Mr Simon Tilford

10 JULY 2007

  Q100  Lord Inglewood: I was involved in the political debate in Europe about the Service Directive and I can corroborate it, but it is part of a wider problem which is in terms of completing the Single Market, as always with these things, you deal with the easy bits first. I wonder whether you can argue from what you have told us that the introduction of the eurozone is going to have the effect of driving the Single Market towards completion. You can make quite a strong argument from what you have told us in your pamphlet and today that because various other options such as fiscal transfer are probably not going to be there, the only way that a number of these countries, which are the potential backsliders in this programme, can survive is by actually acquiescing in what the Single Market is all about, and it would seem therefore to follow that the eurozone project is actually going to drive forward the Single Market. What is your view about that hypothesis?

  Mr Tilford: That is certainly the hope. I was a firm advocate of the euro and indeed UK participation in it, and that was one of the reasons for my confidence and for my belief that it was a good idea and the "there is no alternative" argument was a strong one, ie that because the costs of inaction would be so fierce countries would have absolutely no option but to take the necessary steps, and if you rule out the option of devaluation what better way of forcing governments to ensure their economies are sufficiently flexible? The problem is that since the adoption of the euro, the pace of reform has actually slowed, so instead of seeing an acceleration of the kind of reforms we would need in terms of labour markets and product markets and the completion of the Single Market, the pace of reform really has actually slowed and it has been no more rapid than in, say, the free EU 15 Member States that did not join and who actually start from a much more favourable position. I agree that because the only option is a hugely costly one, ie to leave, that should limit governments' options and leave them with no choice, and long term, yes, the hope is that will happen but so far there is real cause for unease.

  Q101  Lord Inglewood: There are two ways to get things done, you can either dangle the carrot or wave the stick. It sounds to me the way you have put it that the pace of change has declined and so the carrot is not really there any more but the stick in the form of pain may be the thing and we need a bit more pain, on this hypothesis.

  Mr Tilford: It is all a question of how countries respond to the pain. In Italy's case although we argued that we thought there was a very significant chance that they would end up actually being forced out, I think awareness of quite how great the pain would be in other ways if they were to leave could at some point focus minds. I am not sufficiently expert on the Italian economy but from what I can see I think you would need to see the moderate elements on both the centre left and the centre right coming forward to force through the necessary changes. It seems unlikely that the Government, the left or the right, in Italy will be able to take the necessary steps. Certainly there was no sense under the Berlusconi Government that they appreciated the extent of the problem and the urgency of doing something about it. I think the current coalition is very broad-based and they have taken some steps but they are hostage to certain groups within that coalition that are very firmly opposed to the kind of steps that I think most economists believe Italy needs to take.

  Q102  Lord Inglewood: In the context of Italy, are the publicly produced statistics we have seen relevant or is the Italian economy so different in reality from the picture that is painted by the statistics that we cannot be sure about all kinds of things in Italy?

  Mr Tilford: Obviously Italy is experiencing a cyclical upturn.

  Q103  Lord Inglewood: The Italian statistics—there is a big black economy in Italy.

  Mr Tilford: But that is taken into account anyway.

  Q104  Lord Inglewood: And you are still happy that your reservations are accurately taken into account?

  Mr Tilford: I am not an expert in Italian economic data but the country's economic statistics are accepted by the OECD, by the IMF and by the European Commission and I do not think there are significant concerns over the reliability of Italian economic data. However, I am not an expert.

  Q105  Lord Maclennan of Rogart: Although the route towards the completion of the Single Market may point to sunny uplands, if it were to be implemented it must be the case that in the medium term there are winners and losers and that the pain of losing is such that it is difficult for governments like that in Italy at present to contemplate the necessary steps, although they clearly seem to have recognised the need. It is with that political problem that it seems to me the Union needs to grapple and, consequently, I am puzzled by your statement that you do not think there is the necessary solidarity within the European Union to help to ease the passage.

  Mr Tilford: I do not think there is the necessary solidarity. If we take fiscal transfers to cushion the blow, I am not even convinced that that would help necessarily because they had a big fiscal cushion for several years, and that was the solidarity if you like, because following the adoption of the euro they had several years of much, much lower interest rates than they otherwise would have had and the opportunity was largely squandered. My argument there though is that I do not see the solidarity needed for a system of significant fiscal transfers.

  Q106  Lord Maclennan of Rogart: What is sufficient is not calculable, obviously it is a political judgment, but if there was a willingness to recognise on the part of some of those other rather better-placed countries that there was a global problem to overcome and that if they were willing to make a contribution (it might not be very much) then it could have the necessary effect of making the Members who were not succeeding so effectively succeed.

  Mr Tilford: I do not think there is any sense in the more successful countries that they share responsibility for what is happening. The debate in Germany, which I follow very closely, is basically along the lines of: "The Italians are in this position because they have failed to take the necessary steps. We have taken tough decisions in recent years and we are now reaping the rewards of those tough decisions and the Italians have to do similar things." That is the line that the ECB takes and it is the line that most of the central banks take. As I said earlier, that is not the whole story because I think in some ways Germany is part of the problem here. We cannot have easily the biggest economy in the eurozone living indefinitely from the external sector so I think Germany is part of the problem, but there is no recognition in Germany or Holland that they are part of the problem. If one was to argue that in those countries there is no sense of that being the case.

  Q107  Lord Maclennan of Rogart: The Stability and Growth Pact in a sense is very one-sided because it is addressing only certain aspects of the bigger problem. Is there any reason why in the desire to have a pact, if you like, that does implement all these competitiveness improvements and labour market demand that some of those transitional problems should not be addressed within a revised Stability and Growth Pact?

  Mr Tilford: I think there is a case for it.

  Q108  Lord Maclennan of Rogart: That is what I am saying.

  Mr Tilford: I think there is a case for it but I do not think it is politically feasible.

  Q109  Lord Maclennan of Rogart: That is a political judgment?

  Mr Tilford: Yes.

  Q110  Lord Maclennan of Rogart: It is not an economic judgment?

  Mr Tilford: No, I think there is an economic case although it is weakened somewhat by the fact that the economies that find themselves in trouble, particularly Italy, wasted a big opportunity to put their public finances on a firmer footing and to use the opportunity afforded by reasonable growth at the beginning of the decade to implement structural reforms, so I think there is an economic case potentially but politically I find it unfeasible and also economically it might not help, it depends on if the governments in question use the opportunity to actually take steps or whether it just gives them an opportunity to delay further implementing those necessary policies.

  Q111  Lord Blackwell: I want to come back to this point on the Single Market. I wonder whether you are not perhaps being a bit optimistic that an open and competitive Single Market will force the adjustment. It seems to me the other possibility which we may be seeing signs of is that faced with these kinds of adjustments the Single Market is being turned into a social market with regulation being used to prevent the adjustments and share out a level playing field rather than to force open competition.

  Mr Tilford: I think the strongest argument against common economic and social policies as an answer to the divergences we see in the eurozone is that you could then see the institutionalisation of rigidities in labour product markets at a European level. I do not think that would be in anyone's interests. I think the only way we are going to achieve a situation where adjustment happens relatively fluidly is if there are flexible, open, competitive economies working within the Single Market. I think that is the only way we will get the necessary adjustment. Obviously policies in one country affect others and that is unavoidable but I do not think we would address the problems we face by that kind of institutionalisation at the European level.

  Q112  Lord Blackwell: No, but are you confident which direction it is going?

  Mr Tilford: Not entirely, no, for the reasons we discussed earlier that I think there is an increasingly protectionist, anxious mood across Europe and that makes it much harder to argue the case for the kinds of reforms that we are talking about. It makes it harder to argue the case that we need these reforms in order to ensure competitive outcomes and that economies continue to grow. It is not helped by the fact that in many Member States we have seen widening inequality in recent years in response to certain types of economic reform. That makes it harder to sell further reforms, it makes it very hard, so I think it is challenging.

  Q113  Chairman: Do you think the new French Government may have rather material effects and a beneficial effect on overall growth in the Community?

  Mr Tilford: I think their strategy towards the French labour market is the right one but, like many other people following this, the reservations they have over European competition policy and the support for certain types of relatively protectionist industrial policy are potentially damaging. I do not think there is any argument at all for any dilution of European competition policy or for greater allowances to be made for support for state aid for European companies. The argument that we need to allow matching aid—ie if there is competitive state aid given to companies that European countries should be able to that match state aid—ignores the fact that when companies are choosing between various locations to make an investment, the three or four locations are usually all in the European Union, so if you allow the French to start providing more generous state aid to companies, all that is going to do is come at the cost of various other European locations and risks triggering subsidy wars between the various Member States. I think he is responding to French unease about the declining economic influence of Europe and the mounting challenge that we face from various Member States. I think the only way of underpinning our competitiveness and addressing the problems we have is by investing more in skills, in education and in infrastructure, and ensuring that we move into higher value-added sectors, and I do not think that is going to happen by making it more possible and by making it easier to support certain companies.

  Q114  Lord Inglewood: Just arising out of that, paraphrasing what you said, the problems or the challenges are in implementing these strategies. The strategies are good; it is implementation that is going to be the problem.

  Mr Tilford: On the labour market?

  Q115  Lord Inglewood: Absolutely. Do you think he is going to succeed?

  Mr Tilford: In the short term no, because I do not think things are bad enough in France for the French to accept that. I think the portrayal of France, particularly in the media here, is often excessively negative. France has some problems but things are nowhere near as bad as I think many people think they are and there is no perception of crisis really. There might be a sense of an existentialist crisis but there is no sense of a social and economic crisis outside of various suburbs of Paris and Marseilles, so I do not think it is going to be easy, no. He has a decent mandate and I think it is hard to imagine him backing off and retreating in the way previous Presidents have done, certainly President Chirac, but I think it will be difficult. I do not know but I suspect that in the short to medium term we will probably only see modest reform and we will only get substantive reform in the long term when problems are rather greater.

  Q116  Lord Steinberg: Can I ask you about what governments need to do in terms of fiscal discipline and labour market deregulation to reap the full benefits. If I can elaborate on that a bit. About a year ago in this Committee we discussed the Lisbon Agenda the ideals of which are perfectly sound in asking for more employment to take place throughout the EU (but in practice is something that every country wants to see anyhow) and it has an ideal of employment control and regulation seems to be an absolutely dead duck insofar as it is really stating the obvious that every country wants to improve its labour force in terms of reducing the amount of unemployment. So when we talk about labour market deregulation, do we mean complete access between country and country without any restrictions whatsoever? As you well know, Britain's policy of open doors for people within the EU is beginning to receive quite a bit of criticism, and I am not talking about the other unfortunate aspects that we have had to suffer recently; I am talking about the influx of people and particularly the lack of abilities in trade, and by trade I mean the employment of people who are specialists in their various jobs. It may well be, and this is not an exact example, that perhaps Poland, and we have had a big influx of people from Poland here, have got skills for example in joinery and plumbing (I do not know whether that is true) and maybe in Italy they have got skills in other areas. Do you think that it is a realistic thing to have complete labour deregulation without any real control?

  Mr Tilford: We have had that in the EU 15 for many years now without experiencing too many problems. Clearly the EU has become much more heterogeneous. The differences in living standards are much bigger now than they were even between Poland, which is not the poorest EU Member, on the one hand and the UK and Ireland on the other hand, clearly there is a gulf in salary levels if not quite such a big gulf in actual living standards. I think it depends on the country. In the UK's case it has been hugely positive. This happened at a time when we were suffering skills shortages across a whole range of sectors. The overwhelming majority of people who have come in are actually doing work which they are skilled for, so we have brought in a lot of young, skilled people which I think has been a huge boon for the UK economy. That is not to say that the UK or the Irish policy on this would have been the right policy for every country. I think it is understandable that the Germans, for example, who were suffering very high unemployment at the time and who had a surfeit of people in the kind of sectors where we had a shortage, ie construction, opted against opening up from the very outset, and I think the fact they have a transition period in place is understandable. I would not like it to last indefinitely and it probably will not now that their economy is picking up and unemployment is falling. I do not think there are insurmountable obstacles to a fully open market within the existing EU. Many of these countries are developing rapidly and the difference in living standards is big, but it is closing. The big question is how many of the people who have come over to the UK will actually remain here; obviously that has consequences for both the UK and the countries themselves and if they do not then clearly we are going to experience considerable shortages in some areas which will have implications for economic policy in the UK, but also if they stay then there will be problems for the countries themselves. Poland is now actively recruiting in the Ukraine and Belaruss and even further afield for labour because the labour shortages are very serious due to the number of people who have moved away, so it will have consequences for both. I do not think there are huge obstacles.

  Q117  Lord Steinberg: My colleague Lord Inglewood very briefly mentioned the black economy, and when we were taking evidence from another gentleman recently it was obvious to us—and we have just completed an investigation into missing trader fraud so we are very au fait with it—that there is a great deal of black economy operating throughout the EU. My question then was the same question that I am going to ask you: because it is recognised that there is so much of a black economy, why on earth does the EU still print €500 notes?

  Mr Tilford: I am afraid I am just not qualified to answer that. I really do not know.

  Q118  Lord Steinberg: But you would agree that it does aid the black economy.

  Mr Tilford: I cannot really see many reasons for people wanting €500 notes given that anyone buying something costing that much would generally do so electronically, but I really do not know enough about the subject.

  Lord Steinberg: Forgive me for asking.

  Q119  Lord Inglewood: We have talked a bit about labour mobility and, as you have said, it is interesting to see quite how more mobile the Poles have been than many other people in Europe. Is there a particular reason, do you sense, for that?

  Mr Tilford: It is just very high levels of youth unemployment amongst people who are relatively skilled, who can imagine moving. It is also a huge opportunity; for the Poles in particular it is a huge thing to be able to move right around Europe, as it is for all of these new Europeans, and it is something that we took for granted for so long. It is largely economic and demographic.

  Chairman: There are large numbers coming from other countries as well, the Czech Republic and Romania.