Eurozone Crisis

My Lords, I, too, congratulate the noble Lord, Lord Wolfson of Aspley Guise, on his maiden speech. He shares with me a passion for the European issue. We might be coming at it from a slightly different direction, but none the less it is good that people care about Europe. As British families experience more than a decade of frozen living standards and as the euro teeters on the brink, it is time that we stopped name-calling across the Channel and recognise that we are all in this together, in the familiar phrase. The achievement of the OBR’s pretty dismal forecasts is qualified by its assumption that, "““the euro area struggles through its current difficulties””." I looked at what the consequences of a doomsday break-up of the euro area might be, in a paper from the Bertelsmann Foundation website by a German economist called Ansgar Belke. He reckons that if the southern debtors secede, we can expect a 60 per cent depreciation in those countries, a 700 basis point rise in their cost of capital, a 50 per cent decline in their trade and a loss of GDP per head of 50 per cent. If the alternative happens of Germany and the stronger countries breaking away, he says that, "““a strong seceding country would effectively have to write off its export industry””," as a result of a likely 40 per cent appreciation; trade volumes would instantly fall by at least one-fifth across the euro area and, with the break-up of the single market and the rise of protectionism that would follow, the consequences could be even more severe. It is a fantasy to think that Britain could isolate itself from these catastrophic shocks. The eurozone and Britain are inextricably bound together—in or out, our interests are gravely affected—yet, when it comes to the future of the eurozone, the past months have shown how small our influence is on a matter that is central to our prosperity. That is why some of us always thought that it was politically right for Britain to join if the economic conditions were right and why, if the euro surmounts this crisis, I think, as the noble Lord, Lord Heseltine, thinks, that we will be coming back to this issue at some point in future. Is the euro going to survive? First, there is a German political determination that it should survive which has strengthened, not weakened, since the crisis started. Secondly, when we look at what is happening, we have to remember that it is in the Germans’ interests to play a game of brinkmanship; they want to see market pressures on countries to introduce reforms, and they want the French to give way and concede a fiscal union. Thirdly, it is likely that there will be another European grand bargain in which, on the one side, there will be some form of fiscal union and, on the other, some German agreement to collective underwriting of debt. The issue which the eurozone has not addressed, which concerns the British economy as well, is the sustainability of adjustment after that. On that, I would like to make three points, in areas where there are lessons for Britain. First, we have to recognise the need for fiscal austerity, but argue for a common-sense way in which it should be applied. Looking at Britain, of course deep cuts would have been made whoever had won the election in 2010, and the environment has deteriorated since then. We have to accept that. But Ed Balls has been proved right. We are in a worse position today because the coalition chose to cut too deep and too fast. Similarly, in the eurozone, the sovereign debtors have no alternative to austerity, but the speed and depth of that austerity have to be adjusted to avoid a collapse of growth and confidence. We must allow time for the structural reforms that the new Government under Mario Monti in Italy, for example, are putting through to have an effect in raising growth potential. Secondly, we need a plan for growth. In Britain, the risk is that we do not have a plan: we have a public relations strategy of announcements and initiatives, not a serious commitment to mobilise the whole of Government behind a comprehensive strategy for growth. The truth is that both Britain and the eurozone can only compete with Asia now by putting innovation at the heart of our economic thinking. We need massive innovation in the way we live, in energy, in environmental technology, in housing, in urban planning and in public services in order to cope with demographic sustainability. This requires a strategic view on the part of Government about how different industrial sectors should develop, and it requires using intelligently the levers of single market and national regulation to send the right signals and incentives to the marketplace. It also needs a lot of enterprise. But it is not about the deregulatory fantasies of the neo-liberal right. It requires an economic model of public and private partnership, that—for the first time in this country—puts finance at the service of industry, both to help small companies to grow and to mobilise the potential for huge private investments in infrastructure. Here the EU has a model which should be a lesson for the UK: the European Investment Bank, which can issue bonds and leverage private capital. We need to multiply these efforts. In Britain, we should have a national investment bank. This is not a party political point. I want to ask the Minister why it is that, institutionally, the Treasury is prepared to accept the logic of the European Investment Bank, but domestically is totally opposed, for ideological reasons, to the establishment of an institution in this country which would do so much good. Like the noble Lord, Lord Monks, I believe that we have more to learn in this country from our continental partners about how to meet industrial and competitive challenges than many of us reckon. Thirdly, we are in an age of austerity, and this demands fairness and social justice in its application. We are almost where we were at the end of the Second World War in those terms. Of course, in Europe we have regional policy through the structural funds. That needs to be built on and made more efficient, but with inequality rampant, redistribution must come back on to the political agenda. By redistribution, I do not mean raising taxes on badly squeezed middle-income families; I mean formally tackling the new trends in gross excess in the accumulation of wealth through capital and property taxation. The possibility of a capital levy is being debated in many European countries, and we should join in that debate, because the proceeds of new capital taxation could be used to reduce public debt and to prioritise social investments with proven economic and social returns, such as improving life chances for children from disadvantaged families. If we want Britain still to count at Europe’s top table, we should be putting forward a plan that contains those ideas. We need a new economic paradigm. Only by doing this can we avoid austerity turning into despair, populism and the collapse of the European ideal.