Genuine Economic and Monetary Union (EUC Report)

Lord Harrison Excerpts

Wednesday 2nd July 2014 Grand Committee

Moved by

[Lord Harrison]

That the Grand Committee takes note of the Report of the European Union Committee on Genuine Economic and Monetary Union and the implications for the UK (8th Report, Session 2013–14, HL Paper 134).

[Lord Harrison (Lab)]

My Lords, I am delighted to introduce this EU Committee report, ‘Genuine Economic and Monetary Union’ and the Implications for the UK. What is genuine economic and monetary union? In June 2012, the IMF revealed that there was a nearly €40-billion hole in the balance sheets of the Spanish banks and the spectre of contagion threatened to overwhelm the eurozone as a whole. European Union leaders recognised that urgent action was needed.

The result was a report written by the outstanding and now departing President of the European Council, Herman Van Rompuy, entitled Towards a Genuine Economic and Monetary Union. It envisaged a stable and prosperous EMU based on four essential building blocks. The first was an integrated financial framework, otherwise known as banking union. The second was an integrated budgetary framework. The third was an integrated economic policy framework. The final building block was ensuring democratic legitimacy and accountability. On the basis of this report, the Council invited the President of the Council, the Commission, the Eurogroup and the European Central Bank to prepare a specific and time-bound road map for the achievement of genuine economic and monetary union. The final report was published in December 2012, complementing the Commission’s own November 2012 blueprint for a deep and genuine economic and monetary union.

The Sub-Committee on Economic and Financial Affairs, which I chair, heard evidence on these proposals over several months, including on visits to Brussels, Berlin and Frankfurt, where we visited the European Central Bank and the Bundesbank. Our report was published in February. We are grateful to Professor Iain Begg of the London School of Economics, who acted as specialist adviser to the inquiry. I am also eternally grateful to Stuart Stoner, our outstanding clerk, and to Rose Crabtree, policy adviser for the report but a poacher turned gamekeeper who is now working for the PRA.

Our committee found that banking union was the most urgent of the four genuine economic and monetary union pillars. It was vital to tackling the effects of the financial crisis, securing the long-term stability of the eurozone and repairing the damage to the single market in financial services. For our December 2012 report on banking union, we consulted Michel Barnier, the appropriate commissioner, and Herman Van Rompuy. The report was with Chancellor George Osborne at the December Council.

Indeed, significant progress towards banking union has been made. A single supervisory mechanism has been agreed and will become operational under the European Central Bank this November. A single resolution mechanism has been agreed but, regrettably, only a partial banking union is in prospect. For the third leg of banking union, the single deposit insurance mechanism was quickly dropped because of political pressure. What is more, the final agreement on the single resolution mechanism that was reached shortly after our report was published remains sub-optimal.

Our concerns about the SRM focus on two issues in particular. First, the resolution mechanism itself—the process by which a failing bank would be dealt with—remains highly complex. Key players, including the Commission, the Council, the European Central Bank and national authorities, will all have a role to play. Indeed, it has been reported that more than 100 individuals and organisations might need to be involved in a resolution decision. Yet anyone with experience of these issues knows that bank resolution needs to be a quick and decisive process with the confidence of markets, investors and consumers. It is not to be undermined. I ask the Minister whether it is really credible to save a failing bank over a short weekend, before the markets open on a Monday morning, while consulting more than 100 other people or institutions.

Secondly, we were deeply concerned about the limited funds available to rescue failing institutions. The compromise agreement reached in the spring—by frontloading the mutualisation of funds and allowing the single resolution fund to borrow on the financial markets—was a step in the right direction. That is all helpful in avoiding the need for the taxpayer to pick up the bill. Yet even at its full strength of €55 billion, we fear that the resolution fund would be underpowered and ill equipped to deal with the scale of bank failures witnessed in recent years. In the committee’s view, direct recapitalisation of banks by the European stability mechanism was vital to break the vicious circle linking bank and sovereign debt. Again, perhaps the Minister can give us his view.

We also found that the second and third building blocks of genuine economic and monetary union—the proposals for an integrated budgetary and economic policy framework—were politically unrealistic at present. German concerns over moral hazard and the assumption of liability without effective controls mean that debt mutualisation remained highly contentious. That was not to say that these issues were not unimportant. A system of substantial fiscal transfers by a central budget is a characteristic of most currency unions and some degree of debt mutualisation may be inevitable if the single currency is to prosper. In the mean time, we warned that the imposition of so-called austerity policies could aggravate the problems facing weaker economies.

The fourth strand of genuine economic and monetary union—democratic accountability and legitimacy—is explored in the context of the recent report from the European Union Select Committee, chaired by the noble Lord, Lord Boswell of Aynho. On the role of national parliaments in the European Union, that report found that there was an asymmetry between the growing powers of institutions such as the Commission, the European Central Bank, the Eurogroup and the troika, and the ability of citizens to hold them to account for their actions. We found that a serious democratic deficit now exists, as the results of the recent European elections partly testify. While the European Parliament has a key role to play, we found that the principle of democratic accountability could be strengthened only if national parliaments also had an enhanced role and we were therefore extremely concerned at how little emphasis was placed on the role of national parliaments in the genuine and economic monetary union proposals. Incidentally, the ECB and the Eurogroup have clearly advanced as institutions within the European Union. I am pleased to say that our committee interviewed Dr Constâncio, vice-president of the ECB, in our investigation into the banking union report, and we recently visited the ECB and the Bundesbank.

Our report concluded by considering the implications of all this for the United Kingdom. The Government stressed that the United Kingdom’s role had not diminished and that it continued to play an integral role in the European Union, notwithstanding the fact that eurozone members are pursuing an increasingly integrationist agenda. However, the evidence to the committee heard in Brussels and Berlin tended to contradict that assertion. Responsibility for defending the UK interest lies not only, if principally, with the Government but with us as parliamentarians and, I might say, the City of London as the foremost European global financial centre. The European Union institutions have their own obligations to ensure that the United Kingdom’s concerns are not lightly dismissed, and noises off from Angela Merkel, Mark Rutte and Fredrik Reinfeldt hint that that might be recognised.

Our report concluded by observing that the eurozone remains on the road towards greater integration, and the implications of this for the United Kingdom are immense. A strong and prosperous eurozone is in the interests of all European Union members, as is a strong and engaged United Kingdom and a strong City of London. Achieving all those outcomes simultaneously will require close care and attention, together with good will, on all sides. When I talk of good will, the recent Juncker debacle did not help.

I point out that Mr Juncker was head of the Eurogroup—the group that together oversees the 18 members of the eurozone. One thing that I have tried to do as chair of this committee over the past four years is to support our Chancellor when he says that the welfare of the eurozone provides the opportunity for the United Kingdom’s economies to prosper. We have always been told by George Osborne that the European Union needs to integrate more closely and get on with the job of making sure that its members are working together. It is therefore incongruous to describe Mr Juncker as an integrationist when that is the very thing that we have asked the EU to do.

I also say to the Minister that, important though the position of the European Commission President is, others are important too. What plans do we have for the replacement of Herman Van Rompuy, who has played such a behind-the-scenes but effective role? What positions are we likely to get with Andrew Lansley, if he is indeed to be our United Kingdom Commissioner? Is there really any hope that we can get an economic role now that we are outside of the European Union? Cathy Ashton—my noble friend Lady Ashton—will possibly be replaced by Mr Sikorski, currently Foreign Minister of Poland. Although a former member of the Bullingdon Club at Oxford, he has said some choice things about the way that we, the British, have gone about these negotiations.

Sharon Bowles, whose praises must be sung as chair of the European Parliament committee on all these matters, is someone who we need here. She is coming before our committee on 22 July to give us help on, and her understanding of, the subject of our new report—financial structures within the European Union. However, we must be clear, too, about our reform of the European Union. That is unclear at the moment but so often is familiar to us. The single market was a creation of the European Union by a member of this House. Can we pursue that in financial regulation through the digital economy or services directive?

Finally, can we try a little harder to find friends other than “phoning a friend” with Angela Merkel? We need to spread much wider than that. We have already recognised the position of the United Kingdom, which is outside the euro, outside Schengen, outside the fiscal compact—I heard no one from the Government say that the Czech Republic is now a member of the fiscal compact, thereby isolating us even more—and, indeed, outside the very important European Semester.

The constant theme of my committee over the four years that I have had the honour of chairing it is that the best way of ensuring that the United Kingdom’s voice is heard within the European Union is to keep close to our partners and close friends in the European Union. We need man-to-man marking when we are engaging with the other 27 friends. We need to be friends on Facebook with the other 27 and not for ever threatening withdrawal as an instrument of European Union policy—a kind of foreign policy of coitus interruptus. We need to make the case for the European Union and the United Kingdom’s role within it with passion, persuasion and precision. We need to succeed in the European Union not secede from it.

--- Later in debate ---

[Lord Harrison]

My Lords, with the passage of time all committee chairmen tend to fall into their anecdotage. However, before I tell my concluding anecdote, which I hope will sum up the tenor of the debate we have had, I will say that I will resist the opportunity to play footsie with the noble Lord, Lord Lamont, or indeed with the Minister who has replied. I will also resist the opportunity offered by the noble Lord, Lord Desai, to take some of my committee to the United States both for the purposes of literary examination and comparison with the regulatory structure there. To my noble friend Lord Liddle I say that despite all the quotations from the Book of Job I do not see myself as a man of constant sorrow; my job is to help the process of change with the committee that I have.

My anecdote is the following. Some 20 years ago I wrestled to the ground Pierre Moscovici, who was later to become the Finance Minister of the incoming French Government, for the purposes of leading the socialist group on the monetary sub-committee—I am very familiar with sub-committees. However, one dark afternoon in Brussels in the European Parliament we met Alexandre Lamfalussy, who was later to be president of the European Monetary Institute and the forerunner of Trichet, Duisenberg, Draghi and all the rest. I, in my pomp and circumstance, then wrote to the Wirral Globe, Cheshire Observer and Chester Chronicle that I had just elected Europe’s next bank manager. Some 20 years later, I think I was right, but no one was paying attention at the time other than my good local newspapers.

I tell that anecdote because the tenor of this debate has been that we have to be on our pins, toes and high heels to be able to speak with those who might be our friends and who might change things. I thought that view was best put by the noble Lord, Lord Kerr, when he talked about knowing the guy at the other end of the telephone. That is the job of UK Governments now and in the future for the purpose of defending UK interests. I say to the noble Lord, Lord Hamilton, that what united the committee across the political waves was the belief that that was and remains important, and that we will continue to pursue it in the future. I am happy to continue the seminar in the Peers’ guest room shortly afterwards, should any noble Lord need a glass of European wine, and I thank all noble Lords who have contributed.

Motion agreed.