Draft International Monetary Fund (Increase in Subscription) Order 2011
The Committee consisted of the following Members:
Eliot Barrass, Committee Clerk
† attended the Committee
The following also attended ( Standing Order No. 118(2) ) :
The order will increase the UK subscription to the International Monetary Fund. It is in the UK’s interest to have a strong, effective and legitimate IMF at the heart of the international financial economy. The IMF has been at the centre of the international response to the economic crisis and demands for financial assistance from the IMF remain at record levels, with more than 50 IMF financial assistance arrangements currently in place. The present risks to the global recovery underscore the need to ensure that the IMF is adequately equipped to fulfil its core role of promoting financial stability and economic growth.
In April 2009, the G20 summit in London agreed to increase the IMF’s resources by $50 billion, to enable it to assist countries affected by the financial crisis. The G20 agreed to take immediate action to increase the IMF’s resources in the short to medium term. That has been provided through bilateral loans and expansion of the new arrangements to borrow framework—the NAB—as they were the quickest ways to mobilise the additional resources needed by the IMF, but bilateral arrangements are only temporary measures and the NAB is designed as a contingency mechanism, activated in times of crisis for a six-month period.
The G20 summit in London agreed on the importance of preserving the IMF’s status as a quota-based institution in the long term, so at the G20 meetings last November, agreement was reached to review the NAB and to reduce it in size once the quota increase was implemented. At the same time, the G20 reached agreement on a quota and governance reform package, which included doubling total quota resources and delivering a shift in quota shares to dynamic emerging and developing countries. Reaching that agreement represented a significant achievement for the G20 and the international community and the reforms will create an IMF that is representative of today’s global economy. It is now crucial that all countries take the necessary steps to implement that commitment.
The subscription is denominated in the IMF’s unit of account, the special drawing right, and currently stands at 10.74 billion SDRs, which is approximately £10.7 billion at today’s exchange rate. The order will raise the subscription to 20.16 billion SDRs, equivalent to about £20.15 billion, representing an 88% increase in the UK’s commitment
The second and more important point is that lending to the IMF does not count as public spending. A loan to the IMF is a loan to probably the most creditworthy institution in the world. IMF loans have traditionally been afforded primary creditor status, meaning that they are repaid even if other creditors are not. No country has ever lost money lending to the IMF in such a manner. When the IMF calls for financing from the UK, we swap some of our reserves for a claim on the IMF, meaning that we are in essence exchanging one class of safe asset for another; we do not borrow or spend more to do that.
The Chancellor announced in the 2011 Budget that, partially to meet potential calls on the reserves from the IMF, an additional £6 billion of sterling financing would be provided for the official reserves in 2011-12. The Government envisage that financing for the reserves will remain at a similar level over the next three years, up to and including 2014-15.
Mr William Cash (Stone) (Con): Is the basis on which the figures announced do not count as part of public expenditure determined by the Office for National Statistics in its new form as the Statistics Board in the light of EUROSTAT rulings? In other words, it amounts to a dodge, because the amount of money that should be on our balance sheets is not included only under those rather artificial rules.
Mr Hoban: I was about to expand on that point, so my hon. Friend’s intervention is timely. Just as public spending is not affected by increased IMF contributions, public sector net debt remains unaffected by them. Loans to the IMF and SDR holdings remain an asset in our reserves, representing a shift in the composition, rather than the size, of those reserves. The money is a loan, not a grant, to the IMF, and we expect to get it back; accordingly, it is treated as an asset.
In this sense, making a loan to the IMF is a little like our placing a sum of cash in a deposit account at a bank. In doing so, we make a loan to the bank, but we would not say that we had reduced the value of our asset or that we were holding a riskier class of asset.
Mr Carswell: My hon. Friend suggests that an 88% increase in our IMF subscription is somehow a good deal for Britain. As I am sure he is aware, Belgium, the home of many a supranational institution, is increasing its contribution by only 39%, while Canada’s and Holland’s contributions are increasing by 73% and 69% respectively; Kuwait and Saudi Arabia, which are never short of a few bob, are increasing their contributions by 40%; and Switzerland, which is not a member of the EU, is increasing its contribution by 66%. How is the acquisition of greater debt liability a good thing for this country?
Mr Hoban: My hon. Friend might be aware that quota share is determined on the basis of a formula. It is based on a country’s relative contribution to the global economy and the openness of its economy. A very formulaic approach is used to calculate a country’s quota, which also links to the Government’s arrangements.
Mr Hoban: There is a flow of money backward and forward between the IMF and the UK. We still have an asset with the IMF. By increasing that asset with the IMF, we are in no way reducing the resources available for public spending in the UK. That is an important distinction to note. This money is not coming from public spending or reducing the amounts available to spend on our schools, hospitals or police; it is simply a reallocation of reserves on our balance sheet.
Stephen Williams (Bristol West) (LD): Further to the intervention by my hon. Friend the Member for Clacton, if my arithmetic is correct, the amount of special drawing rights has exactly doubled, but Britain’s quota has slightly less than doubled and our share of total SDRs has gone from 4.5% to 4.3%, so some other countries’ contributions must have increased.
Mr Hoban: Indeed, it is a dynamic process. Quota shares change as a consequence of the formula. Part of the reason was to make sure that developing economies could play a greater role in funding the IMF. For example, China’s quota commitment will increase to £30 billion. The US quota will remain the largest—
My right hon. Friend the Member for Wokingham asked about repayments of quota. We received quota repayments of 65.2 million SDRs in June 2010, 82.4 million
Mr Carswell: In as calm a manner as possible, may I say that my hon. Friend is absolutely right, but since 2000, China’s GDP has increased by nearly 400%, while ours has increased by a mere 51%, so China’s IMF contribution will of course grow. That was not the point I was making, however. My question is why countries such as Belgium, Canada, Holland and Switzerland can get a lower increase in their contingent liabilities than we do. How can that be a good deal for Britain?
Mr Hoban: As I told my hon. Friend earlier, quota share is are worked out according to a formula. One cannot simply apply the same percentage to Belgium, Canada, the UK and China. A range of measures are used to assess the contribution that a member of the IMF should be making to the quota. It is not just about GDP.
Mr Cash: On the question of a formulaic system, does my hon. Friend not also think there is a practical system that we ought to bear in mind, which is the actual practicality of default? Most people believe that Greece will default—that seems to be the general consensus, however interpreted. In that context, does he not agree that our exposure to the IMF arrangements, quite apart from those relating to the eurozone, means that we are severely exposed and liable to lose money, so different considerations apply? It is like feeding heroin to a heroin addict.
Mr Hoban: I go back to what I said earlier: no one has lost money by lending to the IMF. The IMF’s status as a preferred creditor means that it is the last to make losses, and history shows that the IMF always gets its money back. My hon. Friend should take comfort from that.
Ms Gisela Stuart (Birmingham, Edgbaston) (Lab): May I remind the Committee that the initial IMF package, which so far has not led to default, includes cutting spending, increasing taxes and devaluing the currency? Up till now, it has not lent to a country that could not actually implement an IMF package because the third element was missing.
Mr Hoban: Hon. Members on both sides of the Committee will be aware that in the eurozone, devaluation is not an option for individual countries. Clearly, as circumstances change, so do the conditions attached to the IMF package. The package of IMF support for Greece, Ireland and Portugal included measures to raise taxes, cut public spending and improve competitiveness in the long term.
Mr Hoban: May I just go back to the question about Belgium and Saudi Arabia? IMF quotas are important in two ways: first, they are about our willingness to commit to support the global economy, and secondly, they affect our voting power. We have a seat on the IMF board as a consequence of our quota share. If we reduced our quota share, we would lose that key role to influence the way in which the IMF acts. Countries such as Belgium and Saudi Arabia do not have a seat on the IMF board. I am not sure whether my hon. Friend the Member for Clacton was suggesting that we should exit the IMF board. I suspect the answer is that he would not regard that as appropriate.
Graham Stringer: The Minister has given us a lot of useful statistics, but I want to follow up the question from the hon. Member for Stone. When the Prime Minister made a statement on the European Council, he said that our contribution to the loan to Greece was 4% of the IMF loan, but he was unable to tell us precisely what that sum was. Can the Minister enlighten us?
Mr Hoban: Our quota share is about 4%, but the way it works is this: we lend money to the IMF and it goes through our quota or it goes through the new arrangements for borrowing, but that funds the IMF’s general activities—we cannot say that a particular amount of money is earmarked for Greece. When the IMF needs resources from IMF members for a particular financing programme, rather than ask everyone to contribute their quota share in proportion, it tends to look at the level of funding from all members, identifies those who have contributed below their quota share and calls upon them for their contribution to that programme. It is not a straightforward matter of saying, “Our quota share is 4%, therefore our share of the package is 4%.” There is a disconnect there.
Chris Leslie (Nottingham East) (Lab/Co-op): I am listening carefully. I know the Minister is talking about the circuitous route for the money to be lent to Greece by the IMF. The scenario is hypothetical, but if there were a Greek default and there were preferred creditors, how much of British taxpayers’ money, in pounds sterling, would potentially be exposed in that default scenario?
Mr Hoban: I have just given the answer to his hon. Friend the Member for Blackley and Broughton. There is not that direct link that the hon. Gentleman is looking for. I should also point out that I do not engage in hypothetical speculation about the future of one nation’s finances. History shows that the IMF has always been repaid. That was true when the Callaghan and Wilson Governments borrowed money from the IMF, and it is
Mr Carswell: On the point raised by my hon. Friend the Member for Birmingham, Edgbaston, which has not been properly addressed, the Minister is correct to say that historically no one has lost money by lending the IMF, but historically the IMF has done three things: it has devalued; it has allowed a country that needs a rescue to either restructure or to default on its debt; and it has allowed a shrinkage of the public sector. In other words, it has taken steps to reduce the level of debt. Now, however, the IMF is presiding over a rescue package that is increasing the amount of debt. It must be the first bail-out in history that has involved ladling water into the boat. Will the Minister explain how with the money we are stumping up for the IMF will help, unless the Government are prepared, as my hon. Friend said, to allow the IMF to do what it traditionally does, but is now failing to do.
Mr Hoban: My hon. Friend should take account of the fact that, as I said to the hon. Member for Birmingham, Edgbaston, there is a different set of circumstances. The IMF has signed off the programme that it has agreed for Greece. It has approved the measures that the Greeks are taking and has looked at the sustainability of the levels of debt, and it thinks that the Greek Government are taking the action required to tackle the crisis. Frankly, if it was not happy with the programme that the Greek Government are introducing, it would not have signed off the debt sustainability report and the release of a further tranche of money. The immediate reason why Greece requires funds is to run over its existing debt, and that tranche of money will enable the Greeks to manage that problem.
Mr Cash: Does the Minister not accept that, apart from the extraordinary situation of the IMF’s bail-out increasing the amount of debt, as so well described by my hon. Friend the Member for Clacton, there is also a serious problem relating to the use of the word “legitimacy”, which the Minister mentioned at the beginning of his remarks? Madame Lagarde, who is now the head of the IMF, said about the bail-out arrangements for the eurozone, including those affecting us, that we broke all the rules because we had to save the eurozone. Furthermore, it broke the rules when it went into Ireland, because it went in before a request was made. Is there not something seriously wrong not only in its increasing the amount of debt, which the IMF is not there to provide except for a legitimate purpose, but in its now having a chief who overtly says that she will break the rules to achieve her political objectives?
Mr Hoban: My hon. Friend has raised Madame Lagarde’s comments before and he has also cast doubt on the legality of article 122 and its use to create the European financial stability facility, and we have debated those matters on several occasions. Is he really saying that it is in the interests of our economy for the Greek economy to collapse, given the contagion effect that that would have on Europe? Does he not agree with me that action needs to be taken to stabilise the Greek economy?
Mr Hoban: Let me continue. Does my hon. Friend agree that it is not in our and Europe’s interests for the Greek economy to collapse, given the impact that would have on jobs in the UK and across Europe?
Mr Cash: I am grateful to the Minister for issuing such a direct challenge. The answer is very simple: it looks as though this Government are completely incapable of being prepared to renegotiate the treaties so that we end up with a European Union—or whatever should replace it—that actually works, which it manifestly does not at the moment. That is the real problem. The Greek situation is merely a symptom of the underlying cause. The failure of the Government to renegotiate the treaties, or even to suggest that that should be done, lies at the root of the trouble.
Mr Hoban: I know my hon. Friend’s long-standing position, but that does not help us to tackle the problem. It will not help create stability in the eurozone, nor will it minimise the threat to the stability of the UK economy. Members have different views about the future nature of the relationship between the UK and the European Union—indeed, Mr Hollobone, I am sure you have a view on the matter—but when dealing with the current crisis, we must focus on what needs to be done to minimise the economic consequences, as they could have a significant impact on the UK.
In order to implement the quota increase that we have been discussing this morning, the IMF requires that three fifths of members with a collective voting share of at least 85% to finalise their domestic legislative requirements. That is why the Government are seeking to increase the UK’s subscription to the IMF, under the International Monetary Fund Act 1979.
Mr Bone: I am grateful to the Minister for giving way; he is generous. I have listened to his entire speech, but let me say, as one accountant to another, that I am still trying to work out whether this is a contingent liability or an actual one. I believe that the Government’s position is contingent, but paragraph 7.3 of the explanatory notes states:
Mr Hoban: We have an agreement to fund up to £20 billion, broadly speaking. We will increase our quota, which is a commitment to spend up to that much, but that is not being drawn down. It is rather like an overdraft facility, but is as yet not fully utilised. That is the distinction that I would make to a fellow accountant.
I am sure the Committee appreciates the importance of the order. The UK must play a full part in ensuring that the IMF remains representative of the global economy
It is important that we are in a position to debate, influence and vote on the whole range of financial assistance programmes on which the IMF is working. Not increasing our quota share would be an abnegation of our responsibility to the global economy. As we have the fourth or fifth largest economy in the world, a strong interest in international trade and a strong interest in ensuring the growth of the global economy, I believe that it is our responsibility to put the measure into effect.
The Chair: In a moment, I shall call the shadow Minister, but given the good attendance this morning, I believe that other Members may wish to catch my eye. I hope that everyone who wants to speak will be able to do so. I shall invite the Minister to respond to the debate at about 11.50 am, but we have to draw stumps at noon.
It has been interesting listening to the Minister. The Opposition agree with him on the importance of the IMF and that it must remain a strong and effective institution. As internationalists, we believe it is important that we support the worldwide community in taking action to secure global stability.
Chris Leslie: If the hon. Gentleman will allow me, I shall continue. There is a number of tests that I hoped the Minister would mention. The order significantly increases our IMF subscription, whether it is a contingent or an actual liability. The Government have in the past, when they have had the opportunity to lend money to other organisations in a domestic context, such as Sheffield Forgemasters, have chosen not to do so, because of a lack of affordability. Although it was useful to hear the Minister’s description of how the IMF arrangements work, but there is potential risk to the taxpayer, albeit that has never crystallised in the past.
Chris Leslie: If the hon. Gentleman will wait a moment, I want to describe the tests that I think the Minister had to address in order to secure support for the statutory instrument. Times have changed considerably in recent months, never mind the past year, and clearly in the eurozone in particular we face a set of scenarios that had not been previously envisaged.
As wholehearted enthusiasts of the work of the IMF, and I congratulate Madame Lagarde on her appointment to its stewardship, we need to balance the UK’s IMF
Chris Leslie: I will give way to the hon. Gentleman in a moment. The UK contributes through the IMF to countries such as Portugal, Ireland and Greece; it also contributes through the EFSM. The first test I was hoping the Minister would address is whether he can guarantee that the UK taxpayer will be exposed to potential sovereign default only through the IMF or through the EFSM, and not both, before the expiry of the EFSM in June 2013.
Mr Cash: I am sure the hon. Gentleman accepts that we will not allow the previous Labour Government to get away without taking responsibility. Does he not agree that it was they who entered into the unlawful arrangement on the EFSM under article 122, whatever acquiescence the present coalition Government may have given? Secondly, does he not agree that the EUROSTAT rules on the question of off-balance-sheet accounting were also agreed by the Labour Government? Thirdly, does he not agree that the increase in the IMF contribution was agreed under the aegis of the previous Labour Government at the G20 meeting in 2009? They are entirely culpable. It is no wonder that the hon. Gentleman is engaged in the greatest escape since the wooden horse.
Chris Leslie: It is very touching to hear the hon. Gentleman’s political loyalty displayed in such a vocal way. I gently say to him that, when the facts change, we should re-evaluate. Changes have occurred, and he would be the first to acknowledge that they have been rapid, even since last May. There is consensus, as outlined by the Economic Secretary’s note, that the EFSM was adopted by the previous Chancellor of the Exchequer in May, but that is not what we are debating today. I do not wish to get diverted from what is actually a debate about the IMF subscription. Given the scenario we face, on the UK’s exposure, I am sure that he would be the first to acknowledge that it is reasonable for us to say “Yes, we should pay our fair share,” but should we really be paying more than our fair share, duplicatively, through the EFSM and the IMF simultaneously?
I pressed the Minister on the second test during my intervention, but he did not come up with the goods. He did not explain what would happen in a default scenario if IMF loans were not repaid in full. I understand the politician’s usual rubric for hypothetical scenarios, but we need to account to our constituents for potential risks to taxpayers’ money. The fact that the Government cannot say how much in pounds sterling is potentially at risk through the IMF loan shows a lack of transparency that is unbecoming of Her Majesty’s Treasury. I would
Despite the rhetoric about the EFSM being signed up by the previous Chancellor, it was notable that it took until last October for the Minister at ECOFIN to object and put that on the agenda. We are still a long way from seeing the permanent eurozone-only bail-out mechanism—the European stability mechanism—come into effect in, I think, June 2013. I would have expected such changing scenarios to have prompted the Minister to get engaged more forcefully, roll up his sleeves and negotiate within the EU to bring forward the commencement of the ESM.
Mr Cash: Will the hon. Gentleman be good enough to explain why, when an amendment was tabled and an objection raised about the coalition Government entering into the treaty to which he refers, precisely because, as the Prime Minister conceded, that affects the UK—
The Chair: Order. To use a cricketing parlance, that was a wide. This debate is on the International Monetary Fund (Increase in Subscription) Order 2011. Perhaps we could stick to the matter before us.
Chris Leslie: I appreciate that, Mr Hollobone. European arrangements come into this debate only when they impinge on the decision about doubling the subscription to the IMF. Another test for the Government concerns whether they enter into immediate and high-level negotiations with European Union partners to bring forward the start of the permanent eurozone-only ESM. At that point, it may be reasonable to countenance a doubling of the IMF subscription. In general, I am sympathetic to the Minister’s points. In a normal situation, it would be reasonable to look at improving the strength of the IMF, although we must be cognisant of the exposure that UK taxpayers will have to that. If he does not negotiate hard to bring forward the start of the ESM, if he is not transparent with taxpayers about the UK’s exposure to the IMF and his engagement in European discussions, and if he does not make it clear that the UK will not be exposed through either the ESM or the IMF, but that we get exposure through both, he will find it tricky to bring forward this statutory instrument.
Mr Ronnie Campbell (Blyth Valley) (Lab): My hon. Friend makes a good point, but I look at it from the position of ordinary folk who see all these loans being made while they are being cut to the bone. We are talking about loans being given out, but what will happen if there are problems in Spain or Italy, which is possible? Do they come back and ask us for another big loan? Where do we get the money? Have we got money to loan? People out there think that if we have money to loan, we have got money to look after our own people and so on.
Chris Leslie: My hon. Friend is completely correct. We are trying to dissect these contingent liabilities and figure out where they would eventually end up. The UK taxpayer is potentially on the hook; we hope that it will not come to that—it probably will not—but there are risks, and it is our duty on behalf of our constituents to ensure that we stand up for the UK taxpayer.
Mr Redwood: Does the hon. Gentleman agree that there is a big difference between now and 2009? In 2009, people thought that increases to the IMF quota might be needed for countries such as Iceland that were freestanding and could devalue, or for poor third-world countries with falling commodity prices. People did not have in mind a bail-out for countries that could not devalue.
Chris Leslie: Absolutely. Under the Labour Government, discussions were started about how to bolster, improve and strengthen the IMF. In normal circumstances, I would agree that that must be done, but the facts and the situation have changed markedly in recent months. My advice to the Minister is that we ought to have brought forward some of the safety positions within the European bail-out arrangements to protect the UK taxpayer, or that he should defer the doubling of the subscription to the IMF until those arrangements have been made. Because he is introducing the order now, I am exceptionally worried.
Chris Leslie: The Minister pre-empts my conclusions. I was basically saying that given those three tests and the fact that unfortunately he has not met them in his speech—we will see what happens in the final 10 minutes of this debate now that he knows that those are the tests that I am setting—although we are sympathetic in general to the points that he makes, at this point in time and given this particular set of scenarios, it is the wrong time to double the UK’s subscription to the IMF. Reluctantly, we will not be supporting the order.
The Chair: Order. I have an array of talent before me. Of those who are standing, I intend to call Members in the following order: John Redwood, Gisela Stuart, Bill Cash, Graham Stringer, Peter Bone and Steve Baker. If anyone else wants to speak, they will need to stand next time. We have 45 minutes left until the winding-up speeches.
Mr Redwood: Thank you, Mr Hollobone. It is a pleasure to serve under your excellent chairmanship. I always feel at home with someone who turns to cricketing metaphors to explain where we are. I will keep my
I think there are two reasons why this item of apparently routine business has become so politically sensitive and of great interest. First, the increase is so enormous. There has been a history of increasing quotas over the years, and we have never got the money back, but this is a very large increase and quite out of the ordinary.
Mr Hoban: I remind my right hon. Friend that we have received a return of our quotas. It is a fluid arrangement, as I made clear in my response to his intervention. We had repayments in October 2010 of £107 million in special drawing rights and of £186 million in November 2010. It is a fluid arrangement.
Mr Redwood: The order proposes to double the total from £10 billion to £20 billion. That is a huge increase. There are movements on the account, as the Minister described, but if we had got the last £10 billion back, the IMF would not want an additional £10 billion; it could use the £10 billion that it had already been given, which it clearly cannot get back in time to do what it wants to do next. We are worried about the magnitude of the amount going in, but—
Mr Redwood: I am pushed for time. Above all, we are worried about the purpose to which the money might be applied. I have no objection whatever to Britain remaining a member of the IMF and making a sensible contribution so the IMF can lend money to poor and distressed countries where an IMF remedial programme is necessary and could do the country good. There are cases in which IMF programmes work well. Iceland is an example of a richer country where one is beginning to work, because Iceland was able to devalue as well as doing the other difficult things that countries must do in that situation.
However, I am concerned about the idea that IMF money should now be a private bank account to bail out the distressed in euroland when the problems are not soluble by lending more money and are inherent in the scheme itself. The IMF should not be sending money to distressed countries in euroland; it should send them a sharp economics lecture explaining why they cannot have a single currency on that basis. It should explain to countries such as Greece that they need to devalue to get people back into work, because their holidays are too dear and their export industries are no longer competitive. As it is asking too much of the Greeks to take a 25% or 35% wage reduction, which is the order of magnitude that would be necessary, the obvious thing to do is allow them to devalue in exactly the way that successive British Governments have done to get back jobs in the export industries, the way that America has done in the past year or two against the successful economies of India and China and the way that is always part of an IMF programme.
Mr Redwood: It is an entirely open process and the consequence of a devaluation is to make the people in the country suffering it worse off because they have less spending power with their currency abroad and they therefore find imports dearer. That is part of the purpose of it. I think my hon. Friend would agree with me that given that we live in a world of fiat currencies and “Monopoly” money, which I know he does not support or like, it is more politically acceptable to do some of the adjustment by devaluation than to enforce wage cuts on people and run the risk of riot and protests, as we have seen already in Greece with the measures they are taking.
Indeed, as the Minister is such a fan of the IMF he should know that central to the IMF packages in the past for every country has been that threefold approach of reducing spending, trying to help them increase revenues and, above all, having a devaluation to get them into a more competitive shape. It is not intellectually pure in the way that my hon. Friend the Member for Wycombe would like; his method would require a complete change as he would want competing currencies and the end of “Monopoly” money and that is not the general view of political establishments around the world as of today.
We are worried about the magnitude and the purpose to which it would be applied. What flexibility do the British Government have? No member state can be forced to make an increase in quota payment once they are full members. The IMF rules are quite clear that the member state’s Government have to consent. It is quite true that indicative sums are requested of member states based on a formula. As the Minister surely knows, the formula is very vague. The 50% that is GDP sounds like a hard number, but there is scope for flexibility over how much is purchasing power parity and how much is real money, over which date is chosen for the exchange rate and all that kind of thing. An international GDP fluctuates massively when currencies move around as quickly as sterling, the renminbi, the dollar, the euro and so forth have been moving.
Then we get on to the other half and 15% of it is about economic variability. There is a lot of room for argument over how that is assessed: 30% is a judgmental issue of openness and 5% is about the state of the reserves. There is a very important rider: the IMF looks at the state of the country’s balance of payments and accepts that a country has to be in a strong financing position to meet its balance of payment deficits if it is in deficit, where again there is room for judgment and argument. So the British Government have some flexibility on the quantum. Colleagues have already mentioned that 88% is pretty heroic when Germany manages only 83% and is clearly in a stronger phase than we are at the moment. Canada is only 73% and Holland is 69%. They are both perfectly good economies. Then there are the oil countries—Kuwait at 40% and Saudi Arabia at
I would ask the Minister to think again. As he is proud that Britain is on the board and has reasonable voting strength because of all this money we are putting in, we need to influence the IMF. The test I would apply to the Minister is this: has he taken his case to the IMF that we should not be bailing out euroland countries because we risk not getting the money back and because it will not solve their problem? If so, has he had any influence on that? Either he has not tried, or it turns out that we do not have any influence over the IMF because clearly the IMF is minded to go on this foolish course of pumping more of our money and other people’s money into economies like Greece where the requirements are very different.
I conclude by pointing out that the Greek army, including professionals and reserves, is 400,000 strong. The paid professional army is larger than the UK Army. Greece is a country under one fifth the size of the United Kingdom. How do I explain to my constituents that the UK is going to find some money to give to the IMF, to lend to Greece, to pay for a bigger army than the UK’s? There is surely something wrong there, when we are making cuts in our own Army. The idea that this is not real money is simply not true. It is real money that the UK has to subscribe to the IMF. I am afraid that the Minister’s point that we might get some of it back one day on the exchanges through the accounts does not wash. It already has £10 billion of our money; it does not apparently have that £10 billion available to give to Greece, and that is why it wants another £10 billion.
Ms Gisela Stuart: To follow up logically on the previous contribution, I want to make three points. The problem with the magnitude and the purpose of the loan—and why I do not think it will remedy the problem in Greece—is illustrated by a straightforward comparison between the fortunes of Ireland and Iceland. One country was able to recover and the other is still struggling. We need to have some resilience.
I want to raise questions about this country’s preparedness for possible default. It is right that it is not in our interest; we do not want it to happen. If it is almost a de facto state of affairs, we had better start preparing for it. I would like the Minister to address two questions he has failed to answer when I have previously put them to him. Article 66 would allow the Commission in the case of emergency to impose currency restrictions on the entire EU for up to six months. That would affect us. Have we even thought about that, or made any representation to the Commission on how that would be applied? Secondly, have Ministers in UKRep asked the Commission to start drawing up theoretical plans of what would be legally involved in a country withdrawing from the euro? It does not have to be country-specific, but it does have to be an ordered framework. Unless those two things are done—particularly the second—I do not think it is right, even as a supporter of the IMF, to start throwing good money after bad.
Mr Cash: I am grateful for the analysis from my right hon. Friend the Member for Wokingham, and the significant efforts of my hon. Friend the Member for Clacton to draw attention to this serious question. The issue on which I would like to concentrate is whether the rules matter at all. We are supposed to be a country that abides by the rule of law. I have already made the point that in respect of the arrangements for the bail-out of other countries and the whole of the euro system that was created last year, Madame Lagarde did say that we would break the rules in order to save the eurozone.
I understand that there is a serious case for maintaining stability in the world economic order. However, is the world economic order improved by breaking the rules? The answer is, no. It is destabilised, because the markets do not trust the basis on which the rules are being put together and put through. I have already given another example, regarding the manner in which the IMF went in, before the request was made, to Ireland. That was a clear breach of the rules. As I have already mentioned, there is also the use of article 122,which is a eurozone issue, rather than an IMF one.
I would also like to mention again the manipulation of the balance sheets and the use of EUROSTAT rules. I have talked to the Statistics Board and raised these matters over an extended period under the previous Government, as have my right hon. Friend the Member for Wokingham and my hon. Friend the Member for Castle Point (Rebecca Harris). The manner in which that situation has been gerrymandered, to give an impression that we are not exposed to the extent that we are off balance sheet, is a real problem. That is something else that needs to be addressed.
I will go through that, because I am sure the Minister is responsible for writing it. If he did not write it personally, it was certainly someone in his office. The position is that we cannot find money for the Greek situation under EU rules, so we are going to bypass the system and do it through the IMF rules. That is what it boils down to, and if we are not going to mislead the Committee or the House, we ought to get that one straight down on the table.
I refer back to the remarks of my right hon. Friend the Member for Wokingham on the purpose that underpins the normal arrangements of the IMF, which is to assist emerging and developing countries with problems such as northern Kenya’s drought conditions. Such things are the object of the exercise.
That is the basis on which the agreement was made, and it is the basis on which the resolutions were passed.
The agreement was followed on 15 December 2010 by a formal resolution of the board of governors of the IMF that proposed a general increase in quotas—I am interpolating the words—for that purpose. In other words, the object of increasing the quotas was explicit when the resolution was passed. I remind the shadow Minister that we cannot turn round subsequently and say, “Oh, the circumstances have changed, so we will adjust the manner in which the resolution is passed.” Any company that attempted retrospectively to justify its unlawful actions in breach of a resolution of the board and in breach of an agreement would be in serious trouble. The truth is that the resolution was for one purpose, but it is being used for another.
Mr Redwood: I want to draw on my hon. Friend’s legal expertise. Is it not also questionable whether the IMF is entitled to lend to a country such as Greece, because Greece is no longer economically sovereign in any normal sense? It is more like bailing out a county council or a metropolitan borough in Britain, because Greece has no monetary policy and no central bank. It is basically a wholly owned subsidiary of the European Central Bank.
The Minister is the Geoff Boycott of the Treasury Bench. He goes in, sticks to the pitch and plays the ball very straight, but, unfortunately, the ball sometimes moves a bit off the wicket. I want to mention the Minister’s reference to legitimacy, which I have already dealt with, because, basically, this is illegitimate, even if it is not unlawful. Secondly, he quickly slipped through the words, “This is not earmarked for Greece”.
If he is not dead on, my right hon. Friend the Member for Wokingham is close to the target. The money is not specifically earmarked for Greece, but that is a subtlety—I do not accuse the Minister of this—of the general deceit that lies behind the whole international deal.
Mr Cash: I am not suggesting that it was earmarked for Greece at that point in time but that the use of this particular mechanism is in itself illegitimate, at least for the use to which it is being put, both under the agreement and under the resolution of the IMF. We know that Madame Lagarde, who is now in charge of the whole shooting match, does not have any regard to the violation of rules to support the eurozone, because on 17 December 2010 she said just that.
We understand that the eurozone needs help because it is such a failed project. We also know that renegotiating treaties and creating real growth will be the way to make sure that neither the IMF nor countries such as the United Kingdom that are outside the eurozone should be expected to participate. That is the whole point.
I do not want to embarrass the Minister, but he specifically said that this was not actually a payment at all but a loan, effectively one of these underwriting arrangements. His own document contradicts that very statement and I would be grateful if he would explain to me and the Committee.
Mr Bone: Is it slightly worse that this order comes into effect the day after it is approved by Parliament, so that effectively the cheque will be written immediately, unless the explanatory notes are wrong?
Mr Cash: Absolutely. I am grateful to my hon. Friend as usual for his perspicacity. We have a Lords Commissioner of the Treasury sitting on the Front Bench. Perhaps he can explain whether he is going to put his signature to this cheque, because he may get used to having to do these things on a monumental scale. The words are:
Graham Stringer (Blackley and Broughton) (Lab): I just want to make three very simple points: the first one procedural, the second arithmetic, and the third political. When I walked in this morning and looked at the Benches opposite, I thought that the Government Whips had made a terrible mistake and that we were going to have an interesting vote until I saw the actual membership of the Committee. In saying that, there is an important point. The issues being debated go to the heart of the fundamental financial and economic issues that are bedevilling and worrying the whole world economy at the moment, not just the European economy. My hon. Friend the Member for Birmingham, Edgbaston, the right hon. Member for Wokingham and the hon. Member for Stone have made important points that the whole House should hear. Listening to Government and Labour Members, it is not clear to me that the Government would necessarily have a majority if this important issue were put before the whole House. The Government can always choose and manipulate their own side of this Committee, but I put on record that I do not think this Committee is representative of the House or that it would necessarily come to the same decision that the House would.
The second point I want to make is an arithmetic one. I am not an accountant, just a mere humble analytical chemist, but when I did maths at school and university, 4% had to be of something. It could not just stand on its own. Therefore, if the Prime Minister says that our commitment to the IMF and to bail out Greece is 4%, it has to be 4% of something. I listened to the Minister’s explanation. I am not sure that I completely understood it, but if it is 4% of something, I would like that to be quantified. I can only speculate that the reason why the Prime Minister avoided the question and why the Minister is avoiding the question is to avoid headlines in the Daily Mail and The Sun that would put a real figure on what the country’s liabilities are to the bail-out of Greece.
As a number of hon. Members have said, this is real money. The Conservative party chastised the previous Government, as you know, Mr Hollobone, for the funny accounting of £20-odd billion that goes on in Network Rail, which is off-balance sheet. It does not behove that party to do exactly the same in relation to the IMF and pretend that this is not real money. It is real money that could be spent on the care of the elderly and many other priorities that all our constituents care about. I would therefore like an answer to those two points.
My final point is political. The Minister gave two reasons why this was a good thing to do. One was that it kept our seat at the top table. Well, it does, but it is very expensive—and we all support the IMF. However, the second reason that the Minister gave was simply fallacious. It was that this would help to stabilise Europe. It will not. It is doing exactly the opposite of stabilising Europe. If we lend more money to a bankrupt country, all we do is put it deeper into debt and prevent it from getting out of it. This is destabilising Europe and destabilising Greece. I ask the Minister to go and look at the television pictures.
Like one or two other hon. Members present, I am old enough to remember the time when Greece was run by a military junta. One of the good things about the European Union is that it has helped to stabilise democracy around Europe, but at present, because of the commitment to the euro, it is doing the exact opposite—it is destabilising Greece. One cannot see where the politics of Greece will go. One can only say that if we lend bankrupts more money, we will get them into deeper trouble, and not just financial trouble. Eventually, they will default or devalue; those are the only two solutions. It could have much more dire political consequences in a country that has been a democracy for only about 40 years—not very long.
For those reasons, I am pleased that my Front-Bench spokesman has indicated that he might vote against the order. I would certainly vote against the order because it is bad for this country and certainly bad for Europe.
Mr Bone: It is a great pleasure to speak in a debate under your chairmanship for the first time, Mr Hollobone. It is also a great pleasure to follow the hon. Member for Blackley and Broughton. I agree with virtually everything that he said and particularly the first part of his speech, when he was talking about parliamentary democracy. Here we are, shut away in a Committee Room, spending £10 billion. One of the things that Parliament has
I do have some good news for the hon. Gentleman, because unlike in the previous Parliament, Conservative Members sitting in Committee are absolutely free to vote the way they want. They are under no Whip. That was a promise made by the leader of the party in the previous Parliament. Therefore, he should not be too disappointed. If the Committee does divide, we may see a result that I would favour.
Of course, it is always possible for the Minister to come up with some form of words to say that this matter should be dealt with on the Floor of the House and he does not want to move the statutory instrument. One problem that we have is that we cannot move amendments to statutory instruments. For the sake of parliamentary democracy, this measure should be dealt with on the Floor of the House, where many more people would be aware of it and able to make points both ways.
I would like the Minister to answer a couple of technical points. The notes on the order say in relation to the Committee on statutory instruments, which is a Joint Committee, that there is nothing of merit for it to refer to. I wonder whether that Committee has considered the order and made comments, because sometimes when I used to serve on that Committee, there were drafting errors that needed to be brought before the House before a decision was made. I would like to know whether that Committee has considered the order and what comments have been made.
the additional £10 billion. Either the Minister is right or the explanatory note is right. They cannot both be right. There is either a contingent liability or an actual liability. If it has been paid, it is an actual liability, not a contingent one.
Perhaps I may briefly explain how I would look at the matter if I were a limited company and had decided to borrow an extra £10 billion and invest it in gold. Gold would be a pretty shrewd investment, but there is no doubt that I would have borrowed an extra £10 billion. There are no ifs, buts or ands. Also, whereas investment in gold is generally a good thing, it can go down as well as up. Therefore provision should be made if there is any thought of the value going down.
If we change the example of the gold for that of the loan to the IMF, it may, historically, be a very good bet, but when we know that the underlying problem is severe, and that at least one of the major credit agencies says that there is already a selective default by Greece, should not at least a provision be made? I think that the arrangement increases our public debt, but even if it does not it, is clearly a contingency off-balance sheet liability. We were hugely critical of the previous Government for not declaring that liability.
Mr Bone: My hon. Friend may have been expecting to make a mistake, but he has not. The fact is that it is a matter of double entry. If someone borrows the money, they get a liability for borrowing it; then there is the asset on the other side. My understanding is that although they have that asset, they have still increased their overall borrowing. There is no question about that. That is what goes to the heart of whether this is real money or not.
I want to talk briefly, because I know time is short; it is ridiculous to have so little time to discuss such an important issue in the round and not all my hon. Friends have had the chance to speak. We have a currency union in Europe called the euro, and many countries are part of that currency union. There is a currency union in north America called the United States of America. If one of those states, such as California, were to get into serious financial problems, would it be the IMF that rushed in to solve the problem, or the currency union? It would be the federal Government sorting it out. That is the same in Europe. If there is a problem in euroland, it should be euroland that sorts it out. It is as clear cut as that.
Finally, Mr Hollobone, you have been lured into suggesting that we have been talking about Greece today, but the reality is that we are increasing our commitment to the IMF by a huge amount of money, not because we are worried about Greece but because of worries about Spain and Italy. Once we have given the money and the commitment, it will be spent.
Steve Baker: I thank my hon. Friends and Opposition Members who have restrained their remarks and left time for me to speak. I declare my interest in Cobden Partners, a consultancy providing advisory services to nations whose banking services have collapsed or are in difficulty.
Steve Baker: Never been so busy. I begin by welcoming the Minister’s resolve and composure in what are clearly historic and contentious circumstances. We have seen today that there is broad agreement across the Committee that what matters is human prosperity, and we are all deeply worried about our constituents. I am going to make three points. First, I do not believe that we have this money and that we cannot afford the liability. I do not think that my constituents will understand why they should pick up the liability. It seems to me that one way or another, this country will end up borrowing in order to lend to fund present consumption, and funding present consumption through borrowing is simply not a route to prosperity. I wish I felt that it was not necessary
I find the notion of getting the money back quite worrying. It seems to me that we will borrow some of this money, at least, from commercial banks, inevitably monetising the debt and debasing the currency further after 40 years of continuous debasement. That will involve inflation and further distortions in the structure of the economy. In short, this measure would simply kick the can down the road. We might argue that that is the job of the IMF these days, but the Greek people are already rioting and we have to ask ourselves whether they would be any more sympathetic to such austerity measures simply because they were brought forward by the IMF. I question the action itself.
Secondly, the IMF was created as part of the Bretton Woods system of currencies. We tend to talk as though our current monetary arrangements were a fixed point and had always been the same, but the present monetary orthodoxy has evolved over the years and centuries. Bretton Woods was constructed after the catastrophe of the second world war; the dollar was redeemable in gold, and all other currencies were pegged to the dollar. The job of the IMF was to stabilise exchange rates by bridging temporary gaps in nations’ balance of payments, but the IMF now seems to serve the purpose of ensuring the repayment of reckless financial institutions.
Above all, at all stages of its history the IMF has existed to bring financial stability, which I believe it has singularly failed to do. Turning to the monetary system and stability, I encourage Members to google a chart that I can make available, which shows the price of oil—indexed to 1945, around the origin of Bretton Woods—brought forward to today. It prices oil in dollars and in gold. I do not like to use the G-word, but I feel that since my hon. Friend the Member for Wellingborough has mentioned it already, I can continue. The price of oil has been high and volatile since 1971, but only when priced in dollars. If we price oil in gold, the price has been low and stable ever since the end of the second world war.
I simply make the point that our monetary arrangements are not fixed, that the IMF has not brought stability and that in fact many of our most important commodities are far more susceptible to the effects of our present, inflationary monetary arrangements than is generally considered. I would like to finish my point about the IMF with Hayek’s words. He said:
Thirdly, I want to talk about the contemporary mainstream. With great respect to hon. and right hon. Friends, although my right hon. Friend the Member for Wokingham foresaw many aspects of the crisis, the majority of the mainstream did not see this coming. I have sat at lunch with eminent economists who said that nobody saw this coming, to which I simply replied that they should read Huerta de Soto’s “Money, Bank Credit and Economic Cycles”. That book, which was written
We are at the end of an extremely long credit expansion. I depart from my right hon. Friend the Member for Wokingham, but that is because I follow that particular theory of capital. Hayek, it is not often known, was a socialist and confesses as much in the preface to Mises’ book, “Socialism”, but he and Mises together worked out the theory of the trade cycle. Mises wrote:
“The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion.
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
Mr Cash: My hon. Friend’s contribution is very thoughtful; he knows a great deal about such things, in the tradition of Cobden. However, is the real problem one of human nature as well as of economics? People are competing in an environment in which there is no real or comparative advantage because the new world—if I may use that expression—of the Brits has a huge advantage over the others. Good money is being thrown after bad unless the real problem is tackled: cheap credit that is not based on real, tangible economic advantage.
Mr Redwood: Before my hon. Friend sits down, I hope that he will give the Committee the benefit of his advice on the order, because we are not yet quite clear what he would do about the £9.5 billion sub.
Steve Baker: I have tried to draw exactly on the order but also to look at some of the wider issues. I have said that I do not believe that the order represents the right approach. I reinforce the remarks of my right hon. Friend the Member for Wokingham in full—I have said where I demur from him on currency debasement—but the order is not the right measure. The Government should avoid committing that sum of money; my view is that it will not help. I made a second point about the IMF and our monetary arrangements. If this is not the time of all times to question the fundamental basis of our financial system, I do not know when we ever shall. My third point was that I am afraid that the contemporary mainstream of economics is missing some vital information, which leads it to justify the very measures that we are discussing today. As I explained, as Mises set out, as
To conclude, we are in danger of simply kicking a can down the road and, as my hon. Friend the Member for Clacton said, ladling water into the boat. We are looking at further credit expansion, further monetisation of debts and further socialisation of risk. Throughout the western world, we are in danger of appearing as King Canute, trying to use politics to hold back the realities of social co-operation, which we usually describe as economics. The IMF is an institutional legacy from a monetary system that failed 40 years ago, and the successor to which is even now failing as well.
I looked at IFRS and how it boosts bank capital, and we found that RBS is possibly overstating its capital by £25 billion. That must mean that RBS at least is far more susceptible to financial shocks than is generally thought. It is my view, because of the weaknesses of IFRS, that all banks are substantially more susceptible to financial shocks than is generally understood. I therefore offer three points. First, the Government should please look at cross-cancellation of debt held by sovereign nations—I refer the Government to work by ESCP Europe and Dr Anthony Evans. Secondly, let us face the reality—not optional—and look at how we restructure outstanding debt. Thirdly, at this time of all times, rather than merely increasing our liability to the IMF, let us seriously rethink the foundations of the international financial system and, in particular, start planning for how to protect the payments system.
Mr Hoban: Thank you. I have been called many things in my life, but even as a non-cricketer I must say that it would be an honour to be seen as the Geoffrey Boycott of the Treasury Bench—always playing a straight bat, always batting away my opponents’ arguments and, more often than not, being on the winning side.
My hon. Friends have the merit of consistency in their arguments. Nothing that they have said today has surprised me. We have had many debates on these issues. I have heard about Madame Lagarde on a number of occasions, and we have talked about the question mark over article 122. I may not agree with them, but they are consistent.
I wonder, though, about the Opposition Benches, and especially about the shadow Minister. What we heard in his carefully couched remarks, which did not give much of a commitment, was a retreat. He said that the Opposition Benches would not support this statutory instrument. I do not know whether that means that they will vote against it or simply abstain. We will find out shortly.
Is it not interesting that two years ago, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown) was seeking to lead the international debate? He was chair of the G20 summit when this package was agreed. Here we are two years later with the Opposition Benches and the shadow Treasury team clearly wishing to retreat from that international leadership role, simply because they think that it creates the right mood music. Such a
Chris Leslie: I do not think it behoves the Minister to impugn my motivations or my principles on this particular point. Is it not the case that in two years the circumstances have changed quite radically? Is it not the case that in October last year this Government set the specific subscription to the IMF for the UK?
Mr Hoban: The agreement about increases in quota for the IMF was made at the London G20 summit in the spring of 2009. Everyone agreed that the long-term basis of funding for the IMF should be quota-based and not loan-based and therefore it was in the minds of all of those who signed the G20 communique, including the former Prime Minister, that this was the end point. I do not think that the hon. Gentleman can wriggle out of that commitment, which was given by the previous Government.
There is a choice here. We can, in our economic interests, support a strong global economy, ensuring that we provide stability through the resourcing that goes to the IMF and we take the benefits that come to us from having a seat on the executive board at the IMF. If our quota share fell, we would lose that seat and the opportunity to influence the packages and the debate about the rescue programmes that have been put in place not just for Greece, Ireland and Portugal but for the other 47 financial assistance programmes that are in place. It is in our interests, both in the context of global economic stability and in our ability to influence what is going on, for us to have a seat at that table. By opposing that increase in our share of IMF resources, we would be accepting a low quota share overall and therefore risking our chance to have a seat.
Mr Cash: On the victory the Minister is predicting in the match that we are playing, does he recall the words of Walpole, who said, “They are ringing their bells now, but soon they will be wringing their hands”?
Mr Hoban: We are trying to have a debate about the IMF and whether it is appropriate to increase its resources. If we fail to pass this measure today, it will lead to a loss of British influence at the IMF. As my hon. Friends have said, they want us to be engaged in a debate about
I do not think we want to retreat—I do not think that my hon. Friends who may no longer wish to be part of the European Union, but who do want to be part of the international community, would agree that that was the right outcome. We should be careful that we do not lose sight of the debate about the IMF through more discussion about Greece. There are lots of other financial assistance programmes out there that are not targeted at the eurozone, and which respond to genuine needs from a number of countries.
One of my hon. Friends said that no one envisaged that the IMF would use this money to bail out a developed economy. Let us not forget that in our own history, in 1976, we relied on the IMF to bail this country out. That is not a partisan point, but the IMF is there to meet the needs of a whole range of member states.
Mr Carswell: The Minister is being incredibly generous in giving way. Can he give an undertaking that if we are to go ahead and have a 4.2% or 4.3% share in the IMF, we will use that influence to make sure that the IMF continues to do what it has historically done so well: to devalue the currency of those who are in trouble, and allow them to default on their debt and downsize their over-bloated domestic public sector?
Mr Hoban: In our position on the executive board, we will continue to ensure that sensible, workable plans to help to tackle the budget deficit that these countries face are put in place and implemented. That requires difficult decisions being made by a number of countries, not just those in the eurozone. It is about reducing public spending, raising taxes and improving the effectiveness of tax collection and prioritisation. Measures will be designed as appropriate to those countries’ needs, and if we do not have that role at the top table, we will not be able to influence those packages in the way my hon. Friend wants us to. There is a choice here. If we do not accept this, we lose our opportunity to influence—and yes, we do influence the shape and nature of the packages.
My hon. Friends the Members for Stone for Wellingborough asked questions about the explanatory notes. As I said, there is a requirement in terms of a simple majority of IMF members and a proportional quota share that needs to be reached to make this
The measure before us today is in our wider economic interest. We are a part of the global economy. We are dependent upon trade for our prosperity, and jobs in our constituencies depend on that international trade. If we send a signal that we are not interested in supporting the global economy, we will lose our influence and ability to shape what is happening at an international level, and we will see our influence diminish; we will see prospects for recovery in a global economy reduce, too. I therefore encourage my hon. Friends to vote for this measure and to reject the Opposition’s opportunistic posturing.