EU: Recent Developments

Lord Higgins Excerpts

Thursday 16th February 2012 Lords Chamber

[Lord Higgins]

My Lords, the noble Lord, Lord Kakkar, has raised—entirely appropriately, given the breadth of the Motion before us—a number of extremely important issues. One must hope that in reply the Minister can give him answers to the very specific three points that he has rightly made.

I wish to concentrate on the crisis in the eurozone. It is very unfortunate that our debate on this subject in the Moses Room was diluted by the fact that the Labour Party insisted on bringing in other, related economic issues. It is sad that we have still not had a debate on this specific issue. It reflects the serious problem that we now have in the relationship between the two Houses. Regrettably, the present Government have followed the practice of the previous one in dramatically guillotining debates in the other place, with the result that legislation arrives here in such a condition that it crowds out opportunities for debate on serious issues such as this one or, as has been mentioned, the Arab spring. To a large extent we are carrying the legislative burden, with the number of Committee days far in excess of what is normally accepted. This is not a criticism of the procedure of the other place; it is a criticism of the way in which the Government are dealing with these matters there. I hope that we will tackle the issue as soon as possible, because the balance between the Houses has been distorted.

Many of us in the past pointed out very clearly the dangers of the single currency. These were exacerbated as the eurozone grew ever larger. It is probably true that even my noble friend Lord Tebbit did not realise the extent of the approaching disaster or the problems that we now face. Of course, the failure to deal with them was to a large extent due to the rigorous approach of those who wished to see an ever closer economic and political union. A little while ago, Mrs Merkel said that if the eurozone broke up it would lead to the end of the European Union. This is simply not the case. What should stop is the headlong pressure toward closer political union.

The search for a solution to the present problems is hampered by confusion between the debt problem and the exchange rate problem. The two are of course related. The extent of the indebtedness of European countries is to a large extent due to the fact that they found themselves in an environment created by the single currency. However, the solution to the problem cannot be found in dealing with the debt problem alone. We need to deal with that, but it will not solve the underlying problem. We could go through bailouts ad nauseam until either German generosity runs out or the streets of Athens become even more dangerous, but we will not solve the problem through bailouts.

The only answer to the Greek situation is for Greece to leave the euro and adjust its exchange rate. However, as was pointed out in an earlier speech, it is not just a question of Greece; there are further problems because countries in the single currency have given up the main means of adjusting for differential movements in costs and prices. Therefore, it is likely that over time other countries such as Portugal, Spain and Italy will find themselves in the same situation. The reality is that the eurozone is too diverse in its present composition to accommodate a single currency. This was not the case when it was just Germany, France, Benelux and so on; but it is now too large an area for these variations in costs and prices over time to remain unadjusted. We may find that eventually a solution is found by an adjustment of the exchange rate. Certainly it would benefit Greece, as well as the eurozone as a whole, if it were to leave.

We were told that the creation of the single currency would lead to convergence. In fact, that has not been the case. European countries have diverged. We were told that it would contribute to peaceful circumstances in Europe, whereas we now find bigger tensions between certain European countries than have existed probably at any time since World War II. There are difficulties here. The other problem, to which my noble friend Lord Lamont referred, is that we are simply seeing a rerun of the stability and growth pact, but with no mention of any growth. This involves a very significant loss of national sovereignty, which one has seen particularly in the Greek situation. Control over tax and spending has always been the hallmark of national sovereignty. Giving up that control—this is currently very apparent with some countries in the eurozone—inevitably leads to that country being undermined. Having said that, obviously a degree of fiscal co-ordination is necessary.

I have a couple of further points. One problem with the debt has been to get a degree of agreement with private creditors. It is constantly being said that there will be a deal and that the creditors will take a so-called haircut. It is understandable that they have been reluctant to do so because they do not know whether, if they write down the debt, there will be a subsequent devaluation that will further reduce the value of that debt. Until they know where they are—there is a high degree of uncertainty about exchange rates—they will be unlikely to be very enthusiastic about agreeing to a debt reduction.

My final point is that if a country—it is likely to be Greece—leaves the eurozone, it will not be a simple matter. My noble friend Lord Wolfson offered a prize of £250,000 for a paper explaining how it could be carried out. Some newspaper commentators think that it is just a question of printing more notes and coins. One certainly hopes that if the thing happens there will not be chaos for a very long time while they get around to printing the notes and coins. It would not be a good idea to go back to the drachma; it would be more appropriate to think up a new name for a euro-replacement currency.

It would be very dangerous if contingency plans were not made well in advance to deal with the problem. This is a matter for the British Government as much as for anyone else, because we will not be able to avoid the consequences, particularly for the banking system, which could be very serious. Therefore, I hope that Her Majesty's Government will be very active in making contingency plans to deal with these matters. It is not just a question of having a new currency established. There will be great dangers of flight from the existing currency in certain countries; there will be a great need for exchange controls, at any rate on a temporary basis; and one must have some doubts about the ability of the Governments concerned to direct a suitable system of exchange controls. These are all very serious matters and one must hope that the Government will take a very proactive line in providing a contingency plan to deal with them. However, this will only be done by dealing with exchange rates and not with the debt alone.