European Union: Recent Developments

Lord Kerr of Kinlochard Excerpts

Monday 17th December 2012 Lords Chamber

[Lord Kerr of Kinlochard]

My first task is to commend to the House the EU Select Committee’s timely report on European banking union. I do so in the absence of the noble Lord, Lord Harrison. This is a riveting report and a riveting read. Clearly, the Leader of the House, given his polite remarks about it, has already studied every word closely. I congratulate the noble Lord, Lord Harrison, whose sub-committee produced it, on his sagacity. He had to deal with some pretty intractable material; I do not mean just me and the noble Lord, Lord Hamilton of Epsom, but the issues, which are quite difficult. They certainly engaged ECOFIN and the European Council last week.

We spent the autumn taking evidence from, among others, the president of the European Council, the Commission vice-president, the vice-president of the ECB, the chairman of the EBA and the Financial Secretary to the Treasury. Our conclusion was that, given the urgent need to break the vicious circle between banks and sovereign states, there was much sense in the Van Rompuy three-pronged approach: a single supervisory mechanism, a common resolution mechanism and a common deposit insurance scheme. We were concerned that the second and third elements had been consigned to the back-burner; we thought all three were necessary. However, we thought that the SSM proposal—the supervisory mechanism—was an important first step, and we accepted that the ECB was the appropriate institution to take on the role.

We stressed the need for triple safeguards, first, to deal with possible conflicts in the ECB between the requirements of monetary policy and concern for the banks under supervision; secondly, to ensure equality in decision-taking between euro-area countries and those non-euro-area member states which wish to participate; and, thirdly, while respecting the ECB’s independence in its monetary role, to provide for effective accountability in the supervisory role, including to national parliaments as well as the European Parliament.

The agreements reached in Brussels last week are only partial and will be reviewed in the European Parliament this week in respect of the EBA. However, I note that the first two safeguards, which we thought important, appear to have been secured; there will be strict separation of supervisory and monetary policy tasks; and the eurozone and non-eurozone member states participating in the mechanism will have full and equal rights. I also note that the new regime will, at least at first, apply only to a small minority of participating member states’ banks. In our report, we thought this realistic. We thought it unrealistic to envisage the ECB taking on intensive supervision of 6,000 banks straight away. We suggested that it should focus on the largest cross-border, systemically important banks, but with the power to step in quickly in respect of others if need be. Possibly for slight different reasons, Mrs Merkel seems to have taken the same view.

In our report, we noted that though—I would say “because” but the report says “though”—the UK would not participate, UK interests could be affected, with a significant risk of our becoming marginalised as others move towards closer integration. We thought that the EBA, the organisation tasked with building a rule book for all member states, could itself be marginalised, or find its decision-taking predetermined in the ECB or by caucusing among SSM member states. We called on the Government to do all in their power to ensure that London’s pre-eminence was not imperilled. It is clear that the Government took these risks seriously. They have secured Council language promising a level playing field between member states that take part in the SSM and those that do not. They have also secured the double-majority voting system for the EBA, which the noble Lord the Leader of the House described and the strength of which he said was rock solid. My noble friend Lord Williamson asked whether it was watertight; some think that it looks a little fragile. That is no doubt one of the points to which the Committee will return as we go on watching developments in banking union in the weeks and months ahead.

Until now, in speaking of the report of the noble Lord, Lord Harrison, I have tried to emulate his admirable even-handedness, breaking with the habit of a lifetime. I will now add two more personal and more partisan points of my own. They are gloomy predictions. I know Cassandra’s fate, but her track record, sadly, was very good.

First, although there is disagreement across the EU—including, strikingly, between Paris and Berlin these days—about the appropriate pace, there is near-unanimity on the direction of travel. The papers which the European Council considered last week made it clear that the SSM, the banking supervision arrangement,

“will constitute a first step towards a financial markets union”.

For most member states, what is envisaged is the deepening, the further integration, of the single market. Our Government take a different view, as our Prime Minister explained after the October European Council:

“you do not need a banking union because you have a single market; you need it because you have a single currency—so Britain should not, and will not, be part of that banking union”.—[Official Report, Commons, 22/10/12; col. 699.]

After this European Council, the Government take pride in having secured a promise of,

“full respect for the integrity of the single market”.

However, those words have a different meaning for those who see the single market not as a finished artefact to be preserved, but as a process to be pressed forward in everyone’s interests. That is what we used to think, because we believed that the general EU interest in open, competitive markets coincided with the UK interest, including in the health of the City of London. That is why the noble Baroness, Lady Thatcher, fought to obtain qualified majority voting for single market legislation. That is why UK Governments and UK commissioners drove the process forward. They were right; London did benefit, strengthening its lead as Europe’s pre-eminent market.

However, looking ahead, as eurozone Finance Ministers meet more and more often with their other fiscal and banking union colleagues, but without us, it seems reasonable to suppose that they will from time to time discuss financial market legislation. When such legislation comes to Council, they will have their qualified majority. As the Leader of the House clarified, the double-lock majority system, about which my noble friend Lord Williamson was a little sceptical, applies only to the EBA, not to the Council.

The French say, “Les absents ont toujours tort.” I wonder whether it is plausible that those envisaging and working for a financial markets union will always agree that its principal location should be for ever offshore. What we have been hearing from Paris from Monsieur Noyer in recent weeks could be a harbinger of real perils ahead.

My last point is that talk of a “new deal” to be negotiated after the election alarms me, whichever side of the House it comes from. I was encouraged by many aspects of the speech made to the CBI on 19 November by the leader of the Labour Party, although, for me, it did not excuse the irresponsible alliance of opposites struck with Eurosceptic Conservatives to seek to embarrass the Government on the EU budget. But even Mr Miliband spoke of working,

“to ensure that this more flexible European Union, where some countries pursue deeper integration and others don’t, still benefits all”.

In my view, the others he speaks of are very few and not very popular.

In his October Berlin speech, the Foreign Secretary spoke of many countries wishing different kinds of integration. Most member states actually want to stick together, in my view. We in Britain resist the idea or talk of a two-tier Europe; we prefer to talk of multi-tier or variable geometry or flexibility. Yet our friends abroad are sadly noting that a common feature nowadays of the groups who opt out—or choose to stay out—is that Britain is in them all: monetary union, banking union, fiscal union, Schengen, and now apparently justice and home affairs. We used to try to shape EU developments. In US football parlance, we played offence. Now we play defence. Our aim is to stop further integration, or at least to ensure that we do not have to comply with it. We used to look for opportunities; now we see only threats, perhaps because we are always looking over our shoulders at UKIP, whom I look forward to hearing from later in the debate.

Against that background, I think we have to recognise that we are losing our friends in Europe. Supposing we turn up after an election seeking a “new deal”, which would mean that we would remain full members of the single market, although we are perceived as obstructing or opting out from its further development, while trying to insist that EU laws affecting social policy, or labour costs, or fisheries or agriculture would not apply to us, or brandishing a totally new blueprint of the kind recommended by the noble Lords, Lord Howell of Guildford and Lord Tugendhat. Is it realistic to expect that such proposals would win the necessary unanimous support of all other member states? Unanimity is required to change the treaties. What we heard from Paris, from President Hollande, last week may be indicative. I think we might well be told to make up our minds, either out or in.

As the Prime Minister prepares his long-awaited EU speech, I really hope he will avoid the temptation to hold out a false prospectus. One should not talk about “new deals” unless one is sure that they are realistic. Better still, when thinking about UKIP, remember Kipling and his warning that the trouble with paying the Danegeld is you never get rid of the Dane. They will always come back for more. You have to stand up to them and make to the people of this country a realistic, positive case for Britain’s EU membership.