Economic and Monetary Union (EUC Report)

Lord Young of Cookham Excerpts

Wednesday 9th November 2016 Grand Committee

[Lord Young of Cookham (Con)]

My Lords, I begin, as others have begun, by complimenting the committee on its comprehensive analysis of the five presidents’ report. This is a fantastically complicated and politically sensitive area, and we have before us a very thorough and interesting report, to which Members have quite rightly paid tribute. As someone who has not had any interface with the EU institutions for some 20 years—since we left government in 1997—I have found it very helpful to be brought up to date and, indeed, to identify a pathway through the thicket of acronyms, which take up five pages in the glossary at the end of the report.

I hope that the report will be read in the rest of Europe as well as here. I was interested to hear the noble Baroness, Lady Falkner, say that it is on the reading list of those in Europe, because it is essentially about the future health not just of the eurozone but of the longer-term relationship between those who are in the eurozone and those who are not. As I said, it is of relevance not just to this country but to those on the other side of the channel.

Since the publication of the report and the Government’s response, we have seen a seismic shift in the relationship between the UK and the EU. The terms of trade—if I can use that expression—between the UK and the EU have changed dramatically following the vote on 23 June. We have already set to work to identify the challenges and opportunities ahead as we enter a new relationship with the EU and, indeed, with the rest of the world in a new era for the UK.

Following the outcome of the referendum, some of the issues covered in the report are now of less significance to the UK as we negotiate our new relationship with the EU. However, our exit from the European Union does not alter our commitment to its success, and the strength and stability of the eurozone is clearly at the heart of that. That was a point made during the debate by the noble Lord, Lord Kerr, and the noble Earl, Lord Caithness, among others. A sensible way of maintaining the prosperity I just referred to is to make the economic, financial and fiscal reforms required to bolster the eurozone’s ability to withstand any crisis that lies ahead. This is important not only for those countries that have adopted the euro but for other EU member states, and indeed for other European countries. That is why we have taken a keen interest in these reports. I thank the noble Baroness, Lady Falkner, for securing the debate, and all noble Lords who have contributed.

Given the outcome of the referendum, the new context for any consideration of the relationship between the euro area and non-euro-area states, and the need to provide the new Prime Minister and her Cabinet with space to develop their negotiating position for the UK’s exit from the EU, the Government judged in July that it would not be appropriate to provide a full response to the report. The Government instead responded by a letter, referred to in the debate, noting these changed circumstances. I hope the committee understand the reasons behind that approach, which I agree departs from usual procedure. I assure the committee that no discourtesy was intended, but I hope to set out some of the Government’s thinking.

It is clear that the fundamental economic challenges facing the euro area have been well known and anticipated since its very inception. One of the themes running through the report is the tension referred to in the debate between, on the one hand, the imperative of a common monetary policy for the eurozone, and on the other the often countervailing pressure from the democratic institutions within the member states, as paragraph 182, for example, shows. If one looks at the conclusions of the report, one can see that paragraph 4 on page 61 makes the same point. Implied loss of sovereignty was certainly a central factor in the UK’s decision not to join the euro, a point referred to by the noble Lord, Lord De Mauley. However, those who chose to join have certainly been working hard to introduce the institutional and policy reforms to make the euro work better. At Maastricht, for example, member states agreed on common fiscal rules through the stability and growth pact, designed to prevent member states from running unsustainable fiscal positions that could cause problems for other member states.

However, the eurozone showed quite clearly that the reforms had not gone far enough, although the noble Lord, Lord Dykes, reminded us of the currency’s achievements since its inception some time ago. While the subsequent agreement on the six-pack and two-pack measures undoubtedly strengthened the EU’s fiscal rules, and though the banking union addressed certain financial issues, none the less I think it is broadly recognised, as came through in the debate, that some of the key issues behind the eurozone’s problems still need to be addressed. So now we have the five presidents’ report, which makes an important contribution to doing so and drives forward the debate on how to improve economic governance within the euro area.

As I said a moment ago, this is of real importance to the UK, regardless of our membership of the EU. While many of the conclusions of the committee’s report referring to the relationship between the euro-ins and euro-outs in the longer term are now of less relevance to the UK, it is still quite simply in our interests that the eurozone is a strong currency area, working successfully in the wider European Union, a point made a moment ago by the noble Lord, Lord Kerr. To achieve this, the eurozone will likely need to pursue closer economic and fiscal integration. Clearly, this is fundamentally a matter for the Governments of the eurozone countries to determine themselves. We know it is not an issue for us to decide, but I will briefly highlight some of the main points in the committee’s comprehensive report, which the Government support.

First, it is most certainly the case that the fiscal policies of an individual country can have a significant spillover effect on other countries. It is for that reason that there are calls for a much greater degree of economic and fiscal co-ordination than we have at the moment. But as the report again makes clear we must be alive to the fact that, when we talk about a fiscal union, this is a broad concept indeed. I read with some interest the exchange between the committee and the then Financial Secretary to the Treasury on the subject of fiscal union. At points it read a little like an Oxford tutorial on a philosophical concept.

It again came out in the discussion that it would be wrong to overlook the wide range of views among the euro area members themselves on how best to proceed. There are important debates among the euro area member states on the precise level and type of integration that is needed to make the euro work as a source of stability of jobs and growth. It is a live and sensitive debate. The report outlines this, for example, in the section about risk reduction and risk sharing, to which a number of noble Lords have referred. Clearly it is down to the euro area to decide on the reforms to be taken and the timetable of implementation.

Secondly, we agree entirely with the committee’s assessment that the drive towards improving competitiveness in the euro area should focus on enhancing productivity. As noble Lords will know, this challenge affects all the economies in the euro area to a different degree, including the UK, and the Government are working hard to address it through our national productivity plan. I can see the case, as is suggested in the five presidents’ report, for the creation of national productivity boards to support competitiveness across the euro area and the wider European Union. They can provide an independent assessment of where further reform, including structural reform, is required.

Thirdly, we support the view of the importance of the macroeconomic imbalances procedure—the MIP—as a surveillance mechanism, particularly for the euro area. This would aim to identify potential risks early on, prevent the emergence of harmful macroeconomic imbalances and then correct any imbalances already in place. However, as the Commission’s report says, consideration of how to reform this process is as yet limited in the five presidents’ report and we need to see the appetite of member states to take this forward. Again, the issue of political will was mentioned during the debate, particularly by the noble Lord, Lord De Mauley.

Lastly, the committee is right to raise the important issue of democratic accountability, a point well made in paragraphs 222 and 223 of the report. What mechanism is chosen to achieve this will ultimately depend on the measures for economic and fiscal integration which are eventually agreed. Those reforms will, of course, primarily be down to the eurozone member states to determine for themselves. Given the emergence of political parties throughout Europe which are hostile to the EU, this is one of the biggest challenges facing the eurozone and the EU. The issue of democratic accountability raised during the debate, as I said, is one of the most critical issues and I was interested to hear what the noble Baroness, Lady Falkner, said on this subject.

Perhaps I may briefly touch on some of the points raised during the debate. If I do not deal with all of them, I shall write. The noble Earl, Lord Caithness, asked why it took so long to set up the European Fiscal Board. The gestation periods in the European Union are notoriously long and the timing of appointments was a matter for the Commission. I note that the board will be in place in time for the 2017 European semester process.

A number of noble Lords mentioned the EDIS, the EU deposit guarantee scheme. I see this as a final element in delivering an effective banking union, although the noble Lord, Lord Butler, made the point that this was a necessary rather than a sufficient condition if one is to get the kind of stability he was talking about.

On the question of CMU, which again was touched on, we welcome the Commission’s approach to the project. The UK will continue to contribute to the CMU, and the need remains for Europe’s firms to access capital-based finance in order to grow.

As the noble Lord, Lord Butler, mentioned on the question of the White Paper, the timetable has slipped a bit. The recently published 2017 work programme confirms that the proposed White Paper will now be broader in scope, setting out steps on how to reform an EU of 27 rather than just economic governance in the euro area. We will need to see how the political uncertainties inherent in the elections in 2017 are addressed. He also raised the key question about the future of the euro. As someone with an Oxford college background he left the question—which of the two options we would end up with: a flourishing currency, or going over the cliff—unanswered.

This report has come at an interesting time in our relationship with the European Union. We are very much at the start of a new chapter, and one which, at this stage, largely remains to be written. Many of the conclusions in the committee’s thorough report refer to the longer-term relationship between those EU member states that are part of the euro area, and those that are outside. As I have said, following the outcome of the referendum these issues will now be of less significance to the UK as we negotiate our new relationship with the EU. However, as we forge ahead to create a new relationship and a new role for the UK, we will also continue to support and take a keen interest in the closer economic and fiscal integration of the eurozone countries. A stable and prosperous eurozone is in the interest not just of those countries themselves, but of all their European neighbours.

We will therefore consider closely any changes that are proposed, and act to protect the UK’s interests where necessary. The noble Lord, Lord Tunnicliffe, asked about the single market and passporting. I will not irritate him and the committee by reading out the line to take on this subject. The country voted to leave the European Union, and it is the duty of the Government to make sure that we do just that, but up to the point of leaving we remain a member of the EU, with all the rights and obligations that membership entails—a point made by the noble Earl, Lord Caithness. While we remain a member of the EU we will continue to play a role representing the interests of the British people. In particular, we will ensure that we protect the UK’s interests as the process for completing Europe’s economic and monetary union continues.