Statement by the Chancellor of the Exchequer.
Mr Speaker, I would like to update the House on the situation in the Eurozone and what we’re doing to mitigate the impact of the crisis on the UK.
Markets remain exceptionally volatile.
Since July, stock markets are down by 11% in the UK, 12% in America, 23% in France, and 24% in Germany.
Bond spreads have widened significantly for a number of European countries.
Bank shares have lost a quarter of their value in the last three months.
And yesterday the governments of France, Belgium and Luxembourg came together to rescue the major European bank Dexia.
While the weakness of the US economy, and its recent downgrade, have contributed to the lack of confidence gripping world markets, it is clear to all that the epicentre of this crisis lies in the Eurozone.
So we need a comprehensive solution that puts our largest trading market on a much more stable footing.
In a string of international meetings, including the recent flurry that began with the G7 meeting in Marseille, Britain has led the rest of the international community in setting out what the components of a solution should look like.
We have again pressed out argument in calls over the last couple of days which myself, the Prime Minister and the Deputy Prime Minister have made to the leaderships in Germany, France, the institutions of the European Union and international bodies like the IMF.
In short, we need a comprehensive solution which ring-fences vulnerable Eurozone countries, recapitalises Europe’s banks and resolves the uncertainty about Greece.
Ring-fence. Recapitalise. Resolve. Let me take each in turn.
First, we need to see the Eurozone members increase the firepower of their bailout fund.
If you’re trying to protect larger countries €440 billion is sadly not enough.
How they do so - whether by using more paid-in resources, more leverage, or more help from the ECB - is up to them.
What I can confirm is that Britain will not be a part of any permanent Eurozone bail-out fund.
We have provided a bilateral loan to Ireland with the support of this House, in recognition of our exceptionally close economic and social ties.
But when we came to office we inherited a situation where we were part of the EU-wide temporary bail-out fund.
As the price we have extracted for ratifying the treaty change that creates the permanent bail-out fund, British taxpayers have made no contribution to the Eurozone bail-out of Greece and will not be part of the permanent fund.
Alongside the ring-fence we need the second “R” - recapitalisation.
The truth is that the European bank stress tests have not been nearly tough enough, as proved by the fact that Dexia did not fail them.
At the beginning of the year, I said that the “new stress tests must be much tougher”.
The IMF now estimate that sovereign credit strain from the Eurozone high-spread countries could have a direct impact of about €200 billion on European banks.
At last, the European Banking Authority is working on a plan to test leading European banks against higher capital ratios and more credible benchmarks of their exposure to sovereign debt.
European nations will need to set out the backstops they have in place to raise capital privately if they can or provide public capital if they cannot.
Detailed work by the FSA confirms that the UK banks are much better capitalised and more liquid than many of their European counterparts.
As the IMF showed in its recent assessment of the UK economy, “the Core Tier 1 ratios of all the major UK banks are in double-digit territory, which compares well with most European peers”.
On Friday, the credit rating agency Moody’s downgraded 12 UK banks.
However, they said explicitly that “the downgrades do not reflect a deterioration in the financial strength of the banking system or that of the government.”
Rather it is recognition of the success of this Government’s efforts to reform banking and remove the perceived taxpayer guarantee for banks that were deemed too big to fail.
This is the direction policy should be moving in.
Recapitalisation is the second “R”. The third is resolution of the situation in Greece.
The weekly drama of troika visits, parliamentary votes and uncertainty about the disbursements of future tranches of international funds is causing great instability for the whole world.
Our advice to our European neighbours about what needs to happen is provided in private - but our overall intent is very public - the speculation about Greece’s future needs to end.
The Eurozone needs to come to a clear decision now - and stick to it.
And that decision needs to be based on a rigorous and realistic assessment of what is really happened in Greece and the debt dynamics of that country’s economy.
Such an assessment should be provided by the IMF.
And we need to ensure that the IMF has enough resources to support economies around the world that require the help of the international community.
Ring-fencing. Recapitalisation. Resolution.
This is what needs to happen now.
At the same time, the Eurozone countries need to undertake structural reforms to make their economies more competitive and move towards greater fiscal integration to underpin the single currency.
Both of these things are required by the remorseless logic of monetary union.
That is the comprehensive package we have been urging - and will again argue for at the G20 Finance Ministers meeting on Friday and at the European Council at the end of next week.
We believe the package must be in place as soon as feasible and certainly no later than the G20 Leaders Summit in Cannes in less than four weeks’ time.
Our timeframe has been clear - and is now broadly accepted by the international community.
Mr Speaker, the crisis in the Eurozone may now be inching towards resolution - but it has already delivered a huge knock to international confidence.
I said earlier this summer that Britain could not be immune from what was happening on our doorstep and that, sadly, has now proved to be the case.
That is the principal reason given by the independent MPC for their decision to request authorisation to undertake further quantitative easing.
As Mervyn King said:
clearly the impact of the rest of the world on the UK does threaten our recovery. That’s why we took action today to try to head that off.
I made it clear last year that I would follow exactly the same procedures that my predecessor established.
I therefore agreed to the request and authorised a further £75 billion of asset purchases.
I think this is the right response to the deterioration in the international situation.
That is what the Bank of England can do.
While we have gone further than the last government in extracting commitments from all the high street banks to increase SME lending and extending loan guarantees, I believe there is more we can do to get credit flowing.
Like credit easing.
The purpose of a credit easing programme will be not just to lower the risk of another credit crunch.
It will also aim to bring about an structural improvement in access to finance for mid-sized and small businesses, so that a loan from their local banks is not their only source of finance.
This action will sit alongside the other measures we have announced to improve our infrastructure, invest in science, and make it easier to employ people - and we will announce more details alongside the Autumn Forecast next month.
All this is to recognise that our economic problems do not all come from abroad - many were home-grown.
Last week’s revisions to the GDP data revealed that Britain had one of the biggest booms and the deepest recession of any major economy other than Japan.
And we went into that bust with the biggest structural deficit in the G7 and came out of it with a deficit forecast to be the biggest in the G20.
None of the measures I have described would be possible if Britain did not have what the Governor of the Bank himself described last week as “a credible plan to repay our debts”.
Fiscal responsibility allows the British authorities to be monetary activists.
Without that credible plan market interest rates would soar in Britain as they have in other European nations.
Instead those rates here are just 2.5% - half what they are in Spain or Italy.
A 1% rise in interest rates would take £10 billion out of the pockets of British families in higher mortgage costs, lead to more repossessions and job losses as companies failed.
These low interest rates are hard won and easily lost.
I can confirm that the credit rating agency that downgraded the US - Standard & Poor’s - has this month affirmed our AAA rating.
But they made it clear that the greatest threat to that rating would be in their words if “the coalition government’s commitment to fiscal consolidation falters.”
We will not take that risk with our nation’s credibility and our interest rates.
These are difficult times.
There is no doubt that a solution to the Eurozone crisis is urgently needed.
It would provide the greatest boost available to the British economy this autumn.
We have been leading the international effort to help the Eurozone find that solution.
While at home we have taken the steps to help ensure that Britain rides out the storm.
And I commend this statement to the House.