European Union (Approval of Treaty Amendment Decision) Bill [HL]

Lord Liddle Excerpts

Wednesday 23rd May 2012 Lords Chamber

[Lord Liddle]

My Lords, this is a small Bill consisting of two clauses but, as we have heard in this excellent debate, it is about the huge topic of the future of the euro. As the noble Lord, Lord Howell, explained to us with his usual clarity, the Bill is an enabling measure. We are legislating here not on the substance of the European stability mechanism but only on the enabling treaty change to allow it to happen. Labour recognises the need for this enabling measure. As the noble Lord, Lord Lamont, said, it is already priced into the markets. No one should kid themselves that the establishment of the European stability mechanism is a sufficient response to the crisis that we have now. There is an enormous crisis in Greece and a growing calamity of collective austerity. To that extent but not much more, I agree with my noble friend Lord Reid.

My noble friend Lord Giddens said that he had had enough of talking about being on the edge of precipices. Perhaps I may say what I think is at stake here. At stake is a crisis that threatens the success of the post-war settlement that we have seen in Europe and the stability and prosperity that the European Union has brought to Europe. That is what is at stake in this crisis. I disagree profoundly with the noble Lord, Lord Flight, and his parallel with the gold standard. The difference between the European Union and the gold standard is that it is a political union, and politics can do something about it. If leadership is shown we can avert a crisis that threatens to break up the post-war settlement.

What we need, as the noble Lord, Lord Hannay, said, is a bit more solidarity and a bit less emphasis on limited liability. How should we go about trying to save the situation? First, the firewall needs to be a lot bigger in scale and more flexible in operation. The existence of the stability mechanism cannot be a substitute for a central bank. The central bank must be willing and prepared to intervene decisively in the bond markets to stem self-fulfilling speculation and panic. I do not think that we will get eurobonds at this stage; I do not think that the Germans will agree to eurobonds until there is established a European fiscal authority. However, we could have a more flexible stability mechanism.

Secondly, the stability mechanism should be preparing now to act quickly on recapitalising the banks in Europe on a pan-eurozone basis. If responsibility for sorting out the banks remains with the national countries—the sovereigns—the problems of countries such as Spain can only get worse because sorting out the banks increases the fiscal problem; dealing with the fiscal problem involves a squeeze that makes austerity more severe; and the impact of this fiscal squeeze on growth ultimately also deepens the problems of bad loans and zombie banks. We have to deal with this on a pan-European level and the ESM is the body to do it.

Thirdly, we need a more balanced strategy—not choosing growth over austerity but a balanced strategy. François Hollande’s victory has changed the political weather in Europe. There is a growth plan under preparation in Brussels. We have heard about it in our debate—unspent structural funds to be used better, recapitalisation of the European investment bank and an experiment in project bonds. Put with that, the noble Lord, Lord Davies of Stamford, talked about the need for structural reforms and the need to revive the single market which Prime Minister Monti is so behind. That is a credible package. They are welcome initiatives but from our side we not think that they are enough. For one thing, their impact would take too long to work. Infrastructure schemes and renewable energy projects are rarely ready to go. Southern Europe needs stimulus to growth now.

[Lord Davies of Stamford]

I am grateful to my noble friend for giving way. He will be aware that in Greece the motorway building programme was stopped midstream because of the bailout conditions. Those projects are shovel ready—a lot of work has been done on them and they are all ready to go. Some financing there could affect demand very rapidly.

[Lord Liddle]

The noble Lord, Lord Davies, is absolutely right. In addition to infrastructure, I think that we need a more moderate pace of deficit reduction. The Commission argues that the fiscal compact gives you all the flexibility that you need in a crisis situation. That should be done. Secondly, we should be mobilising the structural funds to tackle the employment issues, particularly the fact that in countries such as Greece and Spain, getting on for half of young people are out of work which is completely unsustainable socially and politically. It is also the case that a major competitive weakness of southern Europe is the low skills level of its workforce. That must be addressed from Europe through the structural funds—a crash programme of social investment in human capital.

Thirdly, the eurozone needs more balance between the strong and the weak in the urgent competitiveness adjustments that it must make. Stronger countries such as Germany have room for manoeuvre. Noble Lords talked about higher wages for German workers, which are certainly affordable. German wages have gone up very little despite the country’s enormous export success. I am glad that there is now a consensus between the Social Democrats and Christian Democrats on the introduction of a national minimum wage. Germany would have to tolerate only a bit more inflation to help the south, which is suffering debt-trapped deflation. That would enable the ECB to meet and maintain its target level of inflation of around 2% across the whole eurozone.

Our hope is that the political ramifications of the Hollande victory will result in a wider and bolder set of actions to build a stronger firewall, recapitalise the banks, adjust the pace of deficit reduction, offer immediate help on jobs and increase demand in countries with surpluses. That will not get us out of the need to make harsh adjustments. However, if we continue with collective austerity it will lead to collective suicide.

What is the coalition’s view? Is it still backing Mrs Merkel’s priority of fiscal austerity, which has been its policy at home for the past two years? Or is it undergoing a latter-day Keynesian conversion to the need for growth in Europe? If the eurozone can have a plan B, can we not have one at home? That is what we need. It is very odd for a Eurosceptic Conservative Party to argue that it is all right to have additional public borrowing through the EIB and project bonds at European level, but that of course it would be a complete disaster to tolerate any flexibility in the public borrowing of the UK. I find this an amusing contradiction in the present situation.

That confusion and contradiction, with a sharp eye for public relations, have been characteristic of the Government’s conduct of their European policy. As the noble Lord, Lord Williamson, said, they treat the eurozone as a convenient whipping boy to cover their own failures. As we know, last year growth in the eurozone was higher than in the UK. I am interpreting what the noble Lord, Lord Williamson, said.

[Lord Williamson of Horton]

It was a rather broad interpretation: the size of the Atlantic.

[Lord Liddle]

I apologise to the noble Lord, but the point is surely valid. Growth last year in the eurozone was twice that in the UK. Therefore, to blame the eurozone for the present double dip is nonsense.

The big point that the Eurosceptics fail to understand is that we cannot avoid the consequences of the euro by being out of it. In or out, our future is deeply affected because of our exports and the interlinking of our financial system. As Robert Chote said, if Greece exits, who knows what will happen? We may never in the foreseeable future recover the level of output that we had in 2008. A policy of splendid isolation from the continent was never realistic for Britain, but in the world of globalisation and economic integration it does not work at all.

Nor is our isolation very splendid. We are losing influence and clout in Europe to a dangerous degree. I will give one telling illustration. The Prime Minister claimed that the reason he used the veto and walked out of the December European meeting was that his partners would not accept a set of proposals that he tabled at 2 am in order to protect the City of London. A couple of weeks ago, on the capital requirements directive, the Chancellor, George Osborne, and the British for the first time found themselves outvoted by 26 to one at ECOFIN on a key question of financial regulation. The Chancellor has now recognised that he has to go along with the majority. That is not an effective use of the British veto. It just shows how influence is draining away from us at the moment.

[Lord Flight]

I was under the impression that the Chancellor had eventually obtained agreement to his point, which was that there could be some flexibility in the capital ratio of banks, with a view to the UK being rather more demanding than the rest of the EU.

--- Later in debate ---

[Lord Liddle]

I am sure that that is the Chancellor’s interpretation.

I recognise that there are some distinguished Members of this House who are long-term supporters of British membership of the European Union, but never believed that the euro could be made to work. We had wonderful speeches from the noble Lords, Lord Lamont and Lord Lawson, but I do not agree with what the noble Lord, Lord Lawson, said. He said that monetary union will work only if you have what the Germans call the coronation theory—the customs union first, the political union and then the monetary union to crown it.

I recognise that the euro was set up on a flawed basis. I thought that as the problems occurred they would be addressed incrementally and that reforms would be introduced that would make the system work. The trouble is that we have had a cushy decade of total complacency—it was a cushy decade for the UK as much as it was for the eurozone—in which the impetus for reform was completely lost. Short of federal union, if the eurozone took the kind of steps that Labour is advocating now it would have a viable future.

[Lord Reid of Cardowan]

Would my noble colleague consider that perhaps the problem was not complacency but precisely the assumptions that he has outlined to us: that as problems arose, incrementally we would go towards a central state in Europe and no one would ask the peoples of the nations of Europe? That is precisely the problem because what is being suggested now is one of these huge incremental steps. I promise him that there will be a reaction of nationalism in Europe because it will require not only centralisation but the imposition of austerity from the centre. We will create the very conditions that caused such resentment in Germany in the 1920s and 1930s.

[Lord Liddle]

I have the greatest respect for my noble friend Lord Reid, and in my life I have learnt an awful lot from him. However, his assumption that the only alternative to where we are now is a central state is fallacious. What have been lacking in the past 10 years are the incremental reforms of the kind that I have outlined that would have made the euro work.

I have gone on too long. I believe the consequences of a euro break-up, which some noble Lords seem to want to will on, would be horrendous. Eurosceptics make a fundamental mistake in thinking that for a country such as Greece, exit from the euro would solve its problems. A lot of British people think that it would be a classic devaluation, rather like our exit from the ERM in 1992. It would be nothing like that. Ordinary people’s savings would be wiped out as the Greek banks collapsed. There would be severe additional spending cuts, because with all borrowing cut off the Government would be unable to finance the deficit. They would have to cut welfare benefits and public pay. The new currency would plummet in value because there would be no private inflows of capital to sustain the balance of payments. It would be an economic disaster zone.

There would be huge social tensions between the better-off, who had already got their money out of the country, and the wage earners, the poor and the unemployed, who would have to live on the devalued drachma. We would see—here I agree with my noble friend Lord Anderson—the emergence of a failed state on Europe’s south-eastern flank, with incalculable consequences for relationships with Cyprus, Turkey and the rest of the Balkans. As my noble friend Lord Reid knows well, this is a part of the world on which we have spent blood and treasure over the past two decades to try to stabilise. Kick the Greeks out of the euro, and what are we going to do about stability in the Balkans? It is just too awful to contemplate. That is why the euro must, and can, be saved—if we adopt the right policies to do so.

The noble Lord, Lord Dobbs, spoke eloquently about his lessons of history. My lesson would be that a Greek exit would be followed by competitive devaluation, protectionism, a run on other countries, terrible contagion problems and an outbreak of nationalism. Conceivably, it could return Europe to the inter-war years, so I want Britain to play a constructive, committed and engaged role in trying to make this thing work, not a carping, hectoring and lecturing one. We need a rescue, we need the ESM, and that is why we need this Bill.