Question for Short Debate
My Lords, I am very grateful for the opportunity to raise a matter which has already been raised on several occasions in the House recently. The arguments for joining the euro zone as soon as circumstances permit have grown stronger in light of the recent financial crises which show no signs of abating in either this country or elsewhere. Others may hesitate and seek to invoke those very crises as reasons for postponing yet again consideration of this matter but I believe that the reverse applies. I was delighted at the strong leadership shown by Nick Clegg in another place, with his article in Monday’s Independent advocating this target as soon as the circumstances were propitious and utilised. It also brought our party back to the original robust advocacy of the euro by Charles Kennedy, who as leader even went so far as, quite rightly, to set a date for the announcement of our application to move into the euro zone.
I thank the noble Lord, Lord Myners, for coming today to wind up this important short debate. We are, in a way, old friends from our City days many years ago. I have much admired the way in which he has settled into this House and plunged in, in medias res, with a hefty workload on the global financial crisis and major legislation, as if he had been an experienced Member of this place for quite a long time.
I also thank my noble friend Lord Newby for being on parade yet again, despite a very heavy work schedule on the very same legislation and with some other pressing economic tasks thrown in. I thank the noble Lord, Lord Taverne, not only for an outstanding and original speech on this subject in December, in the debate on the Loyal Address, but for coming along to speak today.
We are coming to a crunch decision-time on this matter. Arguably—others may have other examples—the two biggest blunders made by the Governments of Blair and Brown since 1997 were, first, the failure to follow up on the euro pledge, and, secondly, the illegal war in Iraq. Other noble Lords might cite many other examples, but nothing really measures up to the setback to this country from those two instances.
Looking back at the financial crisis and its roots, and without simply being wise after the event, we now can see the incredible weaknesses of our old-fashioned and timid UK system. There was the notion, up to last year, that the free markets knew everything—nonsense which has been imbued in us and in the press, particularly the right-wing newspapers. There was also arrogance among certain practitioners in the City about that very philosophy. The very low level of real investment in Britain has continued to be a serious problem. High interest rates had to be propped up, and we had to pretend that the pound was a leading, strong currency. There was excessive frenzy in home-buying which inflated prices and increased the numbers buying to let. More and more, speculation in property was encouraged as the only virtue and the only scene in town. There were huge and growing trade deficits. All that flim-flam and candyfloss were rolled into one, with excessive greed and shameful bonuses thrown in as well.
Let us contrast that with the more cautious and prudent German approach, with high savings ratios, major new investments in real assets on a continuing basis, a relatively small stock market, low levels of bank and credit card debt, and most of their growth going into exports in spectacular fashion. My word, don’t those German chaps let us down with their old-fashioned habits?
I also much admired the courageous ways in which virtually all the French political classes, except the National Front and the Communist Party, educated the French public for well over 10 years about the virtues of the strong currency as a precursor to entry into the European monetary system. If only the Government here had done that as well. We have now wasted eight years of dither and delay on this matter. If the Government here had the drive, with equal bravery to the French, to start explaining the merits of the euro system to the public, it would still take some time to get in. There is a minimum two-year period to wait at the start, and then it depends on the circumstances. Would the other countries accept our devaluing the currency yet again? It has already fallen by more than one-fifth since midsummer.
It would also entail getting rid of the referendumitis that has bedevilled this country’s politics in recent times. That would be a painful decision. I commend the Government for doing so, with great acclaim from us and others, on the Lisbon treaty, which was a different document from the original document. The task and objective of getting rid of the excessive obsession with referendums will have to be confronted on this matter, and probably others in future. So, full credit to Gordon Brown for what he and the Government did last summer with the Lisbon treaty Bill.
The worsening crisis here may enhance the need to grasp this nettle at long last, even though the UK central bank interest rate is now below the euro zone rate for the second time recently. I asked the then Minister to respond to those points in my speech, on 4 December, in the debate on the Loyal Address, but, sadly, he declined. We have witnessed instead the time-honoured British wheeze of letting the pound come down yet again. It is not a formal devaluation, but it is the fifth time since the war that there has been a major reduction in the value of the pound. Meanwhile, the euro has apparently become one of the strongest currencies in the world. Interestingly, too, despite crises everywhere, all the new member states remain keen to join, including Slovenia, Malta and Cyprus, with the two still eccentric exceptions of Poland and the Czech Republic. Incidentally, the Chinese Government regarded the creation of the euro as the most spectacular achievement of single-market creativity ever witnessed in post-war Europe.
I hope that the noble Lord, Lord Myners, will not hark back tonight to the infamous “back of the envelope” five conditions, which, if he will forgive the phrase, are in my mind pure Mickey Mouse. They are thanks, presumably, to Mr Ed Balls’ excessive imaginary fantasies. I remind the House of the overarching and longstanding advantages of the euro to its member countries. First, there is instant price transparency for customers and consumers in nearly 20 countries, and the neighbours are using the euro more and more as a pro tem side-by-side currency. Even one non-member, Iceland—for fairly obvious reasons right now—wants to become a member, too.
Secondly, there are huge savings for companies and individuals on exchange costs—which, in the real-world marketplace, are often rip-off costs—and freedom from excessive credit card charges on currency exchanges. Weaker members also benefit from very low interest rates which keep both real and money costs down. For us in Britain, keeping the pound also seems, unhappily, to be a long-running Treasury plot to retain its power nexus in the British system. Meanwhile euro-denominated investment bonds are regarded as safe-haven investments worldwide, unmatched, I think, in market valuation terms apart from some in Asia.
The European monetary system is also a political development enhancing the operational unity of sovereign member states working closely together. Although the ECB is not a customary lender of last resort in the conventional, national central bank sense, its established reputation, power and authority give it the ability to provide the huge insurance-type phenomenon of support and cover for weaker members, too, as long as they strive to adhere to the discipline, rules, and normative objectives of the EMS system and policy.
In his FT article of 3 June 2008, Willem Buiter said:
“there is no reasonable argument for a small, highly open economy like Britain to retain monetary independence … the exchange rate does not act as a buffer against asymmetric shocks … it becomes a source of … unnecessary … volatility”.
He went on to say that the UK has massive gross external liabilities—at that time some 400 per cent of annual GDP, compared with 100 percent for the US and a mighty 700 per cent for tiny Iceland. Despite these exposures, it has only the Bank of England’s lender-of-last-resort capacity for sterling liabilities, which is a much more modest figure. Sterling now makes up less than 5 per cent of world reserves of leading currencies.
In a way, the mirror image of these sombre realities is expressed in Peter Sutherland’s conclusion in a booklet on the euro. He reminds us on page 188:
“The last time the UK had a balance of payments surplus was (for one quarter only) 1998, and by mid-2008 the deficit had reached 3% of GDP”.
These deficits, he said,
“will have to decline, and there are only two mechanisms for this—a recession which reduces imports and a fall in the pound. We will get both, but there is a serious risk of a full scale sterling crisis”.
Meanwhile the Government dither; the Tory Party, apart from Ken Clarke, pretends that the EU does not actually exist; UKIP wants to leave when it has grown tired of drawing the generous emoluments of the European Parliament; and only we on these Benches fight on for common sense and sanity. Perhaps, as I said, people want to look away and avoid seeing the results because the euro is a political development as well as a financial and economic one. I believe that it is none the worse for that. Surely it will get more difficult for us to join the euro on fair terms the longer we procrastinate, for no reason other than fear itself. Does the Minister agree?
My Lords, I congratulate the noble Lord, Lord Dykes, on securing this timely debate. I begin by listing three largely incontrovertible facts. My noble friend will of course have the opportunity to put his own gloss on these when he winds up.
First, it is still government policy to join the euro when the five economic tests have been met. Secondly, the five tests have now been met, as was conclusively demonstrated by Willem Buiter in the booklet published earlier this month, to which the noble Lord, Lord Dykes, referred. I also contributed to that booklet, and so I am speaking in that context.
After those first two points, the logical third point is, ergo, await an early government announcement, or perhaps not. The five tests seem to be a movable feast rather than, as one had assumed, a periodic examination. But the unstated objection is, first, that we will not win a referendum, so, secondly, we cannot start a campaign and, so, thirdly, we are stuck where we are. But equally the world has changed irrevocably and I shall spell out why these frozen politics are absurd now that economics have been unfrozen in such a spectacular way.
We cannot, if we are to look further than the end of our noses, which many people refuse to do, refuse to look again at all our options. Far from “talking the pound down”, we advocate that now is the time to consider the modalities of fixing the rate. Our opponents view regular devaluations with equanimity. The tenth anniversary of the setting up the eurozone and fixing the rate is, of course, also the tenth anniversary of the last serious debate in this country, not just among politicians but in industry, among trade unionists, the media, the retail trade, financial services, manufacturing, tourism and everybody in all the regions of Britain. But like Rip Van Winkle, we have had our head firmly under the pillow ever since.
The year 1999 also marked the high point of Gordon Brown’s enthusiasm. It is opportune on this anniversary to revisit his overview at that time, which is conveniently set out in the speech he made at a TUC conference in May 1999 on unions and the euro, and is reproduced in the back of the booklet. In his words:
“We are the first government to state that there is no overriding constitutional barrier to membership”.
His characterisation of the political economy of the eurozone is worth quoting in full. He continues:
“Their macro economic stability is to be pursued through monetary union … through a single currency, intended as it does to remove unnecessary currency speculation within Europe, to reduce transaction costs which are a barrier and a big expense to business often at the expense of employment … We are the first British government to declare for the principle of that currency union”.
Perhaps the Minister will confirm that this statement by Gordon Brown is still the policy of Her Majesty’s Government.
The then Chancellor attached particular emphasis to the central dimension of stability provided by a settled exchange rate with the rest of the economic area in which we carry out most of our trade. That, of course, is the European economic area in which European, including British, multinationals make most of their living.
It is also true—although I am not sure whether we should or should not venture on to this territory this afternoon—that exchange rate stability and the attendant removal of the transaction costs inside that zone, and currency movements, which can be hedged against, of course, but that is still an unnecessary barrier, beg the question of the correct rate at which to join.
It is worth noting that the rate today, when one euro equals 93p, might not be the rate available in two years’ time, any more than the rate of roughly 66p to the euro in January 1999. Looked at the other way round, we have now slipped over two-thirds of the way to parity with the euro and our economic fundamentals may mean that if we want to stop in our tracks before that comes about, we need to do something about it.
British industry is not looking for a lower rate than parity; it is now looking for some stability, and this logically extends to mutual support for reserves at certain exchange rates, though this has not been openly talked about so far.
It is sometimes said that the UK’s ejection from the exchange rate mechanism in 1992 is a convincing argument for not going into the eurozone. In fact, of course, as even the noble Lord, Lord Lamont, would, I think, accept, these are two totally different and non-comparable scenarios if fixing the rate at parity amounted to us entering the waiting room to the euro.
What is the UK’s alternative to the euro in terms of credible currency zones? I do not hear anyone arguing that now is the time to become the 51st state of the USA or to join China. The depth of our involvement in the EU is growing, and that is one of those facts much debated by the historicist tendency. It is a question of the present circumstances being extraordinarily difficult for all of us; but that cuts both ways. We cannot expect perfection in co-ordination, though crocodile tears about the eurozone’s difficulties in co-ordination are not very dignified either.
In 1999, the sceptic group forecast that the euro would fall apart. That scepticism has now had to be reduced to a stark combination of chauvinism and a protection of narrow City interests, given the reluctant recognition that the ECB has become a highly respected institution and the currency, for India and China, has increasingly become a candidate for the status of a reserve currency, alongside or in substitution for the US dollar. That familiarity with the euro is now self-reinforcing also in Africa, Asia, Latin America and the OECD area. Unfortunately, the pound is nowhere by comparison.
As Gordon Brown concluded in 1999, to,
“withdraw from Europe or go outside Europe’s mainstream and become a Hong Kong of Europe—a low wage competitor with the Far East—or a tax haven servicing major trading blocs—the idea of a greater Guernsey—only needs a minute’s consideration to be rejected”.
Perhaps I may add his concluding and particularly apposite remark:
“Our view has been that, instead of the old wait and see attitude which came from the last government, we must make the preparations which are necessary to allow us to make a genuine decision, subject to a referendum of the people of this country. So our policy is not ‘wait and see’ but ‘prepare and decide’.”.
Where are we, and where can we go from here? It is now surely overdue, given what I have sketched out, for us to set out a road map, perhaps including a preliminary question that ought to attract even the support of William Hague, though probably not of the noble Lord, Lord Lamont: “Do you want to save the pound by stopping it falling below parity with the euro?”. I think that the answer would be yes. The Murdoch press would be against it, of course, but it cannot fool all the people all of the time on this or on any other matter, as that empire moves towards its decline and fall.
Many of those politicians who say that they support floating or devaluation today are the same politicians who would cry crocodile tears for the country’s plight and try to make political capital out of it if the pound fell below parity. The opportunity may well arise for us to hold the pound-euro rate at parity, though that, too, would need a good deal of preparation and agreement with our main continental allies. That halfway house would then de facto be the first step to joining, as it would mean that we were part of the euro-pound area. Indeed, to those who ask, “What is so magical about parity?”, my answer is, “It is a once-in-a-lifetime opportunity for the British people to get used to the euro-pound area”.
I part company with the conventional wisdom that suggests that this is all too much of a political nightmare. On the contrary, the British people are renowned for their respect for and acceptance of pragmatic, step-by-step approaches to solving problems, as in the approach that I have outlined; if only this was put in a straightforward way to them. On that point, if I may coin a phrase, there is no alternative.
Finally, I urge my noble friend and his colleagues in government not only to give this serious consideration but to lift the veil of omerta which for far too long has smothered this issue in unreason—which is not, in my submission, a dignified way to address this great question about our national future.
My Lords, at the outset, I apologise to your Lordships’ House for my late arrival for the commencement of the debate. I should like to thank the noble Lord, Lord Dykes, for arranging this debate, which enables us to look at the various issues relating to our membership of the euro.
The debate about the United Kingdom’s membership of the European single currency has abated in recent months, as we have watched our economy and those across the European continent slide deeper and deeper into recession. There remain a number of devotees who are still pressing that we should belong to the European single currency, and who even see the current economic downturn as a fillip for their cause. I believe that those individuals are misguided.
I have long experience in business and I share the concerns of those who see the current economic climate as deeply troubling. This is the first time, since the creation of the European single currency 10 years ago, that we have witnessed an economic downturn across the eurozone, and it will be interesting to witness how this project confronts the challenges of a recession. My instinct is not altogether positive, and there is nothing that I have seen, as yet, that has led me to want to review my stance. Ten years is not long in the life of a currency, and it is proper that we should watch what happens with interest, although, I repeat, I do not believe that we should seek to participate in the European single currency.
It is a shame that the European Commission is so detached from the views of ordinary people in this country. I was astounded when the President of the European Commission, José Manuel Barroso, claimed in December 2008 that the United Kingdom was “closer than ever before” to entering the single currency, as a consequence of the fallout of the global financial crisis. I could not disagree with him more. His confidence, which rests on the basis of his comments that,
“some British politicians have already told me: ‘if we had the euro, we would have been better off’”,
is fundamentally at odds with the official position of Downing Street, which states repeatedly:
“Our position hasn't changed ... we have no plans to join the euro”.
Perhaps unsurprisingly, that view contrasts with that of the noble Lord, Lord Mandelson, who has said that,
“our aim, our goal, should be to enter the single currency”.
I doubt whether even the Secretary of State for Business, Enterprise and Regulatory Reform would advocate that now is the right time for us to enter the single currency. I hope that the Minister will use the opportunity of this debate to clear up this mess and state categorically the position of the Government on the single currency—people have a right to know. The position of our party is clear: there are no circumstances in which the next Conservative Government will propose joining the euro.
We have witnessed a fall in the value of sterling that has enhanced the calls of those who would willingly see us ditch our currency and rush into the single currency. However, these souls are generally the same individuals who were advocating that we should join it some 18 months ago, when the value of the pound was around 30 per cent higher than it is now. It is a fair question to ask what the consequence of taking their advice at that time would have been. One thing is certain: we would not have been protected by the exchange rate, and economic pressure would have found an alternative outlet for its expression—probably in a further reduction in jobs, or lost output. It is possible that instead of a 30 per cent reduction in the value of our currency, we would have witnessed a similar fall in other factors, which could have exacerbated the pain suffered across the whole economy. I am glad that we do not have to endure that indignity at this time.
That point was endorsed in another place when a Labour Member of Parliament asserted:
“Had we been in the euro, we would have been pinioned to an over-valuation that would have been catastrophic for our economy. The depreciation will at least deflect some demand to our home economy, and help us to recover”.—[Official Report, Commons, 9/12/08; col. 426.]
I might agree with the sentiments of that particular politician, but it is not apparent that that is the settled view of the Government, most particularly in their interactions with senior figures in the European institutions.
It is an awkward reality for the countries that comprise the eurozone that they can use only fiscal adjustments, as the freedom to use monetary policy is sacrificed as a condition of entry into the single currency. That point was made clear in a report by a Select Committee of your Lordships’ House in the last Session, which stated:
“In the long run this would imply that the country loses competitiveness; it is no longer able to correct this by a devaluation of its exchange rate and can only adjust through restrained fiscal policies that will bear down on domestic cost pressures and employment”.
It is not even as though a Government within the eurozone could use complete fiscal autonomy in facing these challenges. There are tight requirements as a consequence of membership, such as the size of a member state’s budget deficit.
Our experience of the exchange rate mechanism should have demonstrated more clearly than anything that there is no permanently correct exchange rate. Were we members of the eurozone, the difficulty that we would encounter would be identical to the one that we experienced at that time: maintaining the value of our currency in relation to those across the European Union. The only difference would be that we would now be unable to take our own corrective measures, and the likely pain would be enhanced.
The noble Lord, in proposing this debate, has elected to refer to “the prospects for the UK’s membership of the euro”. He has a long association with a particular view of the European Union, which is one that I do not share. In my opinion, we should be debating not the prospects for our potential membership but whether there are circumstances in which we would want to join the European single currency. My firm view is that sacrificing the independent control of our monetary policy would be far too high a price to pay. I strongly urge the Minister to clarify the confusion that we have witnessed from the Government in recent weeks and to state that we will not be seeking to join any time soon, if ever.
My Lords, we are in the middle of the most serious economic crisis of my adult lifetime. It is more serious than when I was a Treasury Minister in my youth in the late 1960s, and it was bad enough then.
One of the most threatening aspects today is the weakness of sterling. However, the future of sterling outside the eurozone seems to be a taboo subject for both the Government and the Conservative Opposition. When I raised the issue of the pound and the euro last July, no one else took it up. The same was true in our debate on the economy last December, when the very mention of the euro produced a groan from the Conservative Benches. On the last occasion that I debated the issue, I mentioned as part of my concern the longer-term threat to the City if we stayed out of the eurozone, but the future of the City now seems a minor issue compared with the threat to sterling.
Why is the outlook for Britain particularly gloomy, as the IMF confirms? In addition to the banking crisis there is a serious question mark over the credibility and stability of the pound. A funding crisis combined with a currency crisis is an explosive mixture. We are dangerously exposed outside the comfort of membership of a big currency area such as the eurozone.
If there were a serious run on sterling we would face an appalling prospect. We might even have to put up interest rates and cut spending at the very time when we need lower interest rates and increased public spending. Even if, as we all hope and on the whole expect, we can avoid a serious run on the pound, in the longer term with our high public sector deficit, we are likely to have to maintain a much tighter monetary and fiscal policy than the eurozone, with much higher nominal interest rates to mop up the liquidity that we have created during this crisis. We will for some time be condemned to a lower rate of growth.
Before the credit crunch we were doing reasonably well. I suppose we were doing better than I expected, but not as well as the Government boasted. Our productivity deteriorated somewhat compared with the average of the eurozone since the launch of the euro, but again, the relative decline in our productivity, however serious, is a comparatively minor matter. More important, the eurozone’s average cyclically adjusted deficit declined from 2.7 per cent of GDP in 2004 to 1.2 per cent in 2007. Ours increased and will be dramatically higher by 2010. If we had been members it is likely that our deficit would be lower because we would have needed a tighter fiscal policy to make up for lower interest rates. That is highly relevant to the biggest issue before us now—credibility and stability.
The pound is a barometer of international confidence. Its decline, however welcome to exporters, reflects the view of foreigners on the future of our economy. The pound has fallen dramatically in the past six months. The credibility of our fiscal policy is now in question, with the risks of holding sterling high and the rewards low and likely to become even lower. Why should anyone want to hold sterling assets? Foreign holders of sterling will want to reduce their exposure. The threat to the future of sterling is not just an immediate problem; it could well affect the level of foreign direct investment in the longer term. I have always thought that the possible decline in foreign investment in Britain was one of the strongest arguments for joining the euro. I confess that that did not happen—at least, not yet—but it is a real threat now.
Let me sum up the argument about the dangers of sterling in very simple terms. I am a very keen sailor. If you are sailing a small boat you can explore creeks and harbours that you cannot get into with a larger boat with a deeper keel. A small boat has its advantages. But if I am caught out in a force 10 storm, by God I want to be in a bigger boat. Our prospects would be a lot less threatening if we were comfortably in the eurozone.
When the issue is raised we are always told by the Conservatives that we must keep the right to set our own interest rates and keep a floating pound. I would seriously ask those who believe that these arguments are decisive to read the set of essays to which the noble Lord, Lord Lea, referred, which include some carefully argued and authoritative contributions from eminent economists and financial and other experts—I contributed but I do not count myself one of them. It is called Ten Years of the Euro: New Perspective for Britain. I recommend it. These essays show that the case for an independent monetary policy and a floating exchange rate is far weaker than is the current fashionable view.
Monetary policy works with time lags that can be very long, and its effects are variable and uncertain. It is often said, for example, that control over our interest rates is needed to prevent asset bubbles, but the deputy governor of the Bank of England has admitted that interest rates are not a suitable instrument for preventing asset bubbles. The dangers of bubbles are best dealt with by appropriate regulation, and our regulation failed. We are a small, open economy. One of the ways monetary policy has effect is through the exchange rate, yet that often goes up and down unpredictably. Foreign exchange markets are, in effect, a financial casino. Many fears, phobias and sudden mood changes motivate foreign exchange traders and their principals. A floating exchange rate is not a good stabiliser. The idea that we can set our own interest rates entirely to suit our own domestic circumstances is likely to prove somewhat illusory. It is likely that international considerations and influences will exercise an increasingly important influence.
There are other major advantages to being part of a large economy. Being a member of the eurozone would mean that, as a whole, it would be less important to specialise in financial services. The ratio of outstanding debt to GDP in a large economy is lower. Luxembourg and Ireland have highly developed financial services, but they have the eurozone as a source of liquidity. If they had not had that, they may well have followed Iceland. A large economy is too big to fail. The UK is quite large, and it is not likely to go bust, but as our currency is vulnerable, British Government-backed loans will have to be issued on unfavourable terms. To maintain aggregate demand, it is much more effective to stimulate action by co-operation than through national manipulation and exchange rate flexibility.
My final point is political. Co-ordination is going to be more important. We will require a new European regulatory regime. It will be very important to us, and what will be our influence? Denmark and Sweden, like us, wanted to retain their independent sovereignty, but Denmark, Sweden and new members now all want to join the eurozone. There has been a dramatic swing of opinion in Denmark and Sweden, quite apart from in Iceland. We are likely to find ourselves outside the zone and more isolated than in the past, and it is not likely to be splendid isolation.
More generally, to be a central part of an influential political group will become more important as we live in a very uncertain world. It is said that we are going to face the Asian century. It may be that we will. I am not sure; I do not know. What is going to happen in China? Will China maintain its prosperity without democracy? It is likely to face very considerable strains indeed. European co-operation will be more important than ever, and if we do not join the eurozone, our influence will be less than it has been.
We cannot join tomorrow. The Conservatives have a gut reaction against the European Union and have never been more anti-European. The Government are not anti-European in principle, as the noble Lord, Lord Lea, said. They are still committed to membership of the zone, but they seem scared to discuss the matter publicly. They are afraid of public opinion. Not to take the option seriously at this time is wholly irresponsible. We must recognise that opinion may change very suddenly. It changed very suddenly in Iceland; it changed in Denmark, and seems to be changing in Sweden. After all, it changed pretty dramatically during the referendum campaign of 1975, so to rule out the option is an irresponsible action, and the least the Government should do is to start a serious debate.
My Lords, I thank my noble friend Lord Dykes for introducing the debate.
In recent years, debate on the euro has been almost completely sterile. The Conservatives have been implacably opposed; and Gordon Brown has, frankly, not been very different. The five tests conducted with so much rigour and fanfare were one of the most elaborate exercises in kicking an issue into the long grass in my political lifetime. I made the mistake of attempting to read the documents that the Treasury produced at the time. They are at least a foot thick. It was, in essence, an exercise in going down an intellectual cul-de-sac. It led you nowhere. That has set the tone against which a non-debate on the euro has characterised recent years.
However, events in recent months suggest to me that we need to look afresh at almost all aspects of how we do things in our financial system and our economy. Looking afresh at the euro should be an aspect of that. As noble Lords have pointed out, recent months have seen a 30 per cent devaluation. Many people have taken great satisfaction from that because, as they rightly point out, we could not have done that in the eurozone and it will benefit exporters. I declare an interest as a non-executive director of a company that had the good fortune to sign a very large contract in dollars in the middle of last year. It is undoubtedly a windfall winner, but that is not a good basis for setting policy on a currency.
Currencies such as the pound, which are too small to attach themselves to a major reserve currency, inevitably suffer greater fluctuations than make sense from a straightforward market point of view. They overshoot in both directions. Can anyone believe that there is an underlying economic reason why our currency should have deteriorated by 30 per cent? Clearly, that is not an economic issue. Although there is an economic element to it, it is primarily a financial response to the perceived weakness of the British financial system and, subsequently, British finances.
The noble Lord, Lord Sheikh, talked about the indignity—I think that that was the word he used—that we would now find ourselves in if we were in the eurozone at the level that the pound was in a year ago. That is a completely false analogy. If we had been in the eurozone, we would never have entered at the rate that the pound was at a year ago. The pound a year ago was overvalued. It is now undervalued. I submit that that is not something that we should be proud about, but a source of weakness.
My noble friend Lord Taverne referred to the time when, as a young man, he was in the Treasury when we devalued in 1967.
My Lords, my noble friend helped us recover from the devaluation. My recollection of that period is that the Government were very resistant to devaluation, largely because they saw it as a sign of weakness. There was an element of truth in that: it was a sign of weakness. It reflected the fact that the British economy was uncompetitive. Subsequent devaluations have equally reflected the fact that the British economy is uncompetitive. I have always asserted that the way to deal with an uncompetitive economy is not happily to see the currency depreciate, but to do something about the underlying causes of the lack of competitiveness. Perhaps that is an argument for another day, but to me, constant devaluation should not be a sign for satisfaction, although it brings short-term benefits to exporters; it should be a long-term cause for concern.
As for what is happening elsewhere in the eurozone, and those people's views about the euro, it is instructive to compare the situation in Ireland and Iceland. Iceland was able to adopt completely reckless policies and is now bust. Ireland adopted pretty reckless policies, but it will not go bust because it is part of the eurozone. Equally, if Greece and some of the other southern European countries were not part of the eurozone today, we would have a lira crisis, a drachma crisis and probably several other crises. We all remember the whole series of currency crises across Europe in the past that were hugely detrimental to the economies of those countries and gave a permanent sense of crisis.
As my noble friend Lord Taverne says, far from people across the rest of Europe fleeing from the euro, everyone is clambering to get in, including the Danes and the Swedes, who have been as resistant to the euro as we have been. That says something about how most decision-makers in Europe who are in or not yet in the eurozone view the role of the euro in difficult times.
As a consequence of the current crisis, there will be moves in Europe to strengthen European institutions to try to ensure that such crises do not happen again and that we, because we are not members of the eurozone, will be missing from many of the discussions. In the autumn, the Prime Minister made a guest appearance at the meeting of the eurozone Finance Ministers. There was a crisis, and he was the Prime Minister of Britain visiting Finance Ministers, so they let him in, gave him an audience, patted him on the head and said, “Thanks very much”. They then closed the door. No one else from Britain was at the meeting; we were completely outwith those discussions. The eurozone finance group is increasingly powerful, and you can bet your bottom dollar—or euro—that the European Central Bank will become more powerful and will be given more responsibilities. Just as we are giving our Bank more responsibility for financial stability, it will be given more responsibility for financial stability across the eurozone and we will be totally absent from those debates and discussions, even though the outcomes of those debates and discussions will have a major impact on our economy.
From the start, Europe was a club that we wanted to join, but if there were any rules that we did not like we would not follow them. The consequence has been simmering resentment among many of our European partners, and when that happens—it has certainly happened in relation to the euro, which is an inevitable consequence: it is human nature—we will be done down to a certain extent in the negotiations and discussions because we will not be there, and not only will our interests not be taken account of but there will be a predisposition to discount them completely. An inevitable consequence is that the eurozone will huddle together for warmth while we are out in the cold.
On the politics, however, we must accept that the euro is extremely unpopular in the UK. I am afraid that I must part company with my noble colleague when I say that, whatever might have been the right thing to do when the euro was launched, we cannot now avoid a referendum on the euro. We have said that we would have a referendum on the euro. The British public are extraordinarily unsympathetic to and dubious about the views of politicians, for which we have ourselves in no small measure to blame. We will get acceptance of the euro only through a referendum, which I accept is difficult. We certainly could not expect to have a referendum now, because, as the noble Lord, Lord Lea, has said, there has been no campaign to have one. However, the euro was heavily perceived to be inferior. When the pound was high, that was possible to believe, but that is no longer the case. How different things will look if the recession is shorter and shallower in France and Germany and when people look at the cost of buying their holidays in Europe. Once the immediate effects of the sterling collapse wear off, will exporters start asking questions about the value of having such a volatile currency?
The deeply held view in the past that Britain’s economy is a cut above Europe’s is about to take a terrible battering, and I hope that the ideological debates on this issue will now give way to a more sober and pragmatic assessment of the economic needs of millions of anxious British families.
My Lords, I thank the noble Lord, Lord Dykes, for giving the House a further opportunity to demonstrate that there is a wide divergence of views on the merits of joining the euro. Earlier this week, I asked a Peer who would customarily give a Eurosceptic perspective in a debate such as this why he was not speaking. He told me that it was a waste of time, and advised me to say merely that I disagree with the noble Lord, Lord Dykes, and sit down. I shall resist that temptation. It is true that I disagree profoundly with the noble Lord, Lord Dykes, but I shall do him the courtesy of telling the House why.
Only my noble friend Lord Sheikh and I in this debate so far have no passionate commitment to Europe, and certainly no commitment to the euro. This is no surprise. It was clear from our handling of the European constitution last year that your Lordships’ House has a pro-European bias at present. I have no problem with being in the minority in flying the Eurosceptic flag this evening. I know that your Lordships’ House is not representative of the British people on Europe, which is of course why the Government could not risk sticking to their commitment to a referendum on the constitution.
I take great comfort in the fact that, particularly on the euro, my noble friend Lord Sheikh and I can speak for the British people. The latest poll, carried out by ICM for the BBC at the turn of the year, showed that 71 per cent opposed euro entry and only 23 per cent were in favour. That is not an isolated poll. There has never been a poll that showed a majority in favour of euro entry.
The Government announced in 1997 that, while they were in principle in favour of joining the economic and monetary union, there had to be a clear and unambiguous economic case for doing so. As we have heard, to that end the then Chancellor unveiled the famous five tests. Those tests were not passed either in the back end of the 1990s or in 2003.
The Chancellor has not initiated a further examination of the tests since 2003, and it would be a complete waste of public money to do so. The 2003 examination resulted in a boxful of reports which was too heavy for me to carry from the Printed Paper Office without the assistance of the Attendants. I never read them all, and I would wager that most of this mountain of paper had a limited readership; though I see that the noble Lord, Lord Newby, deserves a medal on that score. If only for the sake of our environment, we hope that the Government will sacrifice no more forests in the name of the euro.
We were concerned that the tests would be used as a fig leaf to cover the evident desire of some Labour politicians, not least the then Prime Minister, to take us further into Europe. All of the tests have a high degree of subjectivity—I will not be quite as rude about them as the noble Lord, Lord Dykes, was. Our concerns were increased when the Government announced in 2003 that we had made significant progress towards sustainable convergence with the eurozone economies. We did not believe then that sustainable convergence could be detected on any reasonable analysis. Indeed, the 2003 assessment said that we were more convergent than some of the euro members were prior to the start of the euro, and more convergent than they were in 2003. We felt that that was absolutely the wrong approach. It is well known that, in the political enthusiasm to get the euro off the ground, the politicians conspired to cover up some of the blatant differences in economic convergence before the launch of the euro. They were not truly convergent then, and it is hardly surprising that they have remained non-convergent. The fact that we appeared to be more convergent than some of them in 2003 was neither here nor there, because they themselves were not in a relationship of sustainable convergence and never had been.
I do not think that anyone would suggest now that our economy had sustainable convergence with the eurozone economies. The harsh facts of the current recession show that the boom and bust economic policies pursued by this Government have meant that we are suffering a more rapid and deeper recession than our European neighbours. Yesterday’s IMF report was further proof of that, if more were needed.
The recession has demonstrated that the eurozone has not promoted or nurtured convergence. We only have to look at Ireland to see that the eurozone was quite capable of fuelling an extravagant economic boom and an even greater bust within its confines. The wonder is that the euro is not already fractured, but that story may yet unfold. The noble Lord, Lord Newby, is wrong that there are no crises in countries such as Greece. There may not obviously be currency crises, but they could well result in countries such as Greece having to quit the euro and thus become currency crises.
The Maastricht treaty set out the convergence criteria for entry into the eurozone. I cannot say that my party is proud of the treaty overall, but we are certainly proud of the opt-out from the economic and monetary union that we insisted on. Without that, our economy would have been even more bust than it actually is, but I shall return to that in a minute. The UK does not currently meet the convergence criteria as the ECB, in a statement of the blindingly obvious, pointed out this month. We have an unstable and weak currency, wildly fluctuating inflation and, as we debated earlier this week, we fail spectacularly the tests of the general government budget deficit being below 3 per cent and gross general government debt being below 60 per cent.
My Lords, quite apart from the fact that there is a very good analysis by William Buiter in his booklet, which I hope that the noble Baroness will read, surely, it cannot be argued on the one hand that we have a fluctuating currency, which is why we are not tucked in as a suburb of Frankfurt, while on the other refusing to contemplate being in such a position.
My Lords, the noble Lord will be aware that we need a stable currency as one of the preconditions to enter into the eurozone. I was merely making the point that we are far from being ready to even contemplate entry should we want to. I was also making the point that we would fail not only on the grounds of inflation and currency, we would also fail on the test of the Maastricht criteria in relation to the budget deficit and in relation to Government debt.
In the forecast horizon set out in the PBR up to 2014, we never get back within those parameters. It would be a big surprise, and extraordinarily stupid of the eurozone, if the UK was invited to join the economic and monetary union for many years yet. Even if we temporarily converged with the eurozone economies, it is unlikely to be sustainable because our economy is more linked to the dollar than to the euro—as the analyses of our trade show—and we trade more outside the eurozone than within it. That has been a consistent pattern and those features are unlikely to change when we emerge from this recession.
So, I hope that the issue of joining the euro is firmly off the agenda for the current Government. If, as I fervently hope, my party forms the next Government it will most certainly be off the agenda for as long as we hold power, as my noble friend Lord Sheikh has already said. That leaves the question of whether we would have been better off in the current recession if we had joined the eurozone at the outset. President Barroso told French radio that some British politicians had told him that Britain would have been better off had we been in. There are perhaps no prizes for guessing which newly ennobled Secretary of State he was referring to.
We are clear on this question too. The one-size-fits-all interest rate policy would have fuelled an even bigger boom than the current Prime Minister engineered. It follows that the ensuing bust would have been even greater and would have made our recession look like a teddy bears' picnic. What we see in Ireland would have been magnified many times over. We had a very lucky escape by not being in the euro.
One of the things that the Labour Government got right over the past 10 years was to keep us out of the economic and monetary union, and I hope that the Minister will confirm this evening that there is no practical prospect of us joining in the near future. But in the unlikely event that some crazy integrationists in Europe, and indeed in our own country, get together to try to lure us in, I hope that the Minister, despite the calls we have heard today, will reaffirm the Government’s commitment to holding a referendum in order that the British people can decide.
My Lords, I congratulate the noble Lord, Lord Dykes, on securing the debate today on the prospects for the United Kingdom’s membership of the single currency. I also thank him for his kind and yet undeserved opening remarks about me. He is a true hero to his cause. There is no risk of a veil of omerta being pulled over the euro while the noble Lord is here to lead the debate and the cause. His Question asks whether the Government,
“will undertake an analysis of the prospects for membership of the euro”.
Such an analysis would amount to a reassessment of the five tests. We have heard a number of interesting and well-informed points and I welcome the breadth of discussion and the interest expressed. I will do my best to address all the points raised, and I shall start by outlining the Government’s approach to membership of the single currency and the five tests assessment that was made in 2003.
The Government’s policy on membership of the single currency is unchanged. It remains as set out by the previous Chancellor in his Statement to the House of Commons in October 1997, and again in the Chancellor’s Statement on the five tests assessment in June 2003. The determining factors undermining—I am sorry—underpinning any government decision on membership of the single currency are the national economic interest and whether the economic case for joining is clear and unambiguous, as set out by the famous five economic tests.
When the five tests were last assessed in 2003, the Treasury found that a clear and unambiguous case for UK membership of EMU was not made and that a decision to join at that time would not be in the national economic interest. In the event of a future assessment supporting UK entry to the euro, this decision will be taken—here I answer the question posed by the noble Baroness, Lady Noakes—only if the Government and Parliament agree that it would be in the UK’s best interests. The UK would then join the euro if the public voted “yes” in a referendum.
The five tests remain the foundation for determining whether the economic case for joining is clear and unambiguous. They relate to sustainable convergence between Britain and the economies of the euro area; whether there is sufficient flexibility to cope with economic change; the effect on investment; the impact on our financial services industry; and whether it is good for employment. The 2003 assessment found that the only test that was fully met was the test relating to the financial services industry. For the test on sustainable convergence to be met, it was determined that further improvement would be required in regards to the convergence of business cycles and economic structures. In regards to the flexibility test, it was found that while considerable progress had been made to reform labour, product and capital markets in both the UK and the euro area, more remained to be done. Finally, the assessment found that both the test on the effect on investment and the test on whether euro membership would be good for employment would be met if we achieved sustainable and durable convergence. The conclusion to the 2003 assessment of the five economic tests was that,
“on balance, though the potential benefits of increased investment, trade, a boost to financial services, growth and jobs are clear, we cannot at this point in time conclude that there is sustainable and durable convergence or sufficient flexibility to cope with any potential difficulties within the euro area”.
Following the 2003 assessment of the five tests, a reform agenda was established which would contribute to achieving sustainable and durable convergence, which was right for Britain’s economic interests. I shall come back to that point in a moment when I refer to the observations of my noble friend Lord Lea.
The 2008 Budget reported on the progress of the Government’s reform agenda. It set out measures to address supply and demand in the housing market and measures to enhance the flexibility of labour, product and capital markets. These measures will contribute to achieving sustainable and durable convergence in due course.
Since mid-2007, the world’s economies have been hit by major global shocks. This is a global problem which started in the United States of America and then spread across the rest of the world, infecting banks in almost every major jurisdiction. The UK has been no exception. As the Pre-Budget Report set out, short- and medium-term growth prospects in the UK remain subject to exceptional uncertainty, and exchange rates have been displaying high levels of volatility, which is of course to be expected in today’s economic climate and financial market shocks.
In the light of recent events, some commentators are questioning whether the UK downturn would have been less severe had we joined the euro in 2003. Based on the 2003 assessment, we know that there are both advantages and disadvantages of being outside the euro area. We also know that the key for assessing whether it is in the national economic interests for the UK to join the single currency is whether there is sustainable and durable convergence.
In regard to the current crisis, it is clear that being a member of the euro area would not have been a panacea. Like the rest of the world, the eurozone has been affected by crisis. Based on the European Commission’s latest forecasts, real GDP in the euro area is forecast to fall further. Output is forced to contract in all of the four big euro area member states: Germany, France, Italy and Spain. In the face of the current crisis, the European Council has agreed an EU economic recovery plan based on a fiscal stimulus equivalent to 1.5 per cent of European Union GDP. This plan provides a coherent framework for action while recognising that measures taken by each member state need to be tailored to national circumstances. The plan encourages member states to allow borrowing to rise to support the economy, acknowledging that this would lead to a deepening of deficits in the short term. The recovery plan is consistent with the measures taken in the UK, including the fiscal stimulus announced in the 2008 Pre-Budget Report.
As I said, this is a global crisis that will require a global solution, and the UK will continue to work closely with partners to maintain a co-ordinated approach to secure solutions. The European Union is a vital partner in these matters and the European economic recovery plan is a bold step in taking co-ordinated action to respond to the crisis and the economic downturn to the benefit of citizens in the UK, the EU and internationally.
It is the Government’s policy to consider annually whether to undertake a new assessment of the five tests. While the Government did not propose a euro assessment to be initiated at the time of Budget 2008, the Treasury will again review the situation at Budget 2009. At any stage, a new assessment of the five tests would require a full and vigorous appraisal to arrive at an informed conclusion. These considerations will extend far beyond the current value or volatility of sterling and other implications of the current crisis. Sustainable and durable convergence is the key pre-condition for realising the potential benefits that euro membership offers.
The development of the UK economy following the introduction of the Government’s monetary and fiscal policy frameworks since 1997 shows how stability has provided the foundation for long-term improvement in the UK’s economic performance. This demonstrates why the Government’s decision on euro membership focuses on what is right for the UK economy in the long-term. I think, therefore, that the heart of my answer to the noble Lord, Lord Dykes, is that it is a matter of timing. The Government’s policy is to seek to join the euro, but only when they believe that the conditions are right.
I have read with great interest the booklet 10 Years of the Euro, to which my noble friend Lord Lea and the noble Lord, Lord Taverne, referred. The then Chancellor of the Exchequer said in 1998, in an article or a speech reported in the booklet, that it was appropriate not to wait and see but to “prepare and decide”. That is precisely where we are. We continue, as a Government, to follow policies designed to secure convergence and to achieve the satisfaction of the five tests.
My noble friend Lord Lea also referred to the excellent article in the booklet by Mr Willem Buiter. My noble friend’s own worthy contribution also deserves mention; the article is entitled:
“Let’s Save the Pound—Make it the Euro-Pound”.
These are decisions of great significance. It is good that a national debate continues on this subject and that intellectual and academic minds are applied to these issues.
The matter of timing is extraordinarily difficult. As the noble Lord, Lord Sheikh, said, 10 years is not a long time in the history of currencies. Getting this judgment right is critical because, once it has been made and a decision to apply has been accepted, we are then into the euro at the rate of exchange fixed at that time, and we are in for ever. This is not a decision that can be taken after anything less than the most thorough analysis, national debate, full consideration by Parliament and full support from the nation, as secured by a referendum.
The noble Lord, Lord Dykes, referred to the risk of the pound and contrasted it with euro-denominated bonds. I remind noble Lords that the credit rating agency Standard & Poor’s recently reaffirmed sterling as an AAA long-term and A1 short-term credit rating in the United Kingdom, its highest ratings. Those have also been endorsed by the other two major rating agencies, Moody’s and Fitch. As Standard & Poor’s said, the status of the British pound sterling as a major global funding currency, combined with strong demand for long-dated gilts by domestic institutional investors, is expected to provide funding flexibility for the UK Government during the heavy sovereign issuance expected to flood international debt markets in 2009.
I should like to pick up a point on fluctuations in the exchange markets. Were the UK to join the single currency at any time, it would seek to lock in at a sustainable exchange rate consistent with the long-term trend valuation of the pound against the euro. This would make adjustment to the new currency as smooth as possible and reduce the risk of a negative impact on inflation or growth. The question of when to join the euro rests on far more than simply the current value of sterling. There may be a certain elegance in saying that, if we join at parity, that would make it simpler for people to understand, but the decision is of far greater significance than that.
My Lords, I am sure the House is grateful for that clarification.
The noble Lord, Lord Sheikh, who has a distinguished career in finance, asked me to “clear up this mess” and state the Government’s policy after the “confusion” of recent weeks. I am pushed to understand the confusion of recent weeks to which he referred; indeed, if I see confusion at all, it is possibly on the Conservative Front Benches with the arrival of Mr Kenneth Clarke. However, I hope that my comments, which have restated the Government’s policy on the euro for the past 10 years, will have set aside any anxiety or confusion that he may have. Those comments were confirmed by the noble Lord, Lord Taverne, in his observation that the Government are clearly committed to joining the euro at the right time and according to the right circumstances.
The noble Lord, Lord Newby, made a typical contribution. I admire his ability to distil complex issues into straightforward and logical statements. He serves his party well in summarising its position on the euro, and where he finesses his party’s formal position compared with that of his noble friend, he does so with elegance and some conviction. I was delighted to hear him refer to the status of Ireland and the Irish economy. I have no doubt that he will speak to his colleague, the noble Lord, Lord Oakeshott of Seagrove Bay, who clearly has a different view about the economy of Ireland.
The noble Lord, Lord Newby, said that we were losing our ability to influence European institutions by not being in the euro. I recollect that the noble Lord, Lord Taverne, made similar observations. There is no reason why our voice will not be heard in Europe because we are not a member of the euro. The ECOFIN council takes decisions on economic and financial matters, and all the EU’s 27 member states are members of it. There is a smaller group that meets to discuss matters relating to the euro, but it is informal, and ECOFIN and the European Council, of which we are a full member, take decisions. It is quite clear that the huge respect which the Prime Minister and the Chancellor of the Exchequer enjoy throughout Europe will mean that their views are always welcome in any European discussion related to economic and financial management.
The noble Baroness, Lady Noakes, clearly stated her party’s position, echoing the views of her colleague, the noble Lord, Lord Sheikh. We had another little digression about a “bust” economy, and I do not doubt that if we had been allowed more time we would have heard about the “broken society”, as the Conservative Party takes joy in the problems that the global and UK economies face. However, at the heart of her observations was an acknowledgement of the importance of convergence regardless of the conclusions that one draws; that is, that if one is going to join the euro, convergence is critical. That is at the heart of the five tests. While the noble Baroness and I may disagree on where one is likely to end, we are in agreement on the importance of the tests and processes.
I thank the noble Lord, Lord Dykes, for initiating the debate. It has been a most informed discussion. The noble Lord has given me a good opportunity to restate the Government’s policy.
House adjourned at 7.19 pm.