Eurozone Crisis

Lord Ashdown of Norton-sub-Hamdon Excerpts

Thursday 1st December 2011 Grand Committee

[Lord Ashdown of Norton-sub-Hamdon]

My Lords, I am grateful to the noble Lord, Lord Monks, for introducing this issue. Although it is perfectly reasonable to be discussing the economics of this country, it seems to me completely bizarre that we should be discussing, outside the circle around the fire, this 650-pound gorilla of what happens to the euro. For us not to have addressed or discussed that seems bizarre. Indeed, for us to be doing it in this Room today rather than in the main Chamber seems odd as well, and I am grateful to the noble Lord for mentioning that.

It is a privilege to follow the noble Lord, Lord Monks. I agree with so much of what he said, and I will come on to that in a moment. Although we talk about the economic crisis, I think that the real crisis is a deep political one, and perhaps we do not recognise that at our peril. Of course we must look forward, but it behoves those of us who argued, as I did, that this country should join the euro in 1997 to say a little word about the past and perhaps to justify that position.

I start by saying that I do not resile one iota from my belief that it would have been right for this country to have joined the euro at some time between 1997 and 1999, for reasons that I shall seek to explain. Those who argue to the contrary, that not joining the euro was the best thing that we ever did, seem to miss a number of points. First, they presume that the euro would have been the same as it is today had we joined; of course, it would not have been. We would have added substantially to those voices within the eurozone in favour of liberalised markets and greater competition, and the balance of the euro would have been different. Even those of us who argued, as I did, that it was illogical to create an economic giant controlled by a political pygmy might even have begun to win the argument within the eurozone that we had to create the instruments to ensure that the position we have now arrived at in the euro was at least less likely.

The second proposition is that somehow or other, if we had joined the euro, we would have been like Greece, Portugal, Ireland and Italy. I do not think that that is true. We are not a small southern economy without a manufacturing tradition but with a certain cavalier attitude to the rules. We are a northern economy, large and with a strong manufacturing tradition, and we respect those rules.

Those rules would have been very good for us. I reflect on the fact that by not joining the euro we left ourselves open to do what we have always done whenever we hit a problem: we do not tackle the fundamental problem, which is that Britain does not produce enough goods at competitive prices that the world wants to buy. Instead, we devalue our way out of trouble. It is what Harold Wilson did, for which he was excoriated, and it is what we have done. Even Conservative newspapers have said, “Thank God we can devalue”. Harold Wilson, thou should be alive this day.

Instead of doing what we needed to do—produce competitive goods that the world wanted to buy—we devalued our way out of difficulty. Instead of acting like Germany, we decided to act as we always have done. Sooner or later this country must tackle its fundamental problem and produce goods that the world wants to buy at a competitive rate. However, not only did we take advantage of the ability to devalue and dodge the issue, but we decided that it was easier and more fun to behave like Italians and build up a massive amount of debt—in fact, not like the Italians, because their debt was 97 per cent of GDP in 1999 and is about 104 per cent now, while our net government debt is now two and a half times what it was.

We are now faced with the worst of all propositions. We have to make ourselves competitive because at last we must, and we must deal with a huge burden of debt as well. Is the position better than it would have been if we had been subject to the disciplines inside the euro? I do not think so. Let us compare our position to that of Germany or those of the other northern economies that are most like us. I take the position of Germany in particular, but one could find the same examples in Benelux, Austria, Finland and other countries. Between 1999 and now, Germany increased its debt by 20 per cent but doubled its growth. We increased our debt by 250 per cent and halved our growth. In which position would one prefer to be?

Of course, Germany has the problems of the euro to cope with. However, as an economy it has nothing like the problems that we now have to cope with and nothing like the difficulties that are ahead of us. I know which of the two positions I would much prefer to be in. It was a great pity that this country did not grasp the nettle and submit itself to those disciplines. I am very confident that if we had done, today we would not be in the economic position in which we find ourselves.

I will address the future in the three or four minutes that I have left. Here I find myself more in agreement with the noble Lord, Lord Lamont, than I had thought I would be. There are three options available to the eurozone. Option one is that the whole thing collapses. Of course, that would be a disaster and a catastrophe. I am very confident that it will not happen because the countries that run the eurozone have too much invested in it; they will not allow it to happen. For all that the noble Lord, Lord Lamont, told us of the costs of trying to save it, the costs of not doing so are even greater.

The second option is that somehow the euro of 17 survives. If I was asked to make a judgment on that, I fear I would say that it is unlikely for two reasons. First, I am not sure that the people of the nations that will have to face these austerities will all agree to do so. It may be unwise not to, because conditions for them will be far harsher outside than inside. However, with a frightened population it is unlikely that all of them will accede to the austerity measures necessary to maintain their position inside the euro of 17. Secondly—here the noble Lord, Lord Lamont, is right—the markets cannot yet be made to believe that the euro of 17 can be sustained. We would probably need a bail-out fund not of €1 trillion but of €2 trillion or even €3 trillion to do that. I doubt if the markets can be made to believe that. Therefore I believe and have always believed that the most likely circumstance is that we will fall back to a core euro. Sooner or later, that is the most likely outcome.

I do not predict it as a certainty. However, on the balance of probability the most likely outcome is a eurozone made up of Germany, Austria, Finland and Benelux. My guess is that Sweden would join under those circumstances. So might Denmark, which is tracking the euro. France, of course, would be in—perhaps not for economic reasons, but for political ones it could not be left out. The big question is whether Italy would be in. Again, it seems almost impossible to imagine that it would be, because I doubt that the German people would bail out Italy. However, if Italy is not, Germany will have to find a huge sum to bail out the banks—to recapitalise German and French banks—as a consequence. Somehow or other, that seems to be the position that we come to.

The question is: what should Britain do in these circumstances? If we had a core euro of that sort, the eurozone would be strong—in surplus, perhaps—and it would be deeply in our interests to join. Do I say that we should from this position? No, I do not. But being the only one of the outs, the only one of those not in the current eurozone that wants to go further out, while all the rest of them want to get back in would be disastrous. If we do not show a willingness to join if it is in our country’s interests, then we immediately diminish our influence and our effect in the Councils of Europe. It is inevitable that the eurozone countries, whether a core eurozone or one of 17, will caucus together and work together to their advantage and, ultimately, our disadvantage. If we are outside that circle, we diminish the influence and voice of Britain catastrophically.

My position is very simple. Let me see if I may differentiate it from what I suspect is the position of the noble Lord, Lord Lamont. My position is very practical. Should it become in Britain’s interests to join the euro we should do so. His position is likely to be that even if it were to be in Britain’s interests to join the euro, we should not. A position driven by pragmatism seems to me to be the best position for our country. I believe that this will come sooner than we think. If this thing can be made to survive—and I believe in the end that it will survive—then, sooner than we think, we will have to address the question of whether or not it is in our interests to join. If it is, I say we should, whereas I think that many people, especially in the Conservative Party, still take the view that even if it was in Britain’s interests to join we should not. A position driven by pragmatism is wise for this country; a position driven by prejudice is not.