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European Summit

Volume 525: debated on Thursday 24 March 2011

(Urgent Question): To ask the Chancellor of the Exchequer whether the decision described as the draft decision in the motion to approve the treaty change on the European financial stability mechanism without a referendum, which was passed by the House yesterday, is now under review.

I am grateful for this opportunity to make a statement to the House about Portugal and the European stability mechanism. I understand that hon. Members are concerned about the events that unfolded in Portugal, which has faced difficult challenges for some time.

Yesterday, the Portuguese Prime Minister resigned after Parliament rejected his austerity Budget. However, let us be clear: Portugal has made no request for assistance, and I hope that hon. Members will understand that it would be inappropriate for me to engage in any speculation about what may happen. It is not for me to say whether Portugal should ask for help, just as I would not tell it how to run any part of its economy. However, I assure the House that we will keep hon. Members informed of any developments.

Hon Members may wish to reflect on the fact that, as my right hon. Friend the Chancellor said yesterday, our deficit is larger than Portugal’s, but market rates in the UK are similar to those of Germany. That reinforces the fact that it is right to pursue the course that we set last year to tackle the deficit.

My hon. Friend the Member for Stone (Mr Cash) has also raised questions about the European stability mechanism. A strong and stable euro area is important for British business. Over 40% of our exports go to the euro area, but we are not a member of the monetary union, and it is not our responsibility to deal with the euro area’s problems. That is why we have welcomed the progress that has been made on the European stability mechanism. In the design of the ESM, we had to ensure that there was no transfer of powers from the UK to the EU. We would never have accepted that.

The treaty change applies only to euro area member states. There is no transfer of power or competence from the UK to Brussels. The ESM puts no obligation, legal or political, on the UK to contribute. That is why we have supported the agreement, which makes the euro area’s responsibilities absolutely clear. In 2013, the European stability mechanism will come into effect. Also in 2013, the European financial stability mechanism will come to an end, and the UK will not be part of it.

Several countries, including Germany, have strong views about how the ESM should be designed, but that cannot change the fundamental aspects of the mechanism, because the ESM will be developed under article 136 of the treaty and it can apply only to member states whose currency is the euro. The UK cannot join the ESM without joining the euro. As my hon. Friends know, that will not happen in the lifetime of this Parliament.

Furthermore, we have ensured that the recitals—the preamble—to the draft decision by the Heads of State and Government at the December Council meeting stated that article 122, which was used to create the temporary funding mechanism,

“will no longer be needed”

and “should not be used” to ensure financial stability for the euro area as a whole once the permanent mechanism is in place.

Should there be any suggestion of amending the draft decision at the European Council, the Prime Minister could not legally agree to it without first coming back to the House for additional approval after a further debate. The House and the other place would have to ratify any change to the treaty.

I asked the question, first, because the existing European financial stability mechanism, to which we are potentially exposed in respect of Portugal, was described in the report of the European Scrutiny Committee, which I have the honour to chair, as “legally unsound”; and, secondly, because it involves the United Kingdom underwriting approximately €8 billion to eurozone countries until 2013.

The motion for a treaty change to create the new mechanism, which was passed yesterday, provides for amending article 136 of the European treaty without a referendum, but the amendment prescribes strict conditionality. What are those conditions? The motion that was passed yesterday now appears to be vitiated. Will the Government renegotiate the decision so that the European stability mechanism, if proceeded with at all, is agreed by the British Government with unanimity only if the legally unsound existing European financial stability mechanism, to which we are wrongly exposed, is repealed? The United Kingdom would thus not be required to contribute to the bail-out of other eurozone countries such as Portugal, which would amount to approximately €4 billion. That course of action is open to the Prime Minister in his negotiations at the summit today, and it would relieve the hard-pressed British taxpayer.

If my proposal were accepted, I feel sure that the Government would have an improved chance of obtaining the European Scrutiny Committee’s clearance for any new decision and the passage of any subsequent Bill required under the House’s procedures. Will my proposal be accepted?

My hon. Friend and I have debated this subject before, and my right hon. Friend the Minister for Europe opened a lengthy debate on it on 16 March. The Government are clear that the European stability mechanism is an important tool, but it is for the euro area to fund it. The ESM will lead to the extinction, as it were, of the EFSM. I do not feel it appropriate to engage in further speculation on events elsewhere.

Clearly, it would be troubling if the situation in Portugal reignited a round of eurozone bond market anxieties. The Opposition agree that it would be inappropriate either for us or the Government to engage in a running commentary on the likely impact of events in Portuguese politics or Portugal’s debt-financing capabilities. That is for the eurozone countries to resolve, and I would not expect the UK taxpayer to be drawn into the situation.

However, I have a number of specific questions for the Minister. For general information and the interest of the House, will he say a little more about the UK’s relationship with the Portuguese economy, including our trade relationships and UK banks’ interests in Portuguese bonds and so forth? Will the Minister update us on the Finance Ministers meeting that took place—I think—on Monday as a prelude to today’s EU summit? Originally, there were reports of an expectation that today’s summit would find its way towards resolving the permanent bail-out mechanism, yet we now hear that because of various disagreements, that will be kicked into the long grass again, until June. Does the Minister agree that it would be quite bad not to resolve that ongoing problem until the summer?

What are the Prime Minister and Chancellor doing to expedite negotiations and agreement on the permanent mechanism? Is it acceptable that the Prime Minister did not actually attend the meeting of 17 countries at the last summit at the beginning of the month, when we clearly have an interest in resolving those questions? Is it correct that the eurozone countries have invited the UK and other non-eurozone countries to have a say in debates on the new permanent mechanism? Quite honestly, we have an indirect interest in what happens, so it is surely in our interests to ensure that the eurozone countries resolve those questions quickly. It is not acceptable for the UK to absent itself at the critical moment, when it should be putting pressure on them to resolve those questions. Ultimately, we need stronger leadership from the Government to ensure that those matters are resolved in Europe and the eurozone. The longer they remain unresolved, the more likely it is that our interests will be affected.

The hon. Gentleman makes an important point. It is vital that there is stability in the eurozone and that agreement is reached on the ESM. My understanding is that the issues raised by the German Government and German Chancellor are not about the fundamental design of the mechanism, but about its detailed terms. We will discuss that at this weekend’s European Council, on which the Prime Minister will report to the House on Monday, as is customary.

The hon. Gentleman asked about the UK economy’s exposure to Portugal. Our exposure is relatively small—smaller than that of a number of other European countries. Our bilateral trade in 2010 was about £4 billion, so we do not have a significant exposure, although Portugal is of course an important trading partner.

Can we just have a reality check? There will be no stability in the euro area until at least some of the countries currently in it leave. There seems to be little doubt about that.

May I remind my hon. Friend that we have just had an austerity Budget—another one? In my constituency, people are talking about having to make NHS savings of £84 million over the current planning period. Can he imagine how absolutely furious British voters will be if it turns out that the British taxpayer must continue to contribute to the bail-out of euro countries even though we are not a member? Why does he not take the opportunity—before agreeing to the new stability mechanism—to get our European partners to agree that we shall be released from any obligation to the temporary stability mechanism for which we are currently liable?

My hon. Friend forgets that we have already agreed with our European partners that the European stability mechanism will replace the temporary structures that were put in place, and of course we should not forget that we are part of the EFSM as a consequence of decisions made by the previous Government, not this Government.

Obrigado, Mr Speaker.

The plain fact is that Portugal is our oldest ally. It is in trouble and we should help. When Margaret Thatcher brought the rebate back, she was questioned by a Eurosceptic on the Labour Benches who asked, “Why are you allowing more money to go from the British taxpayer to all these new countries?” She replied: “We should help Portugal”. We should do the same tonight. I hope that our Prime Minister will remember our longest, oldest friendship with any European country, and ignore the Eurosceptic waffle from those sitting behind the Front Bench.

I do not believe it is appropriate at this stage to engage in speculation about the Portuguese economy. There has been no request for a bail-out, and further comment would be unhelpful.

On the Portuguese potential bail-out, will the Minister agree to make a statement to the House before we are committed to any bail-out? What provision has been made in the Budget for such a bail-out?

My hon. Friend wishes me to respond to a hypothetical question, but I do not intend to do so today.

For clarity—and in the hope of getting at least one sensible answer out of this debate—will the Minister confirm that because we do not have a veto over the bail-out mechanism, if Portugal applied for a bail-out, we could be exposed to liabilities of up to €4 billion? We have no veto, which means that we would be forced to do it, irrespective of which Government negotiated the position. I would like a yes or no.

The hon. Lady, who is very knowledgeable and well-versed in these matters, knows exactly the terms on which the EFSM was established. However, I do not believe that it is helpful to speculate on hypothetical situations.

Portugal finds itself in this sorry state today because yesterday its Parliament failed to pass a budget that would have allowed foreign investors to continue investing in its sovereign bonds. Does my hon. Friend realise that had we not had a change of Government in our country 10 months ago, we could just as easily have found ourselves in a very similar situation?

My hon. Friend is absolutely right. Owing to decisions that this Government have taken to get our public finances back on the right track, it is not sterling that has been speculated against in the currency markets.

Listening to what my right hon. Friend the Member for Rotherham (Mr MacShane) said about Portugal being our oldest ally, I was reminded of the only word that survived the Peninsular war. It was “vamos”—the Portuguese and Spanish ran away. It seems from the speeches of the hon. Members for Stone (Mr Cash) and for Harwich and North Essex (Mr Jenkin) that they wish to run away from the European Union. They have been running away from it since its beginning. In response to a question from me, the Prime Minister said recently that he believed in “a healthy eurozone”. Is it not better for the eurozone to have its competitive pact and its financial stability system? Furthermore, building on the point made by my hon. Friend the Member for Nottingham East (Chris Leslie), is the Minister not worried that 17 member states in the eurozone will create a two-speed Europe?

It is absolutely right that Europe should be competitive and able to compete with companies in north America, Asia and south America in what are becoming increasingly challenging global markets. Europe needs to address its competitiveness, which is why we engaged in the economic taskforce led by Herman van Rompuy. We need to see changes in Europe, and my right hon. Friend the Prime Minister will be pressing for that at the summit.

The Minister will know that although Portugal has not so far requested any help, it is in a similar situation to Ireland, in that Ireland did not request any help at the very beginning, but was forced to take it later. Yesterday, we voted—essentially—on a treaty change. Will the Minister confirm that, if the change is made in the coming weeks—the Prime Minister having come back to the House—the UK Government will still have a veto to play, or will the veto be played this weekend, meaning that we cannot change anything in the future?

I do not know whether my hon. Friend was present for the debate in the House on 16 March when we discussed the ESM, but let me remind him of what my right hon. Friend the Minister for Europe said:

“Should there be any suggestion of amending the draft decision at the European Council—there is no such suggestion from any quarter at present—the Prime Minister could not legally agree to it at the European Council without first coming back to this House and the other place for additional approval after a further debate.”—[Official Report, 16 March 2011; Vol. 525, c. 424.]

Of course, there can be no change to the treaty unless primary legislation passes through both this place and the other place.

Will the Minister confirm that had we joined the euro, we would have been expected beyond 2013 to make a significant contribution? Has he had a chance to ask the Chief Secretary to the Treasury whether he has abandoned his policy of joining the euro at the earliest possible date?

Do Ministers agree that, having just put in place the most comprehensive system of democratic checks on further transfers of power to the European level of government, it is now high time that this Government got on with the priority of providing a positive leadership role for Britain in all European decision-making forums, and that the anti-European guerrilla warfare from the Back Benches really does not help?

My hon. Friend is right to point out that much work needs to be done in Europe. I believe that this Government have played an important role, particularly in pushing the competitiveness and growth agenda, and that is the right role for this country to play.

The Minister and colleagues on the Government Benches are again keen to draw an analogy between this country and, this time, Portugal—previously it was Ireland and Greece. Can he confirm that the UK is in an entirely different position from those countries, given that it controls its own interest rates and its own currency?

The only reason that this country is in a different place from Greece, Ireland and Portugal is the action that this Government have taken to sort out the mess left by Labour.

Will the Minister confirm that the contingent liability under the scheme was set up after Labour had lost the election by the then Labour Chancellor? Does what is happening in Portugal, where interest rates have today risen above 8%, not provide the most eloquent lesson on what would happen here if we did not get a grip?

My hon. Friend is absolutely right. The decision taken by the previous Chancellor meant that we became part of the ESFM, and that is why the liability exists today. My hon. Friend is absolutely spot on: we have taken difficult decisions in this country. This Government have decided to tackle the deficit that Labour left behind, and we have a clear plan to do it. The Opposition have no ideas. Under a Labour Government, this country would be running out of steam.

The events last night in Portugal bring into sharp focus why it is important to maintain the confidence of the markets. Is the Minister glad that this Prime Minister did not attend the meeting of the 17 eurozone countries, because the last Prime Minister attended and gave away our rebate?

Certainly, the previous Government very rarely showed any backbone in dealing with our European partners on the rebate or other matters. This Government stand up for Britain’s interests when it comes to the debate in Europe. We have done that on the rebate, on the budget and on this mechanism.

When Ireland was in trouble, we helped out. Ministers brought forward a proposal to give a loan to Ireland to help sort out their finances. I appreciate that at the moment there is no proposal to do the same for Portugal, but will the Minister give an assurance that we as a House will be given the opportunity to debate any such proposal that comes forward?

As I said before, I do not think that it is helpful to engage in unnecessary speculation. However, I would point out to my hon. Friend that this Government have sought to ensure that we keep the House informed on all matters of importance.