My Lords, in thanking my noble friend Lord Newby for introducing this important debate, it goes without saying that I agree with everything he said. It probably will not surprise noble Lords that I disagree with almost everything said by the noble Baroness, Lady Noakes.
When the eurozone was established, it was clear that its members could not have the benefits of the euro without the drawbacks of losing domestic control over their currency, which meant ceding fiscal powers to the centre. At that time, rules were established regarding fiscal policies to be followed by members of the eurozone both to qualify for admission and to maintain those rules when they became members. The first thing that happened of course was that for political reasons the numbers were fudged for Greece, Italy, Spain and probably Portugal in order to allow those countries into the eurozone. Even worse, when things got a bit rough in France and Germany, those fiscal rules were scrapped and France and Germany were allowed not to obey the long-established rules. That, inevitably, has led to the situation in which the eurozone finds itself today.
It would be easy to conclude that that is just Europe's problem and, "Aren't we lucky to be outside the eurozone?". Unfortunately, as the noble Baroness, Lady Noakes, touched on, we have a problem as to what the crisis in the eurozone does for our UK banks and financial institutions. She disclosed the fact that she is a non-executive director of the Royal Bank of Scotland. I do not know the details of the RBS's loan portfolio to eurozone countries. But, clearly, were those countries to default, that must have a significant impact on the UK banks which have lent money to those Governments or institutions in those countries. That will have an ongoing effect on the ability of those banks to lend in the UK domestic market.
Perhaps I may introduce your Lordships to the arcane topic of credit default swaps, which is an even greater danger for UK financial institutions. Credit default swaps are a mechanism that has been invented by banks and financial institutions to make money, of course, which basically means that loans to eurozone countries or other countries throughout the world are insured by this mechanism. Credit default swaps involve parties that are not only UK banks but UK pension funds and UK hedge funds, all of which are involved in this market. If the eurozone countries start to default in relation to loans, it is not only UK banks which have to write down the loans that they have made but there are significant losses in the credit default swap market which affects those institutions. Not only the banks will be affected.
What is worse is that, under the new accounting rules that were brought in on the mark-to-market requirements for financial institutions, even if countries have not gone bust but it looks as though the rating of those credit default swaps is worth less than they would be when they were originally taken out, those banks or financial institutions also have to write down the effect of that mark-to-market valuation. That has a very significant effect on the balance sheets of our UK banks and financial institutions, which will have a serious impact on the ability of all those financial institutions to provide the engine for growth that the UK economy needs.
We have no alternative but to continue the engagement with our European friends. It does not mean that we have to rush into the eurozone, although, interestingly, I see that Poland and Lithuania as we speak are very anxious to join. I am not suggesting that, but we absolutely need to engage in Europe. I commend the initiative of the Department for Business, Innovation and Skills, which has put together an informal like-minded group for growth. It consists of 14 states in Europe, half of which are eurozone countries. That group is trying to work together to develop policies for the development of growth in Europe and the United Kingdom. It is now the time to engage in Europe and not to walk away in order to secure policies for growth.