European Union: Negotiations (European Union Committee Report)

Debate between Lord Lamont of Lerwick and Lord Davies of Stamford

Monday 16th March 2020 Lords Chamber

[Lord Davies of Stamford (Lab)]

My Lords, the narrow nationalism of this Government has been deeply depressing for a long time. But the fanatical, pedantic ideology that the Government have displayed in the last few weeks is quite unspeakable. The Government have withdrawn from the European Aviation Safety Agency and from Euratom. They have withdrawn from the EMA, the European Medicines Agency, in the middle of a pandemic, without any idea of what they are going to put in its place.

We had a debate a few weeks ago in which I asked the Minister a series of questions about what might happen and the various possibilities for replacing the EMA. It is obvious that the Government did not have the faintest clue what they were going to do. You cannot build up a new EMA—or FDA, to use the American term—in just a few months, let alone in nine months. We literally have the prospect that any new compound coming from the world’s pharmaceutical industry—and that could well be a vaccine for the coronavirus—will not be registrable in this country, will not be registered, cannot be licensed and will not be available to British patients. This seems fantastic but is actually the case.

What does one do in these circumstances? Until that debate, which left me with a profound sense of concern and anxiety, I took the view that these negotiations were going to be very difficult, take a long time and that there would be a lot of posing, rhetoric and so forth but that, at the end of the day, between rational, reasonable people, and given the importance of trade, there would be some compromise. Indeed, I worked out what I thought could be a viable compromise in the area of the regulation of traded goods, or what is now known as the level playing field.

I do not mind telling the House what I worked out; it will not have any relevance and, for reasons I shall come on to, it will never be implemented. I had in mind that we would start off with regulatory alignment, and we would then have an understanding, or a rule, that any party wishing to introduce a new regulation or change an existing one would have to give three months’ notice to the other. This would provide time and opportunity for negotiation and possibly compromise. But if the party insisted on having his or her way, at the end of the three months, he or she could withdraw from the whole arrangement. It would be so unlikely that anyone would want to withdraw from an arrangement affecting the exchange of tens of billions of pounds or euros of goods every year that it would be very unlikely that it would ever occur.

But I then realised, particularly after the debate that I have referred to, that I had really got it quite wrong. It was a great mistake to look at this from the point of view of rational analysis. We are dealing with much more powerful emotions than that. If you ask—and I have done this—the members of the ERG, who are supposed to be dominating the Government, what regulations they would like to introduce, if they are going to introduce new British regulations, or about the regulations we currently have that they would like to get rid of, they have no idea. This is not about regulations at all; it is about something much more profound and deeply emotional—something which goes to the heart of the Government’s ability to continue with its nationalist and populist campaign and which has brought it such electoral success recently. It is all about sovereignty.

On the continental side, there are equally strong emotions. In my view, what drives the continentals is more important than pounds, shillings and pence—or euros—or the productivity gains that you can certainly achieve from international trade, or the wealth creation or employment creation. Those things are very important. They are very attached to them. However, even more important to them is the survival of the European Union and the protection of that great sense of solidarity that has been built up over the past 50 years: the cultural changes, the exchanges and the bringing down of barriers; the educational and scientific research programmes; the enhancement of security through things such as the common arrest warrant and Europol; and the economic benefits of the single market—very much so. Above all is the assurance that Europe would not go back to the international system of 1914 or 1939, in which we had a bunch of highly competitive, nationalism-driven states quarrelling from time to time about economic, ethnic and territorial disputes. We know very well to what appalling tragedies that led. These matters are far more important than they appear. I am afraid that I can draw the conclusion only that it is most unlikely that there will be any agreement on them in present circumstances.

I will take another example, which is that of equivalence in financial services—I only have time for two examples, but they are perhaps the big two potential deal breakers in this whole negotiation. Equivalence is not quite the same as the example that I have given about the level playing field, because the proposals on equivalence do not involve giving privileges not available to members of the union to someone who has been a member of the union but has left. That seems absurd and unjust—it is, of course—and would be a permanent source of resentment, bitterness and recrimination within the union. If we came to an arrangement similar to the one that I just proposed theoretically for the level playing field, I do not doubt that, within a day or two, Mr Viktor Orbán would come up with a demand for 200 more regulations to be imposed or removed, so as to show how absurd and unjust the whole thing was.

Equivalence is not quite in the same category because it is not having something better than what members of the union have: it would not be as good as what they have, because they have stability and confidence that the regime will continue in the future. Equivalence means that you are considered equivalent as of today. However, banking regulations change the whole time: you might not be equivalent after six months, most unlikely to be after two years and certainly would not be after five years. You will have no guarantee of it being renewed and do not know what new regulations might come in. You are not in a better position, although it is still a much better position than not having the right to deal in the markets concerned without setting up separate subsidiaries and fragmenting your capital base, which no bank wants to do.

Equivalence is valuable and important but not likely to be granted. There are perhaps three reasons for that. The first is very understandable, and I do not think that anybody should be shocked by it, because I do not doubt that we would be behaving in exactly the same way if the boot were on the other foot. The continentals have noticed that London has attracted an enormous amount of the wholesale banking business that can be so profitable in normal circumstances. Since you need only one capitalised entity in the EU to trade throughout it under present EU arrangements, most of those entities have been placed in London. I doubt that there is a general desire on the part of our continental former partners to ensure that our commercial advantage continues indefinitely; they may well feel that there should be a level playing field there too, and that they should put themselves in a position where they can attract that sort of business to their own financial markets. There will be an element of that, which you can call protectionism, but it is natural—it is human nature, really. As I said, I do not think that we should be particularly shocked about it. We should just accept it. It is a strong argument and there is no answer to it.

The second thing is precedent. All Governments are very concerned about precedents when they give a favour to anybody—we are talking here about a major favour. As has already been said, there has been a considerable extension of the idea of equivalence far beyond what was originally envisaged as a purely EU-US arrangement. The EU is currently locked in difficult negotiations with the Swiss on precisely that point. No doubt the Chinese, the Indians or all sorts of people would like to have equivalence, and they are people whom it is very difficult to refuse, but in this context it would have to be refused because they do not have the effective banking supervision and regulatory systems that would be required. The creation of yet one more precedent would be something that a lot of people in the European Union would want to resist.

Thirdly, there is a point that possibly will not be spoken about very frankly, but it plays a big part in this, and that is the attitude of the central bank, the ECB. All central bankers, before they go to sleep at night and when they wake up in the morning, have two great concerns: one is whether there will be a financial crisis; the other is, if there is a financial crisis, whether they have the instruments to deal with it satisfactorily. If you have a financial crisis, you have to give orders to the banking system—like the orders we gave to banks after the Lehman collapse to stop buying CDOs—and those orders have to be obeyed immediately. You cannot really have a situation in which somebody says, “But I’m British and I’ve got a special protocol. I don’t have to obey you. I want to go to arbitration and do this, that and the other and call in lawyers.” It does not work that way. Equally, central banks depend upon a situation in which the major bankers in their jurisdiction are very beholden to them. I speak as a former investment banker for 14 or 15 years. Latterly, I was a main board member and head of European corporate finance in a large investment bank. Anybody who has ambitions in the City in that field has to make sure that they do not cross the Old Lady—that they do not upset the Bank of England. It is not a question of breaking some specific rule, but you want be regarded as responsible and helpful, particularly in a crisis when it is necessary.

Christine Lagarde and her colleagues will almost certainly be asked by Monsieur Barnier about their views on equivalence—no doubt it has already happened. I doubt very much that they have said that it would be a great idea to have more people in this market based outside the European Union with the privilege of operating under the equivalence regime. I very much doubt they will be saying that. I think they will be saying that it is something they would be reluctant to see. There are serious reasons why in both these cases—and I described them both as potential deal breakers—we will not get what we want.

The Government are very optimistic. They are trying to up the ante the whole time—saying that the continentals have got to agree everything by the end of the year and they have to make substantial progress by May or June otherwise we will drop the whole thing et cetera. They have even, as has come out very clearly from this debate, broken the terms of the agreement that they made on Ireland, which will make it very difficult for a negotiation to succeed. I think they are doing this because they are extremely confident. They have always said that the continentals are much more dependent on us than we are on them because they sell much more to us than we sell to them. It is a wonderfully quaint, mercantilist idea from the 17th century. Most people dropped that idea with Ricardo in the early 19th century. We now believe that the benefit of international trade is the opportunity gains through the international division of labour, and the benefit is computed in terms of gross domestic product, not in bullion accumulated in the central bank as mercantilists believed, or perhaps still do believe.

Nevertheless, if we look at it from the point of view of GDP, it is quite instructive. We find that the reverse is true. Their dependence on us is much less than our dependence on them. Some 14% of British GDP is exports to the European Union. In no European Union country, with the exception of the Republic of Ireland—and the Netherlands, where there is quite a lot of entrepot trade through Rotterdam which perhaps falsifies the figures—is the figure for exports to this country greater than 4% of GDP.

[Lord Lamont of Lerwick]

Is that not a very mercantilist view?

[Lord Davies of Stamford]

No, indeed it is not. I am not saying that the benefit we get is accumulating bullion, because we have a balance of payments surplus. That is the mercantilist idea, and I can only describe it as quaint; it is curious that people still believe in it. Yet the Government evidently do—because that is what it means when people say, “We’re in a better position, because they sell more to us than we sell to them, so they’re more dependent on us.” In fact, the GDP figures show the reverse.

To complete what I was saying about the figures, no EU country, apart from the two I mentioned, has exports to this country greater than 4% of GDP. That means that, if there were a 10% reduction in our trade because we went over to a WTO basis after the end of the transition period, the continentals would lose 0.4%, which is within the annual fluctuations of national accounts, whereas we would lose a much more important 1.4%. If there were a 20% reduction, they would lose 0.8% of their GDP—still manageable, although it would be a difficult blow—whereas we would lose 2.8%, which would be cataclysmic.

For those who do not like elementary economics, I should add that one could ask a 12 year-old, “Who has the greatest leverage and influence: someone who speaks for a market of 500 million people or someone who speaks for a market of 60 million people?”, and that 12 year-old would give you the right answer. The Government have the wrong answer. The first step in wisdom is self-knowledge, and the Government should take that step before they get involved any further in these negotiations.