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Eurozone Crisis

Volume 534: debated on Thursday 27 October 2011

I wanted to update the House as early as possible on developments in the eurozone overnight, and in the absence of the Prime Minister as he travels to the Commonwealth Heads of Government meeting, to report on the good progress made at yesterday’s European Council.

The crisis in the eurozone has caused instability in financial markets, has greatly undermined confidence around the world, and is having a chilling effect on economic growth in many countries, including our own. It is in our overwhelming national interest that a coherent, comprehensive and lasting solution to the eurozone’s problems is found, because the decisive resolution of this crisis would provide the single biggest boost to the British economy this autumn, and the break-up of the euro would be the single greatest threat to our prosperity.

Our view about how to solve the eurozone’s immediate problems has been clear, consistent and forcefully expressed. The Prime Minister, the Deputy Prime Minister and I have set it out to the House on a number of occasions: reinforcement, recapitalisation and resolution. First, eurozone member states need to reinforce their bail-out fund to create a firewall; secondly, weak European banks need to be recapitalised; and thirdly, the unsustainable position of Greece’s debts needs to be resolved. But if the solution is to last, as I said many months ago, members of the eurozone also need to address the logic of monetary union by pursuing greater fiscal integration within the eurozone, while at the same time we protect Britain’s interests.

We have to improve competitiveness: competitiveness in the peripheral economies of the eurozone as measured against the core economies such as Germany, and competitiveness across the whole European continent versus the rest of the world. This is the solution of the crisis that we have been advocating for months, and the solution again advocated by the Prime Minister at yesterday’s European Council.

Our view is that last night very good progress was made towards solving the immediate crisis—very good progress on all fronts. The deal put together is much better than was expected yesterday afternoon. But much detail remains unresolved, and having put pressure on the eurozone to get this far, we have to keep up the pressure to get the details completed. It has started down the right road; now it must finish the job.

Let me take each element of last night’s deal in turn and say how it affects Britain. First, on recapitalising banks, we are pleased that the European Council agreed to the proposal hammered out by myself and other Finance Ministers at the weekend ECOFIN. All major European banks will be required to hold at least a 9% core tier 1 capital ratio by the end of June next year, including marking to market all their exposure to sovereign debt. The European Banking Authority, based here in London, assessed that achieving this target means that banks will require an extra €106 billion of capital, and the Council yesterday confirmed that if this cannot be raised privately, Governments will have to step up to the plate.

I can confirm to the House today that in the assessment of the European Banking Authority and our own tripartite authorities, no British bank requires additional capital. This is an important expression of confidence in this country’s banking system at a time of global financial stress. EU member states also agreed to co-ordinate guarantees of term funding, should they be required, and we have ensured that state aid rules will be applied properly, and European banks will be restructured if necessary, just as the European Commission demanded of the last British Government two years ago.

While some would have wanted an even tougher banking agreement, and even more capital going into Europe’s weak banks, we should welcome what has been achieved with this agreement. We now have—unlike the totally inadequate stress tests of last year—a commitment to significant extra resources for the European banking system. However, the UK and others insisted that that commitment from the whole of the European Union on banking be conditional on the two other key components of the solution to the crisis that I set out: a reinforced firewall and a resolution of Greek debt. These are both properly matters for the Eurozone, not the UK—and they are both matters on which progress was also made last night.

On Greece, a headline agreement was reached to reduce the Greek debt-to-GDP ratio to 120% by 2020. The eurozone will contribute an additional €30 billion. Because the British Government have made sure that we are not part of the Greek bail-out, none of that extra €30 billion will come from our taxpayers, while private holders of Greek sovereign debt will be asked to accept a nominal write-down of 50%. A lot more work is needed to put all this into practice, including detailed negotiations with the private sector—but we said that Greece’s debts were unsustainable, and we are pleased to see a resolution in sight.

On reinforcing the size of the firewall, the eurozone has set out two options that could operate in tandem. One is to provide, from the bail-out fund, insurance on new debt issued by Eurozone countries; the second is to create special purpose vehicles that can attract resources from private and public investors. In its statement, the eurozone said that

“the leverage effect of both options will vary”

but that they could be

“expected to yield around 1 trillion euro”.

We have always believed that the role of the European Central Bank is critical, and I welcome the positive statement made by Mario Draghi, the incoming ECB president.

Talk of special purpose vehicles has given rise to questions about the involvement of the International Monetary Fund and major shareholders such as the UK. As I have said to the House on many occasions, Britain has always been one of the IMF’s largest shareholders and biggest supporters: we helped to create the institution 60 years ago; the last Government agreed to increase its resources two years ago; and this Government not only ratified that agreement but helped to make the IMF more representative of the new world economy by brokering a deal last year that gave countries such as China and Brazil a greater say, while securing Britain’s seat on the board. The IMF has been an active participant in the packages put together to support Ireland, Portugal and Greece. It has also been active in extending flexible credit lines to Poland and Mexico—neither of which is in the eurozone, of course—as well as supporting other countries in central and eastern Europe such as Hungary, Romania and Latvia. Indeed, it currently has 53 lending programmes around the world, of which only three are in the eurozone.

Supporting countries that cannot support themselves is what the IMF exists to do, and there may well be a case for further increasing the resources of the IMF to keep pace with the size of the global economy. Britain, as a founding and permanent member of its governing board, stands ready to consider the case for further resources and contribute, with other countries, if necessary. Let us remember that support for the IMF does not add to our debt or deficit, and that no-one who has ever provided money to the IMF has ever lost that money. But let me be very clear: we are prepared to see an increase only in the resources that the IMF makes available to all the countries of the world. We would not be prepared to see IMF resources reserved for use only by the eurozone. By all means the IMF can use its expertise and advice to help the eurozone to create the special purpose vehicle that it is considering. By all means let countries with large foreign currency reserves such as China consider putting their own money into the eurozone’s special purpose vehicle—that must be their decision—but the IMF cannot put its own resources in; it can lend only to countries with a programme for adjustment.

I confirm today that Britain will not put its resources in either. We do not have a surplus; we have a large deficit. We have had to use our resources to recapitalise our banks and to stand behind our currency. An active member of the IMF? Yes. Helping the IMF with advice and technical support? Yes. But the IMF contributing money to the eurozone bail-out fund? No. And Britain contributing money to the eurozone bail-out fund? No. That is Britain’s clear position.

We expect eurozone members to use the next few days—the next few weeks, at the most—to provide much more detail about their plans to increase their firewalls and sort out Greek debt. We have made it clear that the sooner that happens, the better it will be for the world economy. We must maintain the momentum.

This package will not on its own resolve the longer-term issues of how to make the euro work more effectively. Those longer-term issues were addressed yesterday, and there were proposals for greater fiscal integration and mutual control over the budget policies of eurozone Governments. I have argued that we need to follow the remorseless logic of monetary union, and that involves a loss of national sovereignty for countries in the eurozone.

It is in Britain’s interest that the euro operates more effectively, provided that the interests of all 27 member states are properly protected in key areas of European policy, such as the single market, competition and financial services. We are insistent that our voice will continue to be heard and our national interests protected. We have found allies among the other 10 members of the EU that are not in the euro. An important marker was put down in Sunday’s European Council conclusions.

No one pretends that sorting out this situation in a satisfactory way will be easy, but it is a necessity. That is the context in which we should approach potential treaty changes. The coalition Government have already proved that they can protect Britain’s interests by getting us out of the previous Government’s involvement in the eurozone bail-outs, holding down the European Union budget increases, and putting into law the guarantee that no further powers or competencies can be transferred to Brussels without the consent of the British people in a referendum. The Government will again protect Britain’s interests as the discussions on a possible limited treaty change begin. We will seek to rebalance the responsibilities between the EU and its member states, which in our view have become unbalanced.

Finally, the euro will not find lasting stability until its peripheral members become more competitive. That means credible plans to reduce budget deficits. That commitment was made in the very first section of yesterday’s agreement. However, that involves difficult decisions on pension ages, business tax rates, welfare reform and educational standards. Britain, thankfully, is not in the euro, but we are taking those difficult decisions at home, because the ultimate lesson of this crisis is that unless a country can pay its way in the world and compete around the globe, it will be next in the firing line. I am determined that our country will never be in the firing line.

I thank the Chancellor for coming to the House to make that statement. With the shadow Chancellor in New York, I am responding on behalf of the Opposition, and I have a number of detailed questions. It is good that some agreement has been reached, but with so little detail, many unanswered questions remain. I hope that the Chancellor can help the House today, because whatever happens in the eurozone will have huge ramifications for British families and businesses.

First, on the recapitalisation of the banks, is the Chancellor confident that the deal announced is sufficient and that UK banks do not need further recapitalisation? Will he keep that under review? What estimates has he made of the exposure of UK banks to Greek, Italian, Portuguese and Spanish sovereign debt? Will he confirm that the House of Commons estimates of $3 billion for Greece and $17 billion for Italy reflect the current position for UK banks? Although the agreement states that banks and other creditors are invited to accept a 50% loss on Greek sovereign debt, is the Chancellor confident that the vast majority will agree—and if so, by when?

On the expansion of the European financial stability facility, does the Chancellor believe that the €1 trillion package is sufficient? Does it amount to the “big bazooka” that the Prime Minister talked about earlier this month? Alternatively, will we be back here in a few months’ time, which would mean further uncertainty, undermining confidence, undermining investment and undermining growth? That is the last thing that Britain, or Europe, needs.

Can the Chancellor explain how the leveraging of the EFSF will work, and when he believes the detail of credit enhancement and special purpose vehicles will be finalised? If the EFSF must also fund bank recapitalisation, will it be sufficient to give the markets confidence, and will there be funds remaining to underpin any sovereign debt crisis and prevent further contagion?

Although we have a clear economic interest in the eurozone sorting out its problems, the interests of British taxpayers must be safeguarded. It would have been wrong for Britain to pay twice, both through ongoing temporary EU bail-out funds and through the IMF. If this package is indeed the final and permanent bail-out fund, any British role should be through the IMF alone.

I heard the Chancellor’s question and answer session with himself on the IMF, but will he clarify what he said on the radio this morning? He said that the IMF was not

“going to put additional resources directly into the eurozone, hypothecated for the eurozone.”

Does he believe, though, that there will need to be a further increase in UK contributions to the IMF? Whether he succeeds in persuading it to describe that as anything other than a hypothecated fund is irrelevant.

On the arrangements for future decision making, the agreement states:

“The President of the Euro Summit will keep non euro-area member states closely informed of preparations and outcomes of summits.”

“Closely informed”? Has Britain now been reduced to simply receiving a postcard from Brussels? How will the Chancellor ensure that Britain’s voice, and our vital national interest, is heard loud and clear in future negotiations?

On the forthcoming treaty changes, will the Chancellor admit what the Prime Minister was unable to admit yesterday? Is it now the Government’s policy to seek to repatriate powers as part of those treaty changes? Which ones, and on what timetable?

Finally, is not the missing piece in the agreement the lack of any plan for jobs and growth, which were not mentioned at all in the Chancellor’s statement? Is it not the case that without growth we cannot solve the debt crisis, we cannot solve the banking crisis, and we cannot solve the jobs crisis? At this time, Britain should be leading the charge and pushing for a proper plan for jobs and growth across Europe. But is not the truth that this Chancellor cannot do that? With unemployment at a 17-year high here in Britain, with no growth since last autumn, and with borrowing therefore now set to be £46 billion higher than he planned, he is clinging to an austerity plan that is failing here in Britain.

With the UK economy flatlining since this time last year, before the eurozone crisis of recent months, and with only Greece and Portugal growing more slowly than Britain, is it not time that we had a plan for jobs and growth—across Europe, yes, but here in Britain too?

I thank the hon. Lady for some of her questions. Of course, we miss the constructive and consensual approach of the shadow Chancellor. We are talking about the Bretton Woods institutions, and it turns out that he is at a place called Buttonwood, which adds to the pantomime feel of Labour’s economic policy.

Let me deal directly with the hon. Lady’s questions. First, of course we keep the capital and liquidity positions of the British banks under constant review. We would do that in the absence of any European agreement, but of course we have also participated in the recent work by the European Banking Authority. We thought it was important that that was done at EU level rather than eurozone level. I repeat what I said in my statement: the EBA and our own authorities confirm that no British bank requires additional capital, which of course is very good news for us all.

On the hon. Lady’s question about getting private sector involvement in the write-down of Greek debt, that is of course one of the key unresolved issues from last night. We now need to see whether the headline agreement reached on behalf of the private sector can be implemented in practice. I am confident that it can, but that is one of the crucial next steps that need to be got on with.

The hon. Lady asked about the exposure of the UK banking system and the UK economy to various peripheral economies of Europe. Those figures are published regularly by the Bank of England. I do not propose to repeat them today, but they are available for everyone to see.

On the question that the hon. Lady asked about the overall fund, €1 trillion is the number that the eurozone has put on its firewall. Of course, some said it should be larger, but it is very significantly larger than what we had yesterday, which we should welcome. As with private sector involvement in the Greek deal, we now need to see the details of how the eurozone will create that leverage. It has set out two options that can work side by side. One is a kind of first loss insurance on newly issued debt, and the second is the special purpose vehicle, by which it hopes to get external private sector investment. Of course, it is openly speculating about getting Chinese money into that.

The IMF can only lend directly to countries, and countries with programmes or agreed and negotiated flexible credit lines, which will remain the case. It cannot lend into that special purpose vehicle. That is also the UK position. We do not think that Britain, with its deficit, can contribute to the special purpose vehicle. If we were to do so, we would add to our debt, and we do not think that that is appropriate. We have had to use our own resources to deal with our own problems in this country.

It is of course crucial that the IMF remains a central economic institution in dealing with the world’s problems, and I urge the hon. Lady, newly appointed as shadow Chief Secretary, to reconsider Labour’s position—[Interruption.] I know that the hon. Member for Nottingham East (Chris Leslie) led the Labour party in Committee to vote against the increase in IMF resources, which the last Labour Prime Minister negotiated at the London 2009 summit. Whatever I have said about the right hon. Gentleman—and I have said quite a few things—I do not think that anyone would doubt that the highlight of his premiership was the negotiation of the London 2009 G20 deal. It is completely astonishing that the Labour party voted against that agreement.

As we discuss over the next few months increasing the IMF’s resources to deal with all the countries of the world, I urge Labour Members to reconsider their position on that, and also their rather odd position on the euro. They seem to be holding out membership of the euro—[Hon. Members: “No!”] Well, that is certainly what the Labour leader was doing at the weekend. To be in the euro but out of the IMF strikes me as a rather bizarre economic policy at the moment.

That brings me to my final point. Britain has been arguing consistently for months that a solution to this crisis requires recapitalising the banks, reinforcing the firewall and resolving the Greek crisis. We have insisted that the appropriate issues are discussed at the level of 27, which is why there have been two European Councils this week, and an ECOFIN. We will continue to argue for Britain’s national interest as we enter the difficult discussions ahead on the potential treaty change, on making the euro work, and above all on getting the growth and jobs that the hon. Lady talks about across Europe and in this country, by making this continent far more competitive and stopping Britain and Europe from pricing themselves out of the world economy.

Following on from the Chancellor’s final remarks, I am sure he would agree that without a restoration of growth in the eurozone, the debt crisis simply cannot be resolved. He has been with his counterparts quite a lot in the past few days. What evidence has he seen in discussions with them that the EU has the will to implement the necessary reforms on the supply side of the economy to restore Europe’s global competitiveness?

There is increasing evidence that people are focused on the structural issues facing the European economy. Indeed, when my hon. Friend looks at the agreement issued by the eurozone last night, he will see that when it refers to Spain and Italy, it stresses the importance not just of getting their budget deficits down, but of plans to increase the pension age and make labour legislation more flexible and competitive—all the sorts of things that this Government are pursuing here in Britain, although every one of those measures has been opposed by the Labour party.

Does the Chancellor agree that one reason why the bank recapitalisation worked three years ago was that we were able to provide precisely the sort of detail required to reassure markets that we were taking the necessary action? When can we expect to hear, for example, exactly how much Greek debt is to be written down, and which banks in continental Europe will require additional funds from Governments or other sources? When can we expect to hear more detail about the rescue fund? In relation to that, can he let us know whether there is a commitment on the part of the eurozone to provide real cash—or are we looking at a sophisticated financial instrument of the sort that might have contributed to the problems in the first place?

I fear that we are looking at a sophisticated financial instrument here. However, it is clear that Germany and the Bundestag were not prepared to provide further resources. The European Central Bank was not prepared to provide those resources either, for all sorts of reasons to do with its history and those of other central banks in Europe. They have therefore turned to those options to try to leverage up the money they have already committed. That is the sensible choice for them, given those other constraints. They are trying to get other private investors from around the world, potentially including the involvement of sovereign wealth funds, to leverage up the fund.

Of course, I completely agree with the right hon. Gentleman that the sooner we get the agreement in detail, the better. That applies equally to what he said about private sector involvement in the Greek write-down. A mistake made earlier this year, on 21 July, was that eurozone members put together a deal and then took months to implement it and get the detail. He is completely right to say that yes, we made some good progress overnight, but the job is not finished yet. The eurozone now has to get the detail and reassure the markets that it has got a grip of the situation. That is where we will continue to exert British pressure.

In what respects does the Chancellor believe, and can he demonstrate, that the proposals for a two-tier Europe and a fiscal union do not represent a constitutional, economic and political fundamental change in the relationship between the EU and ourselves?

If my hon. Friend is referring, as I suspect he is, to the European Union Act 2011, there are clear procedures in place for establishing whether powers or competences are being transferred from the UK and this Parliament to Brussels. Those procedures are clearly set out, but I would say that it is in our interests that the euro works. That requires greater fiscal integration within the eurozone, which works to the benefit of Britain, provided that—this is an important proviso—we can continue to ensure that our voice is heard on issues that are for the 27 members, such as the single market, competition policy and financial services. That is what we will be fighting hard for in the coming months.

I remain wholly unconvinced that the euro can survive in its current form, unless the weaker countries are permitted to recreate their own currencies and devalue. They currently face permanent deflation and permanent handouts from Germany. That is no future for them, and no future for Europe.

The hon. Gentleman has consistently made that argument for at least as long as I have been a Member of the House of Commons, and longer still. He probably takes some comfort in the fact that events over the past decade have tended to reinforce the views that he has expressed, but I would say this: it is in Britain’s interest that we make the euro work. The disorderly break-up of the euro, or any break-up of the euro, would be an enormous economic blow for this country. Forty per cent. of our trade is with the eurozone.

If we set aside the arguments that we will have this autumn and next year about the domestic effects of the Government’s policies—the Government will argue that they promote growth, and the Opposition will argue that they undermine it—everyone in the House would accept that 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 will do to this economy.

Will my right hon. Friend explain to the House what the consequences would have been for our membership of the IMF if those who had voted against the increase in our subscription had prevailed?

That would have been catastrophic. We would have been the only IMF shareholder not to have ratified the deal initiated at the London G20 summit, which would have completely isolated Britain. We might have had to leave the IMF, and we would certainly have lost our permanent seat on the board. We heard all the talk from the shadow Chief Secretary about ensuring that Britain is at the table—but she wants us to get up and leave the IMF table.

In his statement, the Chancellor said, quite rightly, that the euro would not work unless the periphery countries regained their competitiveness. How is that possible if those countries do not have the full IMF package, including currency devaluation? In that context, does he think that the IMF will get its money back?

It is perfectly possible for areas within a monetary union to increase their competitiveness relative to other areas in the union—parts of the United Kingdom and the United States have done so in the past 20 or 30 years. It is possible, but it is very hard work—I agree with the sentiment that the hon. Lady is expressing—and requires people to tackle tough issues, such as labour market reform, pension ages, tax rates and so on, which, of course, are controversial. However, people in countries such as Italy, Spain and Greece have been confronted with the reality of the need to make change—although we will see whether they do indeed undertake that change. The IMF is the guardian of its own programmes and makes constant assessments of its programmes in Ireland, Greece and Portugal. I do not want to be premature, but I think that we are seeing substantial improvement in the Irish economic performance after the difficult decisions that they have taken in that country.

The Foreign Secretary once described the euro as a “burning building”. Might it not be an idea for us to help our neighbours get out of the building? We know that there is always an exit from monetary union, so why not help our friends to get out? Keeping them in at any price is in neither their interests nor ours.

My hon. Friend and I have discussed this matter before, and we disagree. What the Foreign Secretary said at the time—I remember because I was his speechwriter—[Interruption.] And there were some very good speeches at the time.

They were all written by him.

The Foreign Secretary described the euro as a

“burning building with no exits”.

That was his point. As I said, the break-up of the euro, disorderly or otherwise, this autumn or in the foreseeable future, would cause enormous instability to the entire global economy and do enormous damage to the British economy.

Will the Chancellor provide some clarification? He said that no UK funding would go to the euro bail-out. When he talked about supporting the IMF, therefore, did he mean with advice and suggestions only or is he using UK taxpayers’ money to support it? If the latter, how will he force the IMF to ring-fence the money so that it does not pay for a euro bail-out?

Let me be clear to the hon. Lady. The IMF potentially has a role—but that is yet to be decided—in helping the eurozone to organise its special purpose vehicle, provide technical support and do all the things that it is very good at doing, which is stepping in and providing expertise. That is a perfectly legitimate role for the IMF. It has done it in other situations where trust funds and the like have been created around the world. However, we are saying that there should not be IMF resources going into this special purpose vehicle in terms of a lending programme. The IMF lends money to countries with conditions attached, and that is what it should do in the future. It is what its articles require it to do. We do not support, and I do not think that the IMF does either, changing those articles and allowing the IMF to lend money to the special purpose vehicle. We are against that and against Britain contributing to the special purpose vehicle, even if countries such as China or Chinese sovereign wealth funds do contribute.

I welcome the Chancellor’s statement that resolving the immediate crisis in the eurozone and securing the long-term future of the euro currency are in Britain’s national interest. However, does he agree that it is also in Britain’s national interest to maintain full, positive and active engagement within the EU 27 member states in order to deepen the single market and increase intra-EU trade, which will benefit all member states?

I absolutely agree that there is a very important role for the EU27 to strengthen and deepen the single market and to promote free trade—the EU has just concluded a free trade agreement with South Korea that benefits the British economy directly. Also, the EU will have an important role in things such as financial services regulation, and it is important that that is discussed at the level of the 27, because we are such an important player in the financial services industry worldwide. So I completely agree with the hon. Gentleman. Britain has been absolutely clear in recent months that issues affecting the 27 should be discussed by the 27, not at the level of the 17 euro members. It has been partly through our insistence, with others, that there have been two European Councils and an ECOFIN this week to ensure that proper procedures are followed.

The Chancellor said that British interests should be properly protected when the eurozone countries move towards giving up national sovereignty and towards greater fiscal integration. Will he clarify how that will happen?

This is the argument that we have to make over the coming months and as the discussions start on whether there is going to be a future treaty change—although what is being talked about is a treaty change of a limited nature. We have to look for ways of securing Britain’s influence and voice, and the influence and voice of the other nine EU member states that are not in the eurozone. That is absolutely top of our negotiating agenda. However, we also want to secure a rebalancing of the responsibilities between the EU and its member states, which will be another important part of the argument that we make.

Does my right hon. Friend agree that now that the 17 eurozone countries have established the precedent of holding their own euro summit and have created yet another president, the president of the euro group, there is a real danger that they will start to agree policies to suit themselves and then impose them on the other 10 EU countries that, thankfully, like the UK, have not adopted the euro?

I agree with my hon. Friend that we have to be alert to the danger of the 17 eurozone members, which will have a qualified voting majority, caucusing on areas that are legitimately the preserve of the 27 member states. When this country, under the previous Government, allowed the eurogroup of Finance Ministers to be established and accepted that Britain would not be at that eurogroup, there was the fear that the eurogroup would caucus. That was one of the concerns of the then Government and Opposition. That actually has not happened. If anything, they have not co-ordinated and worked together closely enough over the past decade or so. However, he is absolutely right that we need to ensure that they do not caucus in the future in a way that undermines our voice and influence or that bounces all 27 member states. All member states not in the euro are alert to this challenge. Indeed, last night the Prime Minister had dinner with the Polish and Swedish Prime Ministers to discuss precisely that issue.

Will the Chancellor be crystal clear? Is he guaranteeing that no British money will be used for this bail-out directly, through the IMF or through any other vehicle?

The Chancellor is absolutely right to say that a disorderly break-up of the euro would be a disaster, but given that the euro is going to break up, should we not take the advice of the hon. Member for Rhondda (Chris Bryant) and organise an orderly break up of the euro?

I do not think that the orderly break-up of the euro, even if it were desirable, which I am not saying it would be, could be done in a way that would not lead to a pretty disorderly impact on financial markets and the British economy.

The hon. Member for Wellingborough (Mr Bone) is a very naughty boy and I shall see him afterwards.

Basically, Greece lied about its finances and Italy is probably still lying about its finances. It would have helped enormously had there been independent proper auditing of those countries’ finances. Many people opposed that when it was proposed, but surely we should be advocating it now. The danger for the Government is that it might apply to all 27 countries, not just the 17 eurozone members.

Indeed. The statement talked about independent auditing of finance and independent growth figures on which to base fiscal projections, which is precisely what we have introduced in this country through the creation of the Office for Budget Responsibility. That will ensure that we do not get political pressure to alter the growth forecast of the type that the former Chancellor, the right hon. Member for Edinburgh South West (Mr Darling), detailed in his recent autobiography.

The 50% haircut has been described as a charge on the banks, but Greek sovereign debt is actually held by insurance companies, pension funds and hundreds of thousands of individual savers. Can my right hon. Friend tell us what is in the package—or what measures he thinks need to be taken—to restore confidence in the existing sovereign debt of the peripheral eurozone countries?

My hon. Friend’s first point is a good one. The write-down of Greek debt ultimately has an impact on people who invest in Greek debt, either directly or—as is more likely for the general population of this country—through their pension funds and the like. Thankfully, British institutions were not that heavily exposed to the Greek banking system and economy, compared with other European countries such as France and Germany, but he is right that people will have taken losses. In Britain, the institutions that he mentioned all provisioned for Greek loss many months ago, so it will come as no shock to them. More broadly, he asked about confidence in the stock of debt, which is of course one of the challenges. The first loss guarantee that the agreement talks about is only for newly issued debt. We will have to see how the special purpose vehicle works as well, but in general, if there is confidence that there is a sufficient set of mechanisms in place to stand behind the euro and countries that are in trouble, that will also increase confidence in the stock of debt.

The Chancellor might be surprised to know that if limited treaty changes are necessary to set up the inner 17, there would be support from the Opposition Benches for the limited changes needed to protect Britain’s interests and for the capacity to build a coalition among the 10 non-eurozone members. However, a very real political question is whether the Chancellor and the Prime Minister will be able to withstand the pressure from their Back Benches for much more fundamental reform of the treaty.

I would hope that we would persuade all parties in this House. There is certainly strong agreement on the Conservative Benches that we want to rebalance the responsibilities and repatriate some powers. The Liberal Democrats and the Liberal Democrat leader have talked about rebalancing responsibilities—he did so earlier this week. [Interruption.] The shadow Treasury Minister, the hon. Member for Nottingham East (Chris Leslie), seems to forget the position set out by his party leader this weekend. When he was asked whether he thought that Brussels had too much power, he said no. That is the official position of the Labour party going into these negotiations. I know that Opposition Members look pretty glum about it, but that is what the leader they chose—or rather, they did not choose—has done for them.

Will the Chancellor explain to the House how it has come about that although the United Kingdom’s deficit this year is larger than Greece’s, our interest rates are similar to those in Germany?

My hon. Friend makes a good observation. Because of the credible fiscal plans that we have set out, we have secured confidence in Britain’s ability to pay its way in the world, taken our credit rating off negative watch, which is where it was at the time of the general election, and secured for our country record low interest rates. Those interest rates would be at risk if we pursued the policies advocated by the Opposition, which would also be a rather bizarre position to take into the European Council discussions, when right at the top of the agreement signed yesterday is the statement that countries need to pursue policies of

“fiscal consolidation and structural reforms.”

The Opposition have voted against every policy of fiscal consolidation and every policy of structural reform.

Does the Chancellor think that the 50% haircut of Greek sovereign debt will be sufficient and does he expect that holders of Italian debt will also need a trip to the barber’s?

We think 50% is a very good number. We had in mind somewhere around 50%, and we wondered whether that would be achievable. One of the pleasant surprises of last night was that it was achieved. It is only a headline agreement, and as the former Chancellor said earlier, it absolutely needs to be put into practice now if this deal is to mean anything. I think it is best for me to stick to talking just about Greece.

RBS shares have jumped 7% this morning in response to the eurozone statement. Does the Chancellor share the markets’ view that British banks are sufficiently capitalised to withstand not just the haircut to Greek debt, but any other eventualities that might arise in the eurozone over the next few months?

Yes, I am confident about that, which is also something that the Bank of England and the Financial Services Authority monitor carefully. The important thing about the test that the European Banking Authority applied was that it not only required banks to hold 9% core tier 1, but marked to market their sovereign debt exposures, which is something that the eurozone resisted for the last year and a half. Of course, the market has priced in some haircuts—to continue the barbershop analogy—of other sovereign debts. That does not mean that I think they will happen; they are what the market thinks will happen. The fact that we have now tested our banks against those marked to market on sovereign debt gives us confidence that the banking system in Britain can withstand whatever is thrown its way in the next couple of months.

Something that I do not often discuss with people in the House is the fact that for some years the previous Prime Minister, Tony Blair, his Chancellor and I chaired the committee on preparations for the euro, on which the present Secretary of State for Business, Innovation and Skills served, so I have some experience in this area. The Governor of the Bank of England said that we were in the middle of the worst crisis in the history of the international economy, but when I listened to today’s statement, the Chancellor seemed to come across as extremely timid about this country’s role in meeting that challenge.

I will have to thumb through the index of Peter Oborne’s book, “Guilty Men”, to see whether there is a reference to the hon. Gentleman. I will concede that there are a few references to some of my colleagues in that book, but I have a good alibi, which is that I was writing speeches for the Foreign Secretary at the time, making it clear what some of the problems were with the euro, and some of those problems have come to pass.

As the Foreign Secretary used to say at the time, he wrote his own speeches, and I write my speeches today—and those who have written my speeches before me have got themselves into the House of Commons, which is a good thing.

The serious point that I would make to the hon. Member for Huddersfield (Mr Sheerman) is this. I completely reject his idea that Britain has been marginalised. We have actually insisted that such matters be discussed at the European Council and ECOFIN. A key component of today’s agreement is the banking package, which is the area where there is most detail. There was a 10-hour negotiation to achieve the banking package last Saturday which Britain was right at the heart of, so we are at the centre of things. I suspect that the hon. Gentleman agrees with me that his party’s Front-Bench policy to marginalise us from the IMF would also see us leaving that key negotiating table.

I cannot confirm that they are dead in the water, because the eurozone is determined to pursue a financial transaction tax and talks about that in its statement. However, I can confirm to my hon. Friend that Britain will not accept a financial transaction tax at an EU27 level while other jurisdictions in the world do not impose one. We are not opposed to financial transaction taxes in principle—after all, we have stamp duty on shares in this country—but we will not have a financial transaction tax at a European Union level while countries such as America, China, Singapore and others do not have one. As their having one is a long way off, we will be waiting a long time—perhaps for ever—for a European Union financial transaction tax.

Over the next few years we are likely to see the emergence of a two-speed Europe, with the Government—or parts of the Government—going in exactly the opposite direction. What can the Chancellor and the Prime Minister do to ensure that we are not locked out of the fundamental decisions that will be made?

I just do not accept the premise behind the hon. Gentleman’s question. The coalition agreement explicitly states:

“We will ensure that there is no further transfer of sovereignty or powers over the course of the next Parliament. We will examine the balance of the EU’s existing competences”.

The odd one out is the Labour party, which has set itself against taking any power from Brussels back to Britain. That is exactly what the Labour leader said this weekend when asked that question. I suggest that the hon. Gentleman use his lobbying efforts and his questions on his own party leader.

I for one do not share the optimism that the latest package of measures will do the job, if only because it does not address the fundamental cause of the problem, which is a lack of competitiveness. Can the Chancellor assure the House and the country that, if there were to be a further downward leg to the crisis, Britain will not be called on in any way to help financially with any further rescue packages, whether through the IMF or not?

As I have said to the House, Britain should not be part of eurozone bail-outs. We got ourselves out of—[Interruption.] I am answering the question. On coming to office, on the Sunday after the general election, the Labour Government committed us to being part of an EU bail-out of the eurozone. We have now got ourselves out of that, which is very important. We are also not contributing to the eurozone bail-out of Greece, which has just increased in size; nor are we going to contribute to any special purpose vehicle or fund that might be created. We are absolutely clear about that. When it comes to IMF resources, like every other country in the world that is a member of the IMF, including China, Thailand, Guatemala, the United States of America, Canada and Brazil, we of course contribute to its resources for the 53 programmes that it is currently carrying out across the world, and we will continue to do so. However, we are not prepared to see—and the articles of the IMF do not allow for—money from the IMF being put into a special purpose vehicle. So I think that the position is pretty clear.

I would think much more highly of the Chancellor if he would actually admit that one reason that the banking system in the UK is not under threat is because the last Government and the people of this country bailed out the banks.

The right hon. Gentleman will recall that, as Hansard will show, I asked him last time about the possibility that they would require a £2 trillion fund, which most economists say they will, and that the so-called haircut—more Sweeney Todd than Vidal Sassoon—would be 60%. Surely we must be in the IMF and involved in funding through the IMF; otherwise the big bazooka that the Prime Minister has talked about will say “Made in China”.

I am happy to acknowledge that the previous Government recapitalised the British banks. They were obviously under enormous duress at the time—[Interruption.] It is simply not the case, as the hon. Member for Nottingham East has just suggested, that the Conservatives opposed that. We supported it at the time; indeed, we were advocating it in advance of it happening. However, I completely recognise that it was a difficult decision for the previous Government to take.

On the question of the size of the fund, of course there are those who would like it to be even larger. We should welcome the significant progress that has increased its size severalfold to, potentially, around €1 trillion, which is a significant sum. The hon. Member for Linlithgow and East Falkirk (Michael Connarty) also asked an interesting question about what was happening during our time as Members of Parliament to the balance of economic force and power in the world. I suspect that we are going to spend many years talking about that in the period ahead.

Order. I am keen to accommodate the remaining colleagues who are seeking to catch my eye, but I must remind the House that there is a business statement to follow, and a significant debate thereafter. I am therefore looking for brevity.

I welcome my right hon. Friend the Chancellor’s approach, including his recognition that the division of responsibilities between the EU and member states has become unbalanced. Does he agree that the new proposals for fiscal integration and mutual control in the eurozone do nothing to reduce the case for a rebalancing of those responsibilities?

Can the Chancellor update us on the situation regarding Cypriot banks, with their many customers in the UK and their tie-in to the Greek economy?

We keep under close surveillance not only British banks but the branches of Cypriot banks and the subsidiaries of other banks operating here in the UK. So we are closely monitoring the Cypriot banks, as we do with the other eurozone banks in Britain.

Has the Chancellor seen any credible figures that show that Greece can solve its long-term deficit and debt problems and still remain in the eurozone?

Yes, I think that there are plenty of things that Greece can do, which the Greek Government have already identified, to make itself much more competitive. It is coming from a long way behind, but it can do quite a lot in regard to its labour market, its pension ages, its tax rates and the like that would make it considerably more competitive than it is today.

Can the Chancellor please give us more details of how he intends to represent the UK’s interests, given that the eurozone countries have their own separate president and summits?

Eurozone Finance Ministers’ meetings are already held every month—that was agreed by the previous Government—and there is now an agreement to hold two eurozone Heads of Government summits a year. There have been two this year already, but we should not regard that as a fundamental threat; we have to allow them to get together to better manage their own currency. We are, however, looking at proposals that have been put forward here for those summits to take place after the EU27 leaders gather, rather than before, so that we do not have any caucusing in advance of a meeting of the European Council.

How confident is my right hon. Friend that countries such as China will want to contribute to the special purpose vehicle, and what will happen if they do not?

The short answer is that we will find out whether China wants to contribute. The President of France is speaking to the President of China today, and he will no doubt give us all an update following that conversation.

Much to the annoyance of some of his Back Benchers, the Chancellor supports greater fiscal integration within the eurozone, but what precisely does he mean by greater fiscal integration?

I think that the hon. Gentleman is being a little unfair to Conservative Back Benchers. Actually, quite a lot of Eurosceptics would argue—as I would, as a Eurosceptic—that we always said that this would happen if we joined the single currency. We always said that it would result in losing national sovereignty, co-ordinating budget policies or giving away powers over budgets. That is one of the reasons that we did not want Britain to join; it is why we stayed out. Given that monetary union logic leads to greater fiscal integration, we should let that happen, because I think that it will make the euro work better. As I have said, however, Britain wants no part of it.

Harlow taxpayers will be very relieved that none of their hard-earned money is to be used to prop up failed socialist Governments in Europe. They will also want to be sure, however, that my right hon. Friend will do all that he can to repatriate powers from Europe, unlike Labour Members, who believe that everything in the EU garden is rosy.

I absolutely agree with my hon. Friend that we are going to seek to rebalance those responsibilities. He also draws our attention to the fact that Greece and Spain are run by socialist Governments, but I do not want to intrude on their politics.

Having just taken credit for letting Greece off half its debt at the expense of, among others, British pensioners, what provisions would the Chancellor advise British institutions to make in regard to Italian debt?

I am not providing that advice across the Dispatch Box, but the Financial Services Authority, the Bank of England and the Treasury monitor British financial institutions to ensure that they are appropriately prepared for things that might happen. The European Banking Authority test that I have talked about takes into account a mark to market on the sovereign debt exposures of countries such as Italy and Spain.

The Opposition have talked a lot about Britain’s marginalisation, so may I say that I welcome the fact that the Prime Minister attended yesterday’s meeting because I know that the Leader of the Opposition would much prefer President Sarkozy to represent this country? Will my right hon. Friend confirm that while he is Chancellor he will do everything he can to ensure that a British Prime Minister represents British interests in Europe?

May I just press the Chancellor a little further on the Prime Minister’s desire to repatriate powers over employment and social policy? What discussions has he had so far with eurozone Finance Ministers on these matters and how many of them would he expect to support the Prime Minister’s position?

The discussions on treaty change, which the Council conclusions on the eurozone mention, have only just begun, so I have not had those discussions.

Would my right hon. Friend anticipate how his international counterparts would have reacted at recent EU summits if he had argued that, as advocated by Labour Members, the UK should increase its borrowing by the end of this Parliament by up to £87 billion a year?

We would, of course, have been laughed out of the summit. We would not even have been able to sign up to the Council’s conclusions. The Labour party policy has no plan to reduce the deficit—[Interruption.] Well, if there is a plan, let us hear it. Let us hear one example. The Labour party has no plan to reduce our deficit, which is higher than that of almost any of the countries we have talked about. It has a plan basically to pull us out of the International Monetary Fund and a plan to join the euro—such plans would be treated as slightly bizarre at some of these meetings.

More constituents have contacted me about the financial transaction tax than ever contacted me about Monday’s debate. They will be pleased to have heard the Chancellor say that he supports this in principle. Will he go to the G20 to argue vigorously in favour of this tax?

What I would say about the financial transaction tax—[Interruption.] I am not sure that it is Labour policy. There is a debate about this tax, but attached to it is a serious red herring. People would like a financial transaction tax to be used to pay for the aid commitments into which big western countries entered. That is what all the non-governmental organisations that contacted the hon. Lady and others are arguing for. Britain is meeting its international aid commitments out of its own resources, and we do need a financial transaction tax across Europe for other countries to meet the aid commitments they entered into. When it comes to the principle of the financial transaction tax, one cannot oppose it, as we have a stamp duty on shares, but I would say that if we impose such a tax in Europe, all the business would disappear overnight to Hong Kong, Singapore and elsewhere. We know that because that is what happened when the United States imposed a form of transaction tax on the euro-dollar market—it moved to London—and when Sweden introduced a financial transaction tax in the early ’90s, its entire business moved to London almost immediately. We have many case-studies. I understand why people are emotive about this issue, but surely the question is, “Are you meeting your aid commitments?”—and this country is. We should all be proud of that.

Following the deal on the eurozone, I understand that Italian media and Italian businesses are calling on Mr Berlusconi to copy this Government’s approach to deficit reduction. Does my right hon. Friend agree that Italy and other eurozone countries would have been far better off if they had followed that course of action long before now?

I think they would have been in a better position if they had got ahead of the pressure from the markets rather than being pursued by them. That is precisely what this Government did in Britain. The markets are, for many people, an abstract idea, but as we have discussed, we are talking ultimately about the decisions of many millions of investors and people with pensions, life insurance policies and the like about where they put their money. If they do not have confidence in a country’s ability to pay its way in the world, that money disappears almost overnight.

Has the Chancellor had an opportunity to carry out the work that will determine if, when and by how much last night’s decision will impact on UK growth? If he has not had that opportunity, will he undertake to come back to us so we can have further debate on that very matter?

The honest answer to the hon. Gentleman’s perfectly good question is that, on the morning after the night before, we do not know because important details remain to be resolved. We need to see the detail of how this 50% write-down of Greek debt is going to happen and we need to see how the new firewall will work in practice. We have to see the details: until they are in place, this will remain unresolved and the instability might return. The answer to the hon. Gentleman’s question is that when the detail is in place, we should be able to make an assessment of whether it has calmed the markets and improved the UK growth position.

While strongly supporting my right hon. Friend’s robust defence of the national interest, may I ask him what the statement means where it says “to provide, from the bail-out fund”, presumably the existing bail-out fund, “insurance on new debt issued by eurozone countries”, presumably including Italy?

The concept here is that first-loss insurance on newly issued debt from countries such as Italy, as my hon. Friend mentions, would be provided out of the special purpose vehicle. That would obviously make it easier for investors to buy bad debt.

I welcome the Chancellor’s statement that some progress has been made to protect the eurozone. In parallel with repatriating powers, will the British Government make it absolutely certain that the single market becomes a place where competition can thrive and productivity can improve, as it is in our interest as well as that of the whole of Europe to make sure that it works well?

I could not agree more with my hon. Friend. The European single market has helped the UK economy over the last couple of decades. We want to see it completed further and we want to see the services directive properly implemented. Competition has brought great benefits not just to the economy, but to European consumers, including those in this country. To my mind, that is what the European Union exists to do. It should make its contribution to growth across the continent.

Will my right hon. Friend assure my constituents that the euro preparations unit has been abolished and that under this Government it will never be re-established?

That is an easy assurance for me to give to my hon. Friend’s constituents. There was a euro preparations unit in the Treasury when I arrived. It was shut down and it will not be reopened.

Can my right hon. Friend confirm that when the previous Government signed this country up to the Nice treaty 10 years ago, they also signed away our veto on financial assistance to European nations?

I can confirm that we have lost our veto on financial assistance. That was one of the issues with the so-called EFSM—the European financial stabilisation mechanism—which was the EU27 bail-out fund, which we joined a couple of days before this Government were created. Getting us out of it—[Interruption.] The former Chancellor’s memoirs are very clear about this.

The former Chancellor wrote them! What I would say to my hon. Friend is that we did not have the power to veto disbursements from the EFSM, so we had to negotiate our way out of it. That is precisely what the British Prime Minister has done.

We hear Labour Members suggesting that Britain is somehow isolated from other members at the EU table, but does the Chancellor agree that what they forget is that by refusing to rule out joining the euro and by insisting that more powers be ceded to Brussels, they are isolating themselves from the broad mass of the British people?

I completely agree with my hon. Friend. It is a remarkable position for the Labour leader to take when he says:

“I don’t think Brussels has too much power.”

What sort of negotiation would it be if he were in charge?

I, too, welcome the Chancellor’s efforts to protect British taxpayers from further bail-outs. I also welcome his statement that the International Monetary Fund exists to support countries that cannot support themselves, but I reiterate my concern that the IMF does not end up supporting a currency if a country chooses not to take the right action.

My hon. Friend has made a good point. The IMF exists to support countries, and supports 53 at present. It does not exist to support currencies.

Can the Chancellor tell us how on earth it can be the case that, although it has a larger deficit than Greece, the United Kingdom enjoys German levels of interest rates?

That is because this Government, in the teeth of opposition from the Labour party—which created this mess—have established fiscal credibility, brought our interest rates down, and ensured that while we may talk about the bail-out of some European countries, we are not talking about the bail-out of Britain.