Eurozone Crisis

William Cash Excerpts

Tuesday 15th November 2011 Westminster Hall

[Glyn Davies (Montgomeryshire) (Con)]

Thank you, Mr Caton, for giving me the opportunity to contribute to what is probably the most important subject of debate that we will have during this Parliament. I congratulate my hon. Friend the Member for Basildon and Billericay (Mr Baron) on securing the debate and on presenting his arguments in a challenging and clear way. I look forward to the Minister’s response to the points he has raised.

Most of my hon. Friend’s speech dealt with the financial aspects of the issue. My view, however, is that it is not possible to consider the issue without also looking at the wider context. Indeed, I raised that point when I intervened on him. The key concern for me and many others is that the euro is destroying democracy as we know it in western Europe. That was my main reason for opposing Britain’s entry to the euro when it was established.

I am not sure how many of the hon. Members present were involved, like me, in the 1975 campaign to leave the European Economic Community, but I think that some of us might have been—I can see one or two. At the beginning, we thought there was a chance that we would be successful, but in the end the argument that I supported was well beaten. I was not trained as an economist—or as anything really; I left school when I was 16 to be a farmer—but my argument was that the public’s gut instinct in those days was that we were creating a huge bureaucracy whereby the ability to influence decisions in our country was to be transferred somewhere where we would not have influence. That was the fundamental gut instinct that drove us to the “no” side.

When the eurozone was being established, I became involved in the opposition to it, which was unusual, because I was the chairman of the Agriculture and Rural Development Committee in the National Assembly for Wales and the agricultural community was fairly supportive of Britain joining the euro. I remember being dismissed on platforms as an extremist, but I was simply not in favour of Britain joining the euro. My argument was exactly the same as that which many people are making today—to create a successful eurozone almost certainly means financial union. Nobody has hidden that. In 1975, the purpose of many people who were behind the establishment of the EEC was that we would eventually move to political union in Europe. That was the small print. Today, I hear people saying that they thought we were joining an economic community, but that is not what I or a lot of other people thought.

[Mr William Cash (Stone) (Con)]

My hon. Friend is making an important point. Last night, the Prime Minister made a speech at the Guildhall in which he called for fundamental reform in the European Union, but it is not really just a question of fundamental reform in the EU, is it? What we have to have is a fundamental change in the relationship between the United Kingdom and the European Union, because it is a failed project. We have been enmeshed in it and it is increasingly causing damage to our own economy.

[Glyn Davies]

My hon. Friend has anticipated my next point, although I shall not use precisely the same language that he uses and has used for a long time—probably about 30 years. The Government’s policy, which I support, is that we should seek to repatriate powers from the European Union. That is easy to say, but for the Government to deliver that objective, the Prime Minister, Chancellor and Foreign Secretary have to have a way to do so. As Members of Parliament, we have a responsibility to think about exactly how we are going to do that. Which parts of European policy, precisely, do we wish to repatriate—whole blocks or just specific parts? The issue is hugely complex and a tremendous amount of work will have to be put in to enable it to be addressed.

We could speak for hours on the issue—I am sure that I could. A lot of Members want to speak. I have raised the points that I wanted to make and look forward to the Minister’s response.

[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.

--- Later in debate ---

[Neil Carmichael]

This Government’s real achievement is to address the deficit. They have set out a plan that is effective and encouraging markets to understand that we are taking the appropriate action. That is one of the benefits of being outside the euro, and we should focus more on that, rather than worrying about the benefits or otherwise of devaluation. I repeat for the last time that I do not think that devaluation is a panacea that we should be pursuing.

[Mr Cash]

What is my hon. Friend’s evidence for the success of the reduction of the deficit? Growth is running at almost zero, and much of that comes surely from the fact that we cannot trade with a completely stagnant Europe.

[Neil Carmichael]

One of the obvious pieces of evidence is that we are not talking about the IMF coming to bail us out—a huge achievement by the Government that should be recognised. We will have to move on from devaluation, but I think that I have made my point and others have attempted to make theirs.

Inflation would certainly help debt reduction, because it does in the long run. As I said in an intervention, when Denis Healey borrowed money from the IMF, that did arrest devaluation. We were more easily able to pay the IMF back quite quickly because of the impact of inflation. I do not support inflating the economy in that way either, as a remedy.