Genuine Economic and Monetary Union (EUC Report)

Lord Davidson of Glen Clova Excerpts

Wednesday 2nd July 2014 Grand Committee

[Lord Davidson of Glen Clova (Lab)]

My Lords, I join all noble Lords in congratulating my noble friend Lord Harrison on chairing the committee, which has produced a welcome assessment of this important and complex subject. The committee, composed of highly experienced and able members, offers views that no sensible Government can easily reject or ignore.

The UK’s engagement with the EU on this subject is of course important. It has potentially dramatic consequences for our globally significant financial sector. History teaches that financial regulation can have serious unforeseen consequences and effects on the sector and the economy. Therefore, this report’s contribution to understanding the implications for the UK of the EU institutions’ proposals is both useful and timely.

Today’s expert and sometimes lively debate, and the exchange that has proceeded, provides Her Majesty’s Government, I suggest, with quite a lot to think about. My noble friend Lord Liddle, unshackled, has also provided something substantial for Labour to consider in this area, paying due regard to his expertise and knowledge. No less, there is to consider the contribution of my noble friend Lord Desai and his view on EMU as a deflationary union, for the UK’s major trading partners are within the EMU. This obviously creates interesting and difficult questions for the future.

I also note the possibly critical view from the noble Lord, Lord Hamilton, of the future of the European Union, given its structure. These observations would be foolish to ignore. They are obviously not accepted by everybody but they should certainly not be treated lightly. My noble friend Lord Davies also made a very interesting point in relation to the warning that he offered between the UK’s regulation in banking and the European zone, and how government can impose costs in a dysfunctional way, as he put it. This is of course one of the problems that government in the UK have faced for quite some time.

We agree that banking union is vital to tackle the effects of the financial crisis, at least in the eurozone. We also agree with the committee that the current proposals fail to break the bank/sovereign debt nexus, as that was the principal rationale for the GEMU project. As the noble Earl, Lord Caithness, observed, that is quite significant. What the committee describes as “sub-optimal” about the SRM—leaving the fiscal backstop substantially in the hands of the individual member states, the resolution fund not being finalised until 2026 and, even then, with only limited, probably inadequate, funds, as my noble friend Lord Harrison observed—leaves the concern about the bank/sovereign debt nexus possibly reduced but certainly not removed. Certain member states in such circumstances will almost inevitably not resist the temptation to game the system, and that of course was the very behaviour that caused the problems of the last crisis.

One is therefore slightly surprised at Her Majesty’s Government’s somewhat reticent response to the report’s clear view that,

“what has been agreed is insufficient to break the vicious circle linking banking and sovereign debt”.

Are the Government of the view that this failing has been resolved or that it will be resolved in due course in negotiations on EMU, or is this simply an issue that HMG accept they cannot influence? Is the concern expressed to the committee by Mr Nigel Farage, MEP, and backed up by Professor Alexander, that certain ECB refinancing operations have perversely reinforced the bank/sovereign debt nexus a concern that HMG share, I assume, or are we simply to disregard what Mr Farage has identified?

The single supervisory mechanism agreement of 2013 is welcomed by the committee but with the caveat that the ECB being expected to supervise some 6,000 euro area banks is “unrealistic”. Even if the ECB is to be confined to larger banks only, as the noble Lord, Lord Lamont, points out, the Government’s assertion in response that the SSM,

“is critical to restoring market confidence”,

and that it,

“ensures that the Single Market of 28 countries is not harmed”,

may seem rather overoptimistic.

The Government expressly recognise that size is not important when it comes to monitoring risk. Economic historians might point out that the UK’s secondary banking crisis of 1973, which featured small banks, precipitated a major crisis. Do the Government not share the committee’s concern about the ECB’s capacity to supervise? Are they confident that the member states’ authorities will, throughout every member state of the eurozone, have the capacity to supervise themselves? Can an absence of ECB capacity to supervise really “ensure”, to use the Government’s word, that the single market is not harmed?

The whole project of the banking union seems to have the Government’s support, observing as they do,

“that the UK stands to benefit from greater financial and economic stability in the EU”,

that banking union provides. That recognition of the interlinked nature of banking is sound. Supranational structures for financial supervision and resolution are of course central to the project. It is correct to say that banking union is another step toward successful ever-closer union, one supposes. Is one nevertheless to assume that the Prime Minister’s oft-expressed but never really specified desire to reform some aspects of the EU would leave this area out of any of his proposed negotiations?

Is it correct that this step to ever closer union will proceed without the Government attempting to revisit the issue; without attempting to renegotiate? Some clarity from the Government on this important subject would be welcome. Perhaps answering the query of the noble Lord, Lord Kerr, as to the logic of keeping the UK out of the banking union, might also be interesting and informative.

Turning to the issue of integrated economic policy, I note that the committee expresses the view that debt utilisation,

“may be inevitable if the single currency is to prosper”,

and that it is “a logical development”. Do the Government agree? I ask because I confess that I was not able to detect the Government’s attitude from their response. I assume that they are not, as the noble Lord, Lord Dykes, put it, wallowing in nationalism on this particular point. It would be interesting if we could have clarity. This is particularly interesting given Germany’s resistance to implementing the concept. Do the Government share the German view? Are they simply unconcerned about the issue, or do they accept that any influence they might have on this issue is inevitably limited?

Influence has been the subject of one of two observations. The noble Lord, Lord Lamont, is sceptical about the utility of influence and there is something to be said for that. Per contra, however, my noble friend Lord Liddle, the noble Lord, Lord Maclennan, and the noble Lord, Lord Jay, from a different perspective, all stress that it is important. They were joined by the noble Earl, Lord Caithness. The noble Lord, Lord Kerr, pointed out the importance of influence and he should know. He also gave useful guidance as to where influence actually lies and how one can use that influence in a way that might possibly overcome the scepticism of the noble Lord, Lord Lamont, about the issue.

The noble Lord, Lord Hamilton, when he characterised the exchanges of poison, as it were, between the respective parties, made a useful point, possibly impliedly, that the diplomatic exchange between the UK and its EU partners could be improved substantially by toning down the rhetoric. Engagement, of course, is always helpful and positive engagement is even better.

As for the implications for the UK, the committee rightly recommends that HMG do not treat the banking union, as the noble Lord, Lord Kerr, quoted, as,

“the sole province of the single currency for all time”.

In trying to decipher the Government’s response, it is not entirely clear what position they now adopt. Clarification would be welcome.

Not unnaturally, the Government note the value of the City of London. Some of us might prefer that they also recognised the substantial contribution made to the UK’s financial sector by other parts of the United Kingdom—Leeds and Edinburgh spring to mind—but that is not my main point. The contribution of the City is substantial and is one of the truly global successful sectors of the UK economy. I am sure that the Minister will agree that government action or inaction can have significant effects on our global position. One notes that in the peroration to the government response they state that,

“a strong and engaged UK (and a strong City of London)”,

are in the interests of all EU members. We agree. It may be, however, that we differ over the meaning of an “engaged” UK. Again, positive engagement is what we would hope for. Where the Government state that the UK’s interests are,

“to be framed in terms of the overall stability and efficiency of EU markets”,

we are in accord. Where they state:

“The Government values the importance of the City of London in Europe”,

we again agree. Is one to assume that, from the point of view of maintaining the City’s global position, the Government are wholly convinced that the UK must remain in the EU? As one is sometimes unsure where they stand on this issue, might the Minister make it clear whether Her Majesty’s Government consider that the UK’s financial sector is strengthened by the UK’s membership of the EU?

I look forward to hearing the Minister’s replies to all these questions—or if not all, at least to some of them. In conclusion, I repeat our welcome of this careful and useful report. We trust that the Government will pay it due and proper attention.