EU: Recent Developments

Baroness Falkner of Margravine Excerpts

Thursday 16th February 2012 Lords Chamber

[Baroness Falkner of Margravine]

My Lords, I too welcome the opportunity to speak to recent developments in the EU. I recognise that it is inevitable that the debate will be dominated by the eurozone crisis. I anticipate that there will be numerous speeches expressing disappointment with the developments in the EU over the past few years. I understand some of those views, particularly as the lack of leadership by some players in the EU has affected our own economy so detrimentally. The profligacy of others is particularly keenly felt when one’s own prudence is imperilled through the behaviour of others.

I am speaking today, though, in support of recent developments in the EU against the backdrop of the turbulence of the past few years. It is now nearly three years since the Commission issued warnings to Greece, Ireland, France and Spain to reduce their budget deficits. It is a full two years since Greece’s budget deficit was revised upwards from 3.7 per cent of GDP to 13.6 per cent—something that could be described only as fraud on an industrial scale—yet the EU continues to bump along and the eurozone itself, for which headline writers had prepared their “Rest In Peace” banners, is still with us.

It is conceivable that the eurozone will lose a member along the way, but it may yet confound predictions and emerge from this crisis far stronger. Whatever happens, we in the UK have to be clear that we will not simply be onlookers but will be affected by what happens there. We would all have wished that the previous decade had not seen the mushrooming of private debt, the housing and construction bubbles and wage spirals with productivity losses in some of the less competitive countries. We can all agree that, had the financial crisis of 2008 not put pressure on government borrowing too, we would not be here. The human cost across the EU and beyond is considerable but, as commentators talk of a 1930s-type recession, it is instructive that we have avoided that sort of catastrophe to date.

If one thing has become apparent over the past three years, it is that the EU is more than a sum of its parts. The intention to create more than a free trade area was there from the very outset, and evidenced in the preamble of the treaty of Rome—an ever closer union of the peoples of Europe. Over its existence we have seen a convergence of policy-making but, more than that, there has been a genuine convergence of the values that bind Europe together. It was for the prize of a united Europe that western Europe held out together in the Cold War and our perseverance paid off handsomely, with those well beyond what was conventional Europe joining the queue to come in over the years.

I turn specifically to the eurozone crisis. Its handling is essentially a political issue. There are those in this Chamber who quite legitimately express concern about the installation of technocratic governments in Greece and Italy and the democratic cost of so doing. There is also concern about the power exercised by the bigger eurozone countries in imposing conditions on the indebted states. The argument goes that this is proof of the power of those faceless Brussels bureaucrats in the Commission, who are accountable to no one. However, it is exactly the opposite. The eurozone crisis has demonstrated the renationalisation of European policy, and it is ironic that those of an anti-EU posture do not like that either. The pull and push of democratic politics is very much in demonstration here, just as it should be.

Let us consider Italy and Greece, the two countries that are being led by technocrats. It was evident in both cases that the Government of the day had neither the resolve nor the numeric capability to carry out the measures needed. An alternative was proposed and accepted by the populations of those countries. What is important is that, in the case of Italy, the Monti Government have taken the necessary steps and should now be allowed to get on with putting themselves to rights. The case with Greece is different. The posturing of both the main parties is synthetic—calculated with an eye on the elections in April rather than the main issue, which is Greek insolvency.

Germany is cast as the villain of the piece, but if you were Germany, with elections forthcoming next year, would you willingly ask your citizens to write an open cheque for someone else’s party? We in the UK have little appreciation of what a charged debate this is in Germany, coming as it does within living memory of the sacrifices made during unification, which resulted in higher unemployment and flat growth for over a decade in the 1990s. The words of the Oxford-educated Polish Foreign Minister Radoslaw Sikorski to Germans are instructive. He said:

“Because of your size and history you have a special responsibility to preserve peace and democracy on the Continent”.

The eurozone 17 have themselves bought time in their handling of the peripheral countries so as to let the system stabilise against unrelenting market pressure. It is salutary that Iceland, which is pulling itself together again, has only recently reiterated its intention to join the EU and the eurozone as it embeds its recovery. The cost of borrowing for the deeply indebted Italy, Spain and Portugal is slowly coming down. In institutional terms, over the past two years we have seen a determined move by the eurozone to address systemic failure and to put in place, albeit belatedly, a series of measures which are intended to shock-proof the system going forward. Improved governance, though little noticed, has taken several steps forward, and a new, more robust architecture is now visible.

Notable among these steps is the so-called “six pack” set of rules aimed at strengthening economic governance in the EU. It will ensure that both the EU and the euro area will benefit from improved surveillance of both budgetary and economic policies. These measures have “Made in liberal north Europe” stamped all over them, and are entirely in keeping with the UK’s traditional approach of embedding legal norms, with the European Commission and the European Court as the guarantor of compliance. Indeed, the agreement of the European Parliament was in large part due to the steerage of Liberal Democrat MEP Sharon Bowles, who as chair of the Economic Affairs Committee ensured that while tough rules on deficits and debt were agreed, sufficient flexibility simultaneously remained to allow for automatic stabilisers to operate in downturns.

The European Central Bank has quietly worked to keep the credit markets liquid and has made significant progress in ensuring that the EU has built up its capital base. Basel III is on track and stress tests are ongoing. The European Financial Stability Facility, or the ESM as it will become, is making progress—slow progress, but progress nevertheless—to erect a firewall as well as to engage emerging markets and others in further capitalisation. The fiscal pact is now agreed, with its emphasis on balanced budgets. So the EU has proved to be extraordinarily resilient. A recent World Bank report on Europe puts it this way:

“America has taken in poor immigrants and turned them into high-income individuals. The European Union has taken in poor countries and turned them into high-income countries”.

However, to believe that Europe's economic model is valid is not to say that there is no case for reform. As the Economist put it recently:

“If America is a defence superpower, spending almost as much on defence as the rest of the world combined, Europe is a ‘lifestyle superpower’, spending more than the rest of the world put together on social protection”.

Demographic change and the pressures of ageing will stretch health and welfare budgets further, while productivity is declining apropos emerging economies. Having closed the productivity gap with America in the mid-1990s, Europe is again falling behind, particularly in the southern countries. That brings me to the Government's priority on a comprehensive growth strategy for Europe, with a renewed emphasis on innovation and enterprise. The single market still has to operate better in certain sectors, not least research and industry, where there are still significant barriers in some countries, hence the importance of the newly agreed growth tests.

I may be presenting too optimistic a picture of where the European Union and the eurozone are presently, but perhaps I can justify my optimism in my closing remarks with a quick overview of where we were just three years ago. The shock that hit the world economy in 2008 was analogous to the great depression. In the 12 months from 2008, industrial production fell as much as it did in the first year of the depression. Falls in equity prices and global trade were greater. Unemployment has risen in some counties to levels above those of the great depression. However, we have survived all these upheavals. The shared safety nets and the ability to act together in international co-operation, to pool resources and share markets, were absent then. When historians look back on this period, the spirit of common endeavour and unity will stand out as the variable that made the difference.

--- Later in debate ---

[Lord Stoddart of Swindon]

The eurozone has proved that a single currency cannot work without fiscal and political union. A lot of people have pointed that out this afternoon.

This debate is about developments in the European Union. So far we have heard about great issues, but all sorts of things are going on all the time in the European Union, many of which affect ordinary people in this country. For example, the Solvency II capital rules, which I believe are now being agreed, will cost the British financial industry £600 billion, according to JP Morgan. They will cause massive damage to the United Kingdom’s pensions industry and will virtually kill off the last vestiges of final salary schemes. That will hurt ordinary British people. We should take note of that.

Then there is the proposal to make mortgages in default after 90 days in arrears, which conflicts with the Government’s own policy of helping people, quite rightly, to hang on to their homes when they are in financial difficulty. Then there is the demand for another £9 billion to meet the additional commitments in the present financial round, which will cost the United Kingdom £1 billion. That is extra to the £10.3 billion that we have already committed and money that we do not have. We will have to borrow £1 billion more. Only on Tuesday, the EU Commission announced that 12 member states, including the United Kingdom, are suffering from severe economic imbalances leading to economic shocks and that they will be placed under stringent observation so that they do not compromise the stability of the EU.

That dictatorial language and action is now commonplace in the EU. The treatment and humiliation of Greece by the EU is alarming, disgraceful and completely undemocratic. Furthermore, the Greeks have had the right to govern themselves taken away and the leaders of the Government are unelected Prime Ministers. The political parties now have to guarantee that they will put into place measures that will hurt ordinary Greeks in a manner that is totally unacceptable in anything other than a third world country. That is in advance of what will be done.

Some of us predicted that eventually there would be fighting in the streets in the European Union or Common Market. We now have it. We have fighting in the streets not only in Greece but in other countries as well—

[Baroness Falkner of Margravine]

But that was happening in London in August.

[Lord Stoddart of Swindon]

Perhaps I may repeat that we have fighting in the streets in Greece and in other countries, such as Spain and Romania. That cannot be denied.

As usual, a crisis situation is being used to transfer more power to the EU institutions. The fiscal agreement was made between countries other than the United Kingdom and the Czech Republic. It may be intergovernmental at this stage. However, all experience has shown that inter-governmentalism eventually collapses and becomes an EU competence. That happened following the Single European Act, the Maastricht treaty, the Amsterdam treaty, the Nice treaty and the Lisbon treaty, all of which transferred more powers from nation states to the institutions of the European Union.

However, even this does not go far enough for the European top dogs. Frau Merkel, for example, was recently reported in the German newspaper Handelsblatt as saying that, step by step, European politics is merging with domestic politics. She called for closer political integration, with members ceding further powers to the European Commission, which ought to be the real government of Europe, with the Council of Ministers operating as a second chamber and adding strength to a European Parliament. That is the vision of people such as the Germans, which is also supported by the current President of France. The noble Lord, Lord Howell, does not agree with that. He is calling for a completely different sort of Europe—but Germany and France in particular are determined to go very much further than the noble Lord outlined in his speech. Of course it is not only the leaders of individual states who are doing this. Mr Barroso was this week telling the Chinese that the EU will become a fully fledged political union after the financial crisis. I hope that the Government will tell these people that that is not the vision that the United Kingdom has for the European Union; and, indeed, that the British people will not tolerate that. They want to continue to be governed by their own elected representatives and by institutions that have been built up and been successful over many hundreds of years.

--- Later in debate ---

[Baroness Stowell of Beeston]

My Lords, I hesitate to rise in a debate that is not time-limited, but perhaps noble Lords will find it helpful if I advise the House that we are running slightly behind schedule, based on the guidance that my noble friend issued at the start of the debate, and that is bearing in mind that two noble Lords have scratched. Most noble Lords have been very diligent in keeping to the guidance, but I thought it would be useful for me to remind noble Lords that the guidance is for about nine minutes.

[Baroness Falkner of Margravine]

My Lords, perhaps I could respectfully say to the noble Baroness that the Order Paper says that the House is intended to rise at 7 pm. We only have four speakers remaining, plus the substantive wind-ups. They have sat here patiently through many hours of this very interesting debate, and I am sure the House would prefer to hear everyone in line with their own aspirations to be heard, rather than now to be time-limited or curtailed.