EU: UK Membership

My Lords, it is a long time since I have spoken in a debate about Europe, and I am as impressed as ever by the quality of the contributions in this debate. I want to make some brief remarks about a subject which most people avoid. It is almost a forgotten subject but it remains an important issue; namely, the pound and the euro. I start with a confession. My original enthusiasm for joining the euro on economic grounds has somewhat cooled. By and large, as acknowledged by most outside observers, the euro has been a success. Its capital markets are now bigger than those of the United States; the circulation of its bank notes in the world is greater than that of dollar notes; and the European Union is setting the pace in the globalisation of finance. The productivity per hour of its leading countries is about as high as that of the United States. Many leading countries in the euro-zone—notably Spain and Ireland—have enjoyed a high rate of growth, and indeed Germany, too, now seems to be recovering. The euro-zone is an area of stability and, for all those reasons, it is right to say that the euro is a success. However, it has been a somewhat qualified success and, on the other hand, many fears about our failure to join have not proved justified. I shall start by mentioning the disasters that have never happened and the fears that have not been realised. It was feared that we would never master inflation without linking our currency to an area, dominated by Germany, which had been much more successful than we had in the past in controlling inflation. However, by making the Bank of England independent, the Government, to their credit, succeeded in controlling inflation, and the Bank’s management of monetary policy has, on the whole, been exemplary. The City has benefited from the euro despite our self-exclusion from the euro-zone. Foreign direct investment has held up. Outside the euro-zone our economy has prospered. We have had a more sustained and higher rate of growth than the other major members of the euro-zone and, assisted by our more flexible labour market, we have had lower unemployment. At the same time, although overall the euro has been a success, there have been hiccups in the workings of the euro. Fiscal policy and monetary policy have not always been in step. The targets for budget deficits were not met and the stability and growth pact was ignored by the EU’s largest members. They acted in what seemed to be their own short-term national interest, to their own longer-term disadvantage. As a result, the monetary policy of the European Central Bank was probably more restrictive than it might have been. Further, labour market reform in the euro-zone and progress in following up the Lisbon agenda has been sluggish and unemployment has been high. On the face of it, on economic grounds it could be plausibly argued that we were right not to join. Perhaps so. Perhaps, however, the issue is less cut and dried. There is, I fear, an element of smugness about our success. Our sustained growth rate has been admirable, but it has been financed by increasing public and private debt. It has been based on increased consumption, not improvement in productivity. Our interest rates and our present rate of inflation are relatively high; our productivity is relatively low. Let us not forget that our economic success has been achieved at a price of much continuing child poverty, increased inequality and many social problems and conditions in the United Kingdom that other EU countries would not find tolerable. On balance: so far, mostly good. But what if there is a major slide in the dollar? I am not predicting that there will be—that would be rash. On the other hand, given the size of the American deficit, surely it cannot be ruled out. Which major currency would then become most vulnerable? Of course, it would be the pound sterling. We, too, have serious deficits. Our growth has had many of the same features and causes for concern, as that of the United States. If the pound did come under heavy pressure, and if the Bank of England were forced to prevent a major depreciation in its value to prevent higher inflation and raised interest rates substantially, consumers, who are already heavily into debt, would be seriously hurt. Economic growth and employment would also suffer. It is not difficult to imagine circumstances in which we would be much better off if we were members of a powerful currency zone that would not leave us vulnerable to the chill winds of international financial instability that are likely to blow throughout the world if the dollar tumbled. Life outside the shelter of the euro-zone may not always be as comfortable as it has been in the past 10 years.