Second Reading (and remaining stages)
My Lords, it is the Government’s intention to ask for authority to make a bilateral loan to Ireland as part of the multinational assistance programme for that country. This is the right action to take, given our country’s close economic, financial and political connections to Ireland. By passing this Bill today, the UK will be ready, come the new year, to meet its commitments to one of our closest international partners.
The legislation before the House today is narrow in scope but it is still enabling legislation. It will sit alongside the actual loan agreement, which will set out the details of what we offer Ireland. I intend to address the substance of both the legislation and the loan agreement. Before that, however, I would like to remind the House of how Ireland ended up in its current predicament.
Over this year, it became increasingly clear that the situation in the Irish economy was unsustainable. Irish banks had become almost wholly reliant on central bank funding to maintain their operations. At the same time, Ireland’s market interest rates rose to record levels and its sovereign debt markets have now effectively closed, with little prospect of reopening.
This situation cannot go on. So, on the weekend of 20 November, Ireland’s Prime Minister, Brian Cowen, made a formal request for international financial assistance. The United Kingdom, alongside the IMF, the EU, the euro area and other member states, made an agreement in principle to take part in an assistance package to Ireland. At the end of November, Ireland agreed with the IMF and the EU a three-year financial assistance package worth €85 billion. The money will be used as follows: from that total, €35 billion will be used to support Ireland’s banking sector, with €10 billion going towards immediate bank recapitalisation. The remaining €50 billion will be used for sovereign debt support.
In terms of contributions to the cost of the package, Ireland itself will provide €17.5 billion towards the total. The remaining €67.5 billion will be split, with one-third coming from the IMF, one-third from the European financial stability mechanism and one-third from the euro area facility and bilateral loans from the UK, Sweden and Denmark.
This is a significant package that will help Ireland deal with its problems and restore stability to its economy. It will help it recapitalise its banks and set up a contingency reserve for future problems. It will also help the Irish authorities cover the shortfall in their budget, which was presented to the Irish Parliament earlier this month.
I understand that some noble Lords may have concerns about the size and the timing of the loan. Indeed, some may be asking why we are extending a loan to Ireland in the first instance. We are doing this because it is overwhelmingly in our national interest that we have a strong Irish economy and a stable banking system. This is not just about the Irish economy and Irish jobs; it is about the British economy and British jobs.
A loan does not add to our deficit; any increase in borrowing is matched by the commitment of Ireland to repay it with interest. Ireland is the fifth-largest market for British exporters, and accounts for 5 per cent of our total exports. Ireland is also the only country with which we share a land border, and in Northern Ireland our economies have particularly close ties.
Just as our two economies are linked, our business and banking sectors are also interconnected. More Irish companies are listed in London than companies from any other foreign country. In Northern Ireland, two of the four largest high-street banks are Irish-owned, accounting for almost a quarter of personal accounts. Our own banking sector has a considerable exposure to Ireland.
I should stress, however, that the UK’s banks are sufficiently well capitalised to more than manage the impact from the situation in Ireland. But one thing is clear: it is undoubtedly in Britain’s national interest that we have a growing Irish economy and a stable Irish banking system. That is the purpose of this Bill.
The Bill has two substantive clauses. Clause 1 sets out the parameters under which the Treasury may make payments under UK loans to Ireland. The total international assistance package, including our contribution, is denominated in euros. However, our bilateral loan will be made in sterling. Subsection (3) includes a cap on the total size of our bilateral loan of £3.25 billion. This will be the total size of our bilateral loan to Ireland, and the period over which these loans may be paid out will end on 8 December 2015, five years after the Bill was first published.
I would like to make it clear that there is no expectation that we will have to make further loans to Ireland in the future. This is reflected in subsection (4), which is intended to prevent an increase in the size of the loan unless an order is made by statutory instrument. But because the loan is denominated in sterling, a mechanism is needed to accommodate potential changes in the exchange rate in the period between the publication of the Bill and the signing of the loan agreement. Therefore, the Bill allows the Treasury, under subsections (4) to (7), to make an order once the Bill is in force to increase the limit, as long as this is done solely to take account of exchange rate fluctuations between now and 30 days after Royal Assent without further parliamentary procedure. Let me be clear: any increase in any other circumstances or for any other reason would require approval in another place. This is something that I and my right honourable friend the Chancellor of the Exchequer do not envisage happening. We also expect full repayment to be made over the term of the loan.
We want the process to be as open and transparent as possible. Clause 2 therefore creates a requirement for the Treasury to prepare and lay before Parliament a report every six months on any payments made by the Treasury by way of a loan to Ireland, the original term of each loan, any sums received by the Treasury by way of interest or repayment of such loans, the amounts outstanding, and the remaining terms of any outstanding loans.
I would like to update the House on the main terms of the bilateral loan, which we have agreed in principle with the Irish authorities and have made available in the Library of the House. The loan will be drawn in eight tranches, each with a seven-and-a-half-year term. This is in line with the terms for both the European and IMF loans. The first tranche of our loan will be available to be disbursed in September 2011 and the interest rate charged on each tranche of the loan will be fixed specifically for that tranche. This will be set by adding a fixed margin of 2.25 percentage points to the appropriate market-determined interest rate, the sterling seven-and-a-half-year swap rate, at the time of disbursement. For example, at present, the estimated interest rate on the first tranche of the UK loan would be the sterling seven-a-and-a-half-year swap rate in September 2011 plus 2.25 percentage points. That margin was set to give an estimated interest rate of 5.9 per cent for the first tranche of the loan.
The rate on our bilateral loan is slightly higher than the estimated rate of 5.7 per cent for the first tranche of IMF and EFSM funds, but it is also slightly lower than the estimated 6.1 per cent rate the EFSF will charge on its first tranche of lending. This reflects the different costs of funding and is a measure of the international confidence in the UK’s public finances. We will charge interest every six months and there will be a repayment of principal at the end of the seven-and-a-half-year term of each tranche. As with the IMF, there will also be a commitment fee for making this loan. We will charge half a percentage point on the total amounts that may be drawn down under the loan agreement for the forthcoming 12-month period. If the loan is drawn the fee will be waived, effectively replaced with the interest charged on the loan.
There are two conditions on the loan set out in the terms, to which I would like to draw the attention of the House. The first condition is that the IMF as well as the EU must be satisfied that Ireland is complying with the agreed restructuring plan. This is a very important safeguard. The second crucial condition is that there are to be no amendments to the restructuring plan that could have a material adverse financial impact on the UK operations of Anglo Irish Bank, Allied Irish Banks and Bank of Ireland. Given the scale of their operation in the UK, this is vital.
The official advice from the Treasury is that this loan represents value for money for the British taxpayer while being in line with the terms offered by both the IMF and the euro area. A summary of the key terms of the agreement and a final written agreement will be forthcoming shortly.
One thing is clear: Ireland is a friend, and a friend in need. Because of the steps we have taken, our economy is currently in a far stronger position than Ireland’s; that is why we are able to offer such reasonable and sensible terms for our bilateral loan to Ireland.
I should like to talk briefly about a related matter which I know is of interest to this House: the proposed permanent stability mechanism for euro area economies. Both my right honourable friends the Prime Minister and the Chancellor of the Exchequer have been very clear that when it comes to putting in place a permanent mechanism, the UK should not be part of it. The time has come for the euro area to put in place its own mechanism for dealing with the imbalances. It needs to be part of a comprehensive solution that sees countries addressing more decisively their own problems, including in their banking systems. As my right honourable friend the Prime Minister said yesterday, it is clear from the recent Council conclusions that the mechanism will be for:
“Member states whose currency is in the euro”.
Britain therefore will not be part of it.
Since our coalition Government came into office, we have taken action to put our own house in order. We are now in a strong position that enables us to help Ireland, our closest neighbour, in its hour of need. As I have said, this is clearly in our national interest. A strong Ireland—indeed, a strong Europe—is vital to the success of the British economy. Today’s Bill will help to ensure this. I beg to move.
My Lords, first I apologise most sincerely to the Minister for not being in the House for the start of his speech. I was trying to catch what his ministerial colleague Mr Lidington was saying to us in evidence in the EU Committee about the permanent mechanism.
I support very strongly the principle of helping Ireland in its hour of need. The case seems self-evident given the interconnectedness of our economies, with 5 per cent of our exports going to the Republic, and the consequences for us of a collapse of its economy, which would be serious, not least for British banks.
No simple solution such as coming out of the euro is available for Ireland, as a lot of people who opposed the legislation seemed to think. It is worth bearing in mind that, were a member state to try to come out of the euro, there would be a very big devaluation. That would cause a collapse in living standards and purchasing power, which would have knock-on economic consequences particularly, in Ireland’s case, for Britain. Moreover, its debt would continue to be denominated in euro. As the new currency had depreciated, there would almost certainly be a default that required a restructuring of that debt, again with very severe consequences for the British financial system.
However, while I fully support the objectives of the Bill, I dislike it considerably. I dislike it because of its bilateral nature. The Government are profoundly wrong in the working assumptions that lie behind this bilateral Bill: that the euro problem is a problem for the eurozone, that it is for the eurozone to sort itself out, and that it is none of our business. That is profoundly misguided and not in the UK’s national interest.
It is wrong for three reasons. First, as we in Britain seek the necessary rebalancing of our economy towards exports and investment, it is absolutely clear that we are dependent on very strong growth in the euro area, which is our biggest market. I know that the rest of the world is growing much more strongly and Asia is growing very strongly indeed, but Germany, more than the United Kingdom and other members of the European Union, is getting the most benefit out of that global expansion. We will be the beneficiaries of that German growth in the eurozone. We live in Britain today in an economy that is deeply integrated into the rest of Europe. Our fortunes are dependent on the rest of Europe. It is completely misleading to talk about their problems over there and think that we can sort out our problems over here as though they are completely separate questions.
Secondly, our banks are extremely interconnected. I was reading the Bank of England’s report on financial stability, which was published last week. It states:
“UK banks’ holdings of sovereign debt issued by countries under heightened strain are relatively small. But total claims on these economies, including lending to households and businesses, are larger ... Losses on such lending could increase were heightened sovereign concerns to be accompanied by weakening economic conditions. Credit risk could also be amplified by the interconnectedness of European banking systems. UK banks have claims of almost £300 billion on France and Germany, whose banking systems are more heavily exposed to the most affected economies”.
The Bank of England argues that there is strong interconnectedness, and we must think in those terms, not that we are something separate and apart.
Thirdly, when there is a crisis, we will end up paying for it just as if we were in the eurozone. I looked at the Hansard report of the debate in the other place on this subject and at what the Chancellor of the Exchequer had to say about it. He said that,
“our contribution has been calculated on the basis of what we would have paid if we had been part of the facility”.—[Official Report, Commons, 15/12/10; col. 946.]
In other words, it is a bilateral contribution but it is based on a calculation of what we would have paid if we had joined. Mr George Osborne goes on to say:
“We are paying pretty much exactly what we would have paid if we had been a member of the euro”.—[Official Report, Commons, 15/12/10; col. 948.]
We cannot avoid our obligations to the rest of the European Union by pretending that this is something apart from us.
What is going on here is that UK politics is taking priority over the national interest. Clearly, we in Britain are in this up to our necks. Our banks are in it up to their necks and our prospects for growth are dependent on the euro area. Instead of the Prime Minister saying, “This is nothing to do with us”, he should be doing today what Gordon Brown did in October 2008; he should go to the summit of the eurozone countries and say, “Here is the plan to rescue the banks in the area. Britain has a vital interest in being part of this”. Instead, we get a washing of the hands of Britain's role. It is clear that this policy will not last. I looked at what various economic experts were saying about the likely pattern of what was likely to happen in the eurozone. It is difficult for the Government to comment on this because no Government can forecast that there will be defaults.
I looked at an article by the one professor who forecast the crash of 2007 and 2008—Professor Roubini. In his view, what he describes as the current strategy of kicking the can down the road will soon reach its limits. He goes on to argue that,
“Europe must … implement early orderly restructurings of distressed sovereigns’ public debt”.
The consequence of the orderly restructuring of distressed foreign debt would be the necessity also to carry out another restructuring of the European banking system, in which Britain’s banks are intimately involved. Instead of doing these bilateral things, we should be putting ourselves at the heart of Europe and of the argument about what needs to be done in order to rescue the European economy. What we are seeing here is a policy for marginalising Britain that is profoundly against our national interests. We will pay a very high price for it in future, because when the new mechanism is set up the key economic decisions will be taken by the eurozone, which will go along to ECOFIN, and Britain will be forced to agree with what the eurozone has decided because decisions are taken by qualified majority voting.
This principle of staying out and doing bilateral deals is a very bad policy for Britain. It is putting playing the politics of the Daily Mail and Rupert Murdoch before a real, patriotic sense of where our national interest lies.
I touched on that subject, because I said that Germany was taking far better advantage of global growth than we are at present. The Prime Minister is absolutely right to try to expand our exports in India, China and other countries, but the fact is that German export success benefits us in the growth in the eurozone, which accounts for half our exports.
I thank the Minister for his very clear introduction to the debate. I was slightly concerned, however, that he did not refer the House with the degree of attention that it may deserve to paragraph 21 of the Explanatory Notes, which deals with the compatibility with the European Convention on Human Rights. I was tempted to ask him whether the law officers had been consulted before the Chancellor of the Exchequer made the statement that,
“pursuant to section 19 of the Human Rights Act 1998 … the Bill is compatible with the Convention rights”.
As this is the first time that we have debated the Bill, the Minister has not had the chance to give any undertaking to speak to the law officers, and it would be invidious to ask him to do so. However, one hopes that that will not be necessary.
Was there any alternative to the loan and the Bill? As the noble Lord, Lord Liddle, has explained, there was not. If the EU had not intervened in the dramatic way in which it did, it is almost certain that Ireland would have had to default and leave the euro. That would have been bad not only for the eurozone but for the UK. It would have been bad for the UK for trade reasons—I shall come back to the point made by the noble Lord, Lord Pearson, a bit later in my speech—as we have a large volume of exports to Ireland. Indeed, 40 per cent of Northern Ireland’s exports go to the Republic. I am sure that the noble Lord, Lord Bew, will expand on that point.
The prospect of Northern Ireland, as a depressed region of the United Kingdom, suffering significantly as the result of a major crisis in the Republic would have had not just a severe impact on Northern Ireland but, obviously, a severe knock-on effect here, including to the public finances. We would have had, in effect, to have filled in some of the hole that would have been knocked in the Northern Ireland economy. Such a crisis would also have been bad for the UK because of the exposure of UK banks. Again, as the noble Lord, Lord Liddle, pointed out, the Bank of England has set out starkly the scale of that issue. A default would have led to instability in sovereign debt markets more generally and could have increased the costs of UK government borrowing.
That does not necessarily mean that we agree with absolutely everything that is being done to restructure the Irish banking system. The arguments for establishing the National Asset Management Agency can be made either way. Effectively nationalising all the risks taken by all the Irish banks raises moral-hazard issues, which we have sought to avoid to a considerable extent in the United Kingdom.
Another issue is whether, even with all this activity, we will have been successful in stabilising the Irish economy. To pose the question that Martin Wolf posed in the Financial Times recently, the question is not whether the Irish banking sector is too big to fail but whether it is too big to save. Hopefully, the answer is that the Irish banking sector can be saved as—heaven knows—it is not lacking resources. The amount that has gone in both from the Irish Government and, via them, from the EU is now considerable.
It would have been irresponsible for the UK not to participate in the Irish bailout, but the Irish problem is not the only issue facing the eurozone. There are broader issues that relate to Greece, Portugal and now Spain and Italy. Given that we are outside the eurozone, it is a logical if inglorious position for us not to commit to taking part in any further bailouts of other member states.
When contemplating this debate, I cast my mind back to the debates that we had a decade ago on whether Britain should join the euro subsequent to, as many noble Lords will remember, the famous five tests. I am pleased to see the noble Lord, Lord Morris, in his place. Uniquely in my hearing, he was able to make a joke—which at least I laughed at at the time—about whether we should join the euro. At a TUC summer reception, he said that, having been asked by the then Chancellor, Gordon Brown, what he thought about the five tests, he had replied, “Well, we’ve won one, we’ve lost one, we’ve drawn one, but I think we might win the series in Sydney”. A decade on, a lot has changed both in cricket and in our perceptions of the euro.
At that time, many of us on these Benches supported Britain’s attempts to join the euro. One of the joys of doing a considerable amount of work with Charles Kennedy, as I was doing then, was that we were summoned from time to time to see the Prime Minister for an uplifting talk on matters of common interest and concern, of which the euro was one. At that point, Charles Kennedy was keen to press the case for British membership of the euro on a Prime Minister who was keen but extremely nervous about that prospect. Indeed, he said at the time that he would like to join the euro but he thought that it was impossible to beat both public opinion and the popular press—he could beat one, he thought, but not both—so he did not attempt it. As a result, we are now in a situation in which nobody seriously thinks that we should join the euro in the foreseeable future. Although it is inconceivable—for the reasons given by Tony Blair among many other reasons—that we should join the euro at this point, some of us at least are not absolutely convinced that we took the right decision a decade ago.
However, if I were to dilate on that argument and those tests, I would no doubt keep your Lordships here all evening. I know how much Members—particularly those opposite—hate overlong speeches. The noble Lord, Lord Hunt, is clearly already extremely impatient with me, and I can understand why that might be the case.
Even though we are agreed that we should not join the euro, two interlinked questions need to be considered—we cannot amend the Bill, and it would be foolish to attempt to do so—in this discussion on the Bill, which gives us an opportunity to range slightly wider. Realistically, what should our role be in terms of ensuring financial stability within Europe? And what should the eurozone do now? As I say, the two issues are inextricably linked, but the first principle should surely be to support eurozone members in doing whatever they agree is prudent to strengthen the working of the eurozone. For example, it would surely be perverse and ridiculous if the Government committed themselves to having a referendum on changes to the EU treaties that eurozone members decided were necessary to allow eurozone members to support each other more effectively. Can the Minister assure us that, as a non-eurozone member, we will wave through any proposed changes to the EU treaties without requiring a referendum in the United Kingdom?
As the noble Lord, Lord Liddle, has pointed out, the Chancellor is more generally in an extremely odd position when considering the development of the eurozone. The eurozone’s success or failure is obviously of crucial importance to the future of the British economy, as has been exemplified by the situation in Ireland. However, as the noble Lord pointed out, there are three reasons why the success or failure of the euro and the eurozone is important to us. The first of those reasons, to which he referred—and on which he was challenged by the noble Lord, Lord Pearson of Rannoch—relates to trade. It seems to me bizarre and sad that we export more to Ireland than to the BRICs combined. However, that may be a slightly misleading figure, as I suspect that the figure includes all the re-exports of goods that come from the rest of the world to Ireland via the UK. For example, I suspect that goods that are shipped from France to Ireland by road through the UK count as UK exports to Ireland. I may be wrong on that, but that may slightly inflate the figure. Even if that is not the case, the figure is still very high.
However, if one wants suddenly to change gear completely and export significantly greater amounts to the BRICs, the problem is that, frankly, that is easier said than done. It is not easy for a small business suddenly to decide to sell its products in China or Brazil, given the problems of language and distance. Therefore, even with the best will in the world, it would take a while before we could re-orientate our trade significantly away from the eurozone, particularly given that our strength rests in exports of services, many of which are easier to export to the eurozone than to the BRICs. That is particularly the case in countries where there are institutional barriers to exports of services. It is not simply that a lawyer or accountant seeking to open an office in India has their work cut out for them but that they cannot do it. Therefore, it would be an extremely difficult challenge for the UK simply to do a handbrake turn and suddenly start newly exporting huge quantities of goods to the BRICs. Therefore, we need the eurozone to do well, because that is where many of our exporters already have links and where, as we grow, they could develop those links significantly more.
My Lords, of course I admit that our trade with the eurozone is important, but is the noble Lord aware that our trade with the rest of the world—both inwards and outwards—is in fact increasing very much faster than that with the eurozone? Surely that points the way to the future rather than to the past.
My Lords, the fact that such trade may be increasing more quickly is not surprising for two reasons. First, it is increasing from a smaller base, so it is easier to achieve a higher percentage increase. Secondly, most of those economies are growing more quickly than the eurozone, so you are feeding into a more buoyant economy. I completely accept that, but my point was slightly different. Incidentally, another problem about exporting to some of those other countries is that the newly passed Bribery Act is making many companies, not least small-to-medium-sized companies, very wary about their ability to export to China or India, for example, because they fear—sometimes rightly and sometimes, no doubt, incorrectly—that they may be faced with business practices there which they need to follow in order to gain access to a market but which they would not have to follow in the eurozone. In the medium term, I am extremely optimistic about the prospects for exports to the BRICs, but in the short term, given that we are starting from a relatively low base, it is a forlorn hope to think that the BRICs can solve our export problems.
I may be mistaken—I do not know the noble Lord desperately well—but I think that, in a former incarnation, he was a Whip. It is not normal, when asked a question, to pose a question back, but I would be inclined to ask the noble Lord, if the House so allowed me, whether, when he was a Whip, he thought it a good idea that everyone who received a note from him in another place be required to divulge the contents of that note. My guess—I may be wrong—is that he would not necessarily have been desperately happy at that.
My Lords, I am extremely grateful to the noble Lord for making that point. He will be aware that I have been interrupted on a number of occasions. However, I am well aware of the conventions of the House and will happily draw my speech to a conclusion by saying, as I said at the beginning, that we support the Bill.