Economic and Monetary Union (EUC Report)

Lord Giddens Excerpts

Wednesday 9th November 2016 Grand Committee

[Lord Giddens (Lab)]

My Lords, I speak not as a member of the committee but as an errant outsider who wandered in here. I congratulate the noble Baroness, Lady Falkner, on introducing this debate effectively. You cannot not mention the American election. The events in the US last night make the EU even more important as a bastion of cosmopolitan values in a world which seems bent on abandoning them. It clearly is threatening to the EU because it will further stimulate the rise of far right populism. Its consequences for the euro we do not know. As of this morning, the euro rose against the dollar, whatever that means.

I congratulate all noble Lords involved on the report, which is exhaustive and analytical. As other noble Lords have mentioned, what happens in the eurozone is highly important to the British economy and will remain so. A preceding report on the euro a few years ago featured only four presidents. Now there are five, as the European Parliament pushed to get involved in the act. I am a pro-European, but five presidents is an awful lot to take coherent decisions—and it does not even feature the true, as it were, informal president of the European Union, Angela Merkel.

The five presidents’ report opens by saying:

“The euro is a successful and stable currency… It has provided its members with price stability and shielded them against external instability”.

These would seem to be, on the face of it, somewhat wild claims. They are certainly disputed by many. However, there is a good deal of truth in the assertions. After all, it was unlucky to set up a new and ambitious currency just before the most profound economic crisis the world has known since the late 1920s, which was predicted by no one. Against that backdrop, the fact that the euro is still here, functional and popular is impressive.

We have no counter factual. We do not know what would have happened in the southern countries, for example, if the euro had not been there in the course of the economic crisis. However, we can guess that some of the weaker economies might have struggled. You cannot make a comparison between what happened at the moment, but their fate could have been even more difficult without the umbrella of security which the euro provided.

A prominent economist, whom I shall not name but who will be known to everyone here, and who is not sitting in this Room but is sitting in the US somewhere, proclaimed four years ago that Greece would exit the euro within a period of months. Many people said that. Yet, in spite of all its travails, Greece is still there and the euro is still popular in Greece and in most of the other eurozone countries, which is quite remarkable.

The Greek economist, Gregory Papanikos, has written an interesting re-evaluation of the Greek economy, which has impressed me. A great deal of suffering has gone on, but that economy has a robustness which is not visible except through a more profound analysis, which he provides. He accepts that there has been a deep recession in Greece since 2008—how could one not? Yet he shows that, even at the bottom of the recession, Greece was producing as many final goods and services as in its best year of the 20th century, when it was thought generally to be in reasonably good condition. This is without counting the huge informal economy where some of Greece’s strengths and many of its core problems, it must be said, lie. So things are not quite what they appear.

The five presidents’ report is right to point out that the euro thus far has been salvaged through firefighting, in an essentially democratic way, dominated by the dreaded troika of the Commission, ECB and IMF. The report rightly recognises the need for what it calls genuine democratic accountability. As noble Lords note, however, there is little in the report showing how this might be achieved on the transnational level that would be necessary. There are huge vacant lots, as it were, in the document.

Much of the five presidents’ report is about setting out a road map as to how the eurozone might move from short-term crisis management to structural solutions for the deficiencies of the existing system. However, as the committee’s commentary notes, not much is said in practical terms about how these successive stages that are mapped out will actually be implemented. Given the series of crises that the EU faces in addition to the problems with the euro, the document reads too much like a fair-weather set of proposals, rather than one where the innovations noted might face serious problems of political legitimacy.

The limitations of the proposals contained in the five presidents’ report seem pretty obvious. If they are not addressed, it is surely in part because no one can quite see how they could be dealt with politically. Beyond a certain point, the constituent nations see their interests differently and have contrasting approaches from the point of view of economic theory. Joseph Stiglitz sets things out pretty well in his book on the euro. A common monetary system cannot function effectively without a countercyclical promotion of demand and without at least some degree of mutualisation of debt to protect against shocks.

Looming over the whole document but, of course, unstated therein, is the dominant position of Germany within the eurozone and within the EU as a whole. Ideological differences are involved because of the role of—forgive the term—ordoliberalism in current German thinking. Ordoliberalism is essentially the German version of austerity. One prominent German theorist has pronounced that the bailouts enacted at the height of the crisis have allowed,

“feckless Mediterranean countries to get away with minimal reforms and only limited fiscal discipline”.

It is a view that resonates strongly with the German public.

Germany is in denial of its own dependence on the euro for its competitiveness, and hence for its surplus. That surplus has the effect of dampening demand in the countries of the south that most need it. Some level of proactive investment is essential if the eurozone is to achieve longer-term stability. When even the IMF has turned against austerity as actively counterproductive, it is time for European leaders to take note. We will have to wait for the Italian referendum of Mr Renzi’s Government and for the French and German elections to see if those leaders are able to respond.

--- Later in debate ---

[Baroness Falkner of Margravine]

My Lords, I thank all noble Lords who have spoken in this debate. I am particularly impressed by the diligence of noble Lords who were not members of the Select Committee because the report cannot be described as a light read. I also acknowledge, in particular, the interest of the noble Lords, Lord Dykes and Lord Kerr. As chair of this sub-committee, my regret is that the noble Lord, Lord Kerr, is not there to enrich our deliberations. I have heard much about the time he was there, and I am very sorry not to have experienced it.

I cannot pick up all the very valid and rich points made, but I start by thanking the Minister for his response, which is quite comprehensive. I did not bring up the Government’s response in my opening remarks because the political situation has evolved so much since our report came out a good six months ago and since the referendum of 23 June that the committee as a whole decided to let it go. We knew that circumstances had moved on. Like the noble Lord, Lord Kerr, I am extremely relieved that the Minister has reiterated the Government’s engagement with developments that will take place.

The noble Lord, Lord Giddens, highlighted the central role of the German surplus, and it is worth picking out one fact from our evidence: the German surplus in terms of the eurozone is now only €6 billion out of a total surplus of €186 billion, so the surplus with the eurozone is very small indeed. That is why I decided that I would not comment on that.

[Lord Giddens]

My point was about the wider significance of the German economy, and how the euro is crucial to its competitiveness. It was not a point about the eurozone itself but about what it has made possible for Germany.

[Baroness Falkner of Margravine]

I noted the comment of the noble Lord, Lord Giddens, on the missing sixth president, in terms of the number of presidents. It is also interesting that the missing sixth president is a woman, on a day that women are doing rather badly in political life generally.

I also want to pick up the point made so eloquently by the noble Lord, Lord Dykes, on the speed, in a historical perspective, with which the 19 countries have come together to embark on this endeavour. There was a tone of pessimism beyond my own pessimism, which was echoed by the noble Lord, Lord Butler, and several other noble Lords. I have no electronic gadget that is charged or that seems to work in this room, so I was trying to work out from memory when the United States became a single currency zone. If I remember correctly, it was in the early years of only the last century.