Employment Law

Statement

5.29 pm

Lord De Mauley: My Lords, I would like to repeat the Answer given to an Urgent Question asked in another place today. The Answer is as follows:

“The Beecroft report was commissioned by the Department for Business, Innovation and Skills as part of both the Red Tape Challenge and the employment law review. Mr Beecroft was asked to give his initial thoughts on areas of employment law that could be improved or simplified to help businesses and job creation. The report was intended to feed into the work that the business department is carrying out to review employment laws to ensure they maximise flexibility and reflect modern workplace practices. This is important both to employers and employees and is designed to strengthen our international competitiveness in difficult economic times. It is worth noting that the UK is considered to have the third most flexible labour market in the OECD, and this is an important strength.

Mr Beecroft was asked to take a candid look at a wide range of issues and he submitted his report in October of last year. Over the last few months, Ministers have been working through Red Tape Challenge and the employment law review, and I can tell the House that of the 23 topics he raised we have identified actions in 17 of them. As part of consideration of the Beecroft report, it was clear that further evidence was required, most notably on the issue of no-fault dismissal for micro-businesses. This was published on 15 March, and I can tell the House that it will conclude on 8 June. Given that this date falls when the House is not sitting, the Government decided to bring forward publication of the report to this week, so that it could inform the debate.

Last week, the Home Secretary announced the outcome of the Equalities Red Tape Challenge, which directly impinges on employment and workplace issues. Our intention was therefore to publish the report in time for this week’s business department oral parliamentary Questions. As you know, Mr Speaker, it was our intention to publish the report this week, but I have noticed from the press that an earlier draft of the report is now in circulation. Therefore, in the interests of accuracy, and so that the House has the correct information in front of it, I can confirm that the report will be published this afternoon, and copies will be placed in the Libraries”.

That concludes the Answer to today’s Urgent Question.

5.32 pm

Lord Young of Norwood Green: My Lords, I have listened carefully to the Minister on Mr Beecroft’s proposals as we saw them last October. Is making millions of workers’ lives more insecure a price worth

21 May 2012 : Column 672

paying? That is a phrase that I cannot help remembering from a previous Conservative Administration. Beecroft himself said:

“The downside of the proposal is that some people would be dismissed simply because their employer did not like them. While this is sad I believe it is a price worth paying for all the benefits that would result from the change”.

That is Mr Beecroft for you—he clearly believes that it is a price worth paying. He is a major Conservative Party donor as well.

Why have the Government, given the situation that we are in, not put forward proposals to introduce a British investment bank to help get finance to business, but are prioritising making people less secure in work? Why have the Government not put forward a temporary national insurance contribution cut for small businesses to take on extra workers but are prioritising making people less secure in work? Why are they failing to do enough to accelerate infrastructure investment—which, after all, business organisations such as the CBI have called for, and could be threatened by Solvency II—but instead are prioritising making people less secure in work?

When there are 2.63 million unemployed, created by the double-dip recession made in Downing Street, does the Minister feel that making it easier to fire staff at will and causing even more insecurity will give hope to people who are desperately seeking a job? Does he think that firing at will will boost consumer confidence at a time when the economy has entered a recession caused by the policy of this Government? Does he agree with Dr John Philpott, the chief economic adviser at the Chartered Institute of Personnel and Development, who said:

“The vast weight of evidence on the effects of employment protection legislation suggests that … less job protection … results in increased firing during downturns. The overall effect is thus simply to make employment less stable over the economic cycle, with little significant impact one way or the other on structural rates of employment or unemployment”.

Does the Minister agree with Beecroft that small businesses have very limited administration skills and very few academic qualifications? Are not those problems that need to be addressed, rather than accepting the anecdotal evidence as a solution for creating more employment?

According to the OECD, the UK has the third least regulated labour market in the developed economies. That is one thing in the Statement with which I agree. Only in the USA and Canada is employment regulation less strict. As the Chartered Institute of Personnel and Development has said, some of the most severe restrictions on the employer’s right to dismiss staff can be found in countries such as the Netherlands, Norway and Austria, which all have unemployment rates lower than the UK’s. Even the Secretary of State has said:

“We don’t want to dent job security and consumer confidence”;

and:

“Our labour market is already one of the most flexible in the world”.

Why, therefore, are the Government ignoring this evidence? Why do they believe that making people less secure at work will be a positive contribution to creating jobs?

21 May 2012 : Column 673

In the Chartered Institute of Personnel and Development’s Labour Market Outlook of summer 2011, far more employers cited access to finance—28%—and candidates lacking the right skills—50%—as obstacles to business growth than cited employment regulation. Those are areas where the Government could give positive assistance, rather than being diverted by the dubious recommendations of the Beecroft report. Is this another example of the Government’s failure to back business and to take the tough choices, such as setting up a British investment bank, and, instead, of their playing to the band of Back-Bench Conservative MPs who promote these job insecurity policies?

In February, David Blanchflower, a former Bank of England Monetary Policy Committee member, said:

“There is zero credible empirical evidence supporting … [the] contention that Britain’s economic problems would be fixed by slashing workers’ rights”.

So, what evidence do the Government have? Would not having a different employment regime for businesses with 10 or fewer employees, and those slightly larger, be a disincentive for growing small businesses to take on extra staff?

The Minister for Employment Relations, Consumer and Postal Affairs is quoted as saying in October last year:

“I think it would be madness to throw away all employment protection in the way that’s proposed, and it could be very damaging to consumer confidence”.

Has he now changed his mind? Interestingly, according to Hansard, the Secretary of State failed to vote on his department’s own legislation on changing the unfair dismissal qualification from one year to two. Today he is reported in the Sun as saying:

“Some people think that if labour rights were stripped down, employers would start hiring and the economy would soar again. This is complete nonsense. British workers are an asset, not just a cost. I am opposed to the ideological zealots who want firms to fire at will”.

Why has he allowed his department to help write and support the Beecroft review if these are the views in which he sincerely believes?

We face many challenges and businesses are giving the Government strong signals about the important things that will help them create more jobs—such as resolving the issue of finance and ensuring that we accelerate infrastructure investment. Those are the positive things that we need to do to inject growth into the economy. I look forward to the Minister’s response to my questions.

5.38 pm

Lord De Mauley: I thank the noble Lord for his comments. The context of this is a review of employment law to make it easier to employ people and to improve the growth prospects of our businesses across the country. Surely all of us seek to achieve that. It was in the coalition agreement that employment law would be reviewed over the course of this Parliament. Mr Beecroft was asked to report as part of that review, to provide a candid view of the law from a businessman’s perspective. His recommendations are not formally adopted as government policy. The Government are pursuing a number of elements. Clearly, however, the

21 May 2012 : Column 674

report includes other proposals and any decision to take them forward will be based on evidence.

The noble Lord, Lord Young, used the expression “firing at will”. I think that he is referring to the element in the report that deals with no-fault dismissal. We currently have an open call for evidence on dealing with dismissal and compensated no-fault dismissal for micro-businesses. It is an exercise to shed light on the issue. It is right that we look at all the evidence before deciding on any change. We are examining existing dismissal processes as a whole, including awareness and understanding of the ACAS code of practice. We are also seeking views on the concept of compensated no-fault dismissal for micro-businesses, whereby the smallest employers would pay compensation as a means of ending a working relationship fairly. It is about getting the balance right. It is about giving business confidence to hire. That is why we have called for evidence, and we want to understand that evidence and make policy on the basis of it.

The noble Lord, Lord Young, raised a number of issues, one of which was the training of business management. We discussed that issue in the debate on the SIs to which he referred. He will know that we are looking carefully at this issue and that we are taking action to make improvements on the basis which the previous Government put in place. He is right to say that it is an issue.

The noble Lord also said that we should be focusing on access to finance for businesses. I agree with that, and, indeed, we are doing so. He will also know that we have a debate on that subject on Thursday, when we will discuss the issue at greater length.

5.41 pm

Baroness Randerson: My Lords, I thank the Minister for his Statement. I am glad that the Statement recognises that the UK already has a flexible labour market, and that the Government acknowledge that that is a strength. Indeed, the Government have recently increased parental rights, and that is an important addition. I recognise that the enterprise and regulatory reform Bill already tackles some of the issues raised in the Beecroft report.

Does the Minister agree that any changes to employment law need to support and facilitate the positive and flexible behaviour exhibited recently by, for example, Vauxhall workers and their trade unions? There needs to be recognition that that sort of behaviour—the product of good employer-employee relations—is very important for the development of our industry. It is therefore important to avoid any reforms that might undermine that positive relationship whereby workers are regarded as an asset and not as a cost.

Given that the Government have had this report since 12 October 2011—some seven months—and their response to it is simply to continue the call for evidence and the consultation, they appear to be somewhat lukewarm about it. Perhaps the Minister can enlighten us on the depth of the Government’s enthusiasm for it. Finally, does he share my belief that, at this time of international economic crisis, it is important that all Governments throughout the world should be allowed to think outside the box, and of bold and imaginative ideas for the benefit of the economy and of all employees?

21 May 2012 : Column 675

Lord De Mauley: I am extremely grateful to my noble friend for her comments. On the issue of co-operative behaviour between employers and employees and their representatives, I wholeheartedly agree that that must be the gold standard. She suggested that the Government might be somewhat lukewarm on the Beecroft proposals. I will not say that the Government are either enthusiastic or lukewarm. The fact is that they will consider each proposal on its merits. Some are being taken forward and some, no doubt, will not be, but we will do this in a balanced way. She invites the Government to think outside the box and be imaginative, and that is exactly what we seek to do.

Lord Clinton-Davis: Why do the Government not denounce the idea of firing at will at this stage? Is it not a complete affront to everything that the trade unions and responsible employers have fought for? Why has Vince Cable denounced this so emphatically? Do the Government think that he is right or wrong?

Lord De Mauley: My Lords, I explained in my answer to the noble Lord, Lord Young, that we have an open call for evidence, which closes on 8 June. I hear what the noble Lord says but it is important that we listen to all the evidence, and that is what we are doing. I should emphasise that this proposal does not extend beyond micro-businesses, so it will not apply to every single employer in the land. However, the Government are keeping an open mind.

Lord Faulks: My Lords, I am sure that many on this side would equally deprecate anything that could possibly be said to smack of firing at will, and I very much doubt that the Government’s proposals will involve anything that could be so pejoratively described. This report was perhaps commissioned before the recent downturn in financial circumstances, and many of the proposals will no doubt potentially be very expensive. Can the Minister assist me on the issue of parental leave? I know that the Government were understandably committed to improving that but I understand that the Beecroft report has costed it at approximately £150 million. Can the Minister assist the House on whether the Government have changed their mind or whether, considering that, they remain committed? Is it a matter on which they will generally be taking soundings and listening to representations?

Lord De Mauley: My Lords, the Government remain committed to the coalition commitment to introduce a system of shared parenting by 2015, and we are of the view that it will bring benefits to businesses. We have always said that we would introduce it from 2015 and we will shortly be publishing the government response, outlining the next steps. It is not something that we are rushing into. At the forefront of our minds is getting this right so that it does not impose additional burdens or costs on businesses.

Baroness Turner of Camden: My Lords, I am sure that the Minister will not be surprised to learn that many of us feel that the introduction of what one might call a “hire and fire society” is not likely to help either the economy or future productivity. Many workers, even in small businesses, will lose any sense of security,

21 May 2012 : Column 676

and that is surely very damaging for any workforce. Therefore, I hope that the Government will seriously reconsider this departure from existing practice. With regard to the Government’s point that it may involve more employment opportunities for people in small firms, one has to recollect that small firms are mostly low-paying employers, which the taxpayer already subsidises. To some extent, the welfare system, including the welfare reforms that the Government are introducing, already subsidises low-paying employers, so why do they need any extra so-called assistance? I do not think that it is assistance at all. It will simply undermine a workforce’s sense of security and that will not help the economy or, indeed, future workplace relations. Therefore, I hope that the Government will seriously reconsider their proposal.

Lord De Mauley: My Lords, I say to the noble Baroness, Lady Turner, that, although we will not go so far as to reconsider the whole thing, in the consultation we are taking account of comments such as the one she has made.

Lord Martin of Springburn: My Lords, the one thing that employers want is stability. I have noted that every time there is a change of Government, there has been a change in the employment laws. That cannot help. It should be borne in mind that in many of our cities, including my native city of Glasgow, unemployment is climbing. The Government are encouraging people who are out of work to move to other parts of the country. They will not do that if they feel insecure and there is a possibility that they will be sacked. It must be borne in mind that it is the small companies which we are depending on to get people into the Labour market. I understand that it is consultation and I hope that he bears that in mind. Apprentices who are taken on as trainees are employees like everyone else. It would be a sad day if a young apprentice were taken on to a job and lost out on not only the job but the apprenticeship. Will the Minister ensure that there are no further leaks from departments? That was a justified complaint when the Conservatives were in opposition. We should not have documents leaked from government departments.

Lord De Mauley: My Lords, in response to the first point made by the noble Lord, Lord Martin, about the importance of stability for employers, I definitely agree with him. The question we are addressing is whether the scales have tipped too far against growth. That is what must matter to all of us, surely. With regard to the noble Lord’s comments on apprenticeships, I share his enthusiasm for them and agree with him on that point.

Lord Teverson: My Lords, I believe that there is a problem in how the current system works in that SMEs—I am involved with some—do not have their own HR staff. They go to professionals for help and the professional advice is inevitably always very conservative. Even when there is a good case that someone should be fired, which should happen only when they have been given the chance of training and have gone through the right appraisals, advice is often given to pay off employees rather than let the matter

21 May 2012 : Column 677

go to an industrial tribunal. The result is a psychology in this sector that that has to happen, when in fact it should go through to the end of the process and be resolved properly and equitably. It results in vexatious claims that wrongly scare SMEs when they do not fulfil the rights that they have when an employee should be dismissed. Will the Government consider that area of professional advisory conservatism to avoid the professionals being told, post event, that they were wrong?

Lord De Mauley: I thank my noble friend who is absolutely spot on. A number of measures will be coming forward that will contribute to that. One of those, which is perhaps not so relevant for smaller businesses, but which is indicative of what we are trying to do, is to involve ACAS at an earlier stage.

Baroness Wall of New Barnet: My Lords, I apologise for leaving shortly after the first two speakers; I nipped out to pick up the report. I agree completely with the noble Baroness on the Liberal Democrat Bench—I am sorry but I cannot remember her name—on the flexibility at Vauxhall that she reminded the House about. It is also important to remind the House not only about Vauxhall, but that over a period of real restraint, apprentices have been going to Jaguar Land Rover and many other organisations on their days off to have training. If that is not flexible, I am not sure what is. Red tape is possibly a good thing to look at, but I am anxious that the Government do so with the overall view of what modern workplaces look like. They are very different from perhaps the view that some noble Lords have of workforces. Flexibility is a way of life. That does not mean exploitation but co-operation and the way in which people work together. It may not be red tape but it certainly is a red ceiling. There is an opportunity to look at why women are not getting on further in their workplaces. I do not know whether it is red tape or how to describe it but it is a fact that women are still restrained in their grades and not allowed to go further. I welcome the opportunity for a comment from the Minister on that as well.

Lord De Mauley: I can find very little to disagree with in what the noble Baroness has said. I absolutely welcome the restraint that I know employees are exercising in this extremely difficult time. We really need and are grateful for their help where this is happening, and I agree with her that it is widespread. People are working beyond the call of duty, and that is a huge accolade for our workforce. We spoke earlier about the need for co-operation between workers and employees, and that must be for the good.

The noble Baroness asked about the Government’s aspirations for women in the workplace. She will know that there is a great deal of work going on and that the Government are very much focused on this as an important issue.

Lord Ryder of Wensum: Is my noble friend aware that unemployment in Germany has fallen by a significant margin over the last five years, largely as a result of supply-side measures that have been introduced by the German Government? Will my noble friend please draw these measures to the attention of the Business

21 May 2012 : Column 678

Secretary and ask him why he has not already followed the German example, if he really is serious about reducing youth unemployment?

Lord De Mauley: My Lords, of course I will draw that to the attention of my right honourable friend.

Lord Layard: Is the Minister aware of the great amount of academic research on the impact of employment protection legislation which has gone on over the last 15 years? The standard finding of this research is that employment protection legislation has no positive or negative effect on the level of employment. The reason is very simple: as is constantly said, of course, if it is easier to fire people, you are more likely to hire them; but you are also, believe it or not, more likely to fire them. The two balance out. Are the Government aware of this research?

Lord De Mauley: My Lords, I am aware of a considerable amount of research. I bow to the noble Lord’s greater knowledge of the academic research, of course. The Government are absolutely committed to flexibility for employers and employees. We have consulted and continue to consult widely on a number of issues and, as I have said before, we will not take action unless it is on the basis of evidence.

Baroness Meacher: Will the Minister explain to the House how the no-fault dismissal idea is compatible with the Government’s declared commitment to well-being? Will the Minister agree that job insecurity and unemployment are the greatest threats to mental well-being, and also that high morale in the workplace is the best assurance of high productivity and therefore growth? Will the Minister agree that any unsuitable member of staff can in fact be moved on by good supervision and management? Will he therefore assure the House that this Government will encourage good supervision and management, rather than heartless employers?

Lord De Mauley: I am sympathetic to what the noble Baroness says. As I have said, we are keeping an open mind on this issue of no-fault dismissal. It is a fact that the smallest businesses are less likely to have access to human resources and legal advice and are therefore less likely to feel confident in applying procedures. I think that is one of the key issues. We want to examine whether a no-fault dismissal system for microbusinesses would be helpful in dealing with this, particularly in increasing their confidence in employing people.

Lord Morris of Handsworth: My Lords, in repeating the Statement, the Minister said that,

“the UK is considered to have the third most flexible labour market in the OECD and this is an important strength”.

Will the Minister tell the House which other OECD countries operate a no-fault dismissal policy? In his Statement, the Minister also indicated that there is clear evidence that employers have dismissed people simply on the basis that they are not liked. If that is the case, is he not therefore proposing in this Statement and in the report a gateway for discrimination against a vast range of people in employment: women, people

21 May 2012 : Column 679

with disability, and others? The Minister indicated that the report was about the confidence to hire. Does he agree that it is also a blank cheque to fire?

Lord De Mauley: My Lords, the noble Lord asked whether any other countries had in effect a micro-exemption. Germany does. He was also concerned about discrimination. Broadening the question, I will say that the Government will not tolerate discrimination in the workplace.

Lord Bates: My Lords, will my noble friend confirm that the whole thrust and purpose of the review is to get people hiring again, not to get them firing, and that it is part of a growth assessment? Does he agree that it stands to reason that there must be one set of rules for large employers—the Vauxhalls, the Tescos—with huge HR departments? If one of their workers underperforms, they can provide them with the necessary supervision, training and reskilling. However, where a firm has only two or three employees, if one underperforms then up to 50% of the workforce is underperforming. The firm will not have an HR department or supervisory skills, and did not employ a firm of global headhunters to hire the person in the first place. Therefore, different rules need to be considered.

Lord De Mauley: My Lords, I could not have put it better myself.

Lord Lea of Crondall: My Lords, if the Government are interested in the totality of the German system, rather than cherry-picking bits of it, they should look at two-tiered boards and the involvement of the whole workforce through works councils and strong trade union collective bargaining. If the noble Lord is interested in the success of the German model, will he look very carefully at evidence of the whole of the German experience, because it seems that there is no evidence available from the way Mr Beecroft has gone about his business?

Lord De Mauley: My Lords, of course we looked very closely at countries we admire, such as Germany. However, we are a different country, we have a different history and we are in a different position. Therefore, we have to do things our way. I emphasise that we will do this in a careful, measured and flexible way.

Euro Area Crisis: EUC Report

Motion to Take Note

6.02 pm

Moved By Lord Harrison

That this House takes note of the report of the European Union Committee on the euro area crisis (25th Report, Session 2010–12, HL Paper 260).

Lord Harrison: My Lords, I am delighted to have the opportunity to introduce the debate on this report. Sadly, I am rather less delighted by the circumstances that required the report to be written and that make today’s debate so urgent and topical. The report was a joint effort based on work undertaken by the Sub-committee on Economic and Financial Affairs, which

21 May 2012 : Column 680

I chair, and the main Select Committee, which was chaired by the noble Lord, Lord Roper, to whom I offer a fond farewell, and which is now chaired by the noble Lord, Lord Boswell of Aynho, to whom I extend a warm welcome. The sub-committee focused on the economic and financial aspects of the crisis, while the Select Committee focused on institutional aspects and was responsible in particular for the chapter on the proposed treaty. I thank all the witnesses who contributed to both elements of this complex inquiry.

The committee began its inquiry in October 2011 and the report was published in February 2012. Noble Lords will be well aware that the situation has become even more serious since then. One challenge that we faced, and continue to face, was the sheer speed of developments in the crisis. Even though events have moved on since our report was published, it may be useful if I briefly remind noble Lords of the political context in which the inquiry was undertaken. Many issues that we considered remain to be resolved by the EU’s leaders.

On 26 October, a key EU summit—already twice delayed because of the difficulties in reaching agreement—struck a three-pillar deal that included the exploration by private-sector banks of a haircut of at least 50% to Greece, an increase in the funding available to the EFSF rescue fund to €1 trillion, and a requirement on the European banks to raise €106 billion in new capital by June this year.

However, in November the crisis escalated dramatically. Amid mounting turbulence in the financial markets, both the Greek and Italian Prime Ministers were forced to resign and were replaced by non-party political figures—the former governor of the Bank of Greece, Lucas Papademos, and the former European Commissioner, Mario Monti. After a general election there was also a change of Government in Spain, whose own bond yields were coming under intolerable strain.

So pressure grew on European leaders for a more fundamental response. The ECB complemented its programme of purchasing sovereign debt in the secondary markets with a major operation to provide long-term loans to European banks. Then, at the Brussels summit on 8 and 9 December, euro area nations agreed to a new fiscal compact that moved towards a fiscal stability union, including the adoption by national Governments of a fiscal rule to achieve balanced budgets and stronger Brussels oversight of national budgets. EU leaders agreed that some of these changes should be achieved through a treaty, but the United Kingdom Government, later joined by the Czech Republic, would not agree to amending the EU treaties. This resulted in the adoption of a separate international agreement on stability, co-ordination and governance, which I shall refer to as the fiscal compact treaty.

Our report sought to reflect on each of these serious developments. In the economic and financial context, we expressed deep concern about the extent of uncertainty that remained in the crucial area of bank recapitalisation. How would it be achieved? How would banks be prevented from reducing their debt ratios by deleveraging and hence reducing lending? How much damage would a sustained restriction on credit do to an already struggling European economy?

21 May 2012 : Column 681

We also concluded that because of the risk of contagion there was an urgent need to establish a credible and well financed system of rescue funding. We acknowledged that the primary responsibility for this must lie with the euro area countries, but given the global implications we stressed that it was also necessary for the international community, including the United Kingdom, to play its part, in particular through the IMF.

Although we highlighted the need for rapid progress on the Greek debt write-down, bank recapitalisation and the construction of a firewall, we recognised that such steps were unlikely to prove sufficient on their own. We noted the unprecedented steps already taken by the ECB and found that, although we could be cautious about regarding the ECB as a panacea, additional intervention was likely to prove essential. We also urged European leaders to consider the case for the introduction of so-called eurobonds.

We concluded by considering the longer-term issues, although we recognised that long-term planning will be irrelevant if the current crisis is not overcome. We concluded that improved budgetary discipline is necessary in order to make progress in resolving the crisis, but ultimately the resumption of sustainable economic growth holds the key, both in general terms across the European Union and in facilitating attempts to resolve the serious imbalances between different countries in the euro area. The committee argued that it was of great concern that the potential of the single market to enhance economic growth had faded from view during the crisis. We suggested that the focus of policymakers now needed to turn to policies to support economic growth that could be implemented effectively during a time of budgetary austerity.

Subsequent events have shown how relevant this analysis has been as the situation has deteriorated dramatically. Once again, we find ourselves in a phase of escalation and of deep uncertainty. Noble Lords will be only too aware of the significant recent political and economic turbulence in France, Spain, Germany, Ireland, the Netherlands, and above all Greece, where a second election in a month will shortly be held. Moreover, the parties most opposed to the austerity programme are expected to make further gains.

The financial markets are in renewed turmoil, with substantial falls on major stock markets. As recent developments in Spain have demonstrated, the European banking system is coming under severe strain. Economic growth in the euro area remains anaemic and would probably have been non-existent had it not been for Germany’s recent strong performance. Indeed, the contrast in economic outlook between Germany and the euro area members under most pressure, such as Spain, Portugal and Greece, grows ever more acute.

Nor is the United Kingdom immune from all this. Not only has the economy fallen back into recession, but last Wednesday the Bank of England cut its growth forecast for the current year from 1.2% to 0.8% and stressed that the biggest risk to recovery in the United Kingdom stems from the difficulties facing the euro area. The governor, Sir Mervyn King, has said, somewhat intemperately, that Europe is,

“tearing itself apart without any obvious solution”.

21 May 2012 : Column 682

Last week, the Prime Minister stressed the importance of the very issues that this report highlighted, saying:

“Either Europe has a committed, stable, successful eurozone with an effective firewall, well-capitalised and regulated banks, a system of fiscal burden-sharing and supportive monetary policy across the eurozone. Or we are in uncharted territory which carries huge risks for everybody”,

including, one must conclude, the United Kingdom. The PM should explain why, if the euro area crisis is crucial to the United Kingdom, we remain so semi-detached in our engagement with our colleagues. In the midst of such a gloomy economic picture, the election of the new French President, François Hollande, on a platform of economic growth, has heightened debate on the fiscal compact treaty and the austerity agenda that it is perceived to entail, even before it has come into force.

On the new treaty itself, the Government said that they went into the December European Council thinking that the optimum outcome would be an agreement by all 27 EU member states, with the interests of the United Kingdom, particularly in relation to the financial services sector and the single market, being protected. As we all know, the Government did not get the safeguards that they say they wanted, so they refused to join the negotiations to draw up the treaty. The committee was strongly critical in its report of the Government’s failure to keep Parliament properly informed about a decision that may have huge long-term ramifications by sidestepping releasing the text of their prior negotiating position.

I hope that the Minister will be able to give the House a full account tonight of the Prime Minister’s intended approach to the informal gathering of EU leaders taking place this Wednesday. I also hope that the UK’s preparatory work, in building alliances with other member states, is rather more effective at this and future meetings than it was in December.

The key measures in the treaty are on budgetary discipline, and they must be translated into national law,

“through provisions of binding force and permanent character, preferably constitutional”.

It should be stressed that only the euro area countries will actually be bound by the key requirements of the treaty, although it appears that other signatory countries are eager to adopt these rules.

The committee considered that the euro area states must be free to take the steps they consider necessary to defend the euro, including the key area of fiscal integration. However, the committee emphasised that matters relating to the internal market must remain the preserve of all 27 EU member states.

The speed with which the treaty was negotiated, and the fact that it is outside the EU treaty framework, has left several important questions unanswered, including its relationship with the EU treaties and the laws made under the EU treaties, and the proper role of EU institutions such as the ECB in relation to the treaties. Some of the difficulties would be resolved if the proposed treaty was integrated into the main European Union treaty framework, once the review of experience with implementation suggested in Article 16 of the fiscal compact treaty has taken place.

21 May 2012 : Column 683

I note that the Government’s response to the report, for which we are grateful, states that they are not opposed to the incorporation of the treaty into the main EU treaties in due course, provided that there are safeguards to protect the interests of all 27 member states. We hope that our own analysis of the treaty has been found to be valuable to other Parliaments. I was very pleased to be invited to Dublin in April to give evidence to an Oireachtas committee inquiry into the implications of the treaty in order to inform the decision to be taken by the Irish people on 31 May.

Given the speed of developments since the report was published in February, and the Government’s response in April, the committee looks forward, as I am sure the whole House does, to the Minister’s explanation of the Government’s current position. I ask the Minister to include the following points in his reply. In our report, we noted that national Governments and EU institutions have struggled to keep up with the pace of events. I think the point may have now come when Europe’s leaders have run out of road, and that hard decisions now need to be taken about whether the euro will continue to exist in its present form. I look forward to hearing from the noble Lord, Lord Sassoon, the Government’s assessment of the current situation. What do the Government think is the most likely scenario for Greece?

Shortly after our report was published on 20 February, the Prime Minister and 11 other Heads of State or Government sent a letter to President Barroso and President Van Rompuy setting out an agenda for growth. The European Council at the start of March came up with some sensible conclusions about developing the single market, and at the G8 summit at the weekend there were encouraging messages on growth. My next question is: what specific progress has been made on the implementation of the growth agenda set out by the EU at the start of March? What does the Minister expect to be on the table for the June European Council to agree, and what is his assessment of the impact of the election of President Hollande?

My final question concerns the status of the fiscal compact treaty. Do the Government still think it is likely that the treaty will be ratified by 1 January 2013? What contact have the Government had with the new Government in France, and would they support further discussions about the text of the treaty?

This is a hugely important issue. I am very pleased to have introduced it. I thank Stuart Stoner and Jake Vaughan, as well as Laura Bonacorsi-Macleod, who acted as policy adviser for this important piece of work.

6.18 pm

Baroness Noakes: My Lords, the noble Lord, Lord Harrison, and his committee have produced an excellent report on the most critical issue facing the European economy since the start of the EU. They are to be congratulated on it.

Given all that has happened—and indeed has not happened—in the eurozone since the report was published in February, I am sure that the noble Lord, Lord Harrison, is not expecting all speakers to stick rigidly

21 May 2012 : Column 684

to the report and the Government’s response. I hope I may be forgiven for straying a little outside the narrow confines of the report.

However, I shall start with the report. The committee was rather exercised about the December 2012 European Council and the circumstances surrounding the Prime Minister’s use of the veto—it seems rather a long time ago now. Unlike the committee, I have never been curious about who said what to whom before the veto was deployed. The most important thing was that the UK demonstrated that we can—and will—use the veto to protect our national interests, and I was extremely proud of the Government that day.

I am well aware that some noble Lords have criticised the UK’s veto as an isolationist strategy which will harm our role in Europe. I am quite sure that some in Europe are extremely vexed by our stance on the crisis and the chatter in Brussels may well be negative. The European project has never liked independent thought or action. However, I have seen no evidence of extra harm since last December and would certainly trade some unpopularity within Europe for a clearer understanding that the UK’s own interests are paramount.

The Government’s position on the eurozone, which I completely support, is that it is for the eurozone countries to sort out their own mess. When the euro started life, we could see that our economy was so unlike those on mainland Europe that we were more likely than not to be damaged by being tied into policies not designed around our needs. We could also see that the countries which became eurozone economies were insufficiently convergent for the one-size-fits-all interest rate to be good for the whole euro area.

It is now plain that the low interest rates within the eurozone, which suited Germany’s economic strategy, have done massive harm in terms of inflation and asset price bubbles to other eurozone economies. The euro arrangements lacked any instruments or incentives to require economic reforms, so southern Europe remained unreformed. But entry was voluntary and those volunteers must now find their own solutions.

As noble Lords are well aware, I am a confirmed Eurosceptic—sceptical about the whole project and about the euro—but I take absolutely no pleasure in seeing the current problems in the eurozone. The UK’s economic success is still too closely bound to that of the rest of Europe for problems across the channel to be any source of joy. My great regret is that the UK has tied its economic fortunes so closely to Europe and hence is vulnerable to economic success or failure there. We depend on European markets for roughly 40% of our exports. Our history as great exporters is in the past. Somehow, we have let the emerging markets grow without us, and it is shameful that we export more to Belgium than to India and China combined. Lessening our trading exposure to the eurozone should be a government priority.

I turn to the position of Greece, which dominates the headlines. Greece lied and cheated about its economic affairs and, at one level, there is a certain satisfaction that it is now getting its comeuppance, but the medicine that has been forced down the throats of the Greek people by the German-led eurozone group is more than tough and more than painful for them. The

21 May 2012 : Column 685

imposition of an unelected Government was a particularly shocking development and it is no surprise that the Greeks now reject austerity and what is demanded of them. Greece needs devaluation, and it simply cannot get that within the euro. It seems to me obvious that Greece cannot survive within the euro and should be encouraged to take an orderly exit. The longer that the European core tries to hold Greece in while imposing impossible economic conditions, the more likely it is that an exit will be disorderly. The signs are not good.

In the past few months, there has been deposit flight from Greece. Corporates routinely sweep any cash out daily. Anecdotal evidence suggests that wealthy Greeks have been transferring large sums of money to other, safer eurozone territories—in particular, Germany—or beyond the eurozone. Now ordinary Greeks seem to think that keeping their money in the banks is not a clever thing to do, and a real bank run could bring the Greek problem to a head.

I am sure that a lot of work has been done throughout Europe to model the consequences of a Greek exit, with best, worst and intermediate cases. I know that my noble friend cannot give market-sensitive information, but I would be interested to hear what he feels that he can say about the impact on the UK of a Greek exit.

Of course, the bigger danger is contagion. Cyprus and Portugal might well be early casualties—the former because it is so intertwined with Greek banks and the latter because it is a weak economy. They, too, could probably exit with few repercussions. The real problems lie elsewhere, as the noble Lord, Lord Harrison, said. We have seen the cost of borrowing in Spain and Italy rise towards levels which could easily be unsustainable. The cost of credit default swaps are also, unsurprisingly, rising for those countries. Those are the judgments of markets. Financial markets have judged that the actions to date have failed to deliver a sustainable solution. For example, last week’s overdue recapitalisation of the Spanish banks was nothing like enough to deal with the underlying problems, which is why Spanish bank yields continue to rise.

Markets want comprehensive solutions. Common issuance eurobonds would probably be a popular solution with markets, because they would involve a common commitment to a long-term economic solution. The committee examined that. Markets need Germany’s financial commitment to the whole eurozone, not just to economic policies, but Germany cannot or will not deliver that at present. If eurozone leaders come up with more half-baked packages which depend on extraordinary feats of austerity or are based on wishful thinking about growth measures, markets will reach their judgments and other weak countries in the eurozone will be exposed.

The G8 summit last weekend failed to do anything to reassure markets that the euro crisis will be dealt with. If the position of Spain or Italy within the euro becomes untenable, the consequences would be severe for Europe as a whole, including the UK. That is why I support the efforts made by my right honourable friend the Chancellor to urge the eurozone countries towards fiscal union.

I certainly would not have started with fiscal union. Indeed, I would not have started with the euro at all, but there is no example of successful currency union

21 May 2012 : Column 686

without fiscal union, and if that leads eventually to greater political union—the dream of the European federalists—so be it. It is a fact of life that the euro exists, so breaking it up is going to be very painful and it is therefore in the British interest to push the euro to its logical conclusion. The Government’s first priority is to protect Britain’s interests, and Britain’s interests will be protected if the euro does not go into a disorderly break-up.

If there is closer fiscal and political union within the eurozone, that will at least lay to rest the question that seems never quite to go away about whether we should join the euro. It will at the same time throw into sharp relief the whole nature of our relationship with the rest of Europe. I am not optimistic that the distinction between the internal market, which we will want to participate in, and the economic governance of the eurozone, which we will not, will stand the test of time. It seems that the eurozone will be driven more closely together, and that that will drive the UK and the other “euro out” countries away. The EU as we know it almost certainly could not survive a break-up of the euro.

As we have had a trade deficit with the EU for a long time, we should not get paranoid about those problems. The eurozone countries need our markets more than we need theirs, so we should be able to achieve our trading aims without the need to conform to every directive or regulation designed by the eurozone countries.

Of more immediate concern is the direct financial exposure of the UK. I congratulate the Government on bringing to an end our liability to the European financial stability mechanism, which the party opposite committed us to after it had lost the general election but before it conceded defeat. It will be important to avoid any further commitment. My noble friend the Minister was only partly reassuring on this front when he answered a Question from the noble Lord, Lord Empey, last week. He refused to say in unequivocal terms that the Government had no intention of providing further funding for the euro bailout. I hope that he can be clearer today. The question is: will the Government rule out providing any further financing to bail out the eurozone? It is a simple question and requires only a simple yes or no answer.

6.30 pm

Lord Monks: My Lords, one of the small pleasures of working in Brussels for eight years as general secretary of the European Trade Union Confederation was to be examined periodically by the House of Lords European Union Committee and to talk with others in the waiting room about just how serious and expert those sessions were, and how well respected the committee and this House is among those people on the inside who give evidence to it from across the Commission and the other European institutions. I thank the committee for a typically good piece of work. It is a balanced and sensible report on a very difficult situation. The tone of the report is about right as well; it is worried but friendly. It is constructive and trying to help, in a rather modest way—not in a kind of “Britain knows best” way, which is too often the tone of some of the critics of the euro and the way that it has developed.

21 May 2012 : Column 687

As the crisis has been developing in the eurozone, there are more and more opportunities for those such as the noble Baroness, Lady Noakes, and others in this House who tend to say to the other side of the argument the four most annoying words in the English language: “I told you so”. The harsh fact is that this is the most difficult economic crisis in the West since the 1930s. It has probed and prised open the cracks in the design of the euro system—and the cracks, by the way, in the economic system which the UK developed over the past 30 years, with our overemphasis on financial services and our ignoring of the importance of manufacturing, and in some of the old-time truths which underpinned the rise of this country in the past. How do we get by? Let us be frank in this House about it. We get by through the devaluation of sterling, which is still 20% down against the euro, with all its troubles, and by quantitative easing, with our central bank printing money. These two ingredients are one reason—perhaps the main reason—why the UK recession is not a lot worse than it is, but those options are not available to our neighbours in the eurozone.

Perhaps we should think for a moment what would have happened without the euro and suppose that this crisis had happened and that all the national currencies were still in place. Their values would have been moving around as some Governments were forced, or chose, to devalue their currencies. Inevitably, had that happened accusations would be flying that the devaluations were a protectionist measure. That very powerful argument would have been going on in Europe at present. The single market would be under considerable challenge, as others considered taking retaliatory action against those who had devalued their currencies. Indeed, if our exports had been rather more impressive than our imports, and it was the other way round, we would have had a much harder time from our European partners than we have had since the devaluation of the pound took place. If the present situation is very difficult, and I certainly acknowledge that it is, the alternative would be difficult too.

British government policy is in the curious position of emphasising the virtues of austerity at home, in the UK economic and political scene, while loudly proclaiming the growth and expansionary path in the eurozone. That is particularly aimed at Chancellor Merkel. This leaves the UK wide open to a charge of, at best, inconsistency and, at worst, rank hypocrisy. After all, actions—not words—matter, and the shrinkage of the UK economy provides limited help to the economies of our neighbours in the present circumstances. Should we now not be asking ourselves how we can help the eurozone do what it must do if it is to survive? Could we, for instance, publicly and intelligently support the ideas of eurobonds and the mutualisation of some of the debt of the hardest hit economies? Could we not encourage making the European Central Bank a lender of last resort like national banks so that it could stand ready to rescue in the most difficult circumstances? Could we not take a fresh look at taxes on financial transactions both to check reckless speculation, of which we have seen far too much, and to act as a fresh and much needed source of public revenue? Can we support the creative use of the surpluses in the EU

21 May 2012 : Column 688

regional and social funds and a stronger financial base for the European Investment Bank? Can we take the lead on something? I believe it should be on a scheme on youth unemployment which would impact on those countries where that problem is particularly serious at present. The UK could take these positive initiatives from outside the eurozone. At present it is like a frustrated football fan sitting in the grandstand shouting plenty of advice that nobody takes any notice of.

The steps I suggest are not just gestures of help for the eurozone; they are self-help for the UK as well, just as the Marshall plan was not just American generosity but American self-interest. If the eurozone can resolve its contradictions and do something to deal with the cracks in its architecture, it will benefit itself, but it will benefit the UK as much as anyone.

6.37 pm

Lord Maclennan of Rogart: My Lords, it has been a privilege to serve on the Select Committee and to participate in at least some of its deliberations on this subject. I thank the noble Lords, Lord Harrison and Lord Roper, for presiding over those deliberations at a time of great sensitivity and urgency to deal with these matters. The Select Committee’s report was published in the aftermath of the Prime Minister’s walk-out from the December seminar. Although that diplomatic mistake has had the lingering effect of diminishing Britain’s influence on decision-making by the European Union, I do not wish to rake over the failure to disclose to the committee the interests that the Prime Minister was allegedly seeking to protect. Suffice it to say that the reasons subsequently advanced by the Chancellor of the Exchequer in his letter to the chairman of the Treasury Committee of the House of Commons were wholly unconvincing. As that letter makes clear, significant levies on the financial sector,

“are subject to unanimity under the EU treaty”.

The Prime Minister was playing to a domestic gallery, not seeking to take forward the decisions that had been taken in principle by the October summit. It was a failure of the worst kind.

The Government’s response to the committee’s report has some positive proposals that I commend and welcome. In particular, the Government claim that they are “leading the growth agenda”. I think some of the remarks by the noble Lord, Lord Monks, about how we might lead it rather better should be taken on board by the Government. The answer to the report makes it clear that there are certain longer-term goals in respect of reforming the single market that could have a beneficial impact on our economy and some of those areas most under stress at this time. For example, in services there is huge overregulation in the domestic law of too many European Union countries, notably Germany. Digital union within the trade area is now likely to be achieved by 2015. That is a little way down the track, alas. The agenda also includes energy, which is a noticeably disrupted economy, with member countries taking very different views of it.

It is also good to notice in the Government’s reply support for a European research area and global openness via the EU free trade agreements with trading partners. These are positive. Although the December

21 May 2012 : Column 689

diversion from the urgent need to particularise and embed the principles agreed at the October meeting caused further delay in coming to grips with the euro area crisis, we are not alone in having been too tardy in responding. Indeed, the German and French attempt to water down the Basel III capital rules as they apply to Europe, even within the past month, must also be regretted. It seems clear that member countries of the Union have not faced up to the seriousness of the crisis in a coherent and constant way, with a direction set by their heads of government.

Major decisions are now required. One is on the Greek debt write-down. A second is on bank recapitalisation and the financing of the European Union rescue funds. These have been too long postponed. As the noble Lord, Lord Harrison, pointed out, the European Central Bank has been inventive in purchasing government bonds of euro area countries in financial distress from the secondary market; in coming together with the central banks from outside the area to help provide liquidity support; and in the long-term refinancing of operations—the LTRO—which provides 500 European banks with nearly €500 billion via three-year loans at very low interest rates. However, it is clear—particularly so because of the current Greek crisis—that this has not been enough.

It is worth noting in passing the evidence given to the committee by the former Prime Minister of Italy, Giuliano Amato, that although fully fledged Eurobonds were not part of Germany’s current thinking, mutually guaranteed project bonds for specific pan-EU projects, such as the development of the European power grid, should be given consideration. I should like to hear from the noble Lord, Lord Sassoon, when he winds up, whether the Government are giving serious consideration to that suggestion, which seems to be one that should be treated favourably.

Most commentators viewing the results of the Greek elections have considered that the Greek Government’s exit from the eurozone is now much more likely. The Greek opinion polls suggest that there is a growing recognition that the consequences for Greece would be disastrous. It is impossible to predict what may happen by 17 June. However, what is to be done now?

Lord Radice: My Lords, might the noble Lord also remark that well over 75% of Greeks who have been polled want Greece to stay in the eurozone?

Lord Maclennan of Rogart: 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

21 May 2012 : Column 690

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.

21 May 2012 : Column 691

6.50 pm

Lord Marlesford: My Lords, both the noble Lord, Lord Monks, and my noble friend Lord Maclennan have warned us against advising or criticising other countries in these matters. It always seems to me that one advantage of the privacy of your Lordships’ Chamber is that we can freely give advice to the Government without much danger of it leaking out.

As the only other member of Sub-Committee A speaking today, I congratulate my chairman, the noble Lord, Lord Harrison, on his lucid exposition of our findings. I also tell your Lordships that in the ever-changing kaleidoscope of events in the euro area that we faced during our inquiry, his skill as a chess master enabled him to guide us through and sometimes even interpret the irrational, usually contradictory and often ill conceived moves of the euro area.

I am neither a Eurosceptic nor a Europhile. If I presume to symbolise anything at all, I would try always to use a pragmatic approach and describe myself if anything as a Euro-challenger.

Never has it been clearer that the first commandment for a leader is to identify and then face reality. That applies in politics, economics and business; it applies especially to bankers and, above all, to central bankers. Do not let us forget that one of the main architects of our misery is that shrunken giant Alan Greenspan, with his failure as chairman of the Fed to face—and still less to act on—the reality that he had, in fact, identified in the three years that led up to the summer of 2007, when it became clear that everything would unravel.

The former name for economics was political economy, which underlines the crucial links between economics and politics. Even when the economic realities are revealed, political forces often conspire to frustrate the hope of solutions. I intend to devote my own brief comments to the situation in Greece and suggest a possible way forward for that country.

I should perhaps declare a rather remote interest in that my great-grandmother was Greek and her uncle was Capodistrias, who after he had represented the Russian tsar at the Congress of Vienna was, in 1827, persuaded to be president of Greece—and for his efforts was assassinated in 1831 within five years of taking office. It was ever thus.

It is perhaps relevant to remember that the British Foreign Office argued strongly against the liberation of Greece from the Turk on the grounds that it would undermine the Ottoman empire and thus destabilise the Balkans. The words of the noble Lord, Lord Monks, “I told you so”, may be echoed by diplomats of today. Of course, it was Lord Byron and his friends who ensured that the advice of the Foreign Office was not taken on that occasion.

Noble Lords will remember that it was Plato himself who argued against Athenian democracy of the fourth century BC on the grounds that demagogues could use it to prevent sound decisions. His analogy was a ship controlled by ignorant and quarrelsome sailors who refused to believe that there was any such skill as navigation and would write off a mere helmsman as a useless stargazer. His solution was, of course, the

21 May 2012 : Column 692

philosopher ruler. Whether either Mr Papademos or Mr Venizelos is up to such a role is not perhaps for me to judge. However, at paragraph 133 of our report we draw attention to the outburst of anger on the part of Greek politicians at the suggestion that there should be a budget overseer for that country. It seems to me that the danger now is that the second round of elections may again result in a preference for the rather destructive demagogues in the extreme right Golden Dawn and the hard-left factions forming the Syriza. There are rather frightening echoes in these economics and politics of how Hitler came to power 80 years ago.

It seems to me most unlikely that Greece can, or should be, bailed out yet again. I think, therefore, that it must leave the euro area, but I certainly hope that it remains inside the EU. Then what? There are two choices. The first is assumed, and that is the re-creation of the drachma as a new Greek currency. I believe that this would be a disaster for Greece. It would be a currency that no one would wish to lend or to borrow. The markets would ensure that it would be rapidly devalued and the Greek central bank would have to resort to the printing press.

Lord Davies of Stamford: I agree with the noble Lord’s analysis entirely up to now. However, does he agree with me that if the drachma collapsed, as it certainly would, everybody would want to borrow in it and have their liabilities in drachmas and their assets in euros, and that that would be part of the problem?

Lord Marlesford: My goodness, the noble Lord is certainly a speculator.

If Germany is prepared to pay not the cost of bailing out Greece but the cost of redeeming the Greek euro debt which already exists, we have to think of something better than going into a Mickey Mouse currency such as the drachma. The solution would be for Greece to leave the euro area but to continue to use the euro. There are plenty of examples from past economic crises, such as Latin America using the dollar and Yugoslavia using the deutschmark after Tito died. The whole point is that using the euro with a new central bank for Greece would impose a discipline on the central bank and on Greece. Like anyone else, it would be possible for it to use only the currency that it could afford. It would not have any relation or connection with the European Central Bank. It would be paddling its own canoe but it might well have to have some help from the IMF. However, it might well produce a remarkable resurgence. Indeed, a noble Lord talked about the possibility of financing certain projects with eurobonds. This might be very possible if people could see sound opportunities in Greece and they knew that the currency being used was a proper international currency. I think that that would be a real help.

Lord Lea of Crondall: The noble Lord has painted a fascinating scenario, but how does he get out from under the problem he referred to whereby, in a sense, the demagogues fail to acknowledge that the real fall in living standards would be a lot greater in the drachma devaluation scenario than in the internal devaluation of taking more medicine in the eurozone?

21 May 2012 : Column 693

Lord Marlesford: When Sub-Committee A looked at the bailout, we saw again and again that the figures produced as necessary to prevent a catastrophe became ever greater by magnitudes. There is the old cliché about “A billion here and a billion there—you are talking serious money”; we almost reached the stage where it was “A trillion here and a trillion there”. If the prospects are for bailout, and that just continues, whatever happens and however much worse it gets, it has been fairly conclusively proved that people will take advantage of a bailout. It is human nature. It was the present governor of the Bank who said that if there is a run on the bank, the sensible thing is to join it. Therefore, if the bank is prepared to bail you out, the sensible thing is to accept the money.

My solution is that you impose a requirement to earn the euros—but with some help through the IMF, eurobonds, or eurobond investments—and you are thus able to rebuild your economy. I do not see, from the point of view of people living in Greece, that there is much difference between perhaps starting off with saying, “We are going to recreate the drachma; and the drachma is equal to a euro”, and then finding that the next day it is worth only half a euro, or, as the noble Lord, who likes speculating on these matters, might think, the drachma would soon be worth only a quarter of the euro. It would be a great deal better to recognise that the flexibility of having to have the euros with which to buy and pay for things would itself generate a reality that, I believe, is lacking.

Lord Hamilton of Epsom: I am rather uncertain as to how, if the Greeks basically default but stay with the euro, they would raise new debt in euros.

Lord Marlesford: I do not think that they could do so as such, except that, as I say, you might have a euro project in which people would invest. It would perhaps be somewhat similar to the private finance initiatives that have been used by the British Government—not entirely with success, maybe, but on balance they have been a useful source of making things actually happen. If people could see a good return, they would invest in it. That is a perfectly sensible way of doing it and, therefore, Greece would not be able to raise euro debt as such, unless the markets thought that that was viable. That is where the self-discipline is. The self-denial of recourse to the printing press would be a solution. I suppose I am really saying that if we get this form of self-discipline, which reality should require, and if this were to work in the case of Greece, it could be an example to other countries either not to follow suit and to grasp the nettle for themselves, or to recognise that this would be a viable way forward.

7.04 pm

Baroness Crawley: My Lords, I add my congratulations to the noble Lord, Lord Harrison, on the work of his committee and on his contribution today. He is a friend and a colleague of many years’ standing—indeed, going all the way back to our years in the European Parliament, where he was especially renowned for his championing of small and medium-sized businesses. I know that he continues with that cause in your Lordships’ House.

21 May 2012 : Column 694

This evening, my noble friend Lord Harrison has presented the House with a first-class, thorough and, I think, essentially pragmatic report on the most vital economic issue of the day—the euro area crisis. I had a first read of the report over the weekend. I know that it will repay further study and that it will be a guide to all of us in this time of extreme difficulty and uncertainty throughout Europe.

This is a time, if ever there was one, for stout-hearted men—and, in my case, just stout women—to rally to the European vision while holding our nerve, if both actions can be achieved together. This is certainly not the time for the rather startling questioning of the whole basis of our membership of the European Union, as some in our political parties, especially but not solely in UKIP, are engaging in currently, and this is where the bulk of my short remarks tonight will be concentrated. As the report before us says unequivocally:

“The EU, and the euro area in particular, face massive challenges and there is a need for effective and proactive leadership both from the EU institutions and Member States, in the interests of the wider Union”—

leadership, not carping, questioning and indecision. The importance of maintaining the euro cannot be overstated for our fiscal and economic health internationally.

As we know, these are perilous economic times, as the noble Baroness, Lady Noakes, said. The UK is running a trade deficit of £2.7 billion per month, unemployment is an extremely worrying 8% and our annualised rate of GDP growth is so small that it can be detected only inside the Hadron Collider. Meanwhile, we still sell around £15 billion-worth of exports to the EU27 alone each month. Around 30% of all imports to Ireland, for example, are from the UK.

So I say this to those in the political class who are raising the possibility of referendums: with the turmoil in the eurozone and seriously depleted growth prospects in Spain, Portugal, Greece, Italy and Ireland—although, as the report says, Ireland is giving us some hope for the future—are we seriously suggesting that it is in the best long-term interests of British companies and British workers to start the debate about EU membership all over again, to revitalise the politics of what I would call the very worst of provincial isolationism in Britain and to tolerate the possibility that we could start dismantling every piece of European legislation introduced in the UK since the 1970s? Do we think that it is in the long-term interests of British workers and British companies to send the signal to large global corporations and the Governments of the USA and China alike that, in our troubled but emphatically interdependent world, the British political class would prefer to give the British economy over to a kind of nervous breakdown just because some people, who probably wear Union Jack waistcoats when alone in their homes, want to go back to the days of Commonwealth preference, pounds, shillings and pence, black and white television, jumpers for goalposts and long queues at airports for anyone without that old black passport?

It is not a question of being pro- or anti-European these days; it is a question of pro- or anti-economic sanity. Withdrawing from Europe makes as much sense as the people of Hampstead declaring UDI from

21 May 2012 : Column 695

London, or trying to divert the flow of the Thames, or shifting the UK’s longitude. No major party represented in your Lordships’ House went into the general election campaign promising a referendum on the European Union and this is certainly not the time to start.

Instead, I respectfully suggest that we should steer our focus to what the report refers to as,

“ultimately the resumption of sustainable economic growth”,

across the European Union. We should also listen to people such as Mario Monti, the Prime Minister of Italy, or President Hollande, who are beginning to construct a serious debate about the bridge between austerity measures and the vital necessity for growth. As my noble friend Lord Monks said in his excellent contribution, this should be our sole focus in these difficult times.

Before resuming my seat, I shall, if I may, congratulate the noble Lord, Lord Boswell of Aynho, and welcome him to his new duties, and thank the noble Lord, Lord Roper, for his excellent work over many years.

7.11 pm

Lord Willoughby de Broke: My Lords, like other speakers, I thank the noble Lord, Lord Harrison, for producing this useful report. I recognise, as the noble Lord, Lord Marlesford, said, that producing a report of this sort entails a lot of work: a lot of reading, many hours of listening to witnesses and probably a little bit of shut-eye, occasionally.

Having said that, I am slightly disappointed by the narrowness and rather blinkered focus of the report. I am disappointed but not entirely surprised because, as a paid-up anorak, when I knew that there would be an inquiry followed by a report, I wrote to the noble Lord, Lord Roper, who I congratulate on remaining in his place throughout this debate, suggesting that some of the witnesses were one-sided—what I call Europhile heavy. We had the foreign editor of the Economist, which is from the same stable as the FT, which has been wrong on just about everything for the past 20 years. We had Charles Grant of the Centre for European Reform, famously a Europhile think tank. We had Professor Willem Buiter, always pro-Euro, and Giuliano Amato.

They are all distinguished witnesses, but I wonder whether we should have had some more Euro-realistic views, which might have produced a greater balance to the report. Why not economics Professor Tim Congdon, Daniel Hannan MEP, Roger Bootle or Ambrose Evans-Pritchard? If they were too strong meat for the committee, perhaps it could have had Wolfgang Munchau from the FT. He has reinvented himself to what he would call a Euro-realist. We are left with a rather unbalanced and one-sided report, with statements of the blindingly obvious, as in paragraph 143, which states that,

“there remains an urgent need to establish a credible and well-financed system of rescue funding”.

Quite.

One point that I notice from reading through the report, which is symptomatic of the tone and why I am quoting it, is that right at the beginning in Chapter 2, Professor Buiter says:

21 May 2012 : Column 696

“It is a sovereign liquidity crisis ... countries that one hopes and assumes are most likely solvent, as far as the sovereign is concerned … frozen out of the funding markets by markets panicking and refusing”,

credit. It is not the markets that are panicking; they are acting entirely rationally in refusing to lend to borrowers who they feel may not repay their loans. It is the eurozone Ministers, the European Central Bank and the European Commission that are panicking by using every sort of dodgy financial wheeze to keep the euro-zombie staggering along on ever-more expensive forms of life support.

The noble Lord, Lord Marlesford, mentioned the possible cost of this going forward, never mind the cost that has occurred so far. I have discovered a rather shocking fact, which I will share with the House: the bailout funds so far used to rescue the eurozone are larger in real terms than the reparation payments and reconstruction plans of the First and Second World Wars combined. The reference is David Marsh’s book, The Euro: The Politics of the New Global Currency. All that in the name of what? Solidarity, cohesion, European destiny, what the noble Baroness called vision. What a cruel joke that is.

How can anyone pretend any longer that the euro project is anything but a disastrous financial and social failure? Greece is in near revolt, Spain has 25% unemployment and over 50% youth unemployment, Ireland is in a double-dip recession, Italy is in turmoil, 11 Prime Ministers have been booted out since the euro crisis began—all this to keep the EU political bandwagon on the road and the euro delusion going, never mind the social and financial cost of doing so. I say to the noble Lord, Lord Davies, that if he is interested in a bet on the euro or the drachma, the biggest financial exchange dealers in the world—ICAP, at least—are all ready to deal in the drachma. He will be able to indulge his gambling whim with them any time now, I guess.

The best solution would surely be for Greece, and any other country that so wishes, to leave the eurozone. The noble Baroness, Lady Noakes, was absolutely right that that is their only chance of becoming competitive in a global economy. There is absolutely no hope for it at all in the eurozone. The report should have said that there is no hope for Greece and the other peripherals while Germany is master in the eurozone. The Greeks cannot become Germans. It occurred to me while reading the report that we could have had a monetary union of countries beginning with S, it would have been just as effective: Switzerland, Syria, Sweden, and Serbia. There is no reason why that should not have been as ineffective as the eurozone.

I agree with the noble Lord, Lord Monks, that Britain’s interest is in a Europe that is economically strong and vibrant. That is obvious. However, do the Government really believe that this can be achieved by propping up at ever greater expense the weapon of mass financial destruction that the euro has become? It is not the Government’s job and it is not in the country’s interests to encourage the EU elite any longer in its very damaging political illusion. I hope that the Minister and the Government will take with a heavy pinch of salt the blood-curdling

21 May 2012 : Column 697

threats that are already being issued by the Eurocrats should the eurozone break up. They should be heavily discounted.

After all, we have been here before. Twenty years ago, Britain went through precisely the same experience when it was stuck with an overvalued exchange rate in the exchange rate mechanism. As in Greece now, our leaders, all the main parties, the CBI, the TUC and the Bank of England assured us that leaving the ERM would be disastrous. On 11 September 1992, the Prime Minister John Major solemnly told us that withdrawal was:

“The soft option, the devaluer’s option, the inflationary option … a betrayal of our future”.

Four days later, we left the system. The noble Lord, Lord Lamont, who I am sorry is not here, was apparently singing in his bath at the time. Our recovery began immediately. Inflation, interest rates and unemployment started falling and we enjoyed 15 years of unbroken growth and prosperity.

That is what the Eurocrats really fear: that if Greece gets out it will be a success, and other countries will want to follow and also get out of the eurozone. Then the whole rotten house of cards will crumble. That is what they fear, and that is what will happen.

7.20 pm

Lord Giddens: 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.

21 May 2012 : Column 698

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

21 May 2012 : Column 699

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.

21 May 2012 : Column 700

7.32 pm

Lord Dobbs: My Lords, I am also tempted to stray a little from the committee’s report this evening, although not before paying tribute to the excellent work of its members and also adding my welcome to my noble friend Lord Boswell of Aynho in his new position.

It has not been a very good week for political classes and elites, and I am told that it is only Monday. Over the weekend, NATO’s strategy on Afghanistan seemed to have been taken over by the Grand Old Duke of York—lost in confusion, trying to remember whether he was supposed to be marching up or down the hill. Then, of course, we had the summit discussions on Europe, where the only consensus seemed to be that Europe is in a terrible crisis. Europe is in chaos, and things will get worse.

I commend the committee for its report. I take to heart its opening lines about the need for leadership. As the noble Lord, Lord Harrison, himself has so ably set out, we have seen so little of that—so many of Europe’s leaders seem blind and bereft of ideas. You can hear the mantra falling from the lips yet again, “One last push and it will all be over,”. We in Europe seem to have learnt nothing for almost 100 years.

I listened in amazement over the weekend to President Barroso. I beg his pardon, because I mean him no personal discourtesy, but his statement was like tugging at the tulips to see if the roots were still intact. Your committee spoke of—I believe the noble Baroness, Lady Crawley, also quoted it, although that is as far as I will be going down the path with her this evening—a need for effective and proactive leadership from the EU institutions and member states. Where has that been?

Over the weekend Mr Barroso’s response to the need for leadership was to say that,

“there is only plan A”.

There is no plan A. It is a meaningless concept. There is nothing but a fog of indecision. Europe’s leaders talk about Greece, the euro and binding undertakings, but they refuse to address the key issue: the increasingly incoherent fiscal and political system that underlies and is undermining—indeed destroying—the euro.

I have always wondered why Europe should need three expensive Presidents—not just Mr Barroso, but two others as well—and of course two even more costly Parliaments. They can only come up with one bankrupt idea: plan A. But perhaps there is a plan A*. We heard it again over the weekend: a strategy for growth. Why did I not think of that? Where have I been? I must have been a stonkingly dull pupil all these years. If platitudes could come to our rescue we would have floated off the rocks long ago and would today be singing from the top of Mount Olympus.

Plan A, plan B—whatever plan has so far been devised—will not do. This cannot do. The people tell us that, which is why in country after country since this crisis began Governments have been swept from office—all of them thrown out, with one exception: Estonia, where a Eurosceptic centre-right Government somehow managed to increase their majority. I draw no general rule from a single example, as much as I am tempted to, but the evidence of every other election is surely compelling. Those who are responsible for the crisis have been called to account.

21 May 2012 : Column 701

As I gaze across the battlefield of Europe, littered with corpse after political corpse, I have to wonder about Brussels, about the system and about Mr Barroso and his colleagues. Why is he—and the rest of them—still there? How many of them have been asked to resign or apologise or accept their share of responsibility for the chaos? Not a single one. They seem to inhabit a parallel universe of different rules, while Greece is condemned to paralysis, stagnation—and perhaps salvation, but those in Brussels demand still more, 7% more. Those whom the gods wish to make mad they first seem to send to Brussels.

The stakes are terrifyingly high. I was taken with the warnings of the Deputy Prime Minister, Mr Clegg, the other day. He is not a man whose insights I have regularly praised in the past, but he talked about his fear that economic failure could lead to political extremism and chaos in parts of Europe. That was echoed by my noble friend Lord Maclennan. He is surely right to give voice to those fears. There is so much at stake. Instead of prosperity, Europe will get bankruptcy. Instead of peace, Europe could be filled with burning barricades. Instead of parliamentary democracy, we could all too easily find tolerance being trashed in country after country.

It requires leadership to see a way through this tangle. I welcomed very warmly what the Prime Minister had to say over the weekend. His words were wise—perhaps not welcome in every quarter but sometimes it is necessary to shake the tree to get at the fruit. He said that the people will decide, and in Greece they will do that in the form of an election that will be seen as a referendum. The people must decide—not the political classes, who by and large have offered nothing but arrogance and indecision in heroic measure in recent years. It is the people who will suffer the consequences of failure, see their jobs taken from them, their pensions smashed and their hope and ambition for the future taken from their children. This is not a decision that can be left in the hands of politicians with gold-plated pensions, even gifted philosopher kings such as those praised by my noble friend Lord Marlesford; it is a decision for the people to make.

I therefore take to heart the Prime Minister’s words and the inexorable logic of his argument, which is that what is good for the Greeks must be even better for the British. I look forward to those Greek elections and hope that they will clarify some issues, just as I look forward with even greater anticipation to the referendum that must at some point surely follow in this country.

7.40 pm

Lord Judd: My Lords, I join those who have thanked the noble Lord, Lord Harrison, and his committee and congratulated them on having had the courage to put their heads above the parapet and produce this report in the midst of all the challenges that face us. I also take the opportunity of joining others, including my noble friend Lady Crawley, in putting on record my admiration for the service given to this House by the noble Lord, Lord Roper, as Deputy Chairman of Committees. I have known him for 59 years and there has been a consistent theme from which he has never deviated in his life: a commitment to making a success

21 May 2012 : Column 702

of international institutions, which he sees as indispensable to the future of humanity. That conviction of his has enabled him to be such an effective operator.

It was interesting to contrast two trenchant speeches, that of the noble Baroness, Lady Noakes, and that of my noble friend Lady Crawley. The noble Baroness, Lady Noakes, finished by expressing her admiration for the Government and the Prime Minister for having made it absolutely clear that, whatever happens, the British national interest will be central to their considerations. The problem about that thesis is, as my noble friend pointed out, that we live in a totally interdependent world. It is a false analysis to suppose that you can look to the national interest without looking to the international interest, because our long-term well-being, survival and prosperity depend on the stability and well-being of the international community of which we are inseparably a part. That in an immediate sense starts in the European Community, of which we are in so many ways very much a part.

The difficulty is that we face a challenge. The challenge is not just all the financial nightmares with which we have been dealing; it is the dilemma with which people feel confronted. On the one hand, they are utterly dependent on effective solutions in an international context; but, on the other, they find globalisation and regionalisation quite threatening, because a large number of them feel that they are losing their sense of identity and purposeful significance. That was true of what we saw in the Arab spring. The Arab spring was not just about economic and social injustice; it was people asserting that they mattered and wanting that to be recognised. As we have the institutions today, they do not feel that. They see them as remote and impersonal; they see them as the preoccupation of a political elite of which they would regard us a part. That is the point that I make to my noble friend—my good friend—Lady Crawley.

Although of course we could argue that this is the very time not to start a major agonising debate, we can equally argue that it would be sheer obstinacy of the worst kind to pretend that there is not that crisis, to pretend that people are not disillusioned, that there is not a crisis of confidence among them, and that they are not feeling alienated—let us be prepared to use that word—from the processes in which we all participate. I do not separate myself from that. As someone who was fashioned and grew up during the Second World War, I put my commitment to the European project second to no one, but we have to face up to the seriousness of the human challenge, not just the economic challenge, that confronts us.

In a reflective moment, if we are looking for strong international regional institutions, confederalism may well produce them more successfully than federalism. People want to feel that they belong to something with which they can identify. The challenge is to enable people to see that that is not enough. We must reintroduce the whole concept of international co-operation, emphasise it and start giving it muscle.

As we look, more immediately, at the euro issue, there are those who say, “Of course we could not find a solution for our economic affairs in Europe while we had a euro without the fiscal discipline that should go

21 May 2012 : Column 703

with it”. It is about not simply fiscal disciplines but a cohesive social and economic agreed agenda; I do not see how we can have sustainable stability without one. When I was a Minister of State at the end of the Callaghan Government, we used to consider agonising issues. In my view, it is wrong to suggest that the urgency of the economic crisis means that economic and social priorities must wait. It is in times of economic stringency and hardship that economic and social priorities become more important than ever. If the remedies are to work, they must be in a context in which people feel confident that there is a prevailing ethos of social justice.

I find it very interesting that if you look at either end of the spectrum you get the same conclusion. Adam Smith did not write first, as a young academic, about liberal economics; he wrote first about ethics. He was a highly ethical man. He approached his economic theory in the context of a strong ethical commitment. The late Lord Soper, when the Berlin Wall collapsed, made the profound observation that it is not a matter of socialism having been tried and failed; it is a matter of socialism having demanded an ethic of which humankind has so far proved itself incapable.

Therefore, whether you are looking at it from a capitalist perspective or a more socialist perspective, the indispensability of the ethical priority cannot be overemphasised. We have to reassert in Europe, and in this country, the overriding importance of ethical discipline, not just fiscal discipline. If not, either system is doomed—I put it as strongly as that. What we have is a system in which greed has got out of control and in which, as has been often said of late, risk has been socialised and wealth and profit have been privatised. That is a recipe for tension and instability in society. It is the key issue that has to be tackled.

This is also a moment to pause and consider the issue of democracy itself and how it can work, which of course brings me back—I must be honest about it—to my own political orientation and attitudes. I have never understood how you can have a democracy if you have not got the accountability of economic power. What we are seeing is that we simply have not had the effective accountability of economic power where it matters. The noble Lord, Lord Marlesford, whom I have been fortunate to know as a friend as well, because we came into this House on the same day, was very right to remind us of what happened in Germany in the 1930s: of how the forces of Hitler and fascism gained momentum and what the social realities were around that.

I am sorry if I have said this before in this House—well, I am not sorry, but I recognise that I have said it before—but this is a juncture where I wish that we had more expression of some solidarity with the Greek people, because it was certainly not them who caused the crisis in which they find themselves. The noble Lord was right to say that the Greeks must make the decisions for themselves. We cannot make them for them and it is absolute madness to start lecturing them on their responsibilities. They have suffered enough. They have to weigh it up for themselves and

21 May 2012 : Column 704

see how they want the issue tackled. That of course has profound implications for us but we brought that on our own head.

It is absolutely clear in the midst of all this that the problem with the principle of unbridled market philosophy is that it emphasises the short term and squeezes out the longer-term perspective. One only has to think of the environmental issues as a good practical example of that. That is why we have to have balance and why an ideology of either left or right is not in itself enough. We have to have more pragmatism and more balance in the way we handle the issue.

I therefore conclude simply that what depresses me most about our predicament is that we are mesmerised by an almost neurotic search for some kind of structural, technical solution. If I have come to a conclusion about life, it is that no structure ever achieved anything of itself. Structures are inanimate; it is the objective against which the use of the structure must be judged that matters. It is the quality and values of the people operating the structures that matter. We have to regain a sense of vision, meaning: what kind of Europe do we want and need in the midst of this overriding reality of interdependence? How are we going to turn what is a massive crisis into an opportunity by asking the profound questions? I hope that my noble friend will forgive me for putting it as bluntly as this but, yes, I am asking profound questions. Where and why has it all gone wrong? Now what has to be done not just to patch it up but to find lasting solutions for the future?

7.55 pm

Baroness Williams of Crosby: My Lords, that was a very eloquent speech by the noble Lord, Lord Judd. There are real concerns about what has happened to the moral framework underlying the market. For lack of time, I cannot go into that and will follow the noble Lord in only one respect: in paying tribute to the noble Lords, Lord Harrison and Lord Roper, for an insightful, thoughtful and brilliantly written report. I add my congratulations to the noble Lord, Lord Roper, on the way in which he has led the committee, which still produces work of the highest possible quality.

Let me say right away that the committee report calls for leadership. A necessity for leadership is adequate information, and that leads me to ask the Minister a direct question. Is there any prospect of the Prime Minister’s draft protocol and the safeguards that he called for at the December Council of Europe being made public—after all, it is now nearly six months later—so that this House and those who are concerned about the future of Europe can have the profound discussion that they are capable of, but which is made more difficult because they do not have the information they need to pursue that matter?

Signor Amato, the former and very good Prime Minister of Italy, said honestly, “We have made a great mistake”. The great mistake in the creation of the euro was the failure to recognise that not only was a technical outcome required but a profound institutional change as well. In its pursuit of democracy within Europe, the European Commission and the other European institutions specifically required that. Some Members of the House will remember the Copenhagen criteria,

21 May 2012 : Column 705

a brilliant set of requirements for creating a real democracy. They range from independent courts up to the necessity for free and safe elections. The Copenhagen criteria are still being discussed with Turkey. They create the kind of countries that become part of the kind of Europe for which the noble Lord, Lord Judd, called. In the case of the euro, no such provision was made. There was no period of transition and no requirement that the basic, fundamental institutions of the eurozone had to be laid down by nation states. One of those institutions is an honest and transparent fiscal system. It is not polite to say so, but the truth of the matter is that very few rich people in Greece, Italy or Portugal ever pay taxes. At most, they pay nominal taxes, and that is not a basis on which one can build a sound and lasting eurozone. Institutional reform is crucial.

For lack of time, I shall make only two other points. First, we should ask why the ESM, which is not yet with us, but will be within a few weeks, decided not to require there to be a general mutual agreement by stakeholders alongside taxpayers to share the pain of the changes that are required. That was a very profound mistake because one of the real challenges to democracy is that when there is pain and sacrifice, it must be shared among society. I agree with the noble Lord, Lord Judd, that it cannot be loaded on only a section of society while the other part goes untroubled and untainted by the need to meet the requirements that are laid down.

Finally, the president of the IMF, Christine Lagarde, made a terrifying, chilling remark: “We may be sliding into a 1930s moment”. I very much commend what noble Lords have said about the real dangers to democracy from what is happening now. We must recognise that none of us can bale out of those requirements. They are part of what it is to sustain democracy at a particularly hard time.

7.59 pm

Lord Davies of Oldham: My Lords, this has been a fascinating debate. I am sure that when the noble Lord, Lord Harrison, began his work with the committee on this report he scarcely anticipated that we would have quite such a wide-ranging debate. It has ranged from practical solutions for how we might emerge from the difficulties to the cataclysmic perspective that the game is up and we may as well fold up our tents and go home.

There are two dimensions to this debate to which I have the greatest difficulty in responding. I have great difficulty in responding to my noble friend Lord Giddens, not because I do not respect his analysis but because I cannot cope with the situation. He says that we, as politicians, do not have the intellectual machinery or concepts to get ourselves out of these difficulties. That may be so but I assure my noble friend that that will not stop politicians trying.

Lord Giddens: I did not mention politicians once. I was talking about intellectuals, saying that we do not have the capability to resolve the issues that face us at the moment. Therefore, it is not surprising that politicians are struggling, too.

21 May 2012 : Column 706

Lord Davies of Oldham: I was not going to be excessively critical of intellectuals. I accept what my noble friend said but I translated it to the political because that is what this House is here to do. We are not a debating Chamber; we are the second House of a very significant Parliament in a Europe that is faced with the most colossal difficulties. That is why we have to address ourselves to the issues.

I greatly applaud the work of my noble friend Lord Harrison. When the report was being drafted, things were not quite as critical as they have developed to be over the past two to three months. Nevertheless, my noble friend and his report clearly reflect the difficulties and tensions faced by the committee in producing a response to the great challenge of the crisis in the eurozone.

Let us get one thing absolutely clear. The reason we cannot walk away is that Britain has nowhere else to walk. Robert Chote is the chair of the OBR, in the work of which not just the Chancellor but the Minister in this House invest so much credence. What does he say? He says that we face a catastrophic situation if Greece moves out of the euro; we face catastrophe as far as the eurozone is concerned. The recession will go on for several more years. There will be deflation. Unemployment will rise from 8% to 11%. Therefore, we will be in a situation in which our own people will suffer severely because of this development. That is why the one thing that the British people will not accept—nor do I see any reason why other Europeans should accept it either—is politicians throwing up their hands and saying, “This is beyond us”. We may have limited intellectual concepts to get beyond Keynesianism or monetarism as an economic theory for the future, but we must put together some kind of strategy for improvement. Without that, we renege on our obligations to people.

The noble Lord, Lord Dobbs, says that the people will decide. Let me say that people who have lost trust in their politicians can reach some very dramatic decisions. We possibly see it in Greece at present. What if the British political community also began to reflect that we have no means of protecting our people in this crisis? A total calamity would be visited upon us and we would deserve it. Of course, I respect how difficult these issues are. I know that the Minister will be challenged in his response to this report. However, it is essential that we recognise that we must look for some steps forward.

Lord Dobbs: Is it now the policy of the noble Lord’s party to support a referendum at some point on Europe? The other day, I heard an interview with his noble friend Lord Mandelson who said that a referendum might be a good idea, although another of his colleagues said, “I wonder what he meant by that”. At the end of the day, does the noble Lord want the people to decide our fate and the direction of Europe, or should this still be simply a matter for the political elites?

Lord Davies of Oldham: I would say, not at the end of this day. We have so much to do before we could even begin to prepare a referendum and the question that that would represent in realistic and proper terms

21 May 2012 : Column 707

to the British people. I will not rule it out altogether. We are accustomed to referenda in certain circumstances. You cannot talk to the people in terms of “We are giving all power to you for you to take this decision because we as politicians have not got the faintest idea what the question should be or how it should be answered”. That is what I am arguing against.

I am confident of the fact that European politicians will take important steps to make progress out of this situation. What will they do first? Let me be clear, we should not visit upon the Greeks the well constructed animosity that infects all our right-wing press at the present time. The Greeks are such a small fraction of the European economy that they are not a threat to anyone. Their loss is marginal. It is certainly a marginal aspect as far as our exports are concerned. But the Greek withdrawal from the euro would represent not one country having left the euro, it would be a recasting of the nature of the euro. The euro would come rather more closely to some kind of a currency regime from which some could defect at a time. But as to the consequences, Greece would be just the first of the victims. Then the pressures would inevitably be presented on the next weakest currency. We have already got pretty well a checklist of how that succession of activity would take place. It is certainly the case that the Greeks did not create this situation. We should have some respect for a nation which has such a significance in its past for European society. But the Greek withdrawal from the eurozone would create enormous difficulties for all. The contagion would merely spread.

What is to be done in these circumstances? It is clear that we have to play our small part. Because we are not part of the eurozone, we are on the margins of this exercise. We are even more on the margins because the Prime Minister walks out in a huff or presents a veto whenever things do not go right. We are not quite sure what has gone wrong. As the noble Baroness, Lady Williams, indicated, we never got the facts of the basis of such a decision. But the Prime Minister is good at chiding nations from the sidelines, giving good advice and lecturing others while not being conspicuous by his success at home. If these countries are being told to pursue a strategy in which they have to improve their growth prospects, by heavens, the Prime Minister should examine more closely the growth position of the UK economy in its double-dip recession through his and his Chancellor’s actions since they have been in government.

So it is quite clear that we will look to others in Europe to present some dimension of the solution to this position. Does it mean that the Germans will have to make additional sacrifices, which it is quite clear that their chancellor is not prepared at present? That will happen only if the consequences of doing nothing are far worse. That is exactly how they are beginning to look. When this report was drafted only three months ago, this discussion could be conducted in fairly normal political language, but we are close to talking the language of cataclysm at present—and of course it changes the perspective of the Germans on this, not least because, after all, the Germans also need friends. In fact, they need the French, their direct allies

21 May 2012 : Column 708

who have helped to build the European project, who under Monsieur Hollande are taking a somewhat different view on the next stages.

It is quite clear that the eurozone has to take actions itself. We cannot play a major part. But it is the case that 40% of our exports go to Europe. It establishes the British economy in a weak position, because we are related to the euro countries in those terms; there is no ready alternative. If you ask any of our major companies or anyone else concerned with export trade, they do not turn round and say, “Because the eurozone’s in such trouble, we’re looking forward to such wonderful opportunities to challenge the Chinese and the Indians and others elsewhere in the world”. They do not say that at all. They say that we should do something about sustaining the most crucial market that we have—the eurozone countries.

I am quite sure that the Minister’s response to this debate will be expressed in very different terms to mine, but I hope that at least what I have done for him is to help to disperse the rhetoric so that we can concentrate on what practical politicians will have to do to get us out of this situation.

8.12 pm

The Commercial Secretary to the Treasury (Lord Sassoon): My Lords, I welcome this opportunity to discuss the European Union Committee’s report on the euro area crisis. I first thank the noble Lord, Lord Harrison, and the committee for its thought-provoking analysis, and particularly my noble friend Lord Roper for not only this report but all the other truly excellent work that the committee has done in recent years, which I am fully confident will continue at that excellent level under the chairmanship of the noble Lord, Lord Boswell of Aynho.

The House is aware that these are difficult and dangerous times for the European and the global economy. The ongoing crisis in the euro area continues to undermine confidence and growth right around the world. We have kept the UK out of that storm by taking decisive and resolute action to tackle our deficit, but it is in our vital interest that the euro area reaches a lasting and sustainable resolution to the crisis, and it needs to do so quickly—a point firmly emphasised by my noble friend Lord Dobbs.

As the noble Lord, Lord Harrison, reminded us at the outset, the Governor of the Bank of England said only last week, the difficulties in the euro area represent,

“the biggest risk to recovery”,

in the UK. So it is in the UK’s national interests that we work to resolve these difficulties.

Resolution of the euro area crisis requires three things: resolving the ongoing uncertainty about Greece; ring-fencing other vulnerable euro area member states; and properly recapitalising Europe’s banks. We should recognise that some progress has been made. Greece was given a second programme of assistance and the face value of its debt written down. As the committee also notes, banks need to be sufficiently capitalised to withstand the instability. At home we have taken the necessary actions and as a result all UK banks passed the recent European Banking Authority capital adequacy

21 May 2012 : Column 709

tests. However, recent events remind us that significant risks remain and the IMF rightly warns us all that the global economy remains very fragile. That is why we agreed to increase our contribution to the IMF by £10 billion on condition that the IMF supports countries not currencies, that other IMF members also increase contributions, as they have done, and that the Euro area increases its own firewall, as it, too, has done.

Noble Lords will be aware that the Government are taking forward legislation to ratify the EU treaty change that provides the legal basis for the European stability mechanism, and we will start to debate that on Wednesday. That means that the position will, I trust, be clear to my noble friend Lady Noakes and to others in this House: the UK will not be making further contributions to eurozone bailout funds under the EU budget. Ultimately, high deficit, low competitiveness countries need to confront their own problems head on. They need to continue taking difficult steps to cut their spending, increase their revenues and undergo structural reforms to boost competitiveness. I agree with much of what the noble Lord, Lord Giddens, said. This is about economic sustainability, in his words—or fiscal sustainability, as I would put it. He did not find another word for growth so I will continue to call it growth. His analysis was very interesting, although, of course—

Lord Giddens: I prefer the term “wealth creation” to growth. You can find other words and you probably need to break them down into various component parts to make sense of what people mean when they use “growth” in a generalised sense, which is not terribly useful.

Lord Sassoon: I am grateful to the noble Lord for those comments. I disagree with some of the fundamental aspects of his analysis of the Government’s prescription for the UK economy but I think that goes a bit beyond the narrow topic of today’s debate.

As we have previously said, the euro area must also put in place governance arrangements to deliver the greater collective support and responsibility that the remorseless logic of monetary union demands. We want the fiscal compact to work in stabilising the euro and putting it on a firm foundation. We support the decision of euro area countries in the fiscal compact to commit to clear rules on fiscal discipline which the UK agrees are needed to make the single currency work effectively.

Questions were raised about the ratification of the fiscal compact. Although I will not comment on the likelihood of that happening, I can update the House and report that so far Greece, Portugal and Slovenia have ratified the compact. The compact will come into force once 12 euro area member states have deposited their instruments of ratification. The ratification processes are significantly different in different member states, but that is where things stand.

As the committee report notes, we agree that eurobonds are another issue that deserves further analysis and serious consideration. I agree with the noble Lord, Lord Monks, on that. Of course, any steps that are taken towards closer integration must not be prejudicial to the single market. We agree with the committee

21 May 2012 : Column 710

that matters relating to the internal market must remain the preserve of all 27 EU member states. This is why last December the Prime Minister did not agree to measures the euro area wanted to pursue on further fiscal integration being part of the EU treaties without adequate treaty-level safeguards for the single market.

I am sure that my noble friend Lady Williams of Crosby will not be surprised—she may be a little disappointed, but I am sure not too disappointed because we have discussed this before—that there is not a lot extra that I can add. My right honourable friend the Chancellor deposited an answer with the Treasury Committee, which is on its website, that goes as far as is appropriate and consistent with the need to keep the details of negotiations confidential. However, I draw noble Lords’ attention, if they have not read it, to that document.

We also agree wholeheartedly with the committee that we all need to address Europe’s low productivity and lack of economic dynamism. The UK has been leading that charge and has formed an alliance with 11 other EU leaders to set out an action plan for jobs and growth in Europe, including completing the single market in services and digital—a point to which my noble friend Lord Maclennan of Rogart drew attention. He was right to do so.

The Prime Minister’s focus at the next informal European Council this month, and at the June European Council, will be on ensuring that the focus in Europe remains on promoting growth. The UK’s specific growth agenda includes the digital single market and the services directive, but also, importantly, completing all the open bilateral EU trade deals, which themselves could add €90 billion to the EU economy. A deal with the US would be bigger than all the others put together, but they are each important. Of course, we want the Commission to commit to a new programme to reduce the overall regulatory burden, following on from the current administrative burden programme that concludes in 2012. The Government will be pursuing that agenda very vigorously with our European partners.

Some other aspects have been referred to in the debate. Again, the noble Lord, Lord Monks, referred to the possibility of an increase in lending capacity by the European Investment Bank. That could indeed have a part to play, although I of course disagree with the noble Lord on his views on a European financial transaction tax. That is not the way to go.

My noble friend Lord Maclennan of Rogart also referred to project bonds, which are another possible funding mechanism, which, if the funding comes out of existing EU resources and is carefully designed to be consistent with the need to minimise EU expenditure, is certainly another option that merits exploration.

I should address one or two of the specific questions that were raised on Greece. I take as my starting point the fact that we must respect the Greek people’s choice in their forthcoming elections. That point was expanded on by the noble Lord, Lord Judd, but I certainly take as a starting point the fact that we have to listen to what they decide they want to do. The important thing for all of us is for Greece to find a way out of economic crisis in co-operation with its creditors and

21 May 2012 : Column 711

for it to get back to sustainable growth and sustainable wealth generation. This Government hope that Greece can agree a way forward on this as soon as possible.

Notwithstanding the encouragement of the noble Lord, Lord Harrison, I am not going to speculate on what may or may not happen in Greece or in any other EU member state. Various scenarios were painted by some noble Lords—my noble friend Lord Marlesford, the noble Lord, Lord Willoughby de Broke, and others—but I shall not comment on those. All I will say is that the Government are undertaking extensive contingency planning to deal with all potential outcomes of the euro crisis. As the House will recognise, given the sensitivity of this work both to the markets and to international relations we will not deviate from the normal response, which is not to divulge specifics of the Government’s plans.

My noble friend Lady Noakes specifically asked about the exposure of the UK economy to Greece. The numbers relating to the relatively limited direct exposure of the UK banks and the UK economy generally to Greece are published, but clearly there is a need for a convincing firewall, as we all know the step change that there would be if contagion spread. Therefore, although I do not recognise the construction that the noble Lord, Lord Davies of Oldham, put on Robert Chote’s remarks, I think we all recognise the very serious implications if these issues are not dealt with speedily and in all their dimensions.

I was asked about one or two other issues. The noble Lord, Lord Harrison, asked about the impact of the French elections and what changes there will be with the new President. Of course, as he should have been, my right honourable friend the Prime Minister was very quick to congratulate Monsieur Hollande on his election victory. France is an important partner of the UK. We look forward to the close co-operation on foreign and defence policy, as well as on other areas, continuing with the new Government. The Prime Minister and the President had a warm exchange in their initial call and they subsequently met at the G20 meeting at

21 May 2012 : Column 712

Camp David. They are working together closely and are looking forward to building on the close relationship that exists. Therefore, based on the discussions in recent days, I think that the impact can only be positive.

The last point I raise nervously but I do so for completeness in tackling the issues that came up in the debate. The noble Baroness, Lady Crawley, said that this was not the time to speculate about a possible referendum—words which I am sure her noble friend Lord Mandelson and the shadow Chancellor will very much take to heart if they listen to this debate or read it afterwards. However, I shall not go further than that.

In conclusion, these are indeed dangerous times for the European economy. It is vital that euro area Governments pull together to deliver a sustainable resolution to the crisis, tackling their deficits, forging closer governance arrangements, and boosting competitiveness and growth. On all fronts, the UK will work as a strong and positive partner with our European neighbours to restore prosperity right across the European Union.

8.29 pm

Lord Harrison: My Lords, it may have seemed at times that we were walking through a cloud of unknowing in the debate that we had on the euro area crisis, but I thank all colleagues who have contributed so well and so widely to what I hope and believe will be a beneficial debate. If I were creating an image of cloud computing and tried to find one word that might sum up the tenor of the debate and my own hopes and aspirations, it would be the reference to showing solidarity with others suggested by the noble Lord, Lord Judd. That is imperative and something that should help us to find and forge solutions to this tricky business in the next few months and years. I hope in that solidarity that the United Kingdom will play its proper and vital role. I thank noble Lords very much.

Motion agreed.

House adjourned at 8.31 pm.