Sir John Major’s Comments on the Financial Situation – 9 October 2011
The text of Sir John Major’s comments on the financial situation, made in an interview on 9th October 2011.
QUESTION:
[Sir John was asked if the economy was in a serious state].
SIR JOHN MAJOR:
I think it’s pretty serious, but I think if you can reach a conclusion to the Eurozone crisis you’ll change the level of confidence and I think that will make a material difference. But at the moment you have the Eurozone pretty flat as an economy, you have American flat, you have the Chinese economy slowing and we don’t know how much it will slow, and you have the British economy teetering between no growth and tiny growth, so plainly it’s serious. And it is a different sort of recession from before because of the debt overhang.
So yes, I do think it’s very serious.
QUESTION:
[Sir John was asked if the Bank of England Governor was right in saying the recession was worse than in the 1930s].
SIR JOHN MAJOR:
I think he’s looking at the scale of debt, if you actually look at the United Kingdom as an example, in 1997 – to pick a date at random – we had a national debt of about 350 billion, by 2010 it was 900 billion and on unchanged policies by 2014 it would be 1.4 trillion. So you begin to see the scale of the problem, and the fact it is absolutely unavoidable that you make changes in order to bring down that level of debt, because that overhang could be with us otherwise for generations.
QUESTION:
[Sir John was asked if everyone would have to work harder and cut back].
SIR JOHN MAJOR:
Certainly for a while, I don’t think there’s any doubt about that. There’s no point in pretending that the situation is suddenly going to magically come good with a bit of growth. I’m afraid we need a good deal more than that. And we’re going to have to restructure a great deal of what has happened, not least in the Eurozone which is crucial to us because we are not part of the Euro because, as you rightly say, I opted out in the Maastricht Treaty, but the Eurozone is 40% of our exports and the rest of the European Union as a whole is 50% of it, so their health is crucial to our health.
QUESTION:
[Sir John was asked if the Germans would transfer more money in].
SIR JOHN MAJOR:
I think it’s very unlikely, and the Germans have expressly been told that they won’t move towards a transfer union which is essentially what is being talked about.
QUESTION:
[Sir John was asked if the Eurozone would fracture].
SIR JOHN MAJOR:
I think it’s extremely unlikely that the European Union will fracture with nations dropping off the edge.
QUESTION:
[Sir John was asked if Greece would default].
SIR JOHN MAJOR:
It’s conceivable.
QUESTION:
[Sir John was asked if Greece would default within the Eurozone].
SIR JOHN MAJOR:
I think that is exactly what will happen and should happen. But I think that it is unlikely that the Eurozone will toss out a member, it’s conceivable that it could happen, but it would certainly be against their wishes.
I think by far the most likely proposition, firstly you have to look at the short-term problem and then the longer-term problem. In the short-term the banks needs to be recapitalised and Greece needs to default. The sooner that happens and Greece defaults, the sooner you remove something, the overhang in the markets.
QUESTION:
[Sir John was asked what would happen if Greece defaulted].
SIR JOHN MAJOR:
What would happen is that if Greece defaulted and couldn’t pay its debts, all the Greek bonds that are held in other banking systems across Western Europe would suddenly have no value. You could, as a knock-on effect, create a banking crisis in Western Europe and French and German banks have most of the bonds. That would be absolutely catastrophic if that happened. So the Greeks mustn’t default until the Western European banks are in a position to absorb any losses that there might be without creating a banking crisis.
QUESTION:
[Sir John was asked if banks would be given money to fund this loss].
SIR JOHN MAJOR:
I think the way they may do it, I think there are two things that they could do, the first thing I think they could do is turn the European structural facility from a structural facility into a bank, give it a banking licence, let it leverage.
QUESTION:
[Sir John was asked if this would mean a new European Central Bank].
SIR JOHN MAJOR:
No, it would be quite separate from the European Central Bank, let it borrow money as banks normally can from the European Central Bank and either buy up the Greek bonds to remove the danger, the contagion from the Western banks, or use the resources to recapitalise the banks so they can bear the losses.
That seems to me to be the first thing that has to happen, and then it would be thoroughly desirable, in my view, to get the Greek default out of the way. It’s a terrible overhang in the market, it’s partly priced-in, let’s get it done and then we can move on to the longer term.
QUESTION:
[Sir John was asked why he didn’t join the Euro].
SIR JOHN MAJOR:
There were three arguments, the first was that if you had a monetary union without a fiscal union it’s like a two-legged dog.
The second argument, at Maastricht we produced some safeguards – although I opted out at Maastricht, we produced some safeguards – one of them was that no European nation would have a fiscal deficit of more than 3%, and the second was that before the Euro was formed the economies of those nations going into the Eurozone should converge, and by that piece of jargon we meant that they should operate at broadly the same level of efficiency. That didn’t happen.
In the late 90s the French and Germans began to worry whether the Eurozone would ever happen, so they went into the Euro without the convergence. That was the tragic mistake, it shouldn’t have happened.
Thirdly, when the Germans and the French went beyond the 3% deficit, the Commission took no action against them and everybody else did too, so you got this burgeoning level of debt that began to spread everywhere.
QUESTION:
[Sir John was asked if the Euro would change].
SIR JOHN MAJOR:
It will have to change, I think it will have to change.
QUESTION:
[Sir John was asked about the flapping of white coats].
SIR JOHN MAJOR:
No, the flapping of white coats was on a quite separate matter – and I don’t withdraw the remark. The substance of the argument is exactly the same as I advanced at Maastricht.
QUESTION:
[Sir John was asked whether the Euro-sceptics had been right].
SIR JOHN MAJOR:
They were partially right, but only partially right, and I will come to the situation as I saw it. The need for fiscal union is something we foresaw at Maastricht, which is why we opted out at Maastricht, that was right and is right.
What is now I think going to happen, albeit in a crab-wise fashion, I think the Eurozone members will have to move towards a fiscal union. I don’t think they will suddenly say they are going into full-scale fiscal union, it would need a treaty and all sorts of other things.
What I think they will do is produce legislation within the European Union that makes the control of fiscal deficits, the harmonisation of tax and matters like that, much more controlled from the centre. So they will be moving towards a federal state within the Eurozone and they will be moving to it out of failure and not out of success, that is the point.
It then gets to the position where you have an inner-core within the Eurozone that is operating much more deeply and closely together than the rest of the European Union. And if you remember in the 1990s, Douglas Hurd and I, we called it variable geometry, and we saw a much looser European Union in which people opted in instead of opting out, and it wasn’t such a tremendously prescriptive union which everybody had to be a part of.
That is the direction over the next decade, slowly, in which I think we will be going.
QUESTION:
[Sir John was asked if there would be a referendum on a new treaty].
SIR JOHN MAJOR:
There won’t necessarily have to be a treaty in this country for fiscal union. In terms of fiscal union it is conceivable that there will be a treaty just among the members of the Eurozone, so don’t overlook that possibility.
QUESTION:
[Sir John was asked if the referendum could be about a federal Europe that Britain wasn’t a member of].
SIR JOHN MAJOR:
I think that is conceivable. There are a dozen different ways in which this could unwind and frankly nobody can be certain which way it will go at the present time.
But it is possible that there will be a fiscal union amongst the Eurozone members, they would have their own treaty. But at some stage there will be another treaty because if there’s fiscal union in Europe, it changes our relationship with Europe. That is the fundamental point.
QUESTION:
[Sir John was asked if powers should be transferred].
SIR JOHN MAJOR:
I think it gives an opportunity for two things, firstly, it gives us an option to negotiate for the looser form of Europe that I would like to have seen in the 1990s and we got no traction when Douglas Hurd and I argued for that then. I think it presents that opportunity. And secondly, I think there are some areas that are worth looking at, and this isn’t anti-Europeanism or Euro-scepticism. There are some areas which it would be worthwhile to repatriate.
Fishing is one. There are elements of employment law, it used to be in the Social Chapter and has now spread, you will recall that I opted out of that in 1992 because I saw it as a job destroying mechanism. Now it has changed but the things like the working time directive, which I think is a very foolish piece of legislation, we could look at repatriating part of it.
Clearly, financial services is another area. There has been a lot of talk about the financial transactions tax, I don’t think that will happen, for a range of complex reasons, but even so, financial services are crucial to the well-being of the British nation, it is what drove our growth – over-drove it as it happened – over the last twenty years or so.
We really don’t want a whole series of restrictive notions damaging our financial structure in this country.
QUESTION:
[Sir John was asked if this was a new opportunity for Britain].
SIR JOHN MAJOR:
Europe changed fundamentally when the Europeans ignored the safeguards in the Maastricht Treaty and proceeded to an unsafe Eurozone, which they did in 1999 without any bark of protest from the United Kingdom. That changed it, that changed everything, because the Eurozone was no longer going to be a stable instrument, we were going to be outside it, but it could have been stable and it wasn’t. And that was a significant change and now I think there is an opportunity.
I don’t see this as a Euro-sceptic attack on Europe, I see that with 27 nations within the European Union it has to change. It cannot be the same as with 15 nations or with 6.
QUESTION:
[Sir John was asked whether quantitative easing was right].
SIR JOHN MAJOR:
It isn’t George who has just quantatively eased as it happens, it’s the Governor of the Bank of England, and I think the Governor is right to do so.
When you consider how much of our economy is driven by exports and you then see what is happening to our markets overseas, I think the Bank of England are right to quantatively ease. I think he is right. But more valuable might be the proposals put forward by the Chancellor himself to direct money specifically to parts of industry.
QUESTION:
[Sir John was asked about Liam Fox and what the Prime Minister should do].
SIR JOHN MAJOR:
It’s extremely difficult to handle these, either natural justice requires that you have to wait a long time and you’re then said to be incapable of making decisions if you operate under natural justice. Or you move too speedily and you’re said to be ruthless, so I don’t know what the situation is, the Prime Minister has asked for the facts to have a first look on Monday, and I think that is right.
From the Prime Minister’s perspective he has to balance natural justice and the truth, rather than the gossip, the rumour and things that may be true, but I’ve no idea whether they are or not.
QUESTION:
[Thank you].
SIR JOHN MAJOR:
Thank you, my pleasure.