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Eurozone Crisis

Volume 733: debated on Thursday 1 December 2011

Considered in Grand Committee

Moved By

That the Grand Committee do consider the economic situation of the United Kingdom, including the impact of the eurozone crisis on the United Kingdom and other non-eurozone members.

Good afternoon, my Lords. I am sorry about the delay, but we had to have a sound engineer so that Hansard could report.

The House yesterday agreed a Motion to limit the debate in today’s Grand Committee in the name of the noble Lord, Lord Lamont of Lerwick, to four hours.

My Lords, I am very delighted to have the opportunity to introduce this debate. I ought to explain that this debate originated as a question put down by myself and the noble Lord, Lord Flight, intended for the dinner break, and was to be a debate entirely and only on the euro crisis. Somehow the Motion has metamorphosed into something wider, and the debate that was originally intended to be in the Chamber has now been relegated to the Moses Room. In view of the attendance here today and the importance of the subject, which can hardly be underestimated, perhaps it would have been more appropriate had it been in the Chamber in the first place.

I hope that noble Lords will forgive me if, despite the widening of the Motion, I confine my remarks almost entirely to the issue of the eurozone. Of course, I will listen extremely carefully to the points made by other noble Lords—notably, the noble Lord, Lord Eatwell, from the Front Bench, the noble Lord, Lord Myners, its other spokesman, and, of course, my noble friend Lord Wolfson of Apsley Guise, who is going to make his maiden speech during this debate. He is notable for many things, but one other notable thing that he has done has been to offer a very large prize—I shall not mention the exact sum of money—for anyone who can given him the solution as to how to dissolve a monetary union. During the course of my speech, I hope to name at least one candidate for the prize.

I will say just one brief word on the Autumn Statement and the position of the British economy. The critics of the Autumn Statement criticised the Chancellor and the Government yesterday for not having achieved their borrowing targets and for having increased borrowing, yet these were the same people who were urging them the day before to increase borrowing further. They seemed to believe that if we had borrowed more money last year, we would be borrowing less money this year. If only life were as simple as that.

As the Chancellor of the Exchequer said the day before yesterday, you have only to turn on your television to see that everywhere in Europe other countries are reducing their budget deficits and taking drastic action to do so. Indeed, we are probably doing so less quickly than many other countries in the eurozone. The Government’s starting point was the situation that our annual deficit as a proportion of GDP was equal to that of Greece, around 12 per cent. Of course, as is fairly, rightly and frequently pointed out, we had the advantage of a low stock of debt, but if you are adding to that at the rate of 12 per cent per annum, that advantage will quickly disappear. In today’s world, the Chancellor was absolutely right to embark on the programme of fiscal consolidation that he has.

One reason for having a debate on the eurozone crisis by itself is that I believe it represents a large threat to our economy and that of the world. One commentator yesterday compared the Chancellor’s task to that of a doctor treating a patient on board the “Titanic”, and the approaching iceberg was the eurozone. If anyone doubts the seriousness of the situation, just look at the front pages of the newspaper, with Mr Van Rompuy and Mr Barroso sitting opposite the President of the United States in the White House; they were not invited there just to have a cup of tea. Indeed, the action by central banks yesterday to increase dollar liquidity and the liquidity of banks in other currencies via swaps was expressly done, according to the spokesman of the United States Government, to offset the effects of the eurozone crisis and the threat to the banking system.

Denial has been a theme of the eurozone crisis. Outstanding examples of denial have been the constant assertions that eurozone banks have adequate capital, a debt default within the eurozone could never happen and the break-up of the eurozone was unthinkable. We have had extraordinary suggestions from Commissioner Barnier—the noble Lord, Lord Myners, had some observations about him the other day—who went out of his way to suggest that credit agencies should be banned from expressing opinions on the economies of member states that had received financial assistance. It seems extraordinary that, in a European Union where we have Charter of Fundamental Rights that enshrines the freedom of speech, this should not extend to credit agencies expressing an opinion about the state of different European economies. We have had many hobgoblins, not just credit agencies. We have had short sellers, credit default swaps, hedge funds and derivative traders—all have been blamed for the increasing and exacerbating crisis within the eurozone.

This crisis has also been characterised by drift. Perhaps that is inevitable because of the nature of the eurozone. When the eurozone was first set up, many people argued that having a currency without a government was a strength; but, in fact, being a currency without a government has turned out to be one of its fatal weaknesses. Thus we have had a whole plethora of attempted solutions at the crisis. First, we had the Irish bailout, then the first Greek bailout, then the Portuguese bailout and then the second Greek bailout. We had the European stability facility, which, as the director of the IMF said, was probably introduced illegally. We then had the European Financial Stability Facility, the EFSF, and we have the proposed ESM in 2013.

We have had lots of different versions of the EFSF. First, it was going to be leveraged; nothing much seems to have happened on that. Then we were going to have co-investment by other countries in it. Then, despite the extreme criticism of credit default swaps, it was going to be made into some sort of insurance mechanism doing exactly what credit default swaps do. Finally, de haut en bas, it was decided that the bailout should be funded by the Chinese—the richest countries in the world were going to ask some of the poorest countries in the world to bail them out. I think that there is an average income of $24,000 per annum in the eurozone compared with $5,000 per annum in China.

It is not just the policies of the eurozone that are the problem. One of the anxieties has been about the ability of the eurozone to execute any solution. Many weeks have passed since the first proposed 50 per cent haircut on Greek bonds was announced. The terms have still not been agreed by private holders, full interest is still being paid on Greek bonds, and the eurozone still wants to deny that there has been a Greek default because, of course, it wishes to maintain the myth that sovereign bonds in the eurozone are risk-free.

We all have different views about the euro and the eurozone and how it was set up, but there seem to me two fatal flaws in the eurozone that have received inadequate attention. The first was the German insistence on the no-bailout rule. That, of course, has been breached not once but several times, but it is still very dear to the German heart for reasons perhaps to do with their own experience of monetary union. It is something that they have surrendered very reluctantly, and it is, I believe, one reason why the German reaction at each stage of the crisis has been to do the minimum necessary in order to keep the euro afloat. For them, there will not be a big bazooka.

The second flaw, which has been pointed out by the economist Andrew Smithers and which again, I think, has received inadequate attention, is the misconstruction of having one central bank coexisting with 17 sovereign Governments. Normally, of course, a central bank must be able to print money. The Bank of England and the Federal Reserve board are owned by their Governments, whose bonds they buy and sell with no credit risk in their daily operations with the banking system. In a currency area, there should, of course, be local governments, but their borrowing should be tightly controlled from the centre, as it is in the UK, or they should be able to default, as is the situation in the United States. In Europe, the pretence is that the debts of the member states are without credit risk; so the European Central Bank is unable to avoid putting risks on its balance sheets in its day-to-day operations with the banking system. It is hardly surprising, therefore, that the Germans are so opposed to the European Central Bank being forced to buy more bonds. It is one thing for the European Central Bank to be the lender of last resort to the banking system, but one can understand the Germans thinking why should it be the lender of last resort to Governments that have overspent and overborrowed?

Until recently, talk of restructuring the eurozone, or of the departure of some members, or of the break-up of the eurozone, was unthinkable. That all changed, of course, at the Cannes summit, when some Greeks made it clear that they did not want to accept the terms of the write-down but wanted to remain within the eurozone. They were then threatened with expulsion from the eurozone—what was unthinkable suddenly became possible. We know that the Financial Services Authority and indeed the Treasury have been drawing up contingency plans. The FSA has been putting questions to companies about a change in the structure of the eurozone. I am not advocating or supporting a change in the eurozone’s structure or saying that a country should depart, but it would be foolish not to recognise that this is now on the agenda and requires thinking about. It is not inconceivable that in a couple of years’ time the shape of the eurozone could be different from how it is today.

We have seen currency unions that have been broken up before: the currency union between Britain and Ireland; that of Czechoslovakia; and indeed—often ignored—that of the rouble-zone, where one currency became five, six or seven currencies. It is clear that, in the currency union of the eurozone, financial integration has been very deep, and has accelerated exponentially in recent years. However, the issues that would arise if one country departed are clear. Some of those were outlined in a paper by Philipp Bagus of King Juan Carlos University in Madrid. My noble friend Lord Wolfson might care to both study his report and to bear it in mind for the award of his prize for someone studying how monetary unions might be adapted. He identified the issues of redenomination, the importance of keeping payment systems going if one country departs, derivative contracts, cross-border loans and the capital banks.

I entirely accept that, in the eurozone, the departure of one or several members would be highly complex and could be extremely expensive. However, while we hear a lot about the costs of breaking up or altering the shape of the euro, the costs of the euro remaining as it is are becoming astronomical and potentially disastrous. Let us start with the bailouts. The two bailouts of Greece cost, respectively, €109 billion and €110 billion. The Irish bailout cost €95 billion. The Portuguese bailout cost €75 billion. These come to a total of nearly €400 billion. If the EFSF reached €750 billion, Germany’s part in that would be €211 billion. Where other countries get into difficulty and are unable to meet their obligations, Germany’s share of that would rise. For this reason the EFSF looks a little like a pack of cards or, as one distinguished central banker called it, a gigantic Ponzi scheme. If it increased to €1.45 trillion—and given that the guarantee of Italy and some other countries in that situation would be worthless—Germany would have to guarantee nearly €800 billion, or 32 per cent of German GDP. If France were to lose its AAA status, the German share would rise to €1.385 trillion, or 56 per cent of German GDP. These may be contingencies; they may be theoretical. However, merely to examine the numbers is to understand why Germany recoils from ploughing more and more money into the EFSF and recoils from the big bazooka.

The European Central Bank has accepted Governments of the peripheral countries as collateral from the banks. If any of the eurozone Governments were to default, they would probably bring down with them part of their domestic banking system. The banks in that situation would be unable to repay the loans to the European Central Bank, which would be left with the collateral. Open Europe calculated Greece’s 50 per cent haircut alone would cost the ECB between €44.5 billion and €65 billion—and that is just one country. Again, one can see why the Germans are reluctant to put more into the EFSF and reluctant also to let the ECB do what so many people have urged it to do: buy more and more bonds.

Which direction will the Germans go in? They talk of fiscal union, but do not mean what we in our debates mean by a fiscal union. We tend to mean a common treasury and tax system. The Germans mean simply more peer pressure and more supervision of national budgets. That is unlikely to work. So what is the German solution? It seems to be to do the minimum possible at each stage. Each country that is in difficulties is expected to deflate for long enough to become competitive with Germany and to put its public finances on a sound footing. However, given the dire state that some of these countries are in, I question whether that is a sustainable solution. The eurozone threatens to asphyxiate its members.

If there were a real fiscal union requiring treaty changes, it would of course be vital to protect our national interests. I would have no objection to the Government agreeing treaty changes that did not affect us, but it is vital that our national interests should be protected. I hope that the Minister will give us some assurance on that. However, I do not think that that is the route Germany will go down. I have said what I think it will try to do. With this minimalist approach, we can look forward—alas—to recurring crises. They could come every few months. They could go on, possibly for years. I think that it was Adam Smith who said,

“there is a lot of ruin in a nation”.

There is probably a lot of ruin in several nations put together. Such a continuing crisis would be extremely damaging to confidence. It would sap it continuously and would mean that the already bleak outlook for growth would become even grimmer.

Such an approach may keep the eurozone and the currency afloat. However, the great risk is the possibility of an accident occurring in the mean time while adjustments take place. It could happen somewhere else in the financial system; for example, in the marking to market of sovereign bonds. We could see a major crisis in a major bank or in another financial institution. It is far better now to look at restructuring the eurozone and not to take it as a given that it must continue in its present form. The effect of delay will be simply that in the longer run the costs of adjustment will become greater. There is no painless solution, but let us hope that somewhere in Brussels, someone is working secretly to prevent this crisis turning into complete chaos.

My Lords, I am grateful to the noble Lord, Lord Lamont, for initiating this timely and important debate. Its title is rather wide; as has been said, it is about the UK and the euro, and my angle is going to be a little bit different from the one that the noble Lord opened the debate with. In the week of the Chancellor’s Autumn Statement, there have been yet more make-or-break meetings in Brussels. Yesterday there was a substantial public sector strike, just to underline the timeliness of what we are going to debate today.

No one should doubt that in the present economic crisis there are also the seeds of a considerable political one. The way that the international markets set strict rules for countries makes it fairly clear that many democracies are struggling to live within those rules, and to some extent that includes us.

When the banks were in trouble, everyone agreed that that moral hazard did not apply. Governments sprang to their defence and transferred the banks’ huge debts on to their nations’ balance sheets, splashing copious amounts of red ink over the national accounts. Yet when the individual countries were subsequently hit, moral hazard came in with the vengeance. The terms of the so-called rescue packages are very harsh—less Marshall Plan, more reparations.

It should now be clear, and I hope that it is clear in Brussels and in the IMF, that this is a road to depression and political crisis in the countries worst affected, not a road to recovery. The single way to cut deficits is to get people back to work. Then there are more tax revenues to be collected and more disposable income to spend. Looking after the deficit while hoping that unemployment looks after itself is self-flagellation or, worse, economic suicide, as Joseph Stiglitz has regularly termed it.

How did we get into this mess? There are many reasons for that, but one is that the world economy has changed fundamentally since the financial deregulation of the 1980s. This was carried through in the UK largely on the watch of the Treasury of the noble Lord, Lord Lawson, who inadvertently is leaving at the very moment that I have referred to him.

Apologies for that. One effect of this, although there were others, is that the traditional constraints in financial services largely disappeared. Banks increased their leveraging and invented a bewildering range of new products, most of which in hindsight appear to have been more dangerous than beneficial, described as “socially useless” by the noble Lord, Lord Turner, currently chairman of the FSA or, to use another memorable phrase used by Warren Buffett about credit derivative swaps, “financial weapons of mass destruction” that we turned in on ourselves. Wall Street and the City nevertheless claimed to have developed sophisticated forms of risk management, a claim that we can now see was wholly fatuous. By the way, very few people anywhere saw the crash coming, and the economic crisis is now also a crisis of economics. The economists have quite a lot to answer for.

To return to deregulation, though, the effect was to increase private indebtedness to unsustainable levels, leading to rising inequality with totally unjustifiable rewards for people at the top—especially, but not only, in financial services. Even in this crisis, in the period of flat growth that we are going through, average executive pay of directors in the FTSE top 100 increased by 49 per cent last year. And just wait for the forthcoming Christmas bonus season in the City; on past form it will be an orgy of Bourbon-like self-indulgence and a two-fingered salute to the Prime Minister’s claim that we are “all in this together”.

In a debate here last Friday, it was suggested that Europe and the euro were to blame for the crisis by the constraints imposed on national economies. In fact, in my view it is not Europe that threatens national sovereignty. Properly led, though I accept that that is a fairly big qualification, it offers a chance at European level to enhance national sovereignty by creating an economic bloc large enough to influence markets and not be cowed by them.

As for the UK, the crisis has exposed the long-running problem that we have not been fully competitive for a long time with our neighbours across the North Sea: especially Germany, but also the Netherlands and the Nordic countries. We have not benchmarked our performance on a consistent basis against those countries in a way that others do—countries like Belgium and, to a degree, France. We have tended to muddle along using periodic devaluations of sterling, bolstered for periods by the bonanzas of North Sea oil and later by the boom in financial services. Now there are no more bonanzas in view, and the national task must be to move our economy in the same direction as our North Sea neighbours. We must be more long-termist. We must promote more investment, more manufacturing, social markets, greater equality and more multi-stakeholder governance on boards, including worker influence, as well as strong public services. That is the way those countries do it, and theirs are among the most successful economies around, not just for this year but for many years.

The noble Lord, Lord Heseltine, recently said that he had favoured the UK joining the euro because it would make us more like Germany. I believe that he was right, and he could still be right if the euro survives the present crisis. Soon Germany has a very big decision to make. In fact, I think Mrs Merkel is the only one who can win the prize of the noble Lord, Lord Wolfson, because she is the only one whose decision is going to matter. One of the interesting things about this debate is how marginal it feels to the debate about the future of the euro.

While we are talking about the German influence, I think that the reasons of the noble Lord, Lord Lawson, and the noble and learned Lord, Lord Howe, for pushing in the 1980s for the UK to join the exchange rate mechanism also rested on a wish to make the fundamentals of the British economy move in a more northern European or Germanic direction. I believe fundamentally that that remains the challenge today for the British Government of whatever hue, for employers—unions included—and for all sections of British society. Our North Sea neighbours have had continuous success, and we should resume our efforts to match them.

My Lords, I am grateful to the noble Lord, Lord Monks, for introducing this issue. Although it is perfectly reasonable to be discussing the economics of this country, it seems to me completely bizarre that we should be discussing, outside the circle around the fire, this 650-pound gorilla of what happens to the euro. For us not to have addressed or discussed that seems bizarre. Indeed, for us to be doing it in this Room today rather than in the main Chamber seems odd as well, and I am grateful to the noble Lord for mentioning that.

It is a privilege to follow the noble Lord, Lord Monks. I agree with so much of what he said, and I will come on to that in a moment. Although we talk about the economic crisis, I think that the real crisis is a deep political one, and perhaps we do not recognise that at our peril. Of course we must look forward, but it behoves those of us who argued, as I did, that this country should join the euro in 1997 to say a little word about the past and perhaps to justify that position.

I start by saying that I do not resile one iota from my belief that it would have been right for this country to have joined the euro at some time between 1997 and 1999, for reasons that I shall seek to explain. Those who argue to the contrary, that not joining the euro was the best thing that we ever did, seem to miss a number of points. First, they presume that the euro would have been the same as it is today had we joined; of course, it would not have been. We would have added substantially to those voices within the eurozone in favour of liberalised markets and greater competition, and the balance of the euro would have been different. Even those of us who argued, as I did, that it was illogical to create an economic giant controlled by a political pygmy might even have begun to win the argument within the eurozone that we had to create the instruments to ensure that the position we have now arrived at in the euro was at least less likely.

The second proposition is that somehow or other, if we had joined the euro, we would have been like Greece, Portugal, Ireland and Italy. I do not think that that is true. We are not a small southern economy without a manufacturing tradition but with a certain cavalier attitude to the rules. We are a northern economy, large and with a strong manufacturing tradition, and we respect those rules.

Those rules would have been very good for us. I reflect on the fact that by not joining the euro we left ourselves open to do what we have always done whenever we hit a problem: we do not tackle the fundamental problem, which is that Britain does not produce enough goods at competitive prices that the world wants to buy. Instead, we devalue our way out of trouble. It is what Harold Wilson did, for which he was excoriated, and it is what we have done. Even Conservative newspapers have said, “Thank God we can devalue”. Harold Wilson, thou should be alive this day.

Instead of doing what we needed to do—produce competitive goods that the world wanted to buy—we devalued our way out of difficulty. Instead of acting like Germany, we decided to act as we always have done. Sooner or later this country must tackle its fundamental problem and produce goods that the world wants to buy at a competitive rate. However, not only did we take advantage of the ability to devalue and dodge the issue, but we decided that it was easier and more fun to behave like Italians and build up a massive amount of debt—in fact, not like the Italians, because their debt was 97 per cent of GDP in 1999 and is about 104 per cent now, while our net government debt is now two and a half times what it was.

We are now faced with the worst of all propositions. We have to make ourselves competitive because at last we must, and we must deal with a huge burden of debt as well. Is the position better than it would have been if we had been subject to the disciplines inside the euro? I do not think so. Let us compare our position to that of Germany or those of the other northern economies that are most like us. I take the position of Germany in particular, but one could find the same examples in Benelux, Austria, Finland and other countries. Between 1999 and now, Germany increased its debt by 20 per cent but doubled its growth. We increased our debt by 250 per cent and halved our growth. In which position would one prefer to be?

Of course, Germany has the problems of the euro to cope with. However, as an economy it has nothing like the problems that we now have to cope with and nothing like the difficulties that are ahead of us. I know which of the two positions I would much prefer to be in. It was a great pity that this country did not grasp the nettle and submit itself to those disciplines. I am very confident that if we had done, today we would not be in the economic position in which we find ourselves.

I will address the future in the three or four minutes that I have left. Here I find myself more in agreement with the noble Lord, Lord Lamont, than I had thought I would be. There are three options available to the eurozone. Option one is that the whole thing collapses. Of course, that would be a disaster and a catastrophe. I am very confident that it will not happen because the countries that run the eurozone have too much invested in it; they will not allow it to happen. For all that the noble Lord, Lord Lamont, told us of the costs of trying to save it, the costs of not doing so are even greater.

The second option is that somehow the euro of 17 survives. If I was asked to make a judgment on that, I fear I would say that it is unlikely for two reasons. First, I am not sure that the people of the nations that will have to face these austerities will all agree to do so. It may be unwise not to, because conditions for them will be far harsher outside than inside. However, with a frightened population it is unlikely that all of them will accede to the austerity measures necessary to maintain their position inside the euro of 17. Secondly—here the noble Lord, Lord Lamont, is right—the markets cannot yet be made to believe that the euro of 17 can be sustained. We would probably need a bail-out fund not of €1 trillion but of €2 trillion or even €3 trillion to do that. I doubt if the markets can be made to believe that. Therefore I believe and have always believed that the most likely circumstance is that we will fall back to a core euro. Sooner or later, that is the most likely outcome.

I do not predict it as a certainty. However, on the balance of probability the most likely outcome is a eurozone made up of Germany, Austria, Finland and Benelux. My guess is that Sweden would join under those circumstances. So might Denmark, which is tracking the euro. France, of course, would be in—perhaps not for economic reasons, but for political ones it could not be left out. The big question is whether Italy would be in. Again, it seems almost impossible to imagine that it would be, because I doubt that the German people would bail out Italy. However, if Italy is not, Germany will have to find a huge sum to bail out the banks—to recapitalise German and French banks—as a consequence. Somehow or other, that seems to be the position that we come to.

The question is: what should Britain do in these circumstances? If we had a core euro of that sort, the eurozone would be strong—in surplus, perhaps—and it would be deeply in our interests to join. Do I say that we should from this position? No, I do not. But being the only one of the outs, the only one of those not in the current eurozone that wants to go further out, while all the rest of them want to get back in would be disastrous. If we do not show a willingness to join if it is in our country’s interests, then we immediately diminish our influence and our effect in the Councils of Europe. It is inevitable that the eurozone countries, whether a core eurozone or one of 17, will caucus together and work together to their advantage and, ultimately, our disadvantage. If we are outside that circle, we diminish the influence and voice of Britain catastrophically.

My position is very simple. Let me see if I may differentiate it from what I suspect is the position of the noble Lord, Lord Lamont. My position is very practical. Should it become in Britain’s interests to join the euro we should do so. His position is likely to be that even if it were to be in Britain’s interests to join the euro, we should not. A position driven by pragmatism seems to me to be the best position for our country. I believe that this will come sooner than we think. If this thing can be made to survive—and I believe in the end that it will survive—then, sooner than we think, we will have to address the question of whether or not it is in our interests to join. If it is, I say we should, whereas I think that many people, especially in the Conservative Party, still take the view that even if it was in Britain’s interests to join we should not. A position driven by pragmatism is wise for this country; a position driven by prejudice is not.

My Lords, I declare an interest, as I spent a good part of my career in the United Kingdom in public service dealing with European affairs and a smaller part of my career in the European Commission.

I am very glad, like earlier speakers, that this debate has been arranged, because the serious difficulty that at least five eurozone members are having with the sale of state bonds to finance their public expenditure is already clearly having an effect on our economy, and, if events continue to deteriorate in the eurozone, it could have a much more serious effect. Despite some of the gloom around the Autumn Statement, the present Government are handling our economic problems well, with the consequent low interest rate on UK bond issues, at or about the level of German Bunds. But we must not be complacent. I do not accuse the Government of this, but complacency is implicit in some comment in the United Kingdom on the eurozone’s problems. It is not just the eurozone’s problem.

I wish to speak briefly on two issues. First, what are the eurozone countries likely to do—all of us here are speculating on it, but it is important—by way of treaty change or other economic or financial measures? Secondly, and most importantly, how should we best protect our national interests as the drama continues to unfold?

First, then, what are the eurozone countries likely to do in order to respond to the absence of a central bank or financial institution of last resort? The European Central Bank has recently purchased a very large amount of national debt from some eurozone countries, but it is under the eagle eye of the German constitutional court. I doubt that it could issue euro debt bonds of its own without breaking the Maastricht treaty. Such bonds could be only a partial substitution of national bonds, and the guarantee need not necessarily be full—it also could be partial. Stability bonds would be a valuable aid to the correction of eurozone problems.

Almost every day the Financial Times tells us that the European Central Bank must be more like the Federal Reserve, and sometimes the Financial Times is right. It seems almost certain that new powers will be taken in the eurozone, either by way of enhanced co-operation or by treaty change.

The United Kingdom has already made it clear—correctly, in my view—that it is benevolent but will not participate. So far, there has been a treaty change in March this year to put the European stability fund on a permanent footing, as well as other measures short of a treaty change in October. In September the Dutch proposed a new budgetary commissioner with the power to intervene in eurozone countries with excessive deficits, with potential sanctions. In October the Commission proposed closer monitoring of eurozone countries’ budgets, including the right to ask a country to look again at its budgetary proposals, and envisaged developing options for eurobonds. The Commission believes that that could be done by an enhanced co-operation procedure with treaty change later. That is questionable. Currently, the position of the eurozone countries is that they are considering changes to strengthen monetary union, including possible treaty change, with an interim report this month and a final report in March 2012.

So it is all go, but, unfortunately, not many of the problems have gone away—rather the contrary. It goes without saying that other methods of increasing the resources available to the European stability fund or a greater use of finite resources could combat some present difficulties. The recent decision by a number of central banks to cut the cost of dollar swap lines is useful in the short term.

However, I would like to say a word or two about the possible enhanced co-operation or treaty change that is under discussion in the eurozone. The Minister has an outstanding knowledge of finance, but it is possible that even he may have found the institutional issues somewhat labyrinthine—not, of course, a traditional Greek labyrinth but a grade one European labyrinth. If the eurozone countries wish to move quickly, as the markets clearly want, the procedure of enhanced co-operation under Article 20 of the treaty and the detailed arrangements in Articles 326 and 334 of the Treaty on the Functioning of the European Union is the quickest. Changes made in this way would, of course, apply only to those countries that agreed them, would not form part of the acquis and could not affect the single market. The Treaty on the Functioning of the European Union is extremely explicit on that point, stating that enhanced co-operation shall not undermine the internal market, that it shall not distort competition between member states and that it should not constitute a barrier to, or discrimination in, trade between member states.

In my view, eurozone countries could not legally introduce a financial transaction tax by this method, but that view may be contested—that is a point of importance for the United Kingdom. If action were not taken by enhanced co-operation of the eurozone countries, the treaty would have to be amended or we would just drift along. For a treaty amendment, there are two methods: there is the ordinary revision procedure —more accurately described as the complicated revision procedure, including a convention, an intergovernmental conference and unanimity of all member states. I think that that is one possibility which can be excluded. Or there is the simplified revision procedure under Part IV of the Treaty on the Functioning of the European Union, without a convention or an intergovernmental conference but requiring unanimity and ratification by member states. We would need to ensure that if the treaty changes applied only to the eurozone, our national interests within the European Union as a whole were not damaged. In my view, maintaining and strengthening our financial services should be the prime object of our attention.

If, as I assume, there were no transfer of powers or competencies from the United Kingdom to the European Union, a referendum would not be required in the United Kingdom. The highly important European Union Act, passed in the current Session but which seems to have had little public impact, embodies the principle of “so far and no further” by requiring referendums in the United Kingdom if there were any transfer of powers or competences but not otherwise.

The most effective response to the eurozone difficulties might well be stability bonds, with partial substitution of national bonds and some element of guarantee. But of course in order to pass the “no bail-out” hurdle currently in the treaty, a simplified treaty revision for the eurozone members would be needed in that case.

My Lords, I join others in commending my noble friend Lord Lamont for having, by a somewhat circuitous route, initiated this debate and for his outstanding opening speech. I echo him too—he was perhaps slightly understated—as in my judgment it is an absolute disgrace that this debate is for only four hours and has been shunted off to the Moses Room rather than being on the Floor of the House. Much as I love the government Chief Whip—and it is not just her—on this occasion the House has been badly let down by the usual channels.

We have so little time that, like my noble friend Lord Lamont, I will confine myself entirely to the eurozone disaster. It was predictable and predicted. I was not alone in predicting it, but I think that I was the first Minister to explain the fatal flaw at the heart of this misconceived venture. I shall quote a speech that I made as Chancellor of the Exchequer at Chatham House on 25 January 1989, before European monetary union had come into being. It was even before the Delors report, the blueprint for monetary union and the eurozone, had been published, but by that time we knew what it was going to say. I said:

“Nor would individual countries be able to retain responsibility for fiscal policy. With a single European monetary policy there would need to be central control over the size of budget deficits and, particularly, over their financing. New European institutions would be required, to determine overall Community fiscal policy and agree the distribution of deficits between individual Member States. These are not technical issues.

The setting up of a European Central Bank or a new European institution to determine Community fiscal policies go to the very heart of nationhood. What organisation would really be the government? It is clear that Economic and Monetary Union implies nothing less than European Government—albeit a federal one—and political union: the United States of Europe. That is simply not on the agenda now, nor will it be for the foreseeable future”.

That is what I said more than 20 years ago, and it was as true then as it is today. It was not meant to be a case for Britain not joining; in my opinion, there was no way Britain would join anyway. I was trying to persuade my European friends and colleagues that they would be ill advised to go down this calamitous route.

You might ask, “Why did it happen?”. It happened partly because there are always ignorant worshippers in the church of Europe who believe that anything that is “more Europe” must ipso facto be a good thing—you do not have to work out the details, because if it is “more Europe” it is good. Of course, the main promoters were much more sophisticated than that. They knew that it could not work without full political union, and it was full political union that they wanted. This was never an economic venture; it was entirely political. It was a means to achieve a full blooded political union—a united states of Europe.

The motives of those who wished for that may have been commendable or noble, but they committed two unforgivable errors—and I could use a worse word than error. First, they showed complete contempt for democracy. That has always been one of the least attractive aspects of the European movement during my time. It was quite clear that you could not have a political union unless you could convince the people of these democracies that they should have it. You had to carry the people with you. But the people do not want it; and it is not just the British who do not want it. As some noble Lords know, my main home nowadays is in France. I can assure noble Lords that French people do not want it either. None of the peoples of Europe, save perhaps those of Luxembourg, want it. But they have been shown a complete contempt for democracy.

The other disgrace, which made this venture the most irresponsible gamble that any senior group of politicians has ever taken in the post-war era, is that it was quite clear that if the gamble did not come off, there would be a disaster, and that is what we have now. In fact, we have a doomsday machine. It is quite extraordinary that we are not asking how to dismantle this doomsday machine, but how to keep it going. “How do we go from bad to worse? Let us keep the doomsday machine going”. It is nonsense. When you have a doomsday machine, you try to dismantle it, but they say, “No. How can we perpetuate it?”.

So where do we go from here? This has both an economic and a political dimension. As I said, the economic dimension has to be the dissolution of the eurozone and a return to national currencies. It has to be done in as orderly a manner as it can. As my noble friend Lord Lamont said, there have been a number of cases in history where monetary unions have been dissolved. Incidentally, history also shows that, as with German monetary union in the 19th century, you have to have political union first, which Bismarck in Prussia imposed, before you can have monetary union. They had to solve the question of the political union first, and they could have monetary union only after achieving political union. I admit that it is not easy, but it is clear that it is the least bad solution. To continue with the doomsday machine would be very much the worst step—not just for us, but for the whole of Europe.

The other aspect of the economic way out is how we deal with a potential—and burgeoning—banking crisis. The consequences of impaired sovereign debt in the eurozone mean that we have a new banking crisis superimposed on banks that are already enfeebled by the banking crisis of 2008 to 2010. This is where the economic threat is coming from. There is no economic threat posed by the break-up of the eurozone because that would be a good thing. The economic threat—it is serious and I do not wish to belittle it—comes from the problem of a serious banking meltdown. But there are ways in which this can be addressed. I believe that the IMF has a key role to play, and as members of the IMF, obviously we will be contributors. The heart of the problem is impaired sovereign debt on banks’ books and so on. I have some experience of this because the first thing I had to deal with when I became Chancellor of the Exchequer in 1983, along with my opposite numbers in what was then the G5—it had not grown to seven in those days—was the Latin American sovereign debt crisis. It was not quite as big as this one, but at the time people felt that there was a real threat to the world economy. It was handled pretty well by the IMF with the support of the finance Ministers and Governments of the G5 countries. I do not have time to go into it now, but it can be done.

Countries are then able to buy time, and that means that to some extents banks are able to do so as well. Banks need time to strengthen their balance sheets. Some banks may still need official assistance as well—assistance from the taxpayer, as it were—in order to prevent a serious banking crisis, but that is the responsibility of national Governments and Treasuries. It is absurd to think that there can or should be a European solution to that. The German Government will have to support German banks if they need support, the French Government will have to support French banks if they need support and so on, just as the noble Lord, Lord Myners—whom I see in his place—tried to support them. Perhaps he was too generous to them; the terms were not very good, and he did not strike a very good bargain. Nevertheless, he was absolutely right that there needed to be some taxpayer support for British banks in difficulty at that time. This is the responsibility of the national Governments around Europe. The idea that there should be eurozone bonds, as if the eurozone were a Government, is ridiculous. The idea that you put the European Central Bank, which is probably already technically insolvent, into an even worse state is absurd.

That is the economic way through. Politically, later on—

My Lords, I do apologise to my noble friend. I respectfully draw his attention, and that of other noble Lords, to the fact that this is a time-limited debate. There is a confusion of clocks around the Chamber, but the one to keep an eye on is the one in front of each of us.

I am most grateful to my noble friend for reminding me of that. It underlines what an outrage it is that we are being cribbed and confined in this way.

However, I conclude by saying that, later on, we will have to address the politics, which means that we have to get our European partners to sit down around the table and say, “Look, the existing way that Europe works is disastrous”. It has led to this. We have to have a proper constitution; not the Lisbon anti-constitution, but a proper constitution in which it is quite clear which are the competences of the centre and which are the competences of the member states, and to have them properly entrenched, as any self-respecting constitution does.

Finally—this is finally, I tell my noble friend—meanwhile, because we cannot wait for that, there is a threat to the City of London and to Britain as the great financial centre of Europe and the world from misguided European regulation, whether it is the Tobin tax or other things.

I cannot possibly give way. Please, I cannot because of the time. Blame the Whips on both sides.

We have to say clearly that we will invoke the Luxembourg compromise. There is no way that we will allow ourselves to accept a majority vote on regulations that will be damaging to the City of London, when the City of London is far more important—indeed, far more important to Europe—than all of the rest of the financial centres of the European Union put together. We must be absolutely firm in invoking the Luxembourg compromise in saying, “No way”.

My Lords, before my noble friend speaks, I ask the Whip representing the Government whether we will all now be allowed, if required, 13 minutes. The Whip made very little effort to restrict the noble Lord, Lord Lawson. I personally would have liked the noble Lord to have had more time to speak because he has such rich and informed experience. The Whip allowed that to run for 13 minutes, and I hope that he will extend the same courtesy to people from the other side of the House if they so wish.

My Lords, the noble Lord knows perfectly well that we are a self-regulating House. We have all agreed to time-limited debates.

My Lords, first I thank the noble Lord, Lord Lamont, for giving us this opportunity. I shall also heed what my noble friend Lord Monks said: this is not just an economic crisis, but a crisis of economics. I guess, as the first paid-up academic economist to speak in this debate, I had better take that seriously.

I want to talk simultaneously about the UK economy and the European zone, but I also want to include the USA. I see this as a crisis of the developed economies. I see this as an historic moment when the tectonic plates are shifting, and we are now landed with a geriatric capitalism. The young and dynamic capitalism has moved eastwards and southwards—indeed anywhere but to the old, developed economies.

It is not just that the eurozone is in crisis—and it not just an exchange rate crisis, it is a sovereign debt crisis. The United States is in a crisis of debt and deficit, and so are we. The question we have to ask is this: why is no one practising good old-fashioned Keynesian economics? We told the world for many years that we had the answer and that this would never happen again. Perfectly sane people—I presume they are sane—across many countries are finding that they are restricted by debt and they have to tackle deficits, but they cannot use the fiscal spending instrument that they thought they could always use. One answer is that we are all cowards, but I shall resist that.

There are a couple of things that are worth saying. A long-running cycle started in the 1970s, at which stage manufacturing began to leave the developed economies and migrate eastwards. That came about partly as the result of globalisation and partly through a profitability crisis in western countries. Our labour costs were too high and capital went in search of cheaper labour elsewhere. This happened not just in the UK, but by and large a group of developed countries had the same experience. There are one or two exceptions, but I will stick to this argument. We tried to find substitutes in the services sector, both in public services and in financial services. At the end of 40 years, we have finally come to the crunch. They are no longer a viable solution to our problems.

In the mean time, especially during the long boom from 1992 to 2007, probably the longest boom in the history of capitalism, we compensated for our lack of wealth-creating capacity by finding debt instruments. Both households and Governments were in debt before the recession hit. It is important to remember that both Germany and France broke the growth and stability pact not while there was unemployment but when there was full employment. Our debts started to go up while we still had full employment, as did our household debt. When we entered this recession, unlike any previous recession, we were already in a highly indebted position for both households and Governments. It is this which makes the application of the Keynesian solution somewhat difficult. First, there are large leakages due to imports since we do not make very many things. If you do spend money, there is bound to be import leakage. But it is also the fact that households, especially in the latest crash, feel compelled to deleverage because they have acquired debt and they now feel that they have to get out of it.

There is money in the private non-financial corporations. They are sitting on large surpluses. The puzzle is this: why is it that when interest rates are at historically low levels, private non-financial corporations are not investing? One obvious answer is that there is no demand. But if investment has to be for the long run, surely no one believes that demand is going to stay low for ever. There is an obstacle to private investment spending in the economy, and that is one of the things we need to tackle.

I shall now read out a headline from yesterday’s Financial Times. It states:

“Europe squeeze makes Osborne look soft”—

we are all in this together; all countries are tackling it. In the UK, it was quite clear before the election in 2010 that the problem of our debt levels had somehow to be tackled. There was almost an all-party consensus; the difference was on at what rate we should try to eliminate the deficit. My party took the view that within the Parliament we would eliminate half the deficit, and of course the coalition Government took the view that all the deficit should be eliminated. Now, if we are to believe the OBR, it will not be possible to do it within a single Parliament and will take longer. I reserve my judgment on that; it may be much too pessimistic a view but, for the time being, let us leave it.

Could something else have been done? That is the real question. Could a slower cutting of deficit have led to less of a drop in demand and employment? If so, would we still be suffering from the extra shock of the eurozone crisis—the inflation and all that has derailed the Osborne policy? There are two problems, and I am sure that the noble Lord, Lord Skidelsky, will speak on them. First, I am sceptical that the half-deficit elimination strategy could have been sustainable, especially when markets all around were going hysterical about sovereign debt. That is a matter of judgment and people will disagree. Secondly, even if it was possible to do it, the eurozone crisis and the inflation shock caused by the quantitative easing policy of the Federal Reserve and the Bank of England would have been there anyway.

The room we have for manoeuvre is quite limited. I only have half a minute. We need to develop a very different economy in which households restore the habit of saving and Governments restore the habit of balanced budgets. If we can do that—perhaps not by 2015 but in another decade or so—we might be able to restore western economies to a healthy state.

My Lords, I start from the position of one who has been for many years, and still is, very committed to the European project, not just for reasons of political principle and doctrine but because of my experience in my part of the United Kingdom. It was the European project approach that inspired us as traditional enemies—unionists and nationalists—to meet each other across the table rather than across trenches, virtual or otherwise. It was that model of the institutions—cross-border and council of Ministers—that enabled us to find our way forward into practical political ways of co-operating east-west, north-south and within Northern Ireland. It was the European context that brought the United Kingdom and the Republic of Ireland together and produced a framework of relationships in which political leaders and civil servants were able to work together. However, I confess to having been profoundly disappointed by two approaches and three attitudes within the European project that have been profoundly damaging in recent times.

From the start, I wanted to see the development of a Europe of the regions, because it seemed the way for us to move beyond the nationalism that had been so damaging in the last century and towards a federal Europe. However, as time went on it became increasingly clear that political leaders were not terribly prepared to give up the national power of Governments and pool sovereignty sufficiently to make a Europe of the regions a serious possibility. That to me was finally made clear by the appointment, late in 2009, of Herman Von Rompuy and the noble Baroness, Lady Ashton—very fine people in themselves—which was a mark of the lack of preparedness of European leaders to appoint those who would really drive Europe forward. For many of those leaders, and for many of their people, the European project had become a vehicle for the accumulation of power and wealth, not the management of conflict.

The second was the debate between deepening and enlargement. It seemed that one had to choose one or the other. Many of my colleagues, particularly in the rest of Europe, disagreed. They said, “No, no. That is very old thinking. It is wholly possible to have deepening and enlargement at the same time”. I always begged to differ. I could see value in both, but I could not see the possibility of both being done at the same time. That struck me again at Copenhagen in 2002, for example, when a number of new members were brought in who did not necessarily abide by the rules. I think particularly of the admission of Cyprus when it was quite clear that the Cypriot problem had not been resolved and that this would ensure that it would be impossible to resolve the problems not only of Cyprus but of our relationship with Turkey. Tragically, so it proved.

Those were not the only rules that were broken. Here I move on to the three attitudes. The attitude to the rules was defective, as the noble Lord, Lord Desai, mentioned. The stability pact was already being broken long before we ran into the recent economic problems. It seemed as though the project itself and its political dynamic were so important that one could afford to close one’s eyes to the breaking of rules both by southern and northern countries for their own short-term purposes.

There was a second attitude that disturbed me. I wholly realised that the appointment of the Commission as an institution that could drive things forward when national interests would sometimes have held them back, was a necessary thing for the starting and development of the European Union. However, if it continued for too long, a tendency would develop in which European elites and bureaucrats felt that it was not really necessary to bring all the people along all of the time. Again, while I see the short-term requirement for the new Governments of Greece and Italy not to be properly democratically anchored, it is a very dangerous development that thoroughly undermines our capacity to turn to autocrats in other parts of the world and recommend the European project.

Finally, as time went on, the fundamental purposes of the project became lost and submerged. Increasingly, countries wanted to join the European Union not for the political reason of preventing a return to political instability and war in Europe but because they thought that it was a short-cut to wealth and comfort. Many countries joined without any real intention of finding a way to measure up to the kinds of requirements that were in place. At the same time, politicians saw the European project as a way of gaining a platform on the world stage, where they could compete with the United States, China and the developing powers. However, while that may have been their ambition, it was not the purpose of the project and was frankly not what Europeans themselves wanted. They were not interested in that kind of competition. They wanted peace, stability, reconciliation and economic progress in Europe.

As we move down this road, it has been extremely damaging to us within the European Union. Of course, the noble Lord, Lord Desai, is absolutely right. The economic problems we face are not solely problems for Europe; they are much wider. However, today we are concentrating on Europe. In appreciation of the noble Lord, Lord Lamont, I hope that this debate is the first instalment of a wider consideration of issues that are absolutely critical for our country and need further, longer discussion in your Lordships’ House.

Noble Lords will not be surprised that, as a doctor, I will focus on diagnosis before coming to treatment. There are serious questions about whether the diagnosis of the economic dilemmas that we face has been correct. We were told from the start that it was a liquidity crisis. Then it was a problem of bank capitalisation. Then it was a recession, perhaps even a depression. All these things may be around but, fundamentally, what we face is a differential and massive correction. Some countries have simply been living within Europe way beyond not only their current means but any means that they are likely to be able to acquire. That is a very serious matter because, when we come to the resolution of the problem, some of those countries will not be able to return to the way of living that they had three, four or six years ago. As my noble friend Lord Ashdown said, we could be among those countries; there have been indications of that in recent times.

A solution was put forward by some of our colleagues. I heard Guy Verhofstadt, the former Belgian Prime Minister and a good liberal in many ways, make a diagnosis and treatment proposal that I had heard from him before. He said last week in Palermo that a state without a currency was possible but that a currency was not possible without a state to back it up—therefore, we need more Europe and a European federal state. My difficulty is not in thinking how we can find rules for such a thing to happen. As I said, the problem is in persuading people to live by the rules. Although I can understand that a fiscal union could be developed on a German model, I remain to be convinced that even if it is applied to Greece, the culture of Greek society would accept a German-style implementation of those kinds of rules. So I have difficulty in seeing not the theory but the political practicality of making it work. We need to go back to where we made some earlier mistakes.

If it is not possible for all the countries to maintain the requirements of staying within the euro, as seems to be the case, it may be unhelpful for us to insist that Europe moves forward with all those countries within the euro—unhelpful for them and for Europe. The interests of this country economically and politically require us to have a sensitive and nuanced approach to our European colleagues, not to try to press them in a direction that they cannot sustain. There are rules and debts have to be paid, either by the debtors, the creditors or the whole society through inflation or something else. However, if we do not find a new way in which to run Europe with a more variable geometry that allows all of us to remain together in peace and with variable but significant economic and political prosperity for all of us, I fear that, tragically, questions over the fundamental purpose of the European project—to maintain economic and political stability—may hove back into view. That prospect should make all of us shudder.

My Lords, it is nearly six months ago that the noble Lord, Lord Lamont, and I at the same time asked for a debate on the eurozone’s problems. It is interesting that they have been allowed to worsen since, whereas if measures had been taken a little earlier, perhaps the crisis would not be as grave. But I would like to congratulate the noble Lord, Lord Lamont, on his speech and the noble Lord, Lord Lawson, on his. It was a great pity that we could not hear all that he had to say; here we have two ex-Chancellors of the Exchequer who were in the eye of the needle at key times in recent history and who knew at first hand a lot of what went wrong at the time.

My very modest contribution is a great one for insomniacs. I wrote a book in 1988 called All You Need to Know About Exchange Rates. It focused on what was going on in Europe, and there are references to the wisdom of the noble Lord, Lord Lawson. The point it made even then—a pretty obvious point—was that if countries are very disparate in their economies and some have a real Germanic hard-working ethic and others like to enjoy life you cannot share a currency. It will fall apart. People forget that Europe tried a common currency from 1863 to 1893 everywhere excepting the German states, including Switzerland as well as the other countries—the silver franc. That fell apart because France became massively uncompetitive. There are a lot of other issues but, at the heart of the problem as to why the euro is in such trouble, is the fact that southern Europe has become 35 per cent to 40 per cent uncompetitive against efficient, northern, Germanic Europe. Who wants to buy the bonds of a country where you can see staring you in the face, one way or t’other, that there is going to be a big devaluation sooner or later? That is really at the absolute heart of the problem. You cannot share a currency when those are the characteristics.

Kohl said to Mitterrand that you cannot really embark on a common currency until you have political unification. Mitterrand said to Kohl that that would take forever to achieve, but that if there was a common currency it would force political integration and unification. Much is said about that as a potential solution to our problems. However, I do not see the reality of that. An exercise was done that demonstrated that Germany would need every year to give something like 35 per cent of its GDP to the southern economies to keep them afloat. People forget that in America 30 per cent of federal taxes still go to keeping afloat the unsuccessful regions. Even in little UK, about £80 billion per annum is transferred from the more prosperous to the less prosperous parts. If you share a common currency where there are significant economic differentials, you need substantial transfer payments to keep the less successful economies afloat. However, the sort of long-term transfer payments that would be needed for Germany, Italy, Spain and Greece to share a currency are simply not realistic.

The German solution has been to say, “Come on, you economies, have an internal devaluation and be like us”. Is it realistic to think that Italy would have a 35 to 40 per cent internal devaluation? There would be blood on the streets; it would be hardly practical to achieve. I cannot remember which noble Lord made the point but he was quite right; we do not want Versailles but perhaps a bit of the Marshall Plan. I read just the other day to my amazement that Germany only finished making its Versailles reparations a year or so ago. The total payment was the equivalent of about €350 billion—and look what that did to Europe in the 1930s.

A federated Europe is not the answer to the euro's problems. I cannot see that forcing massive internal devaluations is a solution, either. Hong Kong managed to effect a successful internal currency devaluation after the Asian currency crisis, but that was one of the few successful cases.

So where are we with the various proposals? The noble Lord, Lord Lawson, made the important point that you can perfectly well change currencies if you organise it well and in time. The risk is to the banking system. It is interesting to note not only what the Fed and other central banks organised yesterday, but that, quietly, the Bundesbank over the past six weeks has lent nearly €500 billion to the central banks of southern Europe. Not just individuals but businesses and anyone owing money had been getting their money the hell out of those countries and parking it in euros in Germany and elsewhere. In those countries, the banks are being squeezed like fury and have become forced sellers of government bonds in order to manage their balance sheets. Mercifully this has not been written up too much in the newspapers, but there is an acute banking crisis already in those economies. Yesterday was almost a rescue day before the whole thing collapsed. I note that the IMF said yesterday that the euro was within 11 days of collapse.

Contrary to what some on my side of the argument said, I support the concept of the ECB being able at least in the short term to buy government bonds, because there is a need to buy some time to work out arrangements for orderly currency reordering in the eurozone. I do not think I will win the noble Lord's competition, but it seems to me that the only other option to everyone going back to their historic currencies would be to have a soft currency for southern Europe and a hard currency for northern Europe. One could achieve that either by leaving the euro as the soft currency and bringing in a new, hard currency, or by doing it the other way round. From what one hears, there is a possibility that that may come to fruition because Germany is seriously looking by itself at bringing back the deutschmark. If that happened, Holland, several Benelux countries and probably France would endeavour to join the currency bloc. That is one solution. It is less painful than everyone going back to their individual currencies. It could be done, as occurred in 1893. It needs planning. Banks have to be closed and one has to work out who will bear what liabilities, but it is not impossible.

Keeping the banking system afloat is absolutely fundamental and again I am relieved that the US has come to the rescue. It seems to me that the management by the leaders of the eurozone over the last year has been pitiful. These problems were staring us in the face a year ago; people were writing articles and letters to the paper about them. It is not something that has just come and hit us from nowhere. The whole underlying problem has been understood as well. I just hope that it will get sorted in an orderly fashion and will not collapse in a chaotic fashion. Our economy is clearly in a precarious situation and chaotic collapse would be very bad news for this country. I am still in the camp that thinks that a hard/soft currency would work and I hope Germany will use its initiative to achieve that.

I declare that I am chief executive of London First, a not-for-profit membership organisation that seeks to make London the best city in the world in which to do business.

I will not presume to predict the denouement of the crisis in Europe. However, whatever path to stability is eventually taken, it is likely to take until at least 2020 for Europe to find any sort of new “normal”. With our primary trading partner in a state of flux at best, and paralysis at worst, we in the UK must carefully consider how best we can avoid contagion and the steps we can take to return to growth.

Given the likely period over which we can expect to see reduced growth elsewhere in Europe, it is clear that our own path out of recession is likely to be more challenging and slower than we had previously predicted. To use a hill-walking analogy, before the eurozone crisis we had hoped that we would be gently, if challengingly, climbing our way to the sunlit uplands in the next year or two—a pleasant hike up the South Downs, if you will. We are in a different reality now. Perhaps a better analogy might be a trudge up Ben Nevis—longer, tougher and exposed in places.

Just as there are several routes up Ben Nevis, there are numerous, sometimes competing, approaches proposed for returning to growth. The one I would like to focus most on today is investment in infrastructure. In this context I welcome the Chancellor’s announcement of £6.3 billion in additional investment in infrastructure over this spending period, although this increment is modest compared with the cut in spending from the previous Parliament. The reduction in direct public investment makes it all the more important that the new approaches to funding infrastructure that he announced, such as the memorandum of understanding with pension funds, bear fruit. Investment in economically productive infrastructure shores the UK up for the long term, gives business the confidence to invest, and provides jobs.

I also welcome the review of the PFI model that Infrastructure UK begins this week. However, I would urge the Government to bring it to a prompt conclusion. Private investment will be essential to delivering the Government’s new swathe of infrastructure projects as set out in the national infrastructure plan. However, each investment must be carefully thought through so that it delivers sustainable growth rather than quick fixes or botched jobs. We must be clear about the objectives of any project and the part played by the Government in achieving them. In this context I welcome the new Cabinet committee to be chaired by the Chief Secretary.

If we look at schemes introduced under the old PFI process, a key lesson is that you need an experienced and accountable client for them to deliver well. In practice, this means government clients must resist the temptation to overspecify or constantly tinker. It means standardisation of projects like schools and hospitals and it means being prepared to employ expertise that is not present within government. I appreciate that this runs against the grain of current thinking but there is a real risk of the Government being penny-smart and pound-foolish. Investors need certainty about what will follow from PFI and the Government need to be absolutely clear where accountability sits for the whole of any project, resolving planning issues, funding and financing, and getting the best possible deal for the public sector, otherwise we are in effect setting off without a map.

There will, of course, be many competing demands for infrastructure investment. Typically, investment in London’s infrastructure shows a higher economic return than elsewhere in the country and the capital is some 30 per cent more productive than the rest of the UK. There is therefore a strong argument for supporting projects that will help London to lead the UK through the difficult times ahead. Some of these are within the City itself, such as desperately needed river crossings in east London or the extension of the Northern line to Battersea. These would have a rapid and positive economic impact. While I welcome the government support, I should like to see it accompanied by details of proposed user charges, clarity on sources of public funding and a timetable.

There will also be difficult decisions to be taken. Almost inevitably, given the nature of infrastructure projects, there is an inherent tension between economically productive investment and political antipathy. For example, it is becoming widely accepted that the UK needs an international hub airport with greater capacity than can currently be achieved at Heathrow; the Chancellor noted as much in his speech. The lack of hub capacity is stopping the UK from having the range of direct flights to BRIC and other growing countries enjoyed by European competitors, thus undermining growth and commerce. There is an obvious solution: build a third runway, where the planning application is ready, the financing is in place and services could be up and running within a decade. Ironically, that is the one conclusion that the Government have ruled out. Perhaps the chill winds of economic circumstance have yet fully to penetrate Downing Street.

Beyond infrastructure, and as the rest of Europe works its way back to stability, the competitive position of London will increasingly be challenged. Indeed, we are already seeing this in some of the financial regulation emanating from Brussels such as the proposed financial transactions tax, which has the potential to have a disproportionally damaging effect on London as Europe’s financial capital. Likewise, when I look at the way in which some of our European competitors are forging transport links with emerging markets, I see a risk that we will be left quite literally waiting at the gate.

At the moment, the capital probably has the most successful and international professional and business services sector in the world. A recent report indicates that almost two-thirds of major international companies have an office presence in London. People come here to do deals because they know that the talent and structures are here. London is the natural launch pad for American businesses looking for a European base and vice versa, as well as a toehold for Far Eastern businesses.

Retaining those businesses and attracting more is vital for our future. As Europe is stagnating, so it is imperative that we raise our game in trading terms with the rest of the world. International businesses must see London as a strong and competitive place to do business, and that relies both on their perception of current policy and on their confidence in the Government’s future plans. Above all, the UK must be—and be seen to be—open for business. Immigration policy needs to welcome productive workers and genuine students, employment law needs to create the conditions for more jobs, not fewer, and our regulatory approach needs the flexibility to accommodate these global players. Our corporate and personal taxes need to be seen to be competitive and consistent. At one end, I urge the Government to act on their ambition to lower the top rate of tax. Equally, I would like to see the personal allowance increased as speedily as possible, a measure that is fair and puts more money back in everyone’s pockets.

I began by observing that the eurozone’s path to stability was still uncertain. That being the case, it is all the more important that our own leaders demonstrate clarity of vision, certainty of direction and consistency of approach in how they address the challenges that this crisis has brought for our own country. That way, perhaps climbing the mountain ahead may feel a little more like a hike in the hills.

My Lords, it is with great pleasure that I speak for the first time in your Lordships’ House. I thank your Lordships for the extraordinarily warm welcome that I have received from everyone I have come into contact with here. It is a genuine inspiration and privilege to hear the quality of debates and observations in this House. I also thank the officials and staff for their never-ending patience, helpfulness and professionalism, which are such a great asset to this institution.

I thank my supporters: my noble friend Lord Leach of Fairford, who has been something of a political mentor to me, and my father, my noble friend Lord Wolfson of Sunningdale. I realise that not so long ago it would have been a contradiction in terms for a father to introduce his son. For me it was an unusual pleasure and an apt one. My father’s incisive mind, his deep work ethic, his moral courage in both business and his political life and his philanthropic convictions have been an inspiration to me. I hope that they will remain so and that they will guide me. I am not just saying that because I am his heir, by the way, in case anyone was thinking that I was just creeping.

My father’s qualities reflect some of the character of his uncle, the son of a Jewish eastern European refugee who founded a great business empire and went on to do charitable works. Those have been conscientiously carried on by his son. Indeed, it is his charitable works that are more of an inspiration. It is a lesson in capitalism that it is not necessarily the making of the money but the wise spending of it that is a testament to greatness in a capitalist society. It is also a remarkable testament to this country that my great-grandfather was able to count among his descendants within three generations, three Members of this House and a Baronet. It is an extraordinary reflection of the tolerance, openness and opportunities afforded by this great nation, and it is an honour, to serve in this House which, over the centuries, has done so much to shape and protect the laws and liberties of this land.

Today, we are talking not about protecting our laws and liberties, but protecting our finances. I worry about all the hard work that is going into propping up the eurozone at the moment. To use an analogy, it is like a group of men standing around a fire on a freezing cold night. The fire is beginning to dwindle, and slowly but surely they decide that the best thing they can do to keep it going is to take their coats off and burn them. At some point I worry that we will run out of coats. The German standing by the fire does not have an infinite supply of clothes to burn on the fire. If nations are to behave responsibly at this time, we must face up to the possibility that the eurozone may well collapse. The noble Lord, Lord Ashdown, instructively pointed out that the euro may survive, but that it is likely to do so in a lesser form.

The turmoil and problems caused by a collapse would be enormous, but I do not believe ultimately that the reason for it is anything to do with the financial markets; it is to do with the labour markets. It is to do with the structural problems that have caused these financial problems. The fact is that over the past 10 years, Greek wages have risen by around 30 per cent relative to German wages. Wages in Spain and Portugal have risen by 20 per cent more relative to German wages. That has locked them into a structural lack of competitiveness. Internal devaluation is simply not an option, because people have mortgages and debts. If they take a pay cut, they cannot take a debt cut. If they take a debt cut, that is a real devaluation; that would mean leaving the eurozone. What happens when countries leave the eurozone is the challenge I am most worried about.

The noble Lord, Lord Lamont, was kind enough to refer to a prize that I have initiated. I am hoping that, having heard this debate, there will be a Lords entry and we can pool our resources, although obviously I would not be part of the team myself. The big problem for me is not what happens to trade, because I think that it will sort itself out. I am a trader and I am used to dealing with big swings in the valuation of currencies. The major problem is the banks. The position that we in this country must worry about is the position of the British banks with subsidiaries in southern European countries, particularly where they have more loans and mortgages outstanding than they have deposits. I would be interested to hear the Minister’s view on this. Do the Government have a clear view of what the exposure of British banks would be in the event that certain countries leave the eurozone? British banks could be left with an enormous exposure to debt that would have to be written off. The problem is that whatever view we have at this time of the size of that exposure, it can change. That was pointed out by my noble friend Lord Flight. It can change overnight, and indeed some £500 billion-worth of those deposits have already moved from the weaker countries to the stronger ones.

It is my belief that unless something is done urgently to control this flight of capital, the crisis that will eventually emerge will be far worse. We are facing a Catch-22 of enormous proportions. If the Governments of Europe begin to impose anything that looks like capital controls, that in itself will precipitate the end of the eurozone. If they do nothing, the end of the eurozone will be that much worse.

I finish by saying that, in my view, it is a far better approach to take the bolder of these two choices, and address the issue of capital flight now, before it is too late, with all the risks associated with it. In a case where you have to choose between making a bad decision and making a very bad decision, it is always best to make the bad one.

I thank your Lordships for hearing my maiden speech with such silence and respect and even with apparent interest. I, too, am disappointed that I was not able to make it in the Chamber.

However, I am at least able to say that I made it in front of a full house, so I thank your Lordships very much.

It is a great pleasure to follow the maiden speech of the noble Lord, Lord Wolfson. He showed great humanity and insight, with a nice, witty touch. He is a man of considerable distinction in the business world and, as we have heard today, comes from a family of great distinction. He was the youngest CEO in the FTSE 100 when he was appointed as CEO of Next. He showed, as has been mentioned on a number of occasions, a great flair for promoting some of the causes close to his heart when he announced his £250,000 prize—no mean prize, that. Perhaps he might like to consider a more modest prize for Peers who can come up with an exit strategy from the current economic turmoil that we find ourselves in. Sadly, as he has pointed out, he will be unable to participate in that, as House rules would probably prevent him under a conflict of interests. I congratulate him on his speech, and we very much look forward to his contributions.

I am very grateful to the noble Lord, Lord Lamont. There are two debates here, one about Europe and one about the United Kingdom. I intend to talk about the United Kingdom, but obviously against the background of all that has been said on Europe. The OBR report was a truly sobering document. There has been an alarming deterioration in the public sector finances, with borrowing set to rise by more than £150 billion above last year’s forecast. Growth has stalled for at least another 18 months, with all the risks on the downside. Household budgets, down by 2.3 per cent this year, are under intense pressure, particularly for the less well-off. This takes place against the existential threat of the disintegration of the eurozone, with all the consequences that have been colourfully and accurately made plain in this debate.

The Chancellor’s key economic judgment in 2010 was that fiscal consolidation would promote growth, that private sector growth would replace the jobs lost in the public sector and that private sector investment would make up for the shortfall in public sector investment. That judgment has been shown to be wrong. If you peel away the rhetoric, the Chancellor is now admitting as much. He is now being urged by both the IMF and the OECD to consider a more flexible approach, with a staged approach to cuts combined with temporary tax cuts. The Chancellor, like his predecessor, has worked hard and successfully to maintain credibility in the financial markets. As we have seen in the eurozone over the past few months, once credibility is lost, it is hard and very painful to regain: borrowing costs increase to quite unsupportable levels. Financial markets want to see a clear plan, effectively implemented; but they are also well aware that fiscal consolidation without economic growth is a dead end. The risk in today’s very volatile world economy is that our current recession will turn into a depression.

In March, the Government published The Plan for Growth, with 137 measures. They have just published a scorecard on how they are getting on with these measures. The OBR judged at the time that the measures would have no significant impact on growth. So how does the latest package shape up? Is this apparently long list of rather hurriedly assembled growth measures likely to make any measurable difference? It will not, according to the OBR, until 2014-15. I would be grateful if the Minister could confirm that the Treasury also agrees that the measures will have no discernible effect over the next three years, when growth is most needed.

In our debate on growth in March, noble Lords on all sides of the House urged the Government to focus on infrastructure and SME financing. The Government listened and acted. The noble Lord, Lord Skidelsky, has long advocated an infrastructure bank, which I enthusiastically support. An independent specialist bank that can evaluate risk, access and finance projects and possibly take advantage of the Government's ability to borrow at ultra-low interest rates will be essential if we are to encourage pension funds to invest in infrastructure. Pension funds are indeed hungry for safe, long-term, inflation-proof returns. However, all the evidence suggests that they prefer to invest in established projects with proven cash flows, not in risky greenfield projects.

SMEs create jobs and bring competition to established players, to the benefit of productivity and the consumer. SMEs are now coming to the centre of the political debate. On the supply side, more rigorous competition needs to be stimulated in sectors such as banking, utilities and energy supply if new entrants are to be encouraged to enter the market. Of course, funding must be more readily accessible. Credit-easing initiatives are welcome, particularly after the poor experience of Project Merlin. However, the Treasury is still far too fixated on debt finance. Many of our SMEs are undercapitalised by international standards, in part because the tax system treats debt finance more favourably than equity finance. With insufficient equity, the SME owner pays a very steep price to the bank and has to pledge all his assets to raise a loan.

Instead of tinkering with minuscule tax reliefs for EIS or VCT schemes, why do we not tap into the considerable cash resources of entrepreneurs and the wealthy in our society and encourage them to invest risk capital in SMEs by allowing equity subscription to be written off against the marginal rate of tax? This would not only bring in much needed equity to SMEs but would make available the experience and knowledge of the investors. I can testify that the smart-investor model works well in the venture capital industry here and in Europe, and it is one of the key ingredients behind the successful level of business formation in the United States.

Why SMEs are not borrowing is apparently a mystery to the Treasury. The reason is simple: why should they take on more borrowing to increase capacity if there is no sign of an increase in demand? When Bob Diamond appeared recently before the Economic Affairs Committee of this House, he noted that since the start of the year more than 40 per cent of Barclays business customers had increased the level of their cash deposits with his bank because they saw no merit in investing at a time of weak demand.

If the Government are to deliver growth, they must stimulate demand. Now that the Chancellor is embracing a more flexible and interventionist approach, he needs to be bolder. He should borrow to finance infrastructure projects that generate cash returns, and should stimulate demand by lowering taxes such as VAT and the basic rate of income tax, which will feed directly through to consumption. He should provide much bigger tax incentives to invest in SMEs and to encourage employment and training. He has already identified a number of areas where taxes can be raised without damaging growth. I suggest that he should now bear down even harder on loopholes such as the stamp duty avoidance scheme on expensive properties and on the regressive structure of community charges. Now that he has at last embraced a new approach, he needs to turn this week's mish-mash of measures into a bold and coherent plan to promote growth through investment and demand management.

My Lords, it is a very great pleasure to follow the maiden speech of the noble Lord, Lord Wolfson of Aspley Guise. In Glasgow, where I was brought up, his family was regarded not only as distinguished but as one that aspiring young people ought to emulate. I had the privilege of meeting some of his family in that great city rather a long time ago. I enjoyed what he had to say, as I believe the whole Committee did, and we look forward very much to his future participation in our debates.

The euro crisis has been repeatedly cited as the external factor that has blighted Britain’s economic recovery prospects. It therefore seems to follow that this country ought to do all that is within its power to assist in the resolution of that crisis. The attitude of the responsible Ministers has, I fear, been insufficiently supportive of the efforts being made by the other European Governments to avert the risk of sovereign default and spreading contagious bank collapses.

In the somewhat bullish report that the Chancellor of the Exchequer, Mr Osborne, gave to the House of Commons after the European summit of 26-27 October, he indicated that, although the IMF could use,

“its expertise and advice to help the eurozone to create the special purpose vehicle that it is considering”,

he emphasised not only that the IMF,

“cannot put its own resources in”—

as he put it—but that Britain would not put its resources in either. Having stood back, the Chancellor then saw fit to call for the eurozone countries to produce their plans,

“to increase their firewalls and sort out Greek debt”.—[Official Report, House of Commons, 27/10/11; col. 471.]

While it is clear that our Government recognise that it is in Britain’s interest that the euro operates more effectively, it is rather obscure how the Government are working to bring that about.

The situation has deteriorated in the past few weeks. Risk premiums on the bonds of the AAA-rated Austria and France rose to record levels. It was pointed out this week, on 28 November, that two decisions were made at the summit with damaging consequences that were not intended. I quote a report from Reuters Breakingviews:

“First, banks underwent a stress test that marked their sovereign bond exposures to market whereas previously regulators maintained the fiction that these positions were risk-free. This meant that lenders suddenly had to start holding capital to back their sovereign debt investments. Not surprisingly, they have become more reluctant to buy bonds. This, in turn, has made it harder for governments to fund themselves. Second, the summit decided to strong-arm the banks into agreeing to”,

what was described as,

“a ‘voluntary’ debt restructuring for Greece. Because the deal is supposedly voluntary, credit default swaps (CDS)—a type of insurance policy that pays out if an entity goes bust—won’t be triggered. This arm-twisting has convinced lenders that CDSs are a useless way of hedging the risk of investing in euro zone government bonds. Without a hedge, many prefer not to hold the bonds at all—again making it harder for states to fund themselves”.

Despite these political problems, it does seem that there has been some good political news. The new Prime Ministers of Greece, Italy and Spain have all indicated their determination to cut debt and make their economies much fitter. None the less, they will have an impossible task if investors cannot be convinced that the euro is here to stay. Perhaps the central hope of restoring confidence lies with the European Central Bank. If it can devise support for Governments who are intent on restructuring their economies, that should be backed. It does not necessarily mean that it has to become a lender of last resort; however, that prospect has definitely been advocated by many in this country and elsewhere, although reluctantly considered by Germany. Germany should certainly consider ways and means by which the central bank could go further, to assist the problem of facilitating its greater involvement. Of course, Germany is afraid of the lack of adherence to the terms of the stability and growth pact in some of the peripheral countries—perhaps overlooking what it did itself in the earlier days, which has already been referred to in this debate.

This country should also back the central bank, although we are not part of the eurozone. It was rather surprising that the Government indicated that they would not contribute money to the IMF that might be contributed to Europe. That seems to me to be a bizarre position and certainly makes it more difficult to give credence to the thought that the present Government are actually trying to help the eurozone. The EFSF might be the recipient of loans from the European Central Bank to bring its firewall into effect. Given that the ECB is not at present committed directly to fund Governments, perhaps it could itself lend to the IMF, which in turn could lend to Italy and Spain.

The German recognition and requirement of fiscal discipline is rational and should certainly be embodied in the revised treaty, but perhaps that might be extended to form a debt union, with the mutualisation of debt jointly and severally guaranteed. However, such moves cannot be made overnight and will not deal with the immediate problem. The threatened countries must now pool their thinking on what are acceptable debt targets and the timing of their implementation, and that will not be a uniform scenario; it will have to take recognition of the different platforms from which countries are starting.

Before Britain loses its reputation altogether as a concerned member of the European Union, it should seek to use its position to indicate ways in which the situation can be taken forward. Showing good faith rather than Euroscepticism can have a catalytic effect.

[For the continuation of today’s proceedings, see Official Report, 5 December 2011.]

[Continuation of Official Report from col. GC 114, of Thursday, 1 December 2011.]