Euro-zone Economy

Part of the debate – in the House of Lords at 2:00 pm on 12 October 2006.

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Photo of Lord Newby Lord Newby Spokesperson in the Lords, Treasury 2:00, 12 October 2006

My Lords, I congratulate the noble Lord, Lord Dykes, on initiating this debate. Not surprisingly, I absolutely share his general thesis that Britain would be better off within the euro-zone. However, I fear, looking at recent international events, raising that question is a bit like asking, "Should Beckham play for the England football team?". It is clear that as long as we have the current manager, he won't be. Equally, as long as we have the current Chancellor, who is a possible Prime Minister, the chances of Britain joining the euro-zone are almost as negligible.

The noble Lord, Lord Harrison, reminded us of the golden age in euro preparations, when a whole raft of committees were examining them. Euro preparation plans were produced every few months and there was a sense of real momentum. I feel sorry for those few remaining souls whose job is to work on euro preparation, because one wonders whether, when they go to bed or go home at the end of the week, they feel they have achieved something and are part of a great, positive enterprise.

The debate is not going to go away and, when it is revisited from time to time, our starting point will be whether the euro-zone has been a success in its own terms and whether the economies within the zone have done well out of it. There are a number of signal successes. The euro-zone has achieved one of its central purposes of maintaining inflation at a low and apparently sustainable level. The growth and stability pact that underpins the euro-zone, despite various vicissitudes, has undoubtedly helped to rein in what would otherwise have been unsustainable levels of public expenditure among a number of euro-zone members. As a result, that has avoided the kind of boom and bust in public expenditure with which we have associated some of those economies—and which may become a feature of our own economy.

Figures produced at the end of last month have even led to the suggestion that the euro-zone now enjoys a Goldilocks recovery—neither too hot nor too cold. Inflation across the zone in September was 1.8 per cent; growth in the second quarter exceeded that of the US and it looks as though that figure will be some 2.5 per cent over the whole year. A recent Eurostat survey showed that economic sentiment among businesses and consumers across the euro-zone was at its highest level for five years.

These figures are underpinned by productivity improvements in the first half of the year—up by 2 per cent, compared with an average rise of less than 1 per cent over the past five years. Since the euro-zone was created in 1999, some 7 million new jobs have been created and the employment rate across the zone as a whole has risen from 63 to 66 per cent. Looking at some of the countries within the euro-zone, rather than the aggregate of the whole zone, there have been some remarkable improvements.

Germany has been extremely interesting, because it has adjusted to euro-zone membership by having very low real-wage growth over the past six years, directly as a result of recognising that the country would be locked into a stable currency with its principal trading partners in Europe. That has produced a discipline that has enabled negotiators to rein in real wage increases. In turn, that has helped fuel a big rise in German trade and current account surpluses. Perhaps partly because of that long period of low real-wage growth, it is not surprising that confidence in the German economy was at a 15-year high when it was last measured.

In France, the picture has been more mixed. However, in June, unemployment was at its lowest level for four years and the stability and constraints that the euro-zone has provided have helped to turn the economy around. Of course, given that the euro-zone is a multifarious area, some successes are distinctive to the countries that have been able to achieve them.

The Greek Government recently announced a 25 per cent upward revision in GDP, because Greek statisticians realised that they has failed to take account of some fast-growing areas of the service sector, of which money laundering and prostitution were singled out in the popular press. One wonders what research was undertaken by the Greek statisticians that enables them now to measure those sectors of the economy with greater precision. One can only be grateful and pleased for Greece that its new-found wealth, albeit from surprising sources, means that it can bring its budget deficit below the 3 per cent GDP ceiling, as required by the growth and stability pact.

Given that we are discussing the economy and Europe, it would be mistaken to take the view that everything has been plain sailing and will necessarily continue to be so. I strongly agree on a political level with the support given by the noble Lord, Lord Harrison, to Monsieur Trichet for the independence of euro-zone institutions, so that there is no political interference to underpin the reasons for the key success of those institutions—keeping their eyes focused on a clear, non-political target; namely, the inflation rate. I remember that Monsieur Trichet made a speech here in London before the euro-zone was established about how he was a firm supporter of it, even though he was governor of the Banque de France, because it would impose discipline on the French economy and help reform—which it has.

That is the down side of the current situation, a general sense that reform has not gone far enough, whether in relation to taxes on business, labour costs as a result of social payments, or generally inflexible labour markets. There is an argument, with which I am not sure I wholly agree, that the euro-zone has created a false sense of security for its members in that they believe that, because they have the security blanket of the euro-zone, perhaps they do not need to reform as much as they might in those areas. However, failure to do so only slows down growth.

But even taking into account those issues—and we see how reform is undertaken in a number of countries and remember how difficult it was to reform many of our own labour practices and the great rows that took place, particularly in the 1980s, over reforms that we now extol internationally—reform is taking place and pressure to reform is continuing. In the member states which have newly joined Europe and are struggling to reach a position whereby they can join the euro-zone—Hungary or Poland, for example—for different reasons there is a consensus that euro-zone membership would improve the management of their macro economies making it less likely that high, ongoing budget deficits are maintained and making those countries less vulnerable to international economic shocks.

As for the argument that the euro-zone might unravel because Italy, in particular, has difficulties from time to time, first, that is highly unlikely; and, secondly, does anyone really believe that the long-term interests of the Italian economy would be served by being outside the euro-zone? I think not.

In the UK, there are strong economic arguments in favour of being a member of the euro-zone, including that mentioned by the noble Lord, Lord Harrison, regarding the dollar. The key argument, which we should have been and, it is hoped, will be honest enough to address, is a political one about whether Britain wishes to be at the heart of Europe and whether it wishes to play a full part in moving forward the European economic reform agenda as a whole. So long as we are outside the euro-zone, we are simply not sitting in the meetings which would enable those reforms to take place. There is undoubtedly a big economic cost in not being in the euro but, in my view, there is an even bigger political cost.