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European Council

Volume 723: debated on Monday 20 December 2010


My Lords, it may be a convenient moment to repeat a Statement that has been made in another place by my right honourable friend the Prime Minister. The Statement is as follows.

“With permission, Mr Speaker, I would like to make a Statement on last week's European Council. Britain had three objectives at this Council: first, to bring stability to the eurozone, which is in Britain's interests; secondly, to make sure that Britain is not liable for bailing out the eurozone when the new permanent arrangements come into effect; and, thirdly, to build on the progress we made with the 2011 EU budget, with tougher settlements in the years to follow.

Let me address each objective in turn—first, stability in the eurozone. No one can doubt this is in our interests. Nearly half our trade is with the eurozone, London is Europe's international financial centre, and no one can deny that the eurozone faces very real challenges at the moment. We see that in the Irish situation and with Spain and Portugal paying interest rate penalties in the financial markets. Britain's approach should not be simply to say, ‘We told you monetary union would require fiscal union’, and leave it at that. We want to help the eurozone to deal with the issues it faces.

The fact that we have set out a path to deal with our deficit and seen our interest rates come down is helpful. Following the dinner at which leaders of all the EU countries had a wide-ranging discussion on the state of the eurozone, eurozone leaders issued a statement saying they,

‘stand ready to do whatever is required’,

to return the eurozone to stability. Part of that is a permanent mechanism for assisting eurozone countries that get into financial difficulty.

Enabling eurozone countries to establish such a mechanism is in our interests, but how this mechanism is brought about is equally important. After the October Council I made it very clear to the House that any possible future treaty change would not affect the UK, and that I would not agree to it if it did. I also said clearly that no powers would be transferred from Westminster to Brussels.

At this Council we agreed the establishment of a permanent mechanism with a very limited treaty change. This change does not affect the United Kingdom and it does not transfer any powers from Britain to the European Union.

Secondly, on the issue of liability for any potential bailout of the eurozone in future, Britain is not in the euro, and we are not going to join the euro. That is why we should not have any liability for bailing out the eurozone when the new permanent arrangements come into effect in 2013. With the current emergency arrangements, established under Article 122, we do. This was a decision taken by the previous Government. It is a decision we disagreed with at the time and we are stuck with it for the duration of the emergency mechanism, but I have been determined to ensure that, when the permanent mechanism starts, Britain's liability should end. That is exactly what we agreed.

The Council conclusions state that this will be a,

‘stability mechanism for member states whose currency is the euro’.

This means it is a mechanism established by eurozone countries for eurozone countries, and Britain will not be a part of it. Crucially, we have also ensured that the current emergency arrangements are closed off when the new mechanism comes into effect in 2013.

Both the Council conclusions and the introduction to the actual decision to change the treaty itself—the actual document that will be presented to this Parliament for its assent—are clear that Article 122,

‘will no longer be needed for such purposes’,

and that,

‘Heads of State or Government therefore agreed that it should not be used for such purposes’.

So both the Council conclusions and the decision that introduces the treaty change state in black and white the clear and unanimous agreement that from 2013 Britain will not be dragged into bailing out the eurozone. Before the Government agree to this treaty change, Parliament must first, of course, give its approval, and if this treaty change is agreed by all member states then its ratification in this country will be subject to the terms of our EU Bill and so will be subject to primary legislation.

Thirdly, let me turn to the issue of the EU budget. Securing a tight budget for the future remains my highest priority for the EU. I believe it is a priority shared by the vast majority of the country. At the last Council, we managed to do something we have not done in previous years. We were faced with a situation where the Council had agreed a 2.91 per cent increase. This was not the UK's position. We had wanted a tougher settlement, but were outvoted, yet the Parliament went on and called for 6 per cent increase, but instead of just splitting the difference between what the Council asked for and what the Parliament called for—which is what happened last year—Britain led an alliance of member states to decisively reject the European Parliament's request. We insisted on no more than the 2.91 per cent increase the Council had previously agreed. Many predicted this would be impossible and that Britain would be defeated, but this will save the British taxpayer several hundred million pounds. We also agreed a new principle that from now on the EU budget must be in line with what we are doing in our countries.

We did this by taking the initiative and galvanising others to join us, and we sent a clear message that when we are making cuts at home, with tough decisions on pensions, welfare and pay, it is simply not acceptable to go on spending more and more and more through the European Union. At this Council, I wanted to keep up the momentum on the EU budget by forging an alliance with like-minded partners and starting to work towards securing a tougher settlement for future budgets. At the weekend, Chancellor Merkel, President Sarkozy and I, together with the Prime Ministers of Finland and the Netherlands, sent a letter to the President of the European Commission. This letter sets out our goals for the budgets for 2012 and 2013 and the longer-term financial perspective covering the rest of this decade. It states clearly our collective view that,

‘the action taken in 2011 to curb annual growth’,

in European spending should be stepped up in 2012 and 2013, and we call for a real-terms freeze in the period from 2014 to 2020. I want to achieve a decade of spending restraint in Europe, and the three biggest powers in Europe, the three biggest net contributors to the budget, have committed to that. This is an important step forward.

There are two problems that Europe must urgently address. First, the eurozone is not working properly. It needs major reform, and it is in our interests not to stand in the way of that. Indeed, as I have argued, we should be actively helping the eurozone to deal with its issues. Secondly, Europe as a whole needs to be much more competitive. Collectively we must press ahead with measures which will help European countries pay their way in a world where economic competition internationally is becoming ever fiercer. We must expand the single market in areas such as services, press forward on free trade and, crucially, avoid burdening businesses with costly red tape. We must promote stability, jobs and growth. That is the agenda this Government are pursuing in Europe, and I commend this Statement to the House”.

My Lords, that concludes the Statement.

My Lords, I am most grateful to the noble Lord, Lord Strathclyde, for repeating the Statement made by his right honourable friend the Prime Minister in another place. There are three issues that I would like to ask him about. The first is the agreement on the European budget, the second is treaty change, and the third is the wider but most fundamental question of European growth.

I turn first to the European budget. I welcome the call for restraint in the years ahead. On the budget for this year, the Prime Minister applauded the outcome because, as he said, it avoided the ultimate sin of European negotiations: that of simply splitting the difference between positions. I would remind the noble Lord, Lord Strathclyde, that the Prime Minister originally wanted a freeze on the budget while the European Parliament wanted a 5.9 per cent increase, and the Prime Minister was still arguing for that days before the last European Council in October. Perhaps the noble Lord, Lord Strathclyde, can tell the House what the figure is that splits the difference between 0 per cent and 5.9 per cent. By my reckoning, it is somewhere around 2.9 per cent, which is the outcome we actually ended up with. So, after the Government’s rhetoric, where have we ended up? We have ended up by splitting the difference.

We welcome the Prime Minister’s support for the treaty change agreed at the Council. It is right that the eurozone replaces its ad hoc agreements with a more permanent mechanism. But why does the Prime Minister have to go through such hoops to justify accepting this fairly minor change? He is, after all, showing a sensible piece of what one might call Europragmatism. Of course, the problem for the Government is that before the election, the Prime Minister claimed not to be a Europragmatist but the great Eurosceptic, which is more rhetoric. He promised that if there was any chance for a reopening of the treaty and a referendum on Lisbon, he personally would make it happen. The Foreign Secretary has admitted that the treaty offers a pretext for a referendum, but that it would be absurd to use it to try to derail the whole of Lisbon. Indeed, the Prime Minister also used to say that he would take the first opportunity he needed to repatriate powers over employment and social legislation to Britain, but again, he has not. It would be helpful to the House, and probably more helpful for the noble Lord’s own Back-Benchers, to explain why these pre-election commitments have been abandoned.

I turn to the third and most important issue, that of the European economy. The agreement on a permanent crisis mechanism for the eurozone after 2013 does not address the challenges that Europe’s economy faces at the moment. Does the noble Lord, Lord Strathclyde, agree that eurozone members themselves should do more to promote stability in the eurozone before 2013, and does he also agree that we need European action to promote growth for there to be any chance of serious export growth for the UK? The Prime Minister’s plans, with VAT set to rise and spending cuts kicking in, rely on an extra £100 billion of exports over five years, and over 50 per cent of our exports are made to Europe. But the noble Lord, Lord Strathclyde, will be aware that European Commission forecasts show slowing growth within the EU next year. Does he accept that the Government need to do more to work with colleagues in Europe to improve the prospects for growth?

First, the Prime Minister should argue that all countries engaging in fiscal consolidation, including Germany and the UK, should do so at a pace that supports economic growth both domestically and across Europe as a whole. Secondly, he should ensure that those countries facing problems, including Ireland, are not locked into repeated rounds of austerity with higher taxes and lower spending, hitting the growth those countries need to pay down their debts and recover. Thirdly, he should make sure that Europe’s voice in the G20 argues for a growth-oriented strategy. Indeed, I would say to the noble Lord, Lord Strathclyde, that given the nature of this Statement, many people will wonder whether the Government see any connection between their own optimistic forecasts for exports and the summit that the Prime Minister attended at the weekend.

The Government’s approach regarding Europe reflects their wider domestic approach. They think that you can reduce an economic policy to a pure deficit reduction policy with no focus on growth and jobs. In 2011, the Government need to start engaging in a growth agenda for Europe and Britain that can help us here at home.

My Lords, I thank the noble Lord for responding to the Statement and for the way in which he did so. He made three substantial points and asked questions. I shall try to answer them but, if I am unable to do so, I shall of course right to him in the normal way.

This was an important Council meeting because the issues facing the EU were varied and substantially economic. Some issues were related to the eurozone and the Council took steps to deal with them; and some were related to the budget, which we believed had grown out of control in the past few years.

First, the noble Lord made the point—whether or not he was agreeing with me was hard to tell—that the budget was not the victory it looked because the European Parliament had wanted an increase of 5.9 per cent, or whatever it was. The point is that after the last Council the European Parliament voted for—indeed, demanded—6 per cent. The normal way would have been to split the difference between 3 per cent and 6 per cent and ended up at 4.5 per cent. However, with other countries, we stood firm at 2.9 per cent and were right to do so. In a letter that we have agreed with the major net contributors to the EU, we have set a new standard by which future budgets will be judged. I hope that noble Lords opposite will agree that that is good news.

Secondly, the noble Lord agreed that there is a requirement for a new permanent mechanism—I think that is absolutely right—but he went on to ask why we should go through the hoops. The hoops, incidentally, are to allow Parliament to have a say, not only in the arrangements that we already have in the House under the terms of the Lisbon treaty but in new primary legislation. That is not going through the hoops but putting the decision where it should lie—in Parliament—and that is why we are doing it. There is no question of a referendum because there is no question of a transfer of power from the British Parliament to the European Union.

On the question of growth, the noble Lord is again right to say that there is a problem; there is a crisis in the eurozone and with the euro. We want the EU to succeed—it is in our vital British interests that it should do so—including countries such as Ireland and others which have found themselves in trouble. We believe that we are on the brink of a substantial, export-led growth but Europe, too, needs a credible growth agenda. As the noble Lord pointed out, the EU’s potential growth is forecast to be just 1.7 per cent in 2014.

We believe that each member state needs to carry out its own reforms—that is why the UK Government have launched their own growth review—but there is a strong case for similar determination at the EU level, where Europe 2020 needs to provide a more focused drive towards making progress in areas where there is significant EU value added and can genuinely promote growth. For example, we should focus throughout Europe on a more efficient and competitive single market, especially on increasing productivity and trade in the services sector; we need a more ambitious and open approach to global trade to allow Europe to benefit from growth elsewhere, particularly in Asia; we need a framework for innovation that enables technological change; and we need smarter regulations that will leave enterprise freer to drive the growth that we need.

No one underestimates the challenges that face this country and the rest of Europe. However, with some of our enlightened European partners, we believe that with this kind of agenda for growth we can get ourselves out of trouble.

My Lords, perhaps I may take the opportunity to thank my noble friend the Leader of the House for repeating the Statement and, through him, to congratulate the Prime Minister on his perseverance and clarity in his clearly difficult negotiations in Brussels. One of the successes of the Statement is that it is forward-looking. We all know of the difficult issues that are still with us, two or three years after the financial crisis, in the peripheral countries of the eurozone. It was surprising to hear so much time devoted by the Official Opposition to the past and what the Government might or might not have promised in previous years. Media reports suggest that some concessions were made in terms of the financial perspectives moving forward to the period 2014 to 2020—indeed, the Germans secured their Lisbon treaty revision to establish the financial stability facility—but it was disturbing to hear that there was agreement with the French that the common agricultural policy would remain untouched. In other words, our desire to achieve greater efficiencies will not now bear fruit. Will my noble friend reassure us that we will continue with our commitments to reform the common agricultural policy? I wonder also whether he could reassure us that the newer eurozone countries, which have done very well by the structural funds and would naturally be loath to see them cut back, will nevertheless have conversations with us to attain that end, because we cannot all have cake every day.

My Lords, my noble friend is entirely right: we cannot have cake every day. Throughout Europe, different countries in different ways are learning the lesson of increasing productivity and trying to do more for less. The Prime Minister had one thing on his mind, and was not alone in so doing. He made it clear that, with leaders having to look at cuts in all sorts of very sensitive areas in their home countries, as we have had to do in ours, it was quite wrong to see net contributions to the EU continue to rise exponentially and that we needed to come forward with a very sensible plan over the next few years.

My noble friend Lady Falkner asked about our commitment to reform the CAP. This has been a long-standing commitment, and we cling very firmly to our view that the CAP needs to be reformed. Discussions on it will continue, likewise on the structural funds.

My Lords, has the Leader of the House had an opportunity to study last week’s financial stability report from the Bank of England, which demonstrated the interconnectedness of the obligations of British banks and those of banks on the continent and suggested to the reader that, should there be any kind of sovereign debt default in a member state in the eurozone, Britain and British banks would be heavily involved in any debt restructuring that was necessary? In this case, is it not time that, instead of trying to pretend to their anti-European and Eurosceptic Back-Benchers that Britain can stand aside from the problems of the eurozone, the Government recognised that we are in these problems up to our neck, that if we want a credible growth strategy for Britain we must also have a credible growth strategy for the eurozone, and that we should be ready as the United Kingdom in our national interest to play a full part in that?

My Lords, I have not had time to study the stability report from the Bank of England to which the noble Lord referred, but I understand exactly what he was saying. With the greatest respect to him, I think that his question was misconceived. There is no fear from us that we are trying to appease anti-European or sceptical Back-Benchers. These are bogeymen that obviously exist in the noble Lord’s nightmares. We have no such nightmares and no such concerns. If any such concerns exist, they are partly dealt with by explaining that there will be a process in the British Parliament for agreeing the changes that we have made. Of course, as I laid out in the Statement and in reply to the noble Lord, Lord Hunt, we have a clear strategy for growth in the United Kingdom and believe that there should be a clear strategy for growth in the rest of Europe.

I perked up slightly at the Minister’s first answer to the noble Lord, Lord Hunt, when he said that the treaty change would be settled in this Parliament, as it should be. I was then a bit saddened to hear that it is only treaty changes that do not affect us that get settled in Parliament and ones that do affect us get settled somewhere else. This reflects a very odd view about the primacy of Parliament.

On the budget, on the financial perspectives, I strongly welcome the fact that the Government are taking a tough line in the initial phases of that negotiation. I think that that is absolutely necessary, but they seem to have nailed their colours to something that used to be known in the jargon as “zero real growth” for a period of 10 years. That is a very long time. I do not imagine that the Government will be proposing zero real growth in public expenditure in this country for 10 years and, if they do, their prospects of re-election in 2015 may be a bit damaged. So some care needs to be taken about what is a very long period ahead, although I very much agree that taking a tough line at the beginning is good.

Finally, will the noble Lord confirm that the fact that Montenegro was accepted as a candidate country shows that the European Union is continuing with future enlargement in the Balkans and elsewhere?

My Lords, I certainly agree with what the noble Lord said at the end about Montenegro, which we hope, over time, will be able to play a full part in the European Union. I liked the noble Lord’s characterisation, at the start of his words, about treaty modifications. Of course, what he did not go on to say, when speaking about parliamentary sovereignty, or the primacy of Parliament, is that if there is a substantial transfer of power, we will take it to a referendum of the people of this country. We may disagree about that, but I think that it is a perfectly logical position for us to have.

The substance of the noble Lord’s point was about zero real growth for 10 years. We have proposed that we should reduce growth up until 2014 and that between 2014 and 2020 there should be no growth, or zero real growth, as the noble Lord pointed out. We cling strongly to this view in part because of the difficulties faced by individual member states within the European Union. There is also a sense that over the last few years some of the spending within the EU has not been as carefully controlled as it might have been. This is an opportunity for the EU to review its own budgeting process and I very much hope that it will be supported by other member states in due course.

My Lords, since it must now be clear, even to our political class, that the euro is designed for failure, with its single interest and exchange rates and its absence of a federal budget, except in extreme illegality, will the noble Lord give a commitment on behalf of Her Majesty’s Government that we will not voluntarily bail out Portugal, Greece, Spain, Italy and Belgium in the same way that we have volunteered to bail out Ireland?

Secondly, have the Government worked out how much it would cost to return Ireland to its national currency? Would that not be the obvious and very cheap thing to do, followed in short order by Portugal, Greece, Spain and Italy? Have they any idea what that would cost compared with the billions that we are throwing down the eurodrain?

My Lords, we certainly played a part in the Irish bailout because we perceived it to be in our national interest, whether Ireland was in the eurozone or otherwise, for reasons that the noble Lord knows well.

The noble Lord asked another question: what happens if another country asks for similar support? He went on to list a few of them. There have been no requests for financial assistance from other member states. It is therefore inappropriate for me from this Dispatch Box to speculate on what may or may not happen in other member states given that no request for assistance has been made. The European financial stability mechanism and the European financial stability facility are fully operational. Any request for assistance from a member state would be considered on its own merits.

The noble Lord started by saying that the eurozone was designed for disaster. It is not easy for those who were not in favour of us joining the euro in the first place to make a coherent argument for the euro, but it is in existence. It is in our political and economic interests in Britain for the euro to succeed and that is why we continue to support it.

My Lords, could my noble friend help me with my memory of the Maastricht treaty, which set up the euro? I seem to remember that two of the conditions were that: first, no Government should run a budget deficit of more than 3 per cent of GDP; and, secondly, that there should be no bailouts? Is not the reason that the European Union—or the eurozone at least—is now having to breach the no-bailout clause because Governments were allowed to breach the deficit clause? Will that change not create a huge moral hazard? They were getting away with breaking the deficit clause but they did not know that they were going to get bailed out. Now that they know they are going to get bailed out, that is creating a moral hazard that surely will encourage bad behaviour in the future. When my noble friend says that we are in favour of these arrangements, is that because we think that it will make the euro stronger or weaker?

My Lords, my noble friend is right some of the conditions for entry into the euro that were laid out in the Maastricht treaty, and other conditions including those on deficits, have been broken. I believe that there is a sense of moral hazard because they have been bailed out, but it is in the interests of everyone within Europe to make sure that no further countries find themselves in financial trouble. That is why the eurozone is itself taking steps to try to manage its affairs in a more coherent way.

My Lords, I sympathise with the noble Lord, with the puppies snapping at his heels, but will he accept my congratulations on the first few paragraphs of the Statement which say that we indeed think that it is in Britain's interest to bring stability to the eurozone? That is an important signal for people in the City of London and elsewhere who think the opposite.

Secondly, President Sarkozy, Chancellor Merkel and our Prime Minister have written a joint letter on the budget. If we are going to have that close triangular relationship, does it not follow that that will probably be true of banking, energy policy and other areas? The question of creep towards Brussels running things, which is a bit of hyperbole, is one of evolution rather than any major revolutionary change.

My Lords, yes, we are in favour of stability in the eurozone, but we also feel that it is entirely right for nation states to stand up for their interests and to get together. That is in a way exactly what happened in this letter between Chancellor Merkel, President Sarkozy and others, who suggested—rightly, in my view—that it is time for the European budget to come under further control. That is not seeking to centralise power within Brussels; it is seeking to exert more pressure and more control from member states on the European Union. That is a very good direction of travel.

My Lords, the noble Lord has been under attack for trying to kowtow to his Eurosceptic Back-Benchers in the Tory Party. Some of us think that the Government kowtow far too much to the Europhiles, so there is a real difference of opinion. In all the latest opinion polls, a majority of the British people do not want any further powers to be ceded to Europe, and over half of them would like to leave the European Union.

Could I ask the noble Lord a question about the eurozone? In one part of the report, the statement is made that it could work only if there was fiscal union as well— saying that it did not want to tell the European Union this, but going on to do so anyway. Is the noble Lord aware that any reform with regard to the larger powers involves fiscal union? That is what France, Germany and, indeed, Italy want. Can I have the assurance that this would be opposed by the British Government and, perhaps, even by the British people through a referendum?

Yes, my Lords. The noble Lord says that we have been accused of kowtowing too much to Europhiles. We have certainly been accused of kowtowing to Eurosceptics. The main point of this, which the noble Lord has understood very well, is that we have said clearly that if there is to be a transfer of power from this Parliament to the European Union, it should be subject to a referendum. We hear what people are saying in various polls about their view that too much power has been ceded, that they are not consulted enough and it is all being done the wrong way. We will make this a matter of statute when later in this Session we get to the European Bill, which I hope the noble Lord and other noble Lords will support.

The countries of the eurozone need to sort out their own problems. No doubt some of us will have different views as to how that should be done but, if there was a move down the road towards a European-wide fiscal solution for European-wide economic problems, we would oppose it.

My Lords, my noble friend is quite right to say with regard to the proposed new bailout proposals that they affect only the eurozone and do not affect us, so there is no change in our position and no need to consider a referendum on the issue. However, it is probably worth pointing out that, with regard to the eurozone, the proposed changes would be very substantial indeed. The new proposals empower the EU to enforce strict conditionality, which the Wall Street Journal says today is bureaucrat-speak for telling a country what it must do on taxes, spending and economic policy as a price for being rescued. Those are very substantial changes.

My noble friend is absolutely correct; they are substantial changes. However, the eurozone needs substantial changes because of the problems that it has found itself in.

My Lords, the Prime Minister’s Statement says that the eurozone needs major reforms. What specific items did he have in mind?

My Lords, it is not for us to tell the eurozone how to sort out its own problems. I have laid out some proposals this afternoon on how we think Europe should grow again, and I stand by them.

Has it not become clear to even the blindest Eurofanatic that the real problem with the eurozone is that the north is moving at a very different rate from the south, and that tensions would be considerably relieved if they broke up into two?

My Lords, I am not sure that that is plain to everybody, nor is it, I think, a desirable solution. What is desirable is that the member countries should work together to find common solutions to common problems, including economic ones. If that means that the eurozone needs to rewrite its rules, then that is exactly what it should do.