My Lords, for some weeks now I have been pressing the Government to allow us to have a debate on the crisis in the eurozone. Therefore, I am delighted that we have finally got one. It is extraordinary that we have not had one before. I share the surprise that it is taking place in the Moses Room rather than on the Floor of the House, but on reflection I think the reason for that is apparent: business on the Floor of the House is under intense pressure because the Commons continues, despite assurances to the contrary, to programme everything in sight automatically and therefore we are doing the job which the Commons is not doing although it ought to. Having said that, it seems even more extraordinary, given that the pressure is this end rather than the other, that the Commons has not had a large-scale debate on this at all.

My noble friend Lord Lawson has pointed out that many of us predicted right from the start that problems would arise in the single currency. However, it is important to remember that the problem has also been the fact that the area has got bigger and bigger, with more and more countries involved. Therefore, the stresses of having a one-size-fits-all exchange rate becomes greater and greater. With respect to my noble friend Lord Ashdown, if we had joined, I think it would have cracked up long since. I certainly do not think that that is something we should consider for one moment in present circumstances.

The real trouble is also that, while it may have broken up because of the inability to devalue, we have had on top of that a debt crisis, with the failure of the European Union countries to restrict their debt. Those two issues have been mixed up. If countries begin to leave, there will be tremendous problems in revaluing those debts as a result of the change in the exchange rate. It is one thing to say that the banks may take a haircut, but if they find that there is a devaluation on top of that, they will be skew-whiff. We need to take that into account.

The issue is whether it will now be possible to patch up the existing situation, or whether it will break up. There seems considerable resistance to having a European central bank acting as a central bank or issuing eurobonds, so we also have the prospect, if the eurozone does not break up, of countries such as Greece finding themselves locked into a perpetual series of austerity measures, perhaps ending up with total rejection on the streets of Athens, or wherever, and the increasing tendency for it to be dominated by Germany, which is becoming the paymaster for the rest of Europe. In terms of national sovereignty, that will cause great concern to the individual nation states involved.

I say in passing that I think it is absolutely right that the Prime Minister should have expressed views to the European community on this, whatever Mr Sarkozy may think. They may have created the problem, but there is no reason why we should not suggest how to get out of it—simply because it will have a serious effect on both our exports and on banking. If the patch-up fails, we will have a very serious situation.

I am mindful of time. I am only about one-third of the way through my remarks but it has passed half time. My message to the Minister is that it is crucial that we do all we can—our Government and elsewhere in Europe—to have proper contingency plans for the possibility that the eurozone breaks up. The people who created the eurozone were very careful to lock everyone in by the process of abolishing the currency. It is very important that countries which might leave should have available a stock of banknotes and coins which could be used in such a situation. Having said that, it is not simply a question of getting the banknotes and coins.

Noble Lords opposite may smile, but no one is going to get out of the eurozone, however desperately they need to do so, if they do not have alternative notes and coins. The other trouble is that the complexity of breaking up a currency union is great. We will almost certainly need a transitional period where there is redenomination of a currency and, subsequently, a devaluation of the currency. That will inevitably involve the exchange control. The experience we had of the sterling area after the war may give us some useful indications. These problems are immense. The prize offered by the organisation of the noble Lord, Lord Wolfson, may provide a solution. I hope desperately that the Treasury is giving adequate thought to this and has examined the mechanics of a country getting out of a monetary union. It is very complex.

Despite the lack of time, the one thing that I want get over is that it is important that we should have those transitional plans in place. Many of us have been involved in this area before. I was the Minister responsible for implementing decimalisation and my noble friend who moved this Motion had some problems with regard to leaving the ERM, but the problems involved in getting out of a currency union are vastly greater than either of those, so it is important that we do our homework on this issue. If there is one message that ought to go out from here, it is that we should do so.

This has been a remarkable debate already. I feel bound to point out that I do not think that we could have had the same debate in another place, and that of course is because we are appointed, not elected. There is not the expertise in another place that we have had today. Even though we are having this debate in the Moses Room, I get the impression that we are being broadcast—or, if not broadcast, at least recorded. If that is so, I hope that it will have widespread distribution because many of the arguments put forward today are of great importance.

My Lords, I, too, congratulate the noble Lord, Lord Wolfson of Aspley Guise, on his maiden speech. He shares with me a passion for the European issue. We might be coming at it from a slightly different direction, but none the less it is good that people care about Europe.

As British families experience more than a decade of frozen living standards and as the euro teeters on the brink, it is time that we stopped name-calling across the Channel and recognise that we are all in this together, in the familiar phrase. The achievement of the OBR’s pretty dismal forecasts is qualified by its assumption that,

“the euro area struggles through its current difficulties”.

I looked at what the consequences of a doomsday break-up of the euro area might be, in a paper from the Bertelsmann Foundation website by a German economist called Ansgar Belke. He reckons that if the southern debtors secede, we can expect a 60 per cent depreciation in those countries, a 700 basis point rise in their cost of capital, a 50 per cent decline in their trade and a loss of GDP per head of 50 per cent. If the alternative happens of Germany and the stronger countries breaking away, he says that,

“a strong seceding country would effectively have to write off its export industry”,

as a result of a likely 40 per cent appreciation; trade volumes would instantly fall by at least one-fifth across the euro area and, with the break-up of the single market and the rise of protectionism that would follow, the consequences could be even more severe.

It is a fantasy to think that Britain could isolate itself from these catastrophic shocks. The eurozone and Britain are inextricably bound together—in or out, our interests are gravely affected—yet, when it comes to the future of the eurozone, the past months have shown how small our influence is on a matter that is central to our prosperity. That is why some of us always thought that it was politically right for Britain to join if the economic conditions were right and why, if the euro surmounts this crisis, I think, as the noble Lord, Lord Heseltine, thinks, that we will be coming back to this issue at some point in future.

Is the euro going to survive? First, there is a German political determination that it should survive which has strengthened, not weakened, since the crisis started. Secondly, when we look at what is happening, we have to remember that it is in the Germans’ interests to play a game of brinkmanship; they want to see market pressures on countries to introduce reforms, and they want the French to give way and concede a fiscal union. Thirdly, it is likely that there will be another European grand bargain in which, on the one side, there will be some form of fiscal union and, on the other, some German agreement to collective underwriting of debt.

The issue which the eurozone has not addressed, which concerns the British economy as well, is the sustainability of adjustment after that. On that, I would like to make three points, in areas where there are lessons for Britain. First, we have to recognise the need for fiscal austerity, but argue for a common-sense way in which it should be applied. Looking at Britain, of course deep cuts would have been made whoever had won the election in 2010, and the environment has deteriorated since then. We have to accept that. But Ed Balls has been proved right. We are in a worse position today because the coalition chose to cut too deep and too fast. Similarly, in the eurozone, the sovereign debtors have no alternative to austerity, but the speed and depth of that austerity have to be adjusted to avoid a collapse of growth and confidence. We must allow time for the structural reforms that the new Government under Mario Monti in Italy, for example, are putting through to have an effect in raising growth potential.

Secondly, we need a plan for growth. In Britain, the risk is that we do not have a plan: we have a public relations strategy of announcements and initiatives, not a serious commitment to mobilise the whole of Government behind a comprehensive strategy for growth. The truth is that both Britain and the eurozone can only compete with Asia now by putting innovation at the heart of our economic thinking. We need massive innovation in the way we live, in energy, in environmental technology, in housing, in urban planning and in public services in order to cope with demographic sustainability. This requires a strategic view on the part of Government about how different industrial sectors should develop, and it requires using intelligently the levers of single market and national regulation to send the right signals and incentives to the marketplace.

It also needs a lot of enterprise. But it is not about the deregulatory fantasies of the neo-liberal right. It requires an economic model of public and private partnership, that—for the first time in this country—puts finance at the service of industry, both to help small companies to grow and to mobilise the potential for huge private investments in infrastructure. Here the EU has a model which should be a lesson for the UK: the European Investment Bank, which can issue bonds and leverage private capital. We need to multiply these efforts. In Britain, we should have a national investment bank. This is not a party political point. I want to ask the Minister why it is that, institutionally, the Treasury is prepared to accept the logic of the European Investment Bank, but domestically is totally opposed, for ideological reasons, to the establishment of an institution in this country which would do so much good.

Like the noble Lord, Lord Monks, I believe that we have more to learn in this country from our continental partners about how to meet industrial and competitive challenges than many of us reckon.

Thirdly, we are in an age of austerity, and this demands fairness and social justice in its application. We are almost where we were at the end of the Second World War in those terms. Of course, in Europe we have regional policy through the structural funds. That needs to be built on and made more efficient, but with inequality rampant, redistribution must come back on to the political agenda. By redistribution, I do not mean raising taxes on badly squeezed middle-income families; I mean formally tackling the new trends in gross excess in the accumulation of wealth through capital and property taxation. The possibility of a capital levy is being debated in many European countries, and we should join in that debate, because the proceeds of new capital taxation could be used to reduce public debt and to prioritise social investments with proven economic and social returns, such as improving life chances for children from disadvantaged families.

If we want Britain still to count at Europe’s top table, we should be putting forward a plan that contains those ideas. We need a new economic paradigm. Only by doing this can we avoid austerity turning into despair, populism and the collapse of the European ideal.

My Lords, it gives me particular pleasure to add words of congratulation and thanks to the noble Lord, Lord Wolfson of Aspley Guise, on his quite stunning maiden speech. I agreed with a lot of the details of his analysis and I look forward to him making not just the occasional speech, but many speeches in this place. He can rest assured that he will be listened to with great care. He mentioned the great Isaac Wolfson from the old days. Some years ago, in the Cholmondeley Room, I had the honour of hosting a fund-raising effort for the Wolfson Centre on the coast in Israel, which specifically helps poor Israeli and Palestinian families. It was expanding its facilities and we raised a lot of money on that night. It was a great honour to do that and I can assure him that his antecedent’s name was mentioned on many occasions by subsequent speeches to mine. I thank him very much for his interesting suggestions. I suggest that the Lords would take a different competition, because what he is suggesting might be too demanding for other people, but I wish him well with that project. I would not necessarily agree with the conclusions, depending on which way they went.

I thank the noble Lord, Lord Lamont, very much for initiating this debate today, as others have done. In the early 1990s, he was driven out of the exchange rate mechanism, with a lot of searing pain, I am sure—it was a very deep and bitter experience, with which I have great sympathy; it was a very painful moment for the United Kingdom. At the time, I was chairman of the European Movement in Britain, working with other figures in the European Movement on the continent, including Francois Poncet, the son of the famous ambassador in France who built up reconciliation between Germany and France with Konrad Adenauer. I also worked with the chairman of the European Movement of the whole Community, Giscard d’Estaing, who had a reputation in the press in France and elsewhere for being very pompous as a head of state, but I did not find that at all. I found him very amusing indeed and we had many intellectual discussions, because he also used to write books that were very difficult to understand. We discussed whether it was Rousseau or Voltaire who had come out with the immortal utterance, which I always remember and use occasionally, “La superstition met le monde entier en flammes. C’est seulement la filosofie qui peut les éteindre”. We decided it was Voltaire, and I think that is still right, but there is no bet on it.

The debate in Britain has been far too much on Europe and, because there is so much anti-Europeanism in this country, it is a poison that is cascading through many layers of this country, much to our detriment. There is too much superstition here and not enough philosophy and wisdom about our relationship with the European Union. I am very glad, none the less, that the Government have proceeded from the superficial triumphalism of a few weeks ago about the terrible woes of the European Union, “We told you so with the currency and the euro. Look what’s happening. We have no intention of being contaminated by that. Thankfully we are not in the euro. What a good idea it is that this country has its regular habit of devaluations”. I think we have had at least six or seven formal and informal devaluations in the marketplace since the war. That is a very congenial fix to get into. Since then, the Government’s attitude has changed. I deliberately wish to embarrass the noble Lord, Lord Sassoon, my noble friend and colleague in the Government, because of the way in which he has handled these exchanges in the Lords as well. I think the Government now realise—George Osborne himself has said it in the Commons, and so has David Cameron—that we are all in this together, having said that before about the recession in Britain and the problems here. That is absolutely true in respect of what we do to help the European Union to deal with the eurozone crisis.

It is always a pleasure to follow the noble Lord, Lord Liddle, who is an illustration once again of how Labour has become solidly pro-Europe, with the notable exception of Douglas Alexander, who, in his Guardian article of 13 November seemed to be talking about the repatriation of certain powers, but we will gloss over that for the moment. It is none the less a pleasure to agree with the noble Lord that the eurozone will get through this crisis, probably with a single euro intact. I notice that the noble Lords, Lord Lawson and Lord Flight, have previously promoted the idea of two different currencies—a soft one and a stronger one. That may eventuate, but I doubt it, because I think of the technical problems involved, the money transfers and so on. I think they will get through it. I have always been a European optimist and I think I am entitled to be on this occasion.

The press in Britain always give the wrong impression—some of the continental newspapers are beginning to do it as well—of the briefings they receive, including from the meetings of the last two days. The British journalists are getting briefed by British government officials on these matters, and they say that things are impossibly difficult after every meeting. That is not so. I believe that the eurozone Ministers on Tuesday and the ECOFIN Ministers meeting together for the whole 27 yesterday have made substantial progress in dealing with the German resistance, for reasons of the Bundesbank and the forthcoming German elections, in accepting the idea of combined policies to create a new syndrome in Europe, including with the ECB being given the additional powers that it must have to be the lender of last resort. That will come, but it takes time to get through these things.

British anti-Europeans always say that national sovereignty is sacred and the national interests—whatever that means; it is sometimes a meaningless phrase—are primordial. When the sovereign countries have to be carefully consulted in the European Councils as these painful matters are being discussed, they complain about the delays. There is bound to be a delay for a new experience where no Minister expected this to happen. I know that rules were allowed to be broken, but we are being wise after the event. This country has probably done that kind of thing on internal policies on many occasions and all countries do it. On this occasion, it was creating a new structure for the single currency, which has been a tremendous success. Let us remember, please, that the euro has not been devalued on the international markets. Maybe some member states have to offer higher yields and lower prices to buy the bonds now, because of the crisis of individual sovereign debts in particular countries. Why the hysteria about Italy? Ten years ago, Italy was offering rates of interest of 8 per cent and above on bonds of the equivalent term length to those that they are now offering 7.6 per cent on. These are temporary matters until these problems are solved, as I am sure they will be. It is very important for us to focus on the main elements of what will come out of these matters. I believe I am right in saying that there have been enough hints now, derrière les coulisses in the corridors, to suggest that the IMF and the EU financial authorities at one level or another, including the member Governments, are talking very closely about working together. The IMF has already made an approach to Italy to give it a tide-over facility to help the new Prime Minister. Incidentally, he is not undemocratic at all. He was confirmed and sustained on a democratic vote of the Parliament. That buys Italy time to get through these problems. Italy has no problem of liquidity. People often think that it does, but that is not the case. It has a much lower budget deficit than we do in Britain, at only 1.5 per cent. With all the other parameters coming into this, the hysteria in Britain must decline so that we reach a correct solution for what needs to be done.

I believe that the IMF and the EU will work together, coming up to the crucial talks that will take place on 9 December—the headlines say there are 10 crucial days to save the euro. We know that most of the “outs” still want to join the euro. It is amazing. We saw what the Polish Minister was saying just a few days ago. Britain now needs to support this process, as the member states support us in dealing with our own internal recession and our problems of the slowdown of the British economy. They are sympathetic to us. They helped us in the Falklands, too. When the Argentineans invaded, they all supported us through and through, including Italy and Spain, even though it was much more difficult for those two countries. Let us remember European solidarity. That way, we will achieve our aims.

My Lords, thanks to the efforts of the noble Lord, Lord Lamont, we have heard some fascinating insights into what has gone wrong in the eurozone. I share the views of my noble friend Lord Lawson that this was a fatally flawed project. The fault lines were there from the start. It was only a matter of time before it fractured. The challenge now is to try to ensure that the mess that this causes is limited. Efforts to glue it all back together seem to me to be doomed. What is required is an orderly restructuring, and I believe that in the end we will have a much smaller core eurozone.

However tempting it may be to rejoice that Britain is not in the euro, as noble Lords have said this afternoon it is in our interests that that restructuring should be accomplished as smoothly as possible and that we play our part. The pain we feel at having to contribute to paying for the failed ambitions of others is understandable, but our economy is too closely linked to Europe for us to be able to turn our backs. However, we should not need to go on indefinitely paying for others’ profligacy. So I want to address my remarks today to the need for a new economic discipline in Europe. It will not make me a contender for the generous prize of the noble Lord, Lord Wolfson—I take this opportunity to congratulate him on his maiden speech—but it is relevant, because it shows the mindset that has bedevilled the euro project and our economy, too.

While the bitter chill of austerity has blown across the continent, it seems to have bypassed Brussels. It will not have escaped the attention of noble Lords that last month, after a long weekend of deliberations, the European Union’s decision-makers decided that the EU’s budget should rise by 2 per cent next year. This was seen as something of a victory for prudence. After all, MEPs, who obviously forget about the realities of life as soon as they board the train to Brussels, thought that 5.23 per cent would have been appropriate. The bureaucrats at the Commission were only slightly less spendthrift, aiming for 4.9 per cent. So a mere 2 per cent increase may be seen in EU terms as penny-pinching. It is not. It means that countries that are having to impose drastic cuts on the pay and pensions of their people are being asked to fund an EU budget of €129 billion for next year. And it will not stop there. There is a projected €550 million overspend from this year’s budget. Remembering that Brussels is a city where surrealism flourished, I point out that the allowed spending commitment for next year is almost €20 billion more than the agreed budget.

We know that a significant amount of this money will be misspent. Last month, as the noble Lord, Lord Pearson, is fond of reminding us, the European Court of Auditors reported for the 17th year in a row that the payments made by the EU were,

“still affected by material error”.

It is little consolation to learn that in most areas of spending, the error rate is “stable”. Overall, it has increased from 3.3 per cent in 2009 to 3.7 per cent last year. That amounts to €4.5 billion. I know that this is a time when debts are measured in trillions, but to me that is still a sizeable sum to go astray.

It is not just the money that goes to subsidise non-existent farms and the like that should cause concern. In this age of austerity, we should surely be querying every aspect of the way that Brussels spends cash. It is time to ask whether there really is a need, for instance, for the EBBAs. No doubt many noble Lords are familiar with the work of Donkeyboy and Mumford & Sons, but for those who are not—I confess that I was not—I shall explain that Donkeyboy, from Norway, and Mumford & Sons, from the UK, are both winners of the 2011 EBBAs, the European Border Breakers Awards. These are not handed out to those who successfully evaded passport checks; they are for musicians whose work sells outside their own countries. The European Music Office labours mightily to decide who should deserve such an honour and then stages a big celebratory concert. There is no shortage of music awards ceremonies. I contend that, in today’s climate, we could cope without the EBBAs.

The EU’s extravagances have, in the past, caused amusement. Spending €411,000 on an innovative project to provide a canine hydrotherapy centre that would,

“improve the lifestyle and living standard of dogs”,

was a prize 2009 example. But it is trifling, of course, compared with the billions currently being spent on the Galileo project. This satellite scheme is now many years behind schedule and, at the last count, destined to cost €5 billion against an original budget of €1.8 billion. Surely it is time for us to ask if, apart from the 3.7 per cent of our money which goes astray, the rest is being well spent.

The European Court of Auditors clearly has doubts. It says in its latest report:

“The Court observed that the differences between planned targets and achievements were often not analysed … and that the framework for reporting on effectiveness did not cover economy and efficiency of the spending”.

An effectiveness review that does not involve finance is surely as useful as a book review that concentrates solely on the cover. In this age of austerity we need to know that our money is being spent effectively, so the Commission’s reporting on its activities has to improve. We should also demand independent audits of some projects to highlight failings and procedures and produce blueprints for change. That would be money well spent. But we must go further. We should question whether we really want the European Commission to continue to extend its remit. Is what it does worth while? Do the member states themselves, facing years of cutbacks, have to continue funding the type of projects that Brussels embraces? That is not to say that we should withdraw from Europe, but we want a Europe that works—potentially, a smaller Europe. Britain should lead the way in demanding a review of what is being achieved by the high-spending bureaucrats, several of whom continue to be paid by the EU when they have left and found other employment. That is something that we might take a closer look at.

As a starting point, I suggest one obvious saving that could be made. The travelling circus that goes each month from Brussels to Strasbourg is a nonsense and is estimated to cost more than €200 million a year. It is hugely time-consuming and environmentally unfriendly. The travelling circus is a great generator of CO₂ emissions. Even if there is merit in the move, which the majority of MEPs now question, we simply cannot afford it. The problems of the eurozone will not be solved more easily in Strasbourg than they will in Brussels, and the new age of austerity through which we are living has to start hitting Brussels too.

My Lords, I add my congratulations to the noble Lord, Lord Wolfson, on his maiden speech. He must find it quite appropriate to meet under the presidency of Moses. The noble Baroness, Lady Harris of Richmond, will forgive me, but I think that Moses is presiding up there with some dignity. On that point, I quite like being in this Room. First of all, it has a table which you can put your papers and your elbows on, and I think that we look at each other and pay a bit more attention to each other. That is as far as I can get to anything that could be a consensus, but I was not very good even on that—and I will not have a consensus with the noble Baroness, Lady Wheatcroft, I am afraid. I think that the noble Lord, Lord Lawson, or the noble Lord, Lord Lamont, said at the start that some people never see anything wrong with Brussels and think that everything to do with Brussels is absolutely fine and perfect and so on. We have just heard an example of someone who thinks that anything to do with Brussels is absolutely wrong—it is all awful all of the time. In a strategic line of thinking, we cannot afford a train from Brussels to Strasbourg: that is the big picture.

Before I give a bit of current history, or my version of it, I should like to give a bit of a counterfactual, sparked by the advice of the noble Lord, Lord Lawson. The whole project was not proceeded with in the first place; it has disappeared. He said that it was his advice not to proceed with the project in the first place. Let us follow that counterfactual. When we got to 2008, the banks went belly up and we were rescued by Governments. What would have happened? Italy, Spain, Portugal, Greece, Ireland and the UK would have devalued against the deutschmark and the guilder et cetera. The deutschmark would have shot up in value, choking off German exports. The debate today would have been about the future not of the euro but of the single market.

Chancellor Merkel was recently criticised for making some general allusion to the history of the European project, going back to the outcome of the war with the cementing of good relations, no more wars and so on. It was grossly overinterpreted by people. Even the single market would have broken up, there would have been an indefinite cycle of devaluation and the pressures for protectionism would soon have reasserted themselves. There was of course some resentment at the UK’s devaluation in 2008. Many others were doing it. Essentially, that resentment would have given way to anger.

I mention Chancellor Merkel and will make a prediction, putting my money where my euros are. People say that she cannot make a U-turn on the European Central Bank or find some other way of getting out of where we are now. I would say that that is not the correct question. She has a choice of two U-turns. She has to do that U-turn or a U-turn about the survival of the euro. I would put my money on her doing a U-turn on the ECB since she will not do one on the survival of the euro. That is where I would put my few thousand euros. In that connection, Chancellor Merkel does not need any lessons from David Cameron along the lines of, overall, being very tardy and so on. I agree with my noble friend Lord Liddle about how the German political dynamics move—the rate of them and so on.

Simply saying that we must protect the City of London as the Hong Kong of Europe sounds quite like special pleading. To extrapolate along those lines, there is China, which is a funny sort of democracy to be compared with. If you extrapolate the arithmetic of the noble Lord, Lord Lamont, and look at the numbers he gave us, Europe is twice—if not three times—the size of China. We cannot be in and out of any fiscal arrangement at the same time so far as the City of London is concerned.

By the way, I saw in the Evening Standard the other day that many involved in the short-selling of the euro had had their fingers burnt so they are giving up on that. You might say that this is not the correct week to say that but I am not inventing it; you can look it up yourselves.

We have to recognise that we are all in this together, to coin a phrase. The noble Baroness, Lady Valentine, spoke about promoting London. I have to say that every speaker from the City should feel an obligation to say what their recommendations will do for the rest of Britain—for Burton-on-Trent; all the workers in the rest of Britain in the manufacturing sector, which does not have the export base that Germany has; the research and development which we need; and so on. Otherwise, that looks like special pleading just for London, which is what she is paid for, but that is what it is.

The noble Lord, Lord Lawson, made the point about a united states of Europe being still the mirage or the aspiration of many of us. I have the greatest admiration for the noble Lord, as he knows very well, but I do not think that that shibboleth should be used. The European Union has always been sui generis. It is a very unusual, unique animal. It does not even have four legs; I do not know how many legs it has got, but it is not like any other animal. There is something fallacious about comparison with any other animal. If President Obama finds it difficult to talk to it, that is just a problem with which we have to live.

In my last minute, I should like to talk about the reference made by my noble friend Lord Monks to contempt for democracy. “Hang on a minute”, I say to myself, “do people want petrol tax?”. They probably do not. “Do they want income tax?” They probably do not. “Would they vote for value added tax?” They probably would not. These are things for general elections because you have to look at the costs and the benefits. I am sure that the noble Lord, Lord Lawson, having run the Treasury, would agree. If one wants to play around with the word “democracy”, who elected the merchant banks? If we want to throw around points of semantics—

I do not think that anyone mentioned “democracy”.

Someone did. I apologise to the noble Lord, Lord Lawson. I know that the noble Lord, Lord Lamont, is not interested in democracy. I know that the noble Lord, Lord Lawson, is. Surely it is lazy thinking just to kick around the word “democracy”. I want to know the answer to the following questions. Who elected the people who control British capitalism? Who elected the merchant banks? Who elected the hedge fund strategists? I think that noble Lords have got my drift.

This is very intimidating company with so many speeches from people with experience, knowledge and wisdom on this issue. While I fully recognise the seriousness of the problems that the eurozone faces and those that it poses for an already difficult economic situation globally—I may say a few more words about that in a minute—we are at risk of slipping into some extraordinary melodrama in the way in which we have discussed this issue. Today may have been an illustration of that. I just thought, as others will have, how this debate would sound if it was taking place in Berlin, Paris, Madrid, Rome or even in Athens. Would we be hearing parliamentarians calling for exit from the euro and the dissolution and break-up of the eurozone? The noble Lord, Lord Lawson, mentioned democracy; what would we hear people calling for if we were out on the street in those capitals?

We are all very conscious that that is not the theme that we would be hearing. I do not think that anyone doubts that there has to be a resolution to this crisis. There has to be a process of change and a rebalancing, and part of the problem is obviously political. But I very much doubt that we are looking at a major collapse of the euro. Perhaps Greece might have to leave, but even that is in question, and I think that there will be a notion of hard currency and soft currency. Having all those variabilities is probably a very British viewpoint of a circumstance where we are outsiders and not in very good communication with the countries most engaged.

I accept—and the noble Lord, Lord Liddle, had it right—that Germany is playing a rather difficult game, encouraging and enforcing new levels of fiscal discipline in countries such as Italy, Spain and Greece, which have played the game badly and taken advantage of the past years of plenty in order to ignore the need to restructure and reform their economies. That I fully accept. I think that Merkel is playing a game of chicken, and it is a relatively dangerous one, as chicken always is. However, I think that we will eventually see the Germans, one way or another, allowing the ECB to play its role as lender of last resort. That will be a change—relationships will have changed within the EU—but it will be very different from a break-up. Looking back on this period in 10 years’ time, I think we will see this as a period of reform within the euro and the eurozone but not as the collapse and final end of the eurozone, and we have to be conscious of that.

Two things have become incredibly apparent during these past weeks. The first is that we are dangerously distant from the conversations with our European partners. I am not referring simply to some of the snubs to David Cameron, which I think have been unfair, because advice has been offered in good spirit and in genuine concern. However, looking at how other countries work with each other—for example, the relationship between France and Germany—surely we need to start building something like that ourselves. We should do so not in order to become more part of the eurozone but to be in proper conversation with it, whether through joint Cabinet meetings or much more extensive engagement between Ministers. I am talking about the building of trust. This even relates to the Civil Service. It is often considered a career dead-end in Britain if you are a civil servant who spends time in Brussels or engages with other European countries. Surely we have to overcome that so that we have a proper communication flow, real conversation and real influence. The noble Baroness, Lady Valentine, raised a series of issues. It seems to me that if we want protection for the British interest, we surely have to build on those things too.

The other thing that has become apparent is how fully engaged our economy is within Europe and with the eurozone. Sometimes people say that we have a problem in that 40 per cent of our exports go to Europe, but the engagement goes much deeper than that. You will be hard-pressed to find a major British company that is not in some way deeply embedded within Europe and the eurozone. That may be because investment comes from Europe to a British company. Many companies that we think of as British are European-owned, or they are British companies with major European subsidiaries, or they are British subsidiaries of US or Japanese companies but we are part of their European portfolio.

The consequences for us of what happens in the eurozone are far more substantial than we would think from most of the superficial conversation that takes place. We need to look at the various charts and statistics published by the Office for Budget Responsibility this week to see the exposure of various banks within Europe to various European Governments. It is absolutely clear that British banks are heavily engaged not just at the superficial level that the chart shows but in layer upon layer: the exposure that we have to French or German banks is as a consequence of second-hand engagement just as much with Italian, Spanish—in fact, we are deeply in with the Spanish—and Greek banks as with others. Even the statistics here do not mention things such as credit default swaps and other mechanisms and derivative mechanisms that have led to incredibly deep engagement in Europe by our financial institutions. We have to resolve that. For me, probably the most alarming statement when the OBR report talked about the viability of its forecast was that the impact of the collapse of the eurozone would be impossible to quantify. That kind of uncertainty gives us a sense that we are dealing with circumstances that have a very big impact on us. What can we do? I believe that restoring and building communication, trust and understanding is going to be absolutely crucial as we move forward.

Secondly, as others have said, we have to look to our own economy. Again, others have talked of the importance of the new commitment to growth, infrastructure and to taking care of our own house, as it were, and making sure that we are underpinning our own future. This is not a debate about the autumn Statement but there are important things to be said in that a good part of our protection going forward is the kind of commitments we have seen for infrastructure and releasing the cash from our pension funds and major businesses to support our economic future. There has been support for the green investment bank. We had talk of a broader investment bank but the green investment bank is crucial because that kind of support can take us through the sort of innovative technologies that will be necessary if we are to be involved in a major economy. The new mechanism is there for supporting small and micro businesses. Many of them are measures that are neither political nor contentious, but they should have been introduced years ago to ensure that there was a breath of life in the British economy.

I end by saying that we are at great risk of a self-fulfilling prophecy. I remember seeing a play at the National Theatre of “Oedipus Rex” that was so desperately depressing that at the end all the actors came on stage covered in bells to jingle and sort of relieve the sense of depression. We have to start looking at the positives in our own and in the global economy before we manage to drive ourselves down into the depths. We have areas of manufacturing that are thriving. The German economy, believe it or not, is showing new confidence with strong manufacturing prospects. There are signs now, finally, of recovery in the US economy, despite the fact that there is political crisis there. Let us not always be about doom and gloom. Let us not always be about melodrama.

My Lords, I, too, congratulate the noble Lord, Lord Lamont of Lerwick, not only on securing the debate but on an excellent introductory speech. I also add my words of congratulation to the noble Lord, Lord Wolfson of Aspley Guise. We have waited a long time for his maiden speech but it has been well worth it. We look forward to his future contributions to our debates.

I was due to speak immediately after the noble Lord, Lord James of Blackheath. He is with us in Grand Committee but is not going to speak. I am disappointed because he would have made a contribution of national significance to this debate. I propose to confine my remarks to the European dimension of the Motion. The Minister has had more than enough excitement, pushed by me to the point of agitation this week on the Autumn Statement, and I do not want to put him at risk of again losing his self-control. I shall limit my remarks to Europe.

The key in Europe now lies with Germany. It seeks to promote a transfer union linked to fiscal contracts—real and enforceable. Germany can move only at the pace that the German people will agree with. I am sure that the noble Lord, Lord Lamont, would have used the word “democratic” in talking about the limitations to what Angela Merkel can currently do. The German proposals will be accompanied by measures ultimately to bring productivity costs across Europe into a more harmonised relationship than they currently have, and only Germany can legitimise the ECB if it moves to take less conventional policy stances. In that respect, I particularly welcome today’s cut in interest rates by the ECB. There is more that it can do within conventional mechanisms before it needs to consider doing the unconventional.

I also hold very firmly to the view that there are right and proper limits to what a central bank can do. Those apply to the ECB, as they do to any other central bank, and they are eloquently summarised in Walter Bagehot’s Lombard Street, published in 1873, which is as relevant today as it was then. Germany’s plan, as I said, is the implementation of structural reforms by obliging nations to pursue or steer economic strategies. This is a very difficult call, as our current Chancellor is finding out. It is not easy, and I would be the first to admit that this is a judgment that I do not feel confident in making. I do not think any economist or Minister could be confident in making that call about whether you think debt is frustrating growth, which is clearly the position that the Chancellor of the Exchequer is currently taking, or the position that the Labour Party is taking, which is that the growth problem is increasing debt. There is clearly a tipping point there somewhere, and it is extremely difficult to establish where it is.

The Germans are also seeking to promote the European financial stability facility, which they want to see leveraged, and to provide a solid support for interventions that are necessary to help the eurozone through this difficult period. The EFSF is looking increasingly stretched; global funding support is clearly not available and there is nervousness about the lack of transparency and use of leverage. The increased slippage in the ratings of a number of European countries means that the burden of AAA support for the EFSF is increasingly dependent on Germany, which means that the size of the EFSF, even complemented by the available funds from the IMF, is probably not sufficient to meet the financing needs of Europe over the next three years. This is a very serious issue, which does not rest solely at the door of our own Treasury but is a matter on which it should take an active involvement in discussing.

The Germans are also seeking to secure a treaty committing eurozone nations to long-term budgetary discipline. There has been much talk about the ECB, either directly or via loans through the IMF and the EFSF, supporting Europe. But this primarily addresses the problem of liquidity. There is a liquidity problem, and it is very worrying to see the almost complete attrition of issuing unsecured bonds by banks over the past six months. The funding of banks is now becoming as difficult as it felt during the second and third quarters of 2008. Money market funds are withdrawing support for European banks—not British banks, but European banks. This is a moment of increasing nervousness. Europe needs without delay to significantly strengthen the capitalisation of its banks and banking system to absorb the inevitable losses that will come forward as a result of the write-offs of sovereign loans, while maintaining depositor and counterparty confidence.

The EU bank capital objectives announced last month by the EBA simply fail on three critical tests. They were too little; €106 billion is simply not enough. The IMF estimated the need for at least double that; my own personal view is that it would be more than treble that amount to get the banks to a position where people can say that is more than enough to cope with whatever might hit these banks in terms of write-offs. That is what we learnt in 2008; you need to go further than your advisers tell you to ensure that you have absolute comfort and security. Secondly, the EBA’s proposal is too slow; it allows the banks until June 2012. We should do that as a matter of urgency, and if banks cannot raise capital from their own shareholders they should raise it from their national Governments and if they cannot raise it from their national Governments they will have to raise it from European institutions or the IMF. The third fatal flaw in the EBA’s proposal is that it is expressed in terms of ratios of capital to risk-weighted assets. So banks are naturally contracting their lending to achieve the ratio target, which can be addressed only by putting an absolute capital requirement in place to ensure that banks do not use that strategy. We are already seeing that happen with UK banks, which is one reason why the Chancellor had to increase the rate at which the bank levy is charged, because banks are contracting their balance sheet, as the Governor of the Bank of England has also talked about. So that needs to be done as a matter of priority.

The Bank of England has made it clear today that it believes that more can and should be done by our banks to increase their capital. Our banks are relatively well capitalised, but in my experience no bank can have too much capital in these sorts of markets. But banks do not cover their cost of capital, so it is very difficult for them to raise money from the markets. How can they address this? They have to cut back on dividends—very few of them are paying dividends, but those that are should not. They also need to stop paying bonuses. It is an absolute nonsense that an industry which cannot cover its cost of capital still pays huge bonuses. Why can this be? They have said that they have to remain competitive to protect the interests of their shareholders. However, the same shareholders own all the banks. Institutions such as BlackRock, Capital International, Fidelity and Legal and General own shares in almost all the banks. I encourage the Minister and the Treasury to take immediate action, to call these major institutions in and say to them, “We want you to write to these banks and say that, across the board, you expect them to adopt a wholly different approach to bank bonuses”. That would be a powerful forcing mechanism which would stop the excuse that they have to pay bonuses to remain competitive. It would also take a lot of the heat off the Government, who bear a lot of criticism for bank bonuses, but, from my own experience, are quite limited in what they can actually do. I encourage the Minister to take strong and robust action on that point.

The Minister should also back up the Bank of England’s suggestion today that the FSA should intervene to ensure that banks do not contract their balance sheets. The Bank of England’s Financial Stability Report is very clear that something needs to be done here. The Treasury needs to say to the FSA, “What are you going to do in response to the governor’s report today?”.

Finally, I encourage the Bank to do its very best, as we did when I was in Government, to support the interests of Britain in Brussels and protect the important financial sector within our economy.

My Lords, I find myself agreeing very much with the speeches of the noble Lords, Lord Lamont and Lord Lawson, but that is because they talked about Europe and not about Britain. I have always been a strong supporter of the European Union, but Britain was right to stay out of the euro. The eurozone has always been a flawed construction, created for political reasons. It never had the political and economic institutions needed to make it work. Gordon Brown should be given credit for keeping Britain out. We had more tools to deal with the crisis: fiscal policy, control over our exchange rate and a central bank which can buy gilts almost without limit. I agree with those noble Lords who have argued that the eurozone should, and probably will, break up, either into a northern and a southern tier, or in a more disorderly way.

But the eurozone crisis should not be used as an excuse for the failures of domestic policy. Of course, it is true that it has worsened the prospects of a swift British recovery, but in fact stagnation in our economy had set in before the European crisis exploded. At any rate, growth started to slow down in Britain almost from the moment the Chancellor announced his confidence-boosting programme of budget cuts in June 2010. It went from 1.1 per cent in the second quarter, to 0.7 per cent in the third quarter, to minus 0.5 per cent in the fourth quarter. According to the OBR the British economy will grow about 0.9 per cent this year; it is expected to grow 0.7 per cent next year, and then to pick up to 2.1 per cent in 2013, with a one in three chance of recession next year. Miserable though these figures are for the third and fourth years of a supposed recovery, I believe they are overestimates. Our growth figures are having to be revised downwards. For example, in mid-2010 both the IMF and the OECD forecast a British growth rate of 2.5 per cent in 2011, 2.9 per cent in 2012, and 2.8 per cent in 2013. As I have said, we will be fortunate to reach 1 per cent this year.

It is hard not to be sceptical of these forecasting models. A lot of them are pure bamboozlement and depend upon assumptions which are plucked out of the air. There are two systemic mistakes being made. First, I believe they underestimated the positive effects of the monetary and fiscal stimulus in 2009-10 in helping recovery. Secondly, today they underestimate the effects of the fiscal contraction in retarding it.

The direct effect of the government cuts is to take spending power out of the economy when spending power is exactly what a depressed economy needs. The continual shrinkage of demand increases the debt and devalues the assets of both banks and Governments. It is thus a direct cause of the financial crisis today, as indeed it was—I am talking here as an economic historian—in 1931, when the financial crisis spread from central Europe to London. The banking system is certain to crack if the economy contracts. That is why it is far more important to plug the hole in the economy than to plug the hole in the Budget. The Chancellor is at last showing signs of recognising this.

As the noble Lord, Lord Monks, said, this is not just a crisis in the economy but a crisis in economics. One of the problems of our arguments is the lack of any fundamental economic theory, particularly on the Government’s side of the debate. Macroeconomics, as a discipline, has virtually collapsed. Finance theory is hardly taught in the universities. So what we have is a kind of primitive microeconomics backed by Victorian aphorisms—you must not get into debt, or, if you do, you must pay it off as quickly as possible, and therefore you must reduce your spending, increase your savings and tighten your belt. I do not decry any of that. I do not condone either the extravagance, greed and myopia that led to the crashes of 2007-08. However, I think that Adam Smith was wrong when he said:

“What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom”.

He ignored the fallacy of composition; it is as simple as that. I think that we are in danger of forgetting that one person’s spending is another person’s income. We must always remember that a Government have control over their spending but not over their income, as I am sure both noble ex-Chancellors will agree. If, by spending less, a Government cause the economy to fail, their own income or revenue collapses and they therefore will not be able to meet their targets. Already, the Government are having to borrow £111 billion more than they anticipated over the next five years; in my view, that is a direct consequence of the policy of cutting.

Critics of the Government's policy always face two charges. The first was voiced today by the noble Lord, Lord Lamont. He pooh-poohed the stimulus advocates by saying that their argument amounted to saying that if we borrow more money today, we will have to borrow less tomorrow. The implication was that this was a ridiculous remark: you reduce your borrowing by borrowing more. Nevertheless, the fact is that we are having to borrow more today as a result of trying to borrow less, because the economy is not growing. That is what missing your targets means. What matters is the level of output and employment in the economy and its growth. If you take actions to restore the growth, the deficit will automatically fall away—not completely by any means but certainly partially.

Secondly, the Chancellor claimed that the Government’s deficit reduction plan has saved the taxpayer £21 billion by keeping the cost of government borrowing down. It is true that UK gilt yields, currently at 2.4 per cent, are among the lowest in Europe, even briefly dropping below German bonds. However, the savings pencilled in by the Government—that £21 billion figure—depend on sustained economic recovery. If the cuts continue, what little economic growth is predicted will surely disappear. As it did this Tuesday, the OBR will revise its borrowing figures upwards again, and the growing size of the deficit will negate any savings made on the rate at which the Government borrow.

Nor do I think that it is the deficit reduction programme that has kept the cost of government borrowing down. The fall in UK interest rates is entirely due to the danger of sovereign debt default by European countries; and the bond markets and pension funds know that the UK will not default. Of course you can say that they know that it will not default because of the Budget reduction policy. It is not that at all. We have tools, including the ability of the central bank to purchase gilts, which means that the danger of default has always been negligible.

I know that there are huge complications in applying Keynesian wisdom today, as the noble Lord, Lord Desai, pointed out. But we must start from some point of economic theory or we will simply be battered by day-to-day events. If we do not have some basic theory behind us, we are intellectually and morally adrift. I use the word “moral” because the choices made by the Chancellor are morally deplorable. They are consigning to the scrapheap millions of people who are able and willing to work. By destroying their spirit and their skills, he is creating the very bleakness to which we are now being asked to adapt ourselves. Policy should aim to build up, not cut down. The economy does not require the arts of bleeding, but an injection of vitamins.

My Lords, as I came into the debate this afternoon I was convinced that I was on the speakers’ list, but I seem idiotically not to have pressed the right button on the screen. However, I am grateful for the four minutes that I now have. There are two approaches to the euro crisis and the EU crisis. The one is the Lamont-Lawson-Flight approach, which is to say that the whole venture was misconceived from the start, it was bound to end in tears and we predicted it all along. They remind me, if I may say, of those Marxists in the first three-quarters of the 20th century who, every time there was a banking crisis or a recession, said, “Ah, this is the final collapse of capitalism. We were right all along”. The other view, which is my view, is that the crisis has been induced by too little integration and the solution is more integration. Indeed, as often happens in life, this crisis will force us to do what we should have done anyway in easier times. The solution here is what is normally known as fiscal federalism.

There are two ways in which things may pan out from now on. One is that the problematic countries carry out their obligations under the bailout programme. They reduce their deficits and, no less important, they carry out supply-side reforms. Those reforms can produce quite rapid results, as we saw from the Hartz reforms in Germany nearly 10 years ago or the Thatcher reforms here in the 1980s. If they fulfil those obligations to a level of commercial satisfaction, it is only right to lay on a system of eurobonds that would be jointly and severally guaranteed by all the eurozone member states, and therefore would be issued at a yield comparable with that of the yield paid by Germany today.

Interest rates are enormously important. If you look at the primary deficit of Greece, it is only 1 per cent of GDP, so reducing interest rates is going to be absolutely critical. On that basis, we shall be able to get through this. I do not think that the ECB should be involved at all. The Germans are absolutely right about this. You should never take risks with the solvency or monetary credibility of your central bank. That is essential.

I would like to make what I think is a novel suggestion. The European Financial Stability Facility and the subsequent mechanism should be allowed to lend in addition to eurozone countries with high debts where their bonds are trading at a price below or, if you like, at a yield above the bailout level. The last time I looked, Greece’s bonds were at a discount of 66 per cent whereas the bailout level is 50 per cent. The facility should be allowed to lend to those countries for the sole purpose of enabling them to buy in those bonds on the secondary market and cancel them. We have lost some good market opportunities of that kind over the past couple of months, which is regrettable. I do not believe that there would be a big problem about doing that.

So far as the euro is concerned, it is a fatal error to think in terms of abandoning it. That would be an act of self-destruction on an unprecedented scale. As has already been mentioned by my noble friend Lord Lea and others, it would immediately add a foreign exchange crisis to the crisis we already have. You would have the deutschmark or the hard euro parity rising to a level that would stymie growth in Germany. That has already happened with the Swiss franc. You would also have the other parities of the weaker economies going down the tube and causing high inflation. That is not the way forward at all. What is more, it would greatly increase the real value of the euro-denominated debts of these countries in terms of the drachma, the escudo or whatever successor currency existed. Again, that would be very foolish. Further, I would say to those who think that devaluation is a solution in that it would encourage competitiveness, it only increases competitiveness if it is accompanied by a programme of domestic austerity and restraining domestic consumption. Otherwise it just washes through the system like a dose of salts and produces a cycle of inflation and continuing devaluation. We had that in the 1970s and there no point in doing it at all. If you cannot deliver an austerity programme as part of the bailout, you will not gain any benefit from a devaluation, and that would be a great mistake.

To sum up, European integration, greater fiscal integration, federalism and the euro are part of the solution; they are not part of the problem.

My Lords, like other noble Lords I am grateful to the noble Lord, Lord Lamont, for securing this debate, even though the topic has widened from that he initially intended. I also wish to congratulate the noble Lord, Lord Wolfson of Aspley Guise, on his witty maiden speech.

Despite appearances to the contrary, the debate has not been about economics. Instead, as the noble Lord, Lord Ashdown, pointed out, it has been about politics—the political choices made by Governments in the eurozone, most notably the Government of Germany, and the choices made by Her Majesty’s Government. Indeed, the common theme that has run through much of the debate has been the severe austerity that Germany demands of the rest of the eurozone and the similar economic misery that the coalition is inflicting on Britain. It is now clear that the eurozone embodies fundamental design flaws. These have been addressed by the noble Lords, Lord Lamont, Lord Alderdice and Lord Higgins, my noble friend Lord Myners and the noble Baroness, Lady Wheatcroft. A successful monetary union requires a powerful and active central bank, an all-Union bond market managed by a central treasury function, some means of balancing the economic benefit between the most successful and least successful parts of the Union, easy migration and, it is hoped, some sort of all-Union employment policy. This is a reasonable description of the United States of America, with the employment policy being provided by the military.

My noble friend Lord Desai was right to point to problems in the bond market as far as short-term financial stability is concerned, for it is the existence of an all-Union bond market that is crucial. Given that the eurozone economy is the largest in the world, any major bond fund must have significant exposure to the euro, just as it must have exposure to the US dollar and, to a lesser extent, to sterling. This can be obtained by holding any eurozone sovereign bond. Moreover, the exposure can be maintained by switching between different sovereign bonds with no foreign exchange risk whatever. Hence the huge flows between eurozone sovereigns that have produced wild gyrations in interest rates over the past few months as uncertainty and rumour have fuelled massive capital flight. The point was made by the noble Lords, Lord Wolfson and Lord Flight: it is like walking along a rocky path carrying a large amount of water in a shallow pan.

Compare this with the situation in the US. The state of California, which represents 13 per cent of the US economy, is bankrupt. This has no impact on the US Treasury bond market at all. Similar problems in Greece, which represents 2 per cent of the eurozone economy, have produced a wave of destructive contagion. The creation of a eurobond market equivalent to the market of the US Treasury—no bailout, no austerity, no ECB as lender of last resort—will bring durable financial stability. Of course, creating a eurobond market is a formidable political problem, but it is not impossible to imagine that this could be solved. It is not necessary to have a United States of Europe, as the noble Lord, Lord Lawson, claims. It is conceivable to have a powerful central bank, a central bond market funding a monetary union with a centre that is still politically weak relative to powerful member states. Indeed, that is a description of the most stable monetary union in the world, the Confederation of Switzerland. Clear identification of the design flaws of the eurozone that have resulted in such appalling financial instability should finally dispose of the illiterate comparisons often made between Britain’s fiscal problems and those of the eurozone members.

Are the Government right to argue, as they do over and over again, that their austerity policy is necessary to maintain the confidence of the bond markets and keep UK interest rates low? Perhaps it is, but only because of their own political folly. The Government have repeated this mantra so often that the markets probably believe it by now, and in believing the Government’s pro-cuts propaganda, they demand a redoubling of austerity. We have financial stability, but it is the stability of the grave. We are repeating Japan’s lost decade in an economy that is much poorer and much more unequal. I warned at the time of the Budget that the Government’s austerity policy risked creating a vicious cycle in which expenditure cuts and tax rises would lead to lower growth, which in turn would lead to falling tax revenues and rising costs of recession. This in turn has led to yet further higher deficits, and so on in a downward spiral. But there is another twist in the tail that I had not fully appreciated until I read the OBR report.

The austerity programme also reduces the medium-term productive potential of the economy and hence reduces the possible future growth rate that is supposed to restore the nation’s finances, so now we have two mutually reinforcing engines of economic decline—the merry-go-round of cuts that do nothing to cut the deficit, and the recession-induced fall in growth potential that is making the deficit bigger too. And what is the Government's response? It is more of the same. That is not my verdict. As the noble Lord, Lord Hollick, pointed out, it is the verdict of the OBR. Reviewing the plethora of schemes to turn the economy around, the OBR concludes:

“We have not made any material adjustments to our economy forecast on the basis of these policy announcements”.

In other words, the OBR concludes that the Government’s much spun “growth strategy” will achieve a net result of precisely nothing. However, I believe that the OBR is being overly optimistic.

First, the OBR persists in being excessively optimistic about where future demand will come from. In March, it predicted that private sector investment would grow this year by 6.7 per cent. Now, eight months on, it admits that investment has fallen. In March, it predicted that investment next year would grow by 8.9 per cent, and it still thinks that that is almost achievable. It says that investment in 2015 will be roaring along at 12.6 per cent growth a year, up from the 8 per cent it predicted in March. Where do these fantasy figures come from? Where is the incentive to invest when household incomes are going to be as low in 2014 as they were in 2002? It does not matter if interest rates are low: if there is no demand, there is no reason to invest.

Secondly, the other component of the rebalancing of the economy referred to by the OBR is supposed to be net trade. Again, the OBR is being excessively optimistic. It admits that most of the beneficial impact of the devaluation of sterling has now been exhausted, and recognises that markets in Europe will be depressed for some time, and yet somehow conjures up a significant improvement in trade performance, so overall the OBR is far too optimistic. The situation is much worse than it thinks. The people for whom matters are really worse are the poorer members of our society. If the OBR’s predictions are correct—I think that they are overoptimistic—household real disposable income will fall by 4.7 per cent over the next three years. However, that is an average figure and well over 60 per cent of the population have below-average incomes. If we examine the impact of the Government’s policies on median income—that is, the level of income in the middle of the income distribution—then the fall in disposable income will be 7.5 per cent. The cuts in real income are concentrated at the bottom end. Indeed, as the IFS analysis of the Autumn Statement has shown, the measures taken this week will lead to further cuts in the real income of the bottom 30 per cent and give benefits to the top 30 per cent. Nothing is more disgraceful and distasteful than the savage pleasure that Liberal Democrats and Conservatives take in cutting support for the poorest in Britain.

There is one further chapter of this dreadful story that must be taken into account in any overall assessment of the state of the economy: that is the level of unemployment, particularly of youth unemployment. It is simply uncivilised to have more than a million young people unemployed and their lives blighted at just the time when they should be looking forward to building a future, careers, stable households and families. Yet the prolonged recession holds out that prospect not just for the 22 per cent of young people now unemployed but for thousands more. We can begin to solve these problems only if there is a return to significant rates of growth in the eurozone and in Britain. The austerity imposed on the eurozone by Mrs Merkel, and on Britain by the coalition Government, will achieve nothing but a lost decade, or more. Stable financial markets will not produce an automatic increase in business confidence. There is no confidence fairy; she was killed by the Government's austerity rhetoric.

What is necessary is a radical rethink of economic policies and even economic institutions. We need a major increase in government investment to kick-start private sector investment. We need new funding for industry on a greatly enhanced scale—not just what the Financial Times called the “gimmicks” of the Autumn Statement. We need a realisation that demand can be boosted by redistributing income towards the poorest, because they spend every pound they get and their spending has a lower import content than that of the wealthier sections of the community. The Government must become an employer of last resort to tackle youth unemployment.

How should we pay for all this? First, we should realise that unless something radical is done, the deficit will go on rising; we will go on borrowing more as we cut more. Secondly, if there is to be quantitative easing, it should be far better directed than it is under the shotgun approach used at the moment. Thirdly, even small amounts of redistribution could have a significant effect on the rate of growth of demand.

It will be evident from what I have said that I am fearful for the prospects of the eurozone and of our economy. Of course our current economic circumstances are dreadful, but they are made by human hand and they can be unmade by human hand. The key is political: political will and political intelligence, allied to sound economic analysis. All three ingredients are notably absent from the Government’s policy.

My Lords, I start by thanking my noble friend Lord Lamont of Lerwick for leading this debate, and all noble Lords who contributed to a very important debate that showed the House at its best. I add my congratulations to my noble friend Lord Wolfson of Aspley Guise not only on his wit and wisdom but on the great rigour and clarity of his thoughts.

We have really had two debates this afternoon. The main plot had the European theme going through it and the subplot concerned UK-specific issues. If noble Lords will bear with me, I will be guided by my noble friend Lord Lamont and others and stick mostly to the main plot of euro issues, and will respond to a number of important points that were made on UK-specific issues if I have time.

We heard some remarkable big-picture and historical perspectives on the European story. My noble friend Lord Alderdice came at it from a very particular angle. We also heard the rather different positions of my noble friends Lord Lawson of Blaby and Lord Ashdown of Norton-sub-Hamdon. While neither of them will be surprised that I do not necessarily share their conclusions on the way forward, there were things that I certainly agreed with in both their analyses, which I will come back to. Their speeches were remarkable in setting out two dramatically opposed perspectives on our predicament.

The euro area crisis continues to drag on. The summer now seems a long time ago and the waters were relatively calm then compared to now. Confidence in all economies across the world, including that of the UK, has been undermined. The Office for Budget Responsibility on Tuesday cited the euro area crisis as a major reason for its downward revision of the UK growth forecast. As I have said, a resolution to the crisis would provide a significant boost to the UK economy. It is in our vital interest to work with our euro area counterparts to make that happen.

A comprehensive, coherent and lasting solution means first and foremost that euro area members must implement the agreement that was reached towards the end of October.

It is clear what needs to happen and what decisive action is needed. First, the new Governments in vulnerable countries must implement reforms fast; secondly, the euro area’s financial fund—the European financial stability facility—needs maximum firepower to protect vulnerable countries; thirdly, the euro area needs to strengthen its weaker banks to withstand the turmoil; and, fourthly, following a decision to provide more assistance for Greece, including significant debt restructuring, all parties must now stick to that specifically agreed deal.

More broadly, it is important that euro area Governments and the institutions of the euro area demonstrate that they will do everything necessary to stand behind the euro. Prolonged uncertainty merely undermines confidence across the global economy. Specifically on those issues, we have had discussions on the need for bank recapitalisation, with which I agree. The issue was first raised by my noble friend Lord Lawson of Blaby and by my noble friend Lord Flight. I agree with much of what the noble Lord, Lord Myners, said on the imperative of this. He looks surprised. I do not follow all his logic—it amuses me that he urges the Government to do things that his Government were not prepared to do in restricting bank bonuses and dividends—but what he said seriously echoes some of the thoughts of the Governor of the Bank of England today and the financial stability report the bank have issued which goes into many of these details.

Bank recapitalisation needs to be co-ordinated; it has to be decisive and it must bolster the position of the undercapitalised banks in Europe. Of course it is preferable for new bank capital to be raised privately—some of the difficulties in doing that have been mentioned today—and Europe needs to make it clear that national public backstops are available if required. As the governor has re-emphasised today, of course, UK banks are well capitalised as a result of actions that the authorities and the banks have already taken. In answer to the specific question from my noble friend Lord Wolfson, the governor was asked today whether the Bank was making contingency plans in case of a eurozone break up, and he confirmed, as we would expect, that it is.

We will continue to press our euro area counterparts to see through a decisive resolution to the crisis but at no point have we committed—or will we commit—any British taxpayers’ money to a euro area bailout, neither to Greece nor to the bailout fund. However, as a founding and permanent member and one of the largest shareholders in the IMF, we continue to be a strong supporter of the IMF in its role as global backstop to the world economy.

The IMF can certainly use its expertise to help administer a euro area bailout fund and I agree with my noble friend Lord Dykes on that point. However, it can lend only to countries with a programme for adjustment. A potential special purpose vehicle for the euro bailout fund would not fit that bill. So the bottom line is that it is for the euro area and the European Central Bank to support the euro. I know that some noble Lords would like a different balance as between the European Central Bank and the role of national central banks within the eurozone, but the role of the ECB will be critical. Global commitment cannot be a substitute for euro area action and it is necessary to increase the firepower of the bailout fund to stand behind the euro.

However, I do not want to shy away from questions around break-up. Whatever conclusions different Members have drawn from this issue in the debate, and they are radically different, I think that we would all agree that the cost of a break-up of the euro would, in the recent words of my right honourable friend the Chancellor of the Exchequer, be “economically disastrous”. As he put it on 26 October, instability in the eurozone has had “a chilling effect” on the British economy and other economies. If that is what a bit of instability and market volatility can create, let us just imagine what the break-up of the eurozone would do to this country.

The break-up of the euro, disorderly or otherwise, would cause enormous instability to the entire global economy and, I argue, do enormous damage to the British economy. I accept that one or two noble Lords who have spoken nevertheless believe that the cost of continuing would be greater, but I take the point that was made by, among others, my noble friend Lady Kramer when she in particular drew attention to the cost of break-up.

In answer to my noble friend Lord Higgins, of course all sorts of scenario planning is done—I have referred to the Bank of England already—but we should not go too far down this route. As my right honourable friend the Prime Minister said on 7 November,

“the more we discuss and speculate on the nature of another country’s currency and economy, the more we could damage their interests”.—[Official Report, Commons, 7/11/11; col. 35.]

If we start to describe exactly what we might have to do, we could set off all sorts of chain reactions. Yes, we plan, but I would leave it at that.

The euro area and its member states must reform for the long term. That means that the euro area members follow the remorseless logic to closer fiscal union. One vision for the eurozone has been clearly laid out by the noble Lord, Lord Eatwell; I would not necessarily agree with all the detail but he sets out a clear and coherent logic.

My noble friend Lady Wheatcroft has drawn attention to another critical piece of this puzzle, the need for much greater budgetary restraint, and I very much echo that. However, as the euro area pursues greater fiscal integration, as it needs to, we have to ensure that the UK’s interests in Europe are protected. That means ensuring that countries in the euro area cannot impose decisions on the remainder of member states in the EU27. It is not a question of slow or fast lanes. I am not sure if that has been mentioned today—I am being told both that it has been and that it has not—but it is right that it should not be. I have said on other occasions in the House that the EU already has variable geometry in a number of areas, but the decisions that concern the EU27 must and will be taken at the level of all 27 member states.

I mentioned the “outs”. The Minister may recall that I said that it seems to me that Britain is the only “out” that wants to get further out—in some cases, out altogether. All the other “outs”, and I cannot think of an exception to this, want to get in. Is that not the difference between us?

No, my Lords, I do not believe that is the difference. I will come back to engagement in a minute or two if my noble friend will permit me to carry on until I get there. It is important that we make a positive contribution, and indeed we do so.

Linked to that, I agree with my noble friend Lord Maclennan of Rogart that the UK has played and can continue to play a catalytic role, with a positive effect on driving forward the single market. That goes part of the way to my noble friend’s point. On the other hand, I very much agree with the noble Baroness, Lady Valentine, my noble friend Lord Lawson and others about the vigour with which we need to defend the City. The financial transaction tax has been mentioned on a couple of occasions. The Government have made completely clear their opposition to that, it being a proposal that has been brought forward under an article which requires unanimity.

Let me move on from our engagement, or lack of it, to the key area where it could become apparent: treaty changes, which were brought up initially by my noble friend Lord Lamont and others. I agree with the noble Lord, Lord Williamson of Horton, that a lot can be achieved to strengthen the eurozone’s economic governance within the existing treaty provisions. The Government do not think that this is a time for treaty change; instead, we need to devote all our time and energy to boosting the stability and competitiveness of Europe’s economies with a relentless focus on the priorities of our citizens; namely, growth and jobs. If it is agreed within the eurozone that treaty changes are necessary for the eurozone countries, the UK Government will need to consider how to secure UK national interest. Like other member states, we will pursue our national interest in any treaty change negotiations.

I also emphasise, as my right honourable friend the Prime Minister has recently said—and this goes to the heart of the point made by my noble friend Lord Ashdown—that we are determined to play a strong and positive role within the European Union. That is set out in the coalition agreement which is at the heart of this Government. We want to make the case for a Europe that is fit for the challenges of the 21st century—my noble friend Lady Kramer shared with us some thoughts about how we should do that. That is the stance of this Government.

My Lords—

I shall give way in a moment. I do not accept the premise of my noble friend that that paints us into a corner of one.

Can the Minister name another “out”; that is, another beyond the 17 and the 10 who are out? Can he name another one which has not expressed the intention of getting in when it can, whereas Britain has expressed the intention of getting out? Is there another one?

I am not sure that that is the point; the point is that we have to fight for the single market to be developed in the way that I have described. I believe that Sweden and Denmark are in the same position as we are.

Oh!

We are getting some ping-pong between noble Lords. I am conscious of the time that we have for this debate, delighted though I am to have started this ping-pong and much as I would love to be able to sit down and let others carry on, having lit the fuse.

I am grateful to the Minister for giving way. Does what he just said about the Government wishing to be supportive if changes in the treaty are required to accommodate the requirements of the eurozone mean that the Government have now definitively given up the idea of taking advantage of such an opportunity to try to repatriate powers to this country; for example, in the social chapter?

My Lords, that is not what I have said. I have said that should the eurozone countries decide that it is appropriate and necessary for them to come forward with proposed treaty changes, we will seek to defend our national interest at that point. Other countries will do so. That is what I said and that is what I repeat. I should like to turn for a few minutes to the subplot of this afternoon.

Before my noble friend turns to the subplot, will he just clarify the position on measures that might be highly damaging to the City of London and are subject to qualified majority voting? Will he undertake that, should it look as though a vote would go against us, we would invoke the Luxembourg compromise?

My Lords, we will take whatever appropriate actions suit the particularities of the situation as we find it. We have demonstrated this, as I hope my noble friend would recognise, by, for example, taking the ECB to court when we thought a level playing field was threatened in relation to clearing settlement matters. We will be vigorous in our defence and will look at all avenues on a case-by-case basis. I can assure my noble friend of that.

May I ask the noble Lord one further question on Europe? In describing the financial transaction tax, he very carefully made reference to it being under a directive that currently requires unanimous support. Was he raising the possibility that this could be proposed under a qualified majority vote—perhaps by not describing it as a tax, as the Government have done with the banking tax, which they call a banking levy? Are the Government fearful that there is a way in which that financial transaction tax could be imposed on us without requiring a unanimous vote?

My Lords, no, I was not doing that. I was merely describing the route under which this proposal was brought in. It was as simple as that. I would rather not have any interruptions but it is up to noble Lords what they want to do. I would rather answer some of the points that have been made, particularly by noble Lords opposite. They are important points on the UK economy. Let me start to address some of those.

The first critical point, which was initially brought up by the noble Lord, Lord Desai, is the question of the pace of fiscal retrenchment and the approach that the Government are taking to eliminating the deficit over a five-year period. I am grateful to him for recognising, as he said in terms, that there is no realistic alternative, as the OBR confirms. On this, I can only disagree with the analysis of the noble Lords, Lord Liddle and Lord Skidelsky, and others. The OBR analysis is clear. To be fair to the noble Lord, Lord Skidelsky, he did not fall into the trap of accepting the OBR’s figures and then not accepting its explanation; he does not accept its figures either. I respect the position that he takes but, of course, I disagree with it.

What flows from a lot of the analysis that we heard from the noble Lords, Lord Hollick, Lord Liddle and Lord Eatwell, is that they apparently want to borrow more. They want more borrowing and more debt. I simply do not understand where this will lead, other than saddling future generations with an insupportable burden and, in the meanwhile, entailing a very severe risk that our interest rates will quickly go the way of Italy’s. The Government will not go down that path.

I come to the reforms that we are putting in place and the point made by the noble Lords, Lord Hollick and Lord Eatwell. First, many of the supply-side reforms that we have put forward are in direct response to what British industry is asking us for. We consulted 500 businesses and our measures largely respond to what the CBI and individual businesses want. If we are tackling fundamental reform of the planning system in this country, putting a renewed boost on economic infrastructure at the heart of government and challenging the skill base of this country, of course that will not show a return this year or next. It would be naïve to say that it will. On this, I very much take the point that was well made by the noble Lord, Lord Monks, who rightly stressed that this is all about the long-term approach. I agree with him about that and the lessons that are to be learnt about manufacturing and from Germany specifically. That is why we have initiatives such as the university technical colleges and so on. We were reminded by my noble friend Lord Ashdown about the importance of manufacturing. I would remind him and other noble Lords that our manufacturing sector is of course still as large as that of France. I am grateful, in this context, to the noble Baroness, Lady Valentine, for stressing the importance of our plans on infrastructure.

To bring it back to where we started, in brief conclusion, as my noble friend Lord Lamont of Lerwick made clear at the start of this debate, the ongoing instability in the euro area is vindication of this Government’s decision to get ahead of the curve, cut our own deficit and improve our own economic competitiveness. The Autumn Statement on Tuesday this week reinforced that commitment and, as forecast by the OBR, we remain on course to meet our fiscal mandate and debt target. It also reinforced our commitment to increasing competitiveness and embedding a recovery through private sector enterprise and investment. It is those decisions that have kept us out of the current sovereign debt storm, and which lay the foundations to rebalancing our economy to a sustainable future. We will encourage our euro area counterparts to take similar and determined action to bring a decisive end to that crisis—one that continues to undermine us all.

My Lords, I thank everyone who participated in this debate. Out of the 20 Back-Benchers who spoke, I think that 16 spoke purely on the European issue, although we had some highly interesting other speeches. At least the objective of my noble friend Lord Flight and me in initiating this debate was achieved. I am grateful to my noble friend Lord Ashdown for saying that there was a degree—perhaps a surprising degree—of overlap between my view and his. Even he was envisaging that the structure of the eurozone might not remain immutable. However, with respect, I would like to disagree with one point that he made, when he said that people like me opposed to the euro held that view even if it was in Britain’s interest. That is not, with respect, correct; I am against the euro because I believe it is against Britain’s interest. The economic and, indeed, the political reasons for that were powerfully spelt out in the speeches by my noble friends Lord Lawson and Lord Flight.

From the pro-euro side, I thought that my noble friend Lady Kramer raised a very interesting question when she asked whether, looking back later, all this would appear just a melodrama. While nobody was making predictions—I was not making a prediction and saying that anything was certain—I do not think that the concern being expressed about the eurozone can really be dismissed as a melodrama. The noble Lord, Lord Myners, described graphically some of the problems in the banking sector. We would not have had the central banks swaps exercise on that massive scale yesterday if there was not a crisis of liquidity in the banking system, originating in Europe. Even the noble Lord, Lord Liddle, talked about the euro teetering on the brink while my noble friend Lord Ashdown, as I have already said, referred to the possibility of the structure altering.

The noble Baroness, Lady Kramer, is of course quite right to say that there are different attitudes to the euro in the eurozone. An enormous amount of political capital has been invested in the project. It has always been the objection of me and people such as my noble friends Lord Lawson and Lord Flight to the euro that it is indeed a political project. The question is not what the attitudes in the eurozone are but whose attitudes will actually prove to be right in the long run. It is interesting, anyway, that some of the attitudes in the eurozone in countries such as Finland and Holland are changing. Indeed, polls in Germany show that a very significant proportion of the population would like to see the restoration of the deutschmark.

The noble Lord, Lord Myners, said very accurately that the key to the future is Germany. One point that I think did not emerge at any time in this debate has been the really quite startling rise in German interest rates in the past few days, which I am afraid is a very strong indication that the markets are beginning to look beyond one or two countries failing, and seeing what that means for the public finances of no less a country than Germany.

Germany is the key. The noble Lord, Lord Williamson, talked about the possibility of a eurobond and how that might help the situation. I remain sceptical whether Germany could ever agree to that, because I think Germany sees the convergence of bond yields as being part of the origin of the crisis, and that would appear to replicate that.

The second issue is the central bank and the purchase of bonds, on which various people have touched and which some have advocated. Whatever the rights and wrongs of that, my opinion is that Germany is very unlikely to go down that road because I think the key for Germany in the establishment of the euro was not just the “no bail-out” rule but the insistence that the European Central Bank should be modelled as closely as possible on the Bundesbank. If, as Germany sees it, the integrity of the ECB is in any way jeopardised, Germany would rather leave the euro.

I was going to say that, whatever the disagreements in the debate, we were unanimous on two things. The first is that the debate should have been held in the Chamber, but we were not unanimous because the noble Lord, Lord Lea—this is the reason we all treasure him—strongly disagreed with that and went against the consensus in a minority of one. The second thing, which we were unanimous on, was on the excellence of the maiden speech given by my noble friend Lord Wolfson. That was not a surprise to me, because I have shared Eurosceptic platforms with him in draughty village halls in different parts of the country from time to time. He modestly referred to his dynastic political origins. That brought to my mind the phrase that Churchill used when Austen Chamberlain made his maiden speech, which he described as a speech to warm a father's heart. That is exactly what my noble friend’s speech was. With that, I thank everyone who participated in the debate.