Euro Area Crisis: EUC Report

Lord Sassoon Excerpts

Monday 21st May 2012 Lords Chamber

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, I welcome this opportunity to discuss the European Union Committee’s report on the euro area crisis. I first thank the noble Lord, Lord Harrison, and the committee for its thought-provoking analysis, and particularly my noble friend Lord Roper for not only this report but all the other truly excellent work that the committee has done in recent years, which I am fully confident will continue at that excellent level under the chairmanship of the noble Lord, Lord Boswell of Aynho.

The House is aware that these are difficult and dangerous times for the European and the global economy. The ongoing crisis in the euro area continues to undermine confidence and growth right around the world. We have kept the UK out of that storm by taking decisive and resolute action to tackle our deficit, but it is in our vital interest that the euro area reaches a lasting and sustainable resolution to the crisis, and it needs to do so quickly—a point firmly emphasised by my noble friend Lord Dobbs.

As the noble Lord, Lord Harrison, reminded us at the outset, the Governor of the Bank of England said only last week, the difficulties in the euro area represent,

“the biggest risk to recovery”,

in the UK. So it is in the UK’s national interests that we work to resolve these difficulties.

Resolution of the euro area crisis requires three things: resolving the ongoing uncertainty about Greece; ring-fencing other vulnerable euro area member states; and properly recapitalising Europe’s banks. We should recognise that some progress has been made. Greece was given a second programme of assistance and the face value of its debt written down. As the committee also notes, banks need to be sufficiently capitalised to withstand the instability. At home we have taken the necessary actions and as a result all UK banks passed the recent European Banking Authority capital adequacy tests. However, recent events remind us that significant risks remain and the IMF rightly warns us all that the global economy remains very fragile. That is why we agreed to increase our contribution to the IMF by £10 billion on condition that the IMF supports countries not currencies, that other IMF members also increase contributions, as they have done, and that the Euro area increases its own firewall, as it, too, has done.

Noble Lords will be aware that the Government are taking forward legislation to ratify the EU treaty change that provides the legal basis for the European stability mechanism, and we will start to debate that on Wednesday. That means that the position will, I trust, be clear to my noble friend Lady Noakes and to others in this House: the UK will not be making further contributions to eurozone bailout funds under the EU budget. Ultimately, high deficit, low competitiveness countries need to confront their own problems head on. They need to continue taking difficult steps to cut their spending, increase their revenues and undergo structural reforms to boost competitiveness. I agree with much of what the noble Lord, Lord Giddens, said. This is about economic sustainability, in his words—or fiscal sustainability, as I would put it. He did not find another word for growth so I will continue to call it growth. His analysis was very interesting, although, of course—

[Lord Giddens]

I prefer the term “wealth creation” to growth. You can find other words and you probably need to break them down into various component parts to make sense of what people mean when they use “growth” in a generalised sense, which is not terribly useful.

[Lord Sassoon]

I am grateful to the noble Lord for those comments. I disagree with some of the fundamental aspects of his analysis of the Government’s prescription for the UK economy but I think that goes a bit beyond the narrow topic of today’s debate.

As we have previously said, the euro area must also put in place governance arrangements to deliver the greater collective support and responsibility that the remorseless logic of monetary union demands. We want the fiscal compact to work in stabilising the euro and putting it on a firm foundation. We support the decision of euro area countries in the fiscal compact to commit to clear rules on fiscal discipline which the UK agrees are needed to make the single currency work effectively.

Questions were raised about the ratification of the fiscal compact. Although I will not comment on the likelihood of that happening, I can update the House and report that so far Greece, Portugal and Slovenia have ratified the compact. The compact will come into force once 12 euro area member states have deposited their instruments of ratification. The ratification processes are significantly different in different member states, but that is where things stand.

As the committee report notes, we agree that eurobonds are another issue that deserves further analysis and serious consideration. I agree with the noble Lord, Lord Monks, on that. Of course, any steps that are taken towards closer integration must not be prejudicial to the single market. We agree with the committee that matters relating to the internal market must remain the preserve of all 27 EU member states. This is why last December the Prime Minister did not agree to measures the euro area wanted to pursue on further fiscal integration being part of the EU treaties without adequate treaty-level safeguards for the single market.

I am sure that my noble friend Lady Williams of Crosby will not be surprised—she may be a little disappointed, but I am sure not too disappointed because we have discussed this before—that there is not a lot extra that I can add. My right honourable friend the Chancellor deposited an answer with the Treasury Committee, which is on its website, that goes as far as is appropriate and consistent with the need to keep the details of negotiations confidential. However, I draw noble Lords’ attention, if they have not read it, to that document.

We also agree wholeheartedly with the committee that we all need to address Europe’s low productivity and lack of economic dynamism. The UK has been leading that charge and has formed an alliance with 11 other EU leaders to set out an action plan for jobs and growth in Europe, including completing the single market in services and digital—a point to which my noble friend Lord Maclennan of Rogart drew attention. He was right to do so.

The Prime Minister’s focus at the next informal European Council this month, and at the June European Council, will be on ensuring that the focus in Europe remains on promoting growth. The UK’s specific growth agenda includes the digital single market and the services directive, but also, importantly, completing all the open bilateral EU trade deals, which themselves could add €90 billion to the EU economy. A deal with the US would be bigger than all the others put together, but they are each important. Of course, we want the Commission to commit to a new programme to reduce the overall regulatory burden, following on from the current administrative burden programme that concludes in 2012. The Government will be pursuing that agenda very vigorously with our European partners.

Some other aspects have been referred to in the debate. Again, the noble Lord, Lord Monks, referred to the possibility of an increase in lending capacity by the European Investment Bank. That could indeed have a part to play, although I of course disagree with the noble Lord on his views on a European financial transaction tax. That is not the way to go.

My noble friend Lord Maclennan of Rogart also referred to project bonds, which are another possible funding mechanism, which, if the funding comes out of existing EU resources and is carefully designed to be consistent with the need to minimise EU expenditure, is certainly another option that merits exploration.

I should address one or two of the specific questions that were raised on Greece. I take as my starting point the fact that we must respect the Greek people’s choice in their forthcoming elections. That point was expanded on by the noble Lord, Lord Judd, but I certainly take as a starting point the fact that we have to listen to what they decide they want to do. The important thing for all of us is for Greece to find a way out of economic crisis in co-operation with its creditors and for it to get back to sustainable growth and sustainable wealth generation. This Government hope that Greece can agree a way forward on this as soon as possible.

Notwithstanding the encouragement of the noble Lord, Lord Harrison, I am not going to speculate on what may or may not happen in Greece or in any other EU member state. Various scenarios were painted by some noble Lords—my noble friend Lord Marlesford, the noble Lord, Lord Willoughby de Broke, and others—but I shall not comment on those. All I will say is that the Government are undertaking extensive contingency planning to deal with all potential outcomes of the euro crisis. As the House will recognise, given the sensitivity of this work both to the markets and to international relations we will not deviate from the normal response, which is not to divulge specifics of the Government’s plans.

My noble friend Lady Noakes specifically asked about the exposure of the UK economy to Greece. The numbers relating to the relatively limited direct exposure of the UK banks and the UK economy generally to Greece are published, but clearly there is a need for a convincing firewall, as we all know the step change that there would be if contagion spread. Therefore, although I do not recognise the construction that the noble Lord, Lord Davies of Oldham, put on Robert Chote’s remarks, I think we all recognise the very serious implications if these issues are not dealt with speedily and in all their dimensions.

I was asked about one or two other issues. The noble Lord, Lord Harrison, asked about the impact of the French elections and what changes there will be with the new President. Of course, as he should have been, my right honourable friend the Prime Minister was very quick to congratulate Monsieur Hollande on his election victory. France is an important partner of the UK. We look forward to the close co-operation on foreign and defence policy, as well as on other areas, continuing with the new Government. The Prime Minister and the President had a warm exchange in their initial call and they subsequently met at the G20 meeting at Camp David. They are working together closely and are looking forward to building on the close relationship that exists. Therefore, based on the discussions in recent days, I think that the impact can only be positive.

The last point I raise nervously but I do so for completeness in tackling the issues that came up in the debate. The noble Baroness, Lady Crawley, said that this was not the time to speculate about a possible referendum—words which I am sure her noble friend Lord Mandelson and the shadow Chancellor will very much take to heart if they listen to this debate or read it afterwards. However, I shall not go further than that.

In conclusion, these are indeed dangerous times for the European economy. It is vital that euro area Governments pull together to deliver a sustainable resolution to the crisis, tackling their deficits, forging closer governance arrangements, and boosting competitiveness and growth. On all fronts, the UK will work as a strong and positive partner with our European neighbours to restore prosperity right across the European Union.