Lords Committee warn against complacency over eurozone crisis

• Euro area crisis letter to Rt Hon Greg Clark dated 13 February 2013
• Note on the EU Lords Committee Seminar on the Impact of Austerity in the EU (31 January 2013)

Commenting Lord Harrison, Chairman of the Lords EU Sub-Committee on Economic and Financial Affairs, said:

“The biggest enemy facing the EU today is complacency: complacency that the euro area has turned the corner; complacency that we can take the foot off the pedal of the reforms that are so necessary to break the link between sovereign states and banks now that market pressures have eased; and complacency in the UK.”

“Both the UK Government and the City of London must beware the complacency trap of seeing the euro area’s woes as someone else’s problem. The implications for the UK are immense, not only economically but also in terms of the political ramifications. The future direction of the EU is highly uncertain. In light of the Prime Minister’s recent speech, the UK must ensure that it remains able to shape events rather than be shaped by them.”

The Committee fear that the ECB President Mario Draghi’s commitment to do “all that it takes” to save the euro, while welcome, may simply be masking the underlying difficulties facing many euro area countries. The Committee also caution that the effectiveness of the austerity regime remains open to question, and warn that successive years of flatlining growth could be extremely destructive. 

The Committee have asked for the Government’s views on the evidence it heard that:

• There had been an over-emphasis on austerity in response to the crisis. Across-the-board deflationary policies were reducing the potential for growth;
• Although likely to have positive effects in the long run, structural reforms were creating significant short-term pain for European citizens. This runs the risk of fermenting significant political and social unrest;
• There had been significant backtracking on the June 2012 European Council agreement on moves to break the link between sovereign states and their banks, running the risk of a repeat of the 2008 financial crisis;
• There was a risk in the ECB taking on the dual role of fireman and policeman as part of its bond-buying programme;
• A restructuring of Greek debt remained inevitable;
• The deal on banking union secured at the December 2012 summit may not prove as watertight as the Government believe.

The letter forms the Committee’s six-monthly follow-up to its original report on the Euro Area Crisis, published in February 2012, and a further update published in July 2012.