Euro-zone Economy

Part of the debate – in the House of Lords at 1:39 pm on 12 October 2006.

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Photo of Lord Dykes Lord Dykes Spokesperson in the Lords (Europe), Foreign & Commonwealth Affairs 1:39, 12 October 2006

rose to ask Her Majesty's Government what assessment they have made of current developments in the euro-zone economy.

My Lords, there has not been a major debate on the euro as a subject for some time in this House, probably for over a year, so I welcome this chance to ask the Government to respond on some of the salient issues in this won't-go-away debate. I am grateful to the Minister for giving his time and coming to the House today to respond.

It also noteworthy that there are very few European matters on our radar screens anyway—partly, no doubt, because of the French and Dutch referendums on the draft constitutional treaty. I presume that gradually there will be a revival of issues next year with the period of reflection and as the EP elections approach in 2009. But for many of us, and indeed for the country, how frustrating it has been that the Prime Minister's reckless energies have gone into the disastrous adventure in Iraq, and now the disturbing and unplanned second phase of the war in Afghanistan. How depressing that a Chancellor of the Exchequer has rather narrow-mindedly totally discouraged any discussion of the euro as an asset for Britain. We need to seize these moments and press some important questions. After all, the famous five conditions, coupled later with the addition of the exchange rate, remain "back of the envelope" opportunism except as generalised objectives. Mr Blair went back on his solemn commitment to have a campaign on the euro and a referendum. He unwisely chose subservience to perhaps the most disappointing president in recent American history rather than a central role in the courageous creation of monetary union in Europe.

Incidentally, as the German and other leading economies are now recovering from sluggish growth rates, the British press are not crowing so loudly about the Anglo-American economic model being the only success in town. How right they are now becoming. Without a shadow of doubt, European monetary union, a momentous step of staggering bravery by the countries that launched it in 1999, has been a very great benefit to the euro-zone members, large and small. The UK Government sadly did not have the necessary courage to join in. The British Treasury, as we now know, was fearful that the British economy could not cope, even if we were able to devalue, perhaps modestly, before any entry. The German currency discipline model, as originally constructed, was introduced for the 12 member states and, even in these early stages, we can see the internal and external advantages emerging.

Germany was the only country giving up a highly successful strong currency. What has happened there since is vital because many Germans are understandably very nostalgic about the great deutschmark. The internal growth rate there is now accelerating, although most growth still goes virtuously into staggeringly successful high-tech exports on a very large scale. In contrast, we, unfortunately, have a very large trade deficit; they have a mighty surplus. Germany has managed a high level of public sector investment spending over a lengthy time span. Its infrastructure does not creak and groan precariously, as the England fans noticed in large numbers in the summer. Even modest Belgium, with an economy about 12 per cent of the size of Germany's, is doing well in EMU, as its central bank governor, Guy Quaden, asserted in June, referring to the marked rise in the country's business confidence indicators—a reflection of its close trade links with other euro-zone countries.

I am sure that if more and more members of the public here—individuals and families as well as some company directors and finance directors—calculate exactly how expensive it is for us to pay both much higher interest charges and outrageously excessive aggregate charges on bank and credit cards and bank account transactions between us and the euro-zone, resentment will build up against this myopic Government. We should think again about the main advantages of a strong, integrated currency representing a high-output single market. Not only are import prices kept lower, which helps domestic prices to remain low, but rates of interest remain very low, acquisitions overseas are facilitated, international confidence in the currency grows and internal transactions aid greater cohesiveness of the marketplace.

The euro is becoming one of the most successful world marketplace currencies without, like sterling, having to be propped up by artificially high interest rates to attract bond buyers for the Government. It is backed by an internal trading area of high exports and strong surpluses. If you take the seven or eight key criterion comparators that the experts take, the dollar and the euro are now roughly in pole position. In Austria, for instance, the effects on interest rates of joining on 1 January 1999 were striking. Nominal rates on the 10-year benchmark bond fell from 6 per cent-plus to 4.75 per cent. The level of real interest rates fell even more, from 4.8 per cent to around 3 per cent. This trend was seen in the whole euro area. Your Lordships will recall the hysteria in the Sun and other newspapers in Britain that Ireland could not possibly cope with the euro because of property inflation. What happened? The average Irish central inflation figure remained lowish but the greater Dublin property rate of inflation and the Cork property rate of inflation remained higher than this figure. So what?

Of course, in Austria the schilling's setting in the high and strong currency syndrome simply carried on into the euro system, as was the case in Germany. This was easier for the strong currency countries than the transition for weak currency entrants. France is a halfway house example but on the plus side because its political leaders, with the exception of the communists and the National Front, have had the courage to sell the franc fort policy for many years prior to 1999 and 2002. So France is a very good example. The best example of a large country coming from a weak currency, like Britain's, to a strong currency success is Italy. It is a spectacular example of a weak currency being succeeded by a hard euro.

In January 2004, the respected former central bank governor and then president of the republic, Carlo Ciampi, said that,

"the euro is essential for economic growth".

A month later in India he asserted that Italy had changed its old bad habits and could now use the euro as a source of strength. Just like the UK, Italy's Ministers would regularly devalue the lira post-war to get out of a crisis and boost exports. But the entrepreneurs always told them that the advantage was temporary and shortlived. I recall that the debauchment of the pound and the lira against the deutschmark over those years was fairly similar.

The scare recently in the Italian press that price rises had been very sharp because of euro entry turned out to be wholly mistaken. The excess measurement covered only so-called boulevard prices—cafes, restaurants and fripperies. The average price rise in Italy remained modest. You will notice that if you read the research of Del Giovane and Sabbatini in the Bank of Italy economic research department report of May 2005. Then we had the hilarious suggestion from one eccentric Forza Italia Minister that they should go back to the lira after all. However, his colleague, Signor Siniscalco, the Finance Minister, said that that would add some €80 billion to the administration's debt interest costs. Not surprisingly, the idea died away. Everywhere one assesses the euro effect, the conclusions appear to be judged as highly positive for the countries involved. Coming back to Ireland, the country has experienced very strong growth since 2002, with 2007 forecasts of 5 per cent-plus for GNP and GDP. It was described last year by the Governor of the Central Bank, Jean-Claude Trichet, as a "magnificent performer" in making the case for structural modernisation in the euro-zone economies.

The Paribas bank concluded in an in-depth study in March 2005 that the,

"huge turbulences caused by the 9-11 terror attacks, the financial and accounting scandals in recent years [not only in the United States] deflation jitters [here, there and everywhere] oil supply and price shocks" and other negative factors had all helped the euro gain its position as an anchor reference point and a magnet of stability, helping the Union to escape the kinds of disasters such as Black Wednesday in the UK in 1992, and the crisis of leading EU currencies a year later, which was, incidentally, dealt with much more skilfully than by the Treasury and Bank of England's clumsiness. Paribas also noted wryly that the euro's weak post-launch start and its subsequent strong recovery in world money markets after 2003 were both criticised by the press here in exactly the same terms. The euro was being attacked not because it was weak or strong but because it was European and therefore wicked. Even the Independent—although I believe that this occurred only once—had a ridiculous article saying that the euro could not survive. However, as the Spanish central bank representative on the ECB board said in Malaysia in July last year,

"not only is the euro an (internal) currency, its international status is gradually increasing. (It) already plays an important role in world bond and forex markets, and for settlement and invoicing, and as an anchor".

Indeed, as Pascal Blanqué from Crédit Agricole stated,

"the euro's launch has changed the world financial landscape by creating the new duopoly of the dollar and euro. The latter is more and more considered as the alternative to the US dollar".

Repeated studies have proved, as we know, that the euro has not caused sharp price hikes, quite the contrary, except in some property price eruptions in Ireland and Spain, for example. John Monks has repeatedly reminded us of the success of the euro in counteracting the adverse growth in household debt—as would have occurred in Britain, had Britain been a member—and of how Spain has done so well in resisting the excessive debt that we have experienced in this country.

There are other myths, as was shown in Charles Wyplosz's excellent research in the compendium study on the consequences of saying no to the euro. I wish that I had time to go into them. Speaking in Mannheim before the summer holidays, Dr Axel Weber, president of the Bundesbank, dismissed hostility to the euro anywhere as absurd, described it as a monumental success and rejected as foolish the notion that rejection of the constitutional treaty in two countries was going to affect the euro, which is a truly bizarre idea. I await with interest and impatience the Minister's response to those points.