Euro Area Crisis: EUC Report — Motion to Take Note

Part of the debate – in the House of Lords at 6:37 pm on 21st May 2012.

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Photo of Lord Maclennan of Rogart Lord Maclennan of Rogart Liberal Democrat 6:37 pm, 21st May 2012

I believe it is nearer 80%, which is an indication that the traditional parties might be worthy of greater support than Syriza, but it is not for us to comment on the internal politics that are leading up to the June elections in Greece.

I believe that it is not sensible to lecture Greece and still less sensible to lecture Germany from the sidelines about what they ought to do. Britain cannot take a holier-than-thou attitude. Some time ago, the Chancellor of the Exchequer spoke of the need for fiscal union, which we have heard repeated today even by the noble Baroness, Lady Noakes, to stimulate recovery and to make the eurozone a workable phenomenon. Others, including some German voices, have adumbrated steps towards banking and political union. But these, although sensible medium-term goals, will not be achievable in the amount of time available to set aside the crisis that faces us immediately.

Northern Europe is not ready to be tied to bailing out its southern neighbours, despite the probable adverse consequences, including slashed production in most European and many other countries. Nor could Germany take on the entire debts of the European region without calling into question its own credit worthiness. All EU Governments should be assembled in conference to work out an acceptable solution. Two-day meetings by heads of Government are not enough. Some 74% of the Greek Government debt is now held by Governments and the IMF, which poses a massive threat to taxpayers. There is no point in crying over spilt milk. Earlier restructuring would certainly have required more banks to be bailed out but that could have avoided the confidence-sapping sequence of crisis. Roughly €100 billion was paid to private creditors by the Greek Government before their bailout in February.

The European conference which I am proposing should aim further to write down Greek public sector debt, to fix a longer period in which to hit their fiscal target, to agree to second immediate expert personnel to work with the Greek Government and other Governments in difficulty, and to achieve delivery, including structural reform. There is also a need for liquidity support for solvent banks and Governments. The natural liquidity backstop is the ECB, which has been mentioned by speakers in this debate, including the noble Lord, Lord Monks. Lenders must be properly capitalised but that has been postponed time and again in the eurozone. The IMF considered that €200 billion was required last year but only €100 billion was agreed by the Governments.

The new European security mechanism would be a suitable institutional arrangement to sustain the illiquid Governments. The ESM could find itself short of funds, which might be overcome by allowing it to borrow from the ECB. That idea appears to be favoured by successive French Governments, including President Hollande. But insolvent Governments need to restructure their debts and illiquid Governments need credible plans to reduce theirs. There is also a need to introduce controlled resolution of undercapitalised banks. The stakes of shareholders have massively diminished in value. Bondholders could be bailed in to provide a buffer. Banks should be prepared to move to subscribing to such funds in due course.

It is expected that the EU Commission will produce its own proposals in June; they should be fed into the proposed standing conference of member states. Unless member countries of the European Union come together with appropriate expert support on a continuing basis, there is a grave danger that a Greek exit, leading to their Government's default; contagious runs on banks in other countries; exchange controls being imposed; the new currency being devalued; and hyper-inflation being experienced in some countries and deflation in others, will be a highly predictable consequence. We know that Argentina and Iceland managed to turn themselves around, but such chaos as I have described in the euro area, the second largest economy in the world, with the largest banking system, needs to be treated as the paramount challenge to western democracies since the 1930s.