European Union Committee Report

Lord Marlesford Excerpts

Monday 26th November 2012 Grand Committee

[Lord Marlesford]

My Lords, I start by briefly and as simply as possible setting out my position on Europe. I am neither a Euro-enthusiast nor a Eurosceptic. I am a Euro-challenger. In fact, I believe that that should be the role of the EU Select Committee and its six sub-committees. There is much to challenge in what comes out of Brussels. In our work, it is not our function, to appear, as was the fashion in earlier years, communautaire—that is, to support the Commission in its endeavours to create an ever closer union. The path to that objective diverged long ago, first with the formal introduction of the concept of subsidiarity in the Maastricht treaty in February 1992 and, subsequently, with the introduction of a single currency for some EU members. Our task is to establish whether what the Commission proposes is sensible, practical, necessary and, I would say, above all, in the interests of the UK.

I am currently a member of both the Select Committee and EU Sub-Committee A, the economic and financial affairs sub-committee. Sub-Committee A is chaired by the noble Lord, Lord Harrison, who regrets that he is unable to be here today because he is at a conference of EU finance committee chairs. I regard it as a particular privilege to be on the Select Committee. It is my second time on it, so I have been lucky enough to serve under two remarkable previous chairmen: first, the noble Lord, Lord Grenfell, who has done so much for the reputation of the House of Lords in Europe; and, secondly, the noble Lord, Lord Roper, who is one of the most fair-minded people I have ever been lucky enough to serve under. Now, I am under my old friend and colleague from more than 40 years ago, when we were both children in the Conservative Research Department, my noble friend Lord Boswell.

A central element of Sub-Committee A’s work has been its analysis of the ongoing euro crisis. The committee’s first report on the crisis, entitled, The Future of Economic Governance in the EU, was published in March 2011. We concluded that the interconnection of sovereign debt and banking sectors was one of the principal causes of the euro area crisis. We pointed to the weakening effect on public finances of transferring private debt to the public sector and argued that effective mechanisms needed to be put in place to ensure that the public sector did not carry the cost of failing banks. We highlighted the risk of a vicious circle between sovereign debt and a weakened banking sector.

However, it took a long time for this particular penny to drop in Brussels. It was the Commission, in cahoots with the ECB, which persuaded the Irish and Spanish Governments to take on to their books the debts of their banks. Their Eureka moment appears to have come only last month, when the Council conclusions announced that,

“it is imperative to break the vicious circle between banks and sovereigns”—

a bit late, my Lords. We also drew attention to the flaws in the concept and design of EMU, revealed in:

“An asymmetry between a centralised monetary policy and decentralised fiscal and supply-side policies … with a build-up of competitiveness imbalances between Member States”.

We published a follow-up report in February 2012, written in conjunction with the EU Select Committee, which noted how,

“National governments and EU institutions have … struggled to keep up with the pace of events”,

and stressed the need for “effective and proactive leadership” in meeting the massive challenges faced by the EU and the euro area in particular. Since that report was published, we have continued our analysis, most recently in the form of three follow-up evidence sessions with appropriate experts in July. We wrote to the Minister at the end of July setting out our views on such issues as the future of the euro area, the implications of fiscal and banking union for the UK, the role of the ECB and banking supervision, and the direct recapitalisation of banks. We also covered euro bonds and the compact for growth and jobs. We will continue our examination of the crisis in the new year.

EU Sub-Committee A has also reported on other highly significant legislative proposals, notably the European Commission’s proposals for a financial transaction tax. Our report, Towards a Financial Transaction Tax?, was published in March 2012. We were highly critical of the Commission’s proposals, described the proposed residence principle as “impractical and unworkable”, and concluded that there was significant risk of the relocation of financial activity outside the EU if an FTT was introduced. We also stressed that the implications for the UK of an FTT could be considerable, even if it chose to stand apart.

In October this year, 11 member states announced their intention to proceed with an FTT under the enhanced co-operation procedure. It is clear to me that the introduction of an FTT limited to some euro area countries could not only damage financial businesses in Frankfurt and Paris but have an adverse effect on banks based inside the euro area. Its effects on London remain uncertain. At present, London leads New York in being one of the three major financial centres of the world; the third is Hong Kong. I am sure that the American and Hong Kong-based banks will benefit, which must have implications, for example, for the future organisation of HSBC.

EU Sub-Committee A has scrutinised a number of other important legislative proposals, including those for deposit guarantee and investor compensation schemes, EU prudential capital requirements and on various other technical issues—I do not have time to go into them all now. The sub-committee has also assessed various bodies and organisations whose roles have become more prominent since the financial crisis erupted. Its July 2011 report, Sovereign Credit Ratings: Shooting the Messenger?, analysed the role and behaviour of these important institutions. We found that the valid charge against the rating agencies was not so much that they precipitated or exacerbated the euro area crisis but rather that, in the years leading up to it, they conspicuously failed to challenge the assumptions on which their assessments of the sustainability of sovereign debt were based. They just got it wrong. We stressed that investors should see sovereign ratings ultimately for what they are: subjective and sometimes remarkably amateur predictions that rely heavily on personal judgments made by rating agency staff who are not that wonderful. Investors should not follow those ratings blindly, but view them as options to be balanced and confirmed by other market indicators. The role of the credit rating agencies remains contentious, but they now seem to recognise the reality, as seen most recently in the decision reached by Moody’s last week to downgrade France’s credit rating.

In July 2011 we also published a report on the new European supervisory authorities: the European Banking Authority, the European Securities and Markets Authority, the European Insurance and Occupational Pensions Authority and the European Systemic Risk Board. These bodies have responsibility for macroprudential oversight of the EU financial system. We considered their powers and their contribution to macroprudential stability, and the influence of the UK on these bodies. We continue to analyse their roles, not least in the case of the European Banking Authority in relation to the sub-committee’s current inquiry into proposals for a banking union. We shall keep a close eye on the Commission’s review of the European system of financial supervisors, which is meant to take place next year. Further, as I have mentioned, we are shortly going to produce a report on the European banking union.

When I visited Brussels recently with the sub-committee, I was struck by the confusion of thought that exists inside the Commission about the implications of a banking union. Not only had it set out a wholly unrealistic timetable, under which the union was to be set up and running by January 2013, but had failed to understand the crucial difference between setting the rulebook for banks and the invigilation or supervision of their behaviour and compliance with those rules. The lesson I draw from that is not that the European Commission should be expanded so that it can perform better, but that it should be less ambitious in what it seeks to do. Her Majesty’s Government have decided that we should not be part of a banking union, but that does not mean that there should not be an overall rulebook for banks throughout the EU. It should mean that the European Banking Authority, which is very properly based in London, should draw up the rules. In 2013 we also expect to receive legislative proposals arising from the Liikanen report on reforming the structure of the EU banking sector.

I have a final comment to make. We all started off by celebrating the single market when it was set up under the 1985 Luxembourg treaty and enacted in 1987. It appeared to be a logical step on the road from a free trade association to a customs union with, eventually, completely free movement of capital, people, goods and services. Necessary harmonisation for that purpose was to be supported, but now the single market is being revealed as a Trojan horse. Harmonisation is being promoted as a stepping stone to deepening, which is the prerequisite for ever closer union. Facing the tough realities of globalisation, it is being argued that there are no limits to the harmonisation that is needed in the EU.

A key area is taxation. Several years ago a senior énarque from the French Ministry of Finance complained to me that there were 30,000 French working in England because of our tax structure. “We must”, he declared, “have a level playing field”. “But at whose level?”, I asked. My clever friend merely smiled. The soldiers inside that horse are not Greeks or Germans. They are mainly French, accompanied, I suspect, by a cadre of hardened Brussels federalists. Today, French refugees are again flooding into London. I am not surprised. President Hollande is leading his countrymen towards the cliff of economic suicide. He would like to take us with him. We must not follow.

As you have heard, the Select Committee is now looking at enlargement. Widening the EU can be either an alternative to further deepening or it can attempt to build upon it. I believe that the cost of deepening, both in terms of the EU budget and the erosion of treasured cultural differences between member nations, may make further deepening politically unacceptable. I hope that our inquiry may be able to identify a looser structure as an alternative to ever closer union. It may be that the so-called variable geometry EU is a way to relieve the stresses which could fracture the whole enterprise. I, for one, would be greatly disappointed if fracture were the outcome. In one sense, the EU is like a political party—it has to agree on more than it disagrees on if it is to survive. If that means an EU of variable geometry, that may be no worse than coalition government in the UK. The cross-party approach of the Select Committee and its sub-committees can be both a guardian of half a century of achievement and a guide to the hazards ahead.

I remain astonished at the insensitivity—some would say arrogance—of the Brussels Commission in making a bid for a 6% increase in the EU budget. One consequence has already been an erosion of public support for the EU. Whether or not we like it, we must face the fact that Britain’s continued membership of the EU as at present constituted is now in doubt. The EU Select Committees have a responsibility to guide Europe’s leaders away from inappropriate and unsustainable EU Commission proposals which could undermine Britain’s role at the heart of Europe, which is where I still wish us to be.