My Lords, I congratulate the noble Lord, Lord Newby, on bringing forward this debate at such an appropriate time, and I compliment the noble Lord, Lord Bilimoria, on raising some of the really grave aspects of this crisis.
The first point I want to make is that it is no good tinkering around the edges. It is necessary to understand the cause of the eurozone financial and government debt crisis. It is blindingly obvious. If very disparate economies such as those of southern and northern Europe share a currency for political reasons but they are in no way homogenous, and the south has become 35 per cent uncompetitive against the highly efficient north, it is not surprising that the southern economies are in trouble. Their economies are dead in the water; their government debt and borrowing go up.
Secondly, it is not surprising that the markets in the rest of the world do not want to buy Spanish and Italian debts. The prospect is that these economies will not recover without significant devaluation one way or the other. So who is going to buy their bonds when there is the fear, if not the threat, that sooner or later there will be substantial losses as a result of devaluation? The fundamental problem has to be looked at and addressed.
There have been comments about the fiscal union route of dealing with this. Indeed, there is truth in the principle that, if you are going to share a currency, you need to have common economic and fiscal policies. However, I really do not think that is the solution. I will go through some of the ingredients. Euro bonds are okay, but Germany effectively underwrites whatever proportion of the debts of Italy and Spain it is responsible for. Not surprisingly, Germany is not very keen to do that.
The second, more traditional way is to make transfer payments from the more prosperous areas to the less prosperous areas. In America, transfer payments amount to 30 per cent of federal tax revenues. Even in the UK, in our little common currency area, they are £70 billion or £80 billion of public spending. The problem with the sort of transfer payments that would be required from Germany to southern Europe is that they could be of the order of a third of Germany's GDP. Anyone who thinks that Germany is going to consider such amounts is mad. Just supporting the former East Germany depressed its economy for 15 years. The German answer is to say, "Right, effect an internal devaluation". That is fine, but does anyone think it politically practical that Italy and Spain are going to effect internal devaluations of 35 per cent by slashing pay, employment and benefits? Even if they could do it, the result would be a winding-down of their economies, increasing their deficits even further. Candidly, I do not think that the standard route of transfer payments that America and Britain have used offers very much. Transfer payments have had the effect in America and Britain of locking in dependent and rather failed economic areas. The Deep South of America was a failed economic area for 100 years after the Civil War, when it was stuck with the currency of the north.
Finally, as others have said, the whole political objective of the EU was to get rid of nationalism, and what do we see? We see southern Europe starting to get very resentful about being bossed around by Germany, as it sees it, and Germany starting to get extremely uncomfortable about being able to pay for things. This is hardly good news for good relations.
I would like to throw on to the Floor the idea that the only workable solution is for the euro to divide into a hard currency for northern Europe and a soft currency for southern Europe. It would be easy to achieve, but I believe I know how it could be achieved. I think that it would be workable because there is a commonality of economic characteristics between the northern countries and the southern ones. I think that if the eurozone turns its back on this in the present climate, it will miss a huge opportunity to stop chaos.