Euro Area Crisis: EUC Report

Lord Marlesford Excerpts

Monday 21st May 2012 Lords Chamber

[Lord Marlesford]

My Lords, both the noble Lord, Lord Monks, and my noble friend Lord Maclennan have warned us against advising or criticising other countries in these matters. It always seems to me that one advantage of the privacy of your Lordships’ Chamber is that we can freely give advice to the Government without much danger of it leaking out.

As the only other member of Sub-Committee A speaking today, I congratulate my chairman, the noble Lord, Lord Harrison, on his lucid exposition of our findings. I also tell your Lordships that in the ever-changing kaleidoscope of events in the euro area that we faced during our inquiry, his skill as a chess master enabled him to guide us through and sometimes even interpret the irrational, usually contradictory and often ill conceived moves of the euro area.

I am neither a Eurosceptic nor a Europhile. If I presume to symbolise anything at all, I would try always to use a pragmatic approach and describe myself if anything as a Euro-challenger.

Never has it been clearer that the first commandment for a leader is to identify and then face reality. That applies in politics, economics and business; it applies especially to bankers and, above all, to central bankers. Do not let us forget that one of the main architects of our misery is that shrunken giant Alan Greenspan, with his failure as chairman of the Fed to face—and still less to act on—the reality that he had, in fact, identified in the three years that led up to the summer of 2007, when it became clear that everything would unravel.

The former name for economics was political economy, which underlines the crucial links between economics and politics. Even when the economic realities are revealed, political forces often conspire to frustrate the hope of solutions. I intend to devote my own brief comments to the situation in Greece and suggest a possible way forward for that country.

I should perhaps declare a rather remote interest in that my great-grandmother was Greek and her uncle was Capodistrias, who after he had represented the Russian tsar at the Congress of Vienna was, in 1827, persuaded to be president of Greece—and for his efforts was assassinated in 1831 within five years of taking office. It was ever thus.

It is perhaps relevant to remember that the British Foreign Office argued strongly against the liberation of Greece from the Turk on the grounds that it would undermine the Ottoman empire and thus destabilise the Balkans. The words of the noble Lord, Lord Monks, “I told you so”, may be echoed by diplomats of today. Of course, it was Lord Byron and his friends who ensured that the advice of the Foreign Office was not taken on that occasion.

Noble Lords will remember that it was Plato himself who argued against Athenian democracy of the fourth century BC on the grounds that demagogues could use it to prevent sound decisions. His analogy was a ship controlled by ignorant and quarrelsome sailors who refused to believe that there was any such skill as navigation and would write off a mere helmsman as a useless stargazer. His solution was, of course, the philosopher ruler. Whether either Mr Papademos or Mr Venizelos is up to such a role is not perhaps for me to judge. However, at paragraph 133 of our report we draw attention to the outburst of anger on the part of Greek politicians at the suggestion that there should be a budget overseer for that country. It seems to me that the danger now is that the second round of elections may again result in a preference for the rather destructive demagogues in the extreme right Golden Dawn and the hard-left factions forming the Syriza. There are rather frightening echoes in these economics and politics of how Hitler came to power 80 years ago.

It seems to me most unlikely that Greece can, or should be, bailed out yet again. I think, therefore, that it must leave the euro area, but I certainly hope that it remains inside the EU. Then what? There are two choices. The first is assumed, and that is the re-creation of the drachma as a new Greek currency. I believe that this would be a disaster for Greece. It would be a currency that no one would wish to lend or to borrow. The markets would ensure that it would be rapidly devalued and the Greek central bank would have to resort to the printing press.

[Lord Davies of Stamford]

I agree with the noble Lord’s analysis entirely up to now. However, does he agree with me that if the drachma collapsed, as it certainly would, everybody would want to borrow in it and have their liabilities in drachmas and their assets in euros, and that that would be part of the problem?

[Lord Marlesford]

My goodness, the noble Lord is certainly a speculator.

If Germany is prepared to pay not the cost of bailing out Greece but the cost of redeeming the Greek euro debt which already exists, we have to think of something better than going into a Mickey Mouse currency such as the drachma. The solution would be for Greece to leave the euro area but to continue to use the euro. There are plenty of examples from past economic crises, such as Latin America using the dollar and Yugoslavia using the deutschmark after Tito died. The whole point is that using the euro with a new central bank for Greece would impose a discipline on the central bank and on Greece. Like anyone else, it would be possible for it to use only the currency that it could afford. It would not have any relation or connection with the European Central Bank. It would be paddling its own canoe but it might well have to have some help from the IMF. However, it might well produce a remarkable resurgence. Indeed, a noble Lord talked about the possibility of financing certain projects with eurobonds. This might be very possible if people could see sound opportunities in Greece and they knew that the currency being used was a proper international currency. I think that that would be a real help.

[Lord Lea of Crondall]

The noble Lord has painted a fascinating scenario, but how does he get out from under the problem he referred to whereby, in a sense, the demagogues fail to acknowledge that the real fall in living standards would be a lot greater in the drachma devaluation scenario than in the internal devaluation of taking more medicine in the eurozone?

[Lord Marlesford]

When Sub-Committee A looked at the bailout, we saw again and again that the figures produced as necessary to prevent a catastrophe became ever greater by magnitudes. There is the old cliché about “A billion here and a billion there—you are talking serious money”; we almost reached the stage where it was “A trillion here and a trillion there”. If the prospects are for bailout, and that just continues, whatever happens and however much worse it gets, it has been fairly conclusively proved that people will take advantage of a bailout. It is human nature. It was the present governor of the Bank who said that if there is a run on the bank, the sensible thing is to join it. Therefore, if the bank is prepared to bail you out, the sensible thing is to accept the money.

My solution is that you impose a requirement to earn the euros—but with some help through the IMF, eurobonds, or eurobond investments—and you are thus able to rebuild your economy. I do not see, from the point of view of people living in Greece, that there is much difference between perhaps starting off with saying, “We are going to recreate the drachma; and the drachma is equal to a euro”, and then finding that the next day it is worth only half a euro, or, as the noble Lord, who likes speculating on these matters, might think, the drachma would soon be worth only a quarter of the euro. It would be a great deal better to recognise that the flexibility of having to have the euros with which to buy and pay for things would itself generate a reality that, I believe, is lacking.

[Lord Hamilton of Epsom]

I am rather uncertain as to how, if the Greeks basically default but stay with the euro, they would raise new debt in euros.

[Lord Marlesford]

I do not think that they could do so as such, except that, as I say, you might have a euro project in which people would invest. It would perhaps be somewhat similar to the private finance initiatives that have been used by the British Government—not entirely with success, maybe, but on balance they have been a useful source of making things actually happen. If people could see a good return, they would invest in it. That is a perfectly sensible way of doing it and, therefore, Greece would not be able to raise euro debt as such, unless the markets thought that that was viable. That is where the self-discipline is. The self-denial of recourse to the printing press would be a solution. I suppose I am really saying that if we get this form of self-discipline, which reality should require, and if this were to work in the case of Greece, it could be an example to other countries either not to follow suit and to grasp the nettle for themselves, or to recognise that this would be a viable way forward.