European Banking Union: EUC Report

Baroness Falkner of Margravine Excerpts

Thursday 24th January 2013 Lords Chamber

[Baroness Falkner of Margravine]

My Lords, I, too, thank the noble Lord, Lord Harrison, and his committee for this excellent report on the European banking union. In doing so, I make one or two observations in general about the European Union Committee and its reports. I can see in the Chamber five brave people who were not involved in the report of the committee, when our debates can attract, as we know, an attendance of perhaps 450 a day. It saddens me to see debates on reports of such significance to the lives of people, both men and women, in this country so poorly attended. I am extremely glad that the chairman of the European Union Committee is in his place, because I wonder whether the House might consider debating reports from Select Committees on scrutiny days so that they attract wider dissemination, wider knowledge sharing and greater attendances. My gender, which represents more than 50% of the people of this country, is equally affected by the implications of banking union and the financial crisis, and it saddens me that we do not seem to have in this Chamber the interest in these issues that we might have. I spoke to the noble Baroness, Lady Vadera, last night, who has all the expertise to be able to add to debates of this kind. Of course, she is on leave of absence. I was meant to speak in the earlier debate on nuclear non-proliferation until I noticed the composition of the speakers list for this debate and decided that it was important that I bring my non-expert knowledge, but some voice, to it as a priority.

Roughly a year ago, we were debating the break-up of the eurozone in this Chamber. At that point, it appeared possible that the scale of the problem, the lack of its recognition among some eurozone members and political inertia, combined with institutional sclerosis, would lead to a Greek exit, with the potential for Portugal, Spain, and Italy to follow. In this Chamber, we were divided between those who believed that the demise of the eurozone altogether was nigh and those who, such as us on these Benches, could imagine a winding road ahead but recognised the determination within the leaders of the eurozone countries to avoid that catastrophic outcome.

We are still on that winding road, but the pointers for the way ahead for the eurozone are clearer. What has been less clear this afternoon is where the United Kingdom is going. While a significant part of the European Union is negotiating deeper integration, the result of which is not yet evident, I find it difficult, apropos the Prime Minister’s landmark speech yesterday, to consider a referendum in response to a treaty that may not happen and may not ask anything of the United Kingdom.

Within the eurozone, the landmark event was last year here in London, when the Governor of the European Central Bank, Mario Draghi, spelt out the message that the ECB would do “whatever it takes” to save the euro. The outright monetary transactions bond-buying programme saw immediate reductions in bond yields to which Spain and Italy were subject, and signalled that the institutional changes so badly needed were finally to be addressed.

The committee’s report highlights the important areas for change before a single currency zone can be stabilised. It is also clear that the United Kingdom’s vital interests are at stake, irrespective of whether we are in or out.

The first and overarching priority is to address the so-called death spiral born of the interdependence of banks and sovereigns within the single currency. For those participating in the eurozone, the price of stability will be the loss of sovereignty, with all the political implications that that brings. So although progress towards creating a federal structure in banking has been kicked off with the creation of a single supervisory mechanism, there is, nevertheless, a loss of momentum on a common resolution authority, or indeed a common deposit protection scheme, as the noble Lord, Lord Harrison, mentioned. That impasse has been attributed to the German electoral timetable; and people suggest that we will not see moves to resolve other institutional questions until after September 2013. I am a little pessimistic as to the pace of progress even after that. I fear that the emergence of slow growth in late 2013 and the relief that the crisis is abating, will act as a drag on action necessary for stability to be consolidated.

Let me address why it is so important to proceed with a complete federal settlement to underpin the single currency. At the time of the Maastricht treaty, serious academic work was undertaken in the UK on the experience of the United States in the early operation of a single currency there. The American example still stands us in good stead today, and suggests why, if the eurozone is to succeed, it will have to become more like the United States. In doing so, I draw on an excellent paper from the Centre for European Reform, What a Banking Union Means for Europe, which I was very glad to see this morning included in the Library briefing pack for this debate.

As the paper points out, the US has undoubtedly had a faster and stronger recovery from the 2008 financial crisis than that seen in the eurozone economies. Part of the reason for that is that the decentralised state-level institutions in the eurozone states have actually served to amplify the initial shock from 2008, transforming a financial crisis into an existential crisis for the single currency. Without a federal budget, fiscal forbearance for banks is made on the basis of national considerations and political risks. The mutualisation of deposit protection makes free-riding more likely, so it does not exist, and the bonds of solidarity between states are naturally weaker than they are in the US, despite its federal diversity.

Significant key functions are now recognised across the board, even here in the UK, as being necessary if we get a banking union and then, eventually, fiscal and political union within the eurozone. The first, as the committee recognises, is to break the death spirals within the eurozone whereby individual states are pushed towards insolvency by bank rescues, being completely at the mercy of financial markets with higher and higher borrowing costs. Ireland knows the lessons of this well, which is why it is so keen to use the European stability mechanism’s funds for direct recapitalisation of its banks’ legacy debts. It will be interesting to see how this argument sits with the German taxpayer.

The other unresolved issue is the lack of a eurozone authority to restructure or wind up banks that run into difficulties. In the US, the Federal Deposit Insurance Corporation does this; since 2008, it has wound up more than 450 insolvent banks in an orderly manner. Within the eurozone framework, zombie banks continue—thanks to cheap ECB funding—so while we have a road map for single currency stability, there is still much detail to be worked on.

Let me turn to some of the issues that engage United Kingdom interests more directly. It was instructive to read the response from the Financial Secretary to the Treasury, Mr Greg Clark, to the letter from the noble Lord, Lord Boswell, regarding the committee’s concerns. The Government should undoubtedly be congratulated on their success in negotiations at the December Council. We have progress on the institutional relationship between the ECB and the EBA and, significantly, we have achieved solid protections in respect of the voting rights between the “ins” and “outs” when decisions are taken in the EBA. I recognise the concerns of the noble Lord, Lord Trimble, and I note that Mr Clark does not give complete reassurance, as there is still no clarity about what will happen if and when there are four or fewer “outs” left in the system. However, that is some way away and, in my view, we could not have got a better outcome at that point last month. We also did well to gain agreement on the memorandum of understanding securing the co-ordination of cross-border banking supervision.

However, we in the UK will also be affected by events beyond our control as we go forward. Just this week, we have seen moves towards the establishment of a financial transaction tax for 11 of the eurozone members. This came about as a result of the enhanced co-operation, which will now leave us without a say at the table as the shape of this tax is negotiated—with significant implications for eurozone banks that operate out of the City of London. While some Eurosceptics might be pleased at the potential gains for the City of London, particularly if the actual proposals result in driving trading in shares, foreign currency or derivatives out of Frankfurt and Paris into London, I would warn that there are dangers, too.

It is entirely feasible that the regulation might be sufficiently light touch, with a very narrow focus on individual share transactions, not to result in any greater business for the City. What is seen now as an obstacle to growth—the FTT—might have no adverse impact at all but bring revenue gains to the participating countries. Alongside this, we would have the scenario of the UK being seen as an uncertain bet, with the spectre of its referendum. City institutions may well consider it more worth while to be based within a recovering and more stable eurozone.

The overarching issues for both the United Kingdom and other EU and eurozone countries are the looming recession in most eurozone states, the seemingly never-ending austerity, with its record unemployment—never experienced before—and, most urgently, the loss of competitiveness in relation to emerging markets. These problems on their own, if taking place against the kind of recessions that we have experienced before, would have significant effects. However, taking place as they are against a backdrop of political uncertainty and shaky political resolve about seeing the thing through to its conclusion, they do not augur well for a speedy resolution to the eurozone crisis. That does not remove the responsibility for the UK to play a positive, engaged and compromising role if we are to see it though.