Euro-zone Economy

Part of the debate – in the House of Lords at 2:10 pm on 12 October 2006.

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Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions 2:10, 12 October 2006

My Lords, the enthusiasm of the noble Lord, Lord Dykes, for the European project is well known in your Lordships' House and he has not disappointed us this afternoon. It will not surprise him that I find it difficult to agree with anything that he said, and in that I feel somewhat alone among those who have chosen to speak in this debate.

The noble Lord's Question refers to the euro-zone economy, but of course there is no such thing. Adding together the economies of the 12 countries that have committed themselves to economic and monetary union does not make them one economy. It is just possible that if the 12 countries had exhibited genuine and sustainable economic convergence prior to the creation of economic and monetary union, we could now be looking at something that resembled a single euro-zone economy. But the truth was that the politics of the euro were stronger than the economic facts, and so various wheezes and fibs allowed economic and monetary union to proceed on the basis of economies that were, in fact, very dissimilar.

We have seen the truth of divergence in the different economic performances post-economic and monetary union, with Ireland at one end of the growth scale and Germany at the other. That has been the case not just in terms of growth; it will also be found in workforce statistics and in income per person.

The truth is that there is not one euro-zone but 12 economies moving in different ways. That is not just a comment on the smaller countries within the euro-zone; it is true of the core countries of France and Germany. For example, in the past few years, one has done startlingly well at increasing its exports in goods and the other has fallen back. One has a growing trade surplus and the other a growing trade deficit. That helps to explain why Germany has recently turned its economic performance around more than France.

This divergent performance throughout the euro-zone has, in turn, illustrated the fallacy of a one-size-fits-all instrument of economic policy—namely, the single interest rate tuned to a euro-zone-wide measure of inflation. That interest rate policy has, until recently, held rates at levels designed to suit the sluggish German economy. But of course the real impact has been an inflationary boom in other economies, such as those of Ireland and Spain, on the back of negative real interest rates. The overall statistics for the euro-zone never tell the truth for any individual country within it.

For several years, euro-zone growth has lagged behind that of the UK, the US and practically anywhere else you care to mention. There has been some good news on euro-zone economic performance this year, largely on the back of an apparent recovery in Germany. But a number of factors—for example, the World Cup effect and the imminent changes in VAT in Germany—have flattered those statistics in Germany. Yesterday, we had the news that business confidence in Germany had slumped dramatically. The noble Lord, Lord Newby, said that it was at a 15-year high, but I suspect that he did not read yesterday's news, which showed that it was again in serious decline. Indeed, yesterday's view from the European Commission was of lower, perhaps even zero, growth in the first quarter of next year. That rings true. A potential world economic slowdown on the back of high oil prices and a slowing US housing market, as the IMF has warned, will not bypass the euro-zone.

The relative lack of success of the euro-zone is not a Eurosceptic narrative. No less than the Conseil d'Analyse Economique, firmly rooted in the French Government, concluded in a recent report:

"Economic integration has stagnated and no longer promotes growth. The Euro's creation has not produced the knock on benefits expected. The Eurozone area's macroeconomic framework has become obsolete".

The only thing that is extraordinary about that quotation is that it is predicated on a belief that economic integration has, at some stage, in some way promoted economic growth, and I do not believe that there is a jot of evidence to support that proposition. The extraordinary thing about the report overall is that the solution to this failure is more economic integration, but of course there never has been any accounting for the French.

The plain facts remain that some of the euro-zone economies have avoided deep and meaningful reform, especially in their labour markets. We have to single out Germany, France and Italy as the principal culprits. French labour laws are Byzantine by any standards and they probably vie with Germany in their cost. The World Bank, for example, has estimated that in Germany it costs an average of 67 weeks' pay to get rid of each worker. That does not promote flexibility in the economy.

Once upon a time, the failure of the single currency and the consequent implosion of the euro-zone was the prediction of only some Eurosceptics. For those, it was just one more reason why the UK should keep well clear of economic and monetary union. If the euro-zone fails to hold together, that will be messy and costly, not just for the countries concerned but also for countries that have significant trade balances with the euro-zone. That, of course, includes the UK, although we are not, by some margin, the country most affected. That is why the failure of economic and monetary union was not something that any UK citizen, Eurosceptic or not, could rejoice in predicting.

But those Eurosceptics have recently been joined by the distinctly pro-euro think tank, the Centre for European Reform. This think tank has concluded that the single currency now risks becoming a,

"source of economic dislocation and political division".

Italy may well be the closest to the edge in triggering a crisis but it is not alone, with Portugal, Greece and Spain joining it in the possible departure lounge.

I have a number of questions that I hope the Minister will deal with when he responds. First, does he agree that the countries within the euro-zone have not, overall, prospered from their membership? Economic performance within the euro-zone has been disappointing, with the one-size-fits-all policies harming rather than helping those economies. Secondly, and following on from that, does the Minister agree that the Chancellor's determination to keep the UK out of economic and monetary union has been a wise and sensible stance from the perspective of the UK economy?

Thirdly, and more importantly, will the Minister update the House on the Chancellor's current thinking on the UK and economic and monetary union? The likely move of the Chancellor to No. 10 at some stage when the Prime Minister finds it convenient makes this especially important. The Chancellor has strong Eurosceptic credentials and many of us hope that, if he is allowed to move to No. 10, he will take those credentials with him.

Fourthly, will the Minister remind the House when the next assessment of UK membership will be made and will he outline the terms of that assessment? The noble Lord, Lord Harrison, also asked that question. The timing of that assessment against the background of the Labour Party's succession struggles makes this an important issue. The way in which the assessment is carried out is also important. The right result was achieved last time but I am sure that I am not alone in thinking that an assessment carried out behind the closed doors of the Treasury is not a transparent and respectable way to conduct major government business. Will the assessment next time be a more open process?

Lastly, and even more importantly, will the Minister confirm that there will be no question of the UK joining the euro without a referendum, with the UK approving that move? Economic and monetary union has not been a success for the economies that are locked into it. Serious cracks are now appearing and, while we may well struggle on without an implosion, it is not a system that a successful economy, which I believe our economy broadly is, should want to join. I hope that the Minister will confirm that the Government continue to believe that the British people will be the best judge of that if the question ever arises again in earnest.