Loans to Ireland Bill

Lord Liddle Excerpts

Tuesday 21st December 2010 Lords Chamber

[Lord Liddle]

My Lords, first I apologise most sincerely to the Minister for not being in the House for the start of his speech. I was trying to catch what his ministerial colleague Mr Lidington was saying to us in evidence in the EU Committee about the permanent mechanism.

I support very strongly the principle of helping Ireland in its hour of need. The case seems self-evident given the interconnectedness of our economies, with 5 per cent of our exports going to the Republic, and the consequences for us of a collapse of its economy, which would be serious, not least for British banks.

No simple solution such as coming out of the euro is available for Ireland, as a lot of people who opposed the legislation seemed to think. It is worth bearing in mind that, were a member state to try to come out of the euro, there would be a very big devaluation. That would cause a collapse in living standards and purchasing power, which would have knock-on economic consequences particularly, in Ireland’s case, for Britain. Moreover, its debt would continue to be denominated in euro. As the new currency had depreciated, there would almost certainly be a default that required a restructuring of that debt, again with very severe consequences for the British financial system.

However, while I fully support the objectives of the Bill, I dislike it considerably. I dislike it because of its bilateral nature. The Government are profoundly wrong in the working assumptions that lie behind this bilateral Bill: that the euro problem is a problem for the eurozone, that it is for the eurozone to sort itself out, and that it is none of our business. That is profoundly misguided and not in the UK’s national interest.

It is wrong for three reasons. First, as we in Britain seek the necessary rebalancing of our economy towards exports and investment, it is absolutely clear that we are dependent on very strong growth in the euro area, which is our biggest market. I know that the rest of the world is growing much more strongly and Asia is growing very strongly indeed, but Germany, more than the United Kingdom and other members of the European Union, is getting the most benefit out of that global expansion. We will be the beneficiaries of that German growth in the eurozone. We live in Britain today in an economy that is deeply integrated into the rest of Europe. Our fortunes are dependent on the rest of Europe. It is completely misleading to talk about their problems over there and think that we can sort out our problems over here as though they are completely separate questions.

Secondly, our banks are extremely interconnected. I was reading the Bank of England’s report on financial stability, which was published last week. It states:

“UK banks’ holdings of sovereign debt issued by countries under heightened strain are relatively small. But total claims on these economies, including lending to households and businesses, are larger ... Losses on such lending could increase were heightened sovereign concerns to be accompanied by weakening economic conditions. Credit risk could also be amplified by the interconnectedness of European banking systems. UK banks have claims of almost £300 billion on France and Germany, whose banking systems are more heavily exposed to the most affected economies”.

The Bank of England argues that there is strong interconnectedness, and we must think in those terms, not that we are something separate and apart.

Thirdly, when there is a crisis, we will end up paying for it just as if we were in the eurozone. I looked at the Hansard report of the debate in the other place on this subject and at what the Chancellor of the Exchequer had to say about it. He said that,

“our contribution has been calculated on the basis of what we would have paid if we had been part of the facility”.—[Official Report, Commons, 15/12/10; col. 946.]

In other words, it is a bilateral contribution but it is based on a calculation of what we would have paid if we had joined. Mr George Osborne goes on to say:

“We are paying pretty much exactly what we would have paid if we had been a member of the euro”.—[Official Report, Commons, 15/12/10; col. 948.]

We cannot avoid our obligations to the rest of the European Union by pretending that this is something apart from us.

What is going on here is that UK politics is taking priority over the national interest. Clearly, we in Britain are in this up to our necks. Our banks are in it up to their necks and our prospects for growth are dependent on the euro area. Instead of the Prime Minister saying, “This is nothing to do with us”, he should be doing today what Gordon Brown did in October 2008; he should go to the summit of the eurozone countries and say, “Here is the plan to rescue the banks in the area. Britain has a vital interest in being part of this”. Instead, we get a washing of the hands of Britain's role. It is clear that this policy will not last. I looked at what various economic experts were saying about the likely pattern of what was likely to happen in the eurozone. It is difficult for the Government to comment on this because no Government can forecast that there will be defaults.

I looked at an article by the one professor who forecast the crash of 2007 and 2008—Professor Roubini. In his view, what he describes as the current strategy of kicking the can down the road will soon reach its limits. He goes on to argue that,

“Europe must … implement early orderly restructurings of distressed sovereigns’ public debt”.

The consequence of the orderly restructuring of distressed foreign debt would be the necessity also to carry out another restructuring of the European banking system, in which Britain’s banks are intimately involved. Instead of doing these bilateral things, we should be putting ourselves at the heart of Europe and of the argument about what needs to be done in order to rescue the European economy. What we are seeing here is a policy for marginalising Britain that is profoundly against our national interests. We will pay a very high price for it in future, because when the new mechanism is set up the key economic decisions will be taken by the eurozone, which will go along to ECOFIN, and Britain will be forced to agree with what the eurozone has decided because decisions are taken by qualified majority voting.

This principle of staying out and doing bilateral deals is a very bad policy for Britain. It is putting playing the politics of the Daily Mail and Rupert Murdoch before a real, patriotic sense of where our national interest lies.

[Lord Pearson of Rannoch]

My Lords, during the noble Lord’s remarks I think that I heard him say that British prospects for growth depend on the eurozone. Could he enlighten us as to his views on the prospects for trade in the rest of the world?

[Lord Liddle]

I touched on that subject, because I said that Germany was taking far better advantage of global growth than we are at present. The Prime Minister is absolutely right to try to expand our exports in India, China and other countries, but the fact is that German export success benefits us in the growth in the eurozone, which accounts for half our exports.