Eurozone Crisis

John Baron Excerpts

Tuesday 15th November 2011 Westminster Hall

[Mr John Baron (Basildon and Billericay) (Con)]

Good morning to you, Mr Caton. In raising concerns about the UK’s liability to the eurozone bail-out via its contributions to the International Monetary Fund, I will ask various questions of the Minister. I will question the assumption that we always get our money back, whether the IMF’s policy will work and why the IMF should be getting involved at all.

That we are talking about large sums of money cannot be denied. Our liability through the European financial stabilisation mechanism totals some £6.5 billion. Our liability through the bilateral loan to Ireland exceeds £3 billion. Despite Government assurances to the contrary, it does not stop there. Our IMF liability to the Greek, Portuguese and Irish bail-out packages announced before May 2011 totals some £3.5 billion, and that does not include the latest Greek bail-out. Adding in our additional contributions, which are almost doubling—from some £10 billion to nearly £20 billion—it is obvious to all that we are soon talking some big figures. I do not think the Minister can deny—I shall welcome his intervention if he thinks otherwise—that some of the additional IMF money will be routed through to the eurozone crisis. Therefore, the Government’s claim that our liability stops with the EFSM and our bilateral loan to Ireland simply does not wash.

Let me be clear: I support the IMF’s work. IMF programmes can and do work under certain conditions. However, there are real risks to those IMF contributions routed through to the eurozone crisis.

The Government take great comfort from the fact that no country that has lent money to the IMF has ever lost that money. However, this recession is very different. Having been a fund manager in the City of London, running pension funds, charity money and funds for private clients, I know that it is always dangerous to say, “This time it is different,” but economic history makes that clear. Recessions since the great depression have always been de-stocking events, where the problem has been a fall in demand. In response to that, the Keynesian approach of stimulating the economy through additional demand—if necessary, by borrowing—has by and large done the trick. This recession, however, is a deleveraging recession, which has been built on excessive debt. Governments and consumers have taken on too much debt. Demand is not the issue; excessive debt is. The only remedies for this recession are to pare down the debt and attain greater growth through increased competitiveness.

I worry that the Government are underestimating the scale of the debt. There is £300 billion-worth of Italian debt to be rolled over in the coming 12 to 18 months. The eurozone went to the Chinese, who have massive reserves, but the Chinese did not want to know. The fact that the IMF wants an additional £10 billion from us clearly suggests that it does not have our original £10 billion. The Government would be foolish to ignore the omens. Does the Minister accept that there is at least some risk that the UK could lose some of the money routed through the IMF to the eurozone crisis? Again, he is welcome to intervene if he so wishes.

[Mark Reckless (Rochester and Strood) (Con)]

My hon. Friend refers to £10 billion and another £10 billion. I understand that when the issue was discussed in the Joint Committee on Statutory Instruments, the Minister said that, broadly speaking, our liability to the IMF would be £20 billion. However, I understand that another funding source exists that may mean that our liability is already £40 billion. Can my hon. Friend enlighten us?

[Mr Baron]

My hon. Friend is right to raise that issue. There is an additional liability that we know relatively little about, because the Government have not come to the House to explain it. I hope the Minister will take the opportunity in this debate to address that concern. Is that true? What is the extent of the liability? How would it be called upon in the event of certain contingencies?

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

My hon. Friend referred to the idea that we have never—hitherto, at least—lost money to the IMF. Does he recognise that there is potentially a huge opportunity cost in lending money, often at low interest rates, to the IMF? As he will know, Parliament was told at the time that the bilateral deal struck with Ireland had tremendously advantageous interest rates. There has been a haircut on that interest rate across Europe, which could well happen to any future IMF contributions that we make.

[Mr Baron]

My hon. Friend is absolutely right. There is a real danger that we underestimate the extent of the debt and the defaults that could happen. One is not joining the bandwagon of warning signals. The debt that has to be rolled over is quite clear for all to see, but I do not think the Government are acknowledging that. Simply to fall complacently back on the fact that no money ever loaned to the IMF has been lost is to miss the point completely.

[Ian Paisley (North Antrim) (DUP)]

I congratulate the hon. Gentleman on securing the debate. He mentioned a number of times the bilateral loan, which is of significant interest to my colleagues and me. He may be interested to know that last December, I wrote to the Chancellor to suggest that Her Majesty’s Government should hold the deeds of all properties in the United Kingdom that are in the possession of the National Asset Management Agency, the Irish state bank, so that it cannot disproportionately influence our market by the unilateral sale of those properties. Does the hon. Gentleman agree that that is one way of protecting ourselves and our own local market against NAMA?

[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.

[Neil Carmichael (Stroud) (Con)]

When the IMF intervened in our economy in 1976, when Denis Healey was fighting to save the pound, that intervention arrested the devaluation of the pound.

[Mr Baron]

I agree to a certain extent, but my hon. Friend cannot deny that we had the ability to devalue. The currency markets could take the strain and, to a certain extent, they did. If we look at the strength of the pound since the second world war, we see that it has been a sorry tale of devaluation. Had that devaluation not taken place and had we been locked into a system that did not allow devaluation, my goodness me, the austerity packages introduced to compensate for that lack of competitiveness would have been very severe indeed.

[Mr Christopher Chope (Christchurch) (Con)]

I share my hon. Friend’s scepticism about the role of the IMF in the treaty that establishes the European stability mechanism. Does he recognise that that treaty is littered with references to the IMF, even to the extent of including a provision that says that no application can be made for a loan unless a similar application has been made to the IMF first?

[Mr Baron]

My hon. Friend is absolutely right. The IMF is an integral part of the rescue package for the eurozone, but that is something that the Government are, at least publicly, not willing to acknowledge, which is very wrong indeed.

I question why the IMF is getting involved in these bail-outs. The eurozone is a currency union. If a state within the United States got into trouble, the IMF would not be expected to ride to the rescue. The same should be true of the eurozone. I contend that Greece is not economically sovereign: it has no central bank, it cannot set interest rates, it has no currency, and it cannot devalue. I would go so far as to question whether Greece is even politically sovereign. At least in the United States, the people can elect the governor of individual states. That is not happening in Greece and Italy. In some cases, we do not even have a Government.

[Mr David Nuttall (Bury North) (Con)]

My hon. Friend refers to the possibility of an American state finding itself in financial difficulties. Of course that has already happened in California. Can he confirm that, in those circumstances, the IMF was not involved and was not able to contribute?

[Mr Baron]

That is absolutely right. My hon. Friend reinforces my point. The US is a currency union and the IMF is not expected to ride to the rescue there, yet it is expected to ride to the rescue of countries in the eurozone, which is also a currency union. That is completely wrong.

[Glyn Davies (Montgomeryshire) (Con)]

Let me ask my hon. Friend about the wider context. We are dealing with the financial aspects here, but I have always had a greater interest in the constitutional aspects. It seems that the euro is destroying democracy as we know it. Should we not consider that issue, especially as we are seeing the end of democracy in Greece and Italy? Europe has always been my concern, which is why I opposed the whole thing in 1975. We are now seeing the creation of a single country in Europe, to which the British people have not signed up, and that will eventually lead to trouble.

[Mr Baron]

My hon. Friend is absolutely right. If he needs confirmation, I suggest that he look at the front page of City A.M., where he will see what Angela Merkel has said about political union. There is a political deficit in the eurozone at the moment, which is why Governments are being appointed and not elected in Greece and Italy. That is a consequence of the fact that the eurozone and the EU are hellbent on political union at the cost of democracy and getting the people’s consent.

[Mr David Davis (Haltemprice and Howden) (Con)]

I congratulate my hon. Friend on a formidably cogent speech. Sadly, I will not be here to hear the Minister’s attempt to answer it. The democratic deficit that I am worried about is the one in this country. We are having this debate in Westminster Hall. Whatever its outcome, it will not change what happens in the IMF. Is there any way that Parliament can have a say on British taxpayers’ money being used in pursuit of an end that is against their interests?

[Mr Baron]

My right hon. Friend makes a good point. By raising such issues in Parliament and in collaboration with other like-minded individuals, we can hope that we can force the Government to think again and to look at the various mechanisms at our disposal in the House. If we do not raise these points in our Chambers, the Government will not answer the questions that need to be put to them. My right hon. Friend is right; we will not change anything today. The hope is that together we can force the Government to think again.

Let me go back to why the IMF is getting involved at all. What makes the situation even worse is that the eurozone has resources that could do much more to help. For example, the Bundesbank has reserves of £180 billion, £130 billion of which is in gold, and gold is going up in price. That is in stark contrast to our country and the action of the previous Government, who sold gold at near the bottom of the market.

I agree with the point made by my hon. Friend the Member for Clacton about why we supported Christine Lagarde, the former French Finance Minister, being put in charge of the IMF. It is like putting the debtor in charge of the debtors’ prison. Christine Lagarde has admitted on record that the bail-out arrangements broke the rules, but she said that that could be justified because we all had to rally round to save the euro, which itself is a political objective. That is complete nonsense and it does not augur well for the future, and the Government taking confidence in the fact that the IMF has signed off the packages does not augur well either. The IMF signed off the initial Greek package and look at what happened then: the situation went from bad to worse. I suggest that it will get worse still. Having some sort of blind confidence in the IMF signing off the packages is basically abdicating one’s responsibilities of Government to question what is going on. I do not see that detailed questioning happening at the moment.

I suggest that the Government’s line on this issue—their approach to the eurozone crisis—is symptomatic of their flawed approach generally to the euro. The Government seem to have fallen in behind the French and Germans in this cry that somehow we must save the euro. I suggest to the Minister that that is economic clap-trap. Binding divergent economies into a single currency without full fiscal union was, and remains, a massive mistake. Similar thinking warned us of the perils of exiting the exchange rate mechanism, yet look what happened then: almost to the day that we exited the ERM, our recovery started and it was a very strong recovery.

I suggest to the Minister that the sky will not fall in if the euro breaks up. We will still have, by and large, a free market, although I think that it could be improved, and we will still have consumers demanding goods. If anything, by not trying to save the euro, we could help to stimulate demand, because by trying to save the euro we are cutting off one of the key ways to improve competitiveness—devaluation. By cutting off that option, we are making the austerity packages worse; we have to add to the austerity packages because the countries in need do not have the option of devaluation.

Saving the euro is making matters worse, yet the Government are silent on this issue. They have shown no leadership. They have fallen behind the line that saving the euro is everything—it is not. I suggest that the Minister and the Government look at the experiences of Norway and Switzerland, which have their own currencies and free trade agreements with the EU. Those countries are doing very well. Saving the euro should not be the ultimate goal, because it is making the austerity packages worse.

[Mr Stewart Jackson (Peterborough) (Con)]

My hon. Friend is making a powerful and convincing speech, but is the situation not even worse than he suggests, in that the Government are effectively adopting a de facto policy of support for a tighter fiscal union, which in the long term will inevitably militate against this country’s strategic political and economic interests as a sovereign state?

[Mr Baron]

My hon. Friend makes a good point. By joining in the chorus that we must save the euro, we are implicitly supporting fiscal union within the eurozone, which is the wrong approach to take, certainly for this country’s interests. But, no doubt, the Minister will be able to clarify the Government’s position on that issue.

The same flawed approach by the Government has denied the people of this country a referendum on the EU and our future relationship with it, while allowing massive budget transfers to Brussels. Our budget increase totals about £21 billion or £22 billion. It will increase from £19 billion for the last seven years to about £41 billion in the next seven years. What could we get for that additional £21 billion or £22 billion? We could get 100,000 police officers on the streets for each of those seven years, 100,000 nurses in our hospitals or 100,000 teachers in our schools. How could we stimulate growth with that money? We could cut basic rate income tax by 1p in the pound for each of the seven years. We could cut small business corporation tax by 6p in the pound. My goodness me—would that not be a concrete measure to stimulate growth and encourage competitiveness in this country?

I am afraid that the Government’s thinking on this issue is intellectually incoherent, economically flawed and, perhaps worst of all, flies in the face of what the majority of people in this country want. What we want is leadership—strong leadership. We hear noises such as, “Oh, regulation from the EU hurts growth.” There is nothing new in that; saying it is just making noise for the sake of making noise. We have known that about EU regulation for years. What we want is strong leadership that repatriates powers to this country, stops the salami-slicing of our political sovereignty, encourages the establishment of a genuine free market in Europe and guards against our liabilities to the eurozone crisis. But I do not see that strong leadership in front of me today, which worries me and a number of my colleagues and right hon. and hon. Friends greatly. Meanwhile, we stumble on.

I suggest to the Minister that this country will wake up about this issue one day and that we will renegotiate with the EU. My hope is that we will renegotiate a free trade arrangement, similar to the arrangements that Norway and Switzerland have, and that we have a constructive businesslike arrangement with the EU, without sacrificing political sovereignty and without going down the road of political union. My concern is about the damage that will be caused to this country between now and then and the cost that we and our children will have to bear.

I hope that the Minister, as he has refused my invitation to intervene on the questions that I have put to him, will come up with some answers when he winds up this debate. I hope that he answers the questions that I have put, because they are the questions that people in this country are asking.

[Several hon. Members]

rose—

--- Later in debate ---

[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.

[Mr Baron]

My hon. Friend is being generous in giving way. Devaluation is not necessarily the best thing going, but it helps to take the strain for a currency that is weakening and therefore allows austerity measures to be perhaps less harsh than they would otherwise be. That is the point. There is no economic evidence to suggest that, if we did not allow devaluation to take effect, austerity packages would be worse and make the economic downturn much worse.

[Neil Carmichael]

I can certainly understand my hon. Friend’s argument, but it is worth pointing out that devaluation is not a panacea and should not be used frequently.

--- Later in debate ---

[The Financial Secretary to the Treasury (Mr Mark Hoban)]

I congratulate my hon. Friend the Member for Basildon and Billericay (Mr Baron) on securing the debate.

Let me be absolutely clear: it is in our vital national interest that eurozone states reach a coherent, comprehensive and lasting solution. First and foremost, they must implement the agreement reached towards the end of October, which involves a three-pronged strategy to recapitalise the European banks, resolve the situation regarding Greek debt and reinforce the EFSF to create a firewall between Greece and other vulnerable euro area countries. The new Governments in Greece and Italy need to show that they can implement the tough measures required to deal with their debts and make their economies more competitive. Uncertainty in the eurozone is undermining not just their economies, but ours. A return to stability in the eurozone will benefit our economy, whereas continued uncertainty will harm it. My hon. Friends the Members for Cities of London and Westminster (Mark Field) and for Wimbledon (Stephen Hammond) made that point.

We have a clear interest in greater certainty in the eurozone, but at no point have we committed, or will we commit, any British taxpayers’ money to a special purpose vehicle, or through the EFSF or the ESM, either directly or through the EU budget.

[Mr Baron]

If I may be so bold, the Financial Secretary is coming up with the economic clap-trap that we must all save the euro. Does he accept that binding divergent economies into a single currency without fiscal union was and remains a massive mistake? It is as simple as that. The world will not fall apart if the euro breaks up, and countries such as Norway and Switzerland have proved that by trading with the eurozone using their own currencies.

[Mr Hoban]

My hon. Friend is absolutely right, which is why we did not join the euro in the first place. The remorseless logic of monetary union, as he said in his speech, is fiscal union. Fiscal union is necessary for monetary union to work. That is what we are seeing throughout the globe, and that is why we said that eurozone members must make greater progress towards fiscal union.

[Mr Baron]

If the Financial Secretary accepts the logic about the deficiency of the euro, are the Government joining in the chorus that we must all come together and save the euro?

[Mr Hoban]

As I have said, uncertainty and problems in the eurozone have a damaging impact on the UK economy and have a chain effect on what is happening here in the UK. It is not in our economic interest for that to continue. Just last week, John Cridland, director-general of the CBI, commented on the negative impact that the problems in the eurozone are having on the UK economy. We are an open economy and our European partners are our largest trading partner, so it is in our interest to ensure that the eurozone works. That will be of huge benefit to the UK economy.

--- Later in debate ---

[Mr Baron]

rose—

[Graham Stringer]

(Blackley and Broughton) (Lab) rose—

[Mr Hoban]

I would like to make some progress. Let me address UK commitments through the IMF, which is the centrepiece of this debate. In a carefully worded statement, the hon. Member for Nottingham East (Chris Leslie) covered Labour’s retreat on its IMF policy. He was bravely leading his troops through the No Lobby in July without the support of the architects of the G20 London deal. The former Prime Minister and the former Chancellor were not there. What has happened? Last week, his boss, the shadow Chancellor, cut his legs from under him by saying that

“the Labour party supports an increase in the UK’s International Monetary Fund subscription”.

I do not think the hon. Gentleman is in a position to lecture anyone about consistency and principle.

As a founding and permanent member of the IMF, and as one of its largest shareholders, we continue to be a strong supporter of its role as a global backstop to the world economy. Currently, 53 countries are being supported by the IMF, of which only three—Greece, Ireland and Portugal—are in the euro area.

[Mr Baron]

Will the Financial Secretary give way?

[Mr Hoban]

Let me continue. As a founding member of the IMF, we recognise its important role in stabilising the global economy in times such as this. That is why we participated on the nine previous occasions when its quota was increased. In these turbulent times, it is essential for confidence and economic stability that the IMF has the necessary resources, and there may well be a case for further increases. At the G20 two weekends ago, Britain, the US, China and all the other countries round the table made it clear that in principle we are willing to have an increase in IMF resources to boost global confidence. We stand ready to contribute within limits agreed by the House and set out in the International Monetary Fund Act 1979. That limit, denominated in the IMF’s units of account—special drawing rights—stands at 38.8 billion SDRs, or about £38.3 billion pounds.

Let me remind the House that no one who has lent money to the IMF has ever lost that money. The money goes directly to the IMF and not to individual countries. It is one of the most creditworthy institutions in the world, and its loans are afforded preferred creditor status, which means that they are first in line to be repaid, even if not all other creditors are paid. Consequently, no country has ever lost money as a consequence of lending to it.

There has been no agreement about the timing, extent or exact method through which IMF resources will be increased, but an immediate need is to implement existing plans to increase its resources. Let me make clear how IMF resources will be used. Any increase must be available to all its members and not reserved for use only by the euro area. There can be no hypothecation, and money is lent to the IMF, not to specific countries.

The use of IMF resources is linked to the question of the need for economic reform. All hon. Members recognise the need for the euro area to reach a comprehensive resolution to the crisis, and clearly it is for the euro area to resolve that crisis. That resolution cannot be simply through recapitalisation of banks, the creation of a euro area bail-out fund or resolving the problems in Greece.

[Mr Baron]

Will the Financial Secretary give way?

[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 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.

[Mr Baron]

Returning to a previous point, I suggest that the reason why the eurozone crisis is causing a bit of a problem over here is that existing policy is making the situation worse. Denying devaluation is forcing greater austerity packages on populations that are already trying to pare down their debt. That is the problem that the Government do not see.

May I take my hon. Friend back to devaluation? The Government make great play of the fact that only three of the 53 packages go to the eurozone. Can he name one programme outside the eurozone where a country cannot devalue?

[Martin Caton (in the Chair)]

Order. That was a long intervention.