Genuine Economic and Monetary Union (EUC Report)

Lord Hamilton of Epsom Excerpts

Wednesday 2nd July 2014 Grand Committee

[Lord Hamilton of Epsom (Con)]

My Lords, I pay great tribute to our clerk, Stuart Stoner, who has been quite remarkable in the way that he has reconciled all our different views. I also pay great tribute to our chairman, the noble Lord, Lord Harrison, because while he and I do not really agree on Europe, he has managed to accommodate my views in the most agile way.

The noble Lord, Lord Liddle, raised the question of past Prime Ministers poisoning relations with Europe. I think he was referring mainly to Conservative ones and that my late friend Lady Thatcher was probably high in his mind. However, I remember that one of her great achievements was in the rebate of much of the money that we were sending to Europe. You could not have accused Prime Minister Blair of being anything other than a Euro-enthusiast. He did a deal where he gave back half of our rebate in return for the reform of the common agricultural policy. That policy spent 39% of the EU budget last year, so we got absolutely nothing in return. I found that this had slightly poisoned my view of the EU—not that it was not poisoned before—so this poison is going both ways. It is a bit paranoid to suggest that it is one-way traffic.

We have had economic and monetary union; we now have genuine economic and monetary union. I would argue that neither EMU nor GEMU are genuine. The problem with the single currency and the introduction of monetary union is that it was one part of a construct to lead Europe towards being federal. What was also critical within those building blocks would be to have a central elected Government, with the power to tax and transfer money from the rich to the poorer parts of the eurozone. You would also have to have a federal reserve bank as the bank of last resort, which would issue most of the debt for the eurozone. These were two drastic omissions in the construct of what was hoped to be a new European nation. If you leave those two bits out and merely have monetary union on its own, it is extremely vulnerable.

Let us face it: if the European Central Bank had been allowed—the noble Lord, Lord Desai, pointed out that it was the Germans who stopped this happening—the eurozone crisis would have been a fraction of what it actually was. Right from the beginning, the European Central Bank could have moved in to bail out banks and help nations, saving sovereign debt, rather than reaching this point where some of us wondered whether Greece was going to go completely bust and so forth. This crisis has been caused by the way that the whole thing was set up in the beginning.

Is anything going to change? Things are slightly changing in the European Central Bank but the democratic deficit is still there and will not get any better in the immediate future. There are in fact no plans to elect anybody; we have just appointed Mr Juncker and there was not an awful lot of democracy about that. So you have no democratic accountability and, to quote the noble Lord, Lord Desai, again, you have economic policies that may be leading towards deflation. We may be looking at a period of 10 years when there is no growth whatever, which is what the Japanese saw. If the eurozone does not grow, and we are starting with very high levels of unemployment, I do not think it is going to survive.

My noble friend Lord Lamont said that he has always had an argument with me about this. He thinks it is going to muddle its way through. Well, there are the economic problems and the stress tests coming up on the banks. Opinions differ on this. The noble Lord, Lord Davies, always says to me that the markets are buying banks all over Europe, so they do not think there is a liquidity problem with them. Well, the market has been wrong before. We will have to see.

Deflation and low growth are the real problems. I think that the next crisis for the eurozone is going to be not an economic crisis but a political crisis. We have just had the European elections which have demonstrated right across Europe, not just in the United Kingdom, growing Euroscepticism and disillusion about the way that Europe is operating. Just to show that they are completely unmoved by these results, they appoint Mr Juncker as President of the Commission, which demonstrates that this is business as usual, meaning, “We are not going to have our minds changed by electorates and people saying things. We are not going to change anything. We are going to carry on the way we always have”. Well, if it goes on like that, I can see growing political problems in the eurozone.

If it fails to grow and we do not see any economic growth, even if we do not see a period of deflation, all the economists agree with the noble Lord, Lord Desai, that we are going to see arthritic growth, but it is not going to be very great. We are starting with very high levels of unemployment, particularly youth unemployment, and that is not a position that you can sustain over a very long period. Let us face it; if it cannot deliver economically, what is the point of the eurozone? People will increasingly ask that question.

We have a referendum coming up in 2017. All my Eurofanatical friends in this House—I find I do not have many friends who really share my views—always say to me, “Don’t worry. The result of the referendum is going to be exactly the same as it was last time. Why should it be anything else? All the major parties will support staying in, trade unions will support staying in, and the CBI and everybody you can possibly think of”. Yes, but the last time we voted—indeed, I voted—to stay in the European Union, it was quite different. Britain was poverty stricken. We had appalling labour problems, and we looked across the channel at Europe which was prospering. The chances are that in 2017, those roles will be completely reversed. There will be a prospering United Kingdom and a strife-ridden, low growth, pretty appalling Europe exporting as many of its people as it possibly can. I gather that we are suffering from—or benefiting from, possibly—an enormous influx of Spaniards as we speak. More and more people are wanting to come to this country. Migration flows are causing an enormous problem. I think anybody who sits round and thinks that this eurozone is just going to float through all this without any problem has some very nasty shocks coming their way.

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[Lord Davies of Stamford]

I repeat that you cannot at the same time complain about something when it is absent and then complain when it is present; that does not make any sense to me at all. Equally, I do not think that I have heard any response to my points about democratic accountability. If there is a desire for more democratic accountability in the EU, which there is, and if it should be addressed, which in my view it should be, then you cannot turn down every possible proposal that is made in order to achieve that, which is what the Eurosceptics tend to do.

I think that our report makes three conclusions. The first is that the general direction of genuine monetary and economic union is probably right. We support it and think that it is a sensible thing for the eurozone to be engaged in. We feel that it should go further and be completed. We think that it is troubling that one or two elements of the agenda have not been implemented and will not be in the immediate future, notably the retail bank deposit insurance system that we have just referred to and which has been referred to several times today; we are broadly in favour of that and think that it is a very good scheme.

The second general conclusion is that this process is not without risks and costs for our country. That point is made very clearly in paragraphs 185 and 186 of our report, to which I draw the Committee’s attention. It is also made in another document, the British Bankers’ Association report, which we have obviously all been sent. I have been sent a copy, and it has already been referred to and quoted from. I shall quote from it in case some people here have not received it:

“EU, government and industry studies have shown that deepening the Single European Market offers a growth potential that is achievable without further increasing public debt … However, the understandable moves towards stronger Eurozone governance may make it more difficult for the UK financial sector to play a full role. For example, development of Eurozone caucusing, outside the EU-28 format, on matters that impact directly the Single Financial Market could, even unwittingly, damage its integrity”.

The document goes on to raise other risks, not just caucusing but the risk of the eurozone having a permanent president, the risk of the new configuration of the European Parliament being less likely to defend British interests—largely because the Conservative Party withdrew from the EPP, so that is entirely its fault—and other risks.

The fact is that the British public have been bamboozled, and this report goes some way towards redressing that and illuminating them, which is very necessary. They had been persuaded to believe that somehow we can have a half-in and half-out approach, with one foot on one side of the fence and one on the other in our relations with the EU at no cost, or that we can gain all the benefits from the EU without actually subscribing to all its programmes and disciplines. The sheer fact is that you can never do that in life, and you cannot do it in this case. Personally, I would prefer any measure of relationship with and access to the European single market and the EU than none. I am the sort of person who would always prefer half a loaf or even a quarter to no bread at all. However, I am very conscious that we are losing some portion of the loaf by the course that we are adopting. That comes out very clearly in the conclusions to the report, and we have fulfilled a useful function in writing it.

[Lord Hamilton of Epsom]

As the noble Lord, Lord Kerr, said, we are not part of the eurozone group, so are we not inevitably half in and half out, whether we want that or not?

[Lord Davies of Stamford]

As the noble Lord, Lord Kerr, said, as I shall say myself and, indeed, as the report states, we are not just out of EMU. We could not join EMU if we wanted to because we do not qualify under the fiscal provisions. Our fiscal deficit is excessively high—more than twice the level required the last time I looked at the figures. We cannot join anyway; we just have to face that.

Quite apart from that fact, it is true that the public in this country have been poisoned against the whole notion of EMU by a very effective press campaign, and it would be quite difficult to join EMU in the short term even if we qualified, which we do not. As we do not, it is a theoretical issue. Quite apart from that, we could, if we wished, join a banking union. We appear, for reasons which are unconvincing to me, to have decided not to join a banking union. As a result, we will find that we are not really, truly in the single market.

I put that the other day—this is a matter of public record because it was an open committee session—to the chairman of the Financial Reporting Council, Sir Win Bischoff. He agreed with me unequivocally that, as a result of what is happening, we will have a fragmented single market. We will have our own banking regulation based on our own bank regulation Bill. We have secured a derogation from the bank regulation directive, which I think is very undesirable. That means that, although there will be no fundamental differences in the way that banks are regulated in the eurozone and here, there will be small differences from time to time. There will be different responses because different people will be doing the regulating. There will be greater compliance costs. British banks such as HSBC and Barclays with major operations on the European continent will have to go through parallel procedures in different countries, whereas they could have just reported in one coherent way on a consolidated basis to one regulator, which would have been much more desirable.

More serious than that, there will be regulatory arbitrage, with distortions: people being tempted—no, being driven—to practise certain operations and activities in some markets merely because regulation there is slightly lighter than in other areas within the single market. That is not a single market at all. There will of course be a great lack of clarity and, therefore, investor and depositor confidence as a result of the confusion and complexity, which is, again, quite unnecessary.

It is a perfect example of how you can impose costs on yourself for no useful purpose. We all say that we want a single market. We are all in principle against regulatory arbitrage—all British Governments always have been—but we have deliberately created a fragmented structure which has higher costs and prevents a single market taking place. That really cannot make sense. It is about time that we realised that our policies—I say our policies; I mean the policies of the Government of the day, the coalition Government—contradict the national interest. Because we are not in the eurozone, we face the danger that problems may be created for us by the eurozone itself through its members caucusing for meetings of ECOFIN or other bodies due to the greater weight given to the eurozone organisations—a point made by the British Bankers’ Association. Not only may we be the victims of other people doing things that we do not like very much but we are creating problems for ourselves, which seems particularly irrational.

The report is a very useful piece of work and it deserves wide consideration. I hope that it may be the beginning of a reconsideration of the rationality of our policies in this area, because it is a great shame that for reasons of, I think, essentially party politics or emotion, we are often dysfunctional in our pursuit of the national interest.