European Union (Approval of Treaty Amendment Decision) Bill [HL]

Lord Flight Excerpts

Wednesday 23rd May 2012 Lords Chamber

[Lord Flight]

My Lords, the Bill looks to me to be essentially a no-brainer that commands the support of those on all sides. It is necessary to understand what it is all about and what the European institutions do. I am particularly concerned about what Britain’s liabilities, and potential liabilities, might be.

It seems to me that we are facilitating a quid pro quo deal. Germany needs the amendment to Article 136 for its participation in the February intergovernmental treaty obligation to be considered legitimate by Germany’s Federal Constitutional Court. The Prime Minister believes that once Article 136 is amended, any further liability that we have under the initial financial stability mechanism will cease. The issue arises whether this matter would invoke a referendum under the terms of last year’s European Union Bill. However, the Foreign Secretary has confirmed that no powers are transferred, so that is not the case.

As I understand it, this issue arose during the interregnum period after Labour lost the 2010 general election and Chancellor Darling was still the interregnum Chancellor, as it were, when he committed the UK to supporting the initial European financial stability mechanism fund. I say candidly that this was a mistake and that the establishment of the fund was highly questionable. It was set up under Article 122, which provides relief in the event of natural disasters occurring, not relief for Governments who are having problems raising money. The fund was able to provide support worth €60 billion, of which €48.5 billion was committed to Ireland and Portugal. Some €11.5 billion remains unused, of which Britain’s liability is 15%—a total of €1.34 billion. That liability is supposed to end once the formalities of amending Article 136 are completed, and all 28 EU members are signed up to that.

The mechanism of facilities under this fund has been that the European Commission borrows from the capital markets against the contingent liabilities of EU members to provide the finances. I ask the Minister whether members have actually paid up, or whether the Commission has paid but has not yet collected the money owed by the various members. I ask that in particular because my understanding of the arrangements is that the liabilities of members are joint and several. That is to say that if, by the time they have to pay, some members are unable to pay or are insolvent, their liabilities are transferred to members that remain solvent. That is somewhat like the last-man-standing rule applying to pension funds. There is therefore a question as to whether the UK has a material contingent liability relating to the initial fund.

Somewhat like the noble Lord, Lord Lamont, my first question on investigating this territory was to ask: what are the catches and the potential weaknesses in what seemed like a win-win proposal? The second point is that it is not at all clear when or if Britain’s legal liability in relation to the outstanding balance of €11.5 billion comes to an end. It was a political deal that there would be no further drawings under the initial fund, and I think there is agreement that the fund is capped once Article 136 is duly implemented. It is not clear when that is going to happen. It is supposed to happen in July, but it may not be until January, by which time it is entirely possible that further developments will overtake the situation.

Subsequently, as noble Lords will be aware, the 17 eurozone members set up the European finance and stability facility in May 2010, but Britain is not part of it. The facility borrows capital from the markets, again backed by eurozone member guarantees, and pulls together total commitments of €400 billion, of which some €188 billion is already committed—€144 billion to Greece, with the balance going to Ireland and Portugal. I am clear that Britain has no direct liability relating to this fund, which is then to be rolled over into the new European stability mechanism, the establishment of which the Bill relates to, because amendments to Article 136 are required.

The amount to be rolled over from the second fund is therefore of the order of €220 billion, which is part of the €700 billion that the new ESM is providing as its firewall. This, again, is to be funded, I understand, by a mixture of paid-in and callable capital. I would be interested to hear from the Minister whether liabilities in relation to that mechanism are also joint and several, as I presume they are. I make the point alluded to by other noble Lords that if you continue on the joint and several liabilities front, the potential bill building up for Germany gets larger every day.

Considering all that, it looks as though the UK’s position on potential liabilities is reasonable, but I am interested to know what other potential hidden catches there are. I have already made the point about whether our liabilities under the first fund can increase if other members are unable to honour their commitments. Given the history of the EU, I am also cautious about dealing with the potential reinterpretation of treaties that are signed. We have the immediate example of Article 122, which was used to establish the first fund when it was actually intended to relieve natural disasters.

I have already referred to liabilities in relation to the first fund but, as I understand it, there are two other major areas of potential liability. I believe that the ECB can call on up to €50 billion of foreign reserves held by the Bank of England, and, more fundamentally, I believe that the EIB can call on members for financial support, should it, for example, sustain significant losses on loans made to Governments in trouble. I believe that the maximum UK commitment here is €35.7 billion. Strangely, this is 39.6% of the total that all members would need to contribute, but we are shareholders to the tune of only 16%, so I am not quite clear why we have that greater liability. In short, I ask the Minister what the UK’s total contingent liabilities are in relation to the eurozone. I think it is important that the House has the accurate figures.

I close by commenting that I agreed with virtually every word that the noble Lord, Lord Lawson, said. I think that his analysis was absolutely accurate and correct. It also seemed to illustrate that this situation is just like that of the gold standard in the early 1930s. Then, everyone was terrified, believing that you could not come off the gold standard or the whole world would come to an end. The gold standard did the same as the euro; it stopped countries in real trouble being able to devalue and get their economies going again on a competitive basis. When everyone had given up the gold standard, people said, “Why did we regard it as a religion for so long? We have been afforded relief at last”. Although I appreciate that the break-up of the euro, which is inevitable, will bring pain—and the pain may be worse because of the EU’s failure to organise an orderly break-up—within a given period, once it has happened, people will again say, “Why on earth did we stick with this currency, which prevented us from devaluing and has driven our economy into the dirt?”. It is absolutely clear that the economies of southern Europe need major currency devaluation.

--- Later in debate ---

[Lord Liddle]

I apologise to the noble Lord, but the point is surely valid. Growth last year in the eurozone was twice that in the UK. Therefore, to blame the eurozone for the present double dip is nonsense.

The big point that the Eurosceptics fail to understand is that we cannot avoid the consequences of the euro by being out of it. In or out, our future is deeply affected because of our exports and the interlinking of our financial system. As Robert Chote said, if Greece exits, who knows what will happen? We may never in the foreseeable future recover the level of output that we had in 2008. A policy of splendid isolation from the continent was never realistic for Britain, but in the world of globalisation and economic integration it does not work at all.

Nor is our isolation very splendid. We are losing influence and clout in Europe to a dangerous degree. I will give one telling illustration. The Prime Minister claimed that the reason he used the veto and walked out of the December European meeting was that his partners would not accept a set of proposals that he tabled at 2 am in order to protect the City of London. A couple of weeks ago, on the capital requirements directive, the Chancellor, George Osborne, and the British for the first time found themselves outvoted by 26 to one at ECOFIN on a key question of financial regulation. The Chancellor has now recognised that he has to go along with the majority. That is not an effective use of the British veto. It just shows how influence is draining away from us at the moment.

[Lord Flight]

I was under the impression that the Chancellor had eventually obtained agreement to his point, which was that there could be some flexibility in the capital ratio of banks, with a view to the UK being rather more demanding than the rest of the EU.