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European Council Decision: EUC Report

Volume 726: debated on Monday 21 March 2011

Motion to Approve

Moved By

That, in accordance with Section 6 of the European Union (Amendment) Act 2008, this House approves Her Majesty’s Government’s intention to support the adoption of draft European Council Decision EUC 33/10.

Relevant document: 10th Report from the European Union Committee.

My Lords, this Motion is a necessary part of the process leading to a treaty change required by the member states of the European Union in the eurozone. I shall explain the purpose of, and need for, the Motion in detail in a moment. However, at the outset I observe that it is very much in the United Kingdom’s national interest that this House, under the terms of the European Union (Amendment) Act 2008, which we all recall, should approve this Motion without amendment so that the Prime Minister may support the adoption of the draft European Council decision to amend Article 136 of the Treaty on the Functioning of the European Union at the European Council meeting scheduled for 24 and 25 March.

As the Leader of the House made clear in his Statement following the December European Council, no one should doubt that stability in the eurozone is important for the United Kingdom. A large proportion of our trade is with the eurozone and London is Europe’s international financial centre. It is because of this interrelationship that the UK’s financial institutions and companies, both big and small, have huge exposure to the banks and businesses based throughout the eurozone. Worsening stability is therefore a real threat to the UK economy, as I am sure all your Lordships appreciate.

In explaining the background, I begin by reminding the House of the conclusion drawn on this proposed treaty change by the European Union Sub-Committee on Economic and Financial Affairs and International Trade at its meeting on 1 February. In his letter to the Minister for Europe, the chairman of the Select Committee on the European Union said:

“We fully support your view that it is in the UK’s interest to support a stable and prosperous Eurozone. Given that this Treaty amendment would not apply to, or have any financial risks for, the UK, we support your intention to vote in favour of this amendment. We have agreed to clear this document from scrutiny”.

From that background quotation I move to the reason why are we having this short debate this evening. First, Section 6 of the European Union (Amendment) Act, arising of course from the Lisbon treaty, requires that when a draft decision under the simplified revision procedure—that is, Article 48(6) of the treaty—is proposed, a Minister must introduce a Motion and have it passed by both Houses without amendment before the Prime Minister can signal his agreement to the adoption of that draft decision at a subsequent European Council. Secondly, if the House approves this Motion, it authorises the Prime Minister to agree to this draft decision and this draft decision alone at the European Council. Should there be any amendment to the draft decision at the European Council, the Prime Minister could not agree to it at the European Council without first coming back to another place and this House for additional approval. Therefore, the draft decision referred to in this Motion will be the version that is agreed at the European Council. There can be no other without the further approval of this House in a further debate such as the one that we are having tonight.

If the draft decision is adopted by the European Council under Article 48(6), all 27 member states must then also approve the treaty change in accordance with their respective constitutional requirements before the decision can enter into force. This means that the treaty amendment itself will not come into effect until the UK and all other member states approve or ratify the adopted decision.

However, if the European Union Bill, which has just been introduced to this House and will have its Second Reading tomorrow, becomes law, this treaty change will also be subject to Parliament’s approval by Act before the UK can ratify it. We have made it clear that we shall proceed in accordance with the provisions of that Bill. In other words, there will be a full further opportunity for your Lordships to debate this matter when the treaty change comes forward in due course for ratification, which under our new procedures will require the full processes of primary legislation. That is an important change from the position in the past.

I turn to how the proposed treaty change came about. As your Lordships will know, it originates from the need for a permanent mechanism to be established by the member states of the euro area to safeguard the financial stability of the euro area as a whole. That is an obvious need. In May last year, the European Union established two emergency instruments to respond to financial crises. The first is the European financial stability facility. This is a temporary facility established intergovernmentally by euro area member states to provide loans to euro area member states in difficulty. It is a limited fund and is due to end in June 2013. The second is the European financial stability mechanism, which the coalition Government, of whom I am a member, inherited from the previous Government. Under this mechanism, the Council can agree, by qualified majority, to the Commission providing assistance using money raised on the financial markets, backed by the EU budget. It therefore creates an indirect liability for the United Kingdom. That is a very important point.

Against the backdrop of continued uncertainty in financial markets, the members of the European Council agreed in December to amend Article 136 of the Treaty of the Functioning of the European Union to provide that member states of the eurozone may establish a permanent stability mechanism. This mechanism, the European stability mechanism or ESM, will provide a necessary means for dealing with cases that pose a risk to the financial stability of the euro area as a whole, so it is important to us given the extent of our trade with it. This is what we are dealing with tonight.

The details of how the ESM will operate are being discussed in Brussels. In accordance with the conclusions of the December European Council, member states whose currency is not the euro can be involved, on a voluntary basis, in finalising work on the design of the ESM, which will be established by intergovernmental arrangement among the eurozone member states. My colleagues at the Treasury are responsible for overseeing the UK input to these discussions.

I stress that although we are involved on a voluntary basis in the design of the mechanism—it is very much in our interest to be so—we cannot and will not be part of it. In fact, we could not be part of it unless we joined the euro area. As the whole House is aware, this Government will not join the euro and, if the EU Bill becomes law, any future Government who wished to do so could join only with parliamentary approval by Act of Parliament and the British people’s approval by referendum. I should like to reassure your Lordships that the proposed treaty change does not and will not transfer any competence or power from the United Kingdom to the European Union. As I said, this treaty change is in our national interests. Instability in the eurozone has direct implications for the UK and all the other economies in the single market and beyond.

On top of that, the Prime Minster negotiated successfully two important objectives. First, as the conclusions of the December European Council confirm—that is the so-called recitals—once the ESM is established to safeguard the stability of the euro area, Article 122(2), on which basis the old EFSM was established, will no longer be used for such purposes. Our liability for helping to bail out the euro area through European Union borrowing backed by the EU budget will cease. It is crucial to our interests that it does cease. Secondly, securing a tight budget for the future is our highest priority. At the last two European Councils, Britain led an alliance of member states in limiting the 2011 EU budget increase to 2.91 per cent, as your Lordships have already discussed and debated in this House. In moving forward, working alongside key partners such as France, Germany, the Netherlands and Finland, we are committed to a real-terms freeze in the EU budget from 2014 to 2020 and we have written to the President of the European Commission setting out our position.

Without this Motion this evening, the consequences would be serious and damaging for Britain. The Prime Minster would not be able to signal his support for the draft decision at the March European Council next week and the decision then could not be adopted, as like all other treaty changes it requires unanimity. This means that, if it failed, Britain would remain indirectly liable for eurozone bailouts through the EFSM, as it would not have been replaced by the ESM. By supporting the adoption of this treaty change at the March European Council, the UK will be supporting the members of the eurozone to establish a permanent mechanism, which will make clear the responsibilities of all the members of the eurozone to each other and to the overall stability of the euro area.

That means that we will ensure that our current indirect liability for eurozone bailouts comes to an end in 2013. As this new mechanism is established using the treaty provisions specific to members of the euro area, it will not apply to non-euro area member states and cannot confer any obligations on them. I hope that I have provided your Lordships with an explanation of the mechanisms, which I agree are not simple, and the purposes for passing this Motion tonight. I beg to move.

My Lords, the importance of this debate is that the decisions will be made by the European Council at the end of this week, on 24 and 25 March. I speak as the chair of the Economic and Financial Affairs and International Trade Sub-Committee, which has had correspondence with the Government on this. The matter has also gone to your Lordships’ European Union Select Committee for scrutiny. It was thought appropriate in the light of the importance of this debate that this report should be provided on amending Article 136 of the Treaty of the Functioning of the European Union in order to help colleagues to come to a decision.

The noble Lord has rightly pointed out the origins of the problem and the creation of a response to the financial crisis brought about by our Greek colleagues. That relates to the establishment of the European financial stability facility, which is agreed by member states within the eurozone, and the EFSM, the separate mechanism that draws on the European Union budget and, therefore, involves the United Kingdom.

As the Minister said, the matter was raised under Article 122(2) of the European Union treaty, which points out that, in exceptional circumstances that are beyond the control of any one member state, action can be taken to help out that member state. We wrote to the Government and asked whether they felt that that conflicted with Article 125, which is the no-bailout clause, but the Government replied to us insisting that the EFSM provided loans not bailouts and that, therefore, there is a distinction. Incidentally, we have also drawn on the report, which we hope will be cleared by the Select Committee tomorrow, on EU economic governance. Within that report we interviewed many experts on these matters in looking at the basis for the decisions made. There is agreement that this was the right and proper way forward.

We arrive at a situation where a new permanent crisis mechanism has to be created at the end of 2013 when the mechanism and the facility are abandoned. On 16 and 17 December 2010, the European Council decided on the new mechanism, which is to be called the European stability mechanism. It is also the case that Article 122(2), the exceptional circumstances clause, is no longer to be used. Instead—I think that it is true to say that there was pressure from Chancellor Merkel of Germany, who wanted not to fall foul of the German constitutional court—there was insistence on having a treaty change and hence an amendment to Article 136 as printed in the document that we have submitted and which is being proposed now. The process is that, under Article 48(6) of the European Union treaty, amendments to part 3 of the Treaty of the Functioning of the European Union, which includes Article 136, the subject of the debate this evening, can be appropriate. Therefore, as the Minister has explained, we have the simplified revision procedure as the mechanism for achieving that. Perhaps we should say that this is the first use of that procedure.

The amendment was agreed in the European Council. The effect of the simplified procedure is that an intergovernmental conference, a convention of national parliaments or a convention of Governments, the European Parliament and the European Central Bank is not convened. Instead, it requires that the European Parliament and the Commission are consulted and that, because of the exceptional circumstances, the European Central Bank is also consulted. As the Minister explained, that has to be ratified by all member states. Hence we have a separate Motion in each House.

Mention has been made of tomorrow’s Second Reading of the EU Bill. It is perhaps unusual for us to look prospectively as far as it touches on this matter, but it is probably right to do so. We have to attain parliamentary approval for voting on treaty amendments. Then we have to ask whether a referendum to be ratified by the British people would follow. We think that the amendment of Article 136 does not fall foul of that provision, under Clause 4. The Government, as is their obligation, have stated that it does not apply. The Government’s Explanatory Memorandum also points out that the new mechanism will not apply to non-euro states. The amendment does not involve an increase of the European Union’s competences, as we understand it. The amendment therefore provides for action solely in the euro area. The mechanism is set up by euro members and hence separates the United Kingdom from involvement.

It is a matter of urgency to support the setting up of the European stability mechanism, which must be ratified by all member states. The Prime Minister and the Foreign Secretary both said at the outset of their tenure that the viability and support of the euro was important for Britain’s financial future. That, too, must be underlined. I hope that the short document produced by the European Union Select Committee, on advice from Sub-Committee A, has been useful for this debate.

My Lords, I thank my right honourable friend for introducing the measure before the House. I accept 100 per cent that the provisions do not apply to us. I entirely support the Government's attitude that they should not in any way obstruct the setting up of the ESM. I thank the noble Lord, Lord Harrison, for the helpful report published by the Select Committee. I just have two brief questions for my right honourable friend.

My noble friend, my right honourable and noble friend, as he always is and always will be.

As the noble Lord, Lord Harrison, mentioned, at paragraph 6 of the report the Select Committee commented—admittedly, it was talking about the EFSM rather than the ESM—that it did not conflict with the no-bailout provisions in the original Maastricht treaty, now incorporated in the TFEU. Of course, I know only what I read in the report about how it was argued by witnesses before the committee that that did not constitute a bailout because the EFSM did not assume responsibility for the debts. The same arguments must arise with the ESM.

Does the Minister seriously, with a straight face, believe that that does not constitute an infringement of the “no bailout” provisions? It seems extraordinary to say that just because loans are being extended, if there is a rescheduling of debts, that does not constitute a bailout. I do not think that that is what the Germans had in mind at the time, when they argued against bailouts and for a “no bailout” provision in the Maastricht Treaty. Bear in mind that the new facility, the ESM, will, like the EFSM, issue securities which will be guaranteed by the member Governments of the EU. I know that this is a sideshow for our Government, but it is extraordinary to describe that as not conflicting with the “no bailout” provisions.

The second question I want to ask my right honourable and noble friend is more directly germane to the UK. When the German Government agreed to support the ESM, part of the package they insisted on, from what I read in the newspapers, was something called the competitiveness pact, which covered a whole range of policies including: the indexation of wages as applied to countries such as Belgium; the retirement age; and having a uniform system of corporate tax. All that was put forward as part of a quid pro quo that the German Government wanted in exchange for agreeing to the ESM, to which there was some resistance on the part of the German public.

As my right honourable and noble friend may have noticed, fears have been raised in the Economist magazine that those provisions could have an impact wider than the eurozone and might affect us and other non-euro members of the EU. I entirely support the Government’s policy of allowing what is happening with the establishment of the ESM to go ahead; for us to have nothing to do with it but to allow it to go ahead; but I am concerned by the points made by the Economist about how that could spill over into measures that would have an effect on competition and the competitiveness of the rest of the EU. The magazine argued that the competitiveness of the whole might be undermined by protectionist measures taken under the rubric of the competitiveness pact. I hope that my right honourable and noble friend follows my point. I would like to be assured that that is not the case. I would like to be told how the competitiveness pact will be given legislative effect and how we will ensure that it does not have adverse repercussions on us, and other countries not in the eurozone.

My Lords, it will come as no surprise to your Lordships that I rise to speak against the Motion. The heart of the Government's case is that it is in our national interest to help the countries in the eurozone, so we should not withhold our consent to the proposed European stability mechanism. To justify that, the Government even trot out the tired old propaganda about half of our trade being with the eurozone, which is irrelevant nonsense, as I have often pointed out.

The Government are really asking us to agree that the euro should be propped up, which is a very different and risky thing to do. I say that because the euro is so badly designed that it may be un-prop-up-able, certainly in the long term, probably in the medium term and possibly, if one looks at what is happening now in Portugal—not to mention Greece, Ireland, Italy and perhaps Spain—in the short term. The euro's main design faults, as some of us have been trying to point out since before it was born, are that it is a currency area without a federal budget. There is no mechanism for sending support from rich areas in the zone to the poor areas. Its different economies also suffer from a single interest rate and exchange rate with the results we are already seeing in the countries I have mentioned.

The Government’s answer to that in this Motion tonight seems to be that there is nothing to worry about because this new ESM means that the poor old Germans will pay and so will the French, the Dutch and the other countries that already donate to keep the whole unfortunate project of European integration afloat. The question is: will they? For how long? How much? Even if the cosy European political class thinks it is all a splendid idea, what about real people? What about the massive public protests in Portugal over the weekend and those we have seen in Greece? What about Marine Le Pen in France? Indeed, what about UKIP in the recent Barnsley by-election? [Laughter.] Well, I had to put that plug in.

What about another thing? This is a question to the Minister. What about the vote in the German Bundestag last Thursday, when five out of the six main parties gave their consent to the ESM but only with some strings attached? I know this is only a European Parliament, which is made irrelevant, as we know, under the project of European integration. It is not the European Union, but nevertheless, those strings are important. They included strengthening the stability and growth pact, guaranteeing the independence of the European Central Bank, guaranteeing that the EMS would be activated only in emergency cases, a restructuring procedure that would include private creditors and a guarantee that the eurozone would not turn into a transfer union. This last string looks something like shutting the stable door to me, but perhaps the Minister will care to opine. Does the ESM in effect set up a transfer union in clear breach of Article 125 or does it not?

The noble Lord, Lord Harrison, agreed with the Government that it does not breach Article 125, so perhaps it is worth putting on the record, very briefly, the key part of Article 125, which states:

“The Union shall not be shall be liable for or assume the commitments of central governments … A Member State shall not be liable for or assume the commitments of central governments”.

I agree with my noble friend—if I may call him that—Lord Lamont. Of course this does that. At the very least, even for Article 122, so roundly abused just before the present Government came to power, which was designed to help out with natural disasters and things like that, surely a loan which is not repaid becomes a commitment. Here with this ESM, we are in the clearest possible terms breaching Article 125. I would like the Minister to tell us: are we are helping to setting up a transfer union or are we not?

The Bundestag’s third condition—that the ESM should be used only in emergency cases—also looks a bit optimistic. It reflects the proposed additional paragraph to Article 136 which states that the ESM will be activated only if it is indispensable to save the stability of the euro as a whole. I think the Minister told us that this detail has not yet been worked out. We are voting for something that we do not know how it will work. Can he tell us who or what will decide when the use of the ESM has become indispensable? Will it be the Council, in which we sit, and if so will we have a vote, or will it be the Commission and/or the central bank? Will the IMF be involved, which again concerns us? In short, can the Minister tell us how the new European stability mechanism will be activated?

To conclude, I submit that it is really not in this country’s interest to prop up the euro. The quicker it disintegrates the better, with countries that cannot afford to be part of it going back to their national currencies. Only then will they be able to start trading their way out of the colossal debts into which the euro and the project of European integration have led them. Mr Van Rompuy has just said that the EU will collapse if the euro fails. I fear he may be wrong and that the juggernaut of European integration could continue without the euro and would indeed do so, but if he turns out to be right, what a pleasant prospect greets us: no Commission, no Committee of Permanent Representatives, no Council of Ministers, no European Court of so-called Justice, no EU Parliament, none of the colossal fraud, waste and overregulation which weigh us down at home and in our competition and trade with the rest of the world. We would be left with a Europe of democratic nations freely trading and collaborating. It is to those sunlit uplands that the Government should be leading this country and the rest of Europe. That is where the national interest lies, not in this grubby instrument of doubtful legality.

My Lords, it is always a great pleasure to follow the noble Lord, Lord Pearson of Rannoch, because I always think that debates in your Lordships' House are much better when we are not all agreeing with each other. He wants the euro to fail. We on these Benches want it to succeed, and therefore we support the Motion before us this evening. Without having a huge discussion on the history of the euro, it is perhaps worth reminding ourselves that the euro has survived the worst financial crisis certainly in our lifetimes, and has survived many naysayers over the past two or three years who very confidently and regularly predicted that it was about to collapse. It is quite clear that the euro is not going to collapse and that the eurozone is going to continue. Indeed, it is likely to be strengthened as a result of the decisions which are currently being finalised.

It is one of the long-standing features of our view of the EU and the euro that at every point they were about to collapse and, indeed, that the European venture was about to stall, and at every point it has moved forward in its peculiar but almost inevitable way. There was a typical example of this attitude just last week when the FT, reporting on the eurozone summit on this mechanism, had as its headline “Leaders cut surprise deal on key reforms”. The history of European development has been leaders predictably cutting surprise deals when nearing a deadline, which is exactly what has happened here.

I do not intend to attempt to dissect the speech of the noble Lord, Lord Pearson, in great detail, but I point out to him that member states are not donating anything to anyone via this mechanism. The Irish are paying 6 per cent on these loans and are grumbling mightily about them, so just as the British Government are getting a good return on the loans that they are making, member states that are making loans under this mechanism will be getting a pretty good return.

My Lords, I did not suggest that this Government were donating to any other member state through this mechanism; I merely pointed out that we donate generally to the coffers of the European Union—to the tune this year of £17.6 billion gross and £8.3 billion net. That is net cash that we are sending to Brussels and that goes down the drain there—a figure, I might say, that we are struggling to cut from our own public expenditure.

My Lords, I apologise to the noble Lord. I misheard him. I distinctly wrote down that he said that a donation was involved in this process.

My one question to the Minister springs from my concern about the way in which the eurozone is developing, which is simply that the UK’s role in relation to it is extremely strange. We are obviously not part of it, so we are not in many of the meetings. Yet from time to time we are allowed to have a say. What worries me is that with the passage of time that say gets less and less over a whole raft of economic decisions across the EU. In the current exercise, we were allowed to help in the design of the ESM, which presumably means that Treasury officials went to meetings to talk about how it was going to work. What worries me is that, once it is established, those Treasury officials will be told that they have been extremely helpful, that their advice has been most valuable and that they can now go back to London and let the rest of the eurozone implement the policy. As the noble Lord, Lord Lamont, has pointed out, there are a whole raft of secondary consequences for the competitiveness pact, which will undoubtedly have an impact on the UK and on which, as far as I understand it, we will have no say at all in the future.

Will the Minister explain whether, once the ESM is established, there will be any further role for the UK Government and their officials in the design of the conditions that might be required or suggested from time to time to apply in particular cases when member states are being bailed out? These changes could be extremely worrying, not necessarily because they or the conditions are bad in themselves but because, although we are affected by them, we will have had no say in the way in which they are put together.

I suppose I could just say that I agree with everything that the noble Lord, Lord Pearson, has said and sit down, but I will not do that.

I thank the noble Lord, Lord Howell, for explaining very complicated legislation to us. I think I understand it a bit better now that he has explained it. Nevertheless, I believe that it is a serious matter that we are discussing. I think I am right in saying that, during debates on the Lisbon treaty, the then Official Opposition considered Article 48(6)to be an unnecessary and perhaps dangerous measure that could be used to extend European Union power without proper parliamentary scrutiny. I feel that that was their position at the time. Now, even though they have been in power for only 10 months, they are using this provision to extend the power of the eurozone. I do not know what has happened. Perhaps the Liberal part of the coalition is having more influence than it should.

There has not been an IGC, which has been pointed out already. The Motion received only one and a half hour’s debate in the House of Commons and a dinner hour debate in this House. We are not really having the sort of discussion that we should have before the Prime Minister goes to Europe to make a decision. It may be that we will have further discussions in due course but this Motion is to give the Prime Minister the power to act under Article 48(6). It is the first time that that has been done and it is therefore a serious matter. Although we are not at present members of the eurozone and ESM will not affect us, it will nevertheless become part of the European Union’s powers across the board. If this country should join the eurozone, this provision would automatically apply to us. That surely is right. If it is not right, perhaps the noble Lord will say that it is not right and why it is not right.

Furthermore, this first use of the simplified revision procedures is likely to be the thin end of the wedge. This will not be the first time that it will be used. Once a provision is used, it sets a precedent and it will be much easier to use it on other occasions in the future. It is claimed that when the European Union Bill, which we will discuss tomorrow, becomes law, it will prevent Article 48(6) from being misused. But can we be certain of that? Will the noble Lord say that there will never be any conditions under which Article 48(6) cannot be used without parliamentary procedure or perhaps even a referendum? Since the measure has to be agreed by a unanimous vote, the United Kingdom at present has a veto.

During the election, the Conservatives said that they wanted to repatriate to this country a range of measures which they believed were inimical to the best interests of the United Kingdom. Why then are the Government not using this factor—the fact that they have a veto over this provision being discussed tonight—to renegotiate parts of the treaties which are inimical to British interests, especially those relating to industry and commerce? I am also puzzled as to why the eurozone nations cannot agree a system of control that does not involve a treaty change. Is it perhaps because Germany wishes to use this procedure to strengthen its position as leader of the European Union?

The Government state that maintaining the eurozone as a stable and fully functioning entity is in the United Kingdom’s interest and the European Union Committee endorses that view. I do not believe that that is necessarily so. I am not at all sure that the eurozone is necessary for this country to prosper. Indeed, I could probably, if there was time, produce an argument to show that the eurozone works against this country’s interests. It should be no part of this country’s policy to maintain the eurozone in being no matter what the circumstances are.

Let us not forget that the experience of the eurozone so far has not been a happy one. At least four of its members are in dire financial and economic trouble, needing massive tranches—that is what this debate is about—of bail-out money. Interest rates in the eurozone have been kept at an artificially high rate, thus resulting in lower growth in many of its member states and very high unemployment. That is something this country should deplore, wherever it occurs.

Being in the eurozone does not affect our trade in the way that the Minister outlined. The fact is that we are in Europe and we are part of the single market, and whether the eurozone exists or not, the single market will still be there, as it was there before we joined the eurozone. What I believe is that being within the European Union and within the single market in fact damages our ability to export to the much wider world than the European Union represents. Already we see the Chinese and the Indians making great inroads into markets in Africa and elsewhere which, untrammelled by the European Union, this country could be exploiting. I have some doubts about this measure, although I suppose it is going to go through. But I hope that the assurances which have been given by the Minister will be carried out.

This debate has been a curious experience for me because, having listened to the contributions of the noble Lords, Lord Pearson of Rannoch and Lord Stoddart of Swindon, I am perhaps a much stronger supporter of what the Government are doing than I think I ought to be. I believe that the Government are right to support this measure and I think that both noble Lords are completely wrong in thinking that somehow it would be in the British national interest to pull the house of the euro down, causing currency chaos and economic disruption on a huge scale in order to pursue their own hatred and fanaticism in their opposition to the European Union.

My suggestion was not that we should pull the eurozone down but that it is not necessary for us to take these measures to bolster the eurozone at all.

Of course I accept what the noble Lord says, but the implication was that the euro would come tumbling down, and I think that the economic consequences for us, with our trade and economic links to Europe, would be very serious. Further, the instability that would be created by a German mark soaring and a Greek drachma plunging would be too horrendous to contemplate.

What I want to do in my brief remarks is to declare that I support what is being proposed, but with two qualifications. First, what we have seen tonight is an excellent example of parliamentary accountability. This motion has been put to the House and, before it is approved by the European Council, we have an opportunity to say whether we agree with it or not. If I may anticipate the debate tomorrow on the EU Bill, this is in sharp contrast to what will be proposed under the new arrangements. What we are going to have there is a requirement for the Government somehow to argue that, under the proposed criteria, a referendum would not be justified for this measure. I am totally opposed to multiple referenda and will be arguing that tomorrow, but on the basis that the Government are arguing, it seems extraordinary to suggest that what we have before us with the European stability mechanism is somehow not a big extension of competence and is not significant. It is extremely significant.

Indeed, I would argue that what is happening in the eurozone at the moment is as significant a development for the strengthening of its governance as we have had since the establishment of the single currency and the single market in the 1980s. It is a far more significant development than the Treaty of Lisbon or the constitutional treaty that preceded it. It is for European integration very significant.

One cannot argue that this is of no relevance to Britain. For one thing, the ESM will be one pillar of a new regime of economic governance that includes macroeconomic surveillance and a competiveness pact. I do not argue that these measures are perfect; in fact, they are far less than ideal and this should be very much work in progress. However, integration of economic governance is certainly proceeding.

The Government make the crucial error of thinking of this question in terms of a transfer of power to Brussels from the United Kingdom. They argue that, because Britain is not in the eurozone, there is no transfer of power. However, what in fact is going on within the whole of the European Union at the moment is a very big shift in the balance of power, with the likely creation of a eurozone bloc that has a much bigger influence on the economic policies of the whole of the EU. It is about this important change in the balance of power that we should really be concerned, instead of going on about transfers of power.

Perhaps I may cite one example that is directly related to the subject of the ESM: the issue of financial regulation. If we have a sovereign debt crisis in a eurozone member country and it is necessary for there to be a restructuring of the debt, it will logically lead to problems in the banks which own the bonds that have lost much of their face value. That will in turn require new rules on the capital adequacy of banks and on banking mergers. If there are to be in future stages restructurings of Greek and Irish sovereign debt, there will also be grave consequences for financial regulation and the banking system. We are exposing ourselves to real loss of influence on these matters, because it will be a eurozone bloc that decides in terms of its own interests what those regulations should be. We will turn up at the Council of Finance Ministers with that decision in practice having been taken, with majority voting there in the Council of Finance Ministers, and with very little opportunity for us to influence it. When one thinks that the City of London is one of our key interests, one realises that this is quite a serious threat to us.

Of course, the new regime is not ideal and it is work in progress—I dare say that my noble friend Lord Eatwell will say something about this. My strong view is that if something is not ideal we should use our maximum influence to try to change it. Obviously, there is no immediate prospect of us joining the euro and becoming part of the ESM, but we should try to involve ourselves intimately in the discussions that are taking place. I am worried that the Government, as far as I can see, are not doing that. Mrs Merkel, as I understand it, made an offer to the British Government whereby they could be part of the competitiveness pact that she was trying to negotiate. Apparently the British Government have said that they do not wish to be part of that pact, whereas Poland, which is equally not a member of the euro area, is anxious not to be excluded from these decisions on economic governance questions which go wider than the eurozone.

There is a significant problem here for the United Kingdom and the Government ought to recognise this. They should also recognise that something of fundamental importance to our economic future and, indeed, to our sovereignty is happening here.

My Lords, as noble Lords will be aware, this is the first time that a Motion of this sort has been debated in your Lordships’ House. We are, as the noble Lord, Lord Stoddart, said, creating a precedent, although I am not entirely clear how long the precedent will last with respect to the discussion that we will have tomorrow. However, it clearly is important that we should define the criterion that we ought to apply to our assessment of the Motion.

The Government’s Explanatory Memorandum suggests that they have clearly applied the criterion of the “UK national interest”. In support of this Motion to give the green light to the establishment of the ESM, the memorandum states emphatically:

“We therefore support this draft proposal to amend the Treaty to make clear that the euro area Member States can establish a permanent ESM. The UK will directly benefit”—

directly benefit—

“from increased stability of the euro area brought about by the ESM, without being part of the new mechanism or having any obligations under it”.

The noble Lord, Lord Howell, repeated at some length the idea that this is directly in Britain’s benefit. Indeed, so important is the ESM deemed to be to the UK that, as the Explanatory Memorandum tells us, and as the Minister confirmed, the Chancellor of the Exchequer eagerly proposed UK participation in the design of the mechanism—participation which has apparently taken place.

This repeated emphasis on the importance of the ESM to the UK and of UK participation in the design process sits rather uncomfortably with the other theme of the Explanatory Memorandum:

“The ESM established by the proposed treaty change will be set up by the euro area countries for euro area countries with no financial liability on the non-euro area Member States or the EU budget. There are therefore no direct financial implications associated with agreeing the draft decisions to amend the TFEU to establish the ESM”.

So on the one hand we have a direct benefit, but on the other hand there are no direct financial implications.

It is, of course, entirely possible to hold these seemingly contradictory positions at the same time. For example, the policies of the United States Government have a direct economic impact on the UK, and yet we have no responsibility for their financial implications. However, the key difference here is that we do have a direct responsibility—we have actually participated in the design of this mechanism. This Government have both a primary and a secondary responsibility for the mechanism agreed: primarily because we participated in its design; and secondarily because, as has frequently been acknowledged, the performance of the ESM is of direct national interest to the UK.

In his introduction the Minister told us nothing whatever about the ESM itself. It really is essential that, when he sums up, he remedy that failure and answer some of the pertinent questions about the impact of the ESM on the UK. He quoted my noble friend Lord Harrison, saying that we should support a stable and prosperous eurozone, which of course we should; but when my noble friend wrote that letter in February he could not have known what we know now. In the early hours of the morning of Saturday, 13 March, eurozone leaders reached agreement on the structure of the ESM, to be ratified by the European Council this week. The assessment of whether the agreement of 13 March is or is not in the best interests of the UK is the key issue and it should be based on one clear criterion: will it work? That is the fundamental question, which the Minister has not even bothered to address this evening.

The purpose of the ESM is to provide a mechanism for managing debt crises within the eurozone. There is no doubt that that would be a good thing, in the words of 1066 And All That. There are two ways of managing a debt crisis: either by a bailout—the provision of funds or guarantees; or by restructuring—or, to give it its proper name, default. The crucial factor in the design of the ESM which distinguishes it from previous mechanisms is that it provides a mechanism for default—something essentially impossible today without falling foul of the German constitutional court, since Germany, under current mechanisms, would have to make good on the guarantees that it has provided. The default mechanism works by making the loans and guarantees made by the ESM senior to those made by all other investors in euro-country bonds. So the private investors are at risk, but the ESM is at far less risk.

There is a catch in this: the private investors will notice. Indeed, today’s private investors will notice what is coming in two years’ time and, even now, will be far less willing to support the bonds of Governments who are likely to get into trouble. That is how financial markets work. So the device does not actually get the German Government off the hook. Will the German Government be willing to push for systemic default when they are no longer on the line, when they have only senior debt and others are forced into a junior position? The likely answer is no, because the opprobrium would be too great for the eurozone to survive. Instead, with this design of the ESM, there will just be more bailouts and more onerous conditions imposed on the long-suffering citizens of Greece and Ireland, and perhaps Spain and Portugal, with damaging political consequences for the European Union and, crucially, damaging economic consequences for the UK. In other words, the proposed ESM neither creates an effective default mechanism nor provides for a fresh flow of funding to countries in the grip of a debt crisis. Indeed, it will weaken that flow. This mechanism will not work. Therefore, it is not in the best interests of the UK that it be implemented.

When the Minister sums up, will he confirm that my description of the proposed working of the ESM agreed last week is accurate? What do the Government expect the impact to be of defining ESM debt as senior on private debt markets? Have the Government assessed the impact of that measure on current interest rate premiums? Will he say precisely why Her Majesty’s Government believe that the likely outcome of the proposed mechanism will be to the benefit of the UK? Will he explain to the House why Her Majesty’s Government are prepared to ratify a change to the treaty that is likely to have damaging economic consequences for the UK? He said that not to ratify would expose the UK because of the continuation of the EFSM, but the EFSM is reviewed every six months. There is no unconditional continuation of that particular mechanism and no continuing exposure of the UK.

I said in my opening remarks that we are creating a precedent. It would be unfortunate if that precedent were to be that Motions are agreed by this House on the nod, without proper scrutiny. I fully understand and sympathise with the noble Lord that many of the technical aspects of the ESM were agreed only a week ago. But it was a full week ago. Surely we could have considered what those mechanisms were, and the Government could have made a report to this House explaining the mechanisms which have been agreed and assessing their impact on the UK. If we are unable to assess the actual measures precisely, then—if the noble Lord really has respect for this House—he should withdraw this Motion and bring it back with proper documentation so that we can fully assess the impact of the actual mechanism which we are being asked to agree.

My Lords, I am grateful to all those who have spoken on this Motion and applied their—in many cases—extremely acute learning and expertise to the various issues that arise. The noble Lord, Lord Eatwell, who has just spoken with the tremendous skill of a professional economist, if I may dare call him that—but anyway an expert—made some very acute points. He seemed at one point to come very near to questioning the whole future virtue of the euro and the eurozone and asking me to describe details of the ESM system, of which of course the design is not yet complete. He is asking me to produce something that simply does not exist yet and, much as I am anxious to please him, I cannot do that this evening. The ESM has yet to be completed. The British Government will be involved in input to that design, but we will not actually be part of it—so I am not quite sure how I can describe something that has not yet been put together yet. I would love to try, but I am not sure how I can do it.

Would the Minister explain why he is asking this House to agree to a Motion that he asserts is going to be in the best interests of the UK when he does not even know the mechanism that the Motion will create?

For the obvious reason that, in order to go ahead with the design of the ESM, there has to be first this Motion and then the alteration of the treaty, which under our new provisions of the EU Bill will also be debated in this House. We have to start the process off. If the proposition is that we cannot start until we know everything and that we are not going to know everything until we start, the noble Lord is asking me to go around in circles. That is often the fate of those in government, but in this case I prefer to begin to proceed on a process. Of course, I cannot stand here and say that what is going to emerge for the ESM and members of the eurozone will all be wonderful and work perfectly and that the eurozone will be happy for ever. The noble Lord could not reasonably expect me to be able to say that. I have no idea, as there are major issues of a geopolitical, political and economic nature lying ahead for the organisation of a financial structure for the eurozone, and none of us can be dead certain how these things will turn out. What one can say is that this is a move in the direction of trying to stabilise the eurozone, which the Government believe is in the interests of the United Kingdom. The noble Lords, Lord Pearson of Rannoch and Lord Stoddart, took different views, but that is what we believe and that is the Government’s position.

The Minister is confirming what the noble Lord, Lord Eatwell, said and what I asked him in my few remarks. We are being asked to agree something when we do not know what it will be. Why cannot we agree to the next phase going ahead and then make a final decision when we know what we are talking about? Why cannot we do it that way around?

Perhaps the noble Lord has not understood. That is exactly what your Lordships are being asked to do—to go ahead with the next phase. The Motion is required under the Lisbon treaty legislation; there will be a full debate on the new primary legislation, which we will start debating tomorrow. This is the next phase. The alternative is obviously to stand pat and do nothing, which the Government believe very strongly would be a serious and damaging step, which might lead, although I cannot guarantee it, to very serious damage for this country. So it seems right to take the next step forward. That is what both Houses of Parliament have been asked to do in order that the Prime Minister can take the necessary measures at the European Council later this week. Noble Lords are quite right—I said next week but I meant this week.

One or two of the points that have been raised are complex and important. The noble Lord, Lord Harrison, referred to the excellent Select Committee report which confirmed a number of the points that I have made, including the very important one that Article 122(2), which is the one governing the EFSM, will no longer be used. That is just as well because it had a liability for the UK.

My noble friend Lord Lamont of Lerwick asked two questions. The first was on whether Article 125 was compatible with having no bailout. He asked whether I, with a straight face, could make various assertions on that matter. I will give him what is in the brief before me, which has some strong validity. Article 125 of the treaty provides a clear assurance that no member state shall receive a bailout. However, it does not preclude the EU or member states from providing loans to one other. The EU’s balance of payments facility has already provided medium-term financial assistance to a number of member states. Article 2(1) of the EFSM regulation makes it clear that the financial assistance it envisages is strictly confined to either a loan or a credit, so that would need to be paid back. That is the explanation. I am a little worried about the straightness or otherwise of my face, yet that makes reasonable sense to me. It has been a matter of lively debate in other countries, such as in the Bundestag, but that is the answer that I have to his question.

All I can say is that this is how the debate has gone and these are the decisions that have been taken by those in the eurozone, which does not include us, who decided to go ahead and move from the EFSM to the ESM. The noble Lord has a different opinion of the financial aspects and is a financial expert of no small degree, so he may be right. However, that is not the view taken by the German Government or by the other Governments of the eurozone area.

My noble friend Lord Lamont also asked about the competitiveness pact. I can tell him that the latest draft of the pact makes it clear that:

“The Pact will fully respect the integrity of the Single Market”.

I am then advised that non-eurozone countries—such as us, among others—have been invited to join the pact and that we are assessing whether we should do so. I add that many of these points tonight point in the same direction and that we are really getting into the issues which we will be discussing on the new EU Bill tomorrow, when we shall have its Second Reading.

The noble Lord said that the Government were still considering whether to join the competitiveness pact. Is that the position: that this matter is still open?

That is different from what the noble Lord said, so he is not quite right that that is the position. I was going on to say that under the provisions of the EU Bill, which has its Second Reading tomorrow, any question of a movement of competence or powers from the UK to the European Union arising from any of these things is subject to the most rigorous procedures—in many cases, a referendum procedure but certainly an Act of primary legislation—which make it more or less impossible for them to be, as it were, slipped by or to be involved in any kind of competence creep. That is the position in answer to my noble friend Lord Lamont.

The noble Lord, Lord Pearson, took a familiar position and did not think that we should be propping up the eurozone at all. I admire his concern for the German taxpayer, as he is clearly worried about our German friends and the amount of tax that they might have to pay if liabilities arise. He asked if we were setting up a transfer union. My judgment—this is from outside because we are not a member—would be that the eurozone members are not setting up a transfer union because that would require a far bigger budget at the centre than anything that operates under the present European Union organisation and rules. I think that the answer is no, but really that is a question that was posed by German Bundestag Members and answered by the German Government.

My noble friend Lord Newby was worried, as was the noble Lord, Lord Liddle, about our role in the eurozone and whether it was becoming progressively weaker. I have described the conditions under which we will have a perfectly straightforward role in the design of the future ESM. I have to take a stand on the whole question of whether, as we stand outside the eurozone system, we are really weakening ourselves and putting ourselves in a disadvantageous position, as the noble Lord insists. I am not a rugby player but quite often standing outside the scrum places you in a much better position than being in the middle of it.

That is a much bigger issue that we will debate under the EU Bill: whether we are, as many experts assert, somehow marginal to the development of the European Union generally and of the eurozone or whether in fact we are one of the most active and influential players in the whole system by virtue of our excellent positioning. We shall talk about that during the whole process of the European Union Bill, and I would rather leave that bigger debate for tomorrow. It is there, though, behind all these issues.

The noble Lord, Lord Stoddart, asked whether, if we join the eurozone, we will be part of the ESM. The answer is yes—if we were to join the eurozone. However, there is no proposition or intention under this Government to do so, so that is the country of hypothesis in a very big way. It is not going to happen under this Government. We are not going to join the eurozone.

The noble Lord talked about the passerelle procedure, as did the noble Lord, Lord Eatwell. It is perfectly correct that at the time of the Lisbon treaty—I cannot deny the fact that he remembers it well—I stood on the Benches opposite saying that I did not like the smell of it. Times changes, though, and here we are with the situation with which we are presented: a proposition comes forward that does not technically or indeed actually involve the United Kingdom, and the passerelle procedure is used. He will learn, and I am sure that this will be to his satisfaction in the days ahead, that under the new EU Bill very rigorous controls are going to be applied where there is any suggestion of a movement of power or competence from the UK to the EU under the passerelle procedure, any other ratchet procedures or any other treaty-change procedures proposed in future by the European Union or even by the British Government.

The noble Lord asked what we are getting in exchange. In my opening remarks I covered the two considerable successes that the Prime Minister secured, one of which, I have said repeatedly, is that we are getting out from under the EFSM liability. So we got something in exchange.

Is a stable eurozone really in our interests? The noble Lord did not think that it was, but of course markets think that it is. When the eurozone has run into major troubles in the recent past and when measures have been taken to try to address the troubles of the future, one can see the markets reflecting precisely those trends: they go down if they feel that the eurozone is in deep trouble and go upwards, or strengthen, when they see some kind of efforts being made to stabilise it. Markets think that it is in our interests, even if the noble Lord does not.

The noble Lord, Lord Liddle, came back to the issue of loss of influence. We dealt with participation in the future design of the ESM. The noble Lord, Lord Newby, also took the view that we are somehow marginal. This is a very familiar theme. I always think that there is an element of defeatism in it. It implies that unless we go along with the mob, move with the crowd and are tucked into the system, we will somehow lose influence. Past experience over many years and future prospects in the totally new international landscape do not point in that direction. It portrays a yesterday view of how blocs such as the European Union or the Atlantic community, or superpowers such as America, operated in the 20th century. We are not in that century any more; we are not within that distribution of power. Different modalities apply and we are in a different paradigm. I shall argue that in much more detail when we come to the EU Bill tomorrow, in Committee and on Report. I have dealt with all the issues, although certainly not to the satisfaction of all.

My Lords, I want the eurozone to succeed. That is why I was particularly concerned about the structure of the ESM, as agreed last weekend. I asked several rather technical questions about that. I am content if the noble Lord does not feel that it is appropriate to answer those questions this evening, but I wonder if he would undertake to write to me and answer them.

I will undertake to write if I can get hold of the propositions that the noble Lord is asking about. If he is asking me to describe exactly how the ESM will work, I cannot yet do so because it has not been designed. We are taking a step towards the point where design of the ESM can begin. The noble Lord, Lord Pearson of Rannoch, would rather we did not take that step forward. However, the noble Lord, Lord Eatwell, who is extremely expert in this field, and his party want this to go ahead. We should take this first step. I know I will not be able to satisfy the noble Lord, Lord Eatwell, in describing the exact design of the ESM system because the mechanism is under construction.

The noble Lord also had some fun—it was rather enjoyable—by asking how we could hold two views that he believed to be contradictory. One is that the ESM would directly benefit the UK or, to put it negatively, that failure to go ahead with the ESM would greatly damage the UK. At the same time, we were not involved in it. The remark of, I think, an American philosopher passed through my mind: the mark of an intelligent mind is to be able to hold two contradictory thoughts at the same time. It may be that it is the mark of an intelligent Government to do the same. It is of course possible to argue, as I have this evening and I stand by it, that standing in the way of this next step is standing in the way of a step that may lead to better things and greater stability for the eurozone. We judge, contrary to the views of the noble Lord, Lord Stoddart, that this is an improvement and is good for the British economy, British prosperity and the British people.

That is not the same as saying that we are involved in the powers, competencies and arrangements of the ESM. We are not. We have been in the EFSM and we were liable. We will cease to be liable in the future, once we can get this system in place. The first step is now required and it is one that the Prime Minister wishes to take, quite rightly, in the interests of this nation at the European Council meeting at the end of this week.

There will be, I repeat, a second opportunity to debate this treaty change during ratification, in line with the provisions of the EU Bill once it becomes law. Your Lordships will be addressing their minds to it at Second Reading tomorrow. Under the EU Bill, all treaty changes require primary legislation to be ratified, so this is not the end of the matter by any means. It is a start and it is a good start—the right start in the interests of this nation.

Motion agreed.