Eurozone Crisis

Lord Flight Excerpts

Thursday 1st December 2011 Grand Committee

[Lord Flight]

My Lords, it is nearly six months ago that the noble Lord, Lord Lamont, and I at the same time asked for a debate on the eurozone’s problems. It is interesting that they have been allowed to worsen since, whereas if measures had been taken a little earlier, perhaps the crisis would not be as grave. But I would like to congratulate the noble Lord, Lord Lamont, on his speech and the noble Lord, Lord Lawson, on his. It was a great pity that we could not hear all that he had to say; here we have two ex-Chancellors of the Exchequer who were in the eye of the needle at key times in recent history and who knew at first hand a lot of what went wrong at the time.

My very modest contribution is a great one for insomniacs. I wrote a book in 1988 called All You Need to Know About Exchange Rates. It focused on what was going on in Europe, and there are references to the wisdom of the noble Lord, Lord Lawson. The point it made even then—a pretty obvious point—was that if countries are very disparate in their economies and some have a real Germanic hard-working ethic and others like to enjoy life you cannot share a currency. It will fall apart. People forget that Europe tried a common currency from 1863 to 1893 everywhere excepting the German states, including Switzerland as well as the other countries—the silver franc. That fell apart because France became massively uncompetitive. There are a lot of other issues but, at the heart of the problem as to why the euro is in such trouble, is the fact that southern Europe has become 35 per cent to 40 per cent uncompetitive against efficient, northern, Germanic Europe. Who wants to buy the bonds of a country where you can see staring you in the face, one way or t’other, that there is going to be a big devaluation sooner or later? That is really at the absolute heart of the problem. You cannot share a currency when those are the characteristics.

Kohl said to Mitterrand that you cannot really embark on a common currency until you have political unification. Mitterrand said to Kohl that that would take forever to achieve, but that if there was a common currency it would force political integration and unification. Much is said about that as a potential solution to our problems. However, I do not see the reality of that. An exercise was done that demonstrated that Germany would need every year to give something like 35 per cent of its GDP to the southern economies to keep them afloat. People forget that in America 30 per cent of federal taxes still go to keeping afloat the unsuccessful regions. Even in little UK, about £80 billion per annum is transferred from the more prosperous to the less prosperous parts. If you share a common currency where there are significant economic differentials, you need substantial transfer payments to keep the less successful economies afloat. However, the sort of long-term transfer payments that would be needed for Germany, Italy, Spain and Greece to share a currency are simply not realistic.

The German solution has been to say, “Come on, you economies, have an internal devaluation and be like us”. Is it realistic to think that Italy would have a 35 to 40 per cent internal devaluation? There would be blood on the streets; it would be hardly practical to achieve. I cannot remember which noble Lord made the point but he was quite right; we do not want Versailles but perhaps a bit of the Marshall Plan. I read just the other day to my amazement that Germany only finished making its Versailles reparations a year or so ago. The total payment was the equivalent of about €350 billion—and look what that did to Europe in the 1930s.

A federated Europe is not the answer to the euro's problems. I cannot see that forcing massive internal devaluations is a solution, either. Hong Kong managed to effect a successful internal currency devaluation after the Asian currency crisis, but that was one of the few successful cases.

So where are we with the various proposals? The noble Lord, Lord Lawson, made the important point that you can perfectly well change currencies if you organise it well and in time. The risk is to the banking system. It is interesting to note not only what the Fed and other central banks organised yesterday, but that, quietly, the Bundesbank over the past six weeks has lent nearly €500 billion to the central banks of southern Europe. Not just individuals but businesses and anyone owing money had been getting their money the hell out of those countries and parking it in euros in Germany and elsewhere. In those countries, the banks are being squeezed like fury and have become forced sellers of government bonds in order to manage their balance sheets. Mercifully this has not been written up too much in the newspapers, but there is an acute banking crisis already in those economies. Yesterday was almost a rescue day before the whole thing collapsed. I note that the IMF said yesterday that the euro was within 11 days of collapse.

Contrary to what some on my side of the argument said, I support the concept of the ECB being able at least in the short term to buy government bonds, because there is a need to buy some time to work out arrangements for orderly currency reordering in the eurozone. I do not think I will win the noble Lord's competition, but it seems to me that the only other option to everyone going back to their historic currencies would be to have a soft currency for southern Europe and a hard currency for northern Europe. One could achieve that either by leaving the euro as the soft currency and bringing in a new, hard currency, or by doing it the other way round. From what one hears, there is a possibility that that may come to fruition because Germany is seriously looking by itself at bringing back the deutschmark. If that happened, Holland, several Benelux countries and probably France would endeavour to join the currency bloc. That is one solution. It is less painful than everyone going back to their individual currencies. It could be done, as occurred in 1893. It needs planning. Banks have to be closed and one has to work out who will bear what liabilities, but it is not impossible.

Keeping the banking system afloat is absolutely fundamental and again I am relieved that the US has come to the rescue. It seems to me that the management by the leaders of the eurozone over the last year has been pitiful. These problems were staring us in the face a year ago; people were writing articles and letters to the paper about them. It is not something that has just come and hit us from nowhere. The whole underlying problem has been understood as well. I just hope that it will get sorted in an orderly fashion and will not collapse in a chaotic fashion. Our economy is clearly in a precarious situation and chaotic collapse would be very bad news for this country. I am still in the camp that thinks that a hard/soft currency would work and I hope Germany will use its initiative to achieve that.