EU: Recent Developments

Lord Flight Excerpts

Thursday 16th February 2012 Lords Chamber

[Lord Flight]

My Lords, a noble Lord in this debate and yesterday referred to Britain’s exports to the EU representing approximately 50 per cent of our exports. As many noble Lords may be aware, subsequent research on this figure finds that some 10 per cent of those are merely in transit, largely through Holland, to other parts of the world, and that the more accurate figure is some 40 per cent of our exports.

Perhaps I may appear rather aggressive in saying that the Prime Minister should at least have criticised, if not opposed, the December fiscal compact essentially because it was not about fiscal integration; it was about a framework and enforcement machinery for brutal and self-defeating internal devaluation measures, where the economies in trouble need growth and not to be ground into the dirt.

The key features of fiscal integration, as evidenced by the United States of America, are a single borrower, a central bank that can if necessary print money and buy government bonds, and, above all, transfer payments from the more prosperous to the less prosperous, keeping the less prosperous afloat. Within America, they amount to some 30 per cent of federal tax revenues to this day.

Germany, not surprisingly, has opposed all three key aspects of fiscal integration, largely because the estimates are that the transfer payments would need to be as large as some 35 per cent of German GDP, which is clearly impossible. But the failure is to face up to the conclusion of that: that is, there is really only one way of addressing the problems without imposing enormous hardship on millions of people, which is a currency reorganisation within the eurozone. I perceive what is being proposed and demanded of Greece as smacking of President Hoover in the 1930s, leading to the depression in America, and smacking of those Gold Standard bigots in Europe in the early 1930s having a similar effect on European economies then. The fact is that Greece has been in major recession for four years; its economy is downward-spiralling; and, very clearly, it is going to be vulnerable to political revolt, we hope through the ballot box. The words of Keynes, applied to the German reparation agreement at the end of the First World War, are appropriate: what is being looked for is,

“insincere acceptance of impossible conditions”.

This approach is not only economically mistaken but, in reality, unlikely to work, not just as regards Greece but other countries—it will be like the growth and stability pact. Back in 1953, when the then West was required to bail out Germany, which could not afford to service its debts, a very generous deal was provided—a 50 per cent debt cancellation and a five-year interest moratorium—and it was well understood that it was necessary to give the German economy the oxygen to rebuild and grow. As the noble Lord, Lord Radice, pointed out, these problems are not soluble unless countries can grow their tax revenues. I would have thought that if poor old Adenauer was still around today, he would not make the disastrous mistakes made by the present German Administration, which in effect repeat the very reparations-type of approach that caused so much trouble in Germany after the Great War. Let us look at what is happening: the whole claim of the European Union was that it would get rid of nasty nationalism. Well, many countries in Europe are coming to take a very critical view towards Germany bossing them around and, not surprisingly, many Germans are pretty critical of having to pay up and bail everybody out. So the flames of nationalism are being stirred rather unpleasantly, as others have pointed out.

I am surprised that many whom I would describe as less capitalist than me in my economic views seem entirely happy to see thousands of people thrown out of work and thousands beggared purely in the name of having to maintain the euro unchanged rather than follow the sensible remedy of currency reorganisation. It will clearly be Portugal next and Spain, potentially, after that—Spain already has 23 per cent unemployment and 48.7 per cent youth unemployment.

Germany has subtly “done a China”. She has made herself super competitive within Europe when, if you like, the more pleasure-loving south was getting on with its usual practices and unit labour costs were rising. Germany since 2003 has cut unit labour costs by some 12 per cent. So there is about a 30 per cent competitiveness gap between Germany and its affiliated economies and the south. That is just too large to be able to be addressed by an internal devaluation programme. It is not surprising that we see Germany having had the best figures for years for job growth while southern Europe now has spiralling unemployment.

It is odds-on that Greece and Portugal will exit from the euro relatively soon. I would make the point made by others that, although there will be immediate pain, the process needs to be well planned and organised. Beyond immediate pain, there is the prospect of strong economic recovery, as Argentina has experienced as a result of going through a similar mechanism.

The ECB is financing banks to give them a large interest margin when they buy the debt particularly of southern European economies, which should keep the debt issue afloat in Italy and Spain for some time, but there remains a competitiveness problem with both economies. Unless the ECB’s action is used to buy time in which a sensible European currency reorganisation is planned, it will simply worsen the banking problems when things eventually blow up. I have suggested on previous occasions that there is an obvious case for a strong currency for northern Europe and a weak currency bloc for southern Europe. We do not necessarily have to go back to historic currencies.

This needs planning now. Indeed, it should have been planned a year ago when it was blindingly obvious that the inherent problems of the euro were coming to light. But there is a bigger issue to which many noble Lords have referred, including the noble Lord, Lord Howell, and indeed the noble Lord, Lord Mandelson, which is that the world is a hugely changed place. We have huge success and competition from what are widely known as the BRICs and it is very clear that most of Europe and the UK are no longer attractive places in which to do business. The public sectors are way too big, regulation is wildly excessive and tax rates are far too high.

The diagnosis of that has to be that radical reform is needed across Europe and in the UK if we are to compete effectively with the new economies going forward. We are not going to get anywhere merely remaining uncompetitive and unattractive. A major ingredient preventing those reforms is of course the EU itself and its excessive detailed regulation. We heard today an interesting comment that the success in this country of the life science industries is being threatened by EU regulation. It is not just in that area that, I am afraid, EU regulation imported and often enhanced here makes this country uncompetitive.

The task of any responsible Government of the UK, whatever their political hue, over the next few years will be either to change and reform the EU enormously to make it into a vital economic unit and not a stagnant one or to find measures to extract the UK from the various aspects of its regulatory and other regimes which are damaging our economy. In particular, they are a major threat to our biggest industry; the financial services industry.