EU: Financial Stability and Economic Growth

Lord Newby Excerpts

Thursday 3rd November 2011 Lords Chamber

Moved by

[Lord Newby]

To call attention to the Government’s role in supporting financial stability and economic growth in the European Union; and to move for papers.

[Lord Newby]

My Lords, when I first suggested that we have a debate on Britain’s role within the EU, I knew that because of the crisis within the eurozone, it would be topical. What I did not realise was how this crisis was likely to develop, nor quite what demons it would unleash within the UK. It is now clear that we are at a more critical juncture in our dealings with the EU than at any point since 1975. I believe it is decisively in our national interest to play a positive European role.

Of the many illusions of those who believe that we could have a more successful future outside the EU, the one which is, in my view, the most misconceived is that without participating in the world’s largest single market, the UK would on its own have an influence which would satisfactorily protect our national economic interests. I can only assume that when the antis travelled to, say, India, they hear heard businessmen speak with passion about their future relations and trading prospects with Brazil, China and the rest of south and south-east Asia and mention Britain almost as an afterthought; or speak to American bankers who see London's strength as being largely dependent on being part of the single market; or to South Korean manufacturers, who put their European production plants in eastern Europe, but have a European head office in London only because we are part of the EU.

The EU brings many benefits in terms of helping the UK to promote its values and interests globally, but our relationship with the rest of Europe stands or falls on the economics. Here, despite the growing importance of the BRICs, the EU remains our predominant trade partner: over 40 per cent of our external trade is with the EU. Despite the importance which we are now rightly attaching to expanding our trade with the BRICs, it is the case that, at present, trade with China, India and Brazil combined is but a small fraction of our trade with Europe. So while those countries have tremendous potential, even if our performance improves dramatically, they will still be lagging behind trade with Europe for a very long time.

If we judge that our interests remain best served by staying in the EU, how well are we currently placed to promote those interests and what should we do to strengthen our position? Before the eurozone agreement last week, our position was far from ideal. The Labour Government's approach to Europe often sounded very positive, particularly when articulated by Tony Blair in his early years as Prime Minister, but his failure to match deeds with words, coupled with years of supercilious neglect by Gordon Brown, meant that Britain's traditional posture, more like a sulky teenager than a constructive adult, resulted in a disproportionately low degree of influence. This lack of influence at government level has been compounded by the decision of the Conservative group in the European Parliament to withdraw from the EPP and set up a small ragbag of a group. This has resulted in its influence in the Parliament being significantly weakened at a time when the Parliament itself is exercising greater influence, which is a trend that is set to continue.

The UK’s increasingly unsatisfactory position was exemplified by the recent announcement of a financial transactions tax by the European Commission President. This measure would bear predominantly on the UK: in some estimates, up to 80 per cent of transactions covered by the tax take place here. Both the previous Government and now the coalition have made it abundantly clear that they would oppose such a measure unless it were introduced globally, which is at present a very slim possibility. Nevertheless, President Barroso went ahead and unveiled the plan. It is inconceivable that the Commission would vigorously promote a proposal that would predominantly affect France or Germany if he knew that those countries opposed it. It would be a futile gesture and bad politics. However, no such inhibitions apply to a snub to the UK. This only happened because Barroso knew that we were relatively isolated and unpopular and that a populist proposal aimed at London would win him many more plaudits than brickbats.

This far-from-satisfactory situation was where we found ourselves before last week’s eurozone summit. That meeting not only agreed the package of measures to try to sort out the Greek debt problem, recapitalise eurozone banks and enhance the bailout fund, just as importantly it also agreed a step change in co-ordination of the eurozone. In addition to greater co-ordination of economic and fiscal policies, and in order to give greater political impetus to the process, it established a new eurozone governance structure. This will involve regular summits presided over by a new euro summit president and it also includes the possibility of the president of the eurozone being a full-time post based in Brussels. For non-eurozone members, there is only a commitment that the president of the euro summit will keep us informed of the preparation and outcome of the summits themselves. This is not very reassuring.

Arguably these measures by the eurozone countries should have been put in place when the euro was introduced in order to avoid some of the current mess. However, having belatedly begun to get a grip on the crisis, there is a strong chance now that the eurozone Governments will implement this new plan. What is their plan B? The truth is there is none. If this happens, the UK is in danger of moving from being a central if quarrelsome core EU member to being marginalised. Therefore, what should our response be? We are clearly not suddenly going to apply to join the eurozone.

Of course, we are one of 10 countries in the same position. However, we should not be fooled into thinking that the euro-outs are a credible long-term alternative power structure within the EU. It is worth listing the non-eurozone members: Bulgaria, the Czech Republic, Denmark, Hungary, Latvia, Lithuania, Poland, Romania and Sweden. Leaving aside the fact that some of them are keen to join the euro—including the most important, Poland—there is clearly no particularly broad commonality of interest among the outs. If we were to list those member states with which we have the greatest economic and political ties and interests, few of these countries would be near the top. I hope that British Prime Ministers in coming years enjoy their dinners with the group of outs, but I cannot help feeling that, as they look across at the somewhat larger eurozone table, they will feel slightly queasy.

So far I have been pretty gloomy about our position within the EU and I am well aware that simply moping about our lot will not promote our position. Nor do I think adopting the attitude of vultures waiting for the opportunity to pick at the European treaties and take back the odd morsel of power here and there is a substitute for a credible strategy to help support stability and growth across Europe and therefore within the UK. What should we do, and what is it credible to do within the confines of current British politics?

First, we need to continue making it clear that we support the eurozone countries in the action they are taking, including their plans for greater fiscal co-ordination. Our ability to affect that process is in any event extremely limited, but in doing so we should try to avoid lecturing them on the need to sort themselves out and get on with it. I can understand why Ministers find that a very attractive line but even if it were appropriate before last week’s decisions, those decisions mean that it is doubly inappropriate now. I agree that it is very much for the eurozone to deal with the problem which, as it were, it has created, but I hope that the UK will play a positive role in supporting the IMF in this respect. When the statement was made last week, I felt that the Government went to inordinate lengths to try to put the brakes on the IMF supporting sensible measures to sort out the eurozone mess. Statements by the Prime Minister over the last 24 hours suggest that perhaps I misread what he had in mind, and I would be extremely grateful if the Minister could say this afternoon what now the British Government’s position is on providing additional support for the IMF, which, however generally it may be couched, could mean that we would be supporting greater IMF involvement within the eurozone.

If we adopt a sensible tone, we need to articulate a growth strategy for the whole of the EU that will resonate widely across it. Obviously this has to be built on strengthening the single market. The Prime Minister produced a pamphlet on this subject in March, which had four key pillars. The first was completing the single market, particularly by further liberalisation of services and the creation of a single digital market. It has been estimated that if it were possible to do this in full, it could be worth up to £3,500 for each household in the UK. That figure seems somewhat large but even if we were to achieve only a significant proportion of that it would be a prize worth having. Secondly, we must do more to promote the benefits of free trade by pushing for the conclusion of the Doha round, as well as trade agreements with some of our fastest growing trade partners. All these measures sound a bit like motherhood and apple pie but they are absolutely central to a positive agenda for growth. Thirdly, the Prime Minister suggested that we need to reduce the costs of doing business across the EU. Fourthly, we must do more to make the EU more attractive as a hub for innovation.

Those measures have been amplified and supported by the Deputy Prime Minister in recent days. It is a constructive agenda. The question is how to ensure that it is taken forward positively. This now needs detailed, consistent and concerted follow-through, which should be led by Ministers and involve building coalitions involving both the euro-ins and the euro-outs. I believe that the Government are now adopting this strategy with some success and are finding that there is a broader degree of support for some of the lines that we are taking than might originally have been thought to be the case. If we adopt a less hectoring tone and promote a growth strategy that wins widespread support, I hope that we will create an atmosphere in which our voice will carry a more proportionate weight.

However, I am realistic enough to believe that it is not quite as simple as that. For all member states, the importance of promoting their interests within the EU as well as promoting the EU as a whole is critical. A key way in which they all seek to do this is by making sure that their voice is heard as often and effectively as possible within all the EU structures. That requires them to have as many effective people in place across these institutions as possible. For years, some countries, particularly France and Ireland, have recognised this and gone to great lengths to ensure that as many of their compatriots as possible are in position in the Commission and other EU institutions. Not so the UK. The view too often has been that the best officials would do their careers harm, rather than good, by moving to Brussels either permanently or on secondment. That view has definitely been held in the Treasury and the Bank of England over many years.

It is now extremely important that we place as many top-quality officials as possible, not just in the Commission, but given the importance of the financial services sector to the UK, also in the three European supervisory bodies for banking, insurance and securities and markets. I believe that the Foreign Secretary recognises this and is taking steps to encourage more UK high flyers to spend time in Brussels on secondment or on a permanent basis, which is very much to be welcomed.

If we adopt the agenda that I have outlined, we will stand a better chance of playing the kind of constructive role which is vital for the development of the UK economy within the EU. The stakes are very high, but so is the prize. I beg to move.

--- Later in debate ---

[Lord Newby]

My Lords, I thank all noble Lords who have taken part in this fascinating debate. I am sure that the one thing uniting all participants is that the issues we have been debating are of central importance to the future growth and stability of the UK economy. We will no doubt return to them frequently in coming months but, for today, I beg leave to withdraw the Motion.

Motion withdrawn.