Economic and Monetary Union (EUC Report)

Lord Tunnicliffe Excerpts

Wednesday 9th November 2016 Grand Committee

[Lord Tunnicliffe (Lab)]

My Lords, I thank the noble Baroness, Lady Falkner, for opening this debate in such a thoughtful manner and for the work that she and other members of the committee have done to produce this report. Every speaker has rightly noted that the political context in which this report was written was very different to the one in which we now find ourselves. Therefore, the tendency might be to dismiss this report and the issues that it raises, as the Government appear to have done in their response to the committee. However, I argue that exactly because of the decision of the British people on 23 June and because of the rightful insistence of the Prime Minister that Britain will continue to be an outward-looking country, it is even more important that we reflect on the five presidents’ report and the recommendations of the Select Committee.

I shall say a little more on Brexit later, but first I address what I regard as the fundamental flaw of both the five presidents’ report and the Select Committee’s analysis. Neither report ever really challenges the euro’s sustainability; it is almost taken for granted. Because of that overoptimistic assessment, the likelihood of another future euro crisis has been discounted. Merely two paragraphs are devoted to the survival of the euro, and I put it to your Lordships that the issue of the euro’s future viability warrants more detailed examination.

[The Earl of Caithness]

I am not certain that that was within the committee’s remit—our remit was to write a report on the report in front of us, not on the future of the euro.

[Lord Tunnicliffe]

Well, my Lords, it is rather difficult to take that view as an outsider coming to the report for the first time, because it mentions the stability of the euro at the very beginning and then goes on to discuss a whole series of measures designed to make the euro stable. From my reading of it—and you can disagree with that—on each point that it brings up to make the euro more stable, it then analyses and notices that it is probably not going to work. If the report was not about euro stability, I apologise, but I read it as such, and as soon as I finish my speech I shall offend you less. I also note that the noble Earl, Lord Caithness, seemed to have an underlying pessimism in his speech about it—although, probably correctly, he did not address it directly. The noble Lord, Lord Giddens, also made a pessimistic speech, although he brought out the paradoxical relationship that Germany has with the euro, whereby it is absolutely crucial to its economy in pulling down the effective value of the currency without it accepting that at the end of the day some sort of wealth transfer is necessary from its overall surpluses. The noble Lord, Lord Butler, as well, who must have misread the report slightly, said that it was a road map for the survival of the euro. Indeed, it was a road map that could be leading to a cliff.

So I do not feel alone in my pessimism, and it took the noble Lord, Lord Dykes, who is ever optimistic about Europe—I wish his optimism had had more impact on 23 June—to introduce optimism. I would have been interested to hear from the impressive array of witnesses that the Select Committee spoke to about how likely they felt another euro crisis is, how much it would affect the UK banking system and, leading on from that, what resources the UK Government and Bank of England have to manage such a crisis. We have an order in front of us in about four weeks’ time that goes to the whole issue of managing crisis. I will repeatedly, at every opportunity, bring up just how fragile the banking systems are in Europe and how important that is to the United Kingdom.

Whatever the outcome of the Brexit negotiations, and whenever that may be, these are questions we cannot afford to overlook. We saw last week how sensitive markets are to any decisions relating to Brexit. Given that, I would have thought that it would be in the Government’s best interests to consider all scenarios. It is evident that there is a lack of institutional planning on the euro’s future across Europe. We must all do better and challenge that conventional thinking.

That being said, I reaffirm my thanks to the Select Committee for undertaking this investigation. I would not wish the noble Baroness and the other members of the committee to take my remarks as a reflection of my views on the entirety of the report. It was a detailed and considered analysis of the challenges that Europe and monetary union face: for example, the continued procyclicality of the European financial policy, the concerns about the effectiveness of the capital markets union in a crisis—an issue I know the committee highlighted in a number of recent reports—and the lack of detail surrounding key interpretations and accountability. Indeed, one thing that came out as an amateur reading through the report was the avoidance of seeking common definitions of important issues.

However, the issue I wish to pick over in more detail—before turning to the implications of Brexit in our interpretation of the report—is chapter 3. This sets out the immense set of challenges associated with marrying two seemingly contradictory concepts: risk reduction and risk sharing. As paragraph 99 of the report states,

“the suggestions in the Five Presidents’ Report propose a means of pooling the risks facing certain Member States, but that resistance to them reflects others’ concern that they would face an unreasonable burden of responsibility for those risks”.

It is clear that the European Union ideal would be a balance between the two—but is that possible? At present it certainly does not seem that there is a desire to share risks across the eurozone. The report notes that:

“Germany, the Netherlands and Finland, have supported more risk reduction measures before any risksharing begins”.

The report hits the nail on the head when it states that,

“large macroeconomic imbalances in the euro area will … continue to be a source of instability”,

for as long as the reluctance to transfer wealth across the European continent remains. This remains a fundamental weakness of the euro and the key reason I am less confident than the committee or the EU. It would be naive to ignore the possibility of more uncertainty surrounding the European Council.

I finish by addressing the unprecedented climate we now face. I noted at the beginning that, because of the decision of the British public to leave the European Union, it is even more important that we take heed of the warnings this report identifies and the conclusions it makes. While it could be said that European and monetary union is no longer our business because we have no long-term influence over it, it is our business because it will still influence us. I am wary about bringing up the negotiations on Brexit in fear that I get the same, stock answer from the Minister as the rest of my colleagues: “There will be no running commentary”. However, it is simply not possible to fully engage in the report today and do justice to the hard work put into producing it without considering what our future relationship with Europe will look like. For example, will we remain part of the single market? We do not have enough time today to go into the detail, but there is little doubt that single market access is strongly favoured by businesses of all sizes across the country. However, if the decision is taken to stay in the single market, how can we be sure that we have a strong voice advocating British interests?

We also have to consider that the better deal we secure for the City, the more exposed we will be to shocks. Whereas now we have the ability to direct and advise, without guarantees and safeguards Brexit could leave us powerless. I will give just one example from the report which highlights the point I am making. Commenting on the banking union, the completion of which was a key component of the five presidents’ report, Andrew Bailey, the then deputy governor of the Bank of England, noted the relationship between the banking union and the UK banking system as follows:

“Where a bank branches from a country in the euro area to the UK, as it can do under the passporting regimes in the single market, the deposit protection for the depositors in that branch in the UK comes from the home state, which is wherever it is branching from … the solvency of a national deposit protection scheme depends upon the solvency of the sovereign of that country. They are inevitably inextricably linked. We have had incidents where the solvency of the banking system of the home country is a direct product of the solvency of the sovereign, and when both of those are called into question, you then get a situation where you say, ‘Do the depositors in the UK really understand where their deposit protection is coming from?’”.

Taking passporting as a particular issue, the same problem remains: membership and influence. Can Ministers say whether the Government plan to ensure passporting rights for the UK-based banking sector? If full compliance with EU financial regulations is the price required to retain passporting rights, in accepting that price, how do the Government propose to influence the direction and detail of future regulations?

In this short debate, we have barely scratched the surface of what the report touches on or its wider implications. But from the range of questions raised, one cannot help but be seized by the sheer scale of the task ahead of us in the Brexit negotiations and our relationship with economic and monetary union within the EU.