Queen's Speech

Lord Eatwell Excerpts

Wednesday 26th May 2010 Lords Chamber

[Lord Eatwell]

My Lords, a few months ago, we all hoped that the financial crisis that engulfed the western world in 2008 and 2009 was at last fading into history. That hope was, sadly, misplaced. The past few weeks have witnessed growing economic turmoil in Europe, and Britain is suffering from that turmoil. It is in Britain’s fundamental economic interests that the difficulties in the eurozone are resolved. However, instead of expressing concern, the Government bask in self-satisfied complacency, crowing that because Britain has not adopted the euro the eurozone’s problems are not our problems. Nothing could be further from the truth, for three fundamental reasons.

First, the economic health of our economy is inextricably tied to the economic health of the rest of the European Union. It is obviously in our interest that those to whom we sell more than 60 per cent of our exports should be prosperous, providing a growing market for British goods. But perhaps of even greater importance is the financial stability of Europe. If the eurozone were to collapse, the resultant financial apocalypse would engulf us all. Europe’s financial stability should be a major goal of British foreign policy.

Secondly, it has become evident over the past few weeks that the economic institutions of the European Union in general and of the eurozone in particular require fundamental reform. Without major changes to the institutions of monetary and fiscal management, the persistent weaknesses of the past decade will persist, and we will all be buffeted by recurrent storms.

This need for reform is the third reason why we in Britain have such pressing concerns. The necessary reforms will require at the very least treaty revision and perhaps a new treaty to strengthen European institutions—a treaty that will require Britain’s active participation.

The shape of necessary reforms has been defined by the emerging difficulties of the past few months. The mismanagement of the Greek economy, exacerbated by the collapse of world trade and hence the collapse of shipping revenues, led to cumulative severe pressures on the bond sales necessary to fund the Greek government deficit. Since Greek government bonds are denominated in euros, investors faced no currency risk. However, they did face increasing fears of default.

The reaction in European capitals was to initiate a protracted, indecisive debate on raising the funds for a Greek “bail-out”. As vague pronouncements were piled on indecision, the fear of default increased, so that when the €40 billion bail-out was at last agreed, it proved inadequate as a defence against the rising tide of default pessimism.

The incompetent handling of the Greek crisis stands in stark contrast to the rapid and effective measures taken by the United States Government in the Mexican crisis of December 1994, which was very similar. In the latter case, investors in Mexican government tesobonos faced a complex mixture of currency risk and default risk. Yet the $50 billion package assembled by the Clinton Administration in a few days, predominantly in the form of guarantees, stemmed the run and rapidly restored confidence. As Alan Greenspan recounts in his autobiography:

“Mexico ended up using only a fraction of the credit. The minute confidence was restored, it paid the money back—the United States actually profited $500 million on the deal”.

If a credible eurozone institution had guaranteed Greek bonds at the outset, the immediate crisis would be over, at negligible cost. In the face of continued European paralysis, it took a telephone call from President Obama to avert disaster, if only temporarily. At last a €750 billion guarantee fund has been established, with the assistance of the IMF. However, delay has fed the flames of volatility and it is now not clear that even this sum will be enough. A more damaging sequence of events would be difficult to imagine, but worse is to come.

Having at last chosen to follow a sensible guarantee strategy, the eurozone Governments, led by Germany, plan to resuscitate the growth and stability pact—an Orwellian label if ever there were one for a pact that has delivered neither growth nor stability. The eurozone has been gripped, as has the coalition, by deficit hysteria, with all Governments being forced to commit to massive precipitate cuts in public expenditure. The path to recovery is to be paved with unemployment and bankruptcy. As the Financial Times leader argued yesterday,

“growth is a precondition for stability, not something to be traded off against it. Putting countries on the rack of debt deflation will not stabilise their economies, only destabilise their politics”.

To avoid these disasters for Britain, fundamental European reform is required. It therefore serves Britain ill that on his first visit to Berlin since assuming office, Mr Cameron chose to wave around his veto like a virility symbol. He said that,

“any treaty, even one that just applied to the euro area, needs unanimous agreement of all 27 EU states, including the UK, which of course has a veto”.

How proud and grand. I am sure that Mrs Merkel did not need to be reminded of the coalition’s customary negative approach.

Britain must make a positive and substantial contribution to the institutional and regulatory reform required in Europe. Our financial services industry depends on it. Pretending that it is nothing to do with us, obstructing progress and flaunting the veto will achieve nothing.