European Union: Negotiations (European Union Committee Report)

Lord Lamont of Lerwick Excerpts

Monday 16th March 2020 Lords Chamber

[Lord Kerr of Kinlochard]

I bow to the noble Lord’s experience in financial matters. I usually find the usual channels as baffling as the Sibyl of Cumae, but on this occasion we have to congratulate them on arranging such a prompt debate on the Select Committee report. We must also congratulate the noble Earl, Lord Kinnoull, on producing such an excellent, analytical, factual report—a good trigger for the first test of what we mean by Section 29 of the Withdrawal Act. I declare an interest: I sit on his committee, which is why I suck up to him.

As he spelled out, the report brings out the striking contrast between the detailed negotiating mandate put forward by the 27 and the terse assertions of the Government’s White Paper. Of course, these are only opening positions but the gap is quite wide, particularly in the four areas where it seems to have arisen because our Government’s position has changed.

On architecture, we no longer believe in an overriding institutional framework, which is what we agreed to in the joint political declaration of 19 October. Instead, we now want only a free trade agreement

“supported by a range of other international agreements, all with their own appropriate and precedented governance arrangements”—

all, presumably, with different governance arrangements.

The EU mandate sticks with what the political declaration said, and still wants “an overarching institutional framework”. I suspect that this reflects the EU’s unhappy experience with Switzerland and the unsatisfactory multiplicity of separate EU-Swiss agreements. We were one of many member states to agree that the Swiss experiment should never be repeated. I expect the others still feel the same.

Secondly, on the level playing field, as the noble Lord, Lord Hannay, reminded us, we agreed in October that:

“Given the Union and the UK’s geographic proximity and economic interdependence, the future relationship must ensure open and fair competition, encompassing robust commitment to a level playing field”.


That is still in the EU mandate, but it seems that we have changed our minds on that too. We now say that we will not agree to any obligations for our laws to be aligned with the EU’s. That could have consequences. In October, we agreed that the “precise nature of” level playing field

“commitments should be commensurate with the scope and depth of the future relationship”.

That works both ways. If we will not provide convincing assurances on competition and the other topics, any free trade agreement is likely to be rather shallow and narrow in scope.

Thirdly, in October we wanted “ambitious, close and lasting co-operation” on foreign policy, sanctions, security and defence. The EU mandate now covers the same ground in broadly the same terms, but our White Paper is completely silent on the subject. I note that, according to the press, we have rejected the Commission’s idea that one of the negotiating groups working to Mr Frost and Monsieur Barnier should cover external relations topics. I am not clear why our position has changed. Perhaps the Minister could tell us.

Finally, the White Paper robustly rejects the idea of any role for the Court of Justice. Mr Gove, giving evidence last Wednesday to Mr Benn’s committee in the other place, spelled out that this extended to any organisation—say, REACH, the chemicals regulator or the European arrest warrant—that was under CJEU jurisdiction. This, too, would seem to indicate a preference for narrowing the scope of any eventual agreement.

I draw two observations from those four facts. First, I am not sure that our continental friends will fully understand that the election has changed everything, as the Prime Minister, Mr Gove and Mr Frost have maintained in their recent speeches. October’s joint political declaration is not, of course, a legally binding text, as the noble Baroness, Lady Noakes, reminded us—I was delighted to hear something I could agree with—but it is an international agreement. It is not legally binding—it is not part of the treaty—but it was an agreement that emerged from a negotiation involving mutual compromise.

I do not think it follows from Mr Johnson’s election victory that his 27 colleagues will accept that the balance of the declaration can now somehow be changed, with the UK cherry-picking the bits we like best and dropping the other bits, and their having to acquiesce. The thesis seems to be that the political situation in the UK is now different, so we can just pick and choose the bits we like. Perhaps the foreigners may accept that; I am not sure.

Secondly, on the other hand, it must be true that by aiming low and going for a narrow agreement and a more distant relationship with continental Europe, we increase the chances of getting something agreed by the end of the year. If it does not extend beyond trade in goods, as seems plausible on the basis of the opening position, it probably will not need national ratification in 27 capitals with the delays that inevitably entails. I thought it rash of Mr Johnson to rule out any extension to the negotiation period—perhaps coronavirus will now change his mind—but I am not one of the those who argue that it is impossible to secure a deal by December. I am certain that, if the Prime Minister sticks to his timetable and to the brusque autarkic assertions of his White Paper, the best we can get will be a narrow deal, a shallow deal and a very bad deal—but if that is what we want, I think it is possible.

However, there is a wild card and I turn to it now. It is Northern Ireland and the 131 pages of the protocol on Ireland and Northern Ireland in the withdrawal treaty, which has been in force since 31 January. In Brussels and among the 27, one today detects a growing suspicion that we are not terribly keen to implement the protocol. In Brussels, that is understandably taken rather seriously. The protocol is part of the treaty, and it is legally binding. Were we seen to be resiling from it, the consequences would be grave. I would certainly expect the EU to break off negotiations on the further treaty. I would assume that the nightmare of a hard border in Ireland would be back and the Good Friday agreement in grave danger. The noble Lord, Lord Hain, has drawn attention to the United States repercussions of that.

Of course, it seems wild and outlandish to suggest that this country would ever resile from a treaty obligation, an obligation we have only just taken on, on the last day of January. I hope that the suspicions of Brussels are misplaced, but we are currently not trusted over there, as the noble Baroness, Lady Ludford, explained. The Minister has made clear more than once in the House that he believes that the Government will fulfil their legal obligations, and I believe him, but there is a new Attorney-General, who may be more malleable than the previous one.

Why is trust evaporating in Brussels? The issue is the frontier in the Irish Sea and the suspicions spring from what the Government say and from what they do or do not do. First, let us look at the words. Mr Johnson and his new Secretary of State still seem in denial about what the protocol means for trade between Northern Ireland and Great Britain. Under Article 5 of the protocol from 1 January, we will be obliged to collect on the EU’s behalf EU customs duties on goods moving from Great Britain to Northern Ireland, except for those goods on which the UK and EU agree there is no risk of them moving into the Republic. We agreed that; that is what the treaty says. In Article 6 of the protocol we also agreed that the EU customs code and hence EU export checks will apply to goods moving from Northern Ireland to Great Britain, although with controls at ports and airports minimised to the extent possible. We agreed that; that is what the treaty says. In Article 12 we agreed to give the EU the right to monitor and supervise these two-way frontier arrangements. We agreed that. It is in the treaty.

As long ago as 21 October, the then Secretary of State for Exiting the EU, Mr Barclay, confirmed to the Select Committee chaired by my noble friend Lord Kinnoull that there would be two-way checks, but the Prime Minister continues to deny it and, unlike his predecessor, Mr Smith, so now does Mr Brandon Lewis, the new Secretary of State for Northern Ireland. In this context, the White Paper’s flat rejection of any role for CJEU jurisdiction in this country starts to look, in Brussels’ eyes, very sinister. Seventy-five pages of the protocol consist of long lists of single market laws that will apply in Northern Ireland and will be under CJEU jurisdiction.

Did the drafters of the White Paper just forget about Northern Ireland? Or, as some in Brussels fear, are the Government hoping to forget about the protocol? Giving evidence to Mr Benn’s committee in the other place last week, Mr Gove refused to confirm the description of the Irish Sea frontier, which the Government themselves set out in their explanatory document on the EU (Withdrawal Agreement) Bill, published on 21 October. He brushed questions aside, saying that they were a matter for the Joint Committee set up under the protocol, which will, I understand, finally meet at the end of this month. But the Joint Committee’s task, as spelled out in the treaty, is to agree how to implement the provisions of the protocol. It cannot change them—and we have signed up to them.

So much for the words—it is the deeds that worry me most. The Select Committee, visiting Belfast on 25 February, could find no evidence of any central or devolved government action to prepare to implement the protocol. The business community was equally unsighted, and suggested that with five months gone and only eight to go, it would be a “herculean” task to get workable frontier arrangements up and running. I think “herculean” is Hibernian for “impossible”.

We were told that no one from HMRC, which will be responsible for the two-way customs border in the Irish Sea, had, as of 25 February, given the business community of Northern Ireland any indication of what to expect or how best to prepare for it. We were told that 2,500 trucks cross the Irish Sea within the UK every day—850,000 a year—and that for GB-NI movements, 45 questions would probably have to be asked about every consignment. We were told that for NI-GB movements there might be 31 questions, if the precedent of the EU’s Ukrainian-Polish frontier were followed.

I find all this acutely disturbing—indeed, shocking. I can think of few greater infringements of national sovereignty than a foreign-supervised frontier inside our United Kingdom. I am not surprised that Mrs May—and Mr Johnson, before he got to No. 10—ruled it out as something no UK Prime Minister could possibly accept. But he did accept it: it is in an international treaty, and we do not break treaties.

The Government in Dublin are well aware that we are dragging our feet. So, too, is the Commission, whose members have been in Belfast to find out. No wonder there are suspicions in Brussels. If we walk away from the treaty we signed, there will not be another to sign. The worst of all possible worlds would be to leave the people of Northern Ireland in limbo and in the dark, puzzled by the words being uttered and totally unbriefed on the necessary deeds.

I would be grateful if the Minister could confirm that it is not our Government’s intention to seek to reopen or reinterpret Articles 5, 6 and 12 of the Irish protocol, and tell us when the people of Northern Ireland will be informed—ideally, consulted—about the preparations they should make for their resultant new trade frontier with the rest of this kingdom.

[Lord Lamont of Lerwick (Con)]

I do not disagree with everything the noble Lord has said in his formidable speech, but is there not one scenario that he has not covered? If there is a free trade agreement, will not a large part of the protocol fade into it?

[Lord Kerr of Kinlochard]

Yes, I think that is true. The checks would then become much less onerous—but they would still be required. The EU would still be required to collect data on its exports, which means that there would still be checks on Northern Ireland-GB trade, and in the other direction there would still have to be VAT checks, phytosanitary checks and rules of origin checks, even if the customs checks were reduced to near zero.

The noble Lord is right: it is perfectly true that, if there is a comprehensive free trade agreement, checks will be less onerous, but they will still have to happen in both directions. I support both the Motions on the Order Paper. I also support the amendment in the name of the noble Baroness, Lady Hayter. The Minister will note how supportive I am being today.

--- Later in debate ---

[Lord Davies of Stamford (Lab)]

My Lords, the narrow nationalism of this Government has been deeply depressing for a long time. But the fanatical, pedantic ideology that the Government have displayed in the last few weeks is quite unspeakable. The Government have withdrawn from the European Aviation Safety Agency and from Euratom. They have withdrawn from the EMA, the European Medicines Agency, in the middle of a pandemic, without any idea of what they are going to put in its place.

We had a debate a few weeks ago in which I asked the Minister a series of questions about what might happen and the various possibilities for replacing the EMA. It is obvious that the Government did not have the faintest clue what they were going to do. You cannot build up a new EMA—or FDA, to use the American term—in just a few months, let alone in nine months. We literally have the prospect that any new compound coming from the world’s pharmaceutical industry—and that could well be a vaccine for the coronavirus—will not be registrable in this country, will not be registered, cannot be licensed and will not be available to British patients. This seems fantastic but is actually the case.

What does one do in these circumstances? Until that debate, which left me with a profound sense of concern and anxiety, I took the view that these negotiations were going to be very difficult, take a long time and that there would be a lot of posing, rhetoric and so forth but that, at the end of the day, between rational, reasonable people, and given the importance of trade, there would be some compromise. Indeed, I worked out what I thought could be a viable compromise in the area of the regulation of traded goods, or what is now known as the level playing field.

I do not mind telling the House what I worked out; it will not have any relevance and, for reasons I shall come on to, it will never be implemented. I had in mind that we would start off with regulatory alignment, and we would then have an understanding, or a rule, that any party wishing to introduce a new regulation or change an existing one would have to give three months’ notice to the other. This would provide time and opportunity for negotiation and possibly compromise. But if the party insisted on having his or her way, at the end of the three months, he or she could withdraw from the whole arrangement. It would be so unlikely that anyone would want to withdraw from an arrangement affecting the exchange of tens of billions of pounds or euros of goods every year that it would be very unlikely that it would ever occur.

But I then realised, particularly after the debate that I have referred to, that I had really got it quite wrong. It was a great mistake to look at this from the point of view of rational analysis. We are dealing with much more powerful emotions than that. If you ask—and I have done this—the members of the ERG, who are supposed to be dominating the Government, what regulations they would like to introduce, if they are going to introduce new British regulations, or about the regulations we currently have that they would like to get rid of, they have no idea. This is not about regulations at all; it is about something much more profound and deeply emotional—something which goes to the heart of the Government’s ability to continue with its nationalist and populist campaign and which has brought it such electoral success recently. It is all about sovereignty.

On the continental side, there are equally strong emotions. In my view, what drives the continentals is more important than pounds, shillings and pence—or euros—or the productivity gains that you can certainly achieve from international trade, or the wealth creation or employment creation. Those things are very important. They are very attached to them. However, even more important to them is the survival of the European Union and the protection of that great sense of solidarity that has been built up over the past 50 years: the cultural changes, the exchanges and the bringing down of barriers; the educational and scientific research programmes; the enhancement of security through things such as the common arrest warrant and Europol; and the economic benefits of the single market—very much so. Above all is the assurance that Europe would not go back to the international system of 1914 or 1939, in which we had a bunch of highly competitive, nationalism-driven states quarrelling from time to time about economic, ethnic and territorial disputes. We know very well to what appalling tragedies that led. These matters are far more important than they appear. I am afraid that I can draw the conclusion only that it is most unlikely that there will be any agreement on them in present circumstances.

I will take another example, which is that of equivalence in financial services—I only have time for two examples, but they are perhaps the big two potential deal breakers in this whole negotiation. Equivalence is not quite the same as the example that I have given about the level playing field, because the proposals on equivalence do not involve giving privileges not available to members of the union to someone who has been a member of the union but has left. That seems absurd and unjust—it is, of course—and would be a permanent source of resentment, bitterness and recrimination within the union. If we came to an arrangement similar to the one that I just proposed theoretically for the level playing field, I do not doubt that, within a day or two, Mr Viktor Orbán would come up with a demand for 200 more regulations to be imposed or removed, so as to show how absurd and unjust the whole thing was.

Equivalence is not quite in the same category because it is not having something better than what members of the union have: it would not be as good as what they have, because they have stability and confidence that the regime will continue in the future. Equivalence means that you are considered equivalent as of today. However, banking regulations change the whole time: you might not be equivalent after six months, most unlikely to be after two years and certainly would not be after five years. You will have no guarantee of it being renewed and do not know what new regulations might come in. You are not in a better position, although it is still a much better position than not having the right to deal in the markets concerned without setting up separate subsidiaries and fragmenting your capital base, which no bank wants to do.

Equivalence is valuable and important but not likely to be granted. There are perhaps three reasons for that. The first is very understandable, and I do not think that anybody should be shocked by it, because I do not doubt that we would be behaving in exactly the same way if the boot were on the other foot. The continentals have noticed that London has attracted an enormous amount of the wholesale banking business that can be so profitable in normal circumstances. Since you need only one capitalised entity in the EU to trade throughout it under present EU arrangements, most of those entities have been placed in London. I doubt that there is a general desire on the part of our continental former partners to ensure that our commercial advantage continues indefinitely; they may well feel that there should be a level playing field there too, and that they should put themselves in a position where they can attract that sort of business to their own financial markets. There will be an element of that, which you can call protectionism, but it is natural—it is human nature, really. As I said, I do not think that we should be particularly shocked about it. We should just accept it. It is a strong argument and there is no answer to it.

The second thing is precedent. All Governments are very concerned about precedents when they give a favour to anybody—we are talking here about a major favour. As has already been said, there has been a considerable extension of the idea of equivalence far beyond what was originally envisaged as a purely EU-US arrangement. The EU is currently locked in difficult negotiations with the Swiss on precisely that point. No doubt the Chinese, the Indians or all sorts of people would like to have equivalence, and they are people whom it is very difficult to refuse, but in this context it would have to be refused because they do not have the effective banking supervision and regulatory systems that would be required. The creation of yet one more precedent would be something that a lot of people in the European Union would want to resist.

Thirdly, there is a point that possibly will not be spoken about very frankly, but it plays a big part in this, and that is the attitude of the central bank, the ECB. All central bankers, before they go to sleep at night and when they wake up in the morning, have two great concerns: one is whether there will be a financial crisis; the other is, if there is a financial crisis, whether they have the instruments to deal with it satisfactorily. If you have a financial crisis, you have to give orders to the banking system—like the orders we gave to banks after the Lehman collapse to stop buying CDOs—and those orders have to be obeyed immediately. You cannot really have a situation in which somebody says, “But I’m British and I’ve got a special protocol. I don’t have to obey you. I want to go to arbitration and do this, that and the other and call in lawyers.” It does not work that way. Equally, central banks depend upon a situation in which the major bankers in their jurisdiction are very beholden to them. I speak as a former investment banker for 14 or 15 years. Latterly, I was a main board member and head of European corporate finance in a large investment bank. Anybody who has ambitions in the City in that field has to make sure that they do not cross the Old Lady—that they do not upset the Bank of England. It is not a question of breaking some specific rule, but you want be regarded as responsible and helpful, particularly in a crisis when it is necessary.

Christine Lagarde and her colleagues will almost certainly be asked by Monsieur Barnier about their views on equivalence—no doubt it has already happened. I doubt very much that they have said that it would be a great idea to have more people in this market based outside the European Union with the privilege of operating under the equivalence regime. I very much doubt they will be saying that. I think they will be saying that it is something they would be reluctant to see. There are serious reasons why in both these cases—and I described them both as potential deal breakers—we will not get what we want.

The Government are very optimistic. They are trying to up the ante the whole time—saying that the continentals have got to agree everything by the end of the year and they have to make substantial progress by May or June otherwise we will drop the whole thing et cetera. They have even, as has come out very clearly from this debate, broken the terms of the agreement that they made on Ireland, which will make it very difficult for a negotiation to succeed. I think they are doing this because they are extremely confident. They have always said that the continentals are much more dependent on us than we are on them because they sell much more to us than we sell to them. It is a wonderfully quaint, mercantilist idea from the 17th century. Most people dropped that idea with Ricardo in the early 19th century. We now believe that the benefit of international trade is the opportunity gains through the international division of labour, and the benefit is computed in terms of gross domestic product, not in bullion accumulated in the central bank as mercantilists believed, or perhaps still do believe.

Nevertheless, if we look at it from the point of view of GDP, it is quite instructive. We find that the reverse is true. Their dependence on us is much less than our dependence on them. Some 14% of British GDP is exports to the European Union. In no European Union country, with the exception of the Republic of Ireland—and the Netherlands, where there is quite a lot of entrepot trade through Rotterdam which perhaps falsifies the figures—is the figure for exports to this country greater than 4% of GDP.

[Lord Lamont of Lerwick]

Is that not a very mercantilist view?

[Lord Davies of Stamford]

No, indeed it is not. I am not saying that the benefit we get is accumulating bullion, because we have a balance of payments surplus. That is the mercantilist idea, and I can only describe it as quaint; it is curious that people still believe in it. Yet the Government evidently do—because that is what it means when people say, “We’re in a better position, because they sell more to us than we sell to them, so they’re more dependent on us.” In fact, the GDP figures show the reverse.

To complete what I was saying about the figures, no EU country, apart from the two I mentioned, has exports to this country greater than 4% of GDP. That means that, if there were a 10% reduction in our trade because we went over to a WTO basis after the end of the transition period, the continentals would lose 0.4%, which is within the annual fluctuations of national accounts, whereas we would lose a much more important 1.4%. If there were a 20% reduction, they would lose 0.8% of their GDP—still manageable, although it would be a difficult blow—whereas we would lose 2.8%, which would be cataclysmic.

For those who do not like elementary economics, I should add that one could ask a 12 year-old, “Who has the greatest leverage and influence: someone who speaks for a market of 500 million people or someone who speaks for a market of 60 million people?”, and that 12 year-old would give you the right answer. The Government have the wrong answer. The first step in wisdom is self-knowledge, and the Government should take that step before they get involved any further in these negotiations.