EU: Recent Developments

Lord Harrison Excerpts

Thursday 16th February 2012 Lords Chamber

[Lord Howell of Guildford]

Yes, I would like to tell the noble Lord a great deal more and detail the reasons why the decision was taken not to make this into a total EU treaty. Before I answer him in detail, the larger point is that it would have profoundly changed the whole nature of the European Union. That was the essential reason why my noble friend recognised and argued that if there was to be an attempt at a fiscal union pact and it was to go ahead, it would do so without the United Kingdom. That is why he stood back from it.

On the details, let me give four very strong reasons why it did not make sense to go ahead with agreeing with the treaty—I have to find the precise bit of paper in order to do this, which is not so easy.

My right honourable friend the Prime Minister made it clear that our preference was to move forward as 27 with the protections of the single market. That is what we sought. The Prime Minister in his post-assembly European Council statement explained the safeguards that the UK was proposing, which were modest, reasonable and relevant to ensuring that the integrity of the single market was preserved. The Government do not confirm the authenticity of documents or published informal draft texts proposed during the negotiations.

There were four areas where we felt our involvement might damage the single market and our national interests. First, we were concerned about the voting powers on financial levies; secondly, we were concerned when we sought assurances, including on the voting procedure for handing powers to European adviser agencies; thirdly, we were concerned about the freedom that member states had to wreck their own financial stability regimes. I believe that we also sought a fourth assurance. None of those assurances was forthcoming.

I apologise to the noble Lord for my hesitation in putting my finger on all these issues, but they were complex and our concerns were very precise. Those safeguards were not provided.

[Lord Harrison]

My Lords, in setting up ESMA, the European Securities and Markets Authority, have we not already given away that power in order to frustrate credit default swaps legislation?

[Lord Wallace of Saltaire]

My Lords, I think it would appropriate if we continued with the debate. The Minister has sat down. I will answer some of these questions when it comes to winding up.

--- Later in debate ---

[Lord Harrison]

My Lords, this is a timely and important debate, as the European Union is facing its most serious crisis since its inception. Only this week, we have continued uncertainty about the future of Greece against the background of widespread unrest, falling GDP figures, threatened ratings downgrades by one of the credit rating agencies and the danger of fragmentation, with France pushing ahead with its financial transaction tax. What happens in the euro area has a direct bearing on the economic development of this country. Earlier this week, the European Union Committee produced its latest report on the euro area crisis. It was based on the work done by the Sub-Committee on Economic and Financial Affairs, and International Trade, which I chair, and by the main Select Committee, chaired by the noble Lord, Lord Roper. The sub-committee focused on economic and financial aspects of the crisis; the Select Committee focused on the institutional aspects and is responsible, in particular, for the chapter on the proposed fiscal compact treaty.

The crisis is actually a series of overlapping crises—financial, economic, political and institutional. Alone, any one of them would have challenged the European Union leaders. Taken together and reinforcing each other, the challenges are monumental. Professor Buiter, commentating on the alacrity of EU leaders in addressing the problem, described it as a “caterpillar hurdling”. EU summits have come and gone. There has been a series of announcements and agreements but they have so far failed to resolve the crisis, and there have been major difficulties in implementing things that have been agreed.

The committee examined an outline agreement reached at the EU summit on 26 October last year on recapitalising European banks, writing down Greek debts and increasing the financing of the European rescue funds. However, the details were left to be worked out subsequently and are taking too long to finalise. For example, on recapitalising banks, the agreement was aimed at boosting the capital held by banks, and it specifically warned that banks should not achieve a higher capital ratio by deleveraging. It was put to us that giving the banks nine months to achieve their new capital ratios would lead to exactly that—a deleveraging with a failure to invest in future industries.

We examined the role of the European Central Bank. The bank states that Article 123 of the Treaty on the Functioning of the European Union prevents it buying euro area debts directly from euro area states. However, over the past months it has greatly increased its purchases of sovereign bonds on the secondary markets, and in December it offered long-term loans to banks at very low interest rates. Indeed, 500 European banks took up an extraordinary €489 billion in loans. The bank is expected to repeat the operation at the end of this month. We caution against seeing the ECB as a panacea, but we judge that further ECB action is likely to prove essential, at least to preserve the functioning of credit markets.

The Select Committee examined the proposed fiscal compact treaty, which was negotiated after the European Council in December. The Government said that they went into that meeting with the view that the “optimum outcome” would have been an agreement at the level of all 27 European Union member states with the interests of the United Kingdom protected. However, the Government have refused to publish the details of the safeguards to which the other member states did not wish to agree. Again, I say to noble Lords on the Front Bench opposite that it would be extremely helpful and useful if the proposals that we found so difficult were published. It is impossible for parliamentarians and others to form a balanced view about the outcome of that meeting, on which the Government remain dumb.

I turn to the agreement itself. There has been a high-speed series of negotiations, which have resulted in a draft treaty on “stability, co-ordination and governance in the economic and monetary union”. It is intended that only the euro area countries will be bound by the requirements of the treaty, unless any other country volunteers to follow these rules, and many are. The treaty includes, in particular, measures on budgetary discipline, which will have to be translated into national law,

“through provisions of binding force and permanent character, preferably constitutional”.

One witness, the former Prime Minister of Italy, Mr Giuliano Amato, suggested that the treaty would not be enough by itself to resolve the crisis but that it was necessary to restore trust. He said that,

“trust may be the main outcome of this treaty on which you can build what in the treaty itself is missing”.

In principle, the committee considered that the euro area states must be free to take the steps they consider necessary to strengthen the euro, including in the key area of fiscal integration, but that matters relating to the single market must remain the preserve of all 27 EU member states. Again, I urge the Front Bench opposite to consult the evidence of Professor Craig, who came before the Select Committee, on the ambiguity of having a treaty between the EU 27 as currently formulated and having the fiscal compact treaty. There is no doubt that one thing that might become contaminated is the single market. Incidentally, I think that in this Chamber there is a universal view of the benefits of having a proper and functioning single market.

The Select Committee highlighted a number of legal and other issues raised by the proposed treaty, including the relationship between it and the EU treaties and laws made under the existing EU treaties; the proper role of EU institutions in relation to the treaties; and the overlap between the new treaty and requirements under existing EU laws. Some of the difficulties would disappear if the proposed treaty were folded into the main EU treaties. Article 16 of the proposed treaty suggests that this should happen, after a review of experience with implementation. In principle, the Select Committee could see no reason why this should not happen in due course. It is worth emphasising that, even if it does happen, the key provisions will still apply only to countries using the euro. I ask the Government whether they will contemplate folding in the treaty and joining in with that enterprise.

We accepted that budgetary discipline is necessary to make progress in resolving the crisis, but ultimately it is the resumption of sustainable economic growth that will hold the key. We mean this both in general terms across the European Union and specifically to boost the competitiveness of certain areas of southern Europe compared with the north. It is hugely concerning that the potential of the further development of the single market to enhance such growth has faded from view during the crisis. Perhaps the most important challenge facing policy-makers now is to find policies to support economic growth which can be implemented effectively during the period of budgetary austerity.

I draw the House’s attention to other things that are going on which are contingent on the development of the European Union. For instance, this morning my committee interviewed Commissioner Šemeta on the financial transactions tax, and I hope that noble Lords will have the opportunity to read the transcript. My committee has published the sovereign credit rating agencies report, which has come back into focus again with, extraordinarily, one of the CRAs predicting the rating of Scotland were it to leave the United Kingdom. We also now have in place the European new supervisory financial framework. There have been some major changes in the way we oversee the financial services which appertain to London, including the creation of various European supervisory authorities. These things are happening. As the noble Lord, Lord Mandelson, said, we have to be alert to these changes and we have to be actively engaged if we are to ensure that the United Kingdom’s interest is preserved in the future.