Mr Redwood’s contribution the debate on the European Council, 26 Jan

Mr John Redwood (Wokingham) (Con): I rise to support the Prime Minister. I think he had no alternative but to say no to a very unsatisfactory deal and to a totally inappropriate proposed measure at that Council. Nor do I think he has lost Britain influence by doing it; I think he has won Britain influence by doing it. We learned subsequently that several non-euro member states could not go along with the draft any more than the United Kingdom could. We also learned subsequently that France, Germany and others are now beating a path to the United Kingdom Foreign Office door, trying to get us back on board, trying to woo us because we had the courage to say no.

We meet today because we wish to influence our Government in what they are doing at yet another important European summit. The European Central Bank has bought the Europeans a little time by printing and lending unprecedented sums of money to a very weak European banking system, but those meeting would be wise to understand that that has only bought a little time; it has not solved the underlying problem. Indeed, there are two underlying problems. There is the inability of the southern countries to compete with Germany at the fixed exchange rate within the euro, making them poor and giving them large balance of payments deficits which they have trouble financing; and there is the big problem of the southern states’ debt getting ever bigger. Because their economies are malfunctioning, because so many people are out of work and because they cannot price themselves back into jobs, their debts and deficits go on soaring, and now in three cases member states of the euro area cannot finance those deficits in the normal way and have to be on life support from the EU and the IMF.

Martin Horwood (Cheltenham) (LD): On the subject of the right hon. Gentleman’s support for the Prime Minister, will he join me in welcoming the Prime Minister’s remarks this morning in Davos, when he said,

“Let me be clear. To those who think that not signing the treaty means Britain is somehow walking away from Europe let me tell you, nothing could be further from the truth”?

Mr Redwood: Of course the Prime Minister is right that we are in the European Union and all the time we remain in it we have to use our membership as best we can to protect the interests of the British people.

The main purpose of the summit must be to try to deliver greater prosperity and some growth and some hope to the peoples of Europe, because their hope has been depressed and their prosperity is being destroyed by a system that cannot conceivably work. The euro area is now locked into a system of mutually assured deflation, a mad policy, and the more those countries’ economies decline, the more the deficits go up, the more they have to cut. They cannot get themselves out by monetary means, in the way that the United Kingdom and the United States can, by creating more money in their system, and they cannot get out by having a competitive exchange rate.

Mike Gapes (Ilford South) (Lab/Co-op): rose —

Mr Redwood: I am sure that was the point that the hon. Gentleman wanted to make.

Mike Gapes: If the right hon. Gentleman is so against the austerity deflation policies in the eurozone, why is he supporting the austerity policies of his own Government?

Mr Redwood: Because, as I just explained, it is totally different if a country has its own currency and can use monetary mechanisms to try and grow its way out of the problems, and can establish an exchange rate that allows it to export its way out of the problems, which is exactly what these countries have to do, and are unable to do because they are locked in.

Mr Denis MacShane (Rotherham) (Lab): rose —

Mr Redwood: I have no more injury time available, so I need to develop my argument rapidly.

If those countries are to have some hope of prosperity, they need to solve the two underlying problems. It is obvious to most external observers that the way to solve the problem of competitiveness quickly is to devalue. Normally, an IMF programme for a country in trouble not only asks it to cut its budget deficit and reduce its excess public spending, but suggests that it devalue its currency and move to a looser monetary policy domestically, so that there can be private sector-led growth, export-led growth—the kind of thing it needs to get out of its disastrous position. That is exactly what those countries are unable to do. That is why the IMF should not lend a country like Greece a single euro or a single dollar. Greece is to the euro area as California is to the dollar area: it is not an independent sovereign state, and it cannot do two of the three things that a country needs to do to get back into growth and prosperity, because it cannot devalue and it cannot create enough credit and money within its own system.

We need to give honest advice to our partners and colleagues in the eurozone, around the European conference table—in private, not in public—that the only way forward, the only way to resolve the crisis for those countries that can no longer borrow in the marketplace at sensible rates of interest, is to have an orderly way of letting them out as quickly as possible, so that they can re-establish their own currency, their own looser and appropriate monetary policy and their own banking policy, and offer some hope to their subject peoples.

I am very worried that this is not only an economic crisis, this is not only a banking crisis, this is not only a currency crisis, but it is also now a crisis of democracy. The challenge, in countries such as Greece and Spain, is how the Governments manage to get buy-in to the policy of deflation, and cuts with everything, that is the only offering from the euro scheme and the euro system. We see in some of these countries now that the electorates do not choose the Government; the European Union’s senior players choose the Government. We see in some of these countries that the electorate change the Government but they do not change the policy. The new Government have to pledge to follow exactly the same policy, which does not work, in order to get elected and to be acceptable to the European Union, in order to carry on drawing down the subsidies and loans from within the European Union that have to be on offer to try to make the system operate to some extent.

I hope that the British Government will adopt the following position. I hope that they will say in public, whenever asked about the euro, that the British Government have no intention of providing any running commentary on the euro whatever, and have no intention of saying anything that makes the position of the euro worse, but will always give good, strong, independent advice in private. That should be the public position. It is too dangerous to say things. Most of the things that politicians say about bond markets and currency crises make the position worse, so the United Kingdom would be well advised to have a simple formula, which all Ministers use, that we are providing no commentary on the euro and we wish the euro members well in sorting it all out.

In private, we are important allies and partners of the euro area and the British Government need to give honest advice to try to get our continent out of this mess. I do not believe there is a single fix that can solve that problem for all the countries currently in the euro. Many of them went into the euro with inflation rates that were too high, with state deficits and debts that were too high, and with currencies that were not in line with the German currency. It was a huge error. The founders of the euro knew that there had to be very strict requirements; they broke them from day one.

It will not solve the problem to sign up to some new constitutional pact that says that a country down on its luck, unable to borrow money, running out of cash, will be fined. Who will pay the fine? The answer is that the fine would have to be lent to the country in trouble by the very people who are fining it. It is so preposterous that I find it very difficult to believe that serious people can sit round a table, negotiating such an instrument.

They should cast aside the draft instrument. It is irrelevant; it cannot work. They should sit down in private and work out how to get non-competitive countries out of this mess before even more damage is done to their economies and their democracies.

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4 Comments

  1. Simon
    Posted January 27, 2012 at 12:56 pm | Permalink

    Excellent advice – especially to refrain from public commentary; it seems to cause more harm than good anyway, even when we are proved right. However, on the point about this being a crisis of democracy, which I wholeheartedly agree with, only the slightest utterance on the subject by our PM would throw a stone inthe works. Perhaps that is what’s needed.

  2. BobE
    Posted January 27, 2012 at 5:23 pm | Permalink

    Well done John.

  3. Posted January 28, 2012 at 2:00 am | Permalink

    U-TURN TORIES : This government will go down in history as the most shameless one that ever set foot in our great institutions.

    To call you lot traitors would be an understatement. Quite simply, you don’t deserve to be in positions of responsibility. I suggest you drop the “honourable” label when referring to each other from now on.

    “David Cameron in U-turn over fiscal policing of eurozone
    Government signals it will not challenge fiscal enforcement role for European commission and European court of justice” http://bit.ly/xHHKDL

    You must be so proud to have finally put an end to our great country and democracy.

  4. RD
    Posted January 28, 2012 at 4:34 am | Permalink

    While I agree on your analysis of the problem surely it is more honest to admit that this analysis suggests ‘Greece again becomes an independent sovereign state’; that the Eurozone be split up so that the Southern States can effectively devalue for growth and benefit from IMF loans.

    As for remaining silent in public; after the French Government publicly called for the UKs credit rating to be downgraded I think our journalists and MPs and Ministers – and anyone else who wishes to join in – have a perfect right to ridicule the self imposed problems the Eurozone countries have put themselves in. After all last years calls from our ‘partners’ that nobody ‘talk down’ the Euro the French blatantly ‘talked down’ the £; we have every right to respond in kind! See Mr Lilicos blog; http://blogs.telegraph.co.uk/finance/andrewlilico/100013819/is-it-now-ok-for-british-politicians-and-central-bankers-to-call-for-france-to-lose-its-aaa-rating-when-can-we-start/

    Reply: Annoying the partners and wobbling the Euro on the markets is unlikely to further the UK’s interests. We need to get even, not angry.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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