Eurozone Crisis

Debate between Douglas Carswell and John Baron

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.