European Council Decision: EUC Report

Lord Howell of Guildford Excerpts

Monday 21st March 2011 Lords Chamber

Moved By

[Lord Howell of Guildford]

That, in accordance with Section 6 of the European Union (Amendment) Act 2008, this House approves Her Majesty’s Government’s intention to support the adoption of draft European Council Decision EUC 33/10.

Relevant document: 10th Report from the European Union Committee.

[The Minister of State, Foreign and Commonwealth Office (Lord Howell of Guildford)]

My Lords, this Motion is a necessary part of the process leading to a treaty change required by the member states of the European Union in the eurozone. I shall explain the purpose of, and need for, the Motion in detail in a moment. However, at the outset I observe that it is very much in the United Kingdom’s national interest that this House, under the terms of the European Union (Amendment) Act 2008, which we all recall, should approve this Motion without amendment so that the Prime Minister may support the adoption of the draft European Council decision to amend Article 136 of the Treaty on the Functioning of the European Union at the European Council meeting scheduled for 24 and 25 March.

As the Leader of the House made clear in his Statement following the December European Council, no one should doubt that stability in the eurozone is important for the United Kingdom. A large proportion of our trade is with the eurozone and London is Europe’s international financial centre. It is because of this interrelationship that the UK’s financial institutions and companies, both big and small, have huge exposure to the banks and businesses based throughout the eurozone. Worsening stability is therefore a real threat to the UK economy, as I am sure all your Lordships appreciate.

In explaining the background, I begin by reminding the House of the conclusion drawn on this proposed treaty change by the European Union Sub-Committee on Economic and Financial Affairs and International Trade at its meeting on 1 February. In his letter to the Minister for Europe, the chairman of the Select Committee on the European Union said:

“We fully support your view that it is in the UK’s interest to support a stable and prosperous Eurozone. Given that this Treaty amendment would not apply to, or have any financial risks for, the UK, we support your intention to vote in favour of this amendment. We have agreed to clear this document from scrutiny”.

From that background quotation I move to the reason why are we having this short debate this evening. First, Section 6 of the European Union (Amendment) Act, arising of course from the Lisbon treaty, requires that when a draft decision under the simplified revision procedure—that is, Article 48(6) of the treaty—is proposed, a Minister must introduce a Motion and have it passed by both Houses without amendment before the Prime Minister can signal his agreement to the adoption of that draft decision at a subsequent European Council. Secondly, if the House approves this Motion, it authorises the Prime Minister to agree to this draft decision and this draft decision alone at the European Council. Should there be any amendment to the draft decision at the European Council, the Prime Minister could not agree to it at the European Council without first coming back to another place and this House for additional approval. Therefore, the draft decision referred to in this Motion will be the version that is agreed at the European Council. There can be no other without the further approval of this House in a further debate such as the one that we are having tonight.

If the draft decision is adopted by the European Council under Article 48(6), all 27 member states must then also approve the treaty change in accordance with their respective constitutional requirements before the decision can enter into force. This means that the treaty amendment itself will not come into effect until the UK and all other member states approve or ratify the adopted decision.

However, if the European Union Bill, which has just been introduced to this House and will have its Second Reading tomorrow, becomes law, this treaty change will also be subject to Parliament’s approval by Act before the UK can ratify it. We have made it clear that we shall proceed in accordance with the provisions of that Bill. In other words, there will be a full further opportunity for your Lordships to debate this matter when the treaty change comes forward in due course for ratification, which under our new procedures will require the full processes of primary legislation. That is an important change from the position in the past.

I turn to how the proposed treaty change came about. As your Lordships will know, it originates from the need for a permanent mechanism to be established by the member states of the euro area to safeguard the financial stability of the euro area as a whole. That is an obvious need. In May last year, the European Union established two emergency instruments to respond to financial crises. The first is the European financial stability facility. This is a temporary facility established intergovernmentally by euro area member states to provide loans to euro area member states in difficulty. It is a limited fund and is due to end in June 2013. The second is the European financial stability mechanism, which the coalition Government, of whom I am a member, inherited from the previous Government. Under this mechanism, the Council can agree, by qualified majority, to the Commission providing assistance using money raised on the financial markets, backed by the EU budget. It therefore creates an indirect liability for the United Kingdom. That is a very important point.

Against the backdrop of continued uncertainty in financial markets, the members of the European Council agreed in December to amend Article 136 of the Treaty of the Functioning of the European Union to provide that member states of the eurozone may establish a permanent stability mechanism. This mechanism, the European stability mechanism or ESM, will provide a necessary means for dealing with cases that pose a risk to the financial stability of the euro area as a whole, so it is important to us given the extent of our trade with it. This is what we are dealing with tonight.

The details of how the ESM will operate are being discussed in Brussels. In accordance with the conclusions of the December European Council, member states whose currency is not the euro can be involved, on a voluntary basis, in finalising work on the design of the ESM, which will be established by intergovernmental arrangement among the eurozone member states. My colleagues at the Treasury are responsible for overseeing the UK input to these discussions.

I stress that although we are involved on a voluntary basis in the design of the mechanism—it is very much in our interest to be so—we cannot and will not be part of it. In fact, we could not be part of it unless we joined the euro area. As the whole House is aware, this Government will not join the euro and, if the EU Bill becomes law, any future Government who wished to do so could join only with parliamentary approval by Act of Parliament and the British people’s approval by referendum. I should like to reassure your Lordships that the proposed treaty change does not and will not transfer any competence or power from the United Kingdom to the European Union. As I said, this treaty change is in our national interests. Instability in the eurozone has direct implications for the UK and all the other economies in the single market and beyond.

On top of that, the Prime Minster negotiated successfully two important objectives. First, as the conclusions of the December European Council confirm—that is the so-called recitals—once the ESM is established to safeguard the stability of the euro area, Article 122(2), on which basis the old EFSM was established, will no longer be used for such purposes. Our liability for helping to bail out the euro area through European Union borrowing backed by the EU budget will cease. It is crucial to our interests that it does cease. Secondly, securing a tight budget for the future is our highest priority. At the last two European Councils, Britain led an alliance of member states in limiting the 2011 EU budget increase to 2.91 per cent, as your Lordships have already discussed and debated in this House. In moving forward, working alongside key partners such as France, Germany, the Netherlands and Finland, we are committed to a real-terms freeze in the EU budget from 2014 to 2020 and we have written to the President of the European Commission setting out our position.

Without this Motion this evening, the consequences would be serious and damaging for Britain. The Prime Minster would not be able to signal his support for the draft decision at the March European Council next week and the decision then could not be adopted, as like all other treaty changes it requires unanimity. This means that, if it failed, Britain would remain indirectly liable for eurozone bailouts through the EFSM, as it would not have been replaced by the ESM. By supporting the adoption of this treaty change at the March European Council, the UK will be supporting the members of the eurozone to establish a permanent mechanism, which will make clear the responsibilities of all the members of the eurozone to each other and to the overall stability of the euro area.

That means that we will ensure that our current indirect liability for eurozone bailouts comes to an end in 2013. As this new mechanism is established using the treaty provisions specific to members of the euro area, it will not apply to non-euro area member states and cannot confer any obligations on them. I hope that I have provided your Lordships with an explanation of the mechanisms, which I agree are not simple, and the purposes for passing this Motion tonight. I beg to move.

--- Later in debate ---

I said in my opening remarks that we are creating a precedent. It would be unfortunate if that precedent were to be that Motions are agreed by this House on the nod, without proper scrutiny. I fully understand and sympathise with the noble Lord that many of the technical aspects of the ESM were agreed only a week ago. But it was a full week ago. Surely we could have considered what those mechanisms were, and the Government could have made a report to this House explaining the mechanisms which have been agreed and assessing their impact on the UK. If we are unable to assess the actual measures precisely, then—if the noble Lord really has respect for this House—he should withdraw this Motion and bring it back with proper documentation so that we can fully assess the impact of the actual mechanism which we are being asked to agree.

[Lord Howell of Guildford]

My Lords, I am grateful to all those who have spoken on this Motion and applied their—in many cases—extremely acute learning and expertise to the various issues that arise. The noble Lord, Lord Eatwell, who has just spoken with the tremendous skill of a professional economist, if I may dare call him that—but anyway an expert—made some very acute points. He seemed at one point to come very near to questioning the whole future virtue of the euro and the eurozone and asking me to describe details of the ESM system, of which of course the design is not yet complete. He is asking me to produce something that simply does not exist yet and, much as I am anxious to please him, I cannot do that this evening. The ESM has yet to be completed. The British Government will be involved in input to that design, but we will not actually be part of it—so I am not quite sure how I can describe something that has not yet been put together yet. I would love to try, but I am not sure how I can do it.

[Lord Eatwell]

Would the Minister explain why he is asking this House to agree to a Motion that he asserts is going to be in the best interests of the UK when he does not even know the mechanism that the Motion will create?

[Lord Howell of Guildford]

For the obvious reason that, in order to go ahead with the design of the ESM, there has to be first this Motion and then the alteration of the treaty, which under our new provisions of the EU Bill will also be debated in this House. We have to start the process off. If the proposition is that we cannot start until we know everything and that we are not going to know everything until we start, the noble Lord is asking me to go around in circles. That is often the fate of those in government, but in this case I prefer to begin to proceed on a process. Of course, I cannot stand here and say that what is going to emerge for the ESM and members of the eurozone will all be wonderful and work perfectly and that the eurozone will be happy for ever. The noble Lord could not reasonably expect me to be able to say that. I have no idea, as there are major issues of a geopolitical, political and economic nature lying ahead for the organisation of a financial structure for the eurozone, and none of us can be dead certain how these things will turn out. What one can say is that this is a move in the direction of trying to stabilise the eurozone, which the Government believe is in the interests of the United Kingdom. The noble Lords, Lord Pearson of Rannoch and Lord Stoddart, took different views, but that is what we believe and that is the Government’s position.

[Lord Pearson of Rannoch]

The Minister is confirming what the noble Lord, Lord Eatwell, said and what I asked him in my few remarks. We are being asked to agree something when we do not know what it will be. Why cannot we agree to the next phase going ahead and then make a final decision when we know what we are talking about? Why cannot we do it that way around?

[Lord Howell of Guildford]

Perhaps the noble Lord has not understood. That is exactly what your Lordships are being asked to do—to go ahead with the next phase. The Motion is required under the Lisbon treaty legislation; there will be a full debate on the new primary legislation, which we will start debating tomorrow. This is the next phase. The alternative is obviously to stand pat and do nothing, which the Government believe very strongly would be a serious and damaging step, which might lead, although I cannot guarantee it, to very serious damage for this country. So it seems right to take the next step forward. That is what both Houses of Parliament have been asked to do in order that the Prime Minister can take the necessary measures at the European Council later this week. Noble Lords are quite right—I said next week but I meant this week.

One or two of the points that have been raised are complex and important. The noble Lord, Lord Harrison, referred to the excellent Select Committee report which confirmed a number of the points that I have made, including the very important one that Article 122(2), which is the one governing the EFSM, will no longer be used. That is just as well because it had a liability for the UK.

My noble friend Lord Lamont of Lerwick asked two questions. The first was on whether Article 125 was compatible with having no bailout. He asked whether I, with a straight face, could make various assertions on that matter. I will give him what is in the brief before me, which has some strong validity. Article 125 of the treaty provides a clear assurance that no member state shall receive a bailout. However, it does not preclude the EU or member states from providing loans to one other. The EU’s balance of payments facility has already provided medium-term financial assistance to a number of member states. Article 2(1) of the EFSM regulation makes it clear that the financial assistance it envisages is strictly confined to either a loan or a credit, so that would need to be paid back. That is the explanation. I am a little worried about the straightness or otherwise of my face, yet that makes reasonable sense to me. It has been a matter of lively debate in other countries, such as in the Bundestag, but that is the answer that I have to his question.

[Lord Pearson of Rannoch]

My Lords, surely the Minister must agree that when a loan is not repaid it becomes a commitment?

[Lord Howell of Guildford]

All I can say is that this is how the debate has gone and these are the decisions that have been taken by those in the eurozone, which does not include us, who decided to go ahead and move from the EFSM to the ESM. The noble Lord has a different opinion of the financial aspects and is a financial expert of no small degree, so he may be right. However, that is not the view taken by the German Government or by the other Governments of the eurozone area.

My noble friend Lord Lamont also asked about the competitiveness pact. I can tell him that the latest draft of the pact makes it clear that:

“The Pact will fully respect the integrity of the Single Market”.

I am then advised that non-eurozone countries—such as us, among others—have been invited to join the pact and that we are assessing whether we should do so. I add that many of these points tonight point in the same direction and that we are really getting into the issues which we will be discussing on the new EU Bill tomorrow, when we shall have its Second Reading.

[Lord Liddle]

The noble Lord said that the Government were still considering whether to join the competitiveness pact. Is that the position: that this matter is still open?

[Lord Howell of Guildford]

That is different from what the noble Lord said, so he is not quite right that that is the position. I was going on to say that under the provisions of the EU Bill, which has its Second Reading tomorrow, any question of a movement of competence or powers from the UK to the European Union arising from any of these things is subject to the most rigorous procedures—in many cases, a referendum procedure but certainly an Act of primary legislation—which make it more or less impossible for them to be, as it were, slipped by or to be involved in any kind of competence creep. That is the position in answer to my noble friend Lord Lamont.

The noble Lord, Lord Pearson, took a familiar position and did not think that we should be propping up the eurozone at all. I admire his concern for the German taxpayer, as he is clearly worried about our German friends and the amount of tax that they might have to pay if liabilities arise. He asked if we were setting up a transfer union. My judgment—this is from outside because we are not a member—would be that the eurozone members are not setting up a transfer union because that would require a far bigger budget at the centre than anything that operates under the present European Union organisation and rules. I think that the answer is no, but really that is a question that was posed by German Bundestag Members and answered by the German Government.

--- Later in debate ---

[Lord Eatwell]

My Lords, I want the eurozone to succeed. That is why I was particularly concerned about the structure of the ESM, as agreed last weekend. I asked several rather technical questions about that. I am content if the noble Lord does not feel that it is appropriate to answer those questions this evening, but I wonder if he would undertake to write to me and answer them.

[Lord Howell of Guildford]

I will undertake to write if I can get hold of the propositions that the noble Lord is asking about. If he is asking me to describe exactly how the ESM will work, I cannot yet do so because it has not been designed. We are taking a step towards the point where design of the ESM can begin. The noble Lord, Lord Pearson of Rannoch, would rather we did not take that step forward. However, the noble Lord, Lord Eatwell, who is extremely expert in this field, and his party want this to go ahead. We should take this first step. I know I will not be able to satisfy the noble Lord, Lord Eatwell, in describing the exact design of the ESM system because the mechanism is under construction.

The noble Lord also had some fun—it was rather enjoyable—by asking how we could hold two views that he believed to be contradictory. One is that the ESM would directly benefit the UK or, to put it negatively, that failure to go ahead with the ESM would greatly damage the UK. At the same time, we were not involved in it. The remark of, I think, an American philosopher passed through my mind: the mark of an intelligent mind is to be able to hold two contradictory thoughts at the same time. It may be that it is the mark of an intelligent Government to do the same. It is of course possible to argue, as I have this evening and I stand by it, that standing in the way of this next step is standing in the way of a step that may lead to better things and greater stability for the eurozone. We judge, contrary to the views of the noble Lord, Lord Stoddart, that this is an improvement and is good for the British economy, British prosperity and the British people.

That is not the same as saying that we are involved in the powers, competencies and arrangements of the ESM. We are not. We have been in the EFSM and we were liable. We will cease to be liable in the future, once we can get this system in place. The first step is now required and it is one that the Prime Minister wishes to take, quite rightly, in the interests of this nation at the European Council meeting at the end of this week.

There will be, I repeat, a second opportunity to debate this treaty change during ratification, in line with the provisions of the EU Bill once it becomes law. Your Lordships will be addressing their minds to it at Second Reading tomorrow. Under the EU Bill, all treaty changes require primary legislation to be ratified, so this is not the end of the matter by any means. It is a start and it is a good start—the right start in the interests of this nation.

Motion agreed.