Euro Area Crisis Update (EUC Report)

Lord Boswell of Aynho Excerpts

Wednesday 23rd July 2014 Lords Chamber

Tabled by

[Lord Boswell of Aynho]

To ask Her Majesty’s Government what is their response to the Report of the European Union Committee on the Euro area crisis: an update (11th Report, Session 2013–14, HL Paper 163).

[Lord Harrison (Lab)]

My Lords, on behalf of my noble friend Lord Boswell of Aynho, and at his request, I beg leave to ask Her Majesty’s Government what is their response to the report of the European Union Committee on the Euro area crisis: an update. I thank my colleagues behind the scenes—namely, Stuart Stoner, our indefatigable clerk, Sarah Yusuf, Rose Crabtree and Katie Kochmann—who all helped and contributed over the years to these important deliberations.

I am delighted to speak to this short debate on the Euro area crisis: an update. This work was undertaken by the Economic and Financial Affairs Sub-Committee, which I chair. The report brings together four short update inquiries undertaken since the European Union Committee’s previous February 2012 report on the crisis. The most recent update was undertaken in February and March 2014. We heard from a stellar line-up of witnesses, including: Senator Mario Monti, former Prime Minister of Italy and a former Commissioner; likewise Erkki Liikanen, a former Commissioner, now the governor of the Bank of Finland and author, of course, of the Liikanen report on the European Union banking structural reform; Sir Jon Cunliffe, erstwhile UK ambassador to the European Union and now deputy governor for financial stability at the Bank of England; as well as a panel of economic experts, which included the Mayor of London’s chief economic adviser, Gerard Lyons.

We took as our starting point a very simple question: was the euro area crisis over? The answer we received was that the crisis had undoubtedly eased. In particular, the existential crisis afflicting the euro had diminished, in no small part thanks to the European Central Bank president Mario Draghi’s authoritative commitment in 2012 to “do whatever it takes” to save the euro. There were other encouraging signs: the reduction in sovereign bond spreads; Ireland’s exit from its adjustment programme; the entry of Latvia into the single currency; the hint from Poland—not only in terms of its financial line-up but even from so venerable a colleague as Lech Walesa—that it also had aspirations to join the euro; the return to growth in many member states; and even a growing confidence in Greece, the epicentre of the crisis. I thank also the noble Lord, Lord Boswell, who presides over the European Union Committee. He and I were in Athens recently at a COSAC meeting to hear of a very good report that was given by Prime Minister Samaras.

Having said that, we found that fundamental weaknesses remained, including: the extremely high levels of unemployment, particularly youth unemployment; immense economic imbalances between core and periphery member states of the eurozone; anaemic growth; inhibited bank lending, particularly to small businesses; and perhaps incomplete and uncompleted structural reforms in a number of the member states. There was also an overstrong euro on the exchange rates. Perhaps most of all, there were growing fears of a damaging deflationary spiral. All of this fed into wider political tensions about the effect of the austerity on the lives of European Union citizens—tensions that the May 2014 European parliamentary elections in part illustrate.

Our conclusion was that, while the crisis may have abated, it would be wholly unwise to conclude that the storm had entirely passed. In particular, the economic fragility of many member states meant that the euro area remained vulnerable to future shocks. Events since the publication of our report have borne this judgment out. The recent crisis of the Portuguese Banco Espírito Santo led to nervous jitters spreading across the euro area periphery. Industrial production remains low and overall growth is running at only 0.2% a quarter. The recovery remains as ill balanced as ever, as Germany leaves other members of the single currency in its wake—although even with Germany more recently there has been some holding back in its traditional economic growth. Inflation is currently running at only 0.5%, as growth continues to bump along. The threat of a prolonged period of low inflation or even a deflationary spiral looms ever larger. The European Central Bank was applauded for its action in June of this year, when it announced that the deposit rate for banks would be cut from zero to minus 0.1%, alongside targeted long-term refinancing operations, and yet the jury is out as to whether these measures will have any tangible effect.

The euro area crisis has also had a prolonged impact on the EU institutions. The European Central Bank has emerged with well deserved credit for its handling of the crisis. Nevertheless, it faces significant challenges, not only from the deflationary effect but also over the handling of its comprehensive assessment of the banking system, including of course the so-called stress tests, the result of which will be announced in October. Reports last week suggested that banks would have two weeks to plug any gaps in balance sheets that the ECB uncovered. This process will test the robustness of the euro area’s recovery and future health as never before. Overall, we found that the crisis had seriously altered the institutional and decision-making structures of the European Union. Those representing the euro area, such as the European Central Bank and the euro group, have grown in importance. By contrast, the Commission’s powers and influence in determining the crisis response have perhaps diminished. I should remind colleagues that the new Commission President, Jean-Claude Juncker, was a former chair of the euro group, with all the implications that that has.

This trend has significant implications for the United Kingdom. Closer integration is vital if the single currency is to prosper. We therefore agree with the Chancellor that the UK must do all in its powers to support its EU partners on this path. Nevertheless, such moves towards integration leave the United Kingdom in an increasingly isolated position. Noble Lords will be aware that the EU institutions are in a state of flux. As I mentioned, the newly elected European Parliament is finding its feet, the new President of the Commission has been chosen and the shape of the new college of Commissioners will emerge over the coming weeks. In this context, the Government and the Bank of England must maintain and develop constructive relationships with the increasingly powerful euro area authorities. All parties should redouble their efforts to convince euro area colleagues of the benefits of having the City of London as the leading global financial centre for the European Union as a whole. If they can be convinced of the mutual benefits of prosperity for the euro area and the single market, then the UK and the City of London will have much to contribute and much to gain.

I look forward to the Minister’s response on the steps that the Government are taking to ensure that the UK and the euro area enjoy such mutually beneficial relationships in the months and years to come.

European Union Committee: Multiannual Financial Framework

Lord Boswell of Aynho Excerpts

Tuesday 19th June 2012 Grand Committee

Moved by

[Lord Boswell of Aynho]

That the Grand Committee takes note of the reports of the European Union Committee on the multiannual financial framework 2014-2020 (13th and 34th Reports, Session 2010-12, HL Papers 125 and 297).

[Lord Boswell of Aynho]

My Lords, this Motion invites the Committee to take note of two reports of your Lordships’ European Union Committee, which I now chair, regarding the European Union’s multiannual financial framework, or MFF for short. These reports were published as the Commission produced its overarching framework for the MFF for 2014 to 2020, and following the Commission’s detailed proposals. These proposals are complex but at heart this is a simple, and hugely important, debate. It is about how much money the EU should spend, what it should spend money on and how that spending should be funded.

I should like to begin by thanking my predecessor, the noble Lord, Lord Roper, and the committee members who worked on these two inquiries. Each of our specialist sub-committees examined in detail the spending proposals within its remit, so these two short reports distil a massive amount of research and deliberation. It is indeed a privilege to introduce this timely debate on such a vital topic.

At a time of rapid and wrenching change in the European Union and the euro area, the MFF matters more than ever. The committee is following closely events in the eurozone, but short-term action to stem the current crisis must be consistent with the EU’s long-term objectives. The most crucial of these are enhanced competitiveness to support economic growth, based on a fully functioning single market, and greater value for money spent at European level.

Of course, these reports recognise other important factors in deciding where the EU’s money is spent: for example, the principles of cohesion and solidarity and the importance of environmental action. Yet these must be fitted into a budget of financial restraint and considered on an objective basis. Such an important budget should not contain fudged political deals, but should be transparent about where money is being prioritised, and why.

There are a number of difficulties with the MFF as it has been proposed. There needs to be more restraint, and we call for the next MFF to be no higher in real terms than the current one, which will end in December 2013. Equally important, however, is that this limited budget is spent wisely and directed to where it will do the most good. In our view it is disappointing that the Commission’s proposals contain largely cosmetic changes to the current distribution of spending. Economic circumstances have changed radically; so, too, should strategic budget plans.

In practical terms, the proposed MFF lacks transparency in calculation. Noble Lords will be familiar with the problem of comparing apples and pears. They will also note that there is no systematic resource accounting in it. Anyone reading the Commission’s very lengthy set of proposals, or indeed the Government’s responses, would struggle with the mixed use of real terms and current prices. The overall size of the MFF, and the way each year’s budget increases, are based on out-of-date calculations of gross national income and out-of-date growth forecasts. I submit that more up-to-date figures must be used in negotiations so that a realistic budget can be set. We call for sensible restraint based on accurate figures.

A particular difficulty in such a volatile economic climate is the length of the MFF itself. We would prefer a five-year framework, which could be made consistent or congruent with the European Parliament’s political term, offering some real democratic accountability on the strategic budget. Europe’s economic climate may look very different in five years’ time, and there is no imperative that demands a seven-year MFF.

In any case, long-term projects, such as the Galileo project, do not fit into a seven-year term either. The Commission’s proposed solution, which we oppose, has been to take large-scale or unpredictable projects such as Galileo and ITER out of the MFF entirely, calling them off-budget expenditures. Member states will still have to pay for these, just as they will pay for everything else, but they are not counted as part of the MFF when the Commission talks about the size of its budget. This is not good financial sense; the MFF must be negotiated with the same rigour as a proper business plan. Taking major spending lines off-budget will weaken accountability and reduce transparency. Instead, we would prefer to see more flexibility introduced within and between budget lines so that the MFF can offer a more agile growth agenda.

What of the MFF’s five major headings? Many members of our sub-committees are going to speak in this debate, so I will not speak for too long on the specific programmes that they scrutinised. However, I would like to say a little on the committee’s main conclusions on each heading. Heading 1, “Smart and Inclusive Growth”, is a complicated heading taking up almost half of the MFF. It contains several big programmes, such as cohesion funding, the new cross-border infrastructure programme Connecting Europe, and the new Horizon 2020 programme that will fund research and innovation.

The committee supported much of what was proposed for this heading. Cohesion funding can offer an important counterbalance to stringent austerity, which might have an undesirable impact on vital civil society programmes. It can also, if appropriately targeted, facilitate growth in weak regions, which is vital in the present climate. I am sure that the noble Lord, Lord Harrison, will speak in more depth about the work of his committee on cohesion funds.

The committee also supported efforts to boost research and innovation via Horizon 2020. If implemented correctly, this new programme offers benefits over the current structure with a single set of rules and fewer controls and audits to reduce bureaucracy in the research field. It also offers a more joined-up approach to ensuring that research progresses through the innovation cycle and into the marketplace, so that innovation does not stall. These measures will foster innovation in SMEs, which are vital for Europe’s growth.

Connecting Europe is an ambitious infrastructure programme covering energy, transport and tele- communications. Although EU-level action is important in these areas, the committee questioned whether such a large budget was really necessary for the programme. We recommend a strategic review to ensure that EU spending is secondary to market investment and that only projects that offer real added value are taken forward. I am sure that the noble Baroness, Lady Young of Hornsey, will speak to some of the other programmes in heading 1, such as ERASMUS for All and Creative Europe. However, as an introductory and personal remark, I say that these are important proposals that are sometimes overlooked owing to their smaller size. These programmes can support growth by promoting lifelong learning and supporting the creative and cultural industries in the EU.

The committee found the proposals for heading 2, “Sustainable Growth”, more unsatisfactory. The bulk of this heading is taken up by the common agricultural policy; I remind the House of my personal interest in this area, as a farmer and landowner. The Commission’s proposals reduce only slightly the proportion of the MFF being spent on the CAP. Evolutionary change offers the best path to sustained reform, but the committee strongly disagreed with the semi-status quo that we feel is on offer. The new CAP proposals include the greening of Pillar 1 payments. The committee was sceptical about whether the proposals would deliver the intended environmental benefits. Instead, we supported greater funding for Pillar 2, which will target the challenges of biodiversity and climate change. I know the noble Lord, Lord Carter of Coles, will say more on this.

Regarding heading 3, “Citizenship, freedom, security and justice”, the committee urged that the EU’s growing responsibilities under justice and home affairs should not be ignored. We disagreed with the Government’s suggestion that the budget for this heading should not rise above that over the previous financial framework. We proposed instead funding that matched 2013 expenditure in real terms. This would offer support for the EU’s increasing activity. The noble Lord, Lord Hannay of Chiswick, will have more to say on this heading, I am sure.

Heading 4, “Global Europe”, funds pre-accession instruments and many others, such as the instrument for the promotion of democracy and human rights worldwide. The noble Lord, Lord Teverson, chairman of our sub-committee on external affairs, will lead our discussion on this heading. However, overall the committee supported the funding and increased flexibility that was proposed. We also called for the European External Action Service to have a separate, ring-fenced budget to improve accountability. Perhaps the Minister will tell the Committee whether he thinks this will be possible when negotiations are finalised.

Finally, there is heading 5, “Administration”, which is often in the headlines. The Commission proposes to keep spending in the next MFF level with spending during this MFF. The Commission is also proposing revisions to the staff regulations, which dictate 65% of the spending in this heading, although they are not technically part of the MFF. The committee recognised the Commission’s efforts to bring the EU’s administrative costs more in line with those of member states. However, it agreed with the Government that more should be done to reflect the difficult decisions being taken at national level. I would be grateful if the Minister could update the House on the progress of negotiations over the staff regulations.

I should also mention another aspect of the Commission’s proposals that has been prominent in the news: the financing of the EU budget, particularly the proposals for a financial transaction tax. We concluded that no case had been made for an FTT. The proposal is unsuitable because it would fall disproportionately on a minority of member states, such as the UK, and because it cannot be linked to any genuine EU policy objectives. The committee also questioned whether a VAT-based own resource was appropriate, either as proposed, or in its current form.

The committee also objected strongly to the proposals to eliminate the UK’s permanent abatement and to replace all current correction mechanisms, of which there are many, with lump-sum payments. It cannot be overemphasised that these mechanisms are designed for a purpose: to correct unfairness in member states’ net outcomes. For the UK, such imbalance is particularly owing to the CAP. I hope the Minister will confirm that the UK is strongly opposed to these proposed changes.

Two key themes run through these reports: first, all EU spending must support growth and competitiveness. Secondly, today’s economic crisis is no excuse for ill considered or profligate spending, but reinforces the need for sound underpinnings for work aimed at recovery. The MFF is still very much under negotiation by the Council. The Danish presidency has prepared a “negotiating box” that will be carried forward by the Cypriot presidency. The first major discussion of the MFF will be at the Council meetings on 28 and 29 June. It is therefore important for the House to debate and give its input on these issues so the Minister and the Government are able to take the House’s views into account as negotiations progress. I look forward to the contributions from noble Lords. I hope the Minister will be able to update the House as much as he is able on the Government’s position regarding the Danes’ negotiating box, the alliances being forged with other member states and the way forward at the next Council meeting. I beg to move.

--- Later in debate ---

[Lord Boswell of Aynho]

My Lords, I am very grateful to all those noble Lords who have participated in this debate. I am conscious that the hour presses now, so shall respond only very briefly. The contributions that have been made have reinforced the opinion I have already formed in the first month of work on the EU Select Committee as to the tremendous reservoirs of expertise we have, both in the members and in the staff of our sub-committees and main committee. That has come out very closely and clearly in this debate today, in what is a very technical and at the same time a very important subject. I am grateful for that.

I am also grateful for the Minister’s response. All of us are conscious of, and many of us have direct experience of, the sensitivities of going into a negotiation and the need to have the right kinds of signal to do that. I can probably speak for nearly all the members of the committee and sub-committees in saying that we want to see the maximum amount of flexibility and imagination in the negotiations in terms of the particular options that can be taken and some of the particular interests that have been mentioned today. Even if we may not absolutely coincide with him on the exact framework, many of us would welcome the fact that he has shown a commitment to rigour and so forth. That is not a card to play or throw away at this particular juncture, so we are grateful for the way he has put that and responded. It has contributed to an understanding for which I am very grateful. In that spirit, we wish the negotiations well.

Motion agreed.

Equality

Lord Boswell of Aynho Excerpts

Tuesday 8th February 2011 Lords Chamber

[Lord Sassoon]

My Lords, Frank Field’s work will indeed inform the child poverty strategy, which, as I said, will be coming forward by the end of March this year. In relation to his reported comments in the newspapers, the Government have introduced an early intervention grant amounting to £2.2 billion, rising to almost £2.3 billion in 2012-13. It is up to local authorities how they spend that and their other resources. We have taken away significant numbers of the ring-fenced targets that they had to meet. They have money with which to keep the existing network of children’s centres open and they have obligations under the Childcare Act 2006, but it is a decision for the local authorities.

[Lord Boswell of Aynho]

My Lords, while I in no sense wish to minimise the realities of poverty, is it not time that we started to move at least some of the terms of this debate away from a static analysis about whether one measure is or is not helpful, or whether there is enough incentive at one point in time, towards a much more dynamic approach in which we emphasise the importance of personal development, education, training and personal responsibility so that, as people move into employment, which is the best solution for poverty, they may better themselves financially and lead a more fulfilling and satisfactory life?

[Lord Sassoon]

I am grateful to my noble friend and I agree completely with his analysis. That is why we have introduced the £2.5 billion pupil premium to increase the emphasis on the educational development of children from the most disadvantaged backgrounds; that is why we are introducing the £150 million per annum national scholarship fund; and that is why my right honourable friend the Secretary of State for Work and Pensions is working on the most complex and important reassessment of welfare and benefits that has been attempted for two generations in order to get away from the overcomplex system of means-tested cash benefits and the dependency of far too many families who are trapped in welfare.