Grand Committee
Arrangement of Business
The Deputy Chairman of Committees (Baroness Garden of Frognal) (LD)
My Lords, if there is a Division in the House, the Committee will adjourn for 10 minutes.
Economic and Monetary Union (EUC Report)
Baroness Falkner of Margravine
That this House takes note of the Report from the European Union Committee ‘Whatever it takes’: the Five Presidents’ Report on completing Economic and Monetary Union (13th Report, Session 2015–16, HL Paper 143).
Baroness Falkner of Margravine (LD)
My Lords, I thank all members of the committee who participated in the inquiry. I took over the chairmanship of the committee some 15 months ago. It was a daunting prospect to be chairing a committee comprising a former Chancellor of the Exchequer, a former Cabinet Secretary, a biographer of John Maynard Keynes, as well as several others with a thorough grasp of financial and economic affairs. During the year, we lost the noble Lord, Lord Lawson, as the Brexit campaign made a greater call on his time. The noble Earl, Lord Caithness, and the noble Lords, Lord Davies of Stamford and Lord Borwick, stayed with us through the inquiry, leaving us only at its end. This benefited us greatly, due to their expertise, and I am very much looking forward to hearing from the noble Earl in this debate today.
I also wanted to put on record my gratitude to our specialist adviser, Professor Iain Begg, from the London School of Economics, whose knowledge of EMU is objective, deep and thorough. We are lucky to have that level of expertise in our higher education institutions, given that we are not in EMU. I also take the opportunity to thank our small secretariat—our clerk, John Turner, who like me was new to the committee and had a baptism of fire, and our now departed policy analyst, Katie Kochmann, as well as Victoria Rifaat and Susan Ryan, who were our administrative assistants during the inquiry. All rose to the challenge with admirable speed and professionalism.
In undertaking this inquiry, I was conscious of an irony: that a national parliament of a country not in the eurozone and unlikely at that time to ever join, which is now confirmed through Brexit, was looking at how the situation within the eurozone would evolve, as that was the primary focus of the five presidents’ report. I believe that our committee is the only national parliamentary committee to have produced this level of scrutiny, and I am happy to report that it has been well received in the institutions that have been the subject of our attention.
Our inquiry was a response to a report in June 2015 from five EU presidents: the president of the European Commission, the president of the euro summit, the president of the eurogroup, the president of the European Central Bank and the president of the European Parliament. The report, Completing Europe’s Economic and Monetary Union, to which I shall refer throughout the rest of the debate as the five presidents’ report, was published against the backdrop of the Greek financial crisis after a period when the future of the euro itself seemed under threat. The report sought to build on a range of new institutions and reforms aimed at strengthening economic policy co-ordination, its convergence and of course eurozone solidarity, and to set out what future economic governance was needed to build the eurozone into an optimal currency and fiscal area.
Our starting point was that while we looked at the euro from a position of distance, we wished it well, as the then Chancellor George Osborne had said, as it was in the UK’s interest that the eurozone become a prosperous and competitive currency zone. Our interest was that, as far-reaching institutional changes came about, this would have an impact on the UK’s own economic governance and regulatory environment—hence our taking a more granular look at the proposals set forth in the five presidents’ report. One of the overarching questions that we were attempting to answer was about the future of the euro. It is widely accepted that the eurozone is not an optimal currency zone even at this point in time, and the question was whether the speed and depth of convergence after the financial crisis was adequate to ensure its survival. While several of our witnesses could fault the institutional architecture and balance, it became evident fairly quickly that all believed that so much political will was invested in the project that it would eventually muddle through. I am often asked a similar question in Brussels and Berlin relating to the UK and Brexit. My answer is similar: we too will muddle through.
Among the institutional developments we looked at were: whether the stability and growth pact was being implemented as originally intended; the extent to which fiscal rules were adaptable to shocks; the creation of an advisory fiscal board and the impact of it on the balance between national policy and euro-wide convergence; and banking union, with the ongoing debate between risk aversion and risk sharing.
Lying above all this was the very real concern we had about the distinction between what was needed at a technical level to make the eurozone function better, which was more easily identifiable for us, and the issue of sovereignty and democratic accountability. This was described in the paradox identified by the then Harvard, now Princeton, economist Dani Rodrik, where global markets, state sovereignty and democracy cannot coexist, and policymakers have to pick two of them—any two, as he put it, but he thinks it is not possible to have all three.
We came up against the Rodrik trilemma, as it is known in the economic world, in this inquiry in the judgments as to how far economic, fiscal, financial and political integration could go in the context of what are still sovereign states in terms of their budgets, fiscal policy and democratic accountability. We did not come up with a definitive answer, as too much of the detail of what is needed to move towards those integrations was not spelled out by the five presidents. The key document that will seek to flesh out that detailed institutional structure will come in the form of a White Paper around spring next year, with stage 3 of deepening economic and monetary union to commence from 2025. We look forward to its publication, conscious that the Brexit decision has changed the context quite dramatically for the UK economy and financial services, and therefore our own assessment of those developments.
So what did we find? There have been substantive changes to the stability and growth pact since 2005, particularly since the financial crisis, with the implementation of the six pack and the two pack, involving greater requirements for states to stick to domestic commitments to fiscal discipline, using deficit and debt criteria as metrics, with the Commission needing to improve states’ budgets. Needless to say the measures, while necessary in technical terms, have been implemented within a political perspective. For example, by 2009, most EU countries were under the excessive deficit procedure. Financial sanctions that therefore should have been deployed were not.
The majority of our witnesses saw this as undermining the system. Professor Erik Jones from Johns Hopkins University said that the fiscal framework applied in the eurozone was “completely optional” due to the political calculations employed. Megan Greene from Manulife Asset Management told us that fiscal rules in these circumstances should be set not as binding fiscal rules, but on a case-by-case basis. She gave us the example of Spain’s deficit, which had been 5% in 2014, as opposed to the requirement under the rules to keep it under 3% of GDP, but she thought that Spain was right and needed to run a larger budget deficit to emerge from the recession, as it eventually did.
Another issue was the procyclicality of fiscal rules and their amplification of austerity on growth. Christian Odendahl, from the Centre for European Reform, picked out an omission from the five presidents’ report, in so far as it did not even attempt to suggest that fiscal policy should try to achieve a strong countercyclical stance in a downturn. The report did, however, signal an intention to establish an advisory European Fiscal Board to, inter alia, advise on the prospective fiscal stance appropriate for the euro area as a whole, based on an economic judgment. I quote:
“Where it identifies risks jeopardising the proper functioning of the Economic and Monetary Union, the Board shall accompany its advice with a specific consideration of the policy options available under the Stability and Growth Pact”.
Our witnesses’ concern centred on the extent to which this board would be independent and the extent to which it would be advisory. The board has since been established. Its composition is interesting. The chair is Danish, one of the five members is Polish and the remaining three are from France, Italy and the Netherlands, so 40% of the composition of the board designed to facilitate the functioning of the eurozone is from outside the eurozone—a sign of inclusivity on the part of the eurozone, perhaps.
The other large part of our work was to do with eurozone steps towards risk reduction and risk sharing. Again, it was evident that both entail the pooling of sovereignty. If the emphasis was on risk reduction, inevitably national fiscal stances and national budgetary oversight by the Commission, as well as other surveillance measures, needed to be tightened. On the other hand, if risk sharing was to prevail, there would inevitably be fiscal transfers from some states to others, creating moral hazard. Our witnesses were clear that there needed to be both technical and political progress. European Commissioner Dombrovskis described risk sharing and sovereignty sharing, saying a balance would have to be struck between the two. Sir John Cunliffe, deputy governor for financial stability at the Bank of England, saw this balance as a prerequisite for a further pooling of sovereignty.
The core disagreement between member states is a hindrance to completing banking union. The example of the single resolution fund as a common fiscal backstop is a case in point. Professor De Grauwe of the LSE thought that because you would eventually need very deep pockets to resolve large failing banks in a crisis, you need the fiscal capacity to raise taxes. In effect, fiscal union was a prerequisite for a backstop to work.
Likewise the question of how much sovereignty to pool was central to the success of the European deposit insurance scheme. At the heart of the five presidents’ report is the ambiguity about what is meant by fiscal union. It was obvious from our witnesses that overall they interpreted it as implying a very high degree of integrated policymaking. Several saw it as a means of transferring more power to a super euro Commissioner or, in the words of German Finance Minister Wolfgang Schäuble, a eurozone Finance Minister.
It is evident that the greater centralisation envisaged in deepening EMU will involve a significant pooling of sovereignty. We could not see a commensurate focus on measures to improve democratic accountability, and this is the greatest weakness of the five presidents’ report. The steps that currently exist in this regard, such as the European Parliament’s oversight of EMU, the economic dialogues between the Commission, the eurogroup, the Council and the European Parliament, and the European parliamentary week when national parliaments are brought together, are inadequate, and if they are inadequate in the current form they will be more so as integration deepens. The European Parliament cannot be seen in the same light as national parliaments in terms of accountability to a citizen who, first and foremost, sees his national representatives as the accountable individuals who will respond to him. The European Parliament plays as good a role as it can, but there is a danger, as moves towards a state emerge in the eurozone, that the disconnect will deepen.
I shall conclude with the words of one of our witnesses, Phillipe Legrain, who, in summarising the problems facing the eurozone, said:
“We have election after election in the eurozone in which voters reject the outgoing Government, and the first thing that happens is that voters are told that they have to stick to the old policies of the government they have just rejected because EU rules say so, and I do not think that is desirable or sustainable”.
I have managed, on this rather significant day of American elections, to avoid talking about the American election result. In concluding, however, my one word of advice—were they willing to accept it—on behalf of our committee to those forming the new architecture of the eurozone, would be that it is important to put in place the democratic structures and accountabilities that are needed to respond to citizens’ concerns that still exist at national level. I beg to move.
The Earl of Caithness (Con)
My Lords, we are all extremely grateful to the noble Baroness for introducing this Motion, and I also thank her for the way she chaired the committee. It was a great honour and privilege to serve on the committee; we certainly learned a lot and, I think, produced a very worthwhile report, although the circumstances in which we made the report were slightly different from what they are now. I also thank Professor Iain Begg for his advisory work and our clerk and his team for their support.
We are having an unusual debate today: I do not think I have ever taken part in a debate on an EU report where most of it is now under changed circumstances. None the less, I was a little disappointed by the Government’s reply; more could have been written on the back of a postage stamp than what they gave us, and the Commission’s reply was not as detailed or specific as I would have hoped.
Despite the Brexit vote and the fact that the UK is going to leave the EU, the euro is of huge importance to us: the EU is our next-door neighbour and the eurozone is the second most important currency in the world after the American dollar. What happens, therefore, across the 22 miles of the English Channel is as relevant to us in the UK today as it was six months ago. To put this report into context, we should remember that it is the second report on EMU in the past four years: in 2012 we had the Genuine Economic and Monetary Union report, and I sat on the committee that produced the report on that. Three years later we have the report we are discussing today; next year we will have the White Paper; and I have no doubt that there will have to be further reports on EMU in the fullness of time.
Turning to the report, I start by taking up a point mentioned by the noble Baroness, about fiscal rules. There is no doubt that it is a weakness within the eurozone that fiscal rules are not followed in a fashion that most of us would comprehend. Too much is done on an ad hoc basis and, since we wrote the report, both Spain and Portugal have missed their deficit targets under the stability and growth pact and have not been fined by the Commission. Does that give us more confidence in the eurozone? I do not think that it does; it leaves us still wondering where that strength and consistency in fiscal rules—which is so much needed—is going to come from. In paragraph 54 of our report we welcomed the recently set up European Fiscal Board, but can the Minister tell us why it took so long for the Commission to set it up? They normally set these boards up quite quickly, but this one was rather long in gestation, for not very good reasons.
I move on to paragraph 143 of our report, where we talked about the European deposit insurance scheme. That is an old friend, part of banking union, which fell by the wayside, so perhaps it is second time lucky for the Commission on that. I hope so: when we wrote our report on genuine economic and monetary union those of us taking part were disappointed that the three-legged stool on which banking union was going to be based had become a rather wobbly two-legged stool, and EDIS is badly needed if there is to be a strong structure in banking union, albeit that the UK opted out of it.
Moving on, we looked at fiscal union. We were surprised by the number of definitions there were of that. I looked forward to the Commission’s response to our report to see what it might say to enlighten us, but I did not think its reply was terribly constructive. It did not help us—and there is a big weakness here in the EU. Until fiscal union is defined in a structured and sensible way that everybody can agree, there will always be areas for doubt and manoeuvre, which will lead to continued weaknesses.
The noble Baroness, Lady Falkner, also mentioned in opening the debate the need for,
“appropriate and accountable eurozone-level decision-making structures”.
We use those words in paragraph 194 of our report; they are increasingly important, given what is happening in many developed countries and the reaction by large groups of people to how Governments have behaved.
The noble Baroness refused to comment until the last moment on the USA election and I shall get in a little before the last moment. It was depressing to read today that the French ambassador tweeted:
“A world is collapsing before our eyes. Dizziness”.
That shows a view that is totally out of touch with what real people voted for and the change they want. For the German Foreign Minister to say that it was not the result that he or Germany wanted equally shows a disconnect with his own people.
Let us return to accountable and eurozone-level decision-making structures. These need to be altered and strengthened. At present, the House of Lords is considerably more democratic than the European Commission. We have 90 elected hereditary Lords, of which I am proud to be one. We are distinctly more democratic than the European Commission, and that needs to change for credibility in future.
To conclude, there is the recommendation we made in paragraph 205, concerning member states in the EU that are not part of the eurozone. I am sorry for them that the UK is coming out of the EU as that will make their lives much harder. I hope that they will not be subject to caucusing by the eurozone members. The fact that the president of the eurozone group was a signatory to this report gives me cause for concern.
However, another aspect to this is perhaps more worrying for the future of Europe. We all know about majority voting, but not many people understand that you can have a minority blocking vote as well. Britain not being a member of the eurozone was an instrumental partner in that blocking vote when things headed in the wrong direction. Without our vote, it will be much harder for the non-eurozone members. Germany will have to take a much more proactive line to get a better balance and stop some of the mad extremes that were suggested. We are still members of the EU and I hope that, when my noble friend sums up, he will say that we will still play an active role to the moment that we sign on the dotted line and get out.
Lord Giddens (Lab)
My Lords, I speak not as a member of the committee but as an errant outsider who wandered in here. I congratulate the noble Baroness, Lady Falkner, on introducing this debate effectively. You cannot not mention the American election. The events in the US last night make the EU even more important as a bastion of cosmopolitan values in a world which seems bent on abandoning them. It clearly is threatening to the EU because it will further stimulate the rise of far right populism. Its consequences for the euro we do not know. As of this morning, the euro rose against the dollar, whatever that means.
I congratulate all noble Lords involved on the report, which is exhaustive and analytical. As other noble Lords have mentioned, what happens in the eurozone is highly important to the British economy and will remain so. A preceding report on the euro a few years ago featured only four presidents. Now there are five, as the European Parliament pushed to get involved in the act. I am a pro-European, but five presidents is an awful lot to take coherent decisions—and it does not even feature the true, as it were, informal president of the European Union, Angela Merkel.
The five presidents’ report opens by saying:
“The euro is a successful and stable currency… It has provided its members with price stability and shielded them against external instability”.
These would seem to be, on the face of it, somewhat wild claims. They are certainly disputed by many. However, there is a good deal of truth in the assertions. After all, it was unlucky to set up a new and ambitious currency just before the most profound economic crisis the world has known since the late 1920s, which was predicted by no one. Against that backdrop, the fact that the euro is still here, functional and popular is impressive.
We have no counter factual. We do not know what would have happened in the southern countries, for example, if the euro had not been there in the course of the economic crisis. However, we can guess that some of the weaker economies might have struggled. You cannot make a comparison between what happened at the moment, but their fate could have been even more difficult without the umbrella of security which the euro provided.
A prominent economist, whom I shall not name but who will be known to everyone here, and who is not sitting in this Room but is sitting in the US somewhere, proclaimed four years ago that Greece would exit the euro within a period of months. Many people said that. Yet, in spite of all its travails, Greece is still there and the euro is still popular in Greece and in most of the other eurozone countries, which is quite remarkable.
The Greek economist, Gregory Papanikos, has written an interesting re-evaluation of the Greek economy, which has impressed me. A great deal of suffering has gone on, but that economy has a robustness which is not visible except through a more profound analysis, which he provides. He accepts that there has been a deep recession in Greece since 2008—how could one not? Yet he shows that, even at the bottom of the recession, Greece was producing as many final goods and services as in its best year of the 20th century, when it was thought generally to be in reasonably good condition. This is without counting the huge informal economy where some of Greece’s strengths and many of its core problems, it must be said, lie. So things are not quite what they appear.
The five presidents’ report is right to point out that the euro thus far has been salvaged through firefighting, in an essentially democratic way, dominated by the dreaded troika of the Commission, ECB and IMF. The report rightly recognises the need for what it calls genuine democratic accountability. As noble Lords note, however, there is little in the report showing how this might be achieved on the transnational level that would be necessary. There are huge vacant lots, as it were, in the document.
Much of the five presidents’ report is about setting out a road map as to how the eurozone might move from short-term crisis management to structural solutions for the deficiencies of the existing system. However, as the committee’s commentary notes, not much is said in practical terms about how these successive stages that are mapped out will actually be implemented. Given the series of crises that the EU faces in addition to the problems with the euro, the document reads too much like a fair-weather set of proposals, rather than one where the innovations noted might face serious problems of political legitimacy.
The limitations of the proposals contained in the five presidents’ report seem pretty obvious. If they are not addressed, it is surely in part because no one can quite see how they could be dealt with politically. Beyond a certain point, the constituent nations see their interests differently and have contrasting approaches from the point of view of economic theory. Joseph Stiglitz sets things out pretty well in his book on the euro. A common monetary system cannot function effectively without a countercyclical promotion of demand and without at least some degree of mutualisation of debt to protect against shocks.
Looming over the whole document but, of course, unstated therein, is the dominant position of Germany within the eurozone and within the EU as a whole. Ideological differences are involved because of the role of—forgive the term—ordoliberalism in current German thinking. Ordoliberalism is essentially the German version of austerity. One prominent German theorist has pronounced that the bailouts enacted at the height of the crisis have allowed,
“feckless Mediterranean countries to get away with minimal reforms and only limited fiscal discipline”.
It is a view that resonates strongly with the German public.
Germany is in denial of its own dependence on the euro for its competitiveness, and hence for its surplus. That surplus has the effect of dampening demand in the countries of the south that most need it. Some level of proactive investment is essential if the eurozone is to achieve longer-term stability. When even the IMF has turned against austerity as actively counterproductive, it is time for European leaders to take note. We will have to wait for the Italian referendum of Mr Renzi’s Government and for the French and German elections to see if those leaders are able to respond.
Lord De Mauley (Con)
My Lords, like the noble Lord, Lord Giddens, I was not a member of the sub-committee at the time this investigation was carried out—though I have joined it subsequently—so I will keep my contribution brief. This was an important piece of work, so I am extremely grateful to the noble Baroness, Lady Falkner, and the then members of the committee.
The five presidents’ report proposes routes to achieving not only sustainable economic and financial union but fiscal union—whichever definition you may choose—by as soon as 2025. Despite the fact that this weighty report from the five presidents was not exactly gripping reading for the layman, and did not, so far as I recall, form a major part of the argument in the pre-referendum debate, I have a feeling that, had the British public focused on it, it would have been unlikely to have changed the result. Not that most, if they stopped to think about it, would have objected to putting in place the very necessary reforms to reduce the risk of further financial and sovereign debt crises, and to increase democratic accountability. Indeed, many would have applauded such reforms, especially to achieve the latter aim. In fact, I suspect that many of those who voted to leave did so precisely because of the perceived absence of democratic accountability from much of the EU paraphernalia of government. So they should welcome the sub-committee’s strong urging that the issues raised in the report, particularly those relating to democratic accountability, be addressed—something that the noble Baroness, Lady Falkner, emphasised. They should also welcome the fact that, in issuing their report, the five presidents at least recognise that more needs to be done to ensure the long-term sustainability of the eurozone.
As the sub-committee’s report says, no one should underestimate the complexity facing eurozone national Governments, which will have to deal, among many other things, with tensions between what is appropriate for the eurozone as a whole and what is appropriate for the individual member state. It is indeed axiomatic that the effectiveness of this attempt at co-ordination will ultimately depend on political will at member state level, as will, for example, the operation of the European Fiscal Board. The sub-committee is unconvinced of the existence of enough such political will. Indeed, cynics will be unsurprised by the fact that the sub-committee’s report is littered with doubts about the ability or willingness of member states to make all this work. For example, it observes that member states’ adherence to the rules is patchy and liable to be influenced by domestic political pressures, and that they have an undesirable tendency to procyclicality in the exercise of fiscal policy.
In the context of strengthening the macroeconomic imbalances procedure and fostering long-term structural reforms at the member state level, the sub-committee points to a tension between ensuring member state ownership and creating an effective enforcement mechanism at the EU level. It expresses scepticism that financial sanctions under the MIP are any more likely to be used in the future than hitherto and opines that macroeconomic imbalances in the euro area are likely to continue to be a source of instability.
The sub-committee refers to several things which need to be put in place on the route to fiscal union: a stabilisation function, procedures for the transfer of funds and an unemployment reinsurance scheme. There are challenges, too, to the perhaps less-ambitious objective of financial integration, including a potentially ambitious risk-reduction agenda before risk-sharing through the European deposit insurance scheme takes place, and uncertainty surrounding the long-term common backstop to the single resolution mechanism.
The sub-committee quite rightly warns that plans for strengthening the eurogroup, although speculative, mean that our Government must keep a weather eye on the impact a formalised eurogroup might have on our position and do all they can to ensure that the UK is protected. It also sounds a warning note for citizens of eurogroup countries about the effects on them of the pooling of sovereignty and the potential results for democratic accountability.
The proposal for representation externally has been included by the five presidents among their plans for strengthening democratic accountability but, ironically, the sub-committee points to the very real conflict between democratic accountability and unified representation of eurozone interests at the international level, for example, at the IMF.
The sub-committee points out that it is foreseen that the terms which we hope are to be negotiated between the UK in its new settlement with the EU will be incorporated into the treaties at their next revision. The five presidents’ more fundamental proposals also require treaty change. While acknowledging that to achieve the latter by 2025 may be a tall order, this could provide a negotiating opportunity for the Government as they hammer out the UK’s new settlement.
Although the five presidents’ report will still be relevant to us, assuming Brexit proceeds, it will be less so afterwards than it would otherwise have been and, crucially, our ability to influence the drivers it refers to, if we miss this opportunity, will be considerably reduced or removed entirely. So an important message for the Minister is that there is the possibility of a useful negotiating point here which the Government would do well to keep in mind.
Lord Butler of Brockwell (CB)
My Lords, as a neophyte member of the sub-committee in the Lords structure of Europe Select Committees, I found the preparation of this report very interesting. I add my congratulations to the noble Baroness, Lady Falkner, who chaired a not always compliant committee with firmness and skill. I add my thanks to our adviser Professor Iain Begg and the clerks who put together an excellent programme of witnesses.
Nevertheless, the subject matter of report created, in this member of the sub-committee at least, a sense of unreality. It is right that the sub-committee should have produced this report because the UK, although not a member of the euro, not only has an interest in the effect of the euro on the economies of our major trading partners, but is, for as long as we remain a member of the EU, directly affected by some of the proposals in the five presidents’ report.
An example is the proposal for the capital markets union, an initiative which, with the UK’s leadership in financial services, offers important potential benefits for us. One of the many reasons for being worried about our prospective departure from the EU is the prospect that this important initiative will be developed without us, as the noble Lord, Lord De Mauley, said.
The authorship of the five presidents’ report, by the presidents of the European Commission, the euro summit, the eurogroup, the ECB and the European Parliament, certainly gives it weight but not force, in my view. It is a list of aspirations, not decisions. It skirts details where it is known that some of the details of its proposals would be controversial in the lead-up to the French and German elections in 2017. These matters are left to be addressed in a White Paper but, since the stated date for that is the spring of 2017—before the elections—one may doubt how much progress it will make towards specific measures.
The five presidents’ report amounts to a road map for the survival of the euro. Whatever doubts some of us may have about the wisdom of the euro project, and whatever anxieties we may have about its economic and social consequences, there can be no question about the strength of the resolve of the members of the eurogroup. That has already been demonstrated over the last few years. As the noble Baroness, Lady Falkner, said, we asked all our witnesses whether they expected the euro to survive the strains that now exist and that lie ahead. The answer was that they expected the euro to muddle through because of the political will that has been invested in it.
Two main fault-lines run through the way ahead for the euro. One is fiscal, the other financial, and they are of course connected. Both are characterised by the tension between collective action and national sovereignty. Let me take the financial issue first. Can depositors in eurogroup banks be given reassurance that their deposits are secure, and thus prevent a flight to banks in stronger countries at times of strain? Such a flight could produce catastrophic collapses not only for the eurogroup but for the international system as a whole. One answer is that all banks in the eurogroup should build up sufficient capital to withstand any crisis. The second is that depositors should be given a guarantee of the safety of their deposits in the event of bank failure. It would have to be the Germans who gave such a guarantee in present circumstances, and understandably they are reluctant to be a party to such a guarantee, unless and until they are satisfied that other members of the eurogroup have taken steps to ensure that their banks are sufficiently capitalised to make a collapse unlikely. The proposal for the European deposit insurance scheme is therefore unlikely to make progress until that point is reached.
The second fault-line is the fiscal one. It is generally recognised that a single currency requires a single authority with effective control over fiscal policy. In the absence of that, the EU has sought to set fiscal rules for member countries but these fiscal rules have been widely ignored, not least by the principal members of the eurogroup. One reason for that is that the fiscal rules are not necessarily appropriate for all stages of the economic cycle, but their breach in major economics inevitably makes it harder to enforce them in weaker ones.
A section of the five presidents’ report is entitled “Towards Fiscal Union”, but the report is vague about what fiscal union means in practice and the Committee found that our witnesses were no clearer. The report proposes boards on various aspects of the economic convergence necessary for the successful working of a single currency: competitiveness boards in each member country to improve the operation of the real economies; a single fiscal board to review the fiscal policies of member countries; and a strengthened role for the euro group with unified external representation. These are all only advisory. We must doubt whether they will in practice amount to more than a fifth wheel on the euro-country members. The Select Committee report concludes that, in view of national autonomy, the goal of completing economic and monetary union by 2025 is unlikely to be achieved.
What are we to make of the five presidents’ report? Is it simply a programme of bureaucratic measures unlikely to achieve their stated goals, and which will consume resources and simply divert recognition from the fact that the euro is ultimately a doomed project? Is it, in other words, a road map on a road that leads over a cliff? Or is it a list of steps that, though they are unlikely to achieve their stated objectives in the short term, are none the less a necessary further stage in the progress towards greater European integration and shared identity? Only time will tell the answers to those questions but it is clear that the five presidents’ report, like the UK’s referendum, is not the end of European history but simply a further stage in its tortuous development.
Lord Suri (Con)
My Lords, when the original five presidents’ report came out, I was aghast at the implications it contained. I remember reading it, thinking to myself that any British Government would never be able fully to commit to the various goals and targets set by the Commission, Parliament and central bank.
The mistake of many commentators in the British press was blithely to assume that such targets were not applicable to the United Kingdom. We were not in the euro, after all, nor were we in the Schengen area, nor did we ever really engage with the European Semester. However, the press were misguided, for they missed the importance of that report to our banking union. It felt odd reading the report as it was published in the heady days of May when the prospect of leaving the EU seemed risible and the referendum had not even pierced the collective imagination of this place.
However, there are a number of important points to consider in it, the first of which pertains to banking. The five presidents’ report is clear on the importance of banking for not just European monetary union but eurozone stability. Thus, the creation of the banking union, following the proposals put forward by the four presidents in 2012, is likely to be beefed up with additional powers and regulatory capabilities for all banks trading within the single market and especially those that clear euros.
It currently comprises a single supervisory mechanism in which the ECB has overall responsibility for the supervision of banking union banks and a single resolution mechanism run by a single resolution board. The upcoming negotiations will see whether the UK is able to maintain the financial passport, which effectively guarantees the rights of UK-based banks to clear euro-denominated trades and all the lucrative related deals.
In my view, there are two ways for the UK to maintain this access. The first way is to remain within the single market. This would be a Norway-style deal that would allow us full access to the single market. However, I fear this would be impossible, given the nature of restrictions on free movement and regulation that the Prime Minister wishes to make.
The second way would be more complex. The UK should stay within the banking union and then continue to trade as it does normally. The real issue with this is that the UK would then be under the auspices of the European Central Bank. This would not be in keeping with the mantra of the Brexiteers to take back control, but it may be the only way to safeguard a significant proportion of our lucrative trade with the EU. The ball will rest with the EU, but it is worth remembering this.
The eurozone is in a terribly fragile state. Greece’s problems are not yet fixed and the unresolved saga of Italian banks will be perilously hard to manage for any technocrat. If the EU disrupts this, there is likely to be significant knock-on effects for all members, including Germany, as the recent turmoil at Deutsche Bank has shown. For the single currency to survive, further significant fiscal integration will be required. There will need to be eurobonds and a Finance Minister who can raise funds in Germany and spend them in Greece.
It is in the interests of the UK to have a strong, well-functioning EU. Indeed, a prominent Brexiteer put it to me like this: we must be like Canada, a sovereign, free-trading country working efficiently with a far larger, federalised southern neighbour. Now that we are out of the way and our veto and influence will no longer be heard in Brussels, the EU can get on with the job of federalisation, which now falls to the current crop of continental politicians. I wish them well.
Lord Dykes (CB)
My Lords, it is a pleasure to speak in the gap. I congratulate the chairman of the sub-committee on her great work in the task of producing this report. I try to read all European reports, which is a daunting task because there is so many of them, but this report—I am not saying this deliberately to embarrass anyone—is one of the best I have read. It is very thorough indeed, and I agree with most of the points and recommendations made in it.
I shall be brief in enunciating a couple of thoughts which give more of an optimistic background to the growth of the euro. I acknowledge that this is referred to in the report and in some of the speeches and comments that have been made. The development of the euro has been an astonishing achievement in international terms—the noble Earl, Lord Caithness, referred to this in his remarks. It was never expected that it would be so rapid in the days when it first started. I looked up the figures. The most important statistic for measuring these matters around the world is the international daily banking payment transactions figures. The figures I looked at were from about four weeks ago and showed that the euro was responsible for about one-third of all world transactions in reserve currencies and currencies in general. The United States dollar was responsible for 40% of them. So with 33% and 40%, the euro is getting closer to the US dollar.
However, we can consider the aggregate debt figures. Donald Trump kept referring to the nightmare figure for US federal debt—not the debts of the cities or states but just the US federal debt—quoting, quite rightly, a figure of $19 trillion. The aggregate debts of all the member states of the European Union—you need not include the European budget, by the way, because it is a virtuous budget with no debt and its receipts more or less equal its payments—is of the order of $13 trillion. With 300 million people, the US has a debt of $19 trillion, while the debt of the EU, with 500 million people, is $13 trillion. Furthermore, if you look at the way in which growth is taking place and where, the enormous amount of corporate issues in the eurozone has been an astonishing phenomenon, which was not unexpected by people in the City originally. In contrast, our own currency, the pound sterling, has recently seen its eighth devaluation since the War. There were three devaluations by government action in the post-war period and five by market action, including a significant devaluation when the Brexit result was announced after the referendum.
The choice, therefore, for monetary instrument executives in government and central banks in any country is to determine the better choice between the high currency, strong currency, disciplined currency system that the deutschmark has always represented, which encourages the growth of assets and net domestic capital formation and is long term, lasts longer and is stronger and bigger in percentage terms, or the easy devaluation route, which has been the UK habit from time to time whenever there has been somewhat of a crisis. My answer is that if you have in the eurozone the deutschmark but at a low level under the euro than if it was the deutschmark on its own, that is the virtuous choice between the two. I was glad that the noble Lord, Lord Butler, sounded an optimistic note when he allowed that the eurozone might take a bit longer to develop than originally intended but that it is certainly on the way. The message for us in Britain is that we must overcome the psychological trauma and the fears and anxieties that we experienced in 1992 when we were driven out of the exchange rate mechanism in very humiliating circumstances and consider returning to the euro philosophy in the future.
Lord Kerr of Kinlochard (CB)
I, too, am grateful for the opportunity to make a couple of quick points in the gap, and to congratulate the noble Baroness, Lady Falkner, on the report. I used to be a member of the committee in days of yore, and I note that the standard of reports has not fallen since I left—I note that with great regret and deep sadness.
I shall make two short points. One concerns the lapidary, crystalline beauty of the Government’s response to this report, about which I thought the noble Earl, Lord Caithness, was a little harsh. What it lacks in length it has in quality. It is boiled down into crystalline form and includes one excellent sentence. There are eight sentences in all, in reply to 266 paragraphs, but I single out one sentence in particular:
“Regardless of our relationship with the EU, the euro area is a key trading partner for the UK, and a stable and prosperous euro area clearly remains in the interest of all European countries”.
That sentiment needs to be more widely bruited about. It is not generally perceived in continental Europe that our policy is to leave the EU but not to leave Europe and to remain as close as possible to our former partners in the EU. It would be highly desirable and helpful to our negotiations if that were made clear. Their reading of the Birmingham speeches led them, on the whole, to take a different view. They noted that some senior members of the leave campaign argued that the euro would collapse; others argued that the euro should collapse, and that it would be in everyone’s interest if it did. It is very important that they understand that that is not the view of Her Majesty’s Government and that we genuinely see a continuing interest in the health of our largest market.
My second point is smaller, a sort of footnote. This report ends with a sad historical footnote, with the suggestion that the gains made in Mr Cameron’s renegotiation might be written into EU law at a convenient opportunity, which might be provided by action on the five presidents’ report. Alas, the fact is that, because Mr Cameron decided not to follow his Bloomberg prescription and not to propose Europe-wide reforms but simply to concentrate on concessions specific to the United Kingdom, the reforms extinguished themselves the moment when we voted to leave the European Union. It was integral to the deal that they would; they concerned only our relations with the European Union, and they no longer exist. Therefore, there is nothing from their ghost to be written into the treaties at a future treaty negotiation. That is an academic point, because there will be no treaty amendments in the year of the French and German presidential elections.
Lord Tunnicliffe (Lab)
My Lords, I thank the noble Baroness, Lady Falkner, for opening this debate in such a thoughtful manner and for the work that she and other members of the committee have done to produce this report. Every speaker has rightly noted that the political context in which this report was written was very different to the one in which we now find ourselves. Therefore, the tendency might be to dismiss this report and the issues that it raises, as the Government appear to have done in their response to the committee. However, I argue that exactly because of the decision of the British people on 23 June and because of the rightful insistence of the Prime Minister that Britain will continue to be an outward-looking country, it is even more important that we reflect on the five presidents’ report and the recommendations of the Select Committee.
I shall say a little more on Brexit later, but first I address what I regard as the fundamental flaw of both the five presidents’ report and the Select Committee’s analysis. Neither report ever really challenges the euro’s sustainability; it is almost taken for granted. Because of that overoptimistic assessment, the likelihood of another future euro crisis has been discounted. Merely two paragraphs are devoted to the survival of the euro, and I put it to your Lordships that the issue of the euro’s future viability warrants more detailed examination.
The Earl of Caithness
I am not certain that that was within the committee’s remit—our remit was to write a report on the report in front of us, not on the future of the euro.
Lord Tunnicliffe
Well, my Lords, it is rather difficult to take that view as an outsider coming to the report for the first time, because it mentions the stability of the euro at the very beginning and then goes on to discuss a whole series of measures designed to make the euro stable. From my reading of it—and you can disagree with that—on each point that it brings up to make the euro more stable, it then analyses and notices that it is probably not going to work. If the report was not about euro stability, I apologise, but I read it as such, and as soon as I finish my speech I shall offend you less. I also note that the noble Earl, Lord Caithness, seemed to have an underlying pessimism in his speech about it—although, probably correctly, he did not address it directly. The noble Lord, Lord Giddens, also made a pessimistic speech, although he brought out the paradoxical relationship that Germany has with the euro, whereby it is absolutely crucial to its economy in pulling down the effective value of the currency without it accepting that at the end of the day some sort of wealth transfer is necessary from its overall surpluses. The noble Lord, Lord Butler, as well, who must have misread the report slightly, said that it was a road map for the survival of the euro. Indeed, it was a road map that could be leading to a cliff.
So I do not feel alone in my pessimism, and it took the noble Lord, Lord Dykes, who is ever optimistic about Europe—I wish his optimism had had more impact on 23 June—to introduce optimism. I would have been interested to hear from the impressive array of witnesses that the Select Committee spoke to about how likely they felt another euro crisis is, how much it would affect the UK banking system and, leading on from that, what resources the UK Government and Bank of England have to manage such a crisis. We have an order in front of us in about four weeks’ time that goes to the whole issue of managing crisis. I will repeatedly, at every opportunity, bring up just how fragile the banking systems are in Europe and how important that is to the United Kingdom.
Whatever the outcome of the Brexit negotiations, and whenever that may be, these are questions we cannot afford to overlook. We saw last week how sensitive markets are to any decisions relating to Brexit. Given that, I would have thought that it would be in the Government’s best interests to consider all scenarios. It is evident that there is a lack of institutional planning on the euro’s future across Europe. We must all do better and challenge that conventional thinking.
That being said, I reaffirm my thanks to the Select Committee for undertaking this investigation. I would not wish the noble Baroness and the other members of the committee to take my remarks as a reflection of my views on the entirety of the report. It was a detailed and considered analysis of the challenges that Europe and monetary union face: for example, the continued procyclicality of the European financial policy, the concerns about the effectiveness of the capital markets union in a crisis—an issue I know the committee highlighted in a number of recent reports—and the lack of detail surrounding key interpretations and accountability. Indeed, one thing that came out as an amateur reading through the report was the avoidance of seeking common definitions of important issues.
However, the issue I wish to pick over in more detail—before turning to the implications of Brexit in our interpretation of the report—is chapter 3. This sets out the immense set of challenges associated with marrying two seemingly contradictory concepts: risk reduction and risk sharing. As paragraph 99 of the report states,
“the suggestions in the Five Presidents’ Report propose a means of pooling the risks facing certain Member States, but that resistance to them reflects others’ concern that they would face an unreasonable burden of responsibility for those risks”.
It is clear that the European Union ideal would be a balance between the two—but is that possible? At present it certainly does not seem that there is a desire to share risks across the eurozone. The report notes that:
“Germany, the Netherlands and Finland, have supported more risk reduction measures before any risksharing begins”.
The report hits the nail on the head when it states that,
“large macroeconomic imbalances in the euro area will … continue to be a source of instability”,
for as long as the reluctance to transfer wealth across the European continent remains. This remains a fundamental weakness of the euro and the key reason I am less confident than the committee or the EU. It would be naive to ignore the possibility of more uncertainty surrounding the European Council.
I finish by addressing the unprecedented climate we now face. I noted at the beginning that, because of the decision of the British public to leave the European Union, it is even more important that we take heed of the warnings this report identifies and the conclusions it makes. While it could be said that European and monetary union is no longer our business because we have no long-term influence over it, it is our business because it will still influence us. I am wary about bringing up the negotiations on Brexit in fear that I get the same, stock answer from the Minister as the rest of my colleagues: “There will be no running commentary”. However, it is simply not possible to fully engage in the report today and do justice to the hard work put into producing it without considering what our future relationship with Europe will look like. For example, will we remain part of the single market? We do not have enough time today to go into the detail, but there is little doubt that single market access is strongly favoured by businesses of all sizes across the country. However, if the decision is taken to stay in the single market, how can we be sure that we have a strong voice advocating British interests?
We also have to consider that the better deal we secure for the City, the more exposed we will be to shocks. Whereas now we have the ability to direct and advise, without guarantees and safeguards Brexit could leave us powerless. I will give just one example from the report which highlights the point I am making. Commenting on the banking union, the completion of which was a key component of the five presidents’ report, Andrew Bailey, the then deputy governor of the Bank of England, noted the relationship between the banking union and the UK banking system as follows:
“Where a bank branches from a country in the euro area to the UK, as it can do under the passporting regimes in the single market, the deposit protection for the depositors in that branch in the UK comes from the home state, which is wherever it is branching from … the solvency of a national deposit protection scheme depends upon the solvency of the sovereign of that country. They are inevitably inextricably linked. We have had incidents where the solvency of the banking system of the home country is a direct product of the solvency of the sovereign, and when both of those are called into question, you then get a situation where you say, ‘Do the depositors in the UK really understand where their deposit protection is coming from?’”.
Taking passporting as a particular issue, the same problem remains: membership and influence. Can Ministers say whether the Government plan to ensure passporting rights for the UK-based banking sector? If full compliance with EU financial regulations is the price required to retain passporting rights, in accepting that price, how do the Government propose to influence the direction and detail of future regulations?
In this short debate, we have barely scratched the surface of what the report touches on or its wider implications. But from the range of questions raised, one cannot help but be seized by the sheer scale of the task ahead of us in the Brexit negotiations and our relationship with economic and monetary union within the EU.
Lord Young of Cookham (Con)
My Lords, I begin, as others have begun, by complimenting the committee on its comprehensive analysis of the five presidents’ report. This is a fantastically complicated and politically sensitive area, and we have before us a very thorough and interesting report, to which Members have quite rightly paid tribute. As someone who has not had any interface with the EU institutions for some 20 years—since we left government in 1997—I have found it very helpful to be brought up to date and, indeed, to identify a pathway through the thicket of acronyms, which take up five pages in the glossary at the end of the report.
I hope that the report will be read in the rest of Europe as well as here. I was interested to hear the noble Baroness, Lady Falkner, say that it is on the reading list of those in Europe, because it is essentially about the future health not just of the eurozone but of the longer-term relationship between those who are in the eurozone and those who are not. As I said, it is of relevance not just to this country but to those on the other side of the channel.
Since the publication of the report and the Government’s response, we have seen a seismic shift in the relationship between the UK and the EU. The terms of trade—if I can use that expression—between the UK and the EU have changed dramatically following the vote on 23 June. We have already set to work to identify the challenges and opportunities ahead as we enter a new relationship with the EU and, indeed, with the rest of the world in a new era for the UK.
Following the outcome of the referendum, some of the issues covered in the report are now of less significance to the UK as we negotiate our new relationship with the EU. However, our exit from the European Union does not alter our commitment to its success, and the strength and stability of the eurozone is clearly at the heart of that. That was a point made during the debate by the noble Lord, Lord Kerr, and the noble Earl, Lord Caithness, among others. A sensible way of maintaining the prosperity I just referred to is to make the economic, financial and fiscal reforms required to bolster the eurozone’s ability to withstand any crisis that lies ahead. This is important not only for those countries that have adopted the euro but for other EU member states, and indeed for other European countries. That is why we have taken a keen interest in these reports. I thank the noble Baroness, Lady Falkner, for securing the debate, and all noble Lords who have contributed.
Given the outcome of the referendum, the new context for any consideration of the relationship between the euro area and non-euro-area states, and the need to provide the new Prime Minister and her Cabinet with space to develop their negotiating position for the UK’s exit from the EU, the Government judged in July that it would not be appropriate to provide a full response to the report. The Government instead responded by a letter, referred to in the debate, noting these changed circumstances. I hope the committee understand the reasons behind that approach, which I agree departs from usual procedure. I assure the committee that no discourtesy was intended, but I hope to set out some of the Government’s thinking.
It is clear that the fundamental economic challenges facing the euro area have been well known and anticipated since its very inception. One of the themes running through the report is the tension referred to in the debate between, on the one hand, the imperative of a common monetary policy for the eurozone, and on the other the often countervailing pressure from the democratic institutions within the member states, as paragraph 182, for example, shows. If one looks at the conclusions of the report, one can see that paragraph 4 on page 61 makes the same point. Implied loss of sovereignty was certainly a central factor in the UK’s decision not to join the euro, a point referred to by the noble Lord, Lord De Mauley. However, those who chose to join have certainly been working hard to introduce the institutional and policy reforms to make the euro work better. At Maastricht, for example, member states agreed on common fiscal rules through the stability and growth pact, designed to prevent member states from running unsustainable fiscal positions that could cause problems for other member states.
However, the eurozone showed quite clearly that the reforms had not gone far enough, although the noble Lord, Lord Dykes, reminded us of the currency’s achievements since its inception some time ago. While the subsequent agreement on the six-pack and two-pack measures undoubtedly strengthened the EU’s fiscal rules, and though the banking union addressed certain financial issues, none the less I think it is broadly recognised, as came through in the debate, that some of the key issues behind the eurozone’s problems still need to be addressed. So now we have the five presidents’ report, which makes an important contribution to doing so and drives forward the debate on how to improve economic governance within the euro area.
As I said a moment ago, this is of real importance to the UK, regardless of our membership of the EU. While many of the conclusions of the committee’s report referring to the relationship between the euro-ins and euro-outs in the longer term are now of less relevance to the UK, it is still quite simply in our interests that the eurozone is a strong currency area, working successfully in the wider European Union, a point made a moment ago by the noble Lord, Lord Kerr. To achieve this, the eurozone will likely need to pursue closer economic and fiscal integration. Clearly, this is fundamentally a matter for the Governments of the eurozone countries to determine themselves. We know it is not an issue for us to decide, but I will briefly highlight some of the main points in the committee’s comprehensive report, which the Government support.
First, it is most certainly the case that the fiscal policies of an individual country can have a significant spillover effect on other countries. It is for that reason that there are calls for a much greater degree of economic and fiscal co-ordination than we have at the moment. But as the report again makes clear we must be alive to the fact that, when we talk about a fiscal union, this is a broad concept indeed. I read with some interest the exchange between the committee and the then Financial Secretary to the Treasury on the subject of fiscal union. At points it read a little like an Oxford tutorial on a philosophical concept.
It again came out in the discussion that it would be wrong to overlook the wide range of views among the euro area members themselves on how best to proceed. There are important debates among the euro area member states on the precise level and type of integration that is needed to make the euro work as a source of stability of jobs and growth. It is a live and sensitive debate. The report outlines this, for example, in the section about risk reduction and risk sharing, to which a number of noble Lords have referred. Clearly it is down to the euro area to decide on the reforms to be taken and the timetable of implementation.
Secondly, we agree entirely with the committee’s assessment that the drive towards improving competitiveness in the euro area should focus on enhancing productivity. As noble Lords will know, this challenge affects all the economies in the euro area to a different degree, including the UK, and the Government are working hard to address it through our national productivity plan. I can see the case, as is suggested in the five presidents’ report, for the creation of national productivity boards to support competitiveness across the euro area and the wider European Union. They can provide an independent assessment of where further reform, including structural reform, is required.
Thirdly, we support the view of the importance of the macroeconomic imbalances procedure—the MIP—as a surveillance mechanism, particularly for the euro area. This would aim to identify potential risks early on, prevent the emergence of harmful macroeconomic imbalances and then correct any imbalances already in place. However, as the Commission’s report says, consideration of how to reform this process is as yet limited in the five presidents’ report and we need to see the appetite of member states to take this forward. Again, the issue of political will was mentioned during the debate, particularly by the noble Lord, Lord De Mauley.
Lastly, the committee is right to raise the important issue of democratic accountability, a point well made in paragraphs 222 and 223 of the report. What mechanism is chosen to achieve this will ultimately depend on the measures for economic and fiscal integration which are eventually agreed. Those reforms will, of course, primarily be down to the eurozone member states to determine for themselves. Given the emergence of political parties throughout Europe which are hostile to the EU, this is one of the biggest challenges facing the eurozone and the EU. The issue of democratic accountability raised during the debate, as I said, is one of the most critical issues and I was interested to hear what the noble Baroness, Lady Falkner, said on this subject.
Perhaps I may briefly touch on some of the points raised during the debate. If I do not deal with all of them, I shall write. The noble Earl, Lord Caithness, asked why it took so long to set up the European Fiscal Board. The gestation periods in the European Union are notoriously long and the timing of appointments was a matter for the Commission. I note that the board will be in place in time for the 2017 European semester process.
A number of noble Lords mentioned the EDIS, the EU deposit guarantee scheme. I see this as a final element in delivering an effective banking union, although the noble Lord, Lord Butler, made the point that this was a necessary rather than a sufficient condition if one is to get the kind of stability he was talking about.
On the question of CMU, which again was touched on, we welcome the Commission’s approach to the project. The UK will continue to contribute to the CMU, and the need remains for Europe’s firms to access capital-based finance in order to grow.
As the noble Lord, Lord Butler, mentioned on the question of the White Paper, the timetable has slipped a bit. The recently published 2017 work programme confirms that the proposed White Paper will now be broader in scope, setting out steps on how to reform an EU of 27 rather than just economic governance in the euro area. We will need to see how the political uncertainties inherent in the elections in 2017 are addressed. He also raised the key question about the future of the euro. As someone with an Oxford college background he left the question—which of the two options we would end up with: a flourishing currency, or going over the cliff—unanswered.
This report has come at an interesting time in our relationship with the European Union. We are very much at the start of a new chapter, and one which, at this stage, largely remains to be written. Many of the conclusions in the committee’s thorough report refer to the longer-term relationship between those EU member states that are part of the euro area, and those that are outside. As I have said, following the outcome of the referendum these issues will now be of less significance to the UK as we negotiate our new relationship with the EU. However, as we forge ahead to create a new relationship and a new role for the UK, we will also continue to support and take a keen interest in the closer economic and fiscal integration of the eurozone countries. A stable and prosperous eurozone is in the interest not just of those countries themselves, but of all their European neighbours.
We will therefore consider closely any changes that are proposed, and act to protect the UK’s interests where necessary. The noble Lord, Lord Tunnicliffe, asked about the single market and passporting. I will not irritate him and the committee by reading out the line to take on this subject. The country voted to leave the European Union, and it is the duty of the Government to make sure that we do just that, but up to the point of leaving we remain a member of the EU, with all the rights and obligations that membership entails—a point made by the noble Earl, Lord Caithness. While we remain a member of the EU we will continue to play a role representing the interests of the British people. In particular, we will ensure that we protect the UK’s interests as the process for completing Europe’s economic and monetary union continues.
Baroness Falkner of Margravine
My Lords, I thank all noble Lords who have spoken in this debate. I am particularly impressed by the diligence of noble Lords who were not members of the Select Committee because the report cannot be described as a light read. I also acknowledge, in particular, the interest of the noble Lords, Lord Dykes and Lord Kerr. As chair of this sub-committee, my regret is that the noble Lord, Lord Kerr, is not there to enrich our deliberations. I have heard much about the time he was there, and I am very sorry not to have experienced it.
I cannot pick up all the very valid and rich points made, but I start by thanking the Minister for his response, which is quite comprehensive. I did not bring up the Government’s response in my opening remarks because the political situation has evolved so much since our report came out a good six months ago and since the referendum of 23 June that the committee as a whole decided to let it go. We knew that circumstances had moved on. Like the noble Lord, Lord Kerr, I am extremely relieved that the Minister has reiterated the Government’s engagement with developments that will take place.
The noble Lord, Lord Giddens, highlighted the central role of the German surplus, and it is worth picking out one fact from our evidence: the German surplus in terms of the eurozone is now only €6 billion out of a total surplus of €186 billion, so the surplus with the eurozone is very small indeed. That is why I decided that I would not comment on that.
Lord Giddens
My point was about the wider significance of the German economy, and how the euro is crucial to its competitiveness. It was not a point about the eurozone itself but about what it has made possible for Germany.
Baroness Falkner of Margravine
I noted the comment of the noble Lord, Lord Giddens, on the missing sixth president, in terms of the number of presidents. It is also interesting that the missing sixth president is a woman, on a day that women are doing rather badly in political life generally.
I also want to pick up the point made so eloquently by the noble Lord, Lord Dykes, on the speed, in a historical perspective, with which the 19 countries have come together to embark on this endeavour. There was a tone of pessimism beyond my own pessimism, which was echoed by the noble Lord, Lord Butler, and several other noble Lords. I have no electronic gadget that is charged or that seems to work in this room, so I was trying to work out from memory when the United States became a single currency zone. If I remember correctly, it was in the early years of only the last century.
Baroness Falkner of Margravine
I am told it was in 1910. That is when I thought it was, but I was afraid to say so in case I was wrong. Not having a reliable electronic gadget to tell me whether I was right or wrong made me feel quite insecure, so I am very glad the noble Lord, Lord Dykes, confirmed that. If you look at the span of time from when the United States became a federation to this stage, what is happening in Europe is truly remarkable. With all of us expressing doubts, as the noble Lord, Lord Butler, did, about whether this is a road map with a road that leads over a cliff, my feeling is that it will not lead over a cliff, but a core group will move at a different, faster, speed, to the rest of the 19 countries.
I turn now to the comments by the noble Lord, Lord Tunnicliffe, who seems to be most pessimistic about the whole thing. When he asked whether the Government thought that the eurozone was liable to survive another banking crisis, he must have had in mind Deutsche Bank and the parlous situation of Monte dei Paschi di Siena. I remind him that it is not the eurozone and its regulatory structures alone that are responsible for stability in our banking sector now, because the Basel rules, which were incorporated into the eurozone, are, of course, the backdrop. We have had stress tests, and we have backstops now. Obviously these are extremely large and indebted banks, but, on the whole, the tools we now have to cope with financial crises within the eurozone are very different and much stronger than they were some years ago.
I conclude by reminding the committee of one thing that I did not touch on: the title of our report. It was deliberately chosen to echo the comments of Mario Draghi, president of the European Central Bank, in the context of the Greek financial crisis and the lack of confidence of the financial markets in the eurozone. He said that it would do whatever it takes. The United Kingdom should will it to do whatever it takes in its interest and ours. We would all be better served if the eurozone survived and thrived because the consequences of it not doing so would not be good for us either.
Online Platforms and the Digital Single Market (EUC Report)
Lord Whitty
That this House takes note of the Report from the European Union Committee Online Platforms and the Digital Single Market (10th Report, Session 2015–16, HL Paper 129).
Lord Whitty (Lab)
My Lords, this is an important and complex subject and I will get out of the way the obvious elephant in the room immediately: it was produced two months before the Brexit vote and clearly a lot of the recommendations, as with many of our reports, are directed at a situation that no longer is likely to exist. Indeed, the report was obviously triggered by a proposition from the Commission, which was looking at the digital single market as a whole and in particular at the issue of large platforms from the point of view of their effect on business and social life within Europe as a whole, in both the protection side of it and the issue of industrial policy, if I can put it that way. Nevertheless, the same conclusions apply to British authorities as those that are directed at the Commission. Issues there have already been taken on board in the responses from the Government and, in particular, the Competition and Markets Authority.
I suppose it is the timing of this debate just before we all go off on a brief holiday that limits the number of people here—which I regret—but it could also be that it takes some time to get your head round this rather complex subject. It certainly did for my committee and its chairman. Some of the committee, including the chairman, did not initially think that they used platforms but of course we all do. We use Google every day as a sort of public service to access information. We do our shopping via Amazon and we book our holidays through Booking.com or one of the other platforms. They have hugely improved the quality of life in many respects, in their rapidity and range of access for doing business and organising our lives.
Of course, they are—in the best as well as in the negative sense—hugely disruptive technologies. Digital technology as a whole is the biggest disruptive technology of my lifetime. The operation and dominance of digital platforms in our lives disrupts not only the way we do business—in particular the relations between producers and consumers, which is at times quite blurred now—but also issues such as intellectual property and employment. It has changed how contract law and other aspects of life operate.
One reason we looked at the Commission’s proposals in detail was that there was a proposition—an option from the Commission—that there should be a particular regulatory framework to govern platforms. As the report shows in a little table at the beginning, platforms vary from the massive dominance in our lives of Google to one that operates to organise your dog walks in Battersea Park. A single regulatory framework seemed a bit ambitious. Nevertheless, the development of platforms has been disruptive not only to the way we do business and organise our lives but also to various regulatory frameworks. Those regulatory frameworks vary from the European level in aspects of competition policy right down to the local level—for example, in the effect of Uber on the municipal regulation of taxi cabs in various European cities. They are hugely disruptive and if we look at the various frameworks, they hit contract law, competition and merger law, employment law, consumer law, data protection, copyright and taxation.
Some of those we decided we would not take on. We took the early decision that overall, for all platforms, a comprehensive, omniscient, regulatory framework was not an acceptable proposition in this respect. However, we said that many of these regulatory frameworks need updating. They need to improve their speed and to catch up with technology in quite a heavy way. Just to make it clear, the aspects we did not cover are issues such as intellectual property, employment rights, taxation and so forth. That is for another day because there are important implications in those areas, as we have seen in recent court cases. Therefore, we concentrated on competition law, mergers, consumer protection and data protection. We also looked at the issue of what I call industrial policy—it is probably an old-fashioned term—to answer the question of why there is not a European or a British Google.
I shall say just a word on defining platforms. Broadly speaking, we found that all platforms shared one thing in common—they used the internet to connect consumers and businesses and drastically reduce transaction costs in the process. That aspect means that they are also subject to what the economists call the network effect. The more consumers and businesses that they connect, the more useful they become and the bigger they get. We concluded that, while defining online platforms is an insufficient basis on which to build a case for specific regulation, it helps us to highlight the importance of scale and the ability to achieve scale quite rapidly, the control of data, and the informal traditional relationships between consumers and businesses. They are all significant factors when considering the effectiveness of existing regulations.
The issue of scale takes me on to the first area of the regulatory framework for competition and merger law. It raises important questions. Overall, we found that while competition law was flexible enough to identify different forms of abuse of a dominant position, it was too slow to respond to our extremely fast-moving markets. We recommended that competition authorities increase their use of interim measures so as to require a firm to amend its alleged anti-competitive practices before an investigation has concluded, and that time limits can be imposed on the process through which the accused business can table commitments to change its behaviour. The exemplar of this in a negative sense is the ongoing problem between the Commission and Google, which has been covered in the press again this very week.
We also recommended that the EU merger regulation should be modified to take into account the acquisition of small digital firms whose revenues fall below current thresholds. This is an important aspect of this market. The scale of the largest online platforms means that they can rapidly become the main provider in a specific sector or, indeed, a wide range of sectors, so that they become an unavoidable trading partner for businesses and consumers. If you are a small bookseller, for a long time it has been inevitable that you have to use Amazon, which covers a huge range of products for businesses and consumers. Small hoteliers are almost bound to use Booking.com or TripAdvisor, or one of the other dominant platforms. We therefore also recommended that codes of practice should be developed by the competition authorities where asymmetries of bargaining power between the platform and those who use it could result in unfair terms and conditions being imposed on the trading partners. This was not the only example, but we had the most evidence on the area of online travel agents, which force hotels to offer them their best price through price parity clauses and were alleged to have dropped hoteliers up and down their ranking approval ratings if their results did not comply.
A key recommendation of our report was that the CMA in Britain, at national level, should investigate those practices. We are delighted that the Government and the CMA have picked up the recommendation in that area, and that the CMA is currently investigating the practices of online travel agents. Can the Minister provide us with an update on that investigation, in terms of its timescale, and so on?
On the question of mergers and takeovers, our inquiry found that the largest dominant online platforms were able to acquire smaller technology business without the oversight of competition regulators at the European level. We found that the UK was very far advanced and the best country in Europe for small technology companies growing up—particularly in the fintech area—but that once they had reached a certain level of presence in the market, because their assets were pretty small, they were rapidly taken over by large, dominant platforms, either in the fintech area or more generally. There are a lot of examples of European companies being taken over in that way. Beyond changes in the law, I wonder whether the Minister might provide some assurance that the CMA and, for the moment, the Commission are able to investigate mergers that run the risk of reducing competitive pressure on larger firms and dominant platforms over the long run.
Another aspect is the collection and use of data by these large platforms. Many of us think that Google is free. It is not; none of these platforms is free. We give them our data and they use those data in various ways, some of which are completely sealed from consumers and others which are pretty evident because of the adverts they get in return. Through advertising, selling on the data and the reuse of the data we manage to provide them, through complex and completely incomprehensible algorithms, with the basis of their operation through our data, as individuals or as small businesses.
Since data protection is the life-blood of these platforms, and it provides the connection between them and the multisided relationship with consumers and businesses, we find that data protection regulation is also an important regulatory area. We were concerned to find that consumers’ knowledge of how their data were being used was pretty low. Consumers’ trust in how they were being used, even if they knew it, was also pretty low.
It is true that online platforms have developed some codes of practice under the existing data protection directive, which is 20 years old now and therefore not fit for purpose. However, our inquiry recognised that we are about to move into, or have just moved into, the area where the forthcoming general data protection regulation will apply. It will make all businesses, including online platforms, liable for ensuring that users are informed about how their data are collected and used. The regulation also provides room for businesses to innovate through the use of, for example, privacy seals.
There was a recommendation from the Science and Technology Committee in another place for a traffic light system to inform consumers of the efficacy of platforms’ and other organisations’ data policy. We hope that is being pursued. However, we also have to recognise that, following 23 June, the way the implementation of the general data protection regulation will play in this country is in question. It would be helpful if the Minister would confirm that the Government plan to implement the GDPR in full or, if we are outside the European Union or the EEA, that they will seek to gain a certificate of equivalence for the UK’s data protection policies so that data can continue to flow freely between the UK and the EU.
There is overlap between data protection issues and general consumer protection issues, so while online platforms provide great benefit for consumers—there are some pretty positive stories in some areas of the collaborative economy relating to protecting consumers —we felt that online platforms could be more transparent about how they operate, for example, their ranking system and how they present their search results when you look for a holiday, an airline or a Christmas gift, and then how they undertake personalised pricing and price discrimination, which is a very dark art and one on which there is little detailed information. As quite a lot of this becomes consumer-to-consumer transactions, are they protected under existing consumer law?
All these questions are an indication that the consumer protection regulatory framework also needs updating to keep pace with modern technology. There is an update from the Commission on the application of the unfair commercial practices directive, but we need to take that further. Again, on the hotels example, it is not only in Britain and Europe that this is an issue; we have had some discussions with Mr Pascal Lamy, who these days is the chair of the UN World Tourism Organization, who has picked out that this is an issue globally in the way the tourism industry operates. I wonder whether the Minister can give us some general insight on how the Government see these issues and on what steps they are taking to address these concerns, whether through best practice or information as well as through direct regulation.
Finally, I turn to developing this technology faster within the UK. We have felt for a long time that in terms of completing the single market within Europe, the digital single market is a very important prospect. That is now receding as far as the UK is concerned but nevertheless it is important that the Government put in their negotiating portfolio—I do not expect them to say a lot about it today—the importance of ensuring that Britain continues to be in some way a member of the digital single market. That has an implication for the development of companies because a company’s success in this area is dependent on an ability to develop scale, and you will operate at scale only if, like the American or the Chinese, you are in a very large market. Europe is a big enough market for that to develop. There are reasons why it has not developed, one of which is the fragmentation of previous regulatory structures. We were hoping that the digital single market provisions would take us away from that so that we would have a genuine single market in this area, but with the absence of Britain’s participation in that, we clearly have a problem. There is a real issue about start-up companies. If they get off the ground here and begin to operate, they are taken over by large, usually American-owned, concerns. Part of that is also a question of access to finance for such companies here.
There is a wide range of questions here. This was a fascinating new area for me and some other members of the committee, although my colleagues here have greater expertise than me and will no doubt add questions. We have had a response from the Commission and the Government, and I thank the Government for their response, but we need to take these things further in the new context. I beg to move.
Lord Aberdare (CB)
My Lords, I am a member of your Lordships’ European Union internal market sub-committee, ably and affably chaired by the noble Lord, Lord Whitty, with outstanding support from our clerks. It is a great pleasure to follow the noble Lord, although I fear that I am going to reiterate many of the points he has made much more tellingly and elegantly than I shall be able to do.
I shall address two questions: should we be concerned about platforms from a regulatory point of view and what sorts of regulatory action might be needed? No single definition can cover the huge variety of digital online platforms, extending to search engines, such as Google, online marketplaces, such as Amazon and Booking.com, music and video platforms, such as Spotify and YouTube, payment systems, such as PayPal, social networks, such as Facebook, LinkedIn and Twitter, shared economy platforms, such as Airbnb and Uber, and a vast range of more specialist platforms.
Generally accepted features of platforms is that they are multi-sided, enabling two or more different groups to come together and interact, such as advertisers and consumers, buyers and sellers and drivers and passengers, and they often exhibit network effects, whereby the more users they have, the more useful they become, thereby attracting yet more users.
Online platforms play an increasingly important part in commercial activity and people’s daily lives. There can be no question that they provide services that people want by giving consumers access to a wide range of new or improved services and products easily accessible online and by giving providers, including smaller business providers, much wider scope to reach potential markets, including by creating new forms of provision, as Airbnb and Uber do, with disruptive effects on existing services.
Online platforms represent an enormous opportunity to develop new and better ways of doing things to create new marketplaces and forms of commerce and to generate economic and social benefit. A key regulatory requirement is not to close off those opportunities but to ensure that platforms can continue to be developed, to grow and flourish. In any case, because of their huge variety in scale, type, nature of services, target users and so on, as we have heard, it would be virtually impossible to come up with any “one size fits all” regulatory approach. We shared the conclusion of the European Commission that it would be inappropriate to try to devise a specific overarching regulatory system aimed at platforms in general.
However, there are some platforms which, because of those network effects, have grown to a point where they have a dominant position in their own fields and wield substantial market power—a winner-takes-all situation. Examples include Google in search, Booking.com in travel and leisure and Amazon in online retail. It is these that any regulatory approach should focus on to ensure that they are not abusing their strength to disadvantage their users or competitors, many of whom may be their users as well.
The report focuses on three main areas of potential concern: competition issues, whereby platforms may use their market power to reduce competition via unfair pricing or preventing market access; data protection issues, arising if platforms use the vast quantities of personal and other data that they collect in inappropriate or illegal ways; and consumer protection issues, relating to the transparency and completeness of information given to users and to the remedies available when problems occur.
I will briefly outline—reiterate is probably a better word—some of our conclusions in relation to these three areas before suggesting some general principles for regulation and oversight of platforms. Not all of these were addressed in the Government’s four-page response to our report, and I hope that the Minister may be able to expand on that response today.
We felt that the existing framework of competition law is generally flexible and robust enough to address issues that may arise in relation to online platforms. However, some enhancements would be desirable to improve its agility and efficacy in tackling this very fast-moving sector. Our recommendations included more frequent use of interim measures and time limits to speed up competition cases; the development of codes of practice to discourage unfair trading activities; and amendments to merger regulation thresholds to address the problem of innovative new entrants being acquired by large online platforms for their own competitive advantage—what the Economist calls “shoot-out” acquisitions.
We were particularly concerned about some pricing practices, notably the use of price parity clauses which require sellers on a given platform always to offer their lowest available price on that platform, therefore taking away the opportunity to offer better deals to, for example, people who come into a hotel off the street. There was evidence that this could act as an obstacle to competition—for example, in the online travel agents’ sector, which is dominated by two major platform suppliers. As the noble Lord has told us, one of our specific recommendations was for the Competition and Markets Authority to look into that sector. Another concern is the possibility of personalised pricing, when different prices may be charged based on data held about an individual’s habits, interests or past activities.
Platforms gather large quantities of data about their users, including much personal data. Users may not be fully aware of, or happy with, how those data may be used. Consumers clearly tend to value the convenience of using platform services over the privacy of their personal information, which makes it still more important that there should be clear guidelines about what data are held and how privacy and security are assured. We were attracted by the idea of a privacy seal—a sort of kite mark but with gradings or traffic lights—to encourage competition between platforms on the basis of their privacy features.
The EU general data protection regulation, which comes into force in May 2018, should address many of these data-related issues—for example, through its provisions on making data portable between platforms, as long as they are clear, practical and properly enforced. However, there is of course the question of whether the UK will sign up to them.
Consumer trust in platforms is low. Consumer protection law may need updating to require platforms to be more transparent about their obligations to their users, which may be less than in normal business-to-consumer transactions, and how they present information such as search results or reviews and ratings.
In the report, we emphasise the need for a consistent and concerted approach at European level, to avoid regulatory fragmentation between member states, which could undermine the goal of creating a digital single market. This may present a challenge to the UK in its Brexit negotiations, not least because the UK is seen by many as having most to gain from the digital single market and as one of the most promising breeding grounds outside the United States for future large-scale online platforms—the European Google that the noble Lord, Lord Whitty, mentioned.
In summary, I suggest three key principles for government in considering platform regulation. The primary aim should be to encourage and support innovation in the development of platforms, and to prevent obstacles to their growth: avoid over-regulation; promote access to markets; find ways of stimulating investment and access to capital; and recognise the strategic importance of innovation.
Secondly, government should ensure that existing laws and regulations are properly applied and enforced in relation to platforms and that, when they fall short, appropriate adjustments are made to address specific issues arising from the nature of online platforms. Regulatory activity should be strongly focused on platforms whose size and market power make them particularly likely to distort markets and competition. And we should support bodies such as the Competition and Markets Authority and the Information Commissioner’s Office, which are already doing a good job of ensuring that platforms operate fairly—not forgetting the courts, as in current cases involving Uber and Deliveroo.
Thirdly, government should be vigilant for new issues arising from the fast-moving world of online platforms. We suggested that the Commission set up an independent panel of expert advisers to serve as a channel for emerging concerns, to assess their significance, and make policy recommendations.
I end with some specific questions to the Minister arising from the points I have covered. What plans do the Government have to look at changes to the competition regime to make it faster and more effective in relation to platform-related concerns? Will the Government look into the merits of developing codes of practice for platforms, perhaps based on the experience of the groceries code? Will the Government look at the idea of a graded privacy seal to increase public focus on how platforms protect the personal data they amass? What is their response to the suggestion of an independent expert panel to advise on platform-related issues requiring possible action, which might be relevant for the UK as well as, or instead of, the Commission? Finally, what specific support will they offer, not least to SMEs and start-ups, to encourage the development of new and ambitious UK-based platforms?
Digital platforms can be a force for good for our economy and society, provided that Governments are vigilant in ensuring that they remain open to competition and fair, transparent and secure for their users and consumers.
Baroness Donaghy (Lab)
My Lords, I am grateful for the opportunity to contribute to the consideration of this report, which was published seven months ago. It is fair to say that the committee was aware that it was taking on a huge task. For me, at least, it was a very steep learning curve. My noble friend Lord Whitty steered us through the depths and shallows of multisided platforms and the internet of things. He deserves credit for the quality and balance of the report. We were privileged to have an excellent secretariat in Alicia Cunningham and Kilian Bourke—I still do not know how they managed to crystallise the definitions and analyse the benefits and challenges of the digital economy in the way they did. I mention also those who gave confidential or publicly available evidence in writing or as witnesses. The submissions were from tiny organisations and global ones; I thank them for contributing to a weighty and important subject and helping us to build this foundation of knowledge.
My comments on the report and the Government’s response are personal and an attempt to be forward-looking and positive. First, it is clear that the UK is ahead of the pack in relation to other European countries. We identify more easily with the dynamism and creativity of the American market, and less so with protectionist approaches.
We need to do two things to maintain and accelerate our progress. We need to invest in the industries and to solve the conundrum that the minute a UK company develops an idea, brand or new area, it is immediately snapped up by the American giants. Our report states:
“In 2010 early stage investment in the US was valued at $20 billion, whereas Europe in the same period saw investment of approximately €3.8 billion”.
United States venture capital funds were behind more than 50% of London start-ups; 70% of global venture capital heads to the United States. Our report drew attention to the lack of investment being,
“a major obstacle to generating economic growth across the Union”.
We urged the Government to look at the United States’ Jumpstart Our Business Startups Act, or JOBS Act, as an example of scaling up. I have to say that the Government’s response was disappointing. On that recommendation, they recognised the value of learning from best practice, which,
“cannot necessarily be imported wholesale into the UK”.
That is going through the motions, and gives no reassurance that active consideration is being given or that action will be taken—and I ask the Minister whether the Government have updated the consideration since their letter of 20 July.
Again going back to the letter of 20 July, on investment, the Government were,
“helping facilitate and build a market”,
for equity finance, and mentioned the figure of £219 million to be contributed to,
“UK high growth SMEs at the end of December 2015”.
High-growth SMEs presumably cover a wide range of companies and skills, and we must assume that the share of the £219 million for UK digital start-ups is much smaller. This is simply not good enough and shows that the Government are relying on individual initiative to build a digital economy. The danger is that this will enrich the individual and the United States of America, but not the UK. Lack of start-up investment opportunities and ongoing support may well explain the pattern of selling UK talent to USA global companies. The Government must scale up their scale-up.
One feature that we encountered was how fast-moving this area is, where last year’s winner can quickly become this year’s nobody. The Competition and Markets Authority called it a “disruptive cycle of innovation”. As a former trade unionist, to me the word “disruptive” meant either a go-slow or a strike, so I found it quite a re-education to be involved in this report, because to be disruptive in this sense was used by a lot of witnesses as an entirely positive thing. So re-education has taken place.
Professor David Evans reminded us that only eight years ago,
“MySpace was the dominant social network; it was not Facebook at all”.
Trying to cope with that fast-changing scene made it extremely difficult to deal with subjects such a monopoly and regulation, which I believe our report dealt with very well.
One slight niggle is that the CMA—and this applied to all the equivalent European competition bodies that we met—was of the view that any inquiry on allegations of abuse of power would take as long as it takes. So it recognises disruptive cycles of innovation but seems not to have any sense of urgency about dealing with allegations of abuse. I think that that leaves consumers in a vulnerable position, and I ask the Minister whether he agrees.
The report makes an important contribution to such areas as transparency, restrictive pricing practices and bargaining power, but data protection is a subject where consumers are potentially most vulnerable. As our report says, the complex ways in which online platforms collect and use personal data mean that the full extent is not sufficiently understood by consumers. We pointed out the lack of trust in how online platforms collect and use consumers’ data. Trust was worryingly low, which is a barrier to future growth.
As the noble Lord, Lord Aberdare, said, the irony is that that lack of trust goes side by side with many consumers sharing more personal data with online platforms than they share with their own spouse. The majority of consumers have no idea of the value of their personal data—how they are and will be used in future. It is vitally important that the Government ensure that data protection is as strong as reasonably practical, public awareness is raised and we aim to have the same or higher standards as the rest of Europe, particularly after we leave the EU.
Finally, as a former chair of ACAS, it is not surprising that I should mention the issue of dispute resolution. The report refers to the Commission’s launch three years ago of a dispute resolution platform to enable consumers and traders to settle disputes over both domestic and cross-border online purchases. It was hailed as easy, fast and inexpensive. The concern is that it has not been properly implemented, which makes the prospect of a business-to-business dispute resolution platform appear a long way off. I identify strongly with the report’s recommendation that the Commission’s first priority should be to ensure the effective implementation of the online dispute resolution in its current form.
This is an exhilarating field that offers our economy huge benefits and the consumer great potential. It is our job to ensure that, alongside that, there are the protections and transparency that the individual deserves.
Viscount Waverley (CB)
My Lords, I have been developing for the past three years an online platform, so really wish to congratulate the committee for all that I have learned. One message that applies to what I have now heard is about consumer education. I find in the site we developed that some consumers put their personal passwords as part of their data into the site. This is their own personal email information, which I happen to know from friends is their personal protection. The committee might care to take note of that point.
Lord Stevenson of Balmacara (Lab)
My Lords, I thank my noble friend Lord Whitty for a very interesting report and for introducing it so well this afternoon. Other members of the committee reflected on his style, which I can understand would translate into a very effective and interesting committee. I am glad we were able to get an insight into how it worked.
As I have said before and am sure I will say again, the committee system is the jewel in our crown. It is good that we have yet again a fine example of its work. It may seem a little odd to noble Lords that I was so taken by the report that I took it to bed with me last night and read it while waiting for the result sequence to start on the American election. I will not say which I enjoyed more, but I was still reading it at two o’clock so it obviously weighed heavily.
Like my noble friend Lady Donaghy, I was a bit disappointed by the response from the Minister. It may be that she was deflated by the recent referendum result and felt that she could not therefore rise to the full exercise of responding to such a fine report because it dealt so well with the UK dimension and also a presumed continuing European Union relationship. Obviously that was not the case. As my noble friend Lord Whitty said, the report was published before the referendum. I do not think the response did justice to the report. I hope the Minister, who is standing in for the noble Baroness, Lady Neville-Rolfe, who is on other duties—I left her at it in the Select Committee upstairs—will be able to extend a little bit some of the points that were made. On reflection, as I am sure has come through in the speeches we have heard so far, much of what was said in the report, although it may have been focused on systems that will not be in operation after 2019, is still relevant to the way we will deal with online platforms in future. It is worth spending a bit more time on this issue than has been the case.
The main point that comes out of the report, which does not need to be said too often but is rather important, is that these new disruptive technologies are a good thing and are to be supported wherever we can, but they will cause really big problems for our competition area, data protection and for our broader legislative task of seeing how they affect how we operate as a society and therefore how and when they need to be regulated. They will also bite deep into some of the current regulatory structures. I will refer a couple of times to a recent experience I have been having, which is well known to your Lordships’ House and will come back in the Digital Economy Bill. Secondary ticketing arrangements, which are often made relating to big sporting and recreation events, are a very good example of the dangers that can happen if we do not have the right regulatory framework. If we do not have even the right definitions for some of the things that have been happening relating to this part of the consumer space, we will end up in trouble.
The noble Lord, Lord Aberdare, in his well-shaped presentation, gave us four main points under which he wanted to address the issues. I have a couple more that I want to add, but I will broadly follow him in what he said, which is not too difficult. The first point is whether we have the right competition law in place for the new technologies and the online platforms and the way they operate. On this, I disagree with the committee, which was broadly of the view that competition law as it presently stands will be sufficient to take us into the new world. I do not think it is because of the speed of transactions and the way new technologies will eat away at our basic understanding of what we judge to be imperfect competition. As the committee report says, there will not be the same sort of price signals and information about operating. That will not be present.
As the report goes on to explain, although not in these words, we will not be talking about perfect markets. Economists will have to come up with a better understanding of the way markets such as these operate. We will accept, in plain light, the fact that certain of these platforms will effectively be monopolies. We are not saying that that is wrong. If it was a traditional market, we would be attacking anybody who had market dominance of the proportion that Google has. I do not pick on Google particularly, but it is an example of a commercial operation, which, as my noble friend Lord Whitty said, is apparently free and provides a route for many consumers to get information and then subsequently engage in market operations. We know about Amazon and others. Effectively, if these were traditional operations, we would be talking about monopolistic situations, and we would want to attack them with the sort of regulatory practices we have had. That will not work because that will destroy the very impact these operations are having.
The second point is that the speed of operation is so quick and so different that it would be difficult for a traditional approach of notification, asking for undertakings and moving forward in a way that has been the case in the past for the OFT and now the CMA. I go back to my example of ticket touting arrangements. The situation there was that those bodies decided that there was a possibility that unfair practices were taking place in respect of the law as it stood in 2014. They asked the four major contractors—there are now only three because a merger has taken place since then—to give undertakings and said that they would measure them a year on from the point at which the undertakings were given to see whether they happen. I simplify to make the point that we are talking about probably another year before we get the results from that. That is two years, working on a system that has changed so much in that time in the use of computer technologies to access tickets that have been on sale and reselling them in ways that are innovative and different. All this stuff will have moved on way beyond where the Competition Commission was at the time that it was starting this process. I give that as an example, and I think that there are much wider issues arising from that.
The committee’s report is good on issues to do with merger thresholds and valuations, and all the issues that would have been applicable in a traditional economy with a sense of a perfect market. They cannot operate when we are talking about start-up companies providing issues that will immediately go wide inside the space in a way which would not be followed.
Thirdly, on pricing, the committee rightly raises issues about personalised pricing and the way in which market access will be affected by that pricing. Again, with the secondary ticket arrangement, the ability to buy all available tickets and then resell them immediately at a much higher price is a completely novel view of the way in which markets operate. This is something that needs to be addressed.
Fourthly, on data protection, the issues raised were about the lunacy that most consumers—I include myself in this—are happy to surrender all their personal information to these online platforms, in which they trust, while at the same time expressing considerable disquiet and unhappiness about the way in which they operate. We have got to get ourselves right. The noble Lord, Lord Aberdare, was right to make the point about consumer education because it is crucial. We need to think much harder both as a Government and more widely in society about how we are going to get people to realise the risks they run if they do not operate sensibly in this space.
Transparency is an issue that I want to add. Points were made about the need for companies to be more open about their algorithms and about how they deal with individuals in the process. It is fine to call for that, but unless we have a regulatory approach or there is the threat of legislation, it will not happen. They are the private IP of the companies concerned and obviously they will not give it up, but it is completely wrong for consumers to be operating in a knowledge vacuum. That point was well made by the committee, but we need to be able to back that up, possibly through revisiting the Consumer Rights Act.
For the future, the report tries to bring us up to date to what the situation was in early 2016, and we are grateful for that. Things are moving on now, obviously, with Brexit and other things. My noble friend Lord Whitty made the plea that we consider, within our UK dimension—and, I presume, within the post-Brexit scenario—how we would regulate, because the digital single market, on which a lot of this is based, is a good idea, even though we will be outside the EU. It is very hard to see how we will operate. Indeed, the figures reflected in the excellent Library report, showing the proportion of online sites that operate within Europe, based in Europe and based in America, show that there is a huge imbalance already away from Europe. That needs to be addressed. It is not 50-50. When we are outside, how will we manage an arrangement under which we can trade effectively with those new corporations in Europe, but also create and develop our own unicorns—that is their technical term—which are going to be able to operate across Europe and indeed worldwide, because that is what the digital market can do?
This really is an excellent report. It allows us to think very carefully about what this new world will look like, and it will send some very good signposts of where we want to go. As I said, much of what has been discussed and recommended will be applicable post-Brexit, although the circumstances will be very different. We will not get a commentary, I am sure, from the Minister about whether these points will be taken forward, but we all assume that they will be. I hope that it will be done in a way which is a bit better than the initial response from the Government, and I hope that on reflection they will realise that some of the issues raised here need to be dealt with. It will not be sufficient to bat off some of the bullet points made to the CMA or to the data protection area because they are important. They will be the key to regulatory action in the future, and we need to deal with them.
The noble Lord is standing in for the IP Minister, and I know that it is a bit of a stretch for him. I am sure that he enjoyed the report as much as I did and that he will be able to respond in exactly the same way.
The Parliamentary Under-Secretary of State, Department for Culture, Media and Sport (Lord Ashton of Hyde) (Con)
My Lords, I shall start at the end of noble Lords’ contributions with the point made by the noble Lord, Lord Stevenson, which is that this is a bit of a stretch. I was glad to note the point made by the noble Lord, Lord Whitty, at the beginning of the debate when he said that he felt that the weeks and months that he spent on this report were an education for him. I have had slightly less time than him, so I will start by saying that there will be some questions that I will have to write to noble Lords on. I hope to address some of the points in my speech and to answer some of the questions.
I am very grateful to all noble Lords for their contributions. I take on board the point made by the noble Lord, Lord Stevenson, that these are very important issues that we must not back away from or try to kick into the long grass. Issues of the digital economy and the digital single market are critical, and they are things that we will have to address post-Brexit. I hope to give some reassurance on that in a minute. I am very grateful to the committee, and especially to the noble Lord, Lord Whitty, for his work chairing the committee and for leading today’s debate.
As well as considering how government should cultivate this new and burgeoning sector, the report makes a number of helpful recommendations. Some of those recommendations have been raised in the debate, and I will address them in my response. As the noble Lord, Lord Stevenson, said, some of these points have been addressed in my noble friend’s reply, which was not completely to the noble Lord’s satisfaction. I ran through it and noticed that there were many points of agreement with the committee’s report. The tone of the response overall was that we agree on many of the points that the committee made and accept that there are points that we can expand on.
Today I shall specifically talk about the benefits of online platforms, the impact these businesses are having on the UK economy and how we should consider issues of regulation, competition and market power for platforms. While we must make sure that consumer protection remains high, online platforms are often subject to existing regulatory rules in areas such as competition, consumer protection and data protection, so we should not rush to overregulate the sector.
First, I shall address the broader picture of the EU’s competitiveness and growth agenda and, in particular, the digital single market. As noble Lords will know, this package of measures, outlined in the Commission’s DSM strategy in May 2015, aims to bring new opportunities to businesses and consumers through increased digitisation of the economy and to create a regulatory framework fit for the digital age in areas such as consumer protection and e-commerce, data flows, copyright protection and electronic communications.
This agenda matters and will continue to matter greatly to the UK. While we remain a member of the EU, we will continue to play a role and represent the interests of the British people. This includes taking an active part in and influencing negotiations regarding the DSM and ensuring that British views are heard in the debates. We have received messages from the Commissioner’s cabinet outlining its desire to continue a close working relationship with the UK on the digital agenda.
Platforms are at the heart of the digital economy. The report rightly recognises the huge benefits that platforms can bring to consumers and businesses. These benefits extend beyond increased convenience and greater choice to include reduction in geographic barriers to services which allow products and services to be accessed by wider markets at reduced costs. The huge variety of benefits arises because platforms provide a broad range of services to consumers. Platforms include everything from search engines and social media to sharing economy platforms that encourage the use of underutilised assets.
We also need to be clear of the specific benefits that online platforms bring to the UK economy. The Government’s ambition is for the UK to be one of the world’s leading digital nations. When you walk around Parliament Square, you see people absorbed in the content of their smartphone. They may be playing games such as Candy Crush Saga, shopping online on ASoS or finding their way around with Citymapper. All these are home-grown platforms. British platforms are also driving innovation in cutting-edge technologies, such as augmented reality firm Blippar. This is an area where the UK has a lot to offer not just in Europe but to the rest of the world.
As the Committee’s report notes, the UK leads the way in Europe on producing unicorns—$l billion-valued tech companies. According to a report from June 2016 by the tech investment bank GP Bullhound, the UK leads the way in Europe, with 18 out of 47 European unicorns. The Government are committed to maintaining the right environment to ensure that these businesses can thrive in the UK and across the world.
The UK has one of the leading tech sectors in Europe and our citizens are among the most avid online shoppers. The UK therefore stands to gain more than most from the development of the digital single market and a competitive framework for online platforms, and stands to lose the most from a fragmented and disjointed regulatory picture. The UK is inextricably linked to a global market, which should not be fragmented.
Platforms are notoriously difficult to define, as the report outlines, although we can identify a number of characteristics that they share. These include the ability to create and shape new markets, the use of the internet to foster interactions between different groups of users and, in many cases, the use of network effects, which the noble Lord, Lord Aberdare mentioned, whereby the value of a service to both business and consumers increases with the number of users.
For a sector so broad, and so difficult to define, we should not seek to apply a “one size fits all” approach to regulation. Platforms are the engine room for innovation and digital growth. One-size regulation could stifle the innovation that makes platforms unique and hinder the UK’s ability to support and grow the digital economy.
The debate around platforms has a tendency to revolve around problems, but let me highlight some of the issues that platforms have sought to answer. Through networks, platforms are offering new solutions to many issues that Governments have previously looked to regulation to resolve. The Government want to empower consumers to find the best deals. Platform-based services like peer-to-peer reviews or price comparison websites have helped to achieve this without the need for regulation.
These new models may challenge existing ways of doing business, and we of course must make sure that we maintain appropriate rules. However, we should also remember that online platforms are often subject to existing or forthcoming regulation. The general data protection regulation, for example, which comes into force in May 2018, will give consumers more control over how their data are to be used. I should make it clear that the UK will implement the regulation; that was announced by the Secretary of State in the other place, and we are currently working on how best to implement it.
Industry-led alternatives to regulation are also helping to set standards for platforms. Sharing Economy UK, the representative body for the collaborative economy, has developed a trustmark to promote best practice for platforms and their users, as well as identifying where vital features such as insurance policies are in place when using collaborative economy platforms. The noble Lord, Lord Aberdare, and the noble Baroness, Lady Donaghy, referred to the issue of trust in platforms and websites. Such innovative solutions present a challenge to government to consider whether regulation is the proportionate response and whether existing regulation remains fit for the modern age. While we must be careful to make sure that consumers are adequately protected, our starting point should see the development of online platforms as an opportunity to be embraced and not a threat to be regulated.
One area that the committee’s report looks at is the issue of competition and market power. Accelerated network effects, resulting from increased connectivity and very low marginal costs for rolling out services to additional consumers, mean that platforms can often obtain a dominant market position more quickly than in traditional markets.
Nevertheless, we must acknowledge the different dynamics in play. It is important to note that the disruptive innovation, which the noble Lord, Lord Whitty, clearly explained, is more likely in online platform markets due to the low barriers to market entry, such as the low upfront infrastructure investment typically required for an online platform, which tends to be lower than with traditional business models. As a result, high market share in online platform markets is not necessarily an indicator of market power. It is easy to think of online platforms that appear to hold a dominant market position that did not even exist a few years ago. We must therefore think carefully before regulating in this area. Regulation could raise fixed costs and necessitate a larger minimum scale to be viable, increasing barriers to market entry and potentially decreasing competition, resulting in exactly the opposite effect of what we hope to achieve.
In the time available I shall try to answer some specific questions asked by noble Lords. The noble Baroness, Lady Donaghy, mentioned exclusive access to data which may confer competitive advantage, and the fact that people are paying using data. We agree that issues relating to data are of concern, and that robust enforcement of competition, consumer protection and data protection law is important in addressing this, and I accept that there need to be adequate resources to do that.
The noble Lord, Lord Whitty, talked about codes of practice which should be introduced in the online travel and other sectors. The CMA will continue to use its range of market powers where there are risks to consumers in markets, including creating codes of practice if appropriate in the circumstances. We encourage consumers and businesses, if they have concerns, to contact the CMA to make sure it can address them, albeit independently of government.
The noble Lord, Lord Whitty, also asked whether the Competition and Markets Authority should make greater use of interim measures. We agree that interim measures are a powerful and effective means of avoiding significant harm while the CMA investigates underlying concerns, so we support greater use of them where appropriate, although, as I say, that is up to the CMA, which is independent.
The noble Lord also asked whether EU merger regulations should take account of low turnover being acquired by large firms in vertical integration. In this context, the UK’s voluntary merger regime has a share of supply test that allows the CMA to investigate such cases, but this should not necessarily be transposed to the EU or other jurisdictions with different legal systems and, typically, compulsory merger regimes.
On consumer protection, several noble Lords raised issues about whether consumers are properly protected in dealing with platforms under current law. There are several methods of legal protection in place for UK consumers in their dealings with online platforms which, together, we think are adequate. Many existing legal protections apply to platforms as well as other business models. For example, under the consumer rights directive platforms have a legal obligation to provide transparent information about the identity and locality of traders. The unfair commercial practices directive requires them to provide truthful and accurate information about issues such as payment procedures. Platforms have to act in accordance with professional diligence in relation to unfair commercial practices engaged in by traders on the platform, as long as they are not a mere hosting provider: this might include removal or notification of content and placing transparency requirements on third-party sales. I do, however, acknowledge that there may be some cases where we need to ensure that the legal toolkit is correctly applied. The point has been made by several noble Lords that this is a very fast-moving market and we cannot just sit and wait and do nothing, because things move very fast indeed.
Overall, we are very conscious of the fact that following the 23 June decision on Brexit there is a very different outlook, but we are concerned that in the two years—or whatever it is—until we leave, we will continue, as I said before, to engage strongly. Thereafter we are aware of the need for adequacy within Europe and we understand the implications of leaving, but we hope that when we come to that we will be absolutely up to date with current EU standards, and that should help.
The noble Baroness, Lady Donaghy, also asked about helping these digital businesses and start-ups. We are obviously keen to make sure that we continue to be a leading nation for tech start-ups. We are a world leader in this. The digital single market proposals to update copyright law and to ensure data flow will help address this. It is also about infrastructure, including superfast broadband, to ensure start-ups are connected to global markets. As my noble friend Lady Neville-Rolfe said in her reply, through the British Business Bank’s angel and venture capital programme, £219 million in equity funding was contributed to UK high-growth SMEs at the end of December 2015.
The noble Lord, Lord Whitty, asked about the timescales of the CMA’s market study. The CMA opened the market study into digital comparison tools on 29 September and the final report will be published before 28 September next year. The study focuses on the following sectors in particular: broadband, home insurance, credit cards and flights. It will also take evidence from other sectors, including online travel.
As I said, there were several other questions on which I will write to noble Lords. In conclusion, the committee’s report and this debate provide valuable insights into online platforms and the digital single market. We will continue to carefully examine the evidence on the development of this new market. I look forward to working with noble Lords to make sure we support online businesses to grow and harness the potential of the UK digital economy. I certainly look forward to engaging with many noble Lords in the Digital Economy Bill later this year.
Lord Whitty
My Lords, I thank the Minister and everybody who took part in the debate. I thank the Minister for a very full reply, particularly since he has come off the substitutes’ bench today to do this. He clearly had a rapid learning curve, not having had the several months that we in the committee had with very expert evidence provided.
I thank my fellow members of the committee who participated this afternoon, and indeed those who were unable to do so. My noble friend Lady Donaghy mentioned something I had clearly written in my notes but failed to say: my thanks also to the staff of the committee for making sense of a lot of stuff which frankly, when we first looked at it, left us all fairly glazed—even though some of us were more experienced in this field than others, including my colleague the noble Lord, Lord Aberdare.
I thank the Minister for updating us on the situation with the CMA and other aspects of government policy, and giving us a fair degree of reassurance on the Government’s intention post-Brexit for the digital single market. Frankly, without something like the digital single market, we will not be able to maximise either the benefit to the users of the technology and platforms or the huge potential there is for developing British-based talent and companies in this whole field.
A number of important points were made and I will not respond to all of them. I must respond to my noble friend Lord Stevenson’s remark that perhaps we were too soft about competition law. Maybe he is right about the way that was expressed. The Minister and my noble friend Lord Stevenson are quite right that competition law needs to be seriously updated to take account of moving technology and the definitions of abuse of dominance. It is quite easy, even in this field, to prove at least a threat of dominance; it is quite difficult to use traditional measures but dominance is pretty clear to most of us. Yet, in looking for remedies, you must also prove abuse of dominance. If there is abuse of dominance, it is quite difficult to find out without a prior signal. That is something where competition policy and the procedures and metrics whereby the competition authorities have historically worked need some serious updating.
There is the question of speed. The Google issue with the Commission has gone on for at least 15 years and is still ongoing. It covers only a small part of what could be the problem in that area. We need to speed it up; we need new measures; and we need to recognise the necessity for an update of the remedies and the definitions involved.
Another issue I wish to pick up on is the use of personal data. People are aware of this, but not sufficiently aware to complain about it. As I have said, we all notice that the adverts directed to us are closer to our buying habits than we would like; nevertheless, we do not know the totality of how our data are being used. To some extent, neither do the companies themselves, or at least their broad management. When ranking orders and search priorities are determined by extraordinarily complicated algorithms, probably no one in the company knows how that works, let alone any regulatory authority or poor, humble small business trying to work out why it has suddenly slipped down the rankings. It is important that there is a measure for doing that and it is important, as the noble Viscount said, in relation to consumer and small business education in these areas.
In certain sections of law we look at the outcome even if we do not know the reason. In equality law, for example, if the outcome is hugely and irrationally discriminatory, there is a problem without necessarily knowing the reason for it. Sometimes in this area the outcome of algorithms and the interplay of different people’s algorithms can lead to discrimination against certain companies or certain classes of consumers in terms of price or ranking. If there is that degree of discrimination as an outcome, the regulatory authorities ought to do something about it.
The noble Lord, Lord Aberdare, mentioned a point which I did not mention and which would need transferring into British terms post-Brexit—that, because this is an esoteric and rapidly moving area, we needed to provide to the Commission, in a pre-June context, an independent panel or some kind of arm’s-length body which would keep government, policymakers and regulators up to date with what is happening in this market technologically, practice-wise and consumer-wise. The traditional bureaucracies would not be able to keep up with that and we felt that something new was needed in that context at Brussels. It is also needed at a UK national level generally.
I thank everyone who has participated—particularly the Minister for taking this on. I underline that, since the formation of the new Administration, the department on whose behalf he is speaking today includes within its title “industrial strategy”. To some of us that sounds a bit rust belt but the need for a strategy in this area, in order to bring on what are undoubtedly a skilled workforce and dynamic, innovative companies, requires a framework of industrial policy from the new department. I hope its list of priorities includes this area as one to which the new positive approach to intervention and industrial strategy will address itself.
Again I thank everyone who has participated in both the production of the report and this afternoon’s debate.