Genuine Economic and Monetary Union (EUC Report)

Lord Flight Excerpts

Wednesday 2nd July 2014 Grand Committee

[Lord Liddle (Lab)]

My Lords, I congratulate my noble friend Lord Harrison on his committee’s excellent report. I have done that before but this is the first time that I am not doing so as Labour’s Europe spokesman. It is a great privilege to be able to address this body knowing that I am free to tell Labour what its policy ought to be rather than putting the best face on what its policy is, so I am looking forward to this speech. I should also say what a privilege it is to listen to the noble Lord, Lord Lamont. I do not agree with him on the euro but his reflections, as a former Chancellor, are extremely interesting and I would be the last person to argue that the euro does not still face difficult problems, which have to be resolved.

The euro’s future is of fundamental importance to Britain. In all the past arguments about whether we should join, the one where the pros have been conclusively proved right is that we in Britain cannot escape the consequences of the eurozone by being outside it. It has a material impact on our economy. We also have to be conscious of the fact that our circumstances might at some point in the future change. I am not arguing that there is any immediate prospect of our joining the single currency. I do not expect to see that for a very long time but Britain’s prospects could change, which might necessitate us joining the single currency.

The real danger for Britain is a repeat of what happened when we did not seize the initiative in Europe right at the start, in the 1950s. We have to be careful that a construction might be put in place that does not entirely suit our national interests. We saw that with the common agricultural policy, which led to the arguments about whether we should enter on the Tory terms in the 1970s and the renegotiation under Harold Wilson, which then led to Mrs Thatcher’s struggles for the British budget rebate, all of which poisoned our relations with our partners. We must try, as an insurance policy for Britain, to make sure that the development of the euro is one that suits us.

I want to stress the most important recommendation of this report and I am very disappointed by the Government’s reply. The recommendation is:

“The Government would be wise not to close the door on the possibility of participation in some elements of Banking Union in the future, and must stress the City of London’s strategic importance for the EU as a whole”.

I have no doubt that the Government will stress the City of London’s importance but if they want to influence the key ways in which the City’s future is determined, they must play a role in the banking union. Be in no doubt: the ECB will be the body that determines the rules by which financial markets work in Europe. It will be that body and the idea that, because we have some minority protections and a European Banking Authority we can sit back and relax, is for the birds.

What about the alliance of the euro-outs, which is supposed to protect our interests? Where are we with Mr Reinfeldt, after Mr Cameron’s ride in the boat with him? Is he not going down to defeat in the September election in Sweden anyway? As for the Poles, what are the prospects for Britain having any influence over Polish policy after what we now know of the expletive-laden remarks of their Foreign Secretary about his old Oxford friend, the Prime Minister? Can we really rely on Hungary and Mr Orbán when he is the man who plays footsie with Jobbik—the fascists in Hungary—who rigs the constitutional court in Hungary and who has passed laws that are offensive to press freedom in Hungary? Is that our only ally in Europe? Are we really proud of that? Do we think we can defend our interests on a crucial issue such as this simply by having an alliance with Hungary?

[Lord Flight (Con)]

Would the noble Lord not agree that the collaboration between the Bank of England and the ECB has been and remains substantial? Indeed, quite a lot of the ECB regulatory arrangements have been modelled on what has happened here. Whatever the constitutional position may be, the practical position is that the two work hand in hand.

[Lord Liddle]

I am very strongly in favour of practical co-operation between the Bank of England and the ECB but, fundamentally, it is politics that matters. It will not all be decided in an independent regulatory context. The politics will matter, and we are not well placed at the moment.

The banking union is a significant development. I am a bit more bullish about it than the committee. I think it is a glass half full, rather than a glass half empty. Some academics I greatly respect, who are experts in the field, such as the Peterson Institute’s Adam Posen and Nicolas Véron, believe that we should consider that to be a very significant development. That is why it is so important that we try, as far as we can, to get inside—beyond simply co-operation between the Bank of England and the ECB.

On the wider issue of genuine economic and monetary union, the British love playing this intellectual parlour game of what are the necessary conditions for monetary union to proceed. They never think about the United Kingdom itself: is it a satisfactory monetary union? Clearly, in the United Kingdom we have a London economy which is a tremendous success and something that we all admire, but an out-of-London economy that continues to struggle. We all know that if we imagine them as separate countries, the London pound would be far stronger than the out-of-London pound. The country functions only because of massive fiscal transfers from its richer parts to the poorer.

You can argue that those transfers are not there in the eurozone—of course, they are not, except for the structural funds—but one of the problems with our fiscal transfers in Britain is that they have been extremely opaque. They are about to become less opaque as we go for devo-max in Scotland. I forecast that we will have more political arguments about the functioning of the United Kingdom economy in the decades to come as we have arguments about whether the extent of the fiscal transfers from London and the south-east to the rest of England are sustainable in the long run.

I make that point because I think that the mistake in looking at EMU is to neglect the extent to which its survival has depended on political will. Eurosceptics in this country always underestimate the strength of that political will. An enormous number of things have been done, including the European stability mechanism, the six-pack and two-pack legislation, the fiscal treaty, the ECB supervisory powers and the banking union. A lot has been done; let us not underestimate it. At the moment, politics is making a big difference to the chances of the monetary union overcoming its problems. We are seeing less emphasis on austerity and more fiscal flexibility. In part, we saw that with Mr Juncker going around making sympathetic noises to the Italians and the Spaniards to get their support for his nomination as Commission President.

More fundamentally, there has been a shift in Germany as a result of the formation of the grand coalition, with the disappearance of the Free Democrats from the coalition and the presence of the Social Democrats. The German Vice-Chancellor, Sigmar Gabriel—a Social Democrat—has said that he believes that the south needs more fiscal space and more fiscal flexibility. What the Germans are trying to do, of course, is to link that flexibility to support for needed structural reform in the countries of the south. They are also doing something to rebalance the eurozone themselves, with policies such as the introduction of a minimum wage, which will boost spending power in Germany.

The one remarkable thing in the crisis is that, thankfully, unlike the 1930s—this is the huge historical difference from the 1930s—there has not been a political collapse and a reversion to dictatorship in any of the EU countries, despite the very brutal circumstances that they have had to face. Reforms have been made and democracy has just about survived.

We will need to see further developments before the euro is safe. German rebalancing will have to go further and they will have to be more flexible. We will have to see some debt forgiveness because as the noble Lord, Lord Lamont, said, it is difficult to see how those levels of debt are sustainable in the long run. We will have to see more of a European-led investment policy. That is one way of doing things in favour of growth but making them conditional on reform.

I see the eurozone rescue as an incomplete project but I think the politics are working in the right direction. The political will has been demonstrated. My fear is that as a Euro-out we are not really putting our minds to how we will retain influence over this construction in the years and decades ahead. This report has been an extremely valuable contribution to what is an extremely important issue for the future of the United Kingdom.