European Union: Recent Developments

Lord Williamson of Horton Excerpts

Monday 17th December 2012 Lords Chamber

[Lord Williamson of Horton]

My Lords, I declare an interest in that I spent a good part of my career in the British public service on European affairs and some part of it in the European Commission. I am sure that the Minister will agree with me that the wisdom of ancient China sometimes has a lesson for us today. For example, on the current soul-searching about the economic state of the eurozone, I have in mind the phrase in the Tao Te Ching, written many centuries ago:

“I let go of economics, and people become prosperous”.

Of course, I shall say a little about the economics of the eurozone and about the course that, in my view, the United Kingdom should steer in consequence. However, I also want to let go a little of economics and say something about other developments in the European Union, which risk being forgotten but which can help people to become prosperous.

I begin with the economic situation in the EU. It is always important to keep in mind that the EU is the world’s largest single market and is an economic zone larger than that of the USA and Japan combined, with a total GDP of around £11 trillion. This single market of 500 million people—I am very glad to see that it is about to be increased, by the Bill that is before us today on the accession of Croatia, to over 500 million, which I very much support—provides a relatively level playing field for British business to trade in without customs duties and tariffs and with a common set of rules that avoids 27 different sets of regulations in the member states. Of course, if the UK had a different relationship with the rest of the EU, the single market would not vanish away. But what we should do now is to clock up the single market on the plus side of membership and ensure that any future developments, particularly in the area of financial services, remain open and favourable to the UK and, importantly, that we maintain the capacity to influence them.

I am always amazed how quickly people have forgotten what trade and travel was like before UK membership of the EU. In that protectionist world, now long since vanished, when I was first living on the continent, a kind friend sent me an English cheese. However, by the time I had got through all the hurdles to get it out of customs, it had gone completely bad. That was a mouldy cheese and a mouldy system, but the introduction of the single market was marked by the biggest bonfire of forms and regulations in European history.

Now in the eurozone we have the inflexibility of the single currency and, at the same time, the two principal problems damaging the economic performance of the euro member states. First, there is the continuing fallout of the great big recession made in the USA, which brought down important banks and financial institutions or made it necessary for Governments, including our Government, to bail them out with public money. At the heart of all this was the taking of excessive risks by the private sector—for example, sub-prime mortgages in the US, but actually far more widely than that—notably excessive optimism regarding demand for new housing, so clearly visible on the ground in Spain today. This is, of course, the origin of the recuperative measures under way in both the UK and the eurozone, including more effective measures against risk and greater monitoring of banks and other financial institutions. As we have heard from the latest European Council, our situation now, as a non-member of the eurozone, is that we do not participate in the so-called banking union, but there will still be some consequences. This remains important for us, particularly the need to ensure that the voting rules in the European Banking Authority give us adequate protection. I assume that branches of British banks in the eurozone, if large enough, would be covered by the banking union.

The proposals for safeguarding banks in the Commission’s document of June 2012 seem quite straightforward and in some respects reflect our own banking legislation. These proposals cover the power to plan for, and preferably prevent, the possible failure of a financial institution, including the drafting in, if necessary, of a special manager. That has been dealt with at this most recent European Council and I believe that it is going to go forward. The second half of the document deals with insolvency and resolution powers, including, if necessary, a bail-in—that is, a requirement on bond holders to take a loss on their investment—in order to keep a financial institution solvent. That remains to be dealt with, and it will be important for us outside the banking union still to have that under sufficient scrutiny.

For some eurozone member states, the “banking element” is the dominant part of the current economic problems. For example, in the Republic of Ireland, one of our most important commercial partners, the cost of the bailout of Anglo Irish Bank is, I believe, broadly equivalent to the bailout funds received from outside the country. I remain quite optimistic about the greater “safety first” in banking and the gradual elimination of the overhang of toxic lending, and that it will be successfully achieved in both the UK and the eurozone.

The second element of the eurozone problem is more intractable. This is the overhang of excessive public debt and continuing public deficits in many EU member states. Of course, public expenditure has to come down in most EU countries, but in the mean time public debt, much of it predating the euro, has to be financed; hence the crux of the immediate problem. I love Greece dearly, but it is a tiny part of the EU economy and I will not mention it again today. If, however, there was a crisis—not the current half-crisis but a real crisis—in the larger member states, Italy and Spain, that would be serious. Evidently a guarantee given by the eurozone as a whole to the lender of last resort, presumably the ECB, would be a solution, once again demonstrating that the EU is ruled not by bureaucrats but by independent sovereign states, but that has been ruled out by Germany and some other member states.

However, the ECB has made real progress in recent weeks in restoring some confidence to these markets. The interest rate on Italian 10-year bonds, even after the reappearance of Mr Berlusconi in the political field, still remains close to an eight-month low of about 4.8%, which is sustainable. We have to accept that the correction of past overexpenditure—debt-financed—on public account will take time. Efforts should be made to stimulate growth in the eurozone as in the UK, but I am not unduly optimistic.

So what course should the UK be on? Clearly we need to maintain the advantages provided by the single market, not just in the narrow sense but also, for example, in relation to reductions in the cost of air travel, mobile communications, patents and so on. It is also evident that, given the current state of British public opinion and in the light of our correct decision not to participate in the euro, we have to look for opting out of most of the financial measures being proposed or implemented for the eurozone. We should not elevate this to a theological argument. The EU is a living organism and there are already a good number of opt-outs and not only for the UK. For example, I am glad to see in the European Union (Approvals) Bill before us today a decision to continue with one Commissioner per member state. That is perhaps not a very good decision, but it was originally foreseen to reduce the number. That was not acceptable to the Republic of Ireland, hence the Bill before us today demonstrating that point.

Leaving aside economics for a moment, it is important to remember that changes that have taken place in the EU in recent years are extremely favourable. Working and travelling abroad have been made immeasurably easier and 1.6 million Britons live in the EU outside the UK. Other changes include the mutual recognition of qualifications, no visas for three months, and the common EU driving licence and EU health insurance. Telecom monopolies have been abolished. The cost of 10-minute calls has gone down by 74% and the price of texts from 25p to 9p. All these things need to be quoted, for we have to think a bit about ordinary people in this debate as well as businesses, bankers and summit meetings.