Statement by the Chancellor of the Exchequer.
[Check against delivery]
Mr Speaker, I wanted to update the House as early as possible on developments in the Eurozone and - in the absence of the Prime Minister as he travels to the Commonwealth Heads of Government Meeting - report on the good progress made at yesterday’s European Council.
The crisis in the Eurozone has caused instability in financial markets, has greatly undermined confidence around the world and is having a chilling effect on economic growth in many countries - including our own.
It is in our overwhelming national interest that a coherent, comprehensive and lasting solution to the Eurozone’s problems is found.
For the decisive resolution of this crisis would provide the single biggest boost to the British economy this autumn, while the break-up of the Euro would be the single greatest threat to our prosperity.
Our view about how to solve the Eurozone’s immediate problems has been clear, consistent and forcibly expressed.
The Prime Minister and I have set it out to the House on many occasions.
Reinforcement. Recapitalisation. And resolution.
First, Eurozone Member States need to reinforce their bail-out fund to create a firewall.
Second, weak European banks need to be recapitalised.
Third, the unsustainable position of Greece’s debts needs to be resolved.
But if the solution is to last then the members of the euro also - as I said many months ago - need to address the logic of monetary union by pursuing greater fiscal integration within the Eurozone - while at the same time we protect Britain’s interests.
And we have to improve competitiveness:
- competitiveness in the peripheral economies of the Eurozone as measured against the core economies like Germany
- and competitiveness across the whole European continent versus the rest of the world.
This is the solution of the crisis we have been advocating for months - and the solution once again advocated by the Prime Minister at yesterday’s European Council.
Our view is that last night very good progress has been made towards solving the immediate crisis - very good progress on all fronts.
The deal put together is much better than was expected yesterday afternoon.
But much detail remains unresolved.
And having put pressure on the Eurozone to get this far, we have to keep up the pressure to get the details completed.
They’ve started down the right road.
Now they have to finish the job.
Let me take each element of last night’s deal in turn - and say how it affects Britain.
First, on recapitalising banks.
We are pleased that the European Council agreed to the proposal hammered out by myself and other Finance Ministers at the weekend ECOFIN.
All major European banks will b e required to hold at least a 9% core tier 1 capital ratio by the end of June next year - including marking to market all of their exposure to sovereign debt.
The European Banking Authority, based here in London, assessed that achieving this target means banks will require an extra €106 billion of capital - and the Council yesterday confirmed that if this cannot be raised privately, then governments will have to step up to the plate.
I can confirm to the House today that in the assessment of the European Banking Authority, and our own tripartite authorities, no British bank requires additional capital.
This is an important expression of confidence in this country’s banking system at a time of global financial stress.
EU Member States also agreed to co-ordinate guarantees of term funding, should they be required.
And we have ensured that state aid rules will be properly applied, and European banks will be restructured if necessary, just as the European Commission demanded of the last British Government two years ago.
While some would have wanted an even tougher banking agreement - and even more capital going into Europe’s weak banks - we should welcome what has been achieved with this agreement.
Unlike the totally inadequate stress tests of last year, we now have a commitment to significant extra resources for the European banking system.
However, the UK and others insisted that that commitment from the whole of the European Union on banking is conditional on the two other key components of the solution to the crisis I set out - a reinforced firewall and a resolution of Greek debt.
These are both properly matters for the Eurozone not the UK - and both matters where progress was also made last night.
On Greece, a headline agreement was reached to reduce the Greek debt to GDP ratio to 120% by 2020.
The Eurozone will contribute an additional €30 billion - and because the British government has made sure we are not part of the Greek bailout, none of that extra €30 billion will come from our taxpayers.
While private holders of Greek sovereign debt will be asked to accept a nominal write-down of 50%.
A lot more work is needed to put this all into practice - including detailed negotiations with the private sector.
But we said Greece’s debts were unsustainable - and we are pleased to see a resolution in sight.
On reinforcing the size of the firewall, the Eurozone have set out two options that could operate in tandem.
One is to provide, from the bail-out fund, insurance on new debt issued by Eurozone countries.
The second is to create special purpose vehicles that can attract resources from private and public investors.
In their statement, they said that “the leverage effect of both options will vary” but they could be “expected to yield around 1 trillion euro”
We have always believed that the role of the European Central Bank is critical, and I welcome the positive statement made by Mario Draghi, the incoming ECB President.
Talk of special purpose vehicles has given rise to questions about the involvement of the IMF and major shareholders like the UK.
As I have said to the House on many occasions, Britain has always been on the IMF largest shareholders and biggest supporters:
- we helped create the institution 60 years ago
- the last government agreed increase its resources two years ago
- and this government not only ratified that agreement but also helped to make the IMF more representative of the new world economy by brokering a deal last year that gave countries like China and Brazil a greater say, while securing Britain’s seat on the board.
The IMF has been an active participant in the packages put together to support Ireland, Portugal and Greece.
And it has also been active in extending flexible credit lines to Poland and Mexico, neither of whom are in the Eurozone of course, as well as supporting other countries in Central and Eastern Europe such as Hungary, Romania and Latvia.
Indeed, it currently has 53 lending programmes around the world - of which only three are in the Eurozone.
Supporting countries that cannot support themselves is what the IMF exists to do.
There may well be a case for further increasing the resources of the IMF to keep pace with the size of the global economy.
And Britain - as a founding and permanent member of its governing board - stands ready to consider the case for further resources and contribute with other countries if necessary.
Let us remember that support for the IMF does not add to our debt or deficit, and that no-one who has ever provided money to the IMF have ever lost that money.
But let me be very clear - we are only prepared to see an increase in the resources that the IMF makes available to all the countries of the world.
We would not be prepared to see IMF resources reserved only for use by the Eurozone.
By all means, the IMF can use its expertise and advice to help the Eurozone create the special purpose vehicle they are considering.
By all means let countries with large foreign currency reserves like China consider putting their own money into the Eurozone’s special purpose vehicle.
That must be their decision.
But the IMF cannot put its own resources in - it can only lend to countries with a programme for adjustment.
And I can confirm today that Britain will not be putting its resources in either.
We do not have a surplus, we have a very large deficit.
We have had to use our own resources to recapitalise our banks and stand behind our own currency.
An active member of the IMF - yes.
A supported of the IMF helping with advice and technical support - yes.
But the IMF contributing money to the Eurozone bail-out fund - no.
Britain contributing money to the Eurozone bail-out fund - no.
That is Britain’s clear position.
We expect the Eurozone members to use the next few days - at most weeks - to provide much more detail about their plans to increase their firewall and sort out Greek debt.
We have made it clear that the sooner this happens the better for the whole world economy.
We must maintain the momentum.
But this package will not, however, by its own resolve the longer-term issues of how to make the euro work more effectively.
These longer-term issues were addressed yesterday - and they included proposals for greater fiscal integration and mutual control over the budget policies of Eurozone member governments.
I said many months ago that this is where the remorseless logic of monetary unions leads - and it does involve a loss of national sovereignty for countries in the Eurozone.
It’s in Britain interest that the euro operates more effectively - provided the interests of all 27 Member States are properly protected in key areas of European policy like the single market, competition and financial services.
We are insistent that our voice will continue to be heard and our national interests protected - and we have found allies among the other 10 members of the EU not in the Euro.
An important marker was put down in Sunday’s European Council conclusion.
No-one pretends that sorting this out in a satisfactory way is going to be easy - but it is a necessity.
And that is the context in which we should approach potential changes to the Treaty.
This coalition government has already proved it can protect Britain’s interest by:
- getting us out of the last government’s involvement in the Eurozone bail-outs
- holding down the European Union budget
- and putting into law the guarantee that no further powers and competencies can be transferred to Brussels without the consent of the British people in a referendum.
Now this government will protect Britain’s interests again as the discussions on a possible, limited treaty change begin.
And we will seek to rebalance the responsibilities between the EU and its Member States, which in our view has become unbalanced.
Finally, Mr Speaker, the euro will not find lasting stability until its peripheral members become more competitive.
It means credible plans to reduce budget deficits - a commitment made in the very first section of yesterday’s agreement.
But it also involves difficult decisions on pension ages, business tax rates, welfare reform and educational standards.
Britain, thankfully, is not in the Euro - but we are taking these difficult decisions because the ultimate lesson of this crisis is that unless you can pay your way in the world, and compete around the globe, then you country will be next in the firing line.
And I am determined that that country will never be Britain.