Gisela Stuart MPWorking hard for Bartley Green, Edgbaston, Harborne and Quinton

Europe is facing a political and economic crisis // June 8th, 2010 // Speeches, Articles and Interviews

In the Commons debate on European Affairs (3 Jun 2010), Gisela Stuart spoke on the political and economic crisis in Europe.  An extract of the debate is presented below, for the full debate click onto

http://www.publications.parliament.uk/pa/cm201011/cmhansrd/cm100603/debtext/100603-0013.htm#10060333001047

European Affairs Business of the House

House of Commons debates, 3 June 2010, Column 631

2.31 pm

Ms Gisela Stuart (Birmingham, Edgbaston) (Lab): It is a great pleasure to follow the maiden speech of the hon. Member for Wyre Forest (Mark Garnier), not least because I still fondly remember having a photograph taken in 1997 with David Lock, the then Labour Member for Wyre Forest. We all had red balloons and we travelled down to Westminster together. I am glad to say that, apart from David Lock, all of those in the photograph are still in the House. I wish the hon. Gentleman well. I am sure that people in his local carpet industry would have had one or two things to say if it had been forced to “go metric” on the weaving shuttles; I am sure that he will have one or two particular points that he wishes to bring to the House.

I wanted to speak today because Europe is facing a political and economic crisis which, although it has been brewing for a considerable time, is, in some ways, being denied both here and abroad. It is a political elite that is in denial, and in some sense that does not surprise me, because I still bear the scars of spending 18 months in Brussels attempting to write a European constitution. The democratic mandate was ignored then, too, and a political elite essentially rode roughshod over the wishes of the electorate.

Frankly, no party here has much to be proud of on the issue of referendums, nor do the Governments in the countries across Europe whose people said no when asked-and were simply ignored, as happened in Holland and France. Ireland’s people were simply asked twice; they were asked until they came up with the right answer. So there is something wrong going on in the house of Europe, and at the moment, that shows itself in terms of economics and the single currency.

Those who have warned against some of the problems of the single currency take little pleasure in being tempted to say, “I told you so”. People need to face up to what is happening at the moment, because this is not a question of one member of the eurozone having a financial crisis from which they can simply be bailed out. A bail-out is not the answer to the problem, nor is it in the current treaty provisions. The central issue in Greece is not associated with the pubic finances, although those are a problem. The real question is what happens when a country in the current monetary union loses competitiveness and cannot regain it. In essence, we are asking Greece to implement what amounts to two thirds of a traditional

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IMF package, which usually involves raising taxes and cutting public expenditure. However, the third and crucial element that always comes with recovery is depreciation of the currency, and that adjustment is not happening.

What the European monetary union calls “internal depreciation” has to replace a currency depreciation, but that is nothing other than a polite phrase for debt deflation. The programme currently recommended for Greece will crush output and increase both unemployment and private sector default. It will reduce Government revenues still further, and make public sector default and national bankruptcy even more likely.

Some people in countries such as Germany think that every country in Europe should behave like the Germans. As someone born in that country, I think that that is a perfectly reasonable expectation-but it is not the answer, as we cannot answer our economic problems by requiring every country to run a trade surplus. To be fair to Germany, it got out of its own economic crisis of the late 1990s and the first years of this century only at the expense of some of the other countries in the EMU.

So what are we going to do? Two solutions offer themselves. One is to transfer funds from countries with a current account surplus-in effect, those in the German bloc-but that assumes that a one-off payment is the answer. It is not. What is really required are year-on-year transfers, equivalent to what West Germany paid to the old East Germany. Let us be clear about this, however. Just for Greece, such a year-on-year transfer would amount to something like €35 billion to €40 billion a year. If we were talking about the default for Spain and Portugal, we would be looking at something like €100 billion a year, and that would wreck not only the German economy but its public finances as well.

The second solution would involve a massive devaluation of the euro.

Michael Connarty: I hope that my hon. Friend does not mind me intervening, but it seems that, having put down a set of rails, she is going to go all the way along until she crashes. Is there not a possibility that the fundamental flaws lie in the how the failed economies acted? For example, Spain and Portugal put money into infrastructure and not education, with the result that people left school and built houses instead of educating themselves and creating a new economy. In Greece, the question centres on how much of the tax take that is due has been paid. Should we not concentrate on changing those economies so that they are stronger? Should we not use the 2020 strategy to rebuild growing economies, and not just bail them out?

Ms Gisela Stuart: That is a perfectly fair point, but there are two problems. The first goes back to the claim that we would have trade surpluses if only every country were like Germany, but things do not work that way. The second problem is how such a strategy would be policed.

There is a third difficulty, too. Every successful single currency requires significant transfers from the centre to deal with asymmetric economic shocks, and those transfers would be of the order of between 20% and 30% of the overall tax take. In Europe, that would require a European economic and political Government. The approach could not work in any other way, because we cannot expect countries to behave like that in the absence of any mechanisms for policing or transfer that would compensate them for their loss of competitiveness.

3 Jun 2010 : Column 633

The problem in Greece is that it could become competitive again by devaluing its currency, but it is not allowed to do so. As a result, the approach outlined by my hon. Friend the Member for Linlithgow and East Falkirk (Michael Connarty) does not address the problem.

Kelvin Hopkins: Exactly.

Ms Stuart: Thank you.

The second solution is a massive devaluation of the euro - a devaluation that some people say would have to amount to something like 50 cents against the dollar. A small devaluation would not be enough for Greece, and a large devaluation would be disastrous for the other countries in the EMU. For a country like Germany, a small devaluation would help competiveness, but a large devaluation would lead to incredibly high inflation that would ruin the economy again.

Again, what should we do? There is a least bad solution, although it is not a happy one. People argue that Greece should leave the euro, but I think that the least bad solution would be for the German bloc to leave the euro. That would, in a sense, allow for competitiveness to develop. Germany’s banks would still have to recapitalise, but it would be less costly to do this directly than it would be to do it indirectly by trying to rescue Greece.

The simple truth is that neither the eurozone countries nor any countries around the eurozone will get out of this mess without some very serious decisions being made, and there will be consequences for us all. As I understand it, the Prime Minister says that it is in Britain’s interests for there to be a stable and strong euro. If he says that out of diplomatic politeness, I understand and accept that, but with the current structure there is no way that he can have a stable euro and a strong euro. It will be weak in its basic economic fundamentals, and that is what has been wrong with something that was driven by political will but underpinned by excessively bad economics. The euro has always been a political project, and people keep assuming that given sufficient determination by the politicians, this structure will work. But it is fundamentally flawed.

It is then argued that the answer is more central control from Brussels, with its already incredible intrusion into countries’ sovereignty. Look at what has been happening to Greece, and what has been happening to Spanish Ministers and what they were told to do. Essentially, Brussels is now running Greece as if it were a protectorate. Is that the answer? I do not think it is. I do not think it is acceptable. That is the real difficulty-that nobody is facing up to the fact that the structure is so fundamentally economically flawed that it will not work.

That is why, when the Foreign Secretary and the Prime Minister go for the first time to European Union meetings in their new roles, I urge them to stop using phrases such as “having to protect our negotiating capital.” I think they have to face the fact that that is simply a polite phrase for not being prepared to say no when on occasions you need to say no. Again I have seen it, and the Foreign Secretary himself acknowledged that once people join the Government again, the tones get slightly softened. When a problem arises, the Brits will, as always, within a few hours say, “I’m sure there’s
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a way through this,” encouraged by our very able diplomats-who, I remind the House, are always in government, irrespective of which side of the House hon. Members are sitting, so it is in their interests to find these rather smooth solutions.

We are coming to a point where, to get out of serious economic difficulties, Britain will have, on occasions, to say no. When it comes to threats to our financial industries and our financial sector, it is no good protecting our negotiating capital. It is time to say no, just as the French would say no if we attacked their wine industry, or the Germans if we attacked their car industry. The price that will have to be paid if we do not become competitive again, if we do not protect our own currency, will not be paid by Members in the House, or by the Commission in Brussels. The political elite and the nomenklatura are always protected. The price will be paid by the old and the young, by the people who have no jobs, the people who lose their savings and the people who lose their pensions. The political elite have not been prepared to listen to them. It has been driving through a political project that was underpinned by bad economics. I hope that the people on the Government Benches will now show that when in government, they are able to act with the mettle that they pretended to have when they were in opposition.

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