Eurozone Crisis

Lord Maclennan of Rogart Excerpts

Thursday 1st December 2011 Grand Committee

[Lord Maclennan of Rogart]

My Lords, it is a very great pleasure to follow the maiden speech of the noble Lord, Lord Wolfson of Aspley Guise. In Glasgow, where I was brought up, his family was regarded not only as distinguished but as one that aspiring young people ought to emulate. I had the privilege of meeting some of his family in that great city rather a long time ago. I enjoyed what he had to say, as I believe the whole Committee did, and we look forward very much to his future participation in our debates.

The euro crisis has been repeatedly cited as the external factor that has blighted Britain’s economic recovery prospects. It therefore seems to follow that this country ought to do all that is within its power to assist in the resolution of that crisis. The attitude of the responsible Ministers has, I fear, been insufficiently supportive of the efforts being made by the other European Governments to avert the risk of sovereign default and spreading contagious bank collapses.

In the somewhat bullish report that the Chancellor of the Exchequer, Mr Osborne, gave to the House of Commons after the European summit of 26-27 October, he indicated that, although the IMF could use,

“its expertise and advice to help the eurozone to create the special purpose vehicle that it is considering”,

he emphasised not only that the IMF,

“cannot put its own resources in”—

as he put it—but that Britain would not put its resources in either. Having stood back, the Chancellor then saw fit to call for the eurozone countries to produce their plans,

“to increase their firewalls and sort out Greek debt”.—[Official Report, House of Commons, 27/10/11; col. 471.]

While it is clear that our Government recognise that it is in Britain’s interest that the euro operates more effectively, it is rather obscure how the Government are working to bring that about.

The situation has deteriorated in the past few weeks. Risk premiums on the bonds of the AAA-rated Austria and France rose to record levels. It was pointed out this week, on 28 November, that two decisions were made at the summit with damaging consequences that were not intended. I quote a report from Reuters Breakingviews:

“First, banks underwent a stress test that marked their sovereign bond exposures to market whereas previously regulators maintained the fiction that these positions were risk-free. This meant that lenders suddenly had to start holding capital to back their sovereign debt investments. Not surprisingly, they have become more reluctant to buy bonds. This, in turn, has made it harder for governments to fund themselves. Second, the summit decided to strong-arm the banks into agreeing to”,

what was described as,

“a ‘voluntary’ debt restructuring for Greece. Because the deal is supposedly voluntary, credit default swaps (CDS)—a type of insurance policy that pays out if an entity goes bust—won’t be triggered. This arm-twisting has convinced lenders that CDSs are a useless way of hedging the risk of investing in euro zone government bonds. Without a hedge, many prefer not to hold the bonds at all—again making it harder for states to fund themselves”.

Despite these political problems, it does seem that there has been some good political news. The new Prime Ministers of Greece, Italy and Spain have all indicated their determination to cut debt and make their economies much fitter. None the less, they will have an impossible task if investors cannot be convinced that the euro is here to stay. Perhaps the central hope of restoring confidence lies with the European Central Bank. If it can devise support for Governments who are intent on restructuring their economies, that should be backed. It does not necessarily mean that it has to become a lender of last resort; however, that prospect has definitely been advocated by many in this country and elsewhere, although reluctantly considered by Germany. Germany should certainly consider ways and means by which the central bank could go further, to assist the problem of facilitating its greater involvement. Of course, Germany is afraid of the lack of adherence to the terms of the stability and growth pact in some of the peripheral countries—perhaps overlooking what it did itself in the earlier days, which has already been referred to in this debate.

This country should also back the central bank, although we are not part of the eurozone. It was rather surprising that the Government indicated that they would not contribute money to the IMF that might be contributed to Europe. That seems to me to be a bizarre position and certainly makes it more difficult to give credence to the thought that the present Government are actually trying to help the eurozone. The EFSF might be the recipient of loans from the European Central Bank to bring its firewall into effect. Given that the ECB is not at present committed directly to fund Governments, perhaps it could itself lend to the IMF, which in turn could lend to Italy and Spain.

The German recognition and requirement of fiscal discipline is rational and should certainly be embodied in the revised treaty, but perhaps that might be extended to form a debt union, with the mutualisation of debt jointly and severally guaranteed. However, such moves cannot be made overnight and will not deal with the immediate problem. The threatened countries must now pool their thinking on what are acceptable debt targets and the timing of their implementation, and that will not be a uniform scenario; it will have to take recognition of the different platforms from which countries are starting.

Before Britain loses its reputation altogether as a concerned member of the European Union, it should seek to use its position to indicate ways in which the situation can be taken forward. Showing good faith rather than Euroscepticism can have a catalytic effect.

[For the continuation of today’s proceedings, see Official Report, 5 December 2011.]