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EU: Financial Assistance

Volume 723: debated on Wednesday 15 December 2010

Question

Asked by

To ask Her Majesty’s Government whether the United Kingdom’s participation in the European Union stability mechanism, and the proposed loan to the Republic of Ireland, are in breach of the “no bailout” clauses enshrined in the Maastricht treaty.

My Lords, Article 125 of the treaty, on the so-called “no bailout” clause, states that a member state,

“shall not be liable for or assume the commitments”,

of another member state. Article 125 does not preclude member states from providing loans to one another. The European financial stability mechanism was established under Article 122.2, which allows the Union to lend to a member state that is in difficulties or,

“seriously threatened with severe difficulties … or exceptional occurrences beyond its control”.

My Lords, I am grateful to the Minister for that slightly evasive Answer. The phrase about matters “beyond its control” simply cannot be the answer to the difficulties encountered by Greece, Ireland or other potential bailout candidates. Beyond that, could the Minister say whether it is right, when British taxpayers are facing cuts in services and higher taxes, that £7,000 million should be poured into the eurozone black hole in their name?

My Lords, I did not intend to be evasive but to give a factually correct Answer in respect of Articles 125 and 122. I was not asked whether we thought it was proper to use Article 122 in this way. As to whether it is proper to extend loans, to answer a question that the noble Lord did ask, we have decided, in the exceptional case of Ireland, which is our fifth largest trading partner, that it is in the interests of the UK economy to extend a bilateral loan to it. That does not mean that we will participate in any other permanent arrangements that may be put in place for the eurozone.

Can my noble friend confirm that, as our right honourable friend the Chancellor of the Exchequer told the Economic Affairs Committee of this House very recently, it is Her Majesty's Government’s firm commitment to withdraw from the European Union’s financial stability mechanism at the earliest opportunity—obviously while wishing the European Union every possible economic success?

I am grateful to my noble friend, because his question enables me to say that Article 122.2, under which the financial stability mechanism was set up, was originally intended to provide support for member states following natural disasters. It was European Finance Ministers, before my right honourable friend the Chancellor took office, who decided in May to apply that article to deal with the eurozone crisis at that time. It is absolutely the position that my right honourable friend who is now the Chancellor opposed the use of the article at that time and in that way. It is the Government’s position that this is a temporary solution and should absolutely not be the permanent way of doing things.

My Lords, will the noble Lord confirm that the Government will themselves have to borrow the money to provide the loan to Ireland? Will he also acknowledge that the National Audit Office has now determined that any interest paid on such borrowing should be included in current expenditure? Will he therefore tell us how much this interest payment will increase the deficit, and whether any other expenditure cuts are to be made to pay for it?

My Lords, first, there will be no hypothecated borrowing by the Government to back up—as far as I am aware—the loan to Ireland. Of course, the loan to Ireland—as and when it is drawn down—is subject to approval in legislation if and when it comes to your Lordships’ House. We might return to it over the next few days. The loan has to be approved by Parliament. It is then drawn down. Of course funds have to come from somewhere, but there is no intention to back that up with a specific loan.

It will not be for the Government to determine the accounting, but the intention is that the bilateral loan will carry an interest rate that is 2.29 per cent higher than the sterling seven and a half year swap rate that applies at the time. On this week’s figures, that would be an interest rate of 5.9 per cent, which would be considerably in excess of the UK Government’s borrowing rate. My understanding—as I say, it is not the Treasury’s decision—is that the net interest margin, which would of course be a gain because the receipts from Ireland would exceed the costs to the Exchequer, would indeed be a positive contribution on the fiscal balance.

My Lords, is it not inevitable that to make the rescue operations effective, and at the same time to avoid a treaty amendment, the stability mechanism will increasingly become an intergovernmental eurozone mechanism? What plans do the Government have to avoid the United Kingdom being increasingly bypassed in key decisions in the European Union?

My Lords, I do not think there is any question of us being bypassed on key decisions in the European Union, as our participation in recent debates about Ireland and the wider crisis have demonstrated. It will be up to Europe to decide how the permanent arrangements are put in place. The October European Council resolved that there should be a crisis resolution mechanism, and there has been a verbal commitment that the UK will not be asked to be part of it.