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EU (Co-ordinated Action)

Volume 470: debated on Thursday 24 January 2008

8. What discussions he has had with his European counterparts on co-ordinating action across the EU in response to turbulence in the US sub-prime market. (181417)

I met my French, German and Italian counterparts, along with the European Commissioner, in Paris last week to discuss current market conditions. In addition to that, the Prime Minister will meet his counterparts in London next week.

In view of this morning’s announcement of very substantial losses by Société Générale, will my right hon. Friend say a little more about what practical proposals he and the Prime Minister will be putting forward to ensure that financial regulators, central banks and Governments work together right across the European Union to improve both transparency and stability in Europe’s banking sector?

I am aware of the reports from Société Générale in Paris. The Financial Services Authority is looking at the situation. As I understand it, that concerns something that happened in the bank’s operations in Paris, and I further understand that the French Treasury will make a statement later today. On my right hon. Friend’s more general point, it is important to recognise that many of the problems that we have to deal with transcend national boundaries, particularly in relation to the role of the International Monetary Fund and the forum for financial stability and what they can do to get better early warning, and the need to achieve agreement on how banks deal with off balance sheet structured investment vehicles in relation to the credit rating agencies. These are all areas where we must take international action.

We discussed some of these matters in Paris last week, and I very much hope that as we move towards conclusions, we can get the international community to move far faster than it usually does. It took 10 years to get Basel 2 agreed to, and we do not have 10 years to sort out the present problems. We need a combination of actions on the part of individual institutions to report the full extent of their exposure as quickly as possible, so that we can end some of the present uncertainty. That would help to restore stability. In addition, it will be necessary for action to be taken not just domestically, as I shall outline next week, but internationally. Above all, as I think my right hon. Friend would agree, whatever we do must be proportionate. We must avoid the temptation to have a rule and regulation for every possible eventuality, as the American Government did after the Enron difficulties earlier in this decade, which proved to cause as many difficulties as they thought they were solving.

What are the implications for major infrastructure projects such as the expansion of Stansted airport, where a Spanish company which is already heavily borrowed is the lead on that project? What implications will the crisis have for such a project? Are other projects that the Government consider to be in the national interest—I do not happen to think that that is one of them—threatened by the crisis?

I wondered whether the hon. Gentleman was changing his line on Stansted. No doubt he is anxious to make that point for his constituents, if not others. It is for BAA, which owns Stansted, to decide whether the investment that it thinks is necessary can come forward. I very much hope that it can. Yes, we have an immediate problem in relation to credit and what is happening in the markets, but we should ask ourselves all the time what we will need 10, 20 or 30 years ahead. When it comes to aviation, as I have said many times, ever since I published the aviation White Paper in 2003, the problem that we have in this country is that on successive occasions when we should have been looking to the long term, short-term decisions were taken that prejudiced the development of transport infrastructure, in particular. That is why it is important that people ask themselves what Stansted will need in 10 or 20 years. I think BAA will take the long-term view, which is extremely important.

Has the Chancellor noted that there seems to be almost universal agreement in the United States that the threat of recession following the sub-prime mortgage and credit crunch crisis can best be warded off by a combination of lower interest rates and fiscal stimulus? Does he think that the response of the European Union and of Britain should be similar, and if not, why not?

Mainly because the situation in the United States economy is rather different from the situation in our economy and in other major economies in the EU. As the hon. Gentleman rightly recognised, the big problem that the Americans have is that following the collapse of the US sub-prime market, the problem has gone on to affect the US housing market more widely. In America, the basic problem is that the supply of housing far exceeds the demand. In this country, we have the opposite problem: demand for housing exceeds supply, as we well know. What may be appropriate for the US economy is not always necessarily appropriate for other economies. As I have said on a number of occasions, because we have low unemployment, historically low inflation and low interest and mortgage rates, the Monetary Policy Committee has room for manoeuvre—as the Governor said in his speech in Bristol, I think of Tuesday evening—that was not available 15 years ago, when the previous Government got into such terrible problems. We will continue to do what is right for the UK economy, and at the heart of that is ensuring that we have a strong, stable economy and that we take the right decisions for the long term. If we do that, we can get through these problems, just as we have dealt with problems in the past.