European Union: Negotiations (European Union Committee Report)

Debate between Lord Hannay of Chiswick and Viscount Trenchard

Monday 16th March 2020 Lords Chamber

[Viscount Trenchard (Con)]

My Lords, it is a great pleasure to follow the noble Baroness, Lady Falkner. She made some very interesting new points to inform your Lordships’ debate. I thank the noble Earl, Lord Kinnoull, for introducing this debate. His committee rightly concludes that the recent Council decision raises matters of vital national interest.

I believe that the matters that the committee raises are not exactly new, because we have been debating them since before the referendum of 2016 and, indeed, before that. Indeed, a majority of the electorate voted to leave because they considered that remaining in the EU raised matters of vital national interest. They thought that reclaiming our right to have our laws made in this Parliament by MPs accountable to the British people was one of these matters.

I am sure that your Lordships are grateful to the noble Earl’s committee for its report and for promoting debate on our EU negotiations, which will, whatever their outcome, profoundly and permanently change the United Kingdom. However, even if we had not left the EU, the continuing incremental transfer of competences to the European institutions would have continued to profoundly and permanently change the country.

I regret that the negotiations leading to the withdrawal agreement were conducted ahead of and separately from the current negotiations on our future relationship with the EU. As your Lordships know very well, Article 50 states that the negotiations on the withdrawal of a member state shall take account

“of the framework for its future relationship with the Union.”

My understanding is that it was expected that the framework for the future relationship would be agreed at the same time as the withdrawal agreement. Article 50 does not suggest or imply that there should be two separate sets of negotiations or agreements. The EU insisted that we should agree the terms of withdrawal first, dealing with the future framework in the separate and non-binding political declaration.

The political declaration, as your Lordships are well aware, provided for a number of possible outcomes, ranging from continued close alignment with EU laws and regulations, to a clean break with full restoration of national sovereignty but also starting from a point where our legal and regulatory systems are identical.

The Conservative Party manifesto—on which the new House of Commons was elected—made it very clear that the Government would seek a future relationship with the EU based on a free trade agreement similar to that enjoyed by Canada; leave the single market and the customs union; and not agree to the continuing jurisdiction of the ECJ in this country. The Prime Minister made it clear in his Greenwich speech that if the EU would not agree to an FTA similar to that which it has with Canada, the UK would seek trading arrangements similar to those which the EU has with Australia.

I am opposed to the amendment of the noble Baroness, Lady Hayter, which seeks to exercise control over the actual process of our negotiations, or even debate the terms of emerging agreements. This would detract from our negotiator’s ability to obtain the best possible result for the UK and make it more likely that we will not be able to reach agreement with Mr Barnier and his team. I therefore urge your Lordships to reject this amendment, which, if agreed, would send the wrong message to the EU, and damage the authority of Mr Frost and our negotiating team.

One area where the Government’s Command Paper differs significantly from the EU’s decision is state aid. Indeed, the amended text of the decision adopted on 25 February implies not only that the EU will require the UK to continue to apply existing state aid legislation, but that it will be expected to adopt new or amended EU state aid rules in future. But the UK is very far from being the worst culprit of the excessive use of state aid. As the Prime Minister pointed out, and as the noble Baroness, Lady Falkner has just reiterated, the EU has enforced state aid rules against the UK only four times in the last 21 years, compared with 29 enforcement actions against France, and 67 against Germany. The recent hardening of the EU’s position on state aid will make it very difficult to reach agreement on a satisfactory FTA within the time available.

I would like to say a few words about services, especially financial services, based on more than 40 years’ experience as an investment banker. The political declaration suggested that the EU and UK should seek close and structured co-operation on regulatory and supervisory measures, including by working together in international bodies. As a member of the committee’s Financial Affairs Sub-Committee, formerly chaired by the noble Baroness, Lady Falkner, and now chaired by the noble Lord, Lord Sharkey, I can confirm that we have discussed this matter to a considerable extent. Our witnesses have included the present Governor and the Governor-designate of the Bank of England. Both have expressed the view that we should not be a rule-taker from the EU and should in future adopt a regulatory regime which recognises London’s connections with other important financial markets, such as New York and Tokyo.

I regret that the EU did not match our decision to grant temporary equivalence to EU clearing houses for two years, but was willing to grant this only for one year. Does the Minister concur that, in agreeing the basis of granting and withdrawing the recognition of equivalence in financial regulation, we should not establish a cumbersome and bureaucratic bilateral structure for assessing divergence with the EU which would, in effect, tie our rule-making more closely to Brussels than to other important financial markets, such as those of the US and Japan? Does he also agree that in future the UK should seek to maximise its influence in establishing best practice and designing proportionate regulation at the global level, through bodies such as the International Organisation of Securities Commissions, IOSCO? There are several EU financial rules, such as AIFMD, Solvency 2 and MiFID 2 which contain elements which we tried to resist and from which we may wish to diverge. If the structures we agree with the EU unduly restrict us from divergence, it will complicate our freedom to reach agreements on regulatory equivalence with third countries such as the US and Japan.

I agree with the former Chancellor who called for a durable equivalence relationship, whereas the EU has stated that its equivalence decisions can be withdrawn at 30 days’ notice unilaterally, as it has done in the case of Switzerland. This has increased the cost of trading in Swiss stocks, especially in the case of smaller companies.

On defence, the Government’s Written Ministerial Statement contains no specific reference to defence but states that foreign policy alignment, which is likely to be substantial, does not in itself require a joint institutional framework. However, the EU’s decision reflects the political declaration in agreeing that the UK may co-operate in certain projects under the European Defence Fund and PESCO. Our Armed Forces enjoy a close collaborative bilateral relationship with those of France. Does the decision mean that UK-France defence co-operation will be possible only under the framework of the EDF or PESCO in future? Does that mean that in order to co-operate, British forces could work with French forces only under the command of a European general?

[Lord Hannay of Chiswick]

Perhaps I can give the noble Viscount an answer to his question. The answer is no, it does not mean that. It could only mean that if the French agreed to make it mean that, and they will not.

[Viscount Trenchard]

I thank the noble Lord for his assurance.

As noted in paragraphs 34 to 40 of the report, the decision envisages an overall institutional framework, which suggests the EU wishes to enter into an association agreement. Does the Minister agree that such an arrangement would be inconsistent with the Written Ministerial Statement, which proposes a suite of agreements appropriate to a relationship of sovereign equals? Will he confirm that the Government have made it clear to the EU negotiators that the UK will not entertain such a semi-detached continuing relationship with the EU which would make it impossible for this country to respond positively and flexibly to the opportunities that our new freedoms to pursue an independent trade and regulatory policy will provide?

I much look forward to other noble Lords’ contributions and especially to my noble friend’s winding-up speech.