Economic and Monetary Union (EUC Report)

Lord Butler of Brockwell Excerpts

Wednesday 9th November 2016 Grand Committee

[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.