Part of the debate – in the House of Lords at 11:35 am on 23 June 2005.

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Photo of Lord Roper Lord Roper Liberal Democrat 11:35, 23 June 2005

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.