Question for Short Debate
Tabled by
To ask Her Majesty’s Government what is their response to the Report of the European Union Committee on the Euro area crisis: an update (11th Report, Session 2013–14, HL Paper 163).
My Lords, on behalf of my noble friend Lord Boswell of Aynho, and at his request, I beg leave to ask Her Majesty’s Government what is their response to the report of the European Union Committee on the Euro area crisis: an update. I thank my colleagues behind the scenes—namely, Stuart Stoner, our indefatigable clerk, Sarah Yusuf, Rose Crabtree and Katie Kochmann—who all helped and contributed over the years to these important deliberations.
I am delighted to speak to this short debate on the Euro area crisis: an update. This work was undertaken by the Economic and Financial Affairs Sub-Committee, which I chair. The report brings together four short update inquiries undertaken since the European Union Committee’s previous February 2012 report on the crisis. The most recent update was undertaken in February and March 2014. We heard from a stellar line-up of witnesses, including: Senator Mario Monti, former Prime Minister of Italy and a former Commissioner; likewise Erkki Liikanen, a former Commissioner, now the governor of the Bank of Finland and author, of course, of the Liikanen report on the European Union banking structural reform; Sir Jon Cunliffe, erstwhile UK ambassador to the European Union and now deputy governor for financial stability at the Bank of England; as well as a panel of economic experts, which included the Mayor of London’s chief economic adviser, Gerard Lyons.
We took as our starting point a very simple question: was the euro area crisis over? The answer we received was that the crisis had undoubtedly eased. In particular, the existential crisis afflicting the euro had diminished, in no small part thanks to the European Central Bank president Mario Draghi’s authoritative commitment in 2012 to “do whatever it takes” to save the euro. There were other encouraging signs: the reduction in sovereign bond spreads; Ireland’s exit from its adjustment programme; the entry of Latvia into the single currency; the hint from Poland—not only in terms of its financial line-up but even from so venerable a colleague as Lech Walesa—that it also had aspirations to join the euro; the return to growth in many member states; and even a growing confidence in Greece, the epicentre of the crisis. I thank also the noble Lord, Lord Boswell, who presides over the European Union Committee. He and I were in Athens recently at a COSAC meeting to hear of a very good report that was given by Prime Minister Samaras.
Having said that, we found that fundamental weaknesses remained, including: the extremely high levels of unemployment, particularly youth unemployment; immense economic imbalances between core and periphery member states of the eurozone; anaemic growth; inhibited bank lending, particularly to small businesses; and perhaps incomplete and uncompleted structural reforms in a number of the member states. There was also an overstrong euro on the exchange rates. Perhaps most of all, there were growing fears of a damaging deflationary spiral. All of this fed into wider political tensions about the effect of the austerity on the lives of European Union citizens—tensions that the May 2014 European parliamentary elections in part illustrate.
Our conclusion was that, while the crisis may have abated, it would be wholly unwise to conclude that the storm had entirely passed. In particular, the economic fragility of many member states meant that the euro area remained vulnerable to future shocks. Events since the publication of our report have borne this judgment out. The recent crisis of the Portuguese Banco Espírito Santo led to nervous jitters spreading across the euro area periphery. Industrial production remains low and overall growth is running at only 0.2% a quarter. The recovery remains as ill balanced as ever, as Germany leaves other members of the single currency in its wake—although even with Germany more recently there has been some holding back in its traditional economic growth. Inflation is currently running at only 0.5%, as growth continues to bump along. The threat of a prolonged period of low inflation or even a deflationary spiral looms ever larger. The European Central Bank was applauded for its action in June of this year, when it announced that the deposit rate for banks would be cut from zero to minus 0.1%, alongside targeted long-term refinancing operations, and yet the jury is out as to whether these measures will have any tangible effect.
The euro area crisis has also had a prolonged impact on the EU institutions. The European Central Bank has emerged with well deserved credit for its handling of the crisis. Nevertheless, it faces significant challenges, not only from the deflationary effect but also over the handling of its comprehensive assessment of the banking system, including of course the so-called stress tests, the result of which will be announced in October. Reports last week suggested that banks would have two weeks to plug any gaps in balance sheets that the ECB uncovered. This process will test the robustness of the euro area’s recovery and future health as never before. Overall, we found that the crisis had seriously altered the institutional and decision-making structures of the European Union. Those representing the euro area, such as the European Central Bank and the euro group, have grown in importance. By contrast, the Commission’s powers and influence in determining the crisis response have perhaps diminished. I should remind colleagues that the new Commission President, Jean-Claude Juncker, was a former chair of the euro group, with all the implications that that has.
This trend has significant implications for the United Kingdom. Closer integration is vital if the single currency is to prosper. We therefore agree with the Chancellor that the UK must do all in its powers to support its EU partners on this path. Nevertheless, such moves towards integration leave the United Kingdom in an increasingly isolated position. Noble Lords will be aware that the EU institutions are in a state of flux. As I mentioned, the newly elected European Parliament is finding its feet, the new President of the Commission has been chosen and the shape of the new college of Commissioners will emerge over the coming weeks. In this context, the Government and the Bank of England must maintain and develop constructive relationships with the increasingly powerful euro area authorities. All parties should redouble their efforts to convince euro area colleagues of the benefits of having the City of London as the leading global financial centre for the European Union as a whole. If they can be convinced of the mutual benefits of prosperity for the euro area and the single market, then the UK and the City of London will have much to contribute and much to gain.
I look forward to the Minister’s response on the steps that the Government are taking to ensure that the UK and the euro area enjoy such mutually beneficial relationships in the months and years to come.
My Lords, this report is helpful and I am glad to acknowledge that the committee proposes to continue reviewing these developments every six months. I think that will be exceedingly important.
There have been some positive developments, which have flowed largely from the European Central Bank. That is acknowledged by, among others who gave evidence to the committee, Sir Jon Cunliffe of the Bank of England, who noted that the redenomination of currencies was now very unlikely. However, as the noble Lord, Lord Harrison, said, we cannot take anything for granted, and we must watch very carefully. As the report suggests, and the Minister who replied to the report agreed, we must maintain and develop constructive relationships with the euro group and the ECB.
Will the Minister tell the House how that process is being maintained, particularly as we in this country appear to be the odd man out, seeking special deals for Britain without allies or even being particularly specific about what these deals are? It is quite clear that the United Kingdom must support our EU partners on the path towards greater integration of the euro area, but there is of course a risk, if that goes ahead, that we shall find ourselves increasingly isolated as a country and decreasingly influential in decision-making. I entirely endorse the view of the committee that we should be looking to strengthen the role of the City of London as the banking centre for Europe. However, if we remain completely at arm’s length from these developments, that will be an increasingly difficult project.
In their letter of reply to the committee, the Government suggested that we should,
“tackle unsustainable levels of debt, reform labour markets, and support business creation and innovation”.
It would be helpful if the Minister could indicate how these steps are to be taken. With banks currently withholding loans and, as Sir Jon Cunliffe said, with cross-country lending diminishing, that seems quite difficult. The Government should make it clear that they do not intend to limit cross-border immigration of skilled workers as part of the European Union’s so-called reforms. We need these developments if we are to have new business creation and innovation. Without them, there will be particular difficulties for small and medium-sized enterprises.
We look forward to hearing what the comprehensive assessment process of the European Central Bank will reveal. It is a difficult exercise for it because if it reveals too many banks being in difficulties, that could actually not strengthen the system, although we were very happy to hear from Mario Draghi as long ago as June 2012 that the bank would do anything to safeguard the future of the euro. It would be interesting to know what the Government are doing in the negotiations that they are participating in with the euro group to ensure that new arrangements work for those outside the euro area. I do not hear much about that specifically, but it would be helpful to know.
The noble Lord, Lord Harrison, spoke about the deflationary spiral. It seems that that is not an imminent threat but it is something that we have to watch. I would also be interested to know how the Government view that and what they are saying about the austerity programmes that could induce such a spiral.
This is a factually interesting report with interesting evidence from witnesses, but we need more particular replies from the Government. They are generally supportive of the report, but they have not given much indication of how they intend to proceed.
My Lords, it was a pleasure once again to combine with colleagues in producing this report. It is fair to say that all possible perspectives on the issues were represented round the table in our committee and our debates were extremely stimulating and very instructive.
I want to use my time to address three illusions—or delusions, I should perhaps call them—that are extremely widespread, making it very difficult for people to appreciate the problems dealt with in this report. They are serious delusions and very erroneous, and I hope that in the very short time that I have to speak, I can go some way towards destroying them. The first delusion is the idea that the euro crisis is what it sounds like; that is to say that it is a crisis resulting from the existence of the euro and is the fault of the euro project. It is nothing of the kind. The so-called euro crisis is a debt crisis. There is no way in which the existence of the euro, or the existence of any particular currency, would necessarily have produced the outcomes in terms of excessive debt which we have been coping with in the last few years in the euro zone and indeed, elsewhere in the western world.
The reasons for the unbelievably irresponsible and often incompetent excessive lending practices go beyond the subject of this debate, but we are familiar with the general picture. Suffice it to say that we had banks in the European Union—in Ireland and Spain particularly— which lent on real estate projects with less than 10% equity. They were allowing more than 50% of their total assets to be exposed to the real estate sector.
Of course, as a result of the weakness of banks’ balance sheets, the government funds standing behind them produced a move from a banking crisis to a state funding crisis in countries such as Ireland and Spain. The position was made much worse in Greece by the falsification of the national accounts but elsewhere it was almost entirely a result of lender irresponsibility, or even worse than irresponsibility.
I have no doubt that incentives have an important effect on human behaviour, and some of the incentives in terms of short-term bonuses and so on were undoubtedly extremely perverse. They led to people lending to bad risks, taking a bonus on the basis of capitalising the profits to be generated from the loan and then walking off and getting a job somewhere else. We have had to deal with those matters decisively and thank heaven we have.
This was a debt crisis not a euro crisis. Irrespective of the currency these countries had, they would have faced the same magnitude of problems given the levels of debt that had been incurred, the bad debts that had been incurred and the central mispricing of risk that was going on. There was a quite disgraceful mispricing of risk. Again, serious professional incompetence was directed at the management of the enormous resources of the banking system in the European Union. It was a very serious matter indeed.
Some people say that one reason why it was the fault of the euro was because lenders thought that somehow a hidden or covert guarantee was being given by Germany or the other more solid economies to any other economy in the EU that got into trouble. Of course, such people were not only incompetent but they presumably could not read because the treaty precluded such a bail out or guarantee.
I am not suggesting that we had in place all the necessary measures to cope with the crisis and the shock which ensued from this bad lending—we did not. In three areas there was a deficiency of measures and institutions available to cope with this kind of scenario, one of which was that there was insufficient co-ordination of fiscal policy. We had under the euro until recently—until the stability and growth pact in fact—one monetary policy but 17 or 18 fiscal policies. That is not a good situation, but it has now been remedied. There was insufficient co-ordination and no centralisation of banking supervision which, in some areas, was plainly inadequate. The single supervisory mechanism, with the ECB taking charge, is taking place this year and will come into force next year. It is an encouraging measure.
There were, and still are, inadequate mechanisms of automatic stabilisation in the European Union. There is some measure of automatic stabilisation in the working of the cohesion and structural funds, but there should be much more. I am drawn to the idea—I have defended it in many contexts, including in this House—that we should have in the eurozone a single, integrated unemployment insurance system, which would certainly have a major automatic stabilisation effect in a crisis or an asymmetric shock affecting different members of the Union or different parts of the Union in different ways.
There are lessons to be drawn from the crisis. However, under no circumstances can it be called a euro crisis to the detriment of the reputation of the euro because that would not be consistent with the facts. It was a debt crisis.
I move now to the second great delusion, which is even more commonly held. In many places it is an assumption that people take for granted and, therefore, it is never challenged and never thought about. I hope that my mentioning it today might begin to remedy that. It is the assumption that we were quite right to stay out of the euro, that we are much better off out of it, and that it would have been a crazy, inconceivable thought that we would want to join the euro because the euro is in such a crisis. First, that is a misreading of the crisis, as I have already explained. Secondly, it is mathematically incorrect as a description of where the country would be if we had joined the euro. I remind the House of the figures, which I have noted down to make sure that I get them right. In the 15 years from 2000 to 2014—from the beginning of the euro project, if you like—sterling parity has fallen against the euro from 65p to 82p. That is a fall of 27%. So, all other things being equal, we would have been 27% richer—we would have had 27% higher net assets and net revenues—if we were in the system than if we were out of it.
One could say that we would not have had the same growth rate over the same period if we had been in the euro system. I have no idea whether that is the case. Our growth rate over that period has been an average 1.8% per annum. If you take the original EU 12 which were members of the eurozone—and the figures are more or less exactly the same if you take the larger number of countries that joined the EU subsequently—you will see that their growth rate over that period has been 1.2%. That is a difference of 0.6%, which, on the basis of compound interest over 15 years, works out at about 12%. If you make the assumption that our growth rate had been that of the average eurozone member over the period since the beginning of the euro, which is less than we have actually had—it may not be a realistic assumption; it certainly seems odd to make an assumption that our growth rate would have been less than the average eurozone growth rate because we pride ourselves on having a more efficient and more flexible supply side than most of the eurozone— the result would have been that we would have been some 15% better off today, so that is a significant difference.
I refer to a final delusion: the idea that we still face dire consequences from the crisis. The general indicators seem to be rather favourable. Unemployment is falling in the majority of EU countries, including all the four problematic ones—Ireland, Spain, Portugal and Greece. Growth has resumed in the eurozone. The best predictor of the future which I know is the stock market, which tells one really quite an encouraging story about both the future of the eurozone as a whole and about that of the problematic countries within it.
My Lords, I pay tribute to the noble Lord, Lord Harrison, for chairing our committee and for the production of this report, which, given the spread of views on the committee, is very fair and accurate. I think that the noble Lord, Lord Kerr, began to get slightly worried that he found himself agreeing with me on too many issues.
The report is, as the noble Lord, Lord Harrison, has suggested, slightly optimistic in that recovery in southern Europe is pretty weak, the public finances are still worsening, the threat of deflation remains and the unemployment position is terrible. The real problem is that the euro locked Europe into a gold standard. Italy, Portugal, Spain and so forth had happily devalued 2% or 3% every two or three years, but when they could no longer do that and Germany put great effort into becoming super-competitive by holding wage rates down, it ended up with about 30% uncompetitiveness among the countries of southern Europe as against Germanic Europe, and they are stuck with it. They have taken measures to address that. The only scope is internal devaluation, but that is extremely painful and, candidly, I am quite surprised that predominantly socialist politicians, in the cause of sustaining the euro, have been apparently happy to see the lives of a whole generation of young people in southern Europe wrecked with a massively high level of unemployment, so there is a slight problem there.
No, I shall not give way because I do not have long to speak.
The prospect of real political and economic union is for the time being not particularly promising. The big issue is that if you are going to share a currency, you have to have transfer payments. Britain has £70 billion or £80 billion of transfer payments from the prosperous south-east to other parts; in America, some 30% of federal spending goes on transfer payments. When we went to visit every element of Germany and asked them about transfer payments, the answer we got was “Not a pfennig”. Nobody in Germany was willing to face up to the fact that, if they wanted a united Europe and if they wanted to sustain the euro, they would have to be willing to make transfer payments to the less prosperous parts of Europe.
As the noble Lord, Lord Harrison, mentioned, we have yet to see how robust the banking system is with the stress test coming in October. I hope that the test will be genuine and robust, but if it reveals serious undercapitalisation of the banking system, that presents its own problem, because, in essence, it will have to be the relevant Governments who bail out the banking system. Thus the link between government debt and banking problems is not removed but, if anything, worsens.
I cannot help but comment that we have been here before in that in the 1860s, the French established a common European currency, the silver franc. We spent most of the 1870s debating whether to join it, and indeed in the British Museum there are notes and coins which were produced showing what they would be like if we did join. Walter Bagehot, the great economist, was wholly in favour of doing so. It lasted for 30 years until eventually the author, France, became so uncompetitive with something like 35% unemployment that it ditched the silver franc and ended the first attempt at a common European currency. I should add that everyone participated, including Switzerland, other than the German states because Germany had not yet united.
As the noble Lord, Lord Harrison, and others have pointed out, the report makes the point that the crisis has created the eurozone versus the peripherals. Although it is slow, I think that from now onwards there will be a gradual process towards political, economic and financial integration. Noble Lords will know the story of when Kohl and Mitterrand were discussing the euro. Kohl said, “We can’t start the euro because there isn’t much political integration”, and Mitterrand responded by saying, “We’ll never get political integration unless we put the euro into effect, which will force it”. I think that may be true. However, the UK is obviously not part of the eurozone and, as the report states, it is already a semi-detached member of the European project. In particular the loss of sovereignty over financial regulations has damaged the City of London. I describe it by saying that the City enjoyed a boom for around 40 years. It then plateaued and now it is on the way down in terms of earnings, activity and the number of people employed. The AIFMD has been particularly damaging and has moved a lot of business to New York and Singapore, and the biggest threat is the financial transaction tax. If noble Lords have not read it, I particularly recommend the report of EU Sub-Committee A on that.
The point is that although the report exhorts everyone to be friendly and co-operative—indeed the representative and lobbying bits of the City in Brussels never cease to grow, with around seven different institutions that are all there to be friendly and lush up their colleagues—there is a difference of interest. I am afraid that London is at the mercy of what suits Europe, along with its particular jealousies of London’s dominant position. The City has put up with that and got on with it, but beneath the surface there is mounting resentment. If the financial transaction tax were to go ahead, I think that it would be the straw that breaks the camel’s back.
I end by making the point that there is the irony of the British Government being the first to recommend that Europe should get its act together and get a move on with financial, political and economic unification, and yet that is the very thing which has led to Britain being a semi-detached member. The view is becoming clearer and more widely held that the right relationship for the UK is as a member of the EU customs union and the single market, but not of the EU political union. I detect that, one way or another, this is now the direction in which we are heading.
My Lords, my text is taken from the fourth chapter of the book of Harrison. I pay tribute to the prophet for his skill in achieving a consensus, but I shall now try to demonstrate that there is a wide range of views on the committee, as I shall not agree with everything that the noble Lord, Lord Flight, has just said.
I am not competent to follow the noble Lord, Lord Davies of Stamford, into the economics, so I shall stick with chapters 3 and 4 of our report, where we argue about the institutional effects and the impact on the United Kingdom. In particular, paragraph 71 states:
“The economic fortunes of the UK and the euro area are intrinsically linked … moves towards integration leave the UK in an increasingly isolated position. In order to ensure that the UK’s interests are effectively promoted, the Government and the Bank of England should therefore maintain and develop constructive relationships with the increasingly powerful euro area authorities, notably the Eurogroup and the ECB”.
The initial brief reply from Nicky Morgan, who was briefly Financial Secretary to the Treasury, said that we had correctly identified,
“that the changes in governance precipitated by the euro area crisis has seriously altered the EU’s decision making structure and that, in turn, impacts on the UK”.
However, she assured us that,
“going forward the Government will remain, as it has done so far, closely involved in negotiations … to ensure that proposals fully take into account the interests of all Member States”.
I thought that a little complacent. I was also struck by the passage in the balance of competences review that was published by the Treasury yesterday that states:
“Access to the single market in financial services and the Free Movement of Capital provides significant benefits for the UK financial services industry and for consumers … While the ultimate impact of the banking union is hard to predict at this stage, it is likely to pose a number of challenges to the UK’s interest in maintaining a central role of influence in an internationally competitive financial market in the EU”.
We got some advice, as has been mentioned, from Sir Jon Cunliffe, deputy governor of the Bank of England, who advised that the Government would do well to try to maintain,
“contacts with the Eurogroup, ensure its meetings took place in the context of other EU meetings, and being ready to offer technical advice without lecturing or providing unwanted counsel”.
I thought that rather good advice. Maybe Sir Jon could persuade the Governor of the Bank of England, or the Minister could persuade the Chancellor, that the euro group should be invited to hold one or two of its meetings in London, where it could be briefed about, and familiarise itself with, its key market—the City. Maybe the Minister could think about a suggestion made in evidence to the committee yesterday by Sharon Bowles, who until the European Parliament elections chaired the ECON committee of the European Parliament, that the eurozone should be encouraged to meet after, rather than before, meetings of ECOFIN so that it would be better able to take account of the interests of all 28 member states, as the treaty requires it to do.
The balance of competences is right to talk of challenges. I can think of five. First, the eurozone will have a qualified majority from November. Secondly, the UK, as a non-eurozone member, is in practice now ineligible for any of the top economic jobs in Brussels, including: the president of the ECB; the president of the euro group; the Economics Commissioner, who might be combined with the president of the euro group; and the President of the Commission and the President of the European Council, because such a large part of their agenda relates to the euro.
The third challenge is that the UK is in a different position from most other member states, including most other non-eurozone member states. Most non-eurozone member states purport to be, or see themselves as, pre-ins. They say that they want to join one day; we say very firmly that we have no intention of ever joining, which rather singularises us. We said the same about fiscal union—not that it was very stringent; it turned out to be a rather loose form of discipline to apply the austerity that we were at that time loudly preaching. But we chose, with our Czech friends, to flounce out. We alone have refused to contribute to any bailouts of member states in trouble during this crisis and we take great pride in that as one of our great achievements. We report that we have managed to avoid being involved in any bailout. On banking union, it is my impression that most of the pre-ins, such as the Poles and the Swedes, who are certainly not going to join the euro in a hurry, have managed to keep rather closer to banking union than we have done. That could be damaging to the City.
The fourth challenge is that we cannot have any key position on the economic side of the European Parliament as non-eurozone members—Sharon Bowles’s successor is an Italian. Regarding the institutions, the British Bankers Association brought out an interesting report the other day saying that the representation of UK public servants in the institutions is down to under 5%, proportionally lower than at any time since we joined. If that figure was based on our population share, it would be 12%. Only one in every 25 new recruits to the institutions is a British citizen, although one in every five comes from a British university. Why are the Brits not going? It reflects a wider problem: just as young people cannot be sure that a career in Brussels would not be brought to a sudden end, so other member states cannot be sure that it makes sense for them to do deals with us when, as the President of the European Council puts it, they can see that our hand is on the door-handle and when they hear the new Foreign Secretary saying—without defining what we want—that, if they do not give us what we want, he would be ready to recommend that we leave.
None of these problems is easily soluble. We are in a hole and, as the report says, we are “increasingly isolated”. We could remember the first law of holes, which I remember the noble Lord, Lord Healey, explaining: when you are in a hole, stop digging. It would be quite good, as Sir Jon Cunliffe said, to avoid lecturing people. We could also avoid hectoring or denouncing them, for example in articles in the weekend press. It would be good to try to avoid deliberate distancing. The French have a saying: “Les absents ont toujours tort”, or “Those not present are always in the wrong”. Alternatively, you could say, “We’ve got to be in to win”. Given that we are not in the eurozone, it behoves us, and the interests of the City, to stay as close to it as we possibly can.
My Lords, I, too, congratulate the committee on this latest stage of its continuous hard work on these issues. I very much appreciated the excellent introduction by my noble friend Lord Harrison, who covered all the significant points in the report and rendered nugatory any intention on our part to mention them in detail. However, of course, we need to look at the report as a pointer to what needs to be done and the situation that we are in as far as Europe is concerned. There is some cause for optimism: the euro appears to be out of crisis although, as I think my noble friend Lord Harrison said, the storm has not exactly and entirely passed by. That will do as an analogy, but the situation is a good deal better than the one we were facing only a short while ago. Clearly, several countries have significantly improved their economies on the way to some recovery. Ireland in particular has made progress in these terms, as have Spain and Portugal, although, as has been mentioned and is emphasised in the report, employment levels are very low. That leads to an important issue, which I will comment on later, about the level of demand in the European economy.
I am grateful to my noble friend Lord Davies for expanding on what the report makes clear, which is that the euro crisis is part of a global crisis. We are so used to the Conservative perspective on the crisis as being manufactured in the UK and being solely the responsibility of the Labour Government, who spent too much money. There is no comment of course about the collapse in receipts going to the Labour Government at that time because of the crisis that affected the banking and financial sector in particular, which is such a crucial part of our economy. This report puts the euro position into the broader perspective. It is important, therefore, that we recognise that a great deal still needs to be done.
As the report indicated, austerity has been costly. It is costly, of course, in terms of living standards. We have seen that in our own country but, because the margins for some in the euro area have been so low, austerity has had a very bleak impact on populations there. As has been indicated in this debate, we have seen a loss of confidence in and support for Europe because austerity brings discontent where people’s living standards fall as rapidly as they have been doing. The report indicates that it is essential that we see policies that return to growth, and we have to make sure that we pursue the necessary reforms to create that growth. None of us underestimates in a number of European countries how deep the problems are—referred to as requiring structural reforms. They are mighty challenges but it is clear that both Europe and particularly Britain, with its relationship to the European economy, want to see those reforms carried out because it is very much in our interests to have an effective single economy.
The single market is of great advantage to this country in our trading relations but it is also important to the City of London, which is a pivotal point of our economy as a major financial centre. I agreed very much with the point made by the noble Lord, Lord Kerr—that we had better take steps to ensure that there is a close relationship between the institutions in Europe. The Central Bank also clearly helped to avert the crisis in the eurozone and we now need to see the Bank of England establishing closer relationships for the good of all countries in the Community.
The problem with all this is that the challenges are big but we have a Government who seem to exacerbate the issue. The Prime Minister says that he is setting out to reform Europe in meeting these challenges. The task that he has set himself is to effect significant reforms in Europe in the next 24 months with the support of 27 states, when at the moment his support extends to none, except for the United Kingdom, of which he is Prime Minister. We saw a dimension of the failure of diplomacy in the rather ham-fisted attempt to prevent the appointment of Juncker as head of the Commission.
How can we make progress when the Prime Minister seems to be more concerned with negotiating with his party than with Europe? We saw an instance of this in this House this very day. On Monday, we all read in the press and on Sunday we had seen on “The Andrew Marr Show” the new Foreign Secretary making it absolutely clear that he had a terminal point when it came to membership of Europe, and that if there were not very significant changes in the structure of Europe and Britain’s relationship to it, he was voting for “out”. In this House today, the Government’s business spokesman said in answer to a question that there is no question of withdrawal. These are not just members of the same party; they are important figures in the Government of this country because of the role that they play in the party, yet, from what I can see, they have quite contrary positions. What does the Minister have to say about how he proposes to wrestle with those kinds of difficulties?
Finally, I want to make what might be regarded as a minor but quite clear point. We are also losing influence in Brussels because we no longer provide people who operate part of the civil service there. In 2004, more than 9% of civil servants in Brussels were British. That is down to 5.3%. Not a single Briton has gained entry to serve the Commission through the highest-level examination. That is loss of influence and it is a reflection of the fact that the Community’s confidence in Britain is being lost by the stance the Government are taking. It is being reflected in a grievous way, which will adversely affect this country.
My Lords, I thank the noble Lord, Lord Harrison, and European Union Sub-Committee A for publishing the updated report. I also thank members of the sub-committee for organising the debate, and everybody who has spoken.
It is blindingly obvious that a stable euro area is in Britain’s interests. Some 40% of UK goods and services exports go to the euro area and the economic uncertainty emanating from the euro area at the height of the crisis had a chilling effect here. The Government welcome the return to growth in the euro area, but vulnerabilities obviously remain. We agree with the committee that the storm has not entirely passed. While growth has returned, it is weak and unemployment remains high. As the noble Lord, Lord Harrison, pointed out, growth across the euro area is ill balanced. The balance of payment surplus of Germany, for example, has reached record highs, while obviously other member states are still suffering very considerable economic problems.
The ECB’s announcement of its outright monetary transaction mechanism and its clear commitment to stand behind the euro have clearly helped relieve the pressure from the sovereign debt crisis. However, the euro area has to make some important steps to strengthen the single currency for the longer term. Countries in the euro area periphery are undergoing a painful but necessary adjustment. They need to carry on confronting head-on their problems of high deficits and low competitiveness. They are making very considerable progress. By the end of 2014, Spain is forecast to have reduced its deficit by almost five percentage points since 2012, while it, Italy and Portugal all registered current account surpluses in 2013.
My noble friend Lord Maclennan asked whether that adjustment was too quick. It is interesting to see that the rate and path of deficit reduction in Spain, for example, is much sharper than the one we have decided to follow here. It has had a number of consequences, one of which has been high unemployment and a fall in real wages. What is interesting about the Spanish economy is the extent to which it is rebalancing away from property and rebounding. The absolute pace at which some of these economies are adjusting and the extent to which that is optimal will not be clear for some time. However, they have made very significant steps and are to be congratulated, not least against a background, two or three years ago, in which many people in the UK said they would never be able to do it and that the euro would collapse as a result.
A well designed banking union comprising centralised decision-making on supervision and resolution supported by credible financing arrangements, can, in our view, support the long-term stability of the single currency. The ECB’s comprehensive assessment process is critical to restoring market confidence over the medium term and is an important step in implementing the single supervisory mechanism. We strongly support the announcements on stress tests and believe they provide for a robust process. However, all elements of banking union must protect the unity and integrity of the single market and the interests of non-participating member states and be legally sound.
Some progress has also been made on closer oversight of fiscal policy. Exit from the crisis will be easier the more the euro area does to support demand and share the burden of adjustment. The noble Lord, Lord Davies of Stamford, and my noble friend Lord Flight referred to the challenges of greater fiscal co-ordination. The noble Lord, Lord Davies, suggested an integrated unemployment insurance system, but I think my noble friend Lord Flight answered the question of how plausible that is, certainly in the short to medium term, by pointing out that the country making the transfer payments in such a system would be, to a large extent, Germany. There is very little evidence that Germany feels that is an appropriate way forward.
The Chancellor has long made clear his view that there is a remorseless logic that the euro area, like any single currency, needs closer economic and fiscal integration. The euro area needs the right governance and structures to address its current challenges, but the change in governance precipitated by the crisis has altered the EU’s decision-making structure and affected us, as we have heard from a number of noble Lords. We must ensure that any new arrangements work for those outside the euro area as well as for those within it.
My noble friend Lord Maclennan asked how we would maintain our position given these new arrangements and, although the noble Lord, Lord Kerr, thought it was slightly thin, the Financial Secretary to the Treasury pointed out that we will be and are closely involved in negotiations on EMU and in ensuring that proposals fully take into account the interests of both the euro outs and the euro ins. In answer to my noble friend Lord Maclennan’s question about how we are doing this, we are in constant contact with euro area partners at European Council and ECOFIN meetings, and we are pursuing the informal interpersonal relationships that we discussed at some length when we last had a discussion on the issue. I completely agree with the suggestion that in these interactions, we need to avoid hectoring and denouncing—something that UK Ministers of all parties, over several decades, have found exceptionally difficult in dealing with our European partners.
My noble friend Lord Maclennan asked how we are supporting the leveraging labour market reform and innovation. The Government support the attempts to tackle these issues. We support the ECB’s comprehensive assessment—stress test—and the asset quality review as a means to improve confidence in the banking system. We support the ECB’s moves further to develop the European securitisation market as an alternative to bank lending. Labour market reforms need to be undertaken on a country-by-country basis, along with wider structural reforms to promote growth.
The noble Lord, Lord Kerr, referred to the balance of competencies review and the challenges that it identified. It is a helpful and formidable document and has the great advantage of having a large number of sensible and practical suggestions of how decision-making processes might move forward. He identified a number of key challenges, none of which I suspect anyone in your Lordships’ House would disagree with. The one I highlight, which the noble Lord, Lord Davies of Oldham, also mentioned, is the question of staffing, which we have discussed in your Lordships’ House on a number of occasions. We discussed it at our last debate on the subject, and following that debate I wrote to the noble Lord who raised the issue of staffing and I hope that other noble Lords who took part in that debate, most of whom are here today, will have seen a copy of that letter about the initiatives that the Government were taking.
It seems to me that the banking sector needs to be willing to encourage its staff to participate in the European institutions. The sector is quick to denounce the Government but slow to take action itself and, in private moments, will admit that if it has somebody really good who would do it really well, the last thing they are prepared to do is to give that person up to do it. As long as that remains the view of the sector, the current situation will continue.
The noble Lord, Lord Kerr, made a couple of interesting and practical suggestions about the euro group and where and when its meetings might be held. I will draw those suggestions to the attention of the Chancellor.
The Government could not agree more with the points made in the report about the importance of the City of London as a leading international centre. We do not altogether share the gloomy prognosis of the noble Lord, Lord Flight, for the City. The City will evolve. Some areas of business will undoubtedly move elsewhere as global markets evolve. However recent developments, such as renminbi trading in the City and the Government’s decision to initiate a sovereign sukuk and therefore promote Islamic finance, offer very significant new areas of activity for the City which will help underpin its position as Europe’s leading international financial centre.
My noble friend Lord Maclennan asked about cross-border workers and pointed to the important role that they play in the UK economy. As I pointed out at Question Time recently, the growth in house building in the UK, that all parties now believe to be very important to the period ahead, will happen only if we continue to employ large numbers of skilled workers from the rest of the EU because it is physically impossible to train large numbers of skilled workers in the short term. For the future growth of the British economy, the continued involvement here of skilled workers from the rest of the EU is very important.
We have had an extremely interesting debate across some relatively familiar themes. I would like again to thank the committee for this contribution to the debate, and I look forward to its next update.