EUC Report: Economic Governance

Lord Sassoon Excerpts

Thursday 16th June 2011 Lords Chamber

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, I thank the noble Lord, Lord Harrison, and all the members of the sub-committee for their work on this issue and their excellent and timely report. I learn new things about the way in which this House operates on almost every occasion when I stand at the Dispatch Box. After seeing how the topics had been parcelled out and questions were fired at me from left, right and behind, I now understand what effective committee work is all about. In the brief time that I have, I will not be able to give detailed answers to all the questions. I thank all noble Lords who have contributed to this debate, in which the usual degree of repetition was absent; we have covered a very wide range.

The euro area has had and continues to have a very tough time. The weak economic growth of the euro area is a symptom of the fundamental problem that is faced: weak economic governance. That is the starting point that the noble Lord, Lord Woolmer of Leeds, and other speakers have drawn attention to. In answer to the noble Lord’s question about the current situation—there were also other references to restructuring packages—the Government’s position on possible further bailouts for Greece is unchanged, and, incidentally, is the same as that of the French Finance Minister, Madame Lagarde: we do not want to be part of any second European assistance package for Greece. Indeed, no such proposal has been made. In answer to the broader question asked by the noble Lord, Lord Harrison, it would be wrong to rule in or out the participation of the private sector in any package for Greece or anywhere else. This important issue continues to be debated, though, and it should be.

I was interested in and pleased by my noble friend Lord Marlesford’s discussion in this area, reminding us of what we are doing in this country, particularly with the proposals that the Government are bringing forward today to ensure that we have mechanisms in place to identify systemic risks and deal with them effectively. I thought for a moment that I had fallen asleep, it was 4.30 pm and we were already talking about the financial regulatory structure in the UK, which we will be doing later today. Following last year’s EU economic task force and in the context of the ongoing difficult situation, the Commission brought forward six draft pieces of legislation on fiscal and macroeconomic surveillance that aimed to strengthen current monitoring mechanisms and to give early warnings of economic problems in member states. It proposes tough sanctions for euro area countries that step out of line. I will come back to sanctions in a minute.

I stress that we are not part of the single currency but, as the committee’s report notes, a stable eurozone is firmly in the UK’s interests, as is ensuring the success of measures to bring it to economic stability. I trust that there is no doubt about that. I am sorry that the noble Lord, Lord Liddle, thinks there is anything Janus-faced about it; we are working hard and co-operatively to ensure that the measures are appropriate.

Many commentators agree with the committee that the euro area’s problems were caused by tensions between centralised monetary policy and decentralised spending decisions. The proposed legislation seeks to address that through increased co-ordination. In broad terms, the Government welcome the pragmatism of the proposals. We support the refinements to the stability and growth pact that will help to prevent countries from running unsustainable deficits in good times. As the committee report notes, a gradually escalating system of sanctions will mean that member states think twice before breaching the pact.

The noble Lord, Lord Haskins, rightly noted that the most effective sanctions will and must come from the market. A number of questions were nevertheless properly raised about sanctions. We agree that a limited use of reverse qualified majority voting should ensure that member states cannot avoid sanctions through political deal-making at ECOFIN of a sort that was seen from member states in the past. On the questions asked by my noble friends Lord Hamilton of Epsom and Lady Maddock, we think that reverse QMV is one way to address the sanctions question. There should be limits to the use of reverse QMV. We do not think that it would be right to remove voting rights more generally. That would require a treaty change, and the UK would have the right to veto any such proposals.

I reassure the House, specifically my noble friend Lady Maddock, that the UK is not subject to sanctions under the stability and growth pact. The treaty is clear that they apply only to euro area countries. In addition, the UK’s opt-out protocol that was negotiated at Maastricht is clear that we are exempt from such fines.

Another issue that my noble friend raised was the extension of sanctions in the next financial perspective. I assure her that the Van Rompuy task force report clearly stated this with regard to sanctions under the stability and growth pact and under the next financial perspective. Sanctions may be rolled out for other euro area member states but not applied to the UK, so I hope that the position is clear.

I should perhaps clarify a point regarding the fiscal proposals. The noble Lord, Lord Liddle, asked about this. The Government did not disagree with the principle of a benchmark for assessing the pace of public debt reduction. Getting debt on to a downward path is of course essential for the eurozone members just as it is for the UK. However, we had concerns that the original Commission proposal was too rigid and might not take sufficient account of debt dynamics that are beyond a member state’s control. I am pleased to report that we have sought amendments in council to clarify that the benchmark really will be a benchmark rather than a concrete rule.

The Government agree with the committee’s view that while fiscal discipline is important, it will not be enough to prevent or manage future crises. That will require the EU to have the right macroeconomic warning mechanisms to identify them and the right tools to manage them. Economic imbalances are already monitored under the broad economic policy guidelines and the Europe 2020 initiative, but that has lost momentum in recent years. The Commission proposes a more systematic way of identifying economic imbalances through a scoreboard of economic indicators. I am sure that noble Lords will agree that transparent analysis of member states is important, and these indicators will help to achieve that.

I understand the note of caution that the committee has sounded in its report. Yes, the success of this monitoring will depend heavily on the degree of political will in council, but ECOFIN will now be forced to consider the evidence from the indicators on the scorecard. The Government agree with the committee’s recommendation that the composition of the scoreboard should be subject to regular review, and we are negotiating to achieve that. The Government also agree with the committee that all these systems must be intelligently interlinked. We want to see Finance Ministers having realistic discussions of policy problems, drawing on evidence from Europe 2020, the stability and growth pact and European Systemic Risk Board recommendations, if necessary. We want clear, frank recommendations for member states, and help and support for them when they act to improve their economic position and boost growth.

Finally, the proposals for a euro area crisis resolution mechanism, or European financial stability mechanism—the ESM—as it is known, are being debated in parallel to these legislative discussions. The need for them was stressed by my noble friend Lord Hamilton of Epsom and the noble Lord, Lord Woolmer of Leeds. The Government very much support the ESM, which will provide euro-area countries with the financial equivalent of a parachute. We agree with the committee’s view that conditionality is vital and that there must be no question of this being free money for fiscally irresponsible member states. Like the committee, we welcome the explicit recognition that the IMF will play a technical and advisory role in all future uses of the ESM.

The Hungarian presidency wants to finalise this package of legislation by the time that presidency ends on 30 June. My noble friend Lady Hooper pressed me on the details of this. I regret to say that the ECOFIN discussion on this was at an informal dinner earlier this week that was not minuted. There are some difficult issues, of which my noble friend is clearly aware, which need to be resolved. The Hungarian presidency is working on them, and the European Parliament intends to schedule a vote on the package next week.

I emphasise again the importance to the UK economy of achieving lasting economic stability within and beyond the eurozone. This is the central aim of this legislative package. Throughout the negotiations, the Government have striven to achieve genuine strengthening of economic governance while preserving this Parliament's sovereignty over all aspects of economic and financial policy. I am satisfied that we are on track to achieve those objectives and that the report of your Lordships’ European Union Committee has made a most useful contribution to that process.