Eurozone Crisis

My Lords, I start by thanking my noble friend Lord Lamont of Lerwick for leading this debate, and all noble Lords who contributed to a very important debate that showed the House at its best. I add my congratulations to my noble friend Lord Wolfson of Aspley Guise not only on his wit and wisdom but on the great rigour and clarity of his thoughts. We have really had two debates this afternoon. The main plot had the European theme going through it and the subplot concerned UK-specific issues. If noble Lords will bear with me, I will be guided by my noble friend Lord Lamont and others and stick mostly to the main plot of euro issues, and will respond to a number of important points that were made on UK-specific issues if I have time. We heard some remarkable big-picture and historical perspectives on the European story. My noble friend Lord Alderdice came at it from a very particular angle. We also heard the rather different positions of my noble friends Lord Lawson of Blaby and Lord Ashdown of Norton-sub-Hamdon. While neither of them will be surprised that I do not necessarily share their conclusions on the way forward, there were things that I certainly agreed with in both their analyses, which I will come back to. Their speeches were remarkable in setting out two dramatically opposed perspectives on our predicament. The euro area crisis continues to drag on. The summer now seems a long time ago and the waters were relatively calm then compared to now. Confidence in all economies across the world, including that of the UK, has been undermined. The Office for Budget Responsibility on Tuesday cited the euro area crisis as a major reason for its downward revision of the UK growth forecast. As I have said, a resolution to the crisis would provide a significant boost to the UK economy. It is in our vital interest to work with our euro area counterparts to make that happen. A comprehensive, coherent and lasting solution means first and foremost that euro area members must implement the agreement that was reached towards the end of October. It is clear what needs to happen and what decisive action is needed. First, the new Governments in vulnerable countries must implement reforms fast; secondly, the euro area’s financial fund—the European financial stability facility—needs maximum firepower to protect vulnerable countries; thirdly, the euro area needs to strengthen its weaker banks to withstand the turmoil; and, fourthly, following a decision to provide more assistance for Greece, including significant debt restructuring, all parties must now stick to that specifically agreed deal. More broadly, it is important that euro area Governments and the institutions of the euro area demonstrate that they will do everything necessary to stand behind the euro. Prolonged uncertainty merely undermines confidence across the global economy. Specifically on those issues, we have had discussions on the need for bank recapitalisation, with which I agree. The issue was first raised by my noble friend Lord Lawson of Blaby and by my noble friend Lord Flight. I agree with much of what the noble Lord, Lord Myners, said on the imperative of this. He looks surprised. I do not follow all his logic—it amuses me that he urges the Government to do things that his Government were not prepared to do in restricting bank bonuses and dividends—but what he said seriously echoes some of the thoughts of the Governor of the Bank of England today and the financial stability report the bank have issued which goes into many of these details. Bank recapitalisation needs to be co-ordinated; it has to be decisive and it must bolster the position of the undercapitalised banks in Europe. Of course it is preferable for new bank capital to be raised privately—some of the difficulties in doing that have been mentioned today—and Europe needs to make it clear that national public backstops are available if required. As the governor has re-emphasised today, of course, UK banks are well capitalised as a result of actions that the authorities and the banks have already taken. In answer to the specific question from my noble friend Lord Wolfson, the governor was asked today whether the Bank was making contingency plans in case of a eurozone break up, and he confirmed, as we would expect, that it is. We will continue to press our euro area counterparts to see through a decisive resolution to the crisis but at no point have we committed—or will we commit—any British taxpayers’ money to a euro area bailout, neither to Greece nor to the bailout fund. However, as a founding and permanent member and one of the largest shareholders in the IMF, we continue to be a strong supporter of the IMF in its role as global backstop to the world economy. The IMF can certainly use its expertise to help administer a euro area bailout fund and I agree with my noble friend Lord Dykes on that point. However, it can lend only to countries with a programme for adjustment. A potential special purpose vehicle for the euro bailout fund would not fit that bill. So the bottom line is that it is for the euro area and the European Central Bank to support the euro. I know that some noble Lords would like a different balance as between the European Central Bank and the role of national central banks within the eurozone, but the role of the ECB will be critical. Global commitment cannot be a substitute for euro area action and it is necessary to increase the firepower of the bailout fund to stand behind the euro. However, I do not want to shy away from questions around break-up. Whatever conclusions different Members have drawn from this issue in the debate, and they are radically different, I think that we would all agree that the cost of a break-up of the euro would, in the recent words of my right honourable friend the Chancellor of the Exchequer, be ““economically disastrous””. As he put it on 26 October, instability in the eurozone has had ““a chilling effect”” on the British economy and other economies. If that is what a bit of instability and market volatility can create, let us just imagine what the break-up of the eurozone would do to this country. The break-up of the euro, disorderly or otherwise, would cause enormous instability to the entire global economy and, I argue, do enormous damage to the British economy. I accept that one or two noble Lords who have spoken nevertheless believe that the cost of continuing would be greater, but I take the point that was made by, among others, my noble friend Lady Kramer when she in particular drew attention to the cost of break-up. In answer to my noble friend Lord Higgins, of course all sorts of scenario planning is done—I have referred to the Bank of England already—but we should not go too far down this route. As my right honourable friend the Prime Minister said on 7 November, "““the more we discuss and speculate on the nature of another country’s currency and economy, the more we could damage their interests””.—[Official Report, Commons, 7/11/11; col. 35.]" If we start to describe exactly what we might have to do, we could set off all sorts of chain reactions. Yes, we plan, but I would leave it at that. The euro area and its member states must reform for the long term. That means that the euro area members follow the remorseless logic to closer fiscal union. One vision for the eurozone has been clearly laid out by the noble Lord, Lord Eatwell; I would not necessarily agree with all the detail but he sets out a clear and coherent logic. My noble friend Lady Wheatcroft has drawn attention to another critical piece of this puzzle, the need for much greater budgetary restraint, and I very much echo that. However, as the euro area pursues greater fiscal integration, as it needs to, we have to ensure that the UK’s interests in Europe are protected. That means ensuring that countries in the euro area cannot impose decisions on the remainder of member states in the EU27. It is not a question of slow or fast lanes. I am not sure if that has been mentioned today—I am being told both that it has been and that it has not—but it is right that it should not be. I have said on other occasions in the House that the EU already has variable geometry in a number of areas, but the decisions that concern the EU27 must and will be taken at the level of all 27 member states.