Eurozone Crisis

My Lords, as I came into the debate this afternoon I was convinced that I was on the speakers’ list, but I seem idiotically not to have pressed the right button on the screen. However, I am grateful for the four minutes that I now have. There are two approaches to the euro crisis and the EU crisis. The one is the Lamont-Lawson-Flight approach, which is to say that the whole venture was misconceived from the start, it was bound to end in tears and we predicted it all along. They remind me, if I may say, of those Marxists in the first three-quarters of the 20th century who, every time there was a banking crisis or a recession, said, ““Ah, this is the final collapse of capitalism. We were right all along””. The other view, which is my view, is that the crisis has been induced by too little integration and the solution is more integration. Indeed, as often happens in life, this crisis will force us to do what we should have done anyway in easier times. The solution here is what is normally known as fiscal federalism. There are two ways in which things may pan out from now on. One is that the problematic countries carry out their obligations under the bailout programme. They reduce their deficits and, no less important, they carry out supply-side reforms. Those reforms can produce quite rapid results, as we saw from the Hartz reforms in Germany nearly 10 years ago or the Thatcher reforms here in the 1980s. If they fulfil those obligations to a level of commercial satisfaction, it is only right to lay on a system of eurobonds that would be jointly and severally guaranteed by all the eurozone member states, and therefore would be issued at a yield comparable with that of the yield paid by Germany today. Interest rates are enormously important. If you look at the primary deficit of Greece, it is only 1 per cent of GDP, so reducing interest rates is going to be absolutely critical. On that basis, we shall be able to get through this. I do not think that the ECB should be involved at all. The Germans are absolutely right about this. You should never take risks with the solvency or monetary credibility of your central bank. That is essential. I would like to make what I think is a novel suggestion. The European Financial Stability Facility and the subsequent mechanism should be allowed to lend in addition to eurozone countries with high debts where their bonds are trading at a price below or, if you like, at a yield above the bailout level. The last time I looked, Greece’s bonds were at a discount of 66 per cent whereas the bailout level is 50 per cent. The facility should be allowed to lend to those countries for the sole purpose of enabling them to buy in those bonds on the secondary market and cancel them. We have lost some good market opportunities of that kind over the past couple of months, which is regrettable. I do not believe that there would be a big problem about doing that. So far as the euro is concerned, it is a fatal error to think in terms of abandoning it. That would be an act of self-destruction on an unprecedented scale. As has already been mentioned by my noble friend Lord Lea and others, it would immediately add a foreign exchange crisis to the crisis we already have. You would have the deutschmark or the hard euro parity rising to a level that would stymie growth in Germany. That has already happened with the Swiss franc. You would also have the other parities of the weaker economies going down the tube and causing high inflation. That is not the way forward at all. What is more, it would greatly increase the real value of the euro-denominated debts of these countries in terms of the drachma, the escudo or whatever successor currency existed. Again, that would be very foolish. Further, I would say to those who think that devaluation is a solution in that it would encourage competitiveness, it only increases competitiveness if it is accompanied by a programme of domestic austerity and restraining domestic consumption. Otherwise it just washes through the system like a dose of salts and produces a cycle of inflation and continuing devaluation. We had that in the 1970s and there no point in doing it at all. If you cannot deliver an austerity programme as part of the bailout, you will not gain any benefit from a devaluation, and that would be a great mistake. To sum up, European integration, greater fiscal integration, federalism and the euro are part of the solution; they are not part of the problem.