European Banking Union: EUC Report

Lord Liddle Excerpts

Thursday 24th January 2013 Lords Chamber

[Lord Liddle]

My Lords, I begin with two personal points. First, I declare an interest in that the think tank that I chair, Policy Network, has in the past received support from the City of London Corporation. Secondly, it is a pleasure to welcome the noble Lord, my brother-in-law, to the Front Bench opposite. Therefore, there will not be an excess of partisanship on this occasion on my part.

As always, it has been an interesting debate, not least because of the final contribution from my noble friend Lord Desai, which I am still trying to absorb. My noble friend Lord Harrison began the debate with an admirable summary of his report. As usual, one wishes that the country was governed by the committees of your Lordships’ House rather than by the prejudices of its Executive, because we would be much better governed. It is an admirable report.

An interesting, rather off-the-wall point was made by the noble Baroness, Lady Falkner. It is something on which I have long reflected: why is discussion of Europe such a male-dominated subject? That is not something that we should discuss at length today, but we have to take it very seriously if the pro-Europeans want any chance of winning a referendum, so thank you to the noble Baroness for raising that issue.

I want to make three points. First, on the state of the euro itself, I believe that adjustment is on the way. Things are a lot better than they were. The question is whether what is occurring is socially and politically sustainable. I do not think that it will be without more fiscal flexibility. Nor do I think that it will be sustainable without considerable debt write-offs, particularly after the German elections in September. There will have to be an element of a transfer union to make the position of the mezzogiorno of the south, which the noble Lord, Lord Trimble, mentioned, sustainable. That will require further steps towards banking union, particularly in the case of Spain, because there is such an obvious link between bank debts and the sovereign debt position.

My second point is on the Britain in Europe debate. Banking union is the fourth major institutional development since the euro crisis started from which the United Kingdom has stood aside. There was the European stability mechanism, the euro-plus pact, the fiscal compact and now the banking union, which was agreed in principle in June 2012, and which the British urged the eurozone to get on with. Indeed, I think George Osborne first recommended it as long ago as January 2011. He was very foresighted about that, but it is something from which we have chosen to stand aside.

If you read what this is about, while in the British debate it is presented as a measure to rescue the single currency, in the continental debate it is about the creation of what is called a financial market union. I think the noble Lord, Lord Kerr, pointed that out. In the British Government’s view, this is all part of a clear narrative in which the eurozone is integrating and we have to establish a new kind of settlement and relationship with the members outside it; that is the British Government's narrative. However, the real question is: to whom does this narrative apply, other than the United Kingdom? How many other euro-outs share this conception of the British narrative? I might ask the Government what their view of that is.

That is a crucial point, first, in informing a view about the sustainability of the safeguards that the Government obtained on the banking union in the December 2012 summit. Secondly, it is fundamental to whether David Cameron’s essential assertion in his speech yesterday—that the core of Europe is the single market—is right. For most members, however, will it actually be the single currency? This point is fundamental because it is a question of whether we are going along with the support of other euro-outs, to try to negotiate a balanced relationship between outs and ins, or whether we are just making a case for special treatment for Britain, which will be far more difficult to negotiate.

The third point I want to make is about the position of the City of London. These are not just intellectual exercises; we are talking about something that is fundamental to our national interests. I have long believed that the UK is overdependent on financial services and I support the whole concept of rebalancing the economy towards manufacturing. My noble friend Lord Mandelson’s comment was right; there has been too much financial engineering and not enough real engineering. I agree with all that. However, the City is a crucial national interest and the financial centre of the single market. I also agree with the noble Lord, Lord Flight, that it is global and very resilient but it has benefited a lot from the single market in Europe—particularly from the opening-up of the financial single market, a lot of which occurred under the previous Labour Government.

Of course, no one worried about this at the time because it was the era of light-touch regulation. No one worried about the financial imbalances that were building up between countries and the lack of cross-border regulation. Well, the banking crisis changed all that and the Government recognised the need for regulation at EU level. It was a good thing that the Conservative Government, including Chancellor Osborne, accepted when they came in what Chancellor Darling had already agreed to: the establishment of European regulatory agencies.

[Lord Flight]

Could I just make this point to the noble Lord? The investment management industry, in which I spent 40 years of my career, has still failed to penetrate the EU. There are a variety of cultural and other barriers, but a lot of American firms came over thinking that Europe was like America and that all they had to do was have offices. If one looks at how much money the London retail funds business has got from the EU, it is still pitifully small.

[Lord Liddle]

I agree that things vary from sector to sector but one of the reasons why so many foreign-based banks are in London is because it is the financial centre of the single market.

The point is that the banking crisis has changed the way that we thought about the City. It has made regulation absolutely essential. The euro crisis has made banking union essential in order to break the link between sovereign debt and the fact that nation states have had to underwrite their banks. It raises difficult issues for us in the UK. As long as we see ourselves as being outside the single currency, the centre of the European financial market will be remote from the core of the banking union. There is also the block vote problem: if regulation is concentrated through the ECB, we could be outvoted.

The UK made a disastrous attempt in 2011 to try to tackle this problem of what to do. This was at that year’s December summit, where a paper was circulated late at night without prior consultation with anyone. Full of complex detail, it had at the top the horrible word “unanimity”. Basically it was asking for unanimity on questions of financial services. Not only was this tactically maladroit, it was strategically misguided. If the sincere wish of the British Government is to deepen the single market in the European Union, we cannot go around demanding unanimity on a specific UK interest, because every other member state will demand unanimity on an interest specific to it.

That is why the proposals of, for instance, the Fresh Start group are extremely worrying. They do not demand unanimity but in cases of financial services they do demand use of the Luxembourg compromise and they talk about emergency brakes. If you believe in the single market, you cannot put forward such things in the European Union. I should like to hear from the Government that they have no intention of pressing for the Luxembourg compromise or emergency brakes in this area. This would be so damaging to Britain’s interests in pressing forward to the single market.

However, the Government achieved a notable success in December with the acceptance of the double majority principle. I agree with my noble friend Lord Davies of Stamford that, for protecting our position, this is a lot better than nothing. Yet I also agree with the noble Lord, Lord Kerr, who asks how robust this is and whether it will last.

First, this double majority applies only to the banking agency, which is about the implementing regulations, and not to ECOFIN, which draws up the legislation. So we do not have a special position there. Secondly, the noble Lord, Lord Hamilton, is right that the ECB will be the big player in this and the EBA a weakly staffed and resourced organisation. How do the Government intend to deal with that? Thirdly, there is the question of time limitation. How many euro-outs, which are actually banking union-ins, will there be? If there are a significant number of euro-outs who will be banking union-ins, how long do we think that this special double majority arrangement will last?

There are alternatives. I am not saying that this is what the Labour Party would propose but, as my noble friend Lord Davies said, we have not had from the Government a proper cost-benefit analysis of what the alternatives might be. Did they look at how, as a euro-out, we might be a member of the banking union and whether it could be made to work? Could we have built on the model of the European Systemic Risk Board, of which the president of the European Central Bank is chair and the Governor of the Bank of England is vice-chair? Could we have used that as an umbrella? The Government have a duty to look at all the possible alternatives here because this is an issue of such vital importance to the future of the City. The fear that a lot of us have is that for reasons of ideology and prejudice, the UK has opted for very much a second-best, possibly a third-best, solution that would be gravely damaging to our interests in the long run. I will be grateful to the Minister if he can deal with some of these points.