Genuine Economic and Monetary Union (EUC Report)

Lord Lamont of Lerwick Excerpts

Wednesday 2nd July 2014 Grand Committee

[Lord Lamont of Lerwick (Con)]

My Lords, I am a bit of an interloper in this debate, not having been a member of the committee. I congratulate the committee on the report and congratulate the noble Lord, Lord Harrison, on having chaired the committee. The report is useful and interesting. For those of us who try to follow what is happening in the eurozone and the EU, it is a good volume to have telling us all about the things that are going on.

I do not wish to follow the noble Lord, Lord Harrison, in all the directions that he went down, least of all his remarks about the goings-on relating to the nomination of the President of the Commission. I said to him the other day that I had worked with Mr Juncker. Although I found Mr Juncker helpful during our negotiations, it was absolutely right to oppose his nomination because of the important principle of the power of the European Parliament, which was threatening to usurp the decision. Giving that power to the European Parliament was a significant transfer of sovereignty and for that reason I think that the Prime Minister’s tactics in handling the situation were 100% right.

The noble Lord has on various occasions bemoaned our loss of influence. I am always puzzled by the argument about the loss of influence. Of course, if you are not part of something, you do not have so much influence. We do not have a lot of influence on the Federal Reserve Board. If you are not part of something such as the ECB, you lose a bit of influence with it. Although nobody other than my noble friend Lord Dykes speaks in favour of joining the euro today, the implication is always that we ought to join the euro, which is a bad thing, in order to have a bit of influence. Influence is not by itself an objective of policy.

The substance of the report, genuine economic and monetary union, is a puzzling concept, as the noble Lord, Lord Harrison, said. At Maastricht, the aim was always, as the report notes on page 11, to have a centralised monetary union and a decentralised economic and fiscal policy—what the report calls an asymmetry. But during the Maastricht negotiations and talks relating to it, whenever this was raised and whenever one said that surely the logic of monetary union was that there ought to be fiscal transfers, one was told that this monetary union was different. It would work on an entirely different basis; it would be like the gold standard. The impartial discipline of gold and the impartial discipline of the modern version of gold—euro budget surpluses—would ensure that this monetary union would work.

The concept of debt mutualisation, which features a lot in the report, was explicitly ruled out. It was a cardinal principle at the time, very much on Germany’s understandable insistence, that there should be no bailout mechanism. Of course, when the euro got into trouble, we had a bailout of both Greece and Ireland, which Madame Lagarde pointed out was probably illegal under the treaty because the treaty specifically prevented bailouts.

As regards mutualisation, the committee refers to Germany having different priorities. That is one way of putting it, but it is perfectly understandable that Germany always was and always will be cautious about its own money being at risk to bail out other countries. Equally, it was always explicit that there should be no monetary financing of deficits.

The noble Lord, Lord Harrison, concentrated on banking union, which is fundamental to a currency union, the resolution mechanism, deposit insurance and supervision. He is right that the resolution mechanism is suboptimal. Perhaps it should be more centralised. On supervision, subsequent developments have moved more in the direction of the committee, with the ECB supervising more directly the larger banks and national supervisors supervising the smaller banks. Germany is described as reluctant on deposit insurance, but the reluctance is extremely understandable. On page 39 of the report, someone from Germany is quoted as asking why Germany should pay to bail out banks that Germany has not supervised. I regard that as a historical legacy, which is how the Germans regard it.

A key to the future of the euro will be the asset quality review and the stress tests of the banks, but we have been here before. When stress tests were carried out previously, we were told that the banks were all hunky-dory and financially sound. However, several banks that had passed the stress test, including in Spain and Italy, got into deep trouble. It is important that these stress tests should be much more rigorous and credible. The monetary transmission mechanism in the eurozone is not working well, particularly for small businesses.

A lot of the argument in the report is about breaking the link between sovereigns and the banks, but the two are bound to be linked, even with the nirvana of debt mutualisation. I think that “nirvana” is rather a good word to describe debt mutualisation. I looked up what it means. Hindus say that nirvana means blissful egolessness, which seems a good way to look at debt mutualisation.

You cannot abolish the financial danger just by mutualisation. The European stability mechanism has limited resources. It can gear itself up, but who are the guarantors? The second largest guarantor of the ESM after Germany is France, whose own finances are in difficulty. The third most important guarantor is Italy and the fourth is Spain. Therefore, countries in debt, with deep fiscal problems, are guaranteeing themselves. Of course, behind them stands the economic colossus of Germany, but not even Germany could bail out Spain and Italy if they got into trouble together.

We are told that all that has gone. Outright monetary transactions, which are described on page 30, have taken care of all that. I think that Enoch Powell once remarked that a politician’s words were his deeds. He might now say that a central banker’s words were his deeds, because by just uttering the magic words, “Whatever it takes”, Mr Draghi certainly calmed the markets. He did not actually buy any bonds, but the acute phase of the crisis happened and it calmed markets. But did it calm them too much? We are now in a situation where 10-year yields on Spanish and Irish debt are lower than those of the United States. Yet the report says that it is important that the markets should not misprice sovereign risk. It also raises the danger that calming the markets in this way means that the impetus has gone out of structural reform. As it says on page 13, the air has escaped the balloon.

Now we have had the new measures that Mr Draghi has announced, but I suggest that the words are again very important—not the measures but the words. The words that we ought to concentrate on are three particular series of words: “The decision is unanimous”; “We are not finished here”; and “within our mandate”. The impression was given that all the tensions with Germany over committing funds, over mutualisation and over monetary financing had been put aside and that the situation was solved.

The negative interest rate was the first measure. I doubt whether that will have a great effect on the eurozone. Banks hold only €120 billion at the central bank at the moment. A 10 basis point cut will give them a charge of €120 million. I doubt whether that will transform the situation. Then we were told that there would be purchases with asset-backed securities, but that market is not really developed in Europe at the moment. It will take a long time before such securities, in securitised form, are available for the central bank to buy.

Then there was the targeted long-term refinancing operation—the LTRO, €400 billion-worth. Again, the effectiveness of that, which is modelled on the Funding for Lending scheme, will depend very much on the health of the banks and the results of the stress tests. Italy, for example, has €160 billion-worth of non-performing loans, which is why it has to pay 1.2% more for deposits than Germany. I do not think that the LTRO will transform things by itself.

Perhaps the most significant thing was when Mr Draghi said that the bank would be ending the sterilisation of assets that were purchased in order to ease the monetary transmission mechanism. That is almost a little bit of QE. The road to Delhi begins with a single step. Perhaps that is the measure that the Germans should worry a little about, but it will take time before there is an assessment as to whether those asset purchases can take place. None of this will produce a transformation of monetary conditions; none of it will weaken the exchange rate.

What triggered all that was of course the very low inflation figures for the eurozone and for Germany in particular. Without the flexibility of the exchange rate, the lower Germany’s inflation rate is, the more other countries have to cut their costs, cut unit costs and cut price levels to become competitive. I agree that some remarkable changes have taken place, but that has to go on for a very long period. The level of total indebtedness is 133% of GDP in Italy, 175% in Greece and 130% in Portugal. With that constant pressure on the price level—some see it as deflation; the Germans just see it as the periphery becoming more competitive—the outlook for growth in the eurozone is dismal and looks likely to remain dismal for a very long time.

I have always been an opponent of the euro, but I have never, ever said that I thought that it would break up soon. I have always had great arguments with my noble friend Lord Hamilton of Epsom about that. Of course, surviving and working well in the interests of the citizens of Europe are completely different things. It may be that the euro is a bit like a shoe that does not fit a foot. You go on wearing the shoe. Gradually, your foot gets distorted and you suffer pain; eventually, it completely alters its shape and you can get the shoe on. Perhaps the euro is like that and perhaps it will work in 30 years’ time. However, even if it did work in 30 years’ time, that certainly would not mean that we were wrong not to join.

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[Lord Kerr of Kinlochard (CB)]

My Lords, it was a pleasure to take part in the work that led to this report. It was very enjoyable, largely because of the exemplary patience displayed by our chairman, the noble Lord, Lord Harrison, which produced a unanimous report, and because of the diligence of our clerk, Mr Stoner, who is extremely good at marshalling our arguments with rigour and, sometimes, imagination.

I take two texts for my sermon—I have a Scottish Presbyterian background. My first text comes from the Book of Job—that is, the Treasury. The Government’s response to our report states that,

“the government is clear that we are not joining the Euro”.

Yes, I think we got that. It goes on:

“Therefore it is right that we have said from the outset that we will not take part in measures designed to support full economic and monetary union”.

Yes, we have got that. It goes on:

“The Government has been clear that it will not participate in the Banking Union”.

There is a false logic there. It is perfectly possible that the banking union—although the impetus for it arose from the crisis in the eurozone—could be a good thing, irrespective of whether one was a member of the eurozone. Indeed, I notice that, of all the non-eurozone member states who are negotiating the texts of banking union, only the British and the Swedes are negotiating not on the basis that they intend to join.

If I were to dare to part company with the noble Lord, Lord Lamont of Lerwick, I would say that there was a moment in his speech when I thought that he was slipping into the error of equating banking union with economic and monetary union. As he rightly pointed out, our report, although entitled Genuine Economic and Monetary Union, was largely about banking union, because that was the key subject on the agenda. I would argue that it is not necessarily the case that non-members of the eurozone should decide that they have no intention of becoming members of the banking union.

On that, I would say that the committee was in a state of intelligent schizophrenia. It is intelligent because it is an extremely intelligent committee; it is schizophrenic because we all agree—the Government are of the same view—that the creation of an effective banking union, reducing the risks of future crises and making them easier to manage when they arise, is a good thing. We all agree with that. We on the committee felt, however, that it was hard not to acknowledge that the UK’s non-participation in banking union could have a deleterious effect on the City of London’s position as the transaction capital of Europe and one of the great three global financial centres. We felt that it was possible, over time, that that position could be eroded by non-participation in the structures of banking union. That is the point brought out in the passage of the report cited by the noble Lord, Lord Liddle, where we state, at paragraph 227:

“The Government may be ill-advised to assert that Banking Union is the sole province of the single currency for all time. It would be wise not to close the door on the possibility of some level of participation in Banking Union in the future, in particular as a means of further promoting and shaping the Single Market in Financial Services and the UK’s position within it”.

That is my view. However, I recognise that I will not persuade Job in the Treasury of that today and, perhaps, not for some considerable time.

[Lord Lamont of Lerwick]

Does the noble Lord remember that the Book of Job says, I forget in which exact chapter:

“There is a path that no fowl knoweth, and which the eye of the vulture hath not seen”?

[Lord Kerr of Kinlochard]

I cannot say that I think of that every morning as I arrive, but I will bear the noble Lord’s words in mind.

I want to make five minor topical, practical points arising from the report. First, in strict logic, the position that the Government take up—that banking union is nothing to do with us but is a matter for eurozone countries—could mean that the Government do not object to the proposal, much discussed in Brussels at the moment, that the heavily overloaded Commission’s single market directorate-general should be split, with banking and financial legislation moving to the financial directorate-general, the primary concern of which is of course for the health of the euro, leaving the single market directorate-general handling the classic single market agenda. That would be disastrous, from a number of points of view, not least from the point of view of UK interests. The British Bankers’ Association states:

“It is of utmost importance to maintain the structure of the relevant Commission services dealing with financial services so that their work is permeated with the priority of preserving the single market focus. We suggest that the UK Government should proactively defend the unity of DG MARKT and oppose any plan to move financial services out of it. It would be a mistake to move the work e.g. to DG ECFIN which has quite different priorities”.

I strongly agree and I hope that the Minister will be able to reassure us that we shall—to the extent that our current influence allows—work to ensure that that does not happen.

In my view, it is highly desirable and important that the current head of the single market directorate-general, the most senior of that very small and dwindling band of British personnel in the Commission, should stay where he is. I strongly agree with what has been said already today about the need to reinforce that. Retaining the unicity of the director-general is much more important than who is the single market commissioner—the issue that dominates the headlines. What matters is that it is the director-general and that he covers all the work that is of interest to the City of London.

My second point is also quite topical. I hope that the Government will, to the extent that their current influence allows, seek to discourage a second suggestion much debated in Brussels now, which is that the next finance commissioner should also be the next president of the Eurogroup, replacing Mr Dijsselbloem, the Dutch Finance Minister, when his term ends next summer. Combining the two jobs would be a prescription for serious schizophrenia, with a real risk that eurozone concerns might override single market integrity. This is not a moot point in the US sense. In our report we use “moot point” in the British sense, which means it is a key issue. In America, a moot point is a point so boring and irrelevant that it is worth discussing only in a moot court—a fine example of the difference between the two languages, as is “tabled”. If we said that our report had been tabled, people in Congress would say, “Oh, bad luck”, because it means shelved in America.

The moot point is that we have seen two recent examples of just what I am worried about—eurozone concerns overriding single market integrity. In the Cyprus crisis, when the eurozone imposed capital controls, that was a fundamental strike—which may have been necessary in the crisis—against a fundamental principle of the single market. It affected non-eurozone citizens. A British citizen with money in Cyprus could not move his money because of capital controls introduced by the eurozone. The result was that the case was quite rightly taken by the British Government to the Court of Justice against the ECB for its attempt to argue that clearing systems trading euro-denominated paper must be within the eurozone. That, too, is a clear breach of the single market and I applaud the Government for contesting it. It would be dangerous to see the two jobs of presidency of the Eurogroup and finance commissioner in the Commission combined. That may be difficult to prevent, given diminished influence, but I urge the Government to have a go.

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[Lord Lamont of Lerwick]

Of course you can. You can be against transferring fiscal authority out of the UK but say that the only way in which you can make a monetary union work is for you to transfer it out of your country to a central organisation. There is no contradiction in that whatever.

[Lord Davies of Stamford]

I am sorry, I take a different view. It seems very contradictory to me. Either you should not have fiscal integration or you should. It is very important that politicians are coherent about these things and I do not think that the Eurosceptics are coherent, not least on the matter of democracy in the EU.

Incidentally, my noble friend Lord Desai made the excellent suggestion that we should have an election for the President of the European Union. I have always been in favour of that, and I quite agree that the EU lacks democratic accountability. You hear all the time from Eurosceptics that the EU lacks democratic accountability, but the moment you suggest any measure at all, whatever it might be—changes at parliamentary level, say, or the direct election of the President—that would supply much greater accountability, they are always against it. Again, there is a blatant contradiction running through their views on the subject. I have to say that if you pursue politics on a contradictory basis like that, you do not do great credit either to your reputation for intellectual clarity or to the good faith of your arguments.