EU: Recent Developments

Lord Hamilton of Epsom Excerpts

Thursday 16th February 2012 Lords Chamber

[Lord Hamilton of Epsom]

My Lords, like many noble Lords who are contributing to this debate, I am a member of Sub-Committee A of the European Union Committee, and we have contributed to this report today. However, it is quite difficult to find where our report features in this. It has been rather subsumed by the senior committee. If there are any lessons to be learnt from this, it might be that it would be better if Sub-Committee A produced its own reports, the top EU Committee produced theirs and we kept them separate.

While drawing up our report, we took evidence from the German ambassador, Mr Georg Boomgaarden —a charming man. At one stage when we were asking him questions, he said that you could not really expect the President of France and the Chancellor of Germany to take any notice of the markets. The markets are the elephant in the room, and whether you like or hate the markets, you cannot ignore them. One of the problems with the mishandling of this crisis—and it has been mishandled absolutely from its start—is the total misunderstanding of how the markets actually operate.

Just in case the elephant in the room was sitting there not doing anything much, the Chancellor of Germany, Mrs Merkel, decided to stick it very hard in the behind with a sharp stick when she started referring to “haircuts” in respect of the crisis in Ireland. The idea of haircuts, when she first mentioned them, was totally novel. The markets had worked on the cosy assumption up until that moment that the whole of the eurozone was underwritten by the Germans. That was why interest rates paid on debt in Greece were something like 0.5 per cent above those in Germany. The market immediately panicked when the prospect of losing serious sums of money became apparent. Then, of course, President Sarkozy and Chancellor Merkel had to get together at the G20 meeting and, at that point, said that all eurozone debt would be redeemed at par, up until 2013. I wonder what has happened to that commitment. When you are talking about a 73 per cent default on debt with Greece, I am sure that it does not quite seem to be a question of eurozone debt being redeemed at par.

As this crisis has evolved, European institutions have always been behind the curve—everything has been too little and too late. The €440 billion eurozone mechanism, which took a long time to be ratified by different parliaments, might have been enough to stabilise the crisis if it had been produced early on. It arrived much too late of course, and by that time the whole crisis had moved on. Despite reassurances from the Germans that they would make sure that the eurozone remained intact, they were not prepared to underwrite the whole thing, so it was always going to face serious problems.

We now have the ridiculous situation in which the Germans are trying to turn Greeks—and indeed all the other Club Med members of the eurozone—into Germans, which is never going to work. There are enormous problems, which my noble friend Lord Flight has referred to, with competitiveness. The noble Lord, Lord Mandelson, referred to convergence, which was always one of the great hopes of the eurozone; but the eurozone economies have never converged and will never do so. We are never going to get to that position, which is why the whole project is basically doomed. What we have to do from here is manage the eurozone’s decline, and indeed its inevitable disintegration, because I do not believe that we will ever see this situation stabilised. My noble friend Lord Lamont mentioned that he has taken bets. I have bet my German son-in-law that Greece would be out by Easter and have not lost it yet. Although I am not sure I want to double up on that one, I would certainly be very surprised if Greece was still in the eurozone at the end of this year.

This has been one of the other problems with the way this has been handled. I think there was a presidential election in America when one candidate described another as being incapable of walking and chewing gum at the same time. I find it extraordinary that the EU institutions are mesmerised by Greece but at the same time are very worried about the whole problem of what happens if Greece goes down and of contagion. So why are they not handling Portugal, and conceivably Spain, at the same time? If those three countries could be stabilised, there is hope that perhaps the contagion will not spread as far as Italy.

As it is, the sooner Greece defaults, the better it will be, both for the eurozone and for Greece itself. The austerity programme to which Greece is being subjected at the moment is achieving absolutely nothing and is merely guaranteeing that the country is going to go on contracting and that its economy is going to get worse. There is no way forward for it whatever. I am not saying that default and returning to the drachma is a panacea for all Greece’s problems, but it would give the Greeks a breathing space to reorganise themselves. One of the great advantages they have is an enormous tourist industry, which would benefit almost at once if they returned to the drachma and holidays for everyone became very cheap there the next day.

In the past, my noble friend Lord Higgins has always said that the complications of default are so great that you really cannot think about them. I do not go along with that. The Argentinians defaulted by closing down their banks at a weekend and overprinting all their existing bills with the new currency that they were issuing on Monday. They then opened the doors on Monday after the devaluation. We must not get overexcited and think that somehow default and returning to another currency is so traumatic that it cannot be entertained at all; it certainly can. Obviously, transitional arrangements have to be made for companies that owe very large amounts in euros, but that does not mean that these things are impossible.

The alternative is too awful to think about. Many noble Lords, including my noble friend Lord Flight, have referred to the problems of extremism that are now emerging. We have an extraordinary situation in which the Germans resent paying money to the Greeks, and the Greeks resent getting money from the Germans because of all the conditions that it comes with. This is breeding a very unpleasant form of politics in Europe. The very idea that this is somehow bringing Europe together is just fanciful. It is doing nothing of the sort; it is creating divisions, and it is going to make Europe a less and less pleasant place for anyone to live in.

We have to look at this anew. We should not be frightened of the concept of default, and we should try to manage the default of the really weak countries on the periphery of the eurozone. It is critical that we do what we can to save Italy from going down as well or the whole place will disintegrate, although at the end of the day we must not assume that there is an unlimited amount of money that the Germans can afford to pay to keep this thing afloat even if they wanted to. Germany has its own problems with an ageing population and enormous pension liabilities, and its pockets are not so deep that it can go on paying for all this either. We must learn some lessons from where we have got to. This project has failed and we must now manage its default so that it damages as few people as possible as the whole zone disintegrates.