2.02 pm

Lord Radice: My Lords, it is always very good to follow the noble Lord, Lord Brittan, who, as usual, is extremely wise in his remarks on European matters. Clearly, this is a very important debate with a lot of people wanting to get in. We have already heard some impressive speeches. Perhaps I may just say something nice to the noble Lord, Lord Howell, whom I do not always praise. He made a very able tour d'horizon and put a very positive case for British membership, which was good to hear. My noble friend Lord Mandelson combined realism with vision in a most exemplary manner. I want to pay tribute to my noble friend Lord Harrison, who is not in his place, for his excellent Select Committee report, which he addressed very ably.

Of course, in this kind of debate some noble Lords who have spoken-for example, the noble Lords, Lord Lamont and Lord Higgins-and some still to speak who are listening to the debate, have always believed that the euro was a flawed project from the start which was bound to fail. Therefore, what has happened in the eurozone over the past year or so has merely confirmed their original, brilliant judgment and there has been a certain amount of Schadenfreude going around.

My position is different. I speak as someone who not only was in favour of European monetary union but also took the view that, if the circumstances were right, there was a strong case for the UK joining the euro. For a number of years, over the period of what has been called the great moderation, monetary union worked well. The euro was introduced with competence and speed. It rapidly became the world's second currency. The number of members of the eurozone increased to 17 and the eurozone by and large prospered.

However, the banking crisis and the credit crunch of 2008, which we seem to have forgotten had its origins not on the continent of Europe but in the United States, also caused a crisis of confidence in the eurozone. That was most notably, of course, in Greece but it has spread to other countries, such as Ireland, Portugal, Spain and even Italy. As I freely admit, the crisis has revealed shortcomings in the original architecture of economic and monetary union, including asymmetry between a centralised monetary policy and a decentralised fiscal position, competitive imbalances between member states and a lack of an adequate bailout mechanism for countries in trouble.

The response of the leaders of the eurozone has been extremely slow and uncertain. As Professor Buiter said, their decision-making has been like "a caterpillar hurdling". All the same, my view is that the eurozone remains part of the solution rather than the problem. That is the division in this debate. For those who think that that is incorrect, I ask them to imagine the reaction of the European countries without the EU and without the euro. First, there would be competitive devaluation, with all its impact on living standards. The idea that somehow devaluation is a soft option and that you do



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not have to cut living standards is economically totally illiterate. Secondly, there would be the spread of self-defeating protectionism. Thirdly, as in the 1930s, there would be the rise of extremist nationalism. We should not think that somehow there is an easy world outside, which if you get rid of the eurozone will suddenly solve all the problems. It just is not there.

I believe that the monetary union, provided that it is reformed, affords a framework for recovery, to which I will devote the rest of my remarks. It is true that the eurozone is still not out of the woods by a long chalk but there are some encouraging signs. The Greek psychodrama continues but it is noticeable that since the end of last year borrowing rates have been falling for some other countries. In the survival of the euro, which I think will survive, Italy is the key country. It is noticeable that the spread between Italian and German 10-year bonds has narrowed by some 200 basis points and is continuing to shrink. There is no doubt that the advent of Mario Monti, the Italian Prime Minister, is making a real difference, not only in Italy but across Europe and in the markets as a whole.

There have been some other promising developments. First, the strengthening of the euro stabilisation mechanism will come into effect in July 2012. Secondly, the ECB under Mario Draghi has enhanced credit support for bank lending, as the noble Lord, Lord Lamont, pointed out. It has already provided 500 European banks with a total of nearly €500 billion in three-year low-interest loans. That will be repeated at the end of February. The noble Lord is right to say that this has been a game-changer. Thirdly, there has been the fiscal compact, which was agreed on 30 January 2012. There is something in what some people say, and the point has already been made in the debate, that this amounts to not much more than a beefed-up stability and growth pact. But it has a political point, which is key to ensuring the crucial German support for an effective bailout mechanism for the eurozone.

However, as in the UK, the big weakness of European policy at present is the lack of a credible growth strategy. Without growth, it will be difficult to reduce deficits and unemployment will continue to rise. We are told that Mario Monti went to Berlin to say that, and that something more was needed than austerity, while the head of the IMF, Christine Lagarde, has argued that countries which are in a position to expand should be able to do so. Certainly a sustained domestic expansion in Germany would do the eurozone a power of good. We have had two years of domestic expansion; let us have more. Also, we have the welcome prospect of a recovery gathering pace in the United States and it is hoped that this will be yet another example of the new world coming to the aid of the old.

Finally, I turn to the United Kingdom. I believe that it was a mistake for the UK to stay out of the so-called fiscal compact. I am afraid that during my political lifetime this country has had an unhappy tradition of either opting out of European projects or joining late when the parameters have already been set. But even though we are not in the euro, what happens in the eurozone has a major impact on our economy, as the noble Lord, Lord Howell, rightly said; we cannot escape it. It is also very much in our



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interest to ensure, for example, that the integrity of the single market is preserved. The European Select Committee report is surely right when it states that:

"Shifting discussions outside the main EU channels to forums where the United Kingdom has no voice risks marginalising the UK over time".

We may have very good advice for the eurozone-and we often think we do have-but no one will listen if we are not actually there. We cannot defend the City or protect the single market if we are not at the table. As a former Belgian Prime Minister graphically put it, "If you are not at the table, you are part of the menu". There is a strong case for the UK becoming part of the so-called fiscal compact.

At a time of crisis for the eurozone, a crisis that affects us as much as it does the eurozone members, it is surely folly for the United Kingdom to stand outside. In the modern world, isolation is not splendid; it is foolish. If we are to defend our interests and help lead Europe out of its difficulties, as we ought to, it is our duty both to our citizens and to Europe to be involved and to participate.

2.12 pm

Lord Dykes: My Lords, I expected to enjoy and appreciate the speech of the noble Lord, Lord Radice, and I have done so even more than I thought I would. I shall embarrass him deliberately by thanking him for a speech which I envy because I wish I had had the chance to make it myself. However, I forgive the noble Lord because some years ago he said to me-I am happy to apologise if my memory is at fault-that despite having a distinguished Italian name, he is not a linguist and does not speak Italian. None the less, he has been a strong European over the years. I recall that in the mid-1990s he succeeded me as chairman of the European Movement in Britain and we have carried on not only a friendship, but also often a mutual appreciation of European matters to such an extent that all I would need to do today, if only the rules of procedure would allow it, would be to cross the Floor of the House, get the text of his speech and read it out again, such is the common sense and wisdom of many of his remarks.

I share with the noble Lord his appreciation of the positive tone in the speech of my noble friend Lord Howell. It certainly ended on a strong upbeat note by stressing the need for Britain to be fully engaged in developments in the European Union. I do not criticise him, but because of the circumstances of receiving notes which one does not have time to read at the Dispatch Box when they are handed to you, he stumbled a bit on the issue of the clarification of the safeguards. I can understand why because unfortunately, and through no fault of my noble friend Lord Howell, the issue remains a product of imagination rather than reality. It remains to be seen what will actually be done by the Government to rectify this most extraordinary omission in the history of international and European negotiations from 9 December onwards. It is not something you would normally expect. To be fair, the UK Government have come forward substantially and since then have been more positive by realising that we really do have to help our colleagues in the eurozone, both indirectly



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and no doubt directly in some ways. That is the priority and it helps us as well, not just through trade but also in other things, not least the long-term development of the European Union.

I also pay tribute to the interesting, sensible and wise speeches made by the noble Lords, Lord Mandelson and Lord Grenfell. They themselves do not represent the more recent change in many Labour politicians and spokesmen to being keener on Europe than they were in the past; that really was consolidated when the Lisbon treaty was passing through both Houses. I now perceive Labour, particularly in this House but also in the other place, generally as a positive and pro-European party. There is a small number of exceptions among the rather older Labour MPs, but I do not see any other difference.

As our involvement in the EU grows with the passing years, I wish that that was so in the main party in the coalition. However, there have been setbacks in recent years which surprised me before the election and, indeed, surprised me afterwards. Normally, the old historical feature was that parties would become anti-European when they went into opposition. That was the pattern set by the Edward Heath Government, who as a Government were very keen on Europe with Edward Heath pointing the way forward when we first joined the Community. That pattern has been replaced by a new phenomenon of the main party in the Government now being more and more strongly anti-European. A huge number of Conservative MPs in the other place are viscerally opposed to Europe and all its works. Just look at the words they use in speeches in various European debates, and the glee and triumph that greeted the Prime Minister at Chequers when he returned from the 9 December meeting with his so-called deal, which obviously was beginning to unravel almost as soon as the ink was dry in the face of the reality of the situation in this country vis-à-vis our partners and fellow EU members dealing with eurozone problems. It is sad to note that the Conservative Party is like that now and I hope that it sheds this view as quickly as possible, given the reality of our position in the world and the need for us all to work together to deal with the worldwide crisis and the European recession.

The noble Lord, Lord Radice, may have inferred it but did not say it, but I imagine he would agree that you cannot have a genuine, full, single market-to which we are addicted and keep saying as much as a leitmotif-without having a single currency; that has to come. It may be painful on the way, but the European authorities, the heads of government and one head of state in the different countries, mainly France and Germany, are dealing with it and gradually getting there. Although it is a panicky and jittery process, which is inevitable given that these are enormously complicated negotiations in which people often lose their tempers-all the sovereign countries have to be fully consulted, which is very difficult-they are getting there step by step. Enormous progress has been made towards solving the eurozone problem.

I am also very optimistic that there will be a solution for Greece over the next days and weeks. Indeed, everything will have to be in place for the next bond auction date in, I think, the third week of March.



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I believe it will happen because it has to. It is very distressing to see the animosity that has broken out in the international press, now picked up by the British press, between Germany and Greece, with the leading figures from both countries having a go at each other. That may be a function of the stresses of the day in trying to get the agreement going, and thus is understandable, but it is not something that is of any lasting significance. There is a great relationship historically, although of course I am not referring to the Second World War, over the long term not only between Germany and Greece but also between all other European countries, including ourselves. Greece does need help and she will respond. We shall see the details of the agreement very soon.

I pay tribute to the way this has been achieved very patiently by the people involved. We must now support it more and more rather than waiting with relish for things to collapse. The obsession, unfortunately again mainly in Conservative circles but also in UKIP and among other smaller political parties, with the concept of national sovereignty is now truly outdated and has to be overtaken by events as countries work more and more closely together. There is also an idea that we can shrug off the pronouncements of the credit rating agencies by saying that it does not matter if they downgrade various countries. The United States and, I think, France have now had a downgrade, but we still have our triple-A rating. However, the rating agencies are themselves flawed institutions and make lots of mistakes. They certainly did on their triple-A predictions for the credit rating levels of several institutions that then went bust a week later, sometimes even less than a week in the case of one or two hedge funds and housing loan corporations in the United States.

The United States is a heavily indebted, technically bankrupt federal system, and most of its individual states are technically bankrupt. If they were individuals or companies, they would already be in the bankruptcy court. They can do it because they are states and a federal country, with a $16 trillion debt burden that is incapable of being reduced by the American political process. Those matters should be of greater concern to Conservative politicians than the temporary problems of the eurozone as we get through this very difficult period, which, as the noble Lord, Lord Radice, said, was quite likely caused by the international banking and speculators crisis from which we are all still suffering.

I add my words of praise to what has been said about the euro area crisis. We thank the noble Lord, Lord Harrison, and his team for having produced a very positive report on the way in which, once again, the eurozone is coming through this crisis. On 31 January, the Prime Minister said:

"The principle that the EU institutions should act only with the explicit authorisation of all member states remains. Let me be clear: this is a treaty outside the EU. We are not signing it".-[Official Report, Commons, 31/1/12; col. 678.]

Since then, the Government have seen the light about the need to work with the other countries. I agree strongly with paragraph 150 of the EU Committee's report, which states:

"It is unacceptable that the Government have not released appropriate details of the safeguards which the Prime Minister sought at the December European Council. This makes it impossible



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to form a balanced judgement about the outcome. Coming to the present, we invite the Government to indicate what necessary safeguards they think have yet to be achieved, and what provisions ... in the proposed treaty are objectionable to them".

Until the Government give us that essential information, there will be no underpinning of the emotional support that we want to give them now for sounding more positive about European matters.

2.22 pm

Lord Flight: My Lords, a noble Lord in this debate and yesterday referred to Britain's exports to the EU representing approximately 50 per cent of our exports. As many noble Lords may be aware, subsequent research on this figure finds that some 10 per cent of those are merely in transit, largely through Holland, to other parts of the world, and that the more accurate figure is some 40 per cent of our exports.

Perhaps I may appear rather aggressive in saying that the Prime Minister should at least have criticised, if not opposed, the December fiscal compact essentially because it was not about fiscal integration; it was about a framework and enforcement machinery for brutal and self-defeating internal devaluation measures, where the economies in trouble need growth and not to be ground into the dirt.

The key features of fiscal integration, as evidenced by the United States of America, are a single borrower, a central bank that can if necessary print money and buy government bonds, and, above all, transfer payments from the more prosperous to the less prosperous, keeping the less prosperous afloat. Within America, they amount to some 30 per cent of federal tax revenues to this day.

Germany, not surprisingly, has opposed all three key aspects of fiscal integration, largely because the estimates are that the transfer payments would need to be as large as some 35 per cent of German GDP, which is clearly impossible. But the failure is to face up to the conclusion of that: that is, there is really only one way of addressing the problems without imposing enormous hardship on millions of people, which is a currency reorganisation within the eurozone. I perceive what is being proposed and demanded of Greece as smacking of President Hoover in the 1930s, leading to the depression in America, and smacking of those Gold Standard bigots in Europe in the early 1930s having a similar effect on European economies then. The fact is that Greece has been in major recession for four years; its economy is downward-spiralling; and, very clearly, it is going to be vulnerable to political revolt, we hope through the ballot box. The words of Keynes, applied to the German reparation agreement at the end of the First World War, are appropriate: what is being looked for is,

"insincere acceptance of impossible conditions".

This approach is not only economically mistaken but, in reality, unlikely to work, not just as regards Greece but other countries-it will be like the growth and stability pact. Back in 1953, when the then West was required to bail out Germany, which could not afford to service its debts, a very generous deal was provided-a 50 per cent debt cancellation and a five-year interest moratorium-and it was well understood that



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it was necessary to give the German economy the oxygen to rebuild and grow. As the noble Lord, Lord Radice, pointed out, these problems are not soluble unless countries can grow their tax revenues. I would have thought that if poor old Adenauer was still around today, he would not make the disastrous mistakes made by the present German Administration, which in effect repeat the very reparations-type of approach that caused so much trouble in Germany after the Great War. Let us look at what is happening: the whole claim of the European Union was that it would get rid of nasty nationalism. Well, many countries in Europe are coming to take a very critical view towards Germany bossing them around and, not surprisingly, many Germans are pretty critical of having to pay up and bail everybody out. So the flames of nationalism are being stirred rather unpleasantly, as others have pointed out.

I am surprised that many whom I would describe as less capitalist than me in my economic views seem entirely happy to see thousands of people thrown out of work and thousands beggared purely in the name of having to maintain the euro unchanged rather than follow the sensible remedy of currency reorganisation. It will clearly be Portugal next and Spain, potentially, after that-Spain already has 23 per cent unemployment and 48.7 per cent youth unemployment.

Germany has subtly "done a China". She has made herself super competitive within Europe when, if you like, the more pleasure-loving south was getting on with its usual practices and unit labour costs were rising. Germany since 2003 has cut unit labour costs by some 12 per cent. So there is about a 30 per cent competitiveness gap between Germany and its affiliated economies and the south. That is just too large to be able to be addressed by an internal devaluation programme. It is not surprising that we see Germany having had the best figures for years for job growth while southern Europe now has spiralling unemployment.

It is odds-on that Greece and Portugal will exit from the euro relatively soon. I would make the point made by others that, although there will be immediate pain, the process needs to be well planned and organised. Beyond immediate pain, there is the prospect of strong economic recovery, as Argentina has experienced as a result of going through a similar mechanism.

The ECB is financing banks to give them a large interest margin when they buy the debt particularly of southern European economies, which should keep the debt issue afloat in Italy and Spain for some time, but there remains a competitiveness problem with both economies. Unless the ECB's action is used to buy time in which a sensible European currency reorganisation is planned, it will simply worsen the banking problems when things eventually blow up. I have suggested on previous occasions that there is an obvious case for a strong currency for northern Europe and a weak currency bloc for southern Europe. We do not necessarily have to go back to historic currencies.

This needs planning now. Indeed, it should have been planned a year ago when it was blindingly obvious that the inherent problems of the euro were coming to light. But there is a bigger issue to which many noble Lords have referred, including the noble Lord, Lord



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Howell, and indeed the noble Lord, Lord Mandelson, which is that the world is a hugely changed place. We have huge success and competition from what are widely known as the BRICs and it is very clear that most of Europe and the UK are no longer attractive places in which to do business. The public sectors are way too big, regulation is wildly excessive and tax rates are far too high.

The diagnosis of that has to be that radical reform is needed across Europe and in the UK if we are to compete effectively with the new economies going forward. We are not going to get anywhere merely remaining uncompetitive and unattractive. A major ingredient preventing those reforms is of course the EU itself and its excessive detailed regulation. We heard today an interesting comment that the success in this country of the life science industries is being threatened by EU regulation. It is not just in that area that, I am afraid, EU regulation imported and often enhanced here makes this country uncompetitive.

The task of any responsible Government of the UK, whatever their political hue, over the next few years will be either to change and reform the EU enormously to make it into a vital economic unit and not a stagnant one or to find measures to extract the UK from the various aspects of its regulatory and other regimes which are damaging our economy. In particular, they are a major threat to our biggest industry; the financial services industry.

2.31 pm

Lord Stoddart of Swindon: My Lords, I am very pleased to be following the noble Lord, Lord Flight, and I am sure that the House enjoyed his very lively speech. I was also glad that he corrected the trade figures from 50 per cent to 40 per cent. Some people seem to believe that we did not trade with Europe before we joined the Common Market in 1973. But of course before 1973 we had very good trading relationships with Europe and made a profit on many of our exports; including cars, incidentally.

It is difficult to know where to start in a speech about the European Union because of the chaos that reigns in the Union, particularly in the eurozone. As usual, there have been some disparaging comments about those of us who are called Eurosceptics. I would remind those people that the Eurosceptics warned of the dangers of joining or having a single currency. We were told that if we did not join, we would be sidelined. We would miss the train and we would miss the boat. Indeed, people like me were called unpatriotic because we believed that it would be inimical to British interests to join the single currency.

We have been vindicated by events. We are not pleased about that, but we have been vindicated. We believe that the euro currency in the eurozone would not be good for this country even if it might be good for other countries. What surprises and amazes me-and we have heard it again this afternoon-is that the eurozealots who want to get rid of the pound still believe that the United Kingdom should join the euro. In spite of everything that has happened, they believe that we should still join. Even the Deputy Prime Minister believes that. I find that quite incredible.





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Lord Gilbert: He is a Dutchman; that is why.

Lord Stoddart of Swindon: The eurozone has proved that a single currency cannot work without fiscal and political union. A lot of people have pointed that out this afternoon.

This debate is about developments in the European Union. So far we have heard about great issues, but all sorts of things are going on all the time in the European Union, many of which affect ordinary people in this country. For example, the Solvency II capital rules, which I believe are now being agreed, will cost the British financial industry £600 billion, according to JP Morgan. They will cause massive damage to the United Kingdom's pensions industry and will virtually kill off the last vestiges of final salary schemes. That will hurt ordinary British people. We should take note of that.

Then there is the proposal to make mortgages in default after 90 days in arrears, which conflicts with the Government's own policy of helping people, quite rightly, to hang on to their homes when they are in financial difficulty. Then there is the demand for another £9 billion to meet the additional commitments in the present financial round, which will cost the United Kingdom £1 billion. That is extra to the £10.3 billion that we have already committed and money that we do not have. We will have to borrow £1 billion more. Only on Tuesday, the EU Commission announced that 12 member states, including the United Kingdom, are suffering from severe economic imbalances leading to economic shocks and that they will be placed under stringent observation so that they do not compromise the stability of the EU.

That dictatorial language and action is now commonplace in the EU. The treatment and humiliation of Greece by the EU is alarming, disgraceful and completely undemocratic. Furthermore, the Greeks have had the right to govern themselves taken away and the leaders of the Government are unelected Prime Ministers. The political parties now have to guarantee that they will put into place measures that will hurt ordinary Greeks in a manner that is totally unacceptable in anything other than a third world country. That is in advance of what will be done.

Some of us predicted that eventually there would be fighting in the streets in the European Union or Common Market. We now have it. We have fighting in the streets not only in Greece but in other countries as well-

Baroness Falkner of Margravine: But that was happening in London in August.

Lord Stoddart of Swindon: Perhaps I may repeat that we have fighting in the streets in Greece and in other countries, such as Spain and Romania. That cannot be denied.

As usual, a crisis situation is being used to transfer more power to the EU institutions. The fiscal agreement was made between countries other than the United Kingdom and the Czech Republic. It may be intergovernmental at this stage. However, all experience has shown that inter-governmentalism eventually collapses



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and becomes an EU competence. That happened following the Single European Act, the Maastricht treaty, the Amsterdam treaty, the Nice treaty and the Lisbon treaty, all of which transferred more powers from nation states to the institutions of the European Union.

However, even this does not go far enough for the European top dogs. Frau Merkel, for example, was recently reported in the German newspaper Handelsblatt as saying that, step by step, European politics is merging with domestic politics. She called for closer political integration, with members ceding further powers to the European Commission, which ought to be the real government of Europe, with the Council of Ministers operating as a second chamber and adding strength to a European Parliament. That is the vision of people such as the Germans, which is also supported by the current President of France. The noble Lord, Lord Howell, does not agree with that. He is calling for a completely different sort of Europe-but Germany and France in particular are determined to go very much further than the noble Lord outlined in his speech. Of course it is not only the leaders of individual states who are doing this. Mr Barroso was this week telling the Chinese that the EU will become a fully fledged political union after the financial crisis. I hope that the Government will tell these people that that is not the vision that the United Kingdom has for the European Union; and, indeed, that the British people will not tolerate that. They want to continue to be governed by their own elected representatives and by institutions that have been built up and been successful over many hundreds of years.

2.43 pm

Lord Hamilton of Epsom: My Lords, like many noble Lords who are contributing to this debate, I am a member of Sub-Committee A of the European Union Committee, and we have contributed to this report today. However, it is quite difficult to find where our report features in this. It has been rather subsumed by the senior committee. If there are any lessons to be learnt from this, it might be that it would be better if Sub-Committee A produced its own reports, the top EU Committee produced theirs and we kept them separate.

While drawing up our report, we took evidence from the German ambassador, Mr Georg Boomgaarden -a charming man. At one stage when we were asking him questions, he said that you could not really expect the President of France and the Chancellor of Germany to take any notice of the markets. The markets are the elephant in the room, and whether you like or hate the markets, you cannot ignore them. One of the problems with the mishandling of this crisis-and it has been mishandled absolutely from its start-is the total misunderstanding of how the markets actually operate.

Just in case the elephant in the room was sitting there not doing anything much, the Chancellor of Germany, Mrs Merkel, decided to stick it very hard in the behind with a sharp stick when she started referring to "haircuts" in respect of the crisis in Ireland. The idea of haircuts, when she first mentioned them, was totally novel. The markets had worked on the cosy assumption up until that moment that the whole of



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the eurozone was underwritten by the Germans. That was why interest rates paid on debt in Greece were something like 0.5 per cent above those in Germany. The market immediately panicked when the prospect of losing serious sums of money became apparent. Then, of course, President Sarkozy and Chancellor Merkel had to get together at the G20 meeting and, at that point, said that all eurozone debt would be redeemed at par, up until 2013. I wonder what has happened to that commitment. When you are talking about a 73 per cent default on debt with Greece, I am sure that it does not quite seem to be a question of eurozone debt being redeemed at par.

As this crisis has evolved, European institutions have always been behind the curve-everything has been too little and too late. The €440 billion eurozone mechanism, which took a long time to be ratified by different parliaments, might have been enough to stabilise the crisis if it had been produced early on. It arrived much too late of course, and by that time the whole crisis had moved on. Despite reassurances from the Germans that they would make sure that the eurozone remained intact, they were not prepared to underwrite the whole thing, so it was always going to face serious problems.

We now have the ridiculous situation in which the Germans are trying to turn Greeks-and indeed all the other Club Med members of the eurozone-into Germans, which is never going to work. There are enormous problems, which my noble friend Lord Flight has referred to, with competitiveness. The noble Lord, Lord Mandelson, referred to convergence, which was always one of the great hopes of the eurozone; but the eurozone economies have never converged and will never do so. We are never going to get to that position, which is why the whole project is basically doomed. What we have to do from here is manage the eurozone's decline, and indeed its inevitable disintegration, because I do not believe that we will ever see this situation stabilised. My noble friend Lord Lamont mentioned that he has taken bets. I have bet my German son-in-law that Greece would be out by Easter and have not lost it yet. Although I am not sure I want to double up on that one, I would certainly be very surprised if Greece was still in the eurozone at the end of this year.

This has been one of the other problems with the way this has been handled. I think there was a presidential election in America when one candidate described another as being incapable of walking and chewing gum at the same time. I find it extraordinary that the EU institutions are mesmerised by Greece but at the same time are very worried about the whole problem of what happens if Greece goes down and of contagion. So why are they not handling Portugal, and conceivably Spain, at the same time? If those three countries could be stabilised, there is hope that perhaps the contagion will not spread as far as Italy.

As it is, the sooner Greece defaults, the better it will be, both for the eurozone and for Greece itself. The austerity programme to which Greece is being subjected at the moment is achieving absolutely nothing and is merely guaranteeing that the country is going to go on contracting and that its economy is going to get worse. There is no way forward for it whatever. I am not



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saying that default and returning to the drachma is a panacea for all Greece's problems, but it would give the Greeks a breathing space to reorganise themselves. One of the great advantages they have is an enormous tourist industry, which would benefit almost at once if they returned to the drachma and holidays for everyone became very cheap there the next day.

In the past, my noble friend Lord Higgins has always said that the complications of default are so great that you really cannot think about them. I do not go along with that. The Argentinians defaulted by closing down their banks at a weekend and overprinting all their existing bills with the new currency that they were issuing on Monday. They then opened the doors on Monday after the devaluation. We must not get overexcited and think that somehow default and returning to another currency is so traumatic that it cannot be entertained at all; it certainly can. Obviously, transitional arrangements have to be made for companies that owe very large amounts in euros, but that does not mean that these things are impossible.

The alternative is too awful to think about. Many noble Lords, including my noble friend Lord Flight, have referred to the problems of extremism that are now emerging. We have an extraordinary situation in which the Germans resent paying money to the Greeks, and the Greeks resent getting money from the Germans because of all the conditions that it comes with. This is breeding a very unpleasant form of politics in Europe. The very idea that this is somehow bringing Europe together is just fanciful. It is doing nothing of the sort; it is creating divisions, and it is going to make Europe a less and less pleasant place for anyone to live in.

We have to look at this anew. We should not be frightened of the concept of default, and we should try to manage the default of the really weak countries on the periphery of the eurozone. It is critical that we do what we can to save Italy from going down as well or the whole place will disintegrate, although at the end of the day we must not assume that there is an unlimited amount of money that the Germans can afford to pay to keep this thing afloat even if they wanted to. Germany has its own problems with an ageing population and enormous pension liabilities, and its pockets are not so deep that it can go on paying for all this either. We must learn some lessons from where we have got to. This project has failed and we must now manage its default so that it damages as few people as possible as the whole zone disintegrates.

2.51 pm

Lord Monks: My Lords, this debate has inevitably concentrated on the very difficult and testing economic situation in the eurozone and, to some extent, on the UK's awkward relationship with the EU. There has been no shortage of unsolicited advice to our neighbours and partners in the EU about all the things that they are doing wrong. I have one thing to say on that: never underestimate the determination of the leaders of Europe to keep the euro going. They will pay very heavy prices to do that. When we in this country preach such unsolicited advice from a background of an economy that rests to a large degree on devaluing



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our currency and on quantitative easing, our message does not come across with the authority that it might seem to have to some in this House. It is not taken awfully seriously on this subject.

I want to spend some time on a different subject, a different angle, an issue that has been as controversial as economic and monetary union in this country over many years, if not just at the moment-the social dimension of the European Union. Let us remember some of the incidents in its chequered history in this country. Mrs Thatcher was very hostile to Jacques Delors' vision of a single market balanced by some social rules. She gave a fiery speech at Bruges that set in train some events that led to her downfall. Prime Minister Major negotiated an opt-out from the Maastricht treaty. It was the anniversary of that treaty just recently. Tony Blair ended the opt-out but was just as cautious-indeed, as hostile-on certain issues as the Major Government had been, and some were accepted only after many years of procrastination. The Conservative Party today is dedicated to the repatriation of certain powers, particularly on employment policy, although that has been watered down a bit in the coalition Government's programme to a review of the balance of competences.

Open Europe, a think tank that takes an interest in these matters, as do I, is estimating at the moment that the cost of social Europe measures adds up to £8 billion a year for UK employers. I dispute that figure and ask your Lordships to reflect on it for a moment. Are people really asking the UK to save money by reducing the minimum entitlement to four weeks' paid leave a year? Should that be scrapped? Are people saying that the UK should save money by scrapping the extensive health and safety regulations-many of which, by the way, are based on the UK's own practices, which are the best practices in the European Union? That is one of the few areas where we can say that we are actually at the top of the league of labour market measures. How much money would in effect be saved by scrapping those European rules?

Are people saying that we should save money by scrapping the requirement to inform and consult employees about proposed decisions in companies? After all, that was made rather a major part of the recent coalition Government's announcements on executive remuneration: that these channels should be used by the rest of the workforce to try to hold top earners to account. Are people saying that we should save money by scrapping the TUPE regulations on staff affected by transfers of ownership or privatisations? People are probably not saying those things specifically, although I will be interested to see whether some noble Lords do say them, but they are using these global sums, which I believe are fictitious, to justify the unjustifiable. Is that the direction that the UK would want to go in? I do not think so and I certainly hope not.

Another element of social Europe is not just the specific measures but the idea that the EU should have a strong social platform and embrace certain objectives-full employment, redistributive welfare states and the presence of institutions in the labour market, particularly social dialogue and collective bargaining-that seek to



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embed social norms of fairness, the more egalitarian distribution of market incomes and a restraint of excess at the top. In the current economic situation, all that is at risk.

I used to be the general-secretary of the European Trade Union Confederation, which is currently arguing that the approach by the European authorities should be more Keynesian, more expansionary, concentrated more on growth than on austerity and more a Marshall plan than the reparations-tinged measures that are around at present, not just in relation to Greece but in relation to other countries too. We, along with others, have been arguing that no moral hazard doctrine was applied to the banks when they needed urgent rescue but, when it comes to individual countries, moral hazard is the headline, not just in German newspapers but across many other parts of Europe as well.

It is not just the rescue packages that are affected. The strengthened rules, including the fiscal pact, look to enshrine fiscal austerity and a rather monetarist approach to economic policy. I see the noble Lord, Lord Flight, nodding his head; I agree with him on that particular point. From a union perspective you can see the controls on unit labour costs in the fiscal pact, the hostility to wage indexation and to sector-wide collective bargaining, and the downward pressure on public sector pay and on some minimum wage levels, which are very much a part of the programme.

I am pro-European and do not like the fiscal pact-it is going in the wrong direction-but when you look at the world as a whole, you see that the EU is the one significant part of the world, and an important one, that enshrines the values that I believe in. The campaign should be to seek to influence the EU to go in a more expansionary and generous direction, one in which Keynesian principles play a bigger part and the spirit of the Marshall plan is remembered. After all, Marshall was inspired in that plan by what happened in Greece in 1946, and he launched that campaign to defend democracy. We are not so far away from that in some parts of peripheral Europe at present.

I hope that the unions can do in Europe what they did in the Scandinavian countries, particularly in Finland after the collapse of the Soviet Union, which was to form social pacts in individual countries where people pulled together to put the country back on its feet. They did that very well in Finland after a catastrophic drop in GDP of 15 per cent in three months. It can be done in Europe. The problem with this situation as we debate it here is that we are rather isolated from some of these debates. It is a bit like being spectators at a match rather than players on the field.

In my remaining few seconds, I draw to the Minister's attention the current situation in Hungary, where the Orbán regime, as he will know, has changed the constitution to recognise ethnic Hungarians in neighbouring countries, almost nostalgic for the borders of Hungary as they were at the end of the First World War. That Government have also sacked judges from courts that have not done things that comply with government policy. I understand, too, that there are new restrictions on churches: 14 have been legitimised and the rest have to apply for registration, including the Anglicans and Methodists. I ask the Minister what



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representations the UK is making bilaterally to the Hungarian Government, and in the context of the EU, to ensure that Hungary is in line with the best traditions of the European Union and is not being nostalgic for a Hungary of the past, which I do not think anyone should want to go back to.

3.01 pm

Lord Newby: My Lords, like other noble Lords, I will concentrate my remarks on recent economic developments, particularly on growth. Although the EU is doing many other important things-on climate change, as the noble Lord, Lord Jay, pointed out, or in terms of social measures, as the noble Lord, Lord Monks, has just pointed out-economics has always been at the core of the EU. The extent to which the EU will be seen to succeed or fail will be the extent to which, over the longer term, it has been seen to deliver growth to its populations.

It has been tempting for me to follow a number of noble Lords this afternoon in discussing the twists and turns of the euro crisis, not least because, as Moody's reiterated on Monday, the biggest single short-term threat to growth in the UK is a failure of the EU to solve that crisis. However, I will resist the temptation because, at the end of the day, nobody within the eurozone is listening to what anybody in the UK is saying about the future of the eurozone. They do not need to listen because we have no lean on them. They have enough on their plate trying to resolve the conflicting pressures that they find themselves under, both domestically and within the eurozone. My only advice on this to the Government, and to the Prime Minister in particular, is that, having succeeded in annoying everybody by the way he behaved with the veto in December, he should not make things worse by publically lecturing the rest of the eurozone on the need for them to sort themselves out as though they were naughty schoolboys and girls, as he did in Davos. It may play well back here, but it has zero impact on what is actually going to happen and merely serves to build up a stock of resentment against the UK which will inevitably reduce our ability to promote our interests on non-eurozone issues.

I strongly agreed with the noble Lord, Lord Mandelson, when he said that the gravitational pull towards the eurozone and the development of its institutions will be at a cost to Britain's position and influence. That is the long-term position in which we find ourselves, whichever party or parties are in government. For the foreseeable future, the UK must accommodate itself to being outside the mainstream of those discussions. The irony, of course, is that our deficit reduction programme is exactly the kind of thing that the Germans and other north European countries wish to see for the rest of the eurozone. On macroeconomic policy, we are squarely in the middle of that thinking in the EU. That helps to explain why we are far from being the pariah that some of the headlines, particularly in December, have suggested. The challenge and opportunity for the Government for the remainder of this Parliament is how to use the commonality of interest which exists across much of the economic agenda to our best advantage-mainly via the mechanisms of developing



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the single market and on trade. If we are going to have greater engagement, it will be in those areas that we exercise it, rather than in discussions about the detailed management of the eurozone.

One of the more tangible ways in which this has been happening in recent months is via the so-called "like-minded growth group", which was established by my colleague Ed Davey while he was at BIS. Launched in the middle of 2011, it initially had 14 members and was later joined by two more, including Germany. Interestingly, of the 16, eight were "euro-ins" and eight were "euro-outs". The purpose of the group is to agree joint priorities and strategies for delivering core job and growth priorities linked to the development of the single market. Recent months have seen developments which have strengthened this group further. The Italian Government, who were frankly having none of it in their previous incarnation, have, with the advent of Mario Monti, become great enthusiasts for developing the social market. The new Government in Spain are taking a similarly positive view, as are the Government of Romania. You therefore now have a big majority of people and Governments who are prepared to put real impetus behind a positive single market agenda.

Many of the detailed measures under discussion are, of course, extremely arcane, but they all have the potential to increase trade within the EU and therefore promote growth. Some of these issues, like the immensely vexed question of the EU patent, are nearly concluded. One can only hope that, the intellectual problems having been resolved, the practical issue of where the headquarters of the patent court are located does not lead to another decade of delay in sorting this out. Other measures, such as the development of a digital single market, or on the mutual recognition of the myriad professional qualifications, have some way to go, but there is new impetus behind them. Of all of them, here, for many firms, the proposals from the Commission to simplify the EU public procurement rules will be welcome, particularly for SMEs. I would welcome anything that the Minister could, in winding up, say about progress on that matter.

While the single market is going to help to encourage growth via internal trade, the other area that we must put more emphasis on is that of measures to improve external trade. The noble Lord, Lord Lamont, and the right reverend Prelate the Bishop of Guildford referred to Sir Thomas More. Five hundred years ago, Thomas More was sent to Bruges by Henry VIII to conclude a new trade agreement on wool. When he got there, he found that the French were meddling with a new domestic Administration. Problems were so difficult that it took six months before he was able to get anything approaching an agreement. Like all good intellectuals, he did not waste the time and used it to write Utopia. I do not know whether the noble Lord, Lord Mandelson, in the longueur of his time in Brussels as trade commissioner, was similarly penning his chef d'oeuvre but, if so, we very much look forward to seeing it.

Trade has been largely forgotten in recent months. We know that the Doha process has completely run into the sand. However, there are major initiatives ahead-some concluded, as in South Korea, and others



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under way, as with the EU/India summit this weekend. There are others that are small but potentially immensely significant for the countries involved; for example, the WTO's agreement this week to preferential trade agreements with Pakistan, a country which needs all the help it can get. It will get it, in part, through having a more resilient economy, driven by trade.

The single market and trade progress slowly. The work is hard and unglamorous. But it is by taking a leading part in areas such as these that the UK, the euro notwithstanding, will remain fully engaged in the EU, to the tremendous benefit of both the UK and the EU as a whole.

3.10 pm

Lord Risby: My Lords, the eurozone crisis, the very weak European economies and excessive government debt have taken the spotlight away from some major and significant EU achievements of late. For example, if individual European countries tried separately to deal with problems such as Syria and Libya, their impact would be minimal. It is collective European action that has sent a clear and united message to an increasingly isolated and belligerent Iran. It is EU countries acting in concert, with others of course, that have promoted the beginnings of democracy returning to Burma. In the past few weeks, it must have been a wonderfully gratifying sight to all of us to see Aung San Suu Kyi being able to campaign politically. All these actions arise from a united view of common standards of governance and human rights, which are embraced by all EU countries, and appropriate political and economic responses. However, I believe it was Willy Brandt who once said that politicians go into politics to resolve a given set of problems and, once those problems are resolved, they cannot move on. We know of such individuals in our own country's long political history but it applies to organisations and nations as well.

The EU has much to be proud of, including the single market, the pursuit of common, mutually acceptable standards across a whole range of activities, and the huge economic, political and judicial changes that EU membership helped to bring about in formerly totalitarian countries. For example, in an age of threatened energy security, a common position-if it is duly formalised-will be infinitely better in dealing with Russia's politically driven differential gas pricing policies.

Having said that, as we survey the world today, most countries are growing. This is certainly not the early 1930s. However, the area of stubborn, sclerotic growth, for four years now with more to come, is Europe. The European Commission's forecast of a paltry average annual growth rate of 1.5 per cent per annum for the next decade is alarming. In 2012 we may see no growth at all. We are all paying a bitter price in failed consumer and business confidence, with tragically high unemployment, especially among our young people.

The eurozone crisis is a symptom of this malaise. Something has gone very wrong. However much we may co-operate on promoting freer trade and access, foreign policy and the environment, it is on basic bread-and-butter issues that the story is most depressing.



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Quite simply, the euro was an accident waiting to happen. Despite what some think, its origins had precious little to do with the single market. As many of us knew, you simply cannot have a common interest rate in Helsinki, Lisbon, Dublin and The Hague. It was never going to work for all European countries.

There are elections in Greece and France. The likely winners may take a wholly different view from the present incumbents. While the ECB will have to play its part, the IMF may well have to do so as well. However, we should remind ourselves that the traditional IMF package comprises three elements: reduced public expenditure, increased taxes and a depreciation of the currency, which is impossible in the eurozone. I fully accept that the bloated public sector and the wholesale tax avoidance in Greece are not the fault of Europe. However, if the IMF is to get its money back, it will need to facilitate a stabilisation process, given the increasing likelihood of Greece defaulting. If the eurozone breaks up, there will of course be huge short-term dislocations but, in the longer run, it will reflect the simple reality that vastly different economies cannot be unified in a common monetary zone with the ability and necessity to devalue taken away from them.

The very underpinnings of the European Union are under threat because of this crisis. Our whole way of life, with high levels of social protection, is being impacted by the tilt eastward of the world economy. However, even in the USA it costs just €644 to set up a business. In the EU it now costs €2,285, which says so much. The costly extension of EU influence over matters ranging from hours worked to the rights of temporary, agency and full-time workers does nothing to enhance the single market-quite the reverse. These should be matters for individual member states. While it is right that Britain continues to press home the need to cut the red tape and pointless bureaucracy that emanate from the EU, we are certainly pretty good at generating them ourselves here at home. However, we are quite right to do what we are doing now, which is to call for a new growth test to ensure that all EU actions support growth; to exempt micro-businesses from regulatory overkill; to accelerate the review of the implementation of the services directive; and to enforce proper single market rules. At a time of economic crisis, these are the things that we need to concentrate on intensely.

Inevitably, the eurozone crisis has led to a political crisis within the EU at a citizen's level. The Laeken declaration was meant to lead to a reconnection with the people of Europe and European institutions. I am afraid that its end product, the Lisbon treaty, was a failure on that score.

I conclude by referring to an article on this issue that was published in the Economist a few weeks ago. It says that the EU,

"intrudes deeply into the internal workings of its members ... the unelected European Commission ... is acquiring important powers over members, notably the authority to recommend sanctions. Yes, democratic governments grant independence to a lot of important jobs, from central bankers to judges. But the commission has a political as well as a technocratic role. And in the Council of Ministers, which represents elected governments, decisions are prone to opaque back-room deals. The European Parliament hardly commands voters' passion".





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It goes on to say:

"Citizens are thus left feeling impotent. Their governments are eviscerated at home, yet voters lack the means to throw"-

the powers that be-

"out of Brussels. This is dangerous. Bringing debt under control and, more importantly, promoting reforms to boost growth, will take years of sacrifice and suffering. It can be sustained only with a strong national mandate. Without that, both governments and the EU will eventually be discredited".

If nothing else, the eurozone crisis has drowned out much that is good and further alienated European citizens from the institutions of the EU itself. The democratic deficit gets worse and gnaws away at the very legitimacy of the EU. If nothing else, the events of the past few months have made this crystal clear and the matter demands effective solution.

3.18 pm

Lord Kerr of Kinlochard: The Minister ranged widely in his elegant opening remarks but the debate has tended to concentrate on the eurozone crisis. It benefits from the report of the Select Committee under the noble Lord, Lord Roper, to which the noble Lord, Lord Hamilton, paid a sort of tribute. Like the noble Lord, Lord Hamilton, I sit on Sub-Committee A and, like him, I also wish to pay a tribute to the noble Lord, Lord Harrison, for his chairmanship. The noble Lord, Lord Hamilton, spoke of the markets as the elephant in the room. As I said, I serve on Sub-Committee A with the noble Lord: I can recognise an elephant in the room.

I want to talk about the new treaty to be signed on 1 March and to consider it in a totally deadpan, analytical style from four aspects: constitutional, legal, economic and political. I start with the economic aspect. I find myself in the awkward position of agreeing with the noble Lords, Lord Flight and Lord Hamilton, and the noble Lord, Lord Lamont, who has fled to avoid hearing me saying this. They are entirely correct: the economic significance of the new treaty is virtually nil. I think that it is irrelevant, or nearly irrelevant, to the crisis we face. It is a new version of the stability and growth pact-this time we have the stability and no-growth pact, which is even more Germanic. The eurozone needs: greater growth and competitiveness, born of supply-side reform and the deepening of the single market of 27; the correction of current account imbalances; the further strengthening of the banking system; the resolution of the Greek crisis one way or the other; and more fire-power for the EFSF and the ESM to fight the contagion risk, though I would rate that risk much lower than do the noble Lords, Lord Hamilton and Lord Flight.

The treaty is narrowly drawn and addresses none of these issues. Moreover, the new mechanisms in the treaty add relatively little to those that already exist at 27, or are being considered at 27 under Article 136, which permit us to take part in the negotiation of measures applicable to the eurozone and would have been-but for the line we took-for us precisely the ideal vehicle for the new formulations that now find their place in the separate treaty. However, the principal economic significance-perhaps the only economic significance-of these formulations is indirect: promises of future southern virtue, written in treaty form, in



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blood, and into national constitutions, may make it easier for northern electorates to contemplate greater generosity. That, presumably, is Chancellor Merkel's calculation. I do not think this treaty matters much in straightforward economic terms. It probably does more harm than good. However, in institutional terms it matters a very great deal.

The key innovation, which is noted en passant at paragraph 77 of the Select Committee report, is that the treaty will come into force before all its signatories have ratified it. Once the 12th of the 25 signatories ratifies it, the treaty applies among those 12 and, when others ratify, it applies also to them. There is no EU precedent for that. Up to now the rule has been that the convoy moves at the speed of the slowest ship and a single failure to ratify sinks a treaty for all signatories. One could now envisage a member state-in this case hypothetically an Ireland unable to win a referendum, or a Hollande-led France talking of a renegotiation-stuck in a limbo, unwilling or unable to ratify but equally unable to prevent the convoy sailing on. I note that access to support from the ESM will depend on ratification. I think that tells us the answer to the question asked by the noble Lord, Lord King: how many will actually ratify? I would not bet on there being a referendum in Ireland.

The serious point, though, is that in the European convention in 2002-03, some argued that the constitutional treaty we were then drafting should have similar entry-into-force provisions, as the noble Lord, Lord Maclennan, will remember. However, I cannot recall that any single member-state Government supported them-now 25 have. An important precedent has been set and we in this House, with our EU referendum Bill debates fresh in our memories, would do will to reflect on it. As the noble Lord, Lord Howell, said of a different outcome, this really could profoundly change the nature of the EU. I am not sure that those who share his views on European integration have been firing at quite the right targets. I do not believe that this would have happened-that this would have been the entry-into-force provision-if this had been an EU treaty. In other words, this provision is here as a consequence of the position we took. Careful reflection is needed on whether that is a good or a bad thing.

I have a further point about the legal issues. None is as significant as the constitutional point that I have been addressing, but the treaty is a bit of a mess in legal terms, and that too is largely of our making. It is good that the Commission and the ECJ are allowed to do their job, not least because they are the best defence for us against eurozone countries infringing the prerogatives of the Union of 27. However, the various divergences and overlaps of existing provisions would have been better avoided. So I agree with the Select Committee's comments at paragraph 112 and 129 of its report that in the interests of all member states, including the United Kingdom, the folding of the new provisions into the main EU treaty framework would be desirable. I agree, and when that desirable outcome is achieved, all the legal issues that will worry the lawyers for the next couple of years will automatically fall away.





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For the life of me, having read all six draft versions of the treaty, I really do not understand at all why we could not sign up to it. It contains no provisions that could damage UK interests. The provisions apply only to eurozone countries and to any others among the 25 signatories that choose to apply them. For us, there is no transfer of sovereignty involved, and there would therefore be no question of a referendum requirement. The UK negotiators who were involved in the negotiations did very well. I can see improvements, text to text. I see no sign that they were ever obliged to seek any of the mysterious "safeguards" that were sprung on the European Council in the middle of the night on 9 December and have been kept under wraps ever since, including today. That seems wise. I cannot for the life of me see any objective reason why we should not sign the treaty, but I am being entirely analytical and will not therefore press the point.

My final point is political. Does our self-exclusion matter? I fear so. I have argued previously in this House that leaving an empty chair is always unwise. The noble Lord, Lord Radice, must be right to say that it is easier to defend your interests if you are there. When the treaty becomes operational, our officials who helped in the drafting have to leave the room. Most of their colleagues from non-eurozone member states will be able to stick around. Are we sure that the Poles, the Danes and the Swedes have got this wrong and we have got this right? Why are we sure that they have got it wrong? When this group meets at European Council-Heads of Government-level, 25 Governments will be represented. The others will be able to influence the thinking of the eurozone and what it decides to do. Why do we not want to do that? For all this talk of a veto, all we vetoed was our own attendance. I cannot explain that. I shall have to ask our Czech friends-Kafka was a Czech, after all, so they may know.

I conclude with a personal reflection. I think I know what went wrong on the night of 9 December. We suddenly found ourselves without allies. This should never happen. There are alliances to be had all the time on every issue, bar one, in Brussels. Alliances overlap, they wax, they wane, they need continual cultivation, friends need to have the perception that they are being consulted-perhaps they really are being consulted-surprises need to be avoided, advice needs to be sought and taken, and other people's priorities need to be understood. That is what usually happens. In this negotiation, Mrs Merkel was our natural ally, until we contrived to drive her into the arms of the French. When we got into a hole, the Dutch and the Swedes rode to our rescue and tried to help us out, until we spurned their help. There are natural alliances all the time-the free trade alliance; the northern liberal alliance; the blue water alliance with us, the French and the Spanish; and the budget disciplinarian alliance with the Germans, the Dutch and us in the lead. To find oneself isolated in Brussels is extraordinary. There is a huge alliance over there of those who believe that the EU needs to retain one great big global financial centre on a par with Tokyo and New York. These people will fight for the interests of London, because it is the only plausible candidate to play that part.





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We do best in Brussels for the City when we advance the EU arguments for the City. That is what we do, usually, and I agree with the noble Lord, Lord Mandelson: the Chancellor of the Exchequer is clearly good at this. But it is not what we do back home. Fleet Street wants to hear about a Manichaean struggle, a gallant, lonely, Churchillian defiance of overwhelming odds. Everyone else is a monolithic bloc opposed to us. We stand alone. We triumph, or we veto.

It is not really like that over there. It would help us now to rebuild the alliances that we need if we could refrain from pleasing Fleet Street by shouting from the sidelines. I repeat the points made by the noble Lords, Lord Newby and Lord Monks. The raucous shouting from the stand to those who are engaged in a big fight to save their currency does not readily make friends and influence people. He who refuses to pay the piper should be cautious about calling the tune. Now I will follow President Sarkozy's sensible advice to the Prime Minister.

3.30 pm

Baroness Wheatcroft: My Lords, the European Union could and should be a thriving single market. That was the proclaimed aim when the grand project was launched, whatever ulterior motives some may have had. It remains a sensible ambition, although yet to be achieved. It is slow progress. It was only on Tuesday that the European Parliament passed a new regulation on the single European payments area, which should, eventually, mean that payments can be made from accounts within the EU much more cheaply and efficiently. That will benefit people and businesses and is exactly what a single market should be about. But there is too much that the EU does which seems to militate against increased productivity, whether it be restricting clinical trials, as we have heard today, or in loading new regulations on to businesses, such as prospective new rules on data protection.

I am not suggesting undoing all the measures to which the noble Lord, Lord Monks, referred, but we must not restrict the competitiveness of our business. Brussels ventures into too many areas where its presence is unnecessary. I was startled to see that, for the fifth year running, it is staging a "gender drawing competition" for eight to 11 year-olds. Too much, too soon, I thought. It turns out to be not anatomical but sociological, seeking drawings that show gender equality in action. We do not need Brussels to be doing that sort of thing.

No matter how far Brussels tries to reach its tentacles, Europe is not a single political entity, and what we are currently witnessing, as the Greek débâcle unfolds, is evidence that that is unlikely ever to be the case. There are, of course, occasions when Europe can talk as one, where we have the same aims. Burma is an obvious example. Fighting Somali pirates is another. However, we will not always be one political entity. There are many reluctant to acknowledge that. I was struck by the fact that, last week, the noble Baroness, Lady Ashton, who otherwise glories in the title of EU High Representative for Foreign Affairs and Security Policy, was in Brazil, explaining how the EU had started as a single market but that it had soon become clear that its strength will be in what she termed the "political



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coming together". It was this strength, she explained, that had enabled the EU to come to the aid of Tunisia with a package of €4 billion to be distributed over three years.

I applaud someone who chooses to look on the bright side, but a speech that can rejoice in the coming together of the EU and avoid any mention of a little local difficulty in Greece is perhaps taking optimism a little too far. The EU High Representative, however, has to try to think of the EU as a political entity, as she represents its foreign service. She has 136 diplomatic missions around the world, and she overspent a budget of £380 million last year. Quite what this has achieved so far is unclear but, when given money, Brussels has a habit of overspending it. It can always find a way. The fact is that the EU is not a political union and nor is the eurozone. That a single currency would falter if it were not accompanied by political and fiscal union was always likely, if not inevitable. We are now seeing that happen, exacerbated by the financial crisis that has erupted, but not caused by it.

It was clear two years ago that Greece could not continue with the level of debt that it had. Its problems were so bad that simply finding ways of lending it more money, no matter what strings were attached, would not be the answer. If a man is drowning in debt, you do not save him by throwing yet more debt at him. For two years the eurozone has struggled to find a way of dealing with Greece's problems. Despite the increasingly acrimonious rhetoric and posturing of the past few days, it may well be that more bail-out cash will be shovelled its way, but that will only further delay the inevitable. One has only to look at the scale of the pain now being suffered in Greece, and the anger of its people, to know that further austerity measures are going to be desperately difficult, if not impossible, to impose and that even if a Government made an attempt to do so, the end result would not be enough to enable Greece to cope with its debts. It has to default. It should never have been in the euro-its entry was a political fudge built on a concoction of lies.

The good news is that Greece is only a small country. In the first six weeks of this year, according to calculations from Goldman Sachs, China created half the GDP that Greece did in the whole of last year. However, its predicament is taking on more significance because of the eurozone's chronic delays in sorting it out. It is being allowed to increase doubts over the functioning of the entire euro area. That is why it is imperative that the posturing should stop and that action should be taken.

Greece, under the weight of austerity, is now shrinking, although those in need of a dose of Ashton optimism might look at a website entitled Invest in Greece, produced by the Greek Government. It is still predicting a rise in GDP this year and suggests that Germans are looking enthusiastically at investing in the Greek tourist industry. I am not sure that coach-loads of Germans arriving in Greece are going to get a great reception at the moment.

It is not only Greece that has problems, as we know. Only today it has been reported that Spain is back in recession for the first time in two years. And we should not imagine that the banking crisis has finally been



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put to bed, for over the past couple of years what has become apparent is a dramatic rise in eurozone countries taking on their own country's debt. Holdings of sovereign debt since 2008 have moved dramatically. Spanish banks, for instance, are now holding 65 per cent more Spanish government debt than they were two years ago, and Italian banks have 50 per cent more of their own debt than two years ago. For Greece the figure is even higher, at 89 per cent, and significantly for Portugal the figure is 400 per cent. That may indicate that Greece is not the last country to have to exit the euro. Those holdings indicate that, as countries get deeper into trouble, the effects on their banking system will be dramatic.

My noble friend Lord Hamilton has highlighted the problems that the eurozone has had in getting to grips with what goes beyond the Greek borders. It is true. We have seen two years of vacillation. The noble Lord, Lord Mandelson, praised the role of the Chancellor of the Exchequer and the help that he has tried to give at this difficult stage for the euro. It is the role of supportive friend, not guarantor, and it is for the eurozone countries to decide whether they feel comfortable with shouldering the weight of the weaker European economies. Our role is that of a fully fledged member of the single market, anxious to play a pivotal role in making that market work at its optimum. That means looking for ways to limit bureaucracy and stimulate growth.

3.39 pm

Lord Clinton-Davis: My Lords, the single market is not the only feature of the European Union. I was very glad to hear my noble friend Lord Monks refer to the social dimension of the EU, a view which I put forward in the Commission some years ago. I am also very glad that the noble Lord, Lord Brittan, is here today and the noble Lord, Lord Tugendhat, who are members of the Commission.

The idea of Britain being isolated in the European Union is absolutely hopeless. In my view, we have a duty to align ourselves with those who think alike, not on everything, but on most things. That is why I think that our continued membership of the European Union is absolutely vital. The policy pursued by the present Government is quite wrong, in my view. We could say goodbye to our chances of being heard if it were applied. It would be a sure route to insignificance and wholly in line with the decision to quit the European People's Party. I have never agreed wholly with the EPP but I think that is a manifest mistake.

Of course, the Prime Minister is terrified of his own Eurosceptic Back-Benchers and at the same time most of the members of the eurozone. It is a somewhat uncomfortable posture and the very opposite of leadership.

We should always remember that our exports to the European Union constitute a significant proportion of the whole, even if we accept the view that they should be downgraded to 40 per cent from 50 per cent. Perhaps even more salient-this would be the view of the vast majority of the European Union-we should seek allies, as I have already said. Should you put both those objectives in jeopardy?





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As the noble Lord, Lord Newby, has said, it is bizarre that our Prime Minister should invoke other members of the eurozone to,

"sort out the mess that is the euro".

Do we have no responsibility? Is it all down to the Lib Dems? Do they really approve of the Cameron veto? In my view, Labour was right to assert that, in any event, this was a phantom veto because, as the Foreign Secretary has argued, no one really knows where Britain stands vis-à-vis the European Union, not even the Prime Minister. He walked out of the European Union negotiations last December. Was it less an act of defiance and more a frightened curtsey to his European sceptics? It makes it infinitely more difficult to be listened to, to be heeded and for our real interests to be protected. That is not, in my view, the right way to go. The success of the French in hanging on to their dubious agricultural policies has not been due to a walk-out, but quite the reverse.

I am not arguing that everything in the EU is rosy or is incapable of error-no Government can ever tame those objectives-but, in my view, we are better off in than in our present posture of being neither in nor out. Our voice should be heard; that is precisely why we joined the European enterprise in the first place.

The European Court of Justice must be the enforcer of financial rectitude in the eurozone. It should levy fines against eurozone members. In this regard at least, surely Angela Merkel is right to contend that this is immutable. I am not saying that I agree with all her views, but on that proposition she is absolutely correct.

As for Greece, the IMF has contended, via Poul Thomsen, a senior official with direct responsibility for Greece, that while reforms to modernise the economy should continue, the needs of Greek society must not be overlooked. That is not a view that I have always heard in this place or elsewhere.

It goes without saying that the EU is plagued by serious financial problems-but is severe austerity the only and right answer? Overdoing it, as the IMF acknowledged, can lead to deep recession. A compromise is essential. Some growth is indispensable. Public sector cuts must be accompanied by the ability of consumers and businesses to spend more sensibly.

What the Government are doing-alas, they are not the only ones-is aiming their axe at public expenditure, thus reducing economic activity, growth and tax revenue. Alternatively, right across the EU, public investment, cutting income tax for low earners, and attacking tax avoidance, along with deficit reduction, would promote employment and growth. It is never too late to change tack.

For Britain to withdraw from the EU would be a dangerous and perhaps fatal policy. The views of the public, for example on hanging, can be misleading. Something may be popular at one time, but the public are not always right. There is too much at stake on this issue. Those of us who believe in the fundamental purposes of the European Union must be more assertive in explaining that there is no realistic alternative if Britain's true interests are to be served.





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3.48 pm

Lord Taverne: My Lords, I challenge the conventional wisdom that prevails in much of the media, and most of the Conservative Party, that the eurozone is a disaster; that it was always bound to be a disaster; and that we are wonderfully fortunate not to be part of it. Certainly, at its inception, the eurozone made very important mistakes. There was a lack of fiscal co-ordination. I always thought that Pisani-Ferry was right in advocating an economic directorate not dissimilar to what is now proposed.

There is also no doubt that a European monetary union faces considerable disadvantages. Having one interest rate to fit all is a disadvantage; it cannot be denied that it creates problems. There is a problem, too, as many have acknowledged, with peripheral countries competing without the ability to devalue. It has been said that this makes convergence impossible. However, there was convergence within the European monetary union involving many peripheral states until there was a complete breakdown in fiscal discipline and a failure to achieve structural reform.

I do not think it is possible to say that Poland could not possibly join a monetary union because it is on the periphery. I think Poland, with its fiscal discipline, is in a good position to join a monetary union. Nobody talks about Ireland. Ireland suffered severely from the recent crisis, but it is interesting that there is no call within any of the three major parties there to leave the monetary union. Their view is that, overall, they have benefited from the euro.

It is part of this official story that we have done brilliantly by staying out. I am not advocating at this particular moment that we should join the euro, but there is a general view that we are so much better off because we stayed out. The main question is: have we really done so well by staying out? That certainly was the implication of the Prime Minister's lecture to his partners at Davos, to which my noble friend Lord Newby referred. Have we had faster growth since the euro was first introduced? No, we have not. Have we had lower inflation than the eurozone during this period? No, we have not. Our inflation rate has been about double the eurozone average. In fact, inflation in Germany was lower than it was before the euro when it was still being governed by the Bundesbank. Have we achieved higher productivity? No, we have not. Have we achieved trade surpluses? No, we have not. When did we last have a current account surplus? Have we achieved lower budget deficits than most of the eurozone? Our budget deficit was about the same as that of Greece.

Of course the eurozone needs reform, but was it really appropriate for the Prime Minister to lecture his partners and suggest that they should follow our brilliant example? Also-I do not think he has much feel for Europe-was it wise for him at Mansion House to start by boasting that he was a Eurosceptic? That is not exactly the way to achieve the maximum co-operation from his partners.

A further boast is that the Anglo-Saxon model-this again was the implication of the Prime Minister's Davos lecture-is infinitely superior to the social capitalism model in Europe. Of course, the Anglo-Saxon model



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has virtues and advantages, but today the disadvantages are rather more obvious. Our official declared principle is to maximise shareholder value, making assets sweat. What is the result? It is short-termism. In hard times, we reduce the labour force and seek to maintain dividends, even at the expense of investment. In Germany, in hard times, the tendency is to reduce dividends, minimise dismissals and maintain investment. Top pay as a ratio of the pay of the average employee is many times higher in the UK than it is Germany. Companies in Britain are for sale to the highest bidder, and employees' views do not count. In Germany, through Mitbestimmung, employees have more say. They feel more secure in their jobs, they are more committed to companies and they are more inclined to increase the efficiency of their company because through security they make suggestions for innovation. This is part of the reason that German companies are so efficient at exporting and are so competitive.

Then there is the other question to which many speakers have referred: our influence in the world. After the veto, some sections of the Conservative Party seemed to glory in our splendid isolation, but we have become less influential. In the past, the talk in Europe was about what would be the attitude of Germany, Britain and France; now it is only a question of what will be the views of Germany and France. As the eurozone will grow closer and more unified-that is certainly likely to be the trend-we will become more marginalised. We will have no voice, no influence and no votes in the summits of the eurozone.

Do we really want a stronger voice for Europe in the outside world? China is a very important case in point. China would like to see a more effective European Union. It wants more co-operation with the EU, but that depends very much on closer unity, both economic and in foreign affairs. A recent, very interesting paper for the Schuman Foundation by Karine Lisbonne-de Vergeron points out what the attitudes in China are. We are now in great danger that we will decline as a voice of influence inside the European Union, that our influence will decline in relation to Asia, and, if we move away from the European centre, that our influence will also decline in the United States.

The Government are now trying to move away from the heady days of the veto, when the Prime Minister was greeted with cheers from his Back-Benchers. I hope that the Government-as indeed the noble Lord, Lord Howell, indicated-are firm now in their apparent view that we must maximise our influence. This is no time for myopic little Englanders.

3.56 pm

Lord Dobbs: My Lords, it has been a true pleasure to listen to this debate. It has been insightful, it has filled me with fascination, and I have heard arguments-intellectual, hypothetical and institutional-that go way beyond my pay grade. I want to follow up on some of the remarks that the noble Baroness, Lady Wheatcroft, made in her very insightful speech about what the noble Lord, Lord Howell, called in his opening remarks the "noble country" of Greece.

Greece is much beloved by me. I have many friends there. One of them was telling me recently about what a dire state it is in. She said, "It is so dire that the



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Government have even increased the taxation on swimming pools". I said, "Surely that has helped", and she said, "Not very much because there are in the whole of Greece only 137 swimming pools known to the tax authorities". I said, "Surely there must be some industry that is growing in Greece", and she said, "Only one: camouflage netting".

I refer to this silly story to illustrate a very serious point. Greek accounting practices have always been colourful and creative, offering more optimism than insight. It is the way they do things; it is the way they have always done things. What we are witnessing in Greece today is not just a tragedy but a travesty. It was folly to invite Greece to join the eurozone. The Greeks should never have been let in-and that is not with hindsight; that was said at the time. But common sense at that time was buried to obliteration by the imperial dream. I think it was President Mitterand who said that it was inconceivable that we could have Europe without the birthplace of democracy, Greece, as a member.

So Greece was let in and now that birthplace of democracy has been reduced to what? We do not know for sure at the moment. We all harbour fears for that once great and proud nation, but we can be sure that it is reduced-humbled-by those it took to be its friends. When the crisis broke, these friends said it was impossible for Greece to leave the eurozone; it could not be done. A little later they said it was inconceivable that Greece could leave the eurozone; it could not be thought. Then they said it was wholly unlikely, but now we know that in every corner they are preparing for precisely that possibility.

The reduction of that great country of Greece has been a very degrading spectacle. The wise men who run these things came up with a stunning plan. Greece needed to be leaner, to run faster, so they decided to cut off a leg. When that did not work, they said they must continue with the same policy, and cut off another leg. It is Pythonesque in its stupidity, and so the tragedy goes on.

There is no prospect of Greece achieving what is demanded of it. It may have been the glorious birthplace of democracy but today even its democracy is in doubt. Its Prime Minister is unelected and its previous Prime Minister was cast aside for his temerity in suggesting that he should ask the people for their views. The forces of the extreme left and extreme right are gathering pace. Now every party in Greece is expected to sign a binding undertaking that, no matter what the result of any future election, it will do and will continue to do what it is being forced to do by others. The noble Lord, Lord Flight, talked about the situation being horribly like the folly of repatriation imposed upon Germany after the peace treaty of 1919. Once more, almost 100 years later, Europe is a continent of lions led by donkeys. Those leaders who object to what is going, like our own Prime Minister, are told that they have no right to object.

The noble Lord, Lord Lamont, talked about the recession in Greece, which has been going on for five years. Its GDP was down 6 per cent last year and 7 per cent in the past quarter. It is getting worse, not better.



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Unemployment in Greece is 21 per cent and rising rapidly. Yet still the wise men who run these things want to hack and to cut deeper. Greece is a limbless body lying on the ground. It can no longer get to its feet, let alone run.

Will Greece default? It has already defaulted. We are simply arguing about the details. Will the eurozone break up? In my view, it will almost certainly-if not completely, partially at least. Greece will become adrift, like ballast from a plummeting balloon. We are witnessing a catastrophic failure of leadership in Europe. We sit here in our comfortable Chamber discussing plans and possibilities, and doing our best. But it would be better if we were on the streets of Athens, Patras and Thessaloniki, so that we could see what damage is being done by such plans when they go wrong.

In his opening remarks, my noble friend Lord Howell asked that we should look forward and how we should go forward. We have had many different suggestions. My noble friend Lord Dykes has been trying to offer me champagne over the past few days. I fear that instead of the champagne I am likely to get nothing but the ice bucket, because I listened to him and he talked of the temporary problems of the eurozone. There is nothing temporary about these problems. I much prefer-strangely for me and I hope that I will not embarrass him by saying so-the analysis given by the noble Lord, Lord Mandelson. He talked about the need for a fundamental review of the way in which the eurozone is conducted. I agree with many of his analyses, if not all his conclusions. Above all, we must remember to re-establish the democratic legitimacy which must lie at the heart of any Europe in the future.

In his opening remarks, my noble friend Lord Howell said that we are members of the EU "by choice". I think that I can see the noble Lord, Lord Pearson, almost fulminating at that idea. But let us cherish the words "by choice". We must continue to ensure that we remain in Europe by choice-the new and, we hope, fundamentally reformed Europe, which we have heard about and perhaps will be capable of building. We must not be part of a European enterprise simply because we are told, like the Greeks are being told, that there is no alternative and that we have no choice.

I fear for the future. I am not complacent. I fear that Greece will leave the eurozone with all the calamity that that will entail, but I fear even more that Greece will not leave the eurozone and that we will be stuck with a far greater calamity. But whatever that future will be, it must be driven not by egos or imperial arrogance but by popular consent. For that, at some point sooner rather than later, whether we succeed in refashioning Europe or not, we must seek the views of the British people in a referendum.

4.05 pm

Lord Willoughby de Broke: My Lords, it is a great pleasure to follow the noble Lord, Lord Dobbs. In his excellent speech, the right reverend Prelate the Bishop of Guildford talked about the earlier vision for Europe, and the noble Lord, Lord Grenfell, mentioned his own vision for the future of Europe. Well, visions are all very well, but as what the noble and learned Lord, Lord Davidson, would call a "blinkered Europhobe", I prefer to look at the facts. The plain fact now is that



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the southern states, what is referred to as the "Club Med", have been badly failed by the political adventure of the EU and the euro. Nobody, not even the most ardent supporters of the euro-with due respect to the noble Lord, Lord Taverne-can really pretend that, so far, the euro has been a success. The Eurocentrists have had to fall back on the Merkel gambit to justify the pain it is causing to the poorer states. In one of her speeches, she said:

"Nobody should take for granted another 50 years of peace and prosperity in Europe ... If the euro fails, Europe fails".

The argument appears to be that if you are against the euro or the EU, you are in favour of war. But as the noble Lord, Lord Flight, said in his speech, by any objective measure the euro itself is stoking the fires of national antagonism.

I can well remember the triumphant fanfares when the euro was introduced in 1999. Those of us who predicted that it could never work were dismissed as swivel-eyed, foam-flecked Europhobes hopelessly out of touch with the reality of the new Europe. I just want to remind the House what my noble friend Lord Pearson said as long as 15 years ago in a debate on the European Communities (Amendment) Act, talking about European monetary union:

"Personally, I do not believe that that is a bird which will ever fly, but if it is pushed off the top of the cliff by ignorant politicians I fear that it will do much damage when it crashes to the ground ... I believe that civil unrest will become a real probability".-[Official Report, 31/1/97; col. 1332.]

That was 15 years ago, and who has been proved right? It is the foam-flecked ones who have been right and it is the "blinkered Europhiles" who have been comprehensively and spectacularly proved wrong.

The political imperative behind the euro is so strong that the Eurocrats will go to any lengths, as the noble Lord, Lord Dobbs, said in his speech, to keep the political construct of the euro travelling along the road. But let us look at where this Europhile dogma has led us. Instead of the promised stability and prosperity, what do we have? We have riots in Greece, where the taramasalata has hit the fan badly; and we have demonstrations and riots in Italy, in Portugal and in Spain. Indeed, Spain has 50 per cent youth unemployment and 30 per cent total unemployment. That is the reality. Europe has turned into a weapon of mass economic destruction.

What is the remedy prescribed by the EU leeches? It is to take more blood in the form of more wage cuts, more unemployment, lower pensions. "Austerity macht frei" seems to be the remedy prescribed by the Germans, certainly to Greece and to the rest of the "Club Med" members of the eurozone when they are unable to meet the German requisites. They cannot, as one other speaker in the debate has said, turn themselves into Germans.

Lord Teverson: My Lords, can I just say that I find that remark offensive because it likens German economic policy, however wrong we may agree it is, to a camp that practised genocide? I think that that is utterly inappropriate.

Lord Willoughby de Broke: I am sorry that the noble Lord takes it like that. The fact is that the German Finance Minister, Herr Schaeuble, is recommending



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more and more pain to be inflicted on Greece regardless of the fact that it is going to do the Greek population and Greece's economy no good at all. That is what austerity is leading to. That is why I used that expression. He is saying that more austerity will bring you free-austerity macht frei. I repeat that.

As the noble Lord, Lord Hamilton, asked, will it really be worse for the Greeks or any of the other countries afflicted by the euro to leave it? I agree that it is not going to be easy, but will it be any worse than the pain inflicted by 10, 15 or 20 years of austerity, low employment, no jobs and lower pensions? That cannot be a viable alternative in a democratic country.

Worse, almost, than the financial pain which the euro ideology is inflicting on Europe is the failure and erosion of democracy. Ireland, Portugal, Greece and even Italy are now wholly owned subsidiaries of the European Commission. When the European Commission says jump, all they can ask is, "How high?". I remind your Lordships of what happened to the Greek Prime Minister when he threatened to ask his countrymen whether they wanted to submit to the harsh criteria of the bailout fund. He was immediately given a sharp lesson in Euro democracy and told that, if he had the referendum, he would be out. In fact, he was out anyway, and there was, of course, no referendum. It is ironic that what scared the pants off the bureaucracy was the prospect of a democratic vote in Greece, the country that gave the world democracy.

I do not really understand why our Government are spending quite so much political capital and time supporting what is going on in Europe now. O