Banking Union and Economic and Monetary Union

Bernard Jenkin Excerpts

Tuesday 6th November 2012 Commons Chamber

[Greg Clark]

My hon. Friend is entirely right. I do not think that we should be shy about insisting on protecting something that is very important to us. The single market in financial services is essential, and the current proposals would compromise it.

[Mr Bernard Jenkin (Harwich and North Essex) (Con)]

I, too, welcome my right hon. Friend’s approach, but may I caution him about the double-edged invocation of the single market? We are threatened not just by the voting rights in the European Banking Authority, but by those in the Council of Ministers. It is equally possible that the member states of the eurozone that are in the banking union will caucus in the Council and use a single-market measure to create a single market in banking services to reflect the policy already adopted by the banking union. How are we to be protected from that?

[Greg Clark]

My hon. Friend is right to be alert to those dangers and risks. One of the clear principles on which we have insisted throughout all our negotiations on all the different dossiers is that we will accept nothing that would compromise our ability to participate in the single market.

Let me say a bit more about our stance on the EBA. What is currently proposed would not just require but enable members of the eurozone to caucus and adopt positions, which poses the clear risk that the ECB could dominate EBA decision-making. Given that 17 of the 27 EBA members are in the eurozone, that would constitute a blocking minority on all issues decided by qualified majority voting, and indeed a qualified majority under the new Lisbon rules.

Moreover, such action by the Commission would create an asymmetry of treatment between supervisory bodies. The proposal reflects the legal position that, as an EU institution, the ECB cannot be legally bound by EBA decisions on binding mediation, whereas the Bank of England could be. We have argued since the start of the negotiations that it would be inequitable and unacceptable if the Bank of England could be directed in that way but the ECB could not. We are pleased that our concerns are finally being acknowledged, but the asymmetry must be resolved if there is to be any final agreement.

As is required by both the motion and the amendment tabled by the Chairman of the European Scrutiny Committee, my hon. Friend the Member for Stone (Mr Cash), we will certainly use what the amendment describes as our

“best endeavours to ensure that the proposed changes…in the European Banking Authority are not adopted”.

In fact, that is an uncharacteristically mild form of words from my hon. Friend. We will insist that those changes are not adopted, and we will require full protection for the position of the United Kingdom and the other non-eurozone members in the EBA.

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[Greg Clark]

I am grateful to my hon. Friend for that. I am not as familiar as he is with what went on in the previous exchange of correspondence, but I can say that it is essential that the arrangements need to be legal. There is no point marching up a hill of banking union if the whole thing falls apart—I mix my metaphors, but he understands what I mean. There are also other matters on which we will need to be satisfied before any of the proposed measures can be adopted.

[Mr Jenkin]

My right hon. Friend made an important point when he said that the British Government would reserve their position on the legality of this new instrument and how it might be used. Will he just expand on that? Would it not be sensible for UKRep to write a letter similar to the one written in the case of the fiscal union treaty, at the very least, in order to make that clear?

[Greg Clark]

I do not think that there is any difference between us on this. It is essential that this arrangement is legally sound. At the moment, the negotiations are continuing and the shape of the regulation is evolving, but the sensible commitment I have given is to make sure not to proceed unless we are satisfied that it is legally robust.

Let me talk about some of the other measures we need to bear in mind. We must make it absolutely clear that both now and in the future there should be no requirement, for example, for clearing houses that handle significant amounts of euro-denominated business to be located geographically in the eurozone, as proposed by the ECB—a proposal against which we have launched legal proceedings. That blatantly undermines the single market and the United Kingdom’s financial services industry. It is a poor indication of the ECB’s attitude if it intends to proceed in such a way. We need to be clear, too, that London is home to more clearing houses than any other EU capital and such proposals are unacceptable.

As the House will see, there is some way to go before the banking union proposals are acceptable to the Government. They will not be agreed by the United Kingdom unless and until we are satisfied that the UK’s position in the single market has been secured.

Let me turn briefly to the document known as the four presidents’ report, which was published on 12 October. It is an interim report that gives a general overview of the measures that the euro area member states might want to consider taking to improve the functioning of the euro. At this stage, there is little detail in the report apart from in the area of banking union and a great deal more discussion will be needed before there is agreement even on which issues should be explored further. The House will have a particular interest, however, in the discussion about democratic legitimacy and accountability.

I emphasise again that although the UK will not be part of the arrangements, it seems to me to be important that when significant decisions are being taken at the eurozone level about national matters, national Parliaments should be able to scrutinise those decisions, just as the Bank of England, the UK regulatory authorities and not least Ministers are accountable to this House and the House of Lords.

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[Chris Leslie]

It is right for the hon. Gentleman to voice that anxiety. I do not want us to be on the margins, unable to promote the best interests for our nation and our economy. Given that our financial services sector represents approximately 40% of the total of the European Union’s financial services sector, that is absolutely at the core of our vital national interests. It is therefore imperative for us to remain an active driving force in the EU single market in financial services.

[Mr Jenkin]

It seems to me that the hon. Gentleman is trying to have his cake and eat it. Either he is going to be in the room—in the banking union—or not. If he is not going to be in the banking union, the question that he is failing to grapple with is this: what safeguards and protections do we need given that we will not be in the room because we will not be in the banking union? Perhaps he could provide an answer to that question instead of just waffle.

[Chris Leslie]

The hon. Gentleman is too kind, as uncharacteristic of him as that may be.

I am afraid that this is a tall order for the Government to negotiate. It is a conundrum. I do not in any way shrink from the mountain that needs to be climbed in squaring this circle, if I may mix my metaphors in that way. I am just concerned that the Government’s approach—perhaps an echo of their approach to the EU budget—is not ambitious enough. I urge hon. Members to talk to institutions across the City of London and to financial services practitioners across the country. They are very worried about their position if they are not able to be part of a single market. They know very well that there are forums in which the rules will be made and shaped, and yet of course they want to reserve our rights from a UK position. Somehow, we have to try to forge a negotiating strategy that manages to do better.

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[Mr William Cash (Stone) (Con)]

I beg to move amendment (a), in line 10, leave out from ‘and’ to end and add

‘whilst welcoming the Government’s desire to seek safeguards for the UK, calls on the Government in respect of Regulation (EC) No. 1093/2010 to use its best endeavours to ensure that the proposed changes in the voting rights in the European Banking Authority are not adopted, to use its veto in respect of European Union Document No. 13683/12 so as to ensure that the powers of the Governing Council of the European Central Bank are not unlawfully delegated to the Single Supervisory Mechanism without an amendment of the treaties and/or to refer that matter to the European Court of Justice for adjudication of that proposal.’.

I am deeply troubled by the wording of the motion. In my judgment, it simply does not make sense to state that the House should welcome

“the Government’s decision to remain outside the new supervisory arrangements while protecting the single market in financial services.”

We acquiesced in to the Lisbon treaty, the Labour party agreed to the transfer of jurisdiction over the City of London to the EU, which was wrong—the Single European Act was never remotely intended to produce such a result—and, furthermore, views I have received from the City clearly demonstrate that it does not believe that the proposals in the motion will protect the UK or a single market in financial services.

There is another massive issue about the rule of law in Europe. The Foreign Secretary, in his speech to the Körber Foundation conference in Berlin a fortnight ago, said that what bound us together in the EU and the reason for the Government wanting to remain part of it was that it

“has helped to spread and entrench democracy and the rule of law across Europe.”

The tragic reality is that the EU does not subscribe to the rule of law. On 17 December 2010, Madame Lagarde said about the first bail-out fund, the European financial stability mechanism:

“We violated all the rules because we wanted to close ranks and really rescue the euro zone.”

Germany and France themselves broke the stability and growth pact. Furthermore, both the Government and the Attorney-General are clearly of the view that the agreement on the fiscal compact was unlawful, but in reality nothing has been done—hence my call for the legal reserve on this matter, although the legal reserve issued before has never been implemented.

The Government know that the proposals referred to in the second part of my amendment are unlawful. The Council of Ministers’ own legal adviser, in a lengthy opinion which I have seen and which the Government cannot dispute, states that there will have to be an amendment to the treaties if the powers of the governing council of the ECB are to be delegated to the single supervisory mechanism.

The legal opinion says on the proposal amending the EBA regulation, in effect, that in terms of the EBA’s dispute resolution powers there is no justification for treating the ECB differently from banking authorities in non-eurozone member states by exempting it from those powers. To do so would be a clear breach of the principle in law of non-discrimination.

As to the proposal giving the ECB prudential oversight of credit institutions in the eurozone, the legal opinion states that in establishing the single supervisory mechanism the council must respect the legal framework for decision making within the ECB set by primary law—that is, the treaties. This framework does not allow the ECB’s governing council to delegate decision-making functions on banking supervision to a subsidiary body such as the SSM. There is nothing in the legal base for the SSM proposal, in article 127(6) of the treaty on the functioning of the European Union, which would permit secondary law—that is, this draft regulation—amending the rules laid down in primary law. There is no question about it and the Government know that.

Non-eurozone member states are not entitled to participate in the ECB’s decision making, so they can have no formal decision-making role in the SSM as conceived. Furthermore, the law on banking supervision in the EU will be made up of directives to a significant extent. This is a requirement of the treaties. That means that the ECB cannot propose one-size-fits-all legislation on banking union. Rather, it can propose legislation which allows for differences in national transposition.

We simply cannot countenance a situation in which there is a wilful breach of the rule of law and where the dysfunctional European Union vaunts the rule of law, yet deliberately breaks its own rules. This is precisely what led to the kind of constitutional crisis that we have seen in our own history when Governments from the Stuarts onwards claimed a divine right to rule but then broke the common law. This is the primrose path to constitutional disaster not only for the United Kingdom, but for Europe as a whole. I hope the House will understand my concern, as I suggested back in the 1990s that this would happen.

I hear what the Minister says but I cannot understand why and how, given comments that I have received from the City of which I am sure he is aware. Those in the City make it clear that the single market would be put at risk by an imperfect single market in financial services in which rules differed by level of membership of the EU. Furthermore, they say:

“It is essential that voting arrangements within the European Banking Authority are clarified so as to avoid members of the Banking Union voting together en bloc and imposing financial regulation on non-Eurozone members through qualified majority.”

For “clarified”—

[Mr Jenkin]

Will my hon. Friend give way?

[Mr Cash]

I will certainly give way once.

[Mr Jenkin]

Does my hon. Friend agree that for us to invoke the single market is doubled-edged, because in the end it will be the Commission that invokes the single market as a pretext for levelling the playing field which has been unlevelled by measures taken by the banking union? We will therefore finish up with measures that we do not want being imposed on us by qualified majority voting.

[Mr Cash]

That is precisely right. It was never intended when we voted—and I voted at the time, with a reservation about the sovereignty of the United Kingdom Parliament, which I was not allowed to debate—that we would be in this very position. That was in 1986 when I voted for the measure, but it was with that reservation.

To complete my point, where the comments from the City say “clarified”, I would say changed. We must change the rules, not merely clarify them, but we cannot do so because of QMV. That is the problem and it comes from the Single European Act.

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[Mr Bernard Jenkin (Harwich and North Essex) (Con)]

In some respects, this is a modest debate compared with last week’s, although it is worth reflecting that employment in the City, as reported by City AM, has collapsed by more than 100,000 since the peak of 2007. Some of that was self-inflicted, but much of it was inflicted by increased regulation. The Centre for Economic and Business Research reports that employment in the City is set to fall much lower. Most of the jobs are highly paid, high-taxpaying jobs, on which the economy in general and the economy of London and the south-east in particular depend very deeply.

I commend the sincerity of my right hon. Friend the Minister’s approach. He is in a difficult position. The difficulties he is confronting are a microcosm of the conundrum of the UK’s place in the EU. We are not in the room, so we cannot function as a positively engaged member of the EU on our current terms of membership, but we are also not negotiating the alternative terms of membership that would protect us from the effects of the treaties we have already signed.

It needs to be pointed out that banking union simply was not envisaged in the Lisbon treaty. We now find ourselves confronted with a new institution and a reform that simply was not regarded as necessary when the Lisbon treaty and its predecessors were signed. The treaty is not fit for purpose for a banking union.

The problem is that no arrangements that nibble at those problems will protect the UK’s interests—a wholesale change in our relationship is the only way to protect them. Sadly, the motion represents the Government yet again passing up a substantial opportunity to start laying the foundations of a different relationship and to start leveraging the renegotiation of our terms of membership. That is a matter of great significance.

[Andrea Leadsom]

Will my hon. Friend give way?

[Mr Jenkin]

I give way to my hon. Friend, who made a very able speech.

[Andrea Leadsom]

I am grateful to my hon. Friend, but I have to challenge him, because I think that the Government are absolutely committed to renegotiating. Why does he think that they are not?

[Mr Jenkin]

Unfortunately, our party’s leadership does not intend to start substantive renegotiation of our relationship until after 2015, long after this particular opportunity will have passed us by. If we attempt to remediate this measure and its effects on our interests, we will not succeed. This is happening in case after case—the fiscal union treaty is another example.

[Mrs Anne Main (St Albans) (Con)]

Does my hon. Friend agree that we should use every opportunity and not waste any of them? We have an opportunity to make a difference. If we just keep noting everything and do not use our opportunity, that will be another chance gone and the electorate will not forgive us for it.

[Mr Jenkin]

I am afraid that my hon. Friend is right that failure to get the maximum leverage out of these opportunities means that they will be forgone for ever. We may well get to 2015 and find that all the major decisions to federate the eurozone will have already been taken and our opportunities to then renegotiate will look slim and incredible.

I will close by picking up on the contribution of my hon. Friend the Member for Stone (Mr Cash), who is the Chairman of the European Scrutiny Committee and whose comments add a Götterdämmerung-like quality to this debate. Hitherto, the architects of European integration have, like the gods in “The Ring”, attempted to construct their Valhalla on the basis of principles and the rule of law, yet they are now compromising those very principles, on which the legitimacy of this structure depends, and, in doing so, sowing the seeds of their own destruction.

If this was being done properly—I invite the House to reflect on this—it would be a treaty change and there would be an intergovernmental conference. There would be a huge amount of debate about what other changes needed to flow from an intergovernmental conference and we would end up with a whole Act of Parliament, which would have to pass through both Houses of Parliament in this great building. The issue, however, is being debated in a mere 90 minutes on a quiet Tuesday afternoon before the Minister is sent—haplessly, perhaps —to the Council of Ministers to either agree or disagree with these momentous changes.

Major changes are being made in a more casual manner as the European Union becomes more desperate to shore up its previous mistakes. “Macbeth” comes to mind: the worse a situation gets, the more rash and irrational the actors become in defence of the indefensible. I hope that right hon. and hon. Friends will remember this debate, because the move from legality to illegality is a very big step, yet that is what we are witnessing as the Government approach this particular decision. I hope yet that they will see sense and veto the proposal.