Euro

Part of the debate – in the House of Lords at 12:22 pm on 23rd June 2005.

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Photo of Lord Rees-Mogg Lord Rees-Mogg Crossbench 12:22 pm, 23rd June 2005

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.