European Banking Union: EUC Report

Lord Trimble Excerpts

Thursday 24th January 2013 Lords Chamber

[Lord Trimble]

My Lords, it is a pleasure to follow the noble Lord, Lord Harrison, and his admirable presentation of his sub-committee’s report. I also want to congratulate him on the way in which he has handled his chairmanship of that sub-committee.

I want to focus initially on two of the major issues in the sub-committee’s report. The first relates to what the noble Lord has already referred to as the incomplete nature of the EU proposals for a banking union. The committee had pointed to the need for the single supervisory mechanism, proposals for which were published in September 2012, to be joined by a common resolution mechanism and a common deposit insurance scheme.

The single supervisory mechanism was agreed by heads of government at the December European Council meeting but will not, as I read it, be operational until some time in 2014. The Council also called for work on proposals for directives on recovery and resolution and on a deposit guarantee to be accelerated so that the directives could be agreed by the end of March 2013, enabling the Commission to bring forward a proposal for a single resolution mechanism in the course of 2013. I must say that that timetable seems remarkably optimistic and I look forward to what the Minister has to say on that point. Parenthetically, I suspect that the two different timetables were deliberately chosen so that the German voter would not be scared off.

Another major concern of the Select Committee was that the UK should secure a mechanism that would ensure that the eurozone members would not be able to dominate the non-euro members. Initially, there was understandable scepticism about the Government’s prospects of achieving this, so we should congratulate the Government on having achieved substantial progress on it. As Commissioner Barnier said in a speech just after the December Council meeting:

“According to the new voting modalities, any EBA decisions will have to be approved by a majority of countries outside the Banking Union”.

I am always fascinated by the use of this term “modalities” in a European context because it does not really tell you anything about what the mechanism actually is. However, looking at other material, it would appear that this requirement for approval by a majority of countries outside the European banking union will be contained in amendments to the European Banking Authority’s regulations, so that there is a clear legal basis for it there.

That is just the key decisions in the EBA. What about other decisions? The Financial Secretary to the Treasury, Mr Greg Clark, in his letter to my noble friend Lord Boswell, said that the double majority, “will also apply to key decisions including those relating to binding technical standards that will apply to firms across the single market”. He says that this is a, “supplementary requirement to existing voting arrangements”. Can the Minister clarify this? I have not seen anything that indicates how this supplementary requirement is actually inserted: what is the legal mechanism that brings this supplementary requirement into place? Furthermore, Greg Clark says that this will not be a permanent arrangement because the requirement will be reviewed if there are four or fewer euro states.

Commissioner Barnier’s speech says that it was the UK, the Swedes and the Czechs who sought a level playing field in the December meeting. That puzzles me slightly. Is Barnier’s list complete? I would have thought that we had more than three supporters on that and am particularly curious about the position of Denmark.

Our committee, in accordance with its usual practice, confined itself strictly to the banking union and considered that in a consensual manner. It did not go into other developments and related matters that might be slightly more controversial, but I shall tiptoe into those areas where the committee refrained from treading. Banking union itself will not be enough; it will need a fiscal union and an economic policy union. These matters are coyly mentioned in the December Council conclusions as,

“further integration of the fiscal and economic policy frameworks”.

Eventually, these will require treaty change. However, probably at an earlier stage, by one means or another, it will require what the Germans call a transfer union. At the moment, how and when that will kick in is shrouded in mystery, but it will have to. Some of us had the pleasure of meeting the Bundestag’s EU committee here a few weeks ago. Its chairman emphasised to us that Germany was prepared to accept the burdens that would flow from the banking union and, in response to a question from my noble friend Lord Flight, said that he recognised the balances that had accrued through the “target” system.

On all these matters, my doubt is principally whether the safeguards that our Government have achieved can be sustained. For those who believe in “ever closer union”, the achievement of that goal must now be focused on the eurozone, with the non-euro countries either a temporary expedient or a long-term aggravation.

If the euro survives and if the “outs” move to being “ins”, as most of them are obliged to do, it is probable that the views and interests of the ins will dominate the operation of the single market. Unless our safeguards are embodied at treaty level, it is difficult to see them surviving generally—and certainly when the review kicks in after the number drops to four. How we then respond will depend on what we think is the value of the single market, a market with which we have an adverse trade balance, which takes a minority and declining share of our exports while imposing costs on our global business activity, and which, we must remember, is even now a social market rather than what most of us in the UK would call a free market.

My other doubt is whether the Council and the Commission are heading in the right direction. Many years ago, when I had the pleasure of being a member of Sub-Committee A, we did a report on the euro 10 years on. This was before the credit crunch struck. In preparation for that report, we spent a fair amount of time with witnesses on the possible vulnerabilities of the euro—of course, very little of this went into the report because it was essentially speculative. Those who gave opinions to us generally agreed that the eurozone could be vulnerable if struck by a serious, asymmetric shock. The crisis which followed was such a shock. I remember one witness who mentioned this possibility also saying that we must remember that a country can take a lot of hurting. He explained this by reference to Italy, where, in the 1860s, the Mezzogiorno, or the Kingdom of the Two Sicilies which it was before that, was rapidly integrated into the new Italian state on terms which left it locked into poverty and low development in contrast to the prosperous north. Even 150 years after that integration, there is no sign of that uneven relationship changing. Today, there is the prospect of the European Union’s Mediterranean countries becoming effectively an enlarged Mezzogiornio, in a crisis which was caused partly by the euro but from which the euro prevents escape.

I would say to those pressing for banking union and the other unions that flow from it, “Don’t reinforce failure. Don't subject the social fabric of the Mediterranean countries to this awful strain”. They, and maybe some others, too, need a better model for the future.