rose to call attention to current trends and developments in the euro; and to move for Papers.
My Lords, I am moving this Motion on behalf of my noble friend Lord Dykes, and at his request.
My noble friend's Motion calls attention to current trends and developments in the euro. He is, unfortunately, not well, but was most anxious yesterday when it became clear that he could not be here that, as a number of noble Lords had prepared for this debate, it should go ahead. I very much welcome the fact that the noble Baroness, Lady McDonagh, has chosen to make her maiden speech and we all much look forward to hearing her.
I shall confine my remarks to setting out a number of issues which come within the scope of this Motion. My noble friend Lord Taverne will, I am sure, be able to treat them more fully when he replies from these Benches. Whatever one's view about British membership of the euro-zone, and I should make it clear at the outset that it is my ambition to see the United Kingdom become a member of the euro-zone, there must be few who would see it as an issue of the near future—although I shall return to that in my concluding remarks.
Therefore, our debate today will, I suspect, turn on current trends and developments within the existing euro-zone and, perhaps, the growing role of the euro as a global currency. Inevitably, that will involve the reactions on the currency markets to the recent referendums and the evolution of the stability and growth pact, particularly as it was amended at the European Council in March this year. The debate will also, no doubt, touch on the issue of the durability of the monetary union, which is a situation that some commentators have raised since the referendums in France and the Netherlands.
Public discussion during the referendum campaign in the Netherlands and since, in the analysis of the votes, has suggested that the unpopularity of the euro was a factor in the "No" vote. This seems to have turned on the feeling that the Netherlands had gone into the monetary union at the wrong rate and that particularly the larger member states had not taken the fiscal disciplines of the stability and growth pact seriously and that that had led to a modification of the stability and growth pact to their advantage. That behaviour of their larger neighbours was much resented in Holland and clearly influenced votes in that referendum.
On the other hand, the euro does not appear to have played such a significant part in the French referendum, apart from, as in Italy, criticisms of its perceived inflationary impact. There seems to be a universal problem about the perceptions of euro-generated inflation, which, on the whole, seem to conflict with the reports and analyses produced by the national statistical administrations. Perhaps the noble Lord, Lord Peston, may say whether he knows of any reason why there should be such a difference between perceptions and the analysis on this critical topic.
One outcome of the referendums, if they lead to the end of the constitutional treaty, is that the euro-group, the euro-zone's finance Ministers, will not be granted official status. Under the existing European law, although they meet, they can only do so in an informal capacity. The adoption of the constitutional treaty would have given them more authority to co-ordinate fiscal policy and might also have made their relationship with the European Central Bank clearer.
Turning to the current state of the euro-zone, in recent weeks there has been a great deal of pessimistic analysis. I found the short analysis in the recent OECD Economic Outlook, published about a month ago, one of the more objective pieces of analysis on this subject. It is a useful starting place. It recognises that over the euro-zone as a whole—there are exceptions, of which Ireland is the best known, but Spain has also been having a significantly higher rate of economic growth—economic recovery has lost momentum since mid-2004 but it will probably resume in 2006. Economic growth, even when it was doing relatively well, was at 2 per cent across the euro-zone; it is expected to fall this year to 1.25 per cent before recovering to reach 2 per cent next year. The OECD goes on to say that this has led not merely to a negative output gap but, more seriously, unemployment across the euro-zone is more than 8.5 per cent. That is not a happy situation.
In its policy prescriptions for the euro-zone, the OECD says that there is room to ease monetary policy. That has been picked up in the press. Some easing of the exchange rate towards the end of this year is now anticipated. More importantly, the OECD reported on the need to work on structural policies which should aim at completing the European internal market, boost labour market performance and encourage innovation. Those sound rather like some of the objectives of the British presidency of the European Union. Finally, the OECD recommends that the euro-zone's fiscal policy should be rooted in long-term sustainability.
The durability of the monetary union has featured in a good deal of recent discussion. I do not intend to spend very much time on the Italian debate, except to say that it is restricted to one political party; I have been unable to find support from any Italian economist or banker. However, after recent events it would be rash to predict how a referendum on this topic would go in Italy. I share the view of the chief economist of the European Central Bank, Otmar Issing, who suggests that members who want to leave the euro-zone would be committing economic suicide. I was interested to see the recent remark of the very distinguished Nobel prize winner, Robert Mundell, who did a lot of the classical work which pre-dated the euro-zone. He said:
"There is less chance that EMU will be disbanded than there is of a collapse of the dollar".
On second thoughts, I was not quite sure that that was too reassuring a remark.
The certainty of EMU's long-term survival is being questioned. That is in part because some of those who support EMU and its project of monetary union, as well as a number of its opponents, have long believed that there is an essential connection between a monetary union and a political union, and that it is impossible to have one without the other. The apparent failure of the constitutional treaty is taken by some as the end of progress to a political union and as a very serious warning for monetary union.
Noble Lords will know the historical precedents and examples quoted from the nineteenth century to this century of monetary unions which have not continued in the absence of political union. However, although some advocates of political union have prayed this argument in aid, the alternative argument, maintained from the time of the Maastricht Treaty, is that the mechanism set out in that treaty, particularly the stability and growth pact, means that there is no need for a political union to guarantee monetary union as long as three conditions prevail—fiscal discipline among the members of the union; Central Bank independence; and a reasonable degree of product and labour market flexibility.
The problem that now leads to the discussion returning is that while no one would question the independence of the Central Bank, the other two conditions are by no means so clear cut. Even in the softer version, the stability and growth pact agreed by the European Council last March is still not providing fiscal discipline. The Commission has forecast that five of the 12 euro-zone members will breach the 3 per cent deficit to GDP ratio this year. I have not been able, at relatively short notice, to carry out a complete analysis, but I am told that there is very little sign that the larger member states have been in any way influenced in their behaviour by the fiscal rules set out in the stability and growth pact. That is somewhat ironic, given that some of them insisted on such a pact.
Similarly, we know the difficulties that several of the larger members of the euro-zone have had in implementing economic reform, particularly in relation to the rigidities of their labour markets. Lack of progress in this area is sometimes obfuscated by ill defined references to a European social model. While much of the discussion on this concentrates on France, Germany and particularly Italy, we should not overlook the fact that Portugal and Greece, which receive a great deal less attention, are running the highest government budget deficits in the euro-zone.
This situation does not lead to the inevitable demise of the project, but it suggests that both an acceptance of fiscal discipline by the members of the euro-zone and of the structural reforms referred to in the OECD Economic Outlook are required. At least in one respect, the policies for economic reform and a new attention to the Lisbon goals, which are closely related and were referred to in last night's speech by the Chancellor of the Exchequer and this morning's speech by the Prime Minister, suggest that the British presidency is aiming to take the whole of the European Union and, therefore, necessarily the members of the euro-zone, in the direction in which they need to go. I am not sure it was always realised what good friends the euro-zone had. The eternal optimist in me suggests that that might also bring forward the date of British entry into the euro-zone. I beg to move for Papers.
My Lords, I thank the noble Lord, Lord Roper, for that excellent introduction to the debate. I send our very best wishes to the noble Lord, Lord Dykes, who I know will very much regret not being here today. I, too, look forward to the maiden speech of my noble friend Lady McDonagh.
I shall confine my remarks more to the British view of what is happening about our attitude towards the euro. I start with a story of small change in Britain today. My wife and I recently visited the Blackburn Museum and Art Gallery, where we found the Robert Edward Hart collection of ancient coins. The first part was devoted to the history of British coins—the chequered past, leading eventually to the pound from the groat, the mark and other variations—to that imperfect single currency we still have in the United Kingdom. In England, we still refuse to accept Scottish or Northern Irish notes—the ones that do not have the Queen's head on them.
The second part of Hart's collection was devoted to Roman and foreign coins. The Roman coins represented a single currency throughout the then Europe; it was very successful throughout Europe and in Britain.
My wife and I then passed out of the Blackburn Art Gallery and went to have a cup of tea at the coffee shop outside. By mistake, I gave some small change, in euros, to the waitress. She pointed this out to me and I forked out the pennies that were needed, but the owner of the café came up to me and said, "Don't worry about that at all. I'm very familiar with euros. Indeed, I have a euro account". He said that he was a familiar visitor to the Continent and found it advisable to keep euros.
I give this example of "small change" in British life because it is important to draw some parallels between the Roman Empire and now. The Roman Empire needed a single currency to facilitate the business of being a Roman road-builder; the business of being a centurion or a foot-soldier; or the business of being a wine merchant or a corn contractor. And so in modern Europe's single market, it is the euro which facilitates the business of being an entrepreneur; the business of being a small businessperson; the business of being a student; the business of being a tourist or a financier or, indeed, a construction engineer. We fail to say and repeat that the main task of a single currency is to reinforce the single European market. It is that which leads us to the wealth of nations about which Adam Smith would have been so pleased.
But the small change in Britain is happening. If you go to the British Museum today, where there is another magnificent coin collection, you are asked at the door to contribute $5, €5 or £3. The wealth of nations is coming into the British Museum. If you go outside to communicate with a friend on the other side of the European Union, you can now do so in the euro-friendly telephone kiosks. This is another "small change" in British history.
But it is not all small change. I have been interested to read that "the tectonic plates are beginning to move", which is a favourite phrase of the Deputy Leader in another place. I learn, for instance, that Barclays's 700 branches—doubtlessly one of them is in Blackburn—now lend in euros, especially to people who are buying in the main holiday and retirement areas in southern Europe. This change has been brought about by the low-cost airlines, which too have been fostered by the single European market—another success. Barclays lends in euros, whether or not you have an income expressed in euros. Susan Clay, the European business director of Barclays, says that £57 billion of equity was taken out of the UK property market in 2003, most of which was tied up in homes in southern Europe. That is no wonder with a mortgage repayment rate of around 3.4 per cent.
The noble Lord, Lord Roper, is right that joining the euro is not necessarily on the agenda for the United Kingdom today. I have not checked whether the Chancellor reiterated his five reasons for saying "no in thunder" in his Mansion House speech last night. I will do so later today. Nevertheless, the United Kingdom must be ready for the task of preparing for a time when the euro will be embraced in this country. Is the Treasury still actively preparing the reports, industry by industry, to make sure that we will be ready should that call come and the ensuing referendum results in a "Yes" vote? I ask the Minister whether we are making the proper preparations for the tourism, leisure and travel industries in particular.
I reiterate that the tectonic plates are moving. Will the Minister discuss the creation of the new G4, which threatens to replace the G7 and the G8, of which our own Prime Minister is shortly to take up the reins? The G4 comprises the four countries of principal currency unions – the dollar, the yen, the euro-zone and the renminbi. Indeed, in my discussions this week with the Chinese officials from the People's Republic, they told me that the G4 is beginning to operate. It is not surprising that the leaders of its currency unions, who want to speak to each other authoritatively, are now meeting to discuss these important issues. It will be a shame if the United Kingdom is excluded from this conversation.
In our debate in this country, we must avoid the kind of debilitating Euroscepticism which has punctuated the debate too often in this House. From the moment when the euro and the single currency were first conceived, those gainsayers and "painsayers" have always said that the United Kingdom should not be interested in what is happening in the European Union and our euro-zone border. They have always portrayed Europe in one way or another as a basket case. It is interesting that whenever the euro and its predecessors have moved one way or the other against the dollar, it was somehow always the euro that was depreciating out of control; it was never the dollar. There was never a proper analysis of some of the difficulties that the dollar experiences.
We must reject the association of the single currency with failure. The recent "No" votes by the Dutch and the French should not lead us to equate the difficulties surrounding the constitution with those of the euro. The euro is strong and continues to be strong.
I draw noble Lords' attention to a very interesting confirmation of what I have just said. Is the euro in its last throes? According to that noted Eurosceptic, Roger Bootle, apparently it is not. In February, he wrote an article entitled, "Should The Euro Be The Reserve Currency?" which is a matter to which the noble Lord, Lord Roper, has already turned. Mr Bootle pointed out that there was a rumour that South Korea's central bank might consider taking euros to denominate some of its reserves. He wrote:
"Euro financial markets are broad and deep, the currency is fully convertible, the financial system and its institutions are well-known and trusted and the euro-zone is politically stable (at least for now). Moreover, the euro-zone is about the same size as the US in the world economy and just as important in world trade".
That seems to me to be a confirmation that the euro is here to stay.
Indeed, we must not say that the current crisis in Europe is a currency crisis, but we should look at what has been reduced to a contest between this country and France. A new and different vision of Europe has been articulated today by the Prime Minister in the European Parliament. Surely the Prime Minister is right to lay emphasis on the Lisbon agenda and on the importance of Europe spending money on research and development, education and training, and less on the CAP. We in this Chamber and in the polity in Britain really ought to have a common view that it is the Lisbon agenda and the single market that produce the wealth of nations, and that the single currency reinforces that single market.
Before I finish, there is one other area that I would like to tackle—the European Central Bank. When, 10 years ago, I was a Member of the European Parliament and sat on its monetary sub-committee, we had the task of interviewing and talking to the proposed central bank people, including Mr Lamfalusi, when he was appointed as the head of the European Monetary Institute, as well as Mr Duesenberg and Mr Trichet. We were always at pains to remind them that while price stability was the main objective of the future European Central Bank, there was latitude in the Maastricht Treaty, which said that provided that price stability was ensured, interest rates could be used to facilitate and improve the workings of the single market and to encourage and stimulate investment.
I am not sure that that message has always been understood—although it has been well understood in the American Federal Reserve, whose statute says that price stability and recognition of employment conditions are part and parcel of what it needs to do. What we have done in this country with the MPC may be a very helpful model for the future. But we understood that the European Central Bank needed to establish price stability to get the kind of encomium that it got from Roger Bootle, which I read out.
I conclude by saying that this is a hugely important issue, which may currently be on the back burner but which will return increasingly as small change accelerates into greater change in this country, with the advent of the euro not only as a reserve currency but as one that is used in the streets of this country. It may not be everyone's cup of tea, but in the end we will drink it.
My Lords, this debate is the third this week on Europe, and there is a seamless thread that connects them all. It is greatly to our advantage that we are discussing Europe to the extent that we have devoted ourselves to doing this week, and in a spirit which on the whole has reflected well on this House. It certainly contrasts with the nature of the discussions that took place on the Continent. It seemed to me that the Council meetings on the budget were a classic example of open disagreement openly arrived at, with on the whole a fair degree of ill will all round. I cannot say that that disposes me to believe that these supranational organisations are necessarily the best ways in which to promote fraternity among the nations of Europe. But doubtless we shall see how all these matters proceed.
I was particularly impressed—I say deferentially—by the remarks made the other day by my noble friend Lord Lawson of Blaby. His tour d'horizon of the European situation was masterly and highly realistic. If I had to take a quote for my mini-sermon today, it would be his remark that,
"the pause needs to be prolonged and the reflection profound".—[Hansard, 21/6/05; col. 1550.]
It is one of the most difficult things for a politician to do nothing—to engage in masterly lethargy—yet in some ways that is a tempting prospect for the Prime Minister. But doubtless he feels under an imperative to use his term as president to bring to the European scene panache, vigour, intellectual conviction and all the other terrifying components of public life. It is almost as if he had been attending evening classes at the Chicago school of economics, because he has come with a programme which is really quite daunting in what it purports to do with regard to European public spending and spending on the common agricultural policy—in terms not merely of single payments but in what we spend on the environmental activities of agriculture and animal welfare.
All that, ironically, has happened on the very day that the Commission produced its proposals for sugar, which is supposed to be part of the enhancing relationship between us and the third world, only to have it condemned by Oxfam as being unfair to the Caribbean and African sugar producers. But I leave that as part of the footnotes about which we will argue in the coming time.
However, I wish my Prime Minister every success—I do not like seeing him being savaged by the wrath of Luxembourg. This country deserves to be treated with proper respect and regard. But a period of inactivity would be just as well as a period of activity that could be seen only as us presenting our market view of Europe against the social programme of the French. I take no part in adjudicating which is the superior; all I say is that each country can make its own judgment, having regard to its own national character and heritage. When I hear the noble Lord, Lord Harrison, refer generously to Adam Smith, I realise that there is a bond that unites us that is quite independent of our own politics.
The period of presidency is limited to six months, and—perhaps understandably—the Prime Minister comes to it with the excitement almost of a born-again John Kennedy, and his 100 days of vigorous action. I hope that we survive it without too much damage, and that perhaps he will be able to secure certain reforms and directions. But the reform that I would most welcome is to concentrate on how we could disaggregate the European partnership so that more and more it related to national decisions, reacting to national circumstances and national inheritance, and less and less trying to put on us a continental imprint.
I do not regard that opinion as in any sense reactionary—or, dare I use the word, Euro-sceptic, which is now treated like an outbreak of smallpox. As was argued on Tuesday—not by noble Lords from a Euro-sceptic viewpoint, but from the point of view of Members of this House who have established great European reputations—it is a matter of taking the Lisbon agenda as being more appropriate for the national decision processes, rather than being elevated into an aspect of European policy.
I turn to the very item of today's discussions. I must say how much I appreciate the fact that the Liberal Party has chosen this as a topic, as it rounds off our Euro week. I am very sorry that the noble Lord, Lord Dykes, could not be here to deliver his speech, because I believe that I could truthfully say that of all the Members sitting on the Liberal Benches, he is the one most committed to the concept of a European currency, with all the rigours and fixed rates that that implies. But I welcomed the scholarly analysis made by the noble Lord, Lord Roper.
I shall make three fairly simple points about the currency arrangements and the euro, not from the point of view of someone drawing on economic prejudices but from that of a street politician. The first point is that the euro-zone has very considerable difficulties; I do not believe that one is being unduly partisan to observe that. Those difficulties are represented by the way in which the stabilisation pact must be redrawn and is argued about and disregarded. I am reminded powerfully of an article written not that long ago by the noble Lord, Lord Rees-Mogg, in which he said that, at the end of the day, whatever may be the formal banking constraints, domestic politics will triumph—and domestic politics is showing a pretty good sense of durability.
Whatever will be the success of the euro-zone at the end of the day will depend upon the success of the national governments who comprise the euro-zone in conducting their public spending, borrowing, taxation and the like in a way that is responsible and that is consistent with what are the assumed objectives of policy, and upon their not retreating into rhetoric as an alternative to action. I say that in no sense of hostility to the euro-zone. However, I am puzzled by the whole formula of the stabilisation pact, particularly when my noble and learned friend Lord Howe said in Tuesday's debate:
"Nor . . . is the Stability and Growth Pact an agenda for the Union, because it simply spells out the implications of economic sanity, which the markets will in the end enforce come what may".—[Hansard, 21/6/05; col. 1559.]
I must say if that were a really compelling analysis of the situation—I find it rather elliptical—I wonder what the governments in all these countries are doing if it is all going to happen anyway and they have only to sit on their hands, or perhaps because of their inability to sit on their hands these difficulties are now arising. All I can say is that I have no hostility to the euro-zone.
However, that takes me to my second point which is that I have no desire to see this country within the euro-zone. We have now had a period of experience. Like Abbé Sieyès, we may say at the end of it, "J'ai vecu". We have survived. Here we are. We have our sterling. We are running our own policy, which is controversial. I happen to think that there is an overemphasis on government borrowing, certainly when it is coupled with high levels of private borrowing. None the less we have a formula that has enabled the establishment of a relationship between the Bank of England and the politician. I believe that is enviable. We have been immensely well served by the noble Lord, Lord George, and, currently, by Mervyn King. I admire the way in which the Chancellor has been able to use the relationship in a way that stands us in good stead. I am not sure whether that will always be the case. It will possibly be undermined by unwise political decisions. That is for the future. Here and now I see absolutely no reason to surrender an institution which, so far as I can see, affects beneficially the conduct of policy. When I hear talk of linking together all these things to promote the establishment of a master European currency, which by its very existence will bring about greater prosperity, I believe that we have lost the powers of analysis to the powers of an almost religious assertion.
That brings me to my final point; that is, the vogue for having a single currency is closely related to the idea that a European Union must have a single market. It may have an aspiration to a single market but the pursuit of a single market is leading us into an immense web of bureaucracy, complexity and disillusion. The very aspiration is so gargantuan that it should cause us to check and to reflect on whether that is proceeding in the right direction, and above all, proceeding in the right direction when we are looking forward to the day when Turkey and the Ukraine will be in the wider Europe. All this leads me to think that what we need is a recrudescence of—I recall this cheerfully—the days when Harold Wilson as a domestic trade Minister said that he wanted a bonfire of controls. What we need is to look at the acquis. The acquis is so immense that War and Peace looks like a pocket dictionary compared with it.
There is an overwhelming desire to go back to first principles and to say that we accept movement and flexibility as regards currency but because we disavow the desire to have one single fixed currency we are relieved of some of the more absurd ambitions of the single market. Unless and until we do that, we shall always be struggling in the difficulty in which there is an appalling gap between private instinct and views and public policy. That gap can exist perhaps for decades but sooner or later it will all end in tears.
My Lords, I welcome the opportunity to speak for the first time in the House. I understand that it is customary in one's maiden speech to say how warm and welcoming the House is. However, I think I took that reputation a little too literally. Soon after I was introduced I entered the Chamber on my second day and cast around for somewhere to sit. I saw no one on the Labour Benches who I recognised. Sensing my rising panic, the right reverend Prelates on the Bishops' Benches smiled at me with encouragement. I mistook that for an invitation to sit with them. No sooner had I sat down than they all rose to their feet with a speed of which I did not think them capable.
Clearly, the Church of England in recent years has undergone much modernisation, but I think that a woman Bishop, certainly of the Catholic variety, was a step too far. However, I am sure all noble Lords will want to join me in congratulating them on the recent appointment of John Sentamu as the new Archbishop of York. We wish him well in his mission.
It is a great honour for me to serve in this House. For nearly all my adult life I have worked at the other end of politics, trying to make the Labour Party electable and then to get it elected. My ambition went no further than wanting to see Labour win and then be re-elected for a second term. I cannot tell noble Lords how pleased I am that that narrow ambition has now been surpassed.
Before I entered this House I was General Secretary of the Labour Party. Now that I have arrived in this House I am pleased to see that I am not alone. Indeed, with the noble Lords, Lord Whitty, Lord Sawyer and Lord Triesman, on these same Benches, I am somewhat concerned that now that we have replaced hereditary peerages, ex-general secretaries of the Labour Party now form the largest grouping.
I am also pleased that my sister is here today to witness my first speech. She comes from another place. I should like to tell noble Lords that that is something our parents have known all along. It was a great thrill for me to see her first elected in 1997 and then re-elected in 2001 and 2005. I was recently told that this is the first time that two sisters have sat in each House respectively. We both believe that this has nothing to do with our talents but has a great deal to do with the progressive policies of the Labour Party in increasing the number of women representatives. We consider that that has enhanced public policy making in recent years.
As noble Lords will know by now, I am very proud of the Labour Party—a party I joined while still at school—and of what the Labour Government have achieved in the past eight years: economic efficiency coupled with social justice. I am sure that noble Lords on all sides of the House agree that economic stability, low inflation, low interest rates, decreasing unemployment and rising standards in schools are all great achievements. However, one common theme in all these achievements is that they match the concerns of those we seek to serve. What we discuss in these Houses is what the public discuss at home. Unfortunately, that cannot be said for our European institutions. They seem to be unresponsive to public opinion and to speak a language that is not understood by the public in any of the member states.
I am proud to call myself a European; the vision of the EU is one with which I strongly agree. We all understand that with globalisation we rely on one another more than at any time in our history. But before you can begin to rely on any individual organisation or institution, you must be able to trust them and to have confidence in them. To make the decision about whether we can do that, we all have shortcuts. We ask ourselves—how will they react at times of crises? Do they run from difficult decisions? Will they reform and modernise if required? The public, not just in our country but recently also in France and the Netherlands, have come to the conclusion that the EU is not ready to take difficult decisions. Its failure to find a permanent European Parliament in one city is just one decision that it has failed to make. Consequently, trust in the euro and in Europe in general is now at a low ebb. Those are the symptoms, not the cause of the problem. For example, the problem of high unemployment in many member states is not the euro, but it is failure to reform.
The euro was introduced at a time and in economic circumstances that were not appropriate for Britain. That is why we chose not to enter in the first phase. I believe that was the right decision by the Government, and I also believe that the tests of when and whether we join the euro are right. I know that they will be applied rigorously by the Government. That is the minimum of what is expected of us by hardworking families, whose lives we know we can hurt if we make the wrong decision. As Pope Pius XI said:
"Economic power is headstrong and vehement, and if it is to prove beneficial to mankind it must be securely curbed and regulated with prudence".
I thank noble Lords for this opportunity to speak, and I look forward to participating in future debates.
My Lords, it is a great pleasure to have the opportunity to congratulate the noble Baroness, Lady McDonagh, on a distinguished maiden speech. She was careful in managing to avoid undue controversy. She quite properly paid tribute to her past work for the Labour Party, which has been a devotion of her life. She is one of a distinguished group of former general secretaries of the Labour Party. I felt almost that rising immediately after her I ought to have held that post myself.
The noble Baroness also had a distinguished career in Fleet Street, and there perhaps I feel rather closer to her. I notice that the lawyers in this House often hang together, and I think that the newspaper people ought to hang together as well. At any rate, we look forward very much to more speeches from her.
This has been an interesting and excellent debate. I join all other noble Lords who have expressed their regret that the noble Lord, Lord Dykes, was not able to be present. I wish that he will get well as soon as possible. I thank the noble Lord, Lord Roper, for taking his place and for putting a moderate and balanced case, from the point of view of the Liberal Democrats, on how they see the euro in its present stage.
The noble Lord was right to concentrate a part of his speech on what seems to me to be the real intellectual question behind this debate. That question is whether in fact it is possible to have a single currency, and make that single currency work over time, unless you have a single government. Certainly the dollar, which is a currency that despite considerable vicissitudes has lasted well over a couple of hundred years, has been dependent on the strength of the federal government and on the strength of the Federal Reserve board for the stability that has on the whole been maintained. The United Kingdom has had a single currency over the whole of the United Kingdom, which has been dependent on government action and action by the Bank of England that have enabled it to be successful.
It is rather harder to find in the history of currencies single currencies that have lasted for more than a generation or so—a generation is not terribly long in the history of a currency—without having that basic backing of a single government. It is certainly apparent now that the resistance in Europe as we saw in the referendums in France and the Netherlands to the development of a single European government are much greater than they were. We are not, as many people on both sides of the argument thought, moving inevitably towards a united states of Europe. I do not think that project is dead or killed; there are still important forces in Europe that would like to move in that direction, but the inevitability has gone.
That seems to be the central question that must be faced; all the more because of the apparent breakdown of the stability and growth pact. It really is very serious that the condition that was put in to protect the euro—the single currency—against the mismanagement of their own finances by the individual governments of the euro-zone has not been honoured by two or three of the largest and most important governments of the euro-zone. There is a real danger that the rising budget deficits of several euro-zone countries will cause serious financial problems and a decline in confidence in the currency. That is obviously a negative point.
Perhaps we need most to examine the case of Italy. Italy has a long record of running its financial affairs so as to incur as a consequence of over-expenditure—too large deficits—a succession of devaluations. That is really the currency history of Italy throughout the late 19th century and certainly the whole of the 20th century. They took the opportunity when Britain left the exchange rate mechanism to have another, and so far final, devaluation of the lira. Italy does not have that sort of stoic fortitude that enables some countries, including particularly Germany, to maintain a really strong currency over at least a generation or two.
The figures for the deterioration of the bilateral economic relationship between Germany and Italy in the past 10 years are really quite astonishing. The Germans, with immense self-discipline, have managed to reduce the unit cost of labour by slightly over 1 per cent over the past 10 years. They have had absolute stability, with a slight trend downwards.
Italy's unit labour cost figures have risen by 38.7 per cent in the same 10 years. That means that there has been a deterioration of no less than 40 per cent in the bilateral trading relationship in terms of labour costs between Italy and Germany since 1995, which is the relevant period. In theory, Italy could put that right by squeezing its own economy, having a major deflation and forcing prices and costs down. However, that is not at all likely. Italy has no tradition of doing that; its tradition is one of devaluation. It already has unemployment at about 11 per cent.
However, the rise of Italian costs inside what is essentially, although not totally, a fixed currency rather than a floating currency has produced a crisis in, for instance, Italian textile exports, which are not competitive with those of Asia. It has produced another crisis in Fiat, Italy's largest automobile company. General Motors paid $1 billion not to be required to carry out its obligation under contract to buy Fiat, which means that, from the point of view of General Motors, Fiat was worth minus $1 billion to avoid taking on that responsibility. In May, Fiat sales were down no less than 23 per cent on sales in May the previous year.
In that situation, it is not surprising that a government who have done extremely badly in the regional elections because of basic resentment about the country's economy should have at least one of its coalition partners advocate a withdrawal from the euro and a return to the lira. No doubt that would be followed by one of the lira devaluations with which we used to be so familiar.
Italy's problem is that it needs a major economic adjustment. In the old days, it used to make such economic adjustments through adjusting the currency downwards. Desirably or undesirably, that is how it did it. The only other way to do it is to squeeze the economy. Italy does not have the political consent of its own people to squeeze its economy in that way and push unemployment up further. It would lead to the government being inevitably expelled from office.
Italy has been caught by what the critics of the single European currency always said was the problem—that you could have a major European nation inside the euro in circumstances in which it needed to make a major adjustment to its economy, and where that adjustment naturally meant a devaluation and devaluation was impossible, but that the people were prepared neither to put up with the suffering required to make the adjustment nor politically to continue with the situation in which they found themselves.
A considerable number of further difficulties arise. One is the Italian bond market, and the way in which it is possible to speculate against the continued existence of the euro not in the currency itself, but in the Eurobonds issued by different countries. A growing speculation is now in favour of German-denominated Eurobonds and against Italian, Greek and Portuguese-denominated ones. You have the risk of a speculation similar to that suffered by the pound from Mr Soros 13 years ago. I do not believe that that will happen very fast, but it is not true to say that it is not possible for the market itself to start to put pressure on the future of the euro.
The problem is not new. Not many of us are here today, and perhaps we share a fascination for the intellectual history of currencies. The great episode in this country—it led to a single currency not supported by a single government breaking up—was of course the return to the gold standard in 1925, and its abandonment by the Ramsay Macdonald government in 1931. You can have a currency with great authority behind it, which the euro to some extent still has. However, if you get into a situation in which the economics and the politics make it impossible to continue, a government can wake up and find that they have no recourse but to leave that currency. The British government did that in 1931. An Italian government may find themselves forced to do that and leave the euro at some point in the coming years.
My Lords, setting up the European monetary system is the greatest economic achievement of the European Union. As a currency union comprising 12 countries and a population of 300 million, and in the process of becoming larger still, it represents a remarkable step forward in economic integration. Much to my regret, although I understand why, we were not in at the beginning and have engaged in continuous sniping since. As kibitzers, we should not wonder that the real players do not take us seriously at all. Certainly if there are aspects of the euro area that we do not like—there are several—we have only ourselves to blame. I shall not go over the "I told you so" stuff connected with the CAP as well, but it is the same story written over a much longer period.
In that sense, I congratulate the noble Lord, Lord Dykes, on winning the ballot and choosing the subject. Like all noble Lords, I hope that he will make a quick recovery from illness. I also thank the noble Lord, Lord Roper, for introducing the debate. Having said that, deep down I believe that we are wasting our time. It is apparent that the Government will not join the EMS over any realistic time horizon—by which I mean my life expectancy. The Official Opposition seem to be content to stay precisely that for at least the same length of time. Even if eventually—goodness knows how long "eventually" is for them these days—they did become the government one day, they too say that they would not join monetary union. For those of us who wish to see our country at the heart of Europe, that is all deeply saddening.
That is especially so if we accept what the noble Lord, Lord Lawson, said on Tuesday; I apologise to him as he leaves. It must be difficult for him to be congratulated from both sides of the House, but he said that the rationale of the European project had always been political, not economic. I agree totally. The reason that, in a sense, our economic analysis in the debate is somewhat irrelevant is precisely because we do not follow his correct dictum that we really ought to discuss the politics, not the economics. Having said all that, and having said that we are wasting our time, I have another two and a half pages of notes and naturally I have no intention of not reading them. I want therefore to look at the achievements. Inflation has been kept low and stable, which is the primary function of the ECB. Exchange rates between member countries have, ex definitione, ceased to vary. The external value of the euro has obviously varied, notably against the dollar. But even after the recent fiasco on the referendums on the new constitution, the euro has not weakened to any great degree.
The overall balance of payments in the euro-zone is in surplus largely due to the enormous surpluses of Germany and France. Short-term interest rates in the euro-zone are lower than in other countries and have been falling. An even more important point that we should not ignore is that capital markets have become much more integrated and will continue to do so.
However, more important than any of those issues is that at the simplest level the single currency has been a success; namely, it has worked in precisely the way a currency is supposed to work. It operates with no difficulty whatever as a medium of exchange or as a store of value—precisely what Adam Smith would have said was the real pre-requisite for judging this situation. Bearing in mind all the prophets of doom, we should not ignore how amazingly, straightforwardly and simply it was introduced and has worked.
I must admit that even though I was in favour, I expected infinitely more difficulties. The so-called Europhobes, who want a free-trade area rather than a European Union, should understand that a common currency is a vital prerequisite for an efficient system of free trade. It provides exactly what is needed; namely, financial stability. And, for the more profligate, it prevents the easy but only temporary way out of economic difficulties; namely, it stops you inflating your way out of trouble and it stops you devaluing out of trouble.
In that connection, I am astonished that Italy, of all countries, should have any leading public figure saying that it would be better off outside monetary union. It would be idiotic, indeed insane, for the Italians to believe that they would be better off if they left the euro. Referring to what was said by the noble Lord, Lord Rees-Mogg, I can assume only that whichever Italian would say that must literally have forgotten the mess symbolised by the behaviour of the lira over many decades. Many of us who in our younger days travelled to Italy could never remember what the lira was worth from day to day, let alone over any reasonable period. If one country is going to gain by not pursuing the path of unsound public finance and an unwillingness to address the real problems which the noble Lord, Lord Rees-Mogg, rightly pointed out, it is Italy.
Before coming to the problems of the European monetary system, let me add that I am not one of those who believes that the evidence supports the proposition that the introduction of the euro has led to a rise in average prices. Even if one or two economists believe that, the numbers we are talking about are small indeed. But the euro has one other marvellous function: it provides a convenient whipping boy for anyone who wants to allocate blame for whatever is going on in the economy—notably the odd price change and so forth. It reminds me very much of the early days of decimalisation when any price increase, whatever the true cause, always attracted the comment, "We should never have decimalised".
Referring to an earlier remark on the exchange rate, I wish that critics would make up their minds whether the problem with the euro is that it is too strong or too weak. Perhaps their position is that whatever its value, it is wrong. That is a state of economics that even I do not have the imagination to work through.
What are the true problems of the European monetary system? The obvious one is the difficulty of adjustments in nominal wages. If overall inflation and public finances are held in control, short of a productivity miracle, which is pie in the sky in practice, excessive wage rises must lead to greater unemployment and recession. There is no way around that. On the supply side, goods and services cannot be sold profitably and on the demand side prices will rise to some extent so demand will fall, too. Clearly, one has to face the wage or the unemployment and recession problem.
Secondly, even without wage pressure, competition, not least that deriving from productivity differentials both at home and abroad, also necessitates structural adjustment. Labour mobility between industries and their locations has to increase, even though it may lead to disruption in people's lives. In addition, however, retraining and the acquisition of new skills must become the norm.
But there is nothing special about euro-zones. Taking the Longbridge example, if we cannot produce decent cars at a profitable price, unfortunately, a particular industry and the demand for the skills of decent people diminishes. The response to that is not to devalue and, in my judgment, not to throw skilled men and women on the scrap heap and to pay them social security indefinitely. It is precisely to do what Italy and everyone else needs to do—we have to retrain and guide people towards new forms of work. In other words, structural adjustment becomes of the essence. Furthermore, even though we need to look carefully at the whole public finance structure and the nature of the stability and growth pact, whatever you do about it, you do not get away from the problem of structural adjustment. There really is no easy way out.
My last such comment, before making one or two slightly controversial remarks, concerns the behaviour of the ECB. Here I echo some of the remarks of my noble friend Lady McDonagh. If we are to learn one lesson from the EU constitution mess, it is that we live in a world where ordinary people expect to be taken seriously. They no longer accept that something is right because this or that great figure says so. The ECB, whose head is a person of outstanding merit, does too little to take into its confidence the people it is meant to serve. It still wishes to retain the aura of a traditional central bank, with its emphasis on secrecy.
That was particularly true when, according to the Financial Times, M. Trichet refused to say whether they even considered thinking about an interest rate adjustment. It reminds me—and one or two noble Lords present will also remember—of when in the 1960s Harold Wilson issued a diktat that no one in the Treasury was supposed to admit that any thought had been given to devaluation. If asked, they said, "No, we never discuss that sort of thing". I was very young then, but a number of people rang me and the only subject they wanted to discuss was devaluation. Therefore, I would have thought that Harold Wilson had failed in that. The idea you can pretend that delicate, sensitive matters are not debated and therefore you will not talk about them is preposterous.
I conclude as I began. The construction of the euro area has been a great achievement. One or two Members in the debate on Tuesday used phrases such as "failure of the euro" or "the currency has not worked". That is preposterous: the euro is not remotely near to being a failure and, importantly, it has worked infinitely better than any of us would have anticipated. Full success requires many more economic reforms and, in my judgment, it requires full UK participation.
My Lords, I echo the remarks made by others who have referred to the great pleasure of listening to the maiden speech of the noble Baroness, Lady McDonagh. It was a charming speech and she made a number of extremely important points.
I also echo the regret that my noble friend Lord Dykes was not able to introduce the debate. Instead, we had a very good introduction to the issues from my noble friend Lord Roper. It has been very useful to have a discussion of the euro as the last in the series of debates this week on Europe.
I believe it is generally agreed that, at this moment, the euro-zone faces a number of very serious problems, which are of considerable concern to us. I am glad that those who have questioned the euro and its advantages in the past have not gloated about its present predicament. The success and prosperity of the euro-zone is of very great importance to us, even if we stay outside it. It is our biggest market. We have always been strong champions of the enlargement of the European Union, and there is no doubt that what attracted the new members to the euro-zone, and continues to attract other states to apply for membership, is not only the attractions of political security, but also the strength and stability that the European Union has presented, with the core constituted by the euro-zone. Those states would also be greatly affected if the present malaise turned into a serious crisis.
It is perhaps suitable that we should look back at the history, the successes, the failures or the disappointments of the euro-zone in the past six or seven years since its formation. There have certainly been gains, as the noble Lord, Lord Peston, has pointed out, but, make no bones about it, there have also been considerable disappointments. The noble Lord, Lord Rees-Mogg, rightly focused the argument on whether a monetary union requires a political union.
The view of the Bundesbank, as well as that of the noble Lord, Lord Rees-Mogg, and a number of other commentators, has always been that one needed a political union to secure the long-term viability of monetary union. That was the argument not only of the Bundesbank, but also of Germany. That view may still be held as necessary, but I believe that the idea of a political union is more or less dead. The noble Baroness, Lady McDonagh, was quite right in saying that that requires a degree of trust and confidence in the institutions which simply does not exist. National agendas have been pursued, which shows that, at the moment, there is no public support for a political union of Europe.
It has also been argued by another school of thought—for example, by the very eminent economist of the European Central Bank, Otmar Issing—that monetary union is not required. One requires the co-ordination of fiscal and monetary policy, but that can be achieved without political union. As my noble friend Lord Roper pointed out, it requires three factors: the independence of the central bank, which we have; fiscal discipline; and labour and product market flexibility.
An interesting and critical view of the record of the European monetary union has been undertaken by the Centre for European Policy Studies, in which some very important questions were raised by a number of eminent economists, including M. Daniel Gros. First, there is the performance of the central bank. I do not necessarily agree with the noble Lord, Lord Peston—with whom I normally agree—that that has been defective. It has maintained stability and low inflation and in those respects it has been a signal success. Whether it should ease monetary policy at present is, to some extent, a moot point. I agree with the report from the OECD that some easing is now required, but if it took a very relaxed view of monetary easing, that could endanger the view of the Union as such. I do not believe that the ECB is responsible for the present difficulties of the European Union.
The second requirement is fiscal discipline, hence the stability and growth pact which, of course, has been abandoned. In the situation in which we found ourselves, it was inevitable that the strict rules originally required for the stability and growth pact would be relaxed. To insist on rigorous fines for any excess over the 3 per cent limit would be quite inappropriate in the circumstances in which Germany, France and others may find themselves.
However, there was a lack of fiscal discipline. The snag was that that lack of fiscal discipline was evident at the top of the economic cycle when there should have been discipline and in fact attitudes were lax. National policies—often narrow, mistaken national policies—were followed. It has been argued that one did not need the stability and growth pact because the discipline of the market would have been sufficient. The discipline of the market is important, but it was not just national interest that should have been considered.
Within the euro-zone everyone stood to gain from a policy that also took account of the interests of the euro-zone as a whole, and unfortunately that was not evident. The result has been, as the CEPS study has pointed out, that instead of having the convergence of economies that one expected inside the European Union, one of the disappointments of the past six or seven years has been that the economies have diverged.
As the noble Lord, Lord Rees-Mogg, pointed out, the most signal case is Italy. Not only has there been a very considerable rise in unit labour costs, but Italy's real exchange rate has risen since the monetary union started by some 15 per cent.
I do not take the view of the noble Lord, Lord Rees-Mogg, who says that this is a basket case that will never correct itself. Of course, action will have to be taken, but in the past Italy has taken some very courageous steps. One should not forget the very important Amato and Dini reform of pensions, which will take a long time to work through. That was brave, courageous and very realistic. One cannot say that this is a basket case. It would be extraordinary if Italy were to leave the Union because that would be the worst possible case for the future well-being of Italy. The effect on government bonds would be absolutely disastrous.
As my noble friend Lord Roper pointed out, the third element in the Otmar prescription, as it were—indeed, the general requirements of a monetary union if one does not have political union—is the flexibility of labour markets above all, as the noble Lord, Lord Peston, said.
One has to admit that so far the Lisbon agenda has failed. As the noble Lord, Lord Lawson, and others pointed out yesterday, essentially that is a domestic agenda. Its failure would have had an unfortunate effect on the economies of the euro-zone countries if there had been no euro. In fact, it is very doubtful whether any of the euro countries would be in a better position today if there had been no euro. There might not have been fiscal stability, but all the failures to adapt the structural reforms that are required were no more likely to have happened outside the euro than within the euro. There have been national failures.
One has seen a certain element of protectionism in Germany with its requirement for high minimum wages to keep out foreign labour and in France with the rejection of the financial services directive, objection to open borders and continuation of certain subsidies. As Robert Mundell pointed out, a collapse of the European Union is not likely, unless there is runaway inflation, in which case the low inflation countries, such as Germany, might wish to be part of it no longer. I do not believe we are likely to see that.
One should also not forget that Ireland is one country that has prospered enormously inside the monetary union. I do not believe that any members of the Irish Government would wish to leave the monetary union because of the troubles that it has had. Spain has prospered in the monetary union. The troubles of those who are not members of the monetary union are not due to the high interest rates, because historically the interest rates that Germany now faces are no higher than it has faced in the past. The answer lies with the OECD agenda, but we should bear certain things in mind when we may be tempted to turn to the European Union and say that if only it had followed our prescriptions it would be in a much better state and when come to the conclusion, as is now reasonable, that this is not the moment that we should join, it is an academic question in any event.
We should not forget the points made by the noble Lords, Lord Harrison and Lord Peston. The first is that the euro reinforces the single market. The noble Lord, Lord Biffen, apparently accepts the logic that the euro is a very important part of the idea of a single market. But, rather surprisingly, he seemed to reject the single market. He said that it was an impossible aim and if one tried to achieve it one would have a plethora of regulations that we must abandon. I thought that it was generally accepted in this country that the single market has been of enormous benefit to our economy and trade. I agree with the argument that there is a logic about a single currency and a single market. That is one of the reasons why the last thing we should do is rule it out. Free trade is furthered by a single market. One only has to compare the degree of the non-domestic trade of countries within the euro-zone with the degree of the non-domestic trade of Canada within the free trade zone of north America.
The second point made by the noble Lord, Lord Harrison, was that the current crisis is not a currency crisis, and I have made that point myself. It is the failure of the Lisbon agenda, that is, a failure of domestic action.
The third important point is that in the next few years important decisions will be taken by the euro-zone to deal with the problems that it now faces. They will be important decisions that will affect us as well as the members of the euro-zone. We will be completely excluded from those decisions. We should not forget that one of the important arguments for being a member of the euro-zone is that we would then have political influence and that our political influence inside Europe as a whole is diminished while we remain outside the inner group.
My Lords, like other noble Lords, I am extremely sorry to hear about the illness of the noble Lord, Lord Dykes. I hope that he recovers soon. I am very grateful to the noble Lord, Lord Roper, for giving us the chance for this short debate. I would go further and say that I thought his speech was admirably realistic, as the noble Lord, Lord Rees-Mogg, said.
I derive faint amusement from the fact that it seems now that we have all become what were called "Euro-realists". Even the Chancellor has joined the group, although—this is a superb touch—it turns out that although he is saying exactly the same thing as many of us have said for many years, when he says it, it is now called "pro-Europe realism". It is a truly Mandelsonian touch: saying what everyone else has long been saying and pointing out but giving it a special branding. I do not care what they call it or what label they put on the jar. If we are going to have European realism at last, it is extremely welcome.
The euro, which we are here to discuss, has been paying the price for all the political bickering. It has dropped a sharp number of cents in recent days from its very high level. That was what the noble Baroness, Lady McDonagh, pointed out in her excellent maiden speech, which was commendably brief, marvellously well focused and thoroughly enjoyable. I congratulate her on it. If the Euro-constitution has capsized—I think it has sunk, though some bits of it will be salvaged—are we allowed to ask whether the same fate could happen to the Euro-currency? I am reassured by the noble Lord, Lord Peston, that, despite the efforts of Harold Wilson, they went on discussing devaluation in the Treasury in his day. So perhaps it is a permissible discussion even though, obviously, one must handle it in careful terms.
Before the whole idea is dismissed as unthinkable, it has to be remembered—as the noble Lord, Lord Peston, also pointed out—that the euro was originally introduced not as a monetary scheme but as a political one. It was depicted—there are many quotations to support this—as a giant step forward towards political union in Europe and towards the emergence of one integrated European bloc that would be a rival to the almighty dollar and to American hegemony. All this was said a hundred times and all this will be pointed out a hundred times. The euro was, and remains, a political construction.
As I recall it, from the start—and I was one of two English representatives on Giscard d'Estaing's committee for monetary union—there were going to be three pillars. The first was monetary cohesion, which was to be provided by the European Central Bank. The second was budgetary and fiscal solidarity, which in the first phase was to be provided by the so-called "stability pact", rechristened "the stability and growth pact". The third pillar was to be the eventual political cohesion and integration of the EU member states, with the implication of a single government of sorts, as the noble Lord, Lord Rees-Mogg, also pointed out.
The first pillar remains in place. We have discussed the European Central Bank. It has a difficult task, but it is very much in action and it is operative. The second pillar, of course, has crumbled, as several noble Lords have pointed out. Budgetary discipline has been abandoned in Italy and could well be discarded in Germany itself. It is obvious that several states in the zone find it intolerable that their public spending, and the borrowing necessary to finance it, should be limited by rules which seem to them unnecessary, onerous or just plain politically embarrassing or impossible to sell to their electorates. New and much laxer rules for budgetary limits within euro-zone states have now been devised with conditions which seem to be so extensive that they allow almost any pattern of behaviour. There is certainly very little discipline.
Yet it was this stability and growth pact which was supposed to be the rock on which the whole thing rested pending the arrival of full political union in Europe. I remember going to see the then chairman of the Bundesbank, Mr Hans Tietmeyer, before the arrival of the euro and asking him how it would work if there were no political union. Chancellor Kohl had said many times that there had to be political union for it to work. Mr Tietmeyer said that it would be all right because the stability pact would hold everything together. That was the structure on which the whole system would rest. But now that structure has begun to wobble; indeed, it has come apart completely.
The third pillar, political union, has not arrived. Moreover, as noble Lords have said, the prospects for it have been very severely shaken by recent events and by the French and Dutch referendums.
So the outcome, which we can all see, is that the euro, which until recently looked remarkably strong, suddenly looks in financial markets to be a riskier proposition. If one adds to that the strains that already existed, of trying to impose a single interest rate on 25 highly diverse economies, one can see why the financial community is getting increasingly uneasy about the whole thing. Indeed, the other day, the OECD—not at all a critic of the euro-zone—stated that it now sees the euro-zone as a zone of "widely divergent" economic activity. That is a challenge to those who hoped that by now there would be a harmonised and uniform pattern of economic activity.
As we have heard from noble Lords who speak with enormous expertise, the Italians are finding it very irksome indeed. An Italian Minister has spoken out calling for the return of the lira. Lombard Research told us yesterday that its Italian informants believe that the euro is "asphyxiating" the Italian economy. As the noble Lord, Lord Rees-Mogg, so graphically described, Italy no longer has the opportunity to find an outlet, a steam-release valve, in devaluation. For many years, it has not had the political strength to resist public spending growth or to impose swingeing internal cuts.
Meanwhile, the Dutch have also complained loudly. They have said that they should have followed the British policy and stayed well clear of the euro-zone. There have even been rumours from Frankfurt of all places, the heartland of financial prudence, that all is not well with the euro.
The irony in all this is that the main alternative in international markets to the euro, namely the US dollar, has been looking far from healthy itself. Very recently, the central banks of China, Japan, South Korea and other Asian nations, which over the past few years have been patiently accumulating enormous dollar reserves to prop up the dollar and finance American consumption, were just beginning to switch some of their holdings into euros. That is why the dollar had been sagging and why the euro had been rising so amazingly high.
Suddenly all that has changed. The euro's longer-term future no longer looks so good, so we now hear that some of the Asian central bankers are having second thoughts. Of course, the outward and visible sign of that is a very sharp drop in the euro/dollar exchange rate.
So where now for a currency which was born with high hopes but which now has not only not a single government behind it but no hope that such a government will ever come into being? One obvious point is that the British will, I imagine, be reinforced, including this Government, in their determination to stay well clear of the euro-zone and therefore clear of the very sharp swings between the euro and the dollar which have added to international instability. We have always been told that the euro was going to increase stability; of course it has done the opposite.
Another likelihood is that the recent new entrants into the EU from central Europe will be a little more cautious before they commit themselves to the euro-zone and give up their own denominations. On talking to some of them recently, it seems that they will probably favour a kind of semi-fixed relationship with the euro, not unlike what went on under the old deutschmark zone. That system existed exactly so that a number of smaller European countries could keep their currencies roughly in line with the then all-powerful deutschmark.
That is all right for those which have not joined. For those which are in already, as has rightly been said, the exits are not nearly so easy. In fact, if Italy tries to disengage, the immediate effect would be to make its borrowing very much more expensive. Furthermore, a very large number of people in western Europe, including politicians, have invested heavy political capital as well as personal commitment in making the single currency work.
All that suggests to me that while the euro may lose some of its shine, it will probably survive for some years in a more modest form, possibly within a currency union covering France, Germany, Belgium, Spain and maybe Italy if it can get a strong enough government to impose reform. It will be a zone of relatively slow growth and weak competition, possibly protecting itself increasingly with barriers against rising Asian challenges and other cold and unwelcome trade winds.
Eventually, of course, that will lead to falling living standards and impoverishment. But—one must be realistic—the process could take many years. In the mean time, all those countries will remain very pleasant and delightful places to visit and in which others can holiday and in which the euro currency can be used in an atmosphere of tranquillity, free from the cold winds of Anglo-Saxon competition and other unwelcome outside forces.
I end by saying that if that is the way these once great European nations wish to manage their decline, who is to say that they are wrong to choose it, if they so wish? All I would add is that it is not for us.
My Lords, before the noble Lord sits down, will he reiterate his point about criticising "widely divergent" economic activity? I thought that was the mark of a dynamic market, not a failure of a market.
My Lords, I think that the noble Lord has missed the point. What the OECD is worried about—it was its remark, not mine—is that the German economy is doing extremely badly and the French economy is in a coma, whereas Ireland is booming ahead. Some of the new accession countries are doing extremely well. Italy is in a desperate state. Their requirements in terms of monetary and fiscal balance and, indeed, in terms of interest rates have diverged enormously. That puts an intolerable strain on a system that has only one interest rate. That is the point it is trying to make.
My Lords, I start by thanking the noble Lord, Lord Dykes, for initiating this debate and wish him, like other noble Lords, a speedy recovery. I thank the noble Lord, Lord Roper, for stepping in at short notice and so expertly. I also thank all noble Lords who have participated in today's debate. As others have said, it rounds off a week in which Europe has been at the centre of our deliberations.
I should particularly like to congratulate my noble friend Lady McDonagh on her excellent maiden speech. Her impressive career of course encompasses, as she pointed out, a very successful period in one of the UK's toughest assignments—as General Secretary of the party that we share. I have no doubt that her skill and experience in that and in other fields will be brought to bear in our work in the future. I look forward to that.
This has been an interesting and useful debate. A number of important points have been raised. The Motion asks the House to call attention to current trends and developments in the euro. By virtue of this debate and the issues covered by noble Lords, we have indeed given due attention to the subject matter in question.
We have had a full range of views—those clearly in favour, those clearly against and one or two perhaps in the middle. At the heart of our debate must be the analysis that Europe's and the euro-area's low growth and current economic performance stem from structural policy weaknesses. Those challenges were referred to by a number of noble Lords—the noble Lords, Lord Biffen and Lord Taverne, and my noble friend Lady McDonagh. The noble Lord, Lord Howell, made the interesting point that we are making the same kind of analysis; we may not draw the same conclusions in all respects.
The right policy response is therefore the pursuit of structural reform to promote employment, raise productivity and increase flexibility in labour, product and capital markets. That flexibility should be pursued alongside fairness to create opportunity for all in a globalised economy.
Economic and monetary union (EMU) puts an additional premium on structural economic flexibility, since to be successful in monetary union countries need even more flexibility to adjust to change and to unexpected economic events in the absence of monetary policy levers at the national level.
Alongside EMU, global economic change and the challenges of ageing populations underline even more the importance of rising to the reform challenge and enhancing economic flexibility and adaptability. We are part of a rapidly changing global economy. To improve its economic performance relative to the US and match the recent growth rates of other successful developed economies such as Canada and Australia, Europe must take urgent action to promote employment, raise productivity and increase flexibility in labour, product and capital markets.
The noble Lord, Lord Biffen, quoted the noble Lord, Lord Lawson, on the need for a pause, which he hoped would be extended. I put to him that the issues that global economic challenges bring mean that that pause cannot be too long. We need to act now. We need to get that debate under way and we need to get action under way.
The Lisbon programme of economic reform has been refocused by EU leaders on promoting growth and employment. Those are the areas in which Europe most needs to succeed in order to preserve fairness and compete in a global economy that puts a premium on skills, innovation and flexibility.
In summing up, I turn to some of the detail of the issues that have been raised. The Government's policy on UK membership of the single currency was set out by the Chancellor in his Statement to Parliament in October 1997. It remains unchanged. In principle, the Government are in favour of UK membership; in practice, the economic conditions must be right. I do not believe that that can reasonably be interpreted as staying well clear.
My noble friend Lord Harrison highlighted benefits of price transparency; elimination of exchange risks; and the single market and its benefit to consumers. The macro case was made by my noble friend Lord Peston and referred to by the noble Lord, Lord Taverne.
The determining factor underpinning any government decision on UK membership of the single currency is the national economic interest and whether the economic case for joining is clear and unambiguous. The Chancellor's Statement to the House of Commons on
Those reforms are right for the British economy in any event. They will also assist the process of achieving sustainable and durable convergence and the flexibility necessary for Britain to succeed sustainably within the euro-area. Although the Government do not propose a euro assessment to be initiated at the time of Budget 2005, the Treasury will again review the situation at Budget time next year, as required by the Chancellor's June 2003 Statement.
The Government also continue to pursue the objective of a European stability and growth pact that takes into account the economic cycle, debt sustainability and public investment. Greater focus on reducing debt and maintaining low debt, with the flexibility for low debt countries such as the UK to invest in provision of public services, has our strong support.
Several noble Lords commented on the state of the stability and growth pact. The noble Lord, Lord Roper, commented that he thought that concerns about its application and suggestions that larger states were ignoring it were at the heart of the Netherlands' referendum outcome. The noble Lord, Lord Rees-Mogg, said that it was critical and not operating in practice. The noble Lord Taverne also referred to it.
We need to put it in context. Obviously the Government would not comment on the fiscal position of any particular member state, but to suggest that the pact is dead is incorrect. The treaty remains unchanged; the 3 per cent and 60 per cent debt reference values remain unchanged. As the ECOFIN agreement states, the Council and Commission are resolved to preserve and uphold the reference values of 3 per cent and 60 per cent of GDP as the anchors of the monitoring of the development of the budgetary situation. As set out in the treaty, if a member state's deficit rises above 3 per cent the Council will assess whether an excessive deficit exists based on relevant factors. That remains unchanged. I can tell the House that nine member states, including three euro-area countries and six new member states, are currently at different stages of the excessive deficit procedure.
At present, although some member states are performing relatively well, as a whole Europe is losing ground in comparison with key developed economies and unemployment remains high. Why is that? Since 1996, annual average growth in GDP per capita in the euro-area has averaged about ½ per cent less than in the US. In 2004, real GDP growth in the euro-area was less than half that in the US. Stronger growth in non-euro-area countries—Sweden, the UK and the new member states—boosted growth for the EU 25 as a whole to about 2½ per cent in 2004, compared to 4½ per cent in the US. As a whole, Europe's growth rate still lags behind those of its main competitors.
As a result of that persistent gap, the gap in living standards between the US and the EU 15 has widened back to above 30 per cent. Growth accounting analysis suggests that Europe's labour market performance explains around two-thirds of Europe's gap in living standards with the US; the remaining third can be attributed to Europe's lower productivity levels.
Increased employment is the best route to social cohesion. Despite recent efforts to boost employment and marked success in some member states, especially in raising female employment, inactivity rates remain high, with about 93 million inactive people of working age across the EU 25. The employment rate of older workers remains especially low and well below that of major competitors such as the USA and Japan.
Moreover, at around 9 per cent, Europe's unemployment rate is considerably higher than that in the US and Japan, leaving 19.5 million people unemployed. In 2004, unemployment rates averaged close to 10 per cent in Germany, 9 per cent in France and 8 per cent in Italy. Much of that was due to long-term unemployment, reflecting labour market rigidities. Nearly 50 per cent of the unemployed in Germany and nearly 60 per cent in Italy are out of work for more than a year, compared with less than 10 per cent in the US and Canada. That reverses a long-standing European strength.
Raising productivity levels will also be crucial for Europe to improve its long-term economic performance and living standards. Europe underperforms the US in terms of both output per hour and output per worker, and the gap has been widening since the mid-1990s, reversing the trend of catch-up with US productivity levels during the three decades following the Second World War.
Recent analysis suggests that the underlying causes are largely structural, reflecting a failure to boost services productivity; the relatively small size of the EU's ICT-producing sector; and the EU's larger share of low-productivity non-ICT-using or ICT-producing manufacturing industry. That points to a clear need for further action to promote the key drivers of productivity: increasing product market competition; enhancing the EU's frameworks for innovation and enterprise; and upgrading the skills of both existing workers and new entrants to the labour market so that they can exploit the opportunities of new technology.
In its May 2003 review of monetary policy strategy, the European Central Bank stated that it would aim to maintain inflation close to 2 per cent in the medium term. To date, euro-zone inflation has remained near, and in recent years above, 2 per cent and deflationary risks have not materialised.
The ECB framework is very young and continues to evolve. The operation of monetary policy needs to be seen as an evolving process in which both the ECB and markets are learning. Since it took control of monetary policy, the ECB has made several changes, including the biennial publication of staff macro-economic projections and moving to monthly rather than fortnightly decisions on interest rates. Inflation and output have been relatively stable in recent years, with output fluctuating less in the recent downturn than it did in the 1990s. My noble friend Lord Peston made that point.
Noble Lords raised several points about the ECB. My noble friend Lord Harrison probed the mandate of the ECB. As he rightly identified, its primary objective is to maintain price stability but, without prejudice to that objective, it should support the general economic policies of the Community. His point was that greater emphasis ought to be placed on that. I agree.
My noble friend Lord Peston referred to secrecy, and certainly it should not be an insuperable issue to publish even the minutes on an anonymous basis. The issue of a symmetric target for inflation is also important.
The advent of EMU is itself a driver for pursuing structural reform and enhancing economic flexibility, especially in the euro-area. To be successful in monetary union, countries need even more flexibility to adjust to change and to unexpected economic events, once their ability to vary their interest rates and exchange rates has gone and the euro and the single European interest rate are in place. There is the need to tackle unemployment and inflexibility to make sure that Europe as a whole is able to withstand any shocks that arise.
EMU membership therefore puts an additional premium on ongoing reform of EU labour, product and capital markets. In this context, the Government will continue to argue that employability, flexibility and stronger competition policies must be a top priority, so that EMU can be sustained. It is important to enhance the flexibility and dynamism of the European economy and build on the achievements to date, if the full benefits of EMU are to be realised. That will be particularly important as EMU expands to take in the new member states that joined the EU in 2004.
Several noble Lords entered into the debate about whether monetary could go successfully only hand in hand with political union. The noble Lord, Lord Roper, referred to the factors that would need to be in place if that were not to be the case, as did the noble Lords, Lord Taverne and Lord Howell of Guildford. The noble Lord, Lord Rees-Mogg, probed the point in his contribution. Our position is that they need not go hand in hand, but fiscal and monetary discipline is extremely important in the absence of those processes. The noble Lord, Lord Taverne, said that political union was dead; I think that is right.
Alongside EMU, global economic change further underlines the importance of rising to the reform and flexibility challenge. The global economy is undergoing dramatic change, brought about by rapid technological change and the falling costs of communication; by the increasing ease with which goods and services can be subdivided and traded between countries and continents; and by the market reforms in large emerging economies such as China and India that enable them to seize the opportunities that come from closer integration into the global economy.
Europe must act to tackle persistent low growth and to realise the full benefits of globalisation. Some policies that proved successful in the era of post-war catch-up are no longer appropriate in a global environment that demands greater flexibility and competition. Europe must equip its workers with the skills necessary to embrace globalisation. My noble friend Lord Peston addressed that point. To improve its economic performance relative to the US and match the recent growth rates of other successful developed economies, Europe must take urgent action to promote employment, raise productivity and increase flexibility in labour, product and capital markets.
For a full analysis of the economic challenges facing Europe and how we can best respond to them, I refer noble Lords to the Treasury paper published alongside Budget 2005 entitled Long-term global economic challenges and opportunities for Europe.
Europe and the euro-area must therefore adapt to the changing balance of global economic activity and the rise of fast-growing emerging economies to realise the full benefits of economic and monetary union. In her maiden speech, my noble friend Lady McDonagh stressed the need for change. The 2005 spring European Council agreed a renewed focus on jobs and growth, following the mid-term review of the Lisbon agenda. The Government fully support those conclusions. The opportunities offered by globalisation should not be missed. Through the reforms to which I referred, the EU can capitalize on the growing interdependence of the global economy and stimulate growth and employment within its borders.
Our aim is a Europe that looks outwards rather than inwards and advances the pace of structural reform to meet the challenges of globalisation. The UK aims to work closely with its European partners to achieve that aim during its presidency of the EU. My noble friend Lord Peston made the point that, if we were not in the euro, we would lose influence; I believe that we gain influence if we are making the arguments and talking about modernising Europe, as the Prime Minister did this morning in his powerful speech to the Parliament.
Key to the success of the EU economy will be a risk-based approach to the enforcement and implementation of regulation. A risk-based approach including competitiveness testing, simplification of existing legislation and alternatives to regulation will minimise the burden of regulation on business. The noble Lord, Lord Biffen, touched on the impact of regulation and, I think, prayed in aid Harold Wilson for the point that he was making. The concept of a risk-based approach to the enforcement and implementation of regulation is designed to attack that issue.
Member states should take urgent action on labour market reform; further regulatory reform; steps to create a dynamic and competitive single market; knowledge and innovation and enterprise for growth; and on the importance of external openness to trade and investment as a driver of growth and productivity. Member states should set out how they aim to deliver those objectives in their Lisbon national reform programmes later this year. The issue of whether a single market is a correct aspiration was raised by the noble Lord, Lord Biffen. My noble friend Lady McDonagh talked about how a single market was not inconsistent with social justice and how economic prosperity and social justice could go hand in hand.
Although some member states are performing relatively well, as a whole, Europe is losing ground in comparison with key developed economies, and unemployment remains high. In 2004, real GDP growth in the euro-area was less than half that in the US. The underlying factors contributing to Europe's low growth and economic performance stem from structural policy weaknesses, and therefore the right policy response is the pursuit of structural reform.
EMU and global economic changes respectively place an additional premium on flexibility in order to adjust to change and to unexpected economic events and to compete effectively in the global economy. Against that background, the Government have set out an agenda for European economic reform for the UK presidency of the European Union. It is by addressing that reform agenda that the main economic challenges can be dealt with.
My Lords, I begin by expressing my gratitude for the good wishes to my noble friend Lord Dykes expressed by so many participants in the debate. I go on to congratulate the noble Baroness, Lady McDonagh, on what, I thought, was an outstanding maiden speech. She spoke about her background but also addressed the issues that we are considering today.
I feel that it has been a useful debate, in spite of what the noble Lord, Lord Peston, said about us wasting our time; I thought that we wasted it rather well. I thank the Minister for his full reply and all those who took part in the debate, which was surprisingly non-polemical. At times, it seemed more like a seminar than a debate. I am grateful for that. I beg leave to withdraw the Motion.