Eurozone Crisis

Stephen Hammond Excerpts

Tuesday 15th November 2011 Westminster Hall

[Stephen Hammond (Wimbledon) (Con)]

I congratulate my hon. Friend the Member for Basildon and Billericay (Mr Baron) on securing this debate. Like him, I spent some years in the City of London, in various institutions. I want to address three things. First, I want to look at the theoretical construction of the euro as it was set up. My hon. Friend talked about the various eurozone summits and why they failed to find a solution. The reality, of course, is that a theoretically implausible project means that any eurozone solution will not be practical. I also want to talk about some of the reactions, and conditions the International Monetary Fund might want to attach to its bail-out, and our interest in it.

The single market was much welcomed in terms of the encouragement of free trade, which then drove some people to the aspiration for a single currency. It was clear that those countries that were going to join would lose the basic levers of economic policy, namely taxation—that is, fiscal policy—as well as interest rates, exchange rates, protectionism and, indeed, unemployment. It was also clear to any undergraduate, or even A-level economist, that the reality was that a fudge might be possible in good times, but not in a recession. The opponents of that view pointed to optimal currency area theory, which showed that the transaction costs would be lessened and that everything would, therefore, be fine. In practical terms, however, we have seen a theoretical misconstruct. The euro was a misconstruct because it failed to recognise exactly what that theory says: for optimal currency area theory to work, the economies have to be homogeneous in nature or flexible in their arrangements, so that they can move to homogeneity, or a currency union needs to be established alongside a fiscal union at the same time; otherwise, the overwhelming point is that whatever is set up in terms of a single currency will fail.

On the economies that were in the eurozone when it began—the wealth of Germany, the emergence of Ireland and the agrarian underdevelopment of Portugal— surely the appropriate description is diverse rather than homogeneous. Moreover, if we look at the policy formulation since the currency has been in existence, we see that there has been no flexibility that would allow movement to a homogeneous economy. Unless we recognise that the project is flawed in theory and do something about the theoretical basis, we will never find a practical solution. It is not surprising that we have had 15 eurozone summits that have provided no solution whatever.

The absurd reactions of Europe’s senior eurocrats are also of extreme concern. They are preventing any serious discussion of a resolution. The basic premise at the moment is, “The euro must be saved, the euro must be saved, the euro must be saved.” Only last week, President Barroso said yet again that the euro should be the norm for Europe. He even denied the UK’s permanent right to opt out. The President of the European Council, Mr Rompuy, also made an extraordinary remark over the weekend when he suggested that, if the eurozone’s integrity was not preserved, the functionality of the internal market could not be taken for granted. That is an absurd proposition. First, we need only look at the history of how the single market functioned before the euro came into being. Secondly, a single market does not need a single currency, but I will not bother to go into the theoretical construct for that.

[Mr Cash]

Does my hon. Friend remember Madame Lagarde saying on 17 December 2010, when she was Finance Minister for France, that they broke all the rules because they wanted to save the euro at all costs? The rules have been broken, and that relates to the stability and growth pact and every single aspect of this.

[Stephen Hammond]

My hon. Friend is right, and my hon. Friend the Member for Basildon and Billericay made exactly that point. I will not go on, but it seems simply ridiculous. If the eurocrats of Europe think that saving the euro is more important than working out the solution to the economic crisis, progress will be, at best, tortuous.

From a UK perspective we must be interested. The idea that we are not interested in what the IMF bail-out is—or, indeed, in the fact there is a eurozone crisis—is clearly wrong. The impact on the UK is extraordinary. We trade with the eurozone, and therefore have a significant interest. My hon. Friend the Member for Cities of London and Westminster (Mark Field) referred to the possibility of a default of Greek banks. It may or may not be true that we have little or no exposure to Greek banks—I think it is broadly true—but we have great exposure to banks that lend to Greece within the eurozone. That contraction of balance sheets will affect lending to small and medium-sized enterprises in the UK. Therefore, we must have that interest.

A basic and necessary precondition of what the IMF must say to the leaders of Europe is that they must recognise their wider international responsibilities. My hon. Friend also made the point about the Germans effectively wanting to control the eurozone, but not being prepared to accept the economic leadership that that implies by allowing the ECB to attempt to solve the liquidity crisis. We should extend money to the IMF, but I am realistic in accepting that, overall, that means the IMF would extend extra money to the eurozone. Any money that the IMF extends to the eurozone should be met with the precondition that the ECB becomes entirely independent and able to print money for the eurozone, or else it is bound to fail.

The IMF also needs, and almost certainly will accept, a necessary theoretical construction that provides a solution. The most likely solution is that we see a number of countries leave the eurozone—leave the euro—and some perhaps form a tighter unit. That being so, the IMF must stand up and say that it is prepared to fund the cost of dislocation for those leaving the eurozone, so that they have a chance to devalue, make the necessary adjustment to living standards and the necessary lowering of labour costs to allow a competitive solution.

[Mr Carswell]

Is my hon. Friend saying that he wants the IMF to fund the cost of eurozone members’ dislocation from the euro?

[Stephen Hammond]

I am saying that I accept that the IMF will make a bail-out to the eurozone. On that basis, one of the best solutions for the eurozone is for a number of countries to be allowed to leave the euro. The IMF will therefore need to fund the cost of the dislocation of those countries leaving the euro to give them any hope, attendant with their devaluation, of an economically sustainable future.

[Mark Reckless]

Will my hon. Friend give way?

[Stephen Hammond]

I notice that I have gone on rather longer than my five and a half minutes. I had a number of other points, but thank you for the opportunity to speak this morning, Mr Caton.

--- Later in debate ---

[Chris Leslie (Nottingham East) (Lab/Co-op)]

I was interested to hear the comments of the hon. Member for Stroud (Neil Carmichael). I have learnt a lot, including Gerald Ford’s attitude to New York city and the history of the Ugandan shilling. At one point in the debate, I was almost feeling sorry for the Minister, given the heat that he is falling under and that he is simply following orders—it is not entirely his fault—but in the short time available, he needs to explain not only the answers to the questions asked, in particular by the hon. Member for Basildon and Billericay (Mr Baron), who gave a thorough and refreshing contribution, but an area of policy that has not been touched on as much as it should have been and that is central to the debate, which is growth. How will we rejuvenate growth, not only in the UK but throughout the eurozone, as a way to solve the crisis?

The Office for Budget Responsibility continues its relentless drive to downgrade economic prospects, and the European Commission has forecast a massive change in our fortunes. Last year, gross domestic product growth was supposed to be 2.2% in 2011, but a couple of weeks ago, that prediction was downgraded to only 0.7%. We are now forecast to have the slowest growth in Europe, with only Greece, Italy, Portugal and Cyprus growing more slowly in 2011. The Office for National Statistics, however, shows that exports to the euro area were rising by 17.3% in the third quarter, so the eurozone alone cannot be an excuse for the UK’s lack of growth.

Given the fragility of our economy and our vulnerability, I accept that prolonged uncertainty in the eurozone could worsen our position, but it would be disingenuous of the Treasury to suggest that our woes are caused by the eurozone situation. I would be worried if it genuinely thought that to be the case.

[Stephen Hammond]

Will the hon. Gentleman give way?

[Chris Leslie]

Not in the short time that I have available. I prefer to hear the Minister and to deal with particular issues, some of them raised by a number of hon. Members. For example, the hon. Member for Cities of London and Westminster (Mark Field) discussed bond yields and the dangers of the Government giving the impression that we are a safe haven relative to the rest of the world. I am worried about the complacency shown by the Government. Bond yields are as much a function of our relative independence from the euro and the flexibility of having our own central bank. The director of the National Institute of Economic and Social Research, Jonathan Portes, made it clear recently that our gilt yields declining to an all-time low was partly a result of the economy’s weakness, because safe-haven flows are typically accompanied by a rise in the value of the pound or rising stock prices. He could not have been more concise or clear:

“The reason people are marking down gilt yields is because the economy is weak”.

We should not see that entirely as the be-all and end-all of economic policy. The hon. Gentleman is right that we should see it not merely as a safe-haven function, but as a bubble that may burst at any point.

What should the Government be doing? The crisis is far from over, even though the markets have calmed somewhat this week. My right hon. Friend the Leader of the Opposition rightly pointed out that the European summit—the G20 summit—finished prematurely, without adequately solving the difficulties with the EFSF and the permanent bail-out arrangements, and that a further European summit might be necessary to thrash out the issues properly. We also need a proper strategy for jobs and growth throughout Europe and concrete steps to support demand immediately. We have to end the prevarication about the role of the European Central Bank as lender of last resort and to give proper attention to what it takes to make that EFSF firewall stand behind eurozone members.

Hon. Members mentioned the IMF in some detail. In the summer, before the details of the permanent eurozone bail-out fund had been agreed, the Labour party urged the Government to pause before granting additional funding to the IMF. We called for the commencement of the larger eurozone-only bail-out fund to be brought forward and for the Government to negotiate an end to our liabilities via the temporary EFSM. The Minister at the time did not explain what the UK Government were doing to help to ensure that an adequate and permanent EFSF was put in place and, as I said, the European summits came and went, despite the Prime Minister’s attendance.

Ministers, including the Prime Minister, have repeatedly misrepresented our view of the IMF’s role. Today’s debate shows that our concerns are shared across the party divide. Tim Geithner in the United States and people in many other countries have also voiced their reservations. In principle, because of the IMF’s generally vital role in the global economy, we support an increase in its subscription, but I make no apologies for questioning the Government’s stewardship of our public funds. We have a duty to protect the best interests of the UK taxpayer.

We have consistently said that the IMF’s job is to support individual countries with solvency crises and not to solve a structural problem caused by eurozone countries unable to agree the necessary steps to support and maintain their own monetary union. The IMF does have a role around the world and should have the necessary resources, but there should be no IMF funding to plug the gap in the eurozone’s bail-out fund and to do the job that the ECB should be doing. The only way to ensure market confidence in the eurozone is for the ECB, alongside that permanent bail-out fund, to be given the political support that it needs to act as lender of last resort when liquidity problems arise. That is the logic of monetary union that the 17 eurozone countries are signed up to.

I want to hear the Minister’s answers, so I will curtail my remarks. It is vital for the Government to wake up and realise the role that a growth strategy must play in Europe and in the UK. Without that, there could be serious ramifications for the UK and our economy. If the Government fail to act as an honest broker, stepping up to show the leadership that many hon. Members have urged in today’s debate and so that the ECB becomes lender of last resort and that the EFSF has enough weight to become an effective firewall, the eurozone crisis may well deepen further. The Chancellor continuing to talk about Britain as a safe haven betrays a relaxed complacency in the Treasury that is not warranted. Such an approach is misinformed, neglectful and very dangerous in the situation that we face.