested in what the IMF bail-out is—or, indeed, in the fact there is a eurozone crisis—is clearly wrong. The impact on the UK is extraordinary. We trade with the eurozone, and therefore have a significant interest. My hon. Friend the Member for Cities of London and Westminster (Mark Field) referred to the possibility of a default of Greek banks. It may or may not be true that we have little or no exposure to Greek banks—I think it is broadly true—but we have great exposure to banks that lend to Greece within the eurozone. That contraction of balance sheets will affect lending to small and medium-sized enterprises in the UK. Therefore, we must have that interest.

A basic and necessary precondition of what the IMF must say to the leaders of Europe is that they must recognise their wider international responsibilities. My hon. Friend also made the point about the Germans effectively wanting to control the eurozone, but not being prepared to accept the economic leadership that that implies by allowing the ECB to attempt to solve the liquidity crisis. We should extend money to the IMF, but I am realistic in accepting that, overall, that means the IMF would extend extra money to the eurozone. Any money that the IMF extends to the eurozone should be met with the precondition that the ECB becomes entirely independent and able to print money for the eurozone, or else it is bound to fail.

The IMF also needs, and almost certainly will accept, a necessary theoretical construction that provides a solution. The most likely solution is that we see a number of countries leave the eurozone—leave the euro—and some perhaps form a tighter unit. That being so, the IMF must stand up and say that it is prepared to fund the cost of dislocation for those leaving the eurozone, so that they have a chance to devalue, make the necessary adjustment to living standards and the necessary lowering of labour costs to allow a competitive solution.

[Mr Carswell]

Is my hon. Friend saying that he wants the IMF to fund the cost of eurozone members’ dislocation from the euro?

[Stephen Hammond]

I am saying that I accept that the IMF will make a bail-out to the eurozone. On that basis, one of the best solutions for the eurozone is for a number of countries to be allowed to leave the euro. The IMF will therefore need to fund the cost of the dislocation of those countries leaving the euro to give them any hope, attendant with their devaluation, of an economically sustainable future.

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[Neil Carmichael (Stroud) (Con)]

I congratulate my hon. Friend the Member for Basildon and Billericay (Mr Baron) on securing this crucial debate. A large number of important matters have been raised, and it is a good opportunity to discuss them in this Chamber.

I take issue with the assumption that devaluation is a good thing. We have formally devalued twice since the second world war, and we are in a slowly-emerging devaluation. Post-departure from Bretton Woods, we effectively devalued over time. I see no evidence that any of those devaluations ever led to long-term improvements in productivity or competitiveness, so although the IMF, as it has in the past, has perhaps lent to countries that can and have devalued, it is not necessarily a good thing.

[Mr Carswell]

Does my hon. Friend accept that Argentina’s decision to decouple from the dollar and default on its debts helped it to achieve economic growth? Does he think that that was a good thing or a bad thing?

[Neil Carmichael]

I am a great believer in all countries growing. Argentina is doing reasonably well, but that has more to do with the neighbouring countries that it trades with in Latin America than with decoupling from the dollar. However, I take the point that some countries will take the opportunity for a quick leap forward.

[Mr Carswell]

Does my hon. Friend agree that the IMF’s decision to allow the Ugandan shilling to devalue helped to stimulate growth in Uganda in the 1990s and that, without that devaluation, it would not have enjoyed 15 years of prosperity?

[Neil Carmichael]

If my hon. Friend thinks that the devaluations of 1949 and 1967 in this country led to a period of improved productivity and competitiveness, I would dispute that. I want to pursue that argument, because that is what I think is important.

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[Mr Hoban]

Perhaps my hon. Friend will be patient. There are areas where the eurozone needs to tackle its competitiveness to respond to those issues. There is the question whether IMF money is conditional on structural reform to improve competitiveness. The answer is yes, because conditions are built into IMF programmes to ensure that competitiveness changes take place. Portugal, for example, has an extensive programme of privatisation, and the Portuguese Government’s right to be involved in private companies must be abolished. In Ireland, legislation has been passed to increase the state pension age to provide a significant boost to long-term fiscal stability. In Greece, the Government are discussing breaking the link between the national minimum wage and the annual inflation rate, and market reform is being promoted to allow businesses to set wages independently of collective agreements.

[Mr Carswell]

Will the Financial Secretary give way?

[Mr Hoban]

Let me continue. I have only three minutes left, and I want to ensure that I address as many of my hon. Friends’ questions as possible.

We are seeing structural reform to improve the competitiveness of economies hand in hand with IMF programmes. I hope that that will reassure my hon. Friends that reform is taking place in those countries to ensure that they meet their international obligations.