Euro Area Crisis: EUC Report — Motion to Take Note

Part of the debate – in the House of Lords at 7:20 pm on 21st May 2012.

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Photo of Lord Giddens Lord Giddens Labour 7:20 pm, 21st May 2012

My Lords, I congratulate all noble Lords involved in writing the report, which is insightful, well reasoned and fairly non-partisan. The eurozone is on the edge of collapse into a precipice, and with it the world economy. However, it is important to recognise that the situation of the EU as a result of this has been completely transformed. There is no way that the EU can stay as it is. There is no way that the traditional cumulative method of building the European Union can be sustained in such circumstances. Federalism in some sense-including fiscal integration, as noted in the report-is the condition of the survival not only of eurozone but, in any essential sense, of the European Union.

The situation is dramatically affecting politics. I do not think that anyone has noted this, mainly because it is so blindingly obvious. Something extraordinary is going on politically across Europe. It is a Europeanisation of politics far beyond anything that has ever happened. This is true both where Governments have been replaced without elections, as in Greece initially and in Italy, and in countries that followed due electoral process, such as Spain and France. The same will certainly be true of Germany. The German election will be fought largely on European terrain. It is hard to overestimate what a massive transformation this is, although of course it occurs as a result of forces that are extremely difficult to manage.

It is possible that we will never go back to national politics in Europe. Of course, the eurozone could collapse, in which case there could be a reversion to the pre-existing system-but I think that that is very unlikely. Probably the whole scope of European politics has changed, and one could say that maybe national politics will never again hold the stage in Europe in the way that it did in the past. This is high drama by any reckoning.

The report rightly stressed that the fiscal compact and other planned budgetary disciplines would not be enough to resolve the crisis. My noble friend quoted the report, which stated that,

"ultimately the resumption of sustainable economic growth will hold the key".

"Ultimately" at the moment is the wrong word because as we know, and as my noble friend mentioned, to some extent the report has been overtaken by events. The arrival of President Hollande and citizens' revolts-if I may call them that-in Greece, Spain and elsewhere have already pushed growth back on the agenda, and President Obama nudged the eurozone in this direction at the G8 meeting.

The question of the hour concerns the relationship between austerity and growth-terms that I do not like very much. Rather than austerity we are talking about a version of economic sustainability; austerity is the wrong word. On growth, we have to ask what kind of growth, whom it will be for, who will receive the benefits and how it will be distributed in society. A resumption of growth that goes to only 0.05% of the population will not serve any social benefit.

While we talk about the relationship between these two elements, we should not offer facile solutions. At this juncture we need profound rethinking, mainly because there has been a generalised loss of competitiveness in the West which I would trace back for at least the past 25 years. This decline in competitiveness in relation to the large developing economies has been happening. In spite of everyone lauding the reforms that the Germans have made-I am happy with that because I was, in a marginal way, involved in some of them, especially Agenda 2010 and reform of labour markets-even Germany is not competitive in world markets; it is competitive because of the shelter of the euro. A very good paper has been written on what would happen if Germany withdrew from the euro, which is that large chunks of its industry would become uncompetitive overnight.

In contra-distinction to what the noble Lord, Lord Willoughby de Broke, said, this is not just a crisis of the eurozone. My noble friend Lord Monks put it well when he said that the generalised crisis of competitiveness in western economies has driven apart and revealed the frailties which were there in the euro project from the beginning. So the future of the euro, if I may put it this way, is not only a matter of the euro.

Let me make a few points about the relationship between austerity and growth. Although I said that I have strong reservations about the terms and would like them to be dropped, the Prime Minister was right to say that the two are not inconsistent with one another. The key difficult question economically is what is the relationship in the context of not only a national economy such as this one but in the context of the more generalised European economy.

My main objection to the Government's programmes in this country is that they do not seem thought through. You cannot even say whether a cut is a cut unless you trace out the knock-on economic implications of whatever reductions have been made. This is quite close to home to me, working in the university sector, because the Government's reforms of universities could produce a situation where there is less revenue coming in than there would have been if the reforms had been differently structured. This is partly because universities generate a lot of revenue anyway and partly because of the esteem with which they are invested on an international level. In many areas the Government have not thought through the knock-on implications of their programmes of cuts, and if you do not do that you cannot develop a sound plan for the future.

As has now come to the fore with the advent of President Hollande and Mario Monti in Italy, Keynesian-style infrastructure investment can make a difference if it is carried out on a European level, is funded by the European Investment Bank and is invested in sensible projects-not roads but, for example, the building of an integrated pan-European grid, with a fair chunk of renewable energy in it, would be a sensible and systematic project.

It is obvious that the debate at the moment is being carried on between, as it were, the neo-monetarists and the neo-Keynesians and I find it very inadequate. I do not think a Keynesian solution will generate the jobs and style of growth we need any more than a revamped neo-liberal position. We need something more basic and more innovative than that. In general, we have to think much more innovatively.

Even though one can talk about sustainable growth and growth in general and say that one is in favour of it, in current conditions it is extremely hard to achieve in any western economy. The US is finding it as difficult as the core European economies are, although this is disguised by the effects of the euro in the eurozone.

A good example of the difficulty is that one of the main arguments for generating new jobs produced in this country and in the European Union 2020 document is that the EU should be at the cutting edge of technological innovation. It could do this, for example, in the energy industry and keep ahead of competition from the large developing economies. However, this is not possible in any straightforward, facile way. You only have to look at the history of the German solar industry to see this. It is exactly the sort of industry one would expect to keep the German chunk of the European economy ahead of other parts of the world. However, the Chinese started constructing solar panels much more cheaply, with a higher level of technological sophistication than the Germans could manage, more or less undermining the German industry completely. The same thing has happened in the United States.

To me, this shows the scale of the task in front of us. In Europe we have a double task. We have to save the eurozone because, contrary to what has been said by some other speakers, flawed though it is, it is really the condition of some kind of stability, economic and otherwise, in the European Union. Therefore, it is imperative, but the task, if you link it through with a generalised loss of competitiveness, is truly formidable. As an academic, social scientist and economist, I think that we do not actually have the concepts and the ideas we need to break through the situation. Therefore, we are reduced to this rather stale confrontation of traditional economic orthodoxies.