I would like to update the House on the situation in the eurozone and what we are doing to mitigate the impact of the crisis on the UK.
Markets remain exceptionally volatile. Since July stock markets are down by 11% in the UK, 12% in America, 23% in France and 24% in Germany. Bond spreads have widened significantly for a number of European countries. Bank shares have lost a quarter of their value in the past three months, and yesterday the Governments of France, Belgium and Luxembourg came together to rescue the major European bank Dexia.
Although the weakness of the US economy, and its recent downgrade, have contributed to the lack of confidence gripping world markets, it is clear to all that the epicentre of this crisis lies in the eurozone, so we need a comprehensive solution that puts our largest trading market on a much more stable footing. In a string of international meetings, including the recent flurry that began with the G7 meeting in Marseille, Britain has helped to lead the international community in setting out what the components of a solution should look like.
We have again pressed our argument in calls over the past couple of days which I, the Prime Minister and the Deputy Prime Minister have made to the leaderships in Germany, France, the institutions of the European Union and international bodies such as the International Monetary Fund. Half an hour ago the Prime Minister spoke to the President of the United States about the issue.
In short, we need a comprehensive solution which ring-fences vulnerable eurozone countries, recapitalises Europe’s banks and resolves the uncertainty about Greece. Ring-fence, recapitalise, resolve—let me take each in turn. First, we need to see the eurozone members increase the firepower of their bail-out fund. If they are trying to protect larger countries, €440 billion is sadly not enough. How they increase that firepower—whether by using more paid-in resources, more leverage, or more help from the European Central Bank—is up to them. What I can confirm is that Britain will not be a part of any permanent eurozone bail-out fund. We have provided a bilateral loan to Ireland with the support of the House, in recognition of our exceptionally close economic and social ties. But when we came to office we inherited a situation where we were also part of the EU-wide bail-out fund, the European financial stabilisation mechanism. As the price that we extracted for ratifying the treaty change creating the permanent bail-out fund, British taxpayers have made no contribution to the eurozone bail-out of Greece and will not be part of the permanent fund.
Alongside the ring fence, we need the second r, which is recapitalisation. The European bank stress tests have not been nearly tough enough, as proved by the fact that Dexia did not fail them. At the beginning of the year, I said that the new stress tests must be much tougher. The IMF now estimates that sovereign credit strain could have a direct impact of about €200 billion on European banks, and at last the European Banking Authority is working on a plan to test leading European
banks against higher capital ratios and more credible benchmarks on their exposure to sovereign debt. European nations will need to set out the backstops that they have in place to raise capital privately if they can or provide public capital if they cannot.
Detailed work by the Financial Services Authority confirms that UK banks are much better capitalised and more liquid than many of their European counterparts. As the IMF showed in its recent assessment of the UK economy, the core tier 1 ratios of all the major UK banks are in double-digit territory, which compares well to most European peers. On Friday, the credit rating agency Moody’s downgraded 12 UK banks. However, it stated explicitly that the
“downgrades do not reflect a deterioration in the financial strength of the banking system or that of the government”.
Rather it is the recognition of the success of the Government’s efforts to reform banking and remove the perceived taxpayer guarantee for banks deemed too big to fail. That is the direction in which policy should be moving.
The third r is a resolution of the situation in Greece. The weekly drama of troika visits, parliamentary votes and uncertainty about the disbursement of future tranches of international funds are causing great instability for the whole world. Our advice to European neighbours about what needs to happen is provided in private, but our overall intent is very public. The speculation about Greece’s future needs to end. The eurozone needs to come to a clear decision now and stick to it, and that decision needs to be based on a rigorous and realistic assessment of what is really happening in Greece and the debt dynamics of that country’s economy. Such an assessment should be provided by the IMF. We need to ensure that the IMF has enough resources to support economies around the world that require the help of the international community.
Ring-fencing, recapitalisation and resolution—that is what needs to happen now. At the same time, the eurozone countries need to undertake structural reforms to make their economies more competitive and move towards greater fiscal integration to underpin the single currency. At the same time, we must ensure that Britain is not part of that integration and that our influence is protected. These things are required by the remorseless logic of monetary union. That is the comprehensive package—all these things—that we have been urging and will urge again at the G20 Finance Ministers meeting on Friday and the European Council meeting, which has now been moved to the end of next week. We believe that the package must be in place as soon as feasible and certainly no later than the G20 leaders summit in Cannes in less than four weeks. Our time frame has been clear and is now broadly accepted by the international community. Indeed, there are now signs of progress from the leadership of the eurozone.
The crisis in the euro may now been inching towards resolution, but it has already delivered a huge knock to international confidence. I said earlier this summer that Britain could not be immune from what was happening on our doorstep. Sadly, that has proved to be the case. That is the principal reason given by the independent Monetary Policy Committee for its decision to request authorisation to undertake further quantitative easing. As Mervyn King said in interviews explaining his decision,
“clearly the impact of the rest of the world on the UK does threaten our recovery. That’s why we took action today to try to head that off.”
I made it clear last year that I would follow exactly the same procedures that my predecessor established. I therefore agreed to the request and authorised a further £75 billion of asset purchases. I think that this is the right response to the deterioration in the international situation.
That is what the Bank of England can do. Although we have gone further than the last Government in extracting commitments from all the high street banks to increase SME lending and extending loan guarantees, I believe that we can do more domestically to get credit flowing, including credit easing.
The purpose of a credit-easing programme will be not only to lower the risk of another credit crunch, but to bring about a structural improvement in access to finance for mid-sized and small businesses so that a loan from their local bank is not the only source of finance, addressing one of the long-standing problems in the British economy. This action will sit alongside the other measures we have announced to improve our infrastructure, invest in science and make it easier to employ people. We will announce more details alongside the autumn forecast next month. All this recognises that our economic problems do not all come from abroad; many were home grown. Last week’s revisions to the GDP data revealed that Britain had one of the biggest booms in the entire world, followed by the deepest recession of any major economy other than Japan’s. We went into that bust with the biggest structural deficit in the G7 and came out with a deficit forecast to be the biggest in the G20.
None of the measures I have described would be possible if Britain did not have what the Governor of the Bank of England himself described last week as
“a credible plan to repay our debts”.
Fiscal responsibility allows the British authorities to be monetary activists. Without that credible plan, market interest rates in Britain would soar as they have in other European nations. Instead, interest rates here are just 2.5%, half of what they are in Spain and Italy. A 1% rise in interest rates would take £10 billion out of the pockets of British families through higher mortgage costs and lead to more repossessions and job losses as companies failed. These low interest rates are hard won and easily lost. I can confirm that the credit rating agency that downgraded the United States, Standard & Poor’s, has this month affirmed our triple A rating, but it made it clear that the greatest threat to that rating would be if
“the coalition government’s commitment to fiscal consolidation falters.”
We will not take that risk with our nation’s credibility and our interest rates.
These are difficult times. There is no doubt that a solution to the eurozone crisis is urgently needed. It would provide the greatest boost available to the British economy this autumn. We have been leading the international effort to help the eurozone find that solution while at home taking the steps needed to ensure that Britain rides out the storm. I commend this statement to the House.
Let me start by thanking the Chancellor for making his statement and for advance notice of it. It is right that he has today updated the House and the country on the ongoing crisis in the eurozone. It is also right that he and I will have the opportunity to debate the ongoing growth crisis in the British economy in the House on Wednesday.
A year ago the Prime Minister told the House that our economy was
“out of the danger zone”—[Hansard, 15 December 2010; Vol. 520, c. 901.]
We warned then that there was a global hurricane brewing in the eurozone, America and across the developed world. We also warned the Chancellor that ripping out the foundations of the house here in Britain with a reckless approach to deficit reduction was the wrong approach. The global hurricane is now swirling around us. With the eurozone crisis deepening, and in advance of Wednesday’s debate, will he tell us today whether he still believes that Britain is out of the danger zone and that we are still a “safe haven” in a turbulent world? With the European Central Bank unwilling to cut its interest rates, is it really the crisis in the eurozone that has prompted the Chancellor to change so radically his views on quantitative easing? Two years ago he called it
“the last resort of desperate governments when all their other policies have failed”.
We will return to the British economy on Wednesday, but the Chancellor is right to say today that the crisis in the eurozone now constitutes a direct threat to our flatlining economy, not least because only Greece and Portugal in the eurozone have had lower growth than Britain in the past year. With no growth, it is no wonder our interest rates are so low. He is also right to say that the threat is not only to our exporters, but to the stability and solvency of our banking system. Can he update the House on his latest estimate of the full exposure of UK banks to euro sovereign debt? Is the House of Commons Library estimate of a $187 billion exposure correct? Is it correct that, as part of his contingency planning, the Treasury has been working on detailed plans to inject further capital into Royal Bank of Scotland?
The Chancellor is also right that it is a great relief that Britain is not a member of the eurozone, although I was rather surprised to hear him last week give the credit to the Foreign Secretary, who was in opposition, on the Back Benches and writing history books at the time. I have long given up hope of getting any thanks from the Chancellor for that vital judgment. Above all, the Chancellor is right: eurozone leaders have prevaricated too long and need to get their act together to put in place a credible plan before next month’s G20 meeting.
Back in July, the Chancellor told the Financial Times in an interview that eurozone leaders had to “get a grip”, and he called for a eurobond, but what has happened since? Precious little. Has he urged eurozone leaders not just to increase EFSF funding, but to widen its role to help recapitalise troubled banks and to put in place first-loss guarantees on sovereign debt to stop contagion in Spain and Italy? Rather than talking to the newspapers over the summer, perhaps the Chancellor should have gone to those meetings and urged a Europe-wide plan for jobs and growth to get unemployment falling and deficits down.
What do we have today from the Prime Minister? Do we have a report back from weekend meetings with President Sarkozy and Chancellor Merkel? No, because our Prime Minister was not at the meetings; he was too busy dealing with a local difficulty. Instead, we have another interview in the Financial Times, and his solution is that eurozone leaders need to get out their “big bazooka”. Their what? He could have called for political backing for the European Central Bank to act as a lender of last resort in return for credible fiscal policies, for a euro area debt guarantee or for a European plan for jobs and growth, but “big bazooka”—what does it mean? Can the Chancellor explain? I made the mistake of looking it up on Google this morning, and I warn hon. Members, “Do not make the same mistake.”
To be fair, and in conclusion, the Prime Minister did call this morning for a five-point plan to deal with the eurozone crisis, although it was not clear from the Chancellor’s statement what those five points are or add up to, but let us hope that, with Britain badly exposed, our growth flatlining, unemployment rising and borrowing set to be higher than planned, when the Chancellor comes back to the House on Wednesday he will agree to back our five-point plan for jobs and growth here in Britain.
I welcome the shadow Chancellor to his place. When I heard that the Labour leadership were clearing out their shadow Treasury Front-Bench team today, I was worried that the Conservative party would lose its greatest electoral asset, but it is great to see him still in his place.
Let me address the right hon. Gentleman’s specific questions. First, he asked about the exposures to eurozone nations. The FSA publishes the appropriate information on that, on the exposures overall to peripheral economies and to other eurozone banks, and it is appropriate that it does so. On RBS, I touched specifically on that issue, because there has been speculation, but let me make it very clear: in our assessment, and in that of the FSA, RBS is well capitalised and liquid.
On the eurozone facility, let me answer the right hon. Gentleman’s specific question. I believe that it should be broad in application, as well as deeper in funds, and undertake as many operations as is required. He talks about meetings, but let me reassure him that I have been to many, many meetings over the past few weeks. There has not been a shortage of meetings; there has been a lack of leadership from eurozone leaders in those meetings. But, that is changing, and that is very welcome.
Frankly, it is absolutely astonishing that a shadow Chancellor, who led his entire party through the Division Lobby in July to vote against the increase in IMF resources initiated at the London summit by the previous Prime Minister, should accuse us of a lack of leadership in the international community. Let us just imagine if that vote had been won—presumably the right hon. Gentleman cast his vote hoping to win the Division—we, alone in the world, I think, would not be ratifying the increase in IMF resources, and I would have to turn up at those meetings and explain, “I am very sorry, but the British House of Commons does not want to use the Bretton Woods institutions to help us with one of the greatest financial crises of the century.” As I say, his lectures on leadership come a little thin, and perhaps he should practise what he preaches.
I end by saying this. We will have our debate on the British economy, but it would be hard to imagine the shadow Chancellor coming back from the Labour conference with his party’s economic credibility even lower than it was before he began the conference season, but there is still no recognition from him that his Government spent too much money, ran up a big budget deficit when times were good and spent more money than they had available—even though that is acknowledged by Tony Blair, who was Prime Minister at the time. The shadow Chancellor still thinks that the answer to a debt crisis is to spend more money. His five-point plan is, of course, a complete abandonment of the plan set out by the last Chancellor of the Exchequer, to which, as I understood it, the Labour party was still in theory committed.
When we listen to the combined speeches of the shadow Chancellor and the Leader of the Opposition, they seem to amount to more regulation and more tax on businesses—indeed, they confirm the Labour party’s reputation as the anti-business party. The shadow Chancellor has managed to get the Labour party into an extraordinary position for an Opposition—of complete irrelevance: irrelevant at home and irrelevant abroad. The leader of the Labour party asked a good question—“Why would you bring Fred Goodwin back to run the banks?” But why on earth would we bring the shadow Chancellor back to run the British economy?
When the Chancellor gave his authority to create another £75 billion of money, what forecast was he given about the impact that that will have in the next couple of years on the price level and therefore on real incomes? So far it has been high inflation that has clobbered real incomes and depressed demand.
As my right hon. Friend will know, in its most recent quarterly bulletin, the Bank of England did an assessment of the impact that the previous round of quantitative easing had had; it thought that that had increased GDP by 1.5% to 2%, but that it had also increased inflation. However, the Bank was very clear that in recommending or requesting further quantitative easing, it was still aiming to hit its inflation target in the required two-year period.
I am glad that the Chancellor now realises that the policy of quantitative easing was, in fact, a good one and did help get our economy growing. Can he tell us how he plans to ensure that the additional £75 billion gets out of the bank vaults and on to the high street? He has mentioned the credit support scheme, on which we have not yet got some details, but I am sure that he would agree that it is important that the money finds its way out into the economy.
On the question of Greece, is there now an acceptance that the present austerity policies being visited on that country are not going to work? Were the reports coming out of the IMF a couple of weeks ago—that there would have to be some sort of write-down of Greek debts—accurate?
Let me deal first with the right hon. Gentleman’s question about quantitative easing. I think there is general recognition that what worked was the
increase in asset prices and also pushing investors up the risk chain. I defer to the right hon. Gentleman’s view on this, but what did not work so well was an increase in bank lending; that did not happen as a result of QE, although the Government at the time hoped that it would. As he knows better than anyone, the Government also created the asset purchase facility with the idea that the Bank of England might purchase some corporate paper; it ended up purchasing only around £1 billion-worth.
I thought that it was sensible, therefore, that alongside the Bank’s action on QE we separately, as a Government accountable to the House, looked at credit easing options, which directly try to address the bank lending issue and enable the Government—again, directly accountable to elected people—to look at a range of assets that one can buy, such as small business loans.
On the question of Greece, I have to be a little careful; I alluded to that in my statement when I said that the advice that we are giving on Greece is private. But our public intent is very clear: the Greek situation has to be resolved. It is very debilitating for the world that at the moment each week goes past and there is another event risk around Greece—the troika turns up, there is a parliamentary vote in Greece. Of course, a lot of the frustration of eurozone members is not so much at the impact of austerity, but at the feeling that they have that the Greeks have not done what they promised to do. But as I say, if the right hon. Gentleman will forgive me, I will continue to give my specific advice on Greece to my eurozone neighbours in private.
I am pleased that my right hon. Friend is taking a robust approach towards our economy, but does he share my concern that the eurozone’s attempt to open up our benefits and pensions pots this September will derail his efforts to make sure that we get money back to the British taxpayer?
I am very clear that the resources we provide to the European Union should be well spent. Indeed, there is a whole separate agenda that we have not touched on today of getting the European Union better focused on trying to encourage growth and competitiveness across the entire continent. Like, I suspect, my hon. Friend, I also share the frustration about the application of European law that means that we have to end up paying benefits to people who are not in this country. That is one of the frustrations that Governments in the past have had to deal with, and we are looking at whether there are potential avenues around it.
It was no doubt an oversight that the Chancellor did not mention the conference at the weekend between President Sarkozy and Angela Merkel where they called for a rapid and global response that had to be in place by the time of the G20 meeting in July. The Prime Minister responded by saying that he did not want to put a single euro into saving the euro after 2013. He said that he did not want the involvement of the investment bank and that all he wanted was participation through the IMF—which, incidentally, I did not vote against earlier in the year. Is this what we call being at the heart of Europe and punching above our weight, or are we moving towards a two-speed Europe?
I did not directly mention the meeting at the weekend between the French President and the German Chancellor, but I alluded to it when I said that there were signs of progress, as the meeting was one of those signs. They have now decided to delay the European Council until the end of next week to give them more time to put together a package, the components of which are becoming clear. The timetable that we first identified of the Cannes summit being the last possible point when we can resolve this is now generally accepted. On the hon. Gentleman’s substantive point about international resources, I commend him for his sensible vote in defying the Whip imposed by the shadow Chancellor.
Let me address this. There certainly were some people on my side, and no doubt some of them may ask me about it today. I am very happy to stand up and explain why I think that is wrong, why Britain has been a founding member of the IMF, and why the international institutions like the IMF and the World Bank are absolutely central in trying to get an international response to economic problems. However, there is a big difference between Back-Bench Members of this House deciding to vote against this issue as a matter of conscience and the shadow Chancellor leading the entire Opposition into an official vote against an IMF package that—let us remember this—was supposed to be the crowning achievement of the last Prime Minister’s premiership. When we look back at the last Prime Minister’s premiership, the one thing we say he got right was the London G20 summit, and then the shadow Chancellor leads his party into the Division Lobby against it. That is pathetic.
Does the Chancellor agree that if your neighbour’s house is on fire, with or without exits, and if it threatens to set yours on fire too, the sensible, constructive and intelligent thing to do is to protect your own house, do your best to help your neighbour to put out the fire, and not start an argument about where the boundary line falls between the two properties—or, as Labour Members suggest, throw away the fire extinguisher?
There are quite a lot of fire analogies there. We are trying to do those things. First, we are trying to protect our own country. Of course, this was an independent decision of the Bank of England, but when it made its decision it explicitly referenced what was happening in the eurozone as the principal reason for doing so. Secondly, we are very actively engaged with the eurozone in trying to find this international solution to its problems. I mentioned all the conversations that have been had just in the past 72 hours or so. There have been a string of international meetings where we have made forceful interventions. We have helped to push the eurozone in the right direction, but there are also people—leaders—in the eurozone who are trying to lead it in the right direction as well. The hon. Gentleman’s point about the rather remarkable vote by Labour Members against the IMF is well made.
the United Kingdom will not be saddled with the financial burden of saving the euro? Will he continue actively to engage with banks to save the financial viability of small and medium-sized enterprises across the UK?
The hon. Gentleman makes a good point about the financial burden. Obviously we bear a burden as an economy that is closely inter-connected with the eurozone, but we took a decision that we wanted to get Britain out of the EU27 mechanism, and we put considerable negotiating effort into doing that. That meant not just the current mechanism, with its €60 billion capacity which had been established—we are still part of that—but ensuring that the permanent bail-out mechanism did not include people who were not in the euro. If the members of the euro want monetary union and want to move towards greater fiscal union, it is not reasonable to ask countries that are not in the euro to be part of one of the key mechanisms of that union, which is a bail-out fund.
The bail-out-and-borrow approach to dealing with the crisis in the eurozone has not worked. We can call it the three R’s —ring-fence, recapitalise, resolution—but it is still bailing out, and bail-out simply begets more bail-out: more public liability to rescue rich men from the folly of their investment decisions. When will my right hon. Friend advocate a new approach, one that works: instead of bail out and borrow, default and decouple?
The first thing I would say to my hon. Friend is that he is right to allude to the debt dynamics in some of the countries involved, and I mentioned that specifically in the case of Greece. The difference between the Greek situation and the Irish situation at the moment shows that countries can take different paths, and with political will they can deal with their problems. However, if the political system is unable to address those problems, the rest of the international community has to step in.
My hon. Friend’s second allusion—the decoupling—is, I guess, a reference to the break-up of the euro. As he knows, I was against Britain joining the euro—I perhaps did not argue the case on quite as many occasions as he did—but as the world stands today, the break-up of the euro would be absolutely calamitous for the British economy, and it is not in our interests to advocate that. It is profoundly in our national interest to try to make monetary union work. Monetary unions can be made to work, but greater fiscal integration and fiscal union are needed, and—this is a crucial additional part—we also need the competitiveness of the other, peripheral European economies to be greatly improved.
The Chancellor has said that the asset purchase facility is the best way to get money into the real economy and stimulate growth. Why is the Bank of England refusing to use the asset purchase facility, when the last Government used it successfully, and instead allowing the money to be channelled through the banks, which keep hold of it for their own security, and not to be sent into the real economy?
I am not sure that the asset purchase facility was the enormous success that the hon. Gentleman implies. It probably did do a good job—again, I defer to
the views of the Chancellor at the time, who would have seen the data closer up. The asset purchase facility helped to stop the collapse in the corporate bond market at the time, but it never led to the big increase in lending that the previous Government hoped it would. The Bank of England did not make use of the £50 billion facility that was made available. Although the facility remains, to date the Bank has made use of only around £1 billion. Instead of revisiting the theology, as it were, of who is responsible and the role of the Bank, my view has been that in order to maintain the proper division of responsibility between the Bank and the Government, who are accountable to Parliament, the Government should undertake credit easing operations with their own balance sheet, and that is what we are working on at the moment.
What was the point of the European Banking Authority conducting two rounds of stress tests that excluded any serious test of banks’ exposure to sovereign debt? Surely it is in the interests of eurozone Governments to have such exposure made more transparent and to start facing up to how to tackle it?
My hon. Friend makes a very good point. We repeatedly argued that the stress tests should be tougher and more credible, but there were strong vested interests that did not want to see that happen and did not want to confront some of the problems in their own banking system. They are now having to confront those problems, however. The fact that Dexia passed the test, and that when it identified a capital shortfall it was in the low billions of euros across the entire European continent—given that tens of billions of euros were required to deal with the Irish problems that occurred around Christmas—demonstrates that those tests were not credible enough. To be fair, I do not think this is an EBA problem; it is more a problem with the membership of the EBA, but the association is now, with our support and encouragement, finally conducting what I think will be a much more credible set of assumptions for the European banking system.
I thank the Chancellor for his statement and for giving me early sight of it. He said that the eurozone countries needed to undertake structural reform and to move towards greater fiscal integration—he later mentioned fiscal union—and that that would form part of a comprehensive package that he had been urging. He has not, however, described what he means by fiscal integration or fiscal union. Would they involve the European Union controlling 2% or 3% of countries’ gross domestic product, or 20% or 30%? Would they involve a counter-cyclical stability mechanism, or an enhanced European stability fund? Would the measures be applied uniformly, irrespective of debt ratios or savings ratios? It is important that we hear publicly what the Chancellor is saying in private, if we are to avoid speculation and confusion over the UK’s position when none need exist.
The debate on how that fiscal union should take shape is just starting in the eurozone, and we can contribute to that debate while ensuring that Britain is not part of it and that Britain’s important national interests are protected in regard to the single
market, competition policy and financial services. Key components of the measures will include some transfer of resources: in effect, the European financial stability fund is becoming a sort of central resourcing fund. The measures will also mean greater surveillance and mutual vetoes and the like over each other’s budget policies. I have raised the issue of eurobonds, as have the Italian Finance Minister and the chair of ECOFIN. I think there will be a number of components. In the end, it has to be, in part, a decision for the eurozone itself to take the lead, provided that our interests are protected.
I cannot help but make the observation that one of the things we are learning about the eurozone is that if we have a single currency, we need much greater co-ordination of economic policy. That is rather contrary to the Scottish National party’s approach, which is to maintain a single currency but to have a dis-integration of fiscal co-ordination.
On the issue of growth, will the Chancellor accept that, last year, our trade deficit with the eurozone went up from minus £4 billion to minus £38 billion in one year alone? Does he recognise that this has a great deal to do with the problem of over-regulation and that we need to repatriate social and employment legislation so as to create growth in small and medium-sized businesses? Will he also face down the Deputy Prime Minister, as the Home Secretary did the other day?
Speaking as a member of the Conservative party, I would make it clear, as the Prime Minister has done, that if a future treaty should arise, as it may well do, we will argue the case for bringing back certain powers to this country. I am sure that we will have a very active debate about what those powers should be—
I am sure the hon. Gentleman can put in his bid for things he would like to see repatriated. Perhaps there would be some trade union powers, so that a Government led by the union man, the leader of the Labour party, could get their way more easily. But we will have that debate in due course; it is not active at the moment in European circles. I suggest that we focus on the immediate issue at hand, which is resolving the eurozone crisis.
In response to Mr Redwood, who is no longer in his place, the Chancellor described the Bank of England’s analysis of the impact on inflation of the last round of quantitative easing. At a time when British people have less and less cash in their pockets, few issues could be more important. [ Interruption. ] [Hon. Members: “It’s Gordon Brown ringing for you!”] Will the Chancellor tell the House, perhaps by telephone, or by e-mail, whether he has requested any analysis from his civil servants in the Treasury of the forecast for the impact on inflation of the current round of QE?
Chancellor, I set out the procedures I would follow if there were a request from the Monetary Policy Committee. I set it out within weeks of coming into office and I said I would follow exactly the procedures set out by my predecessor—that if there were a request, we would accede to it. I also believe that the MPC has come to the right judgment; its judgment was independent, but I believe it was right.
I am afraid I do not have the figures to hand, although I will definitely bring them to our debate on Wednesday. What I do know is that when I arrived in the Treasury, the euro preparations unit still existed, and we had to shut it down. Perhaps it was something that the shadow Chancellor did not get round to in all those years at the Treasury when he was running British economic policy during the golden era.
A number of eurozone members will be condemned to permanent deflation, low growth and high unemployment and will require ongoing fiscal handouts unless and until they can leave the euro. Britain is well placed to advise on such a process. Whatever the Chancellor says publicly, will he be offering that advice privately?
I think that is called a trick question. The hon. Gentleman has been an absolutely consistent and principled opponent of the euro. When I first arrived in the House in 2001, he was making the argument then and he is still making it now, and I respect him for it. As I have said, however, “I told you so” is not an economic policy at the moment. He may well be right about the problems of combining the economies of different countries with totally different structural problems, competitiveness rates and so on, let alone fiscal policies. He is right about all that, but we have to deal with the world as it is, and at a time like this I do not think that advocating the break-up of the euro is in our national interest. We need to make the euro work. Monetary unions can be made to work, but that involves things like fiscal transfers. At last, I think, the eurozone is facing up to that.
May I remind my right hon. Friend of what he said on
My hon. Friend is right to remind us that the G20 summit in Cannes is the last of a string of international meetings that have involved the G7, ECOFIN, which the Treasury Secretary attended, the International
Monetary Fund, G20 Finance Ministers later this week and the European Council next week. It all culminates in the G20 meeting of world leaders at Cannes. That really is the moment when the world needs to be in no doubt that there is a solution to the eurozone problems and that we have the firepower and strength in the banking system to deal with them. If we do not deal with them, the situation will go from bad to even worse. However, as I say, it would not be sensible to advocate to our European colleagues the break-up of the euro. That would greatly diminish what we had to say in these meetings, as it would not be seen as practical—
Well, I also think it would be wrong, as it is not in Britain’s national interest to see the euro break up.
The Chancellor of the Exchequer says that he wants to make the euro work, although he also says that it is the epicentre and the cause of instability in the world economy, and he talks about co-ordination of fiscal policy and cash transfers. Is that not just a euphemism for taking central control away from many of the peripheral democracies in Europe, and does not the loss of democracy in countries many of which were recently fascist pose a greater danger than an orderly break-up of the euro?
The eurozone was also described as the epicentre by the president of the European Central Bank, Jean-Claude Trichet.
The hon. Gentleman is right: we are talking about the exercise of greater control over the finances of other nations by the eurozone authorities, which is one of the reasons we should be very grateful that Britain is not part of those arrangements. The hon. Gentleman mentioned some of the social and political strains that that might lead to. As I have said, those who follow the remorseless logic of monetary union end up with greater fiscal union, which involves all sorts of sovereignty issues for all the countries in the euro; but I must add that I do not recognise the image of the green pastures of a break-up of the euro and what might happen after that event in Greece. I think that political and social tensions could be considerably higher in countries such as Greece if they left the euro, and that such action could bring about the situation to which the hon. Gentleman referred and which none of us want to see.
Order. A great Members are still seeking to catch my eye, and I am keen to accommodate them, but progress so far has been at best leisurely. What is required is brevity, a legendary example of which will now be provided by Mr David Tredinnick.
Is not the fundamental problem with the Greeks that even if a package is agreed, there is no way the Government can implement it, because the tax authorities have themselves said that they are not going to do so? A depreciated or, indeed, a new currency for Greece would give my Hinckley constituents and others some chance of buying cheaper Greek holidays and stimulating the economy.
As I have said, I was always one of those who said that Britain should not join the euro. I worked alongside my right hon. Friend for Richmond
(Yorks) (Mr Hague) when he was Leader of the Opposition, and helped him to write many of the speeches that set out that case. Although the shadow Chancellor keeps talking about the important role that Mr Brown played in all that, I do not recall lots of passionate speeches about why Britain should not join the euro; but no doubt he was doing his work in private.
Let me say this about the Greek situation. If Greece were to leave the euro, there would be a balance of payments crisis. Greece does not have a primary balance, so there would automatically be a need for a huge international programme. The idea that leaving the euro would get it out of needing international assistance, or out of the clutches of the International Monetary Fund, is just fanciful, because it would need such a programme. There would be a balance of payments crisis and there would probably be runaway inflation as well, which would wipe out any competitiveness gains.
I think that we are depicting a nirvana of Greek exit from the euro which does not exist. Greece is in a very difficult position, and it needs to work through its problems.
The private sector is not creating the jobs that the country needs. Will the Chancellor now review his massive cuts in the public sector? Forty-six per cent. of workers in my constituency work in the public sector; what chance have they of employment if there is a double jobs whammy, in both the public and the private sector?
The hon. Gentleman is the shadow Chancellor’s Parliamentary Private Secretary—[Hon. Members: “No, he’s not.”] Oh, he has been promoted! It is a complete clear-out. Well, well. We are very pleased to see that the shadow Chancellor is still in his place.
Let me draw the hon. Gentleman’s attention to what was said by Digby Jones, one of the members of the last Government. [Interruption.] It is funny how Labour Members disown these people. They booed Tony Blair, and now they are attacking their former Trade Minister. Anyway, he said that the Labour leadership was
“displaying poor statesmanship at a time when the country needs leaders, not players to a union gallery”.
He also said that their policies were
“a kick in the teeth for the only sector that generates wealth, that pays the tax and creates the jobs”
in this country. He added:
It is the businesses that will create the jobs in this country, and being the anti-business party will not get Labour anywhere.
Does my right hon. Friend recall the howls of derision from Opposition Members when he warned 18 months ago of the possibility of a Greek-style economic catastrophe engulfing this country’s economy? Now that the threat of contagion has reached even Italy, what is his assessment of the dangers to the UK economy of slowing down implementation of the deficit reduction strategy?
My hon. Friend makes a good point. When we first said, “Look at Greece”, Opposition Members all said, “Well, that couldn’t happen here.” It
then extended to Portugal, then Ireland, then Spain, then Italy, and now questions are being raised about the French banks, which France is seeking address, and a Belgian bank has fallen over this weekend. In the end, we can look at what the credit rating agency who gave us the triple-A rating said last week. It said that the rating would come under downward pressure if
“the coalition Government’s commitment to fiscal consolidation falters”.
There would be an automatic downgrade if we were to follow the Opposition’s approach. That would lead to higher interest rates, hitting families and leading to more repossessions and more job losses. That is the path to ruin, and we know what it is like because we have been down it before under the shadow Chancellor.
The Chancellor of the Exchequer has laid great emphasis this afternoon on credit easing, but he has said he cannot tell us how that will operate until the autumn statement, although it will be an alternative to bank finance. When will small and medium-sized enterprises actually get something from this process?
As I said, we have already extended the loan guarantees that we inherited. We have concluded a deal with all the high street banks—not just the two that were nationalised under our predecessors—to get an increase in SME lending. We want to go further, however, and we will set out the full details in the autumn statement, when the hon. Lady will, no doubt, be present to ask me a question.
Can the Chancellor confirm that Moody’s downgrades of 14 UK banks on Friday reflected the planned and progressive withdrawal of state support for the banking system and a reduction of the likelihood of further taxpayer bail-outs for the UK banks, rather than any weakening of the UK banking system per se?
Yes, I can confirm that. Moody’s was explicit in saying that that was not a reflection of financial conditions in the UK or the financial strength of the Government. Rather, it was a recognition of the fact that the current Government are trying to move away from the taxpayer either implicitly or explicitly standing behind our largest banks. That is sensible policy, and I hope it commands support on the Opposition Benches.
Returning to the eurozone rather than our domestic concerns, I agree with the Chancellor about the difficulty that would arise if Greece were to leave, or be forced out of, the eurozone. Although he will not tell us his policy, will he give us an estimate in respect of the secure fund for the eurozone? It has been said that €2,000 billion would be required for that fund. How great a contribution from the International Monetary Fund and the World Bank is the Chancellor going to argue for in order to bolster the ability of the eurozone to see itself through the crisis and save Greece from being pushed out?
We are not arguing for an increase in IMF resources as part of the Greek programme, but I did make reference to the broader resourcing of the
IMF. That is increasingly an issue because of its flexible credit lines to Poland and Mexico—neither country is in the eurozone, of course. The truth is that after taking into account the IMF’s existing commitments and the buffers it needs to maintain in order to operate as an institution, it does not have a huge amount of resources—although by most people’s standards it does have a huge amount, of course. Its resources amount to about €400 billion, but that is not as large as some people imagine. There is therefore a debate about whether to try to increase the IMF’s resources, but we are not discussing a possible increase of resources in the IMF programme to Greece.
During the 2008 crisis, it turned out that credit default swap spreads were a better indicator of the financial health of a borrower than credit ratings. Over the last 18 months our credit default swap spread has fallen dramatically, and in the last few weeks it has, for the first time, been lower than that of France and Germany. Does the Chancellor have a reason why that might have happened?
I think it is a reflection of the fact that people around the world believe that we have “a credible plan”—those were the words used by the Governor of the Bank of England last week—to repay our debts. Let us remember that we have the largest budget deficit of any forecast for the G20. That is the situation we inherited and we are trying to bring that deficit down. Other countries with much lower deficits have got into trouble because they have not had credible plans, presented by a united Government and implemented with a good majority in their Parliament. We have those things and we are going to keep them.
Many small businesses and manufacturers across the country are still very worried. They have seen growth stall under the Chancellor’s policies and now they see the crisis in the eurozone. Can he explain, simply and clearly, how his policies are going to help stimulate growth and help these companies have the growth that they need, particularly given that many of them are going to lose a lot of business when public procurement contracts come to an end?
The hon. Lady says that public procurement projects are going to come to an end. The British Government are going to be spending £3 trillion over the next four years, so let us make sure that that money is well spent and that good British businesses, small and large, are able to avail themselves of the procurement that will take place under a £3 trillion Government budget. But of course I do not underestimate the difficulty of the situation the world faces at the moment and the situation that Britain faces because of its exposure to the world and to the problems that it itself created in recent years. I understand that, but the whole world is experiencing slow growth at the moment. We have actually grown more this calendar year than the United States and we are currently forecast to grow more next year than France and Germany. That is just a reflection of the fact that our problems are being experienced by other countries but our solutions have kept us out of the financial danger zone, which the shadow Chancellor
asked me about earlier. They have meant that our credit default swap rates, our interest rates and market interest rates, our credit rating and so on have been protected at a time when many other European countries have experienced real market volatility.
I am not against a financial transaction tax in principle; after all, Britain already has one—the stamp duty on shares. What I am against is a European financial transaction tax that operates only on the European continent and is imposed in Europe. If we can get global agreement, with the United States, China and others, on a world financial transaction tax, all well and good, although I do not think that is terribly likely. If we do not have that, all this business currently conducted in the UK would immediately depart to the United States. We saw the same thing happen when Sweden imposed a financial transaction tax—all the business departed to London. I am therefore against a European financial transaction tax, although, as I say, if we can get global agreement, all well and good.
It is deeply uncomfortable to hear Ministers say from the Dispatch Box that they give advice in private but they do not share it with the House. I wish to give the Chancellor another chance by asking him whether he agrees that as Greece is unable to regain its competitiveness—because it cannot devalue—he is therefore in favour of permanent bail-outs. Another term for those is “permanent gifts”, because that country cannot regain competitiveness.
As the hon. Lady knows, these are very market-sensitive issues and I have to be careful, as the UK’s Finance Minister, in what I say about the Greek situation. However, I was pretty clear in my statement in saying that the debt sustainability of Greece had to add up. That is the issue that has to be confronted with Greece in the coming weeks.
My right hon. Friend was right to be concerned in his statement about money finding its way to small and start-up businesses. May I urge him to consider streamlining the current, overly complex enterprise investment scheme and add tax relief to those business angel investors who are making their savings available to small businesses in this country? Such an approach would give a much-needed boost to small business in this country.
As the hon. Gentleman will understand, that has been kept under close surveillance at the Treasury—certainly for as long as I have been Chancellor, and no doubt before. We are well aware of the exposure of UK banks to the eurozone peripherals. However, we have satisfied ourselves that even with those exposures—as I said, the FSA has made much of the information public—banks such as RBS are well capitalised and liquid and do not have the kinds of problems that some banks on the continent have.
It is my belief that the fiscal activism of this Government has created headroom for the next round of quantitative easing. Will the Chancellor tell us what he thinks would have happened if we had carried on spending under the plans of the previous Government and whether there would have been any room at all for a further round of QE?
My hon. Friend is right to call it fiscal activism, because one has to step in and take difficult decisions, which the Opposition have ducked, to get the deficit under control, to have a credible plan and to allow monetary policy greater freedom of manoeuvre. We are monetary activists while being fiscally responsible and that is the right approach. The alternative advocated by the Opposition is a big increase in interest rates—[ Interruption. ] Let me let hon. Members into a little secret. The Chancellor does not set the interest rates. They are set not only by the Bank of England but by the markets and if we abandoned our plan and suffered the credit downgrade that the shadow Chancellor is, in effect, advocating, interest rates would go up, families would face higher mortgage bills, people would lose their homes, businesses would go bust and jobs would be lost. That is not a path we will go down.
May I refer the Chancellor to Hansard from
Does my right hon. Friend take comfort in the result of the German Parliament’s vote at the end of last month, when it effectively created a fund with conditions? Does he see that as a generation of political support for the robust action that the Prime Minister has been talking about over the past few days?
The vote in the Bundestag was very encouraging. Of course, it is easier for us in the House of Commons to say that the Germans must act and that we must create this fund, but we must understand that German taxpayers are being asked an awful lot—although I would say that that was one of the consequences of a single currency. Nevertheless, it is reassuring that the vote in the Bundestag was passed not merely with a straightforward majority but with the so-called Chancellor’s majority.
I very much welcome the action my right hon. Friend has announced about quantitative easing and credit easing. Will he say whether he thinks it would be helpful for the UK economy if our European partners were to adopt the same policy, given that 40% of our exports go to Europe?
For five centuries, British policy has been to oppose any hegemon on Europe, whether a single religion, a single state, a single economic model or a single ideology. Why is the Chancellor so keen on creating a fiscal and monetary union that would dictate terms of commerce, trade and banking rules to this country?
That was quite a sweep of history. Of course, Britain has always sought to maintain the balance of power in Europe and one could argue that the enlargement policy was quite a successful extension of that policy, but the decision has already been taken with the monetary union and we have to make it work because we would be directly impacted by its failure.
Is not the euro like the parrot in the Monty Python sketch—dead, extinguished, without life—and is not the German Chancellor like the shopkeeper in saying that it is actually healthy and that we really must buy it? Should not the Chancellor be like John Cleese and say, “This is dead and we should bury it”?
Although the Chancellor is completely focused on the eurozone crisis, I am sure that it will not have slipped his notice that meanwhile the European Commission and the European Parliament are asking for more regulation and more money. Could he please instruct his officials to ensure that, whilst negotiations on these very important matters regarding the eurozone are going on, we kill some of the bad ideas that are flowing from elsewhere in Europe?
We are also arguing strongly for a real freeze in the budget and—I alluded to this earlier—a change in the direction of European policy making so that we do not price this entire continent, including ourselves, out of the world market.
With instability in the eurozone and fever in the markets, any Government who contemplated changing three of their five Treasury Ministers would be sending a very dangerous signal. Does my right hon. Friend have any advice for any wannabe political leaders when they choose to sack half of their Treasury Bench?
There is greater recognition in other European member states that we need to make the European continent more competitive, and the pamphlet that we sponsored on making Europe more competitive, which the Prime Minister presented at the European Council, was endorsed by a number of other member states.
International media, particularly in the USA, are beginning to say that it is a matter of when, not if, Greece defaults on her sovereign debt and leaves the euro. If “I told you so” is not the basis of a good economic policy, what credible and mature plans do we have to deal with the Greek default?
Of course, we make contingencies for all possible outcomes—and people should not take that either way because we plan for all situations. I do not want to comment specifically on the issue that my hon. Friend raises about Greece, but I have made it very clear that the situation in Greece needs to be resolved. It needs to come to a decision and stick to it, and it needs to get the debt dynamics in that country right.
Given the close correlation between my right hon. Friend’s disciplined approach to spending, the ratings of our sovereign debt and the low interest rates from which our constituents benefit, has the Treasury been able to calculate the likely impact on our interest rates of the shadow Chancellor’s higher spending policies so that we can calculate the true cost on the average family’s mortgage of the widely discredited plan B that he advocates?
We have not done that calculation, but my hon. Friend has given me a very good idea for Wednesday’s debate. We know, because we have all experienced it, what Labour policies lead to: a completely uncontrollable budget deficit; a negative outlook for our nation’s credit rating; and interest rates that were tracking Spain’s. We have been there under the Labour party, and it is remarkable that when it cleared out the shadow Treasury team, it did not clear out the man most responsible in this Parliament for getting Britain into this economic mess.
In his statement, the Chancellor quoted the sage remarks of the former Minister, Lord Jones. Perhaps it is the Chancellor’s modesty that prevented him from quoting these remarks that Lord Jones made about the fact that we are sticking with plan A:
“The markets of the world will say, ‘well done George’. That will mean that interest rates are low”,
that we keep our triple A rating, and that we do not become Greece.
Deficit reduction has kept us ahead of the curve, so our triple A rating has been maintained and interest rates are lower than they otherwise would be. Is it the same with quantitative easing, that it will keep us ahead of the curve if the eurozone does not make the right decisions in the next three or four weeks?
As I said, it was an independent decision of the Bank of England. In the explanation that the Governor gave of why the Bank took the decision, he explicitly referred to the situation regarding the euro. I agree with that decision. Work done by the Bank of England suggests that the method can work.
Following the bail-out of Dexia, does my right hon. Friend consider that there is an increased risk of the credit rating of other eurozone countries, particularly Belgium, being downgraded?
Of course, a number of eurozone countries have seen their credit rating suffer, and have seen it downgraded. That has impacted on the cost of borrowing for their Government and their citizens. That is one of the reasons why it is so important that we maintain a credible fiscal policy—something to which the Governor of the Bank alluded last week, and to which all business organisations have alluded. As far as I can see, only the shadow Chancellor now opposes that.