Eurozone Crisis

Lord Williamson of Horton Excerpts

Thursday 1st December 2011 Grand Committee

[Lord Williamson of Horton]

My Lords, I declare an interest, as I spent a good part of my career in the United Kingdom in public service dealing with European affairs and a smaller part of my career in the European Commission.

I am very glad, like earlier speakers, that this debate has been arranged, because the serious difficulty that at least five eurozone members are having with the sale of state bonds to finance their public expenditure is already clearly having an effect on our economy, and, if events continue to deteriorate in the eurozone, it could have a much more serious effect. Despite some of the gloom around the Autumn Statement, the present Government are handling our economic problems well, with the consequent low interest rate on UK bond issues, at or about the level of German Bunds. But we must not be complacent. I do not accuse the Government of this, but complacency is implicit in some comment in the United Kingdom on the eurozone’s problems. It is not just the eurozone’s problem.

I wish to speak briefly on two issues. First, what are the eurozone countries likely to do—all of us here are speculating on it, but it is important—by way of treaty change or other economic or financial measures? Secondly, and most importantly, how should we best protect our national interests as the drama continues to unfold?

First, then, what are the eurozone countries likely to do in order to respond to the absence of a central bank or financial institution of last resort? The European Central Bank has recently purchased a very large amount of national debt from some eurozone countries, but it is under the eagle eye of the German constitutional court. I doubt that it could issue euro debt bonds of its own without breaking the Maastricht treaty. Such bonds could be only a partial substitution of national bonds, and the guarantee need not necessarily be full—it also could be partial. Stability bonds would be a valuable aid to the correction of eurozone problems.

Almost every day the Financial Times tells us that the European Central Bank must be more like the Federal Reserve, and sometimes the Financial Times is right. It seems almost certain that new powers will be taken in the eurozone, either by way of enhanced co-operation or by treaty change.

The United Kingdom has already made it clear—correctly, in my view—that it is benevolent but will not participate. So far, there has been a treaty change in March this year to put the European stability fund on a permanent footing, as well as other measures short of a treaty change in October. In September the Dutch proposed a new budgetary commissioner with the power to intervene in eurozone countries with excessive deficits, with potential sanctions. In October the Commission proposed closer monitoring of eurozone countries’ budgets, including the right to ask a country to look again at its budgetary proposals, and envisaged developing options for eurobonds. The Commission believes that that could be done by an enhanced co-operation procedure with treaty change later. That is questionable. Currently, the position of the eurozone countries is that they are considering changes to strengthen monetary union, including possible treaty change, with an interim report this month and a final report in March 2012.

So it is all go, but, unfortunately, not many of the problems have gone away—rather the contrary. It goes without saying that other methods of increasing the resources available to the European stability fund or a greater use of finite resources could combat some present difficulties. The recent decision by a number of central banks to cut the cost of dollar swap lines is useful in the short term.

However, I would like to say a word or two about the possible enhanced co-operation or treaty change that is under discussion in the eurozone. The Minister has an outstanding knowledge of finance, but it is possible that even he may have found the institutional issues somewhat labyrinthine—not, of course, a traditional Greek labyrinth but a grade one European labyrinth. If the eurozone countries wish to move quickly, as the markets clearly want, the procedure of enhanced co-operation under Article 20 of the treaty and the detailed arrangements in Articles 326 and 334 of the Treaty on the Functioning of the European Union is the quickest. Changes made in this way would, of course, apply only to those countries that agreed them, would not form part of the acquis and could not affect the single market. The Treaty on the Functioning of the European Union is extremely explicit on that point, stating that enhanced co-operation shall not undermine the internal market, that it shall not distort competition between member states and that it should not constitute a barrier to, or discrimination in, trade between member states.

In my view, eurozone countries could not legally introduce a financial transaction tax by this method, but that view may be contested—that is a point of importance for the United Kingdom. If action were not taken by enhanced co-operation of the eurozone countries, the treaty would have to be amended or we would just drift along. For a treaty amendment, there are two methods: there is the ordinary revision procedure —more accurately described as the complicated revision procedure, including a convention, an intergovernmental conference and unanimity of all member states. I think that that is one possibility which can be excluded. Or there is the simplified revision procedure under Part IV of the Treaty on the Functioning of the European Union, without a convention or an intergovernmental conference but requiring unanimity and ratification by member states. We would need to ensure that if the treaty changes applied only to the eurozone, our national interests within the European Union as a whole were not damaged. In my view, maintaining and strengthening our financial services should be the prime object of our attention.

If, as I assume, there were no transfer of powers or competencies from the United Kingdom to the European Union, a referendum would not be required in the United Kingdom. The highly important European Union Act, passed in the current Session but which seems to have had little public impact, embodies the principle of “so far and no further” by requiring referendums in the United Kingdom if there were any transfer of powers or competences but not otherwise.

The most effective response to the eurozone difficulties might well be stability bonds, with partial substitution of national bonds and some element of guarantee. But of course in order to pass the “no bail-out” hurdle currently in the treaty, a simplified treaty revision for the eurozone members would be needed in that case.