Genuine Economic and Monetary Union (EUC Report)

Lord Dykes Excerpts

Wednesday 2nd July 2014 Grand Committee

[Lord Dykes (LD)]

My Lords, I share the gratitude expressed by previous speakers in the debate to the noble Lord, Lord Harrison, the chairman, and his colleagues on the economic sub-committee for a masterly report. I note in the second paragraph of the summary the very realistic description of the tensions within the eurozone, which have been referred to and which are still considerable.

Since the eurozone crisis of the three or four weakest members—it is basically a strong international currency with four or five weaker members struggling to get stronger—began to calm down in early 2010, I, like others, have noted that whenever disarray and nationalism have been replaced by the member states in the eurozone working closely together, the markets have usually reacted very positively, markedly, as we see nowadays, with resumed very moderate yields on 10-year and other bonds.

We need also to express admiration for the bravery of the authorities in the four or five weakest member states. I think of Ireland, Spain, Italy and, above all, Greece, where there were remarkable parliamentary votes, with big majorities, on the austerity programme and where the fascist party was kept at bay. I also include in that, in a different way, Cyprus, where there was an esoteric technical problem as well. The steadfast way in which these countries have gone about recovery, despite enormous social losses, has been very encouraging. They were treated in the British press—in the comics in Britain that masquerade as newspapers, with their anti-European outlook with the utmost scorn, at the very same time, ironically, that HMG were pursuing their own extremely rigid austerity programme.

Furthermore, was it not an extraordinary spectacle to witness the contrast between the US and the EU in their respective struggles for post-crisis control? In the US, the political crisis arose again because it could not increase its already massive and excessive federal debt of $17 trillion. In the eurozone, of course, the very reverse was the case, with attempts to reverse debt whenever possible. Although the liquidity increases achieved by the ECB programmes have unfortunately been modest in comparison with those of the US, and the ECB has not dealt with sovereign debt in the way that many had hoped, it has increased its resources to deal partly with future crises. However, it still has not secured enough power for the future for such operations. Mario Draghi, the quite remarkable former head of the Italian Treasury, has achieved a lot as ECB president with sheer will-power, as has been referred to by other speakers. His words of encouragement calmed the markets. The euro itself as an international currency is, as we see, physically forging ahead in the whole world—although less of course in Asia still.

However, we note that in a number of member states the role of lender of last resort is still denied psychologically to the ECB. Never, therefore, has the threat of continued and indeed worsening deflation been more evident. The old fears of historical inflation—mostly expressed in Germany—are in absolutely no danger of being realised again in the post-war period as far as anyone can ascertain with careful and meticulous analysis.

This fear towards countries that have been fighting hard to curb indebtedness, including France, where I live, goes even as far as rejecting the idea of communitarian sharing of debt burdens. This is surely yet again, alas, old-fashioned nationalism. If Europe wallows in nationalist struggles between member states—particularly the leading ones—the markets notice it at once and failure is almost guaranteed, just as when the global economy gives rise to protectionism and goes backwards in history.

Germany, after all, was responsible for some of the earlier problems when its own short-term public sector debts far exceeded the limits laid down in the pact. It was helped then by the rest of the Community, quite rightly, because of the enormous respect for the economic powerhouse that it had created and for its economic and financial leadership. What if, for example, in 10 years’ time that great country Germany were to suffer an unexpected sovereign debt crisis? I do not, of course, expect that, but I am convinced that, if so, the whole Union would back ECB intervention to save it. Presumably by then the ECB would have the necessary resources.

As time goes on and even the weakest eurozone members recover their strength—a remarkable exercise, particularly in Spain, for example—it is going to be necessary for the ECB to receive full powers of action as the authoritative central bank of the Union. This is very much what is already owed to the smaller and more recent member states, which joined in 2004 and afterwards. The Union cannot after all be run exclusively to appease the more traditional and backward members of the Bundesbank board, worthy though they may be. I am sure that Angela Merkel understands this, but of course she is surrounded by the Bild and the Axel Springer press and mainstream local public opinion in Germany. Therefore, I welcome, as I am sure others here today in this short debate will do, the exhortation in the fourth paragraph of the committee report summary that,

“some degree of debt mutualisation may be inevitable if the single currency is to prosper”.

I agree and perhaps it should be more than that.

If outsiders are able to perceive that the eurozone central banking authority is not plenipotentiary, including in debt management, the next crisis will not be fully resolved. The euro must be a long-term project to which all zone members are fully committed. The member states that have recently joined, such as Latvia and Slovenia, and the others waiting to join are owed nothing less. We must think about the smaller countries in the Union as well.

I commend particularly in this excellent report the warnings in paragraphs 197 and 198 on page 68 of the continuing and future dilemma that must eventually be resolved in what is a historic new control structure born out of a massive and greedy speculators’ crisis, which started in the USA. We need to remember that. The SSM and the SRM are still headachy problems that need full and extensive, not just partial, solutions.

In the final analysis, however, this is not just about the central banking architecture for a community or club of nations willing to show European solidarity, which the Prime Minister totally fails to comprehend. It is at the heart of the political union as well. This is a political project, too. The currency is as much international politics as it is just money and bonds. If ever the euro ceased to be, that would be the end of the most unique political project in world history—apart from perhaps the creation of the United Nations after the war. The monetary authorities of the People’s Republic of China were the first of the great third countries of the world to realise this twin characteristic, years ago. I remember being in Beijing when they started purchasing massive quantities of euros for their second stage reserves, when it first started.

All member states achieving the necessary fiscal discipline and restraint can benefit from the long-term plusses in the Germanic, strong currency system, which creates high currency strength and high savings and investment ratios and spreads worldwide confidence. Recent daily international interbank payment transaction figures are remarkable. They show the euro creeping towards the US dollar as the second reserve currency, with 32.5% of the world total of those daily transactions against 39.6% for the US dollar. The UK has just under 3% of the total and has of course devalued seven times since the war—three times by official action and four times in the marketplace.

Despite the crude nationalism here against the remarkable single currency, in a UK that is still fearful and traumatised after being driven out of the preliminary exchange rate mechanism in 1992—a very painful experience for my noble friend Lord Lamont—I still hope that, eventually, the UK will in the future find the courage to join. I do not expect my noble friend the Minister, when replying to this debate, to give a date for that yet, but I hope that it will not be too long in happening.