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EUC Report: Economic Governance

Volume 728: debated on Thursday 16 June 2011

Question for Short Debate

Asked By

To ask Her Majesty’s Government what is their response to the report of the European Union Committee on The Future of Economic Governance in the EU (12th Report, HL Paper 124).

The crisis in the euro area has rarely been out of the news over the past year. Therefore, my committee decided to launch an inquiry into EU economic governance, especially after EU member states banded together to provide financial assistance to Greece in early 2009. Since then the crisis has continued to spread. Indeed, while we were taking evidence Ireland received financial support. Since the report was published, yet another euro area country—Portugal—has asked for and received a loan package. In the wake of these difficulties, the European Union has pushed ahead with proposals to reform its economic governance. The proposals are likely to be agreed at ECOFIN next week, so I thank the Government for providing an opportunity for this timely debate.

The euro area crisis followed the worldwide banking crisis in 2008. The interconnection between sovereign debt and the banking sectors was one of principal elements that contributed to the current crisis. However, it was not the cause of the current problems in the euro area; it was merely the trigger. Our report details two more fundamental reasons for the euro area crisis. First, there is an endemic flaw in the architecture of the monetary union: while monetary policy is centralised, fiscal policy remains fragmented among member states and is inadequately co-ordinated. Secondly, the past decade has seen a build-up of macroeconomic competitiveness imbalances among euro area member states. Within monetary union, states can no longer devalue their currencies to regain temporary competitiveness or adjust their interest rates to take account of variations between different economies.

These problems have been exacerbated by a failure of the markets, and member states themselves, to understand how the monetary union worked. The markets treated the euro area as a single entity, and did not distinguish carefully or sufficiently between the financial health of individual member states. This has meant that for most of the past decade the interest rate on Greece’s sovereign debt has not been much higher than the interest rate on German sovereign debt. It should have been.

Our report focused on a series of six proposals published by the European Commission in autumn 2009, which were designed to address these problems. The proposals would monitor and co-ordinate more closely economic policies among the member states. In parallel with the Commission, the European Council established a task force to consider these issues under the chairmanship of the President of the Council, Herman Van Rompuy. With only minor differences, the task force’s recommendations echoed the proposals put forward by the Commission.

The proposals focus on two distinct aspects of member states’ economies. First, they aim to improve fiscal discipline among member states. The Commission has proposed amending the stability and growth pact to broaden its surveillance of member states’ fiscal policies and, to ensure better compliance, it has suggested strengthening the sanctions regime. In addition, a proposed new directive would incorporate EU-level fiscal rules into domestic fiscal frameworks.

Secondly, the proposals would create new mechanisms to monitor and correct macroeconomic imbalances, such as divergences in current account positions, in competitiveness or in credit and house-price bubbles. In addition to these six proposals, we considered the Council's proposals for a permanent crisis resolution mechanism for euro area member states. The European Council agreed to establish such a mechanism in March this year, although the details of the mechanism are still to be confirmed.

Before I turn to the committee’s view of the Commission's proposals, I should briefly say why the UK should be engaged. After all, we are not a member of the euro area and many of the proposals related to sanctions or fiscal rules will not be binding on the United Kingdom as a result of its opt-out from the monetary union. Our witnesses, however, were unanimous in stating that the health of the euro area directly impacts on the United Kingdom. In 2009, some 60 per cent of the United Kingdom’s trade was with the European Union, the UK financial sector has substantial investment in euro area countries and the Government recognised the UK's substantial interest in Ireland by providing a bilateral loan above and beyond their contribution through the European financial stabilisation mechanism and the IMF.

The Commission's proposals may not all apply to the United Kingdom, but we have a vested interest—a vital interest—in ensuring that they are appropriate and will successfully contribute to the future economic and financial stability of the European Union. In addition to these hard, economic reasons, we believe that the United Kingdom should play an active role for another reason: solidarity. The EU is founded on solidarity and we believe that the United Kingdom should consider and support where possible the interests of other member states. I say to the Minister that it is surprising how often solidarity turns out to be far-sighted self-interest.

I now turn to the Commission's proposals. Taken as a whole, the committee concluded that they are a step in the right direction although they do not go so far as to enact the full fiscal union that some of our witnesses thought was necessary for the future stability of the euro area. Closer economic co-operation is necessary to foster greater economic stability in the European Union, particularly for those countries that have bound themselves together into a single monetary union. The proposals relating to fiscal discipline and co-operation should make it easier for euro area members to arrive at a collective fiscal stance that stands as an equal to a centralised monetary policy. Likewise, the proposals for a new system of macroeconomic surveillance and co-ordination will help to detect and address at an earlier stage excessive imbalances that threaten to destabilise the monetary union.

We also support the establishment of a permanent crisis resolution mechanism. In particular, we concluded that the inclusion of collective action clauses, setting out a formal mechanism for restructuring debt is essential. We felt that these should clearly establish the principle that the private sector should share the burden of any restructuring of sovereign debt. It is only right that, as they share in the rewards, they should share in the risk. The Government's response indicates that private sector involvement will be on a case-by-case basis. I would be interested to hear the Minister say under what circumstances the private sector might be exempted from the restructuring, and a reassurance that this would be the exception not the rule.

While the Government have made it clear that the United Kingdom will not take part in the new permanent crisis mechanism, we believe that there may be times when, as with Ireland, it is clearly in the UK’s interest to participate in financial assistance to member states in difficulties. We welcome, therefore, that the current proposal will allow member states outside the euro area to contribute to rescue packages on an ad hoc basis if they wish to do so.

Our primary concern with these proposals is the likelihood that they will continue to be adhered to rigorously as time goes on. Previous efforts to enforce fiscal discipline among euro area member states have been regrettably ineffective. Under the proposals, the Council will retain responsibility for enforcing responsible fiscal behaviour through sanctions. We concluded that this was indeed appropriate given the sovereign nature of EU member states. Only time will tell, however, whether the collective will of member states is strong enough to ensure that the sanctions procedure is applied when required and when the crisis is over.

In his evidence, Mark Hoban MP stated that:

“The cost of the crisis in the eurozone is a reminder to us that we must make these processes work much more effectively”.

The current crisis must indeed be remembered as a reason why member states should enforce the rules set out in these proposals in good times as well as bad. The ultimate responsibility for this lies with the political authorities of the EU, and the committee, I am sorry to say, remained sceptical that they will have the collective political will to enforce them effectively.

I thank all my fellow members of the committee and Professor Iain Begg—our specialist adviser—Antony Willot and Laura Bonacorsi-Macleod for their sterling work in helping the committee steer its way through a difficult report. I hope that the Minister will come back to this in time because we need constant updates on a very tricky situation that is of huge relevance to the United Kingdom.

My Lords, we have a rather tight timetable. I remind noble Lords that when the clock says four they are into the fifth minute and should sit down.

My Lords, the whole question of the economic governance of the EU is, in anybody's business, a very big topic, and our committee had to restrict itself somewhat. But it was a slight pity that we failed completely to address the whole question of the competitiveness of the EU, which is a subject that perhaps we should turn to at some stage. When you talk to people in Europe and in Brussels they rather like to feel that there is no global market out there at all and that the massive competitive forces building up in China and India can be ignored. The EU is incredibly introverted in the way that it looks at things. As it is, our report did look at the proposals produced by the Commission.

The Commission produced the stability and growth pact originally, and we are now armed with proposals for the stability and growth pact part 2. Of course, part 1 was a total, abject failure. The conditions were broken by the French and the Germans very early in its life. Have we really any confidence in this one? I suspect, although I cannot speak for all my fellow members of the committee, that we felt the chances of this second go from the Commission producing new stability and growth pact proposals was unlikely to be any more successful than the last lot.

We need to think slightly outside the box. I echo the words of the chairman of the committee, the noble Lord, Lord Harrison, that we should be very concerned about what happens in the eurozone. It would be nice if we could stand back and watch the whole thing implode, but if it did, such is the exposure of British banks and of the whole financial sector in Europe that the effect would be devastating. We would move into a serious banking crisis. We have to look to the success of the eurozone. We cannot stand back and watch Greece collapse either. That would have the effect of the collapse of Lehman Brothers, where the collateral damage was very serious indeed. It would have the effect of spreading all across the eurozone. Contagion is a big problem.

The eurozone has to address where it goes from here. I do not believe that there is any will among the nation states to see the eurozone collapse. But if they are not to see it collapse they must move forward into a much more federal structure. We have to see a much bigger role played by the European Central Bank and the eurozone reconciling itself to the fact that there will have to be fiscal transfers to some of these nations. A great date has been dreamt up of 2013. When that was originally dreamt up it seemed quite a long way away but it is getting nearer and nearer. Sovereign debt is guaranteed up until 2013 but one has to start asking now what will happen after 2013. Will places such as Greece and Portugal suddenly become competitive when they are not competitive today? The answer is no and there has to be a completely new construction of how the eurozone is managed. I am afraid that that all points to it becoming a much more federal organisation. Whether that means that the eurozone will succeed, I do not know. If it becomes federal, it will certainly survive for much longer than it otherwise would.

My Lords, as has already been said by the two previous speakers, in or out of the eurozone, effective economic governance in the European Union is important to all member states and particularly to us here in the UK. The noble Lord, Lord Harrison, has clearly set out the remit and context of the report from Sub-Committee A of the EU Select Committee, of which I am a member. In the short time that I have, I will concentrate on the role of sanctions in future economic governance of the EU.

As has been said, the Commission’s proposals on sanctions will not apply to the UK by virtue of its opt-out from membership of the euro. As the noble Lord, Lord Harrison, set out and as I indicated in my opening remarks, the UK has a vital interest in ensuring that these proposals succeed. Our sub-committee report recognised that the markets will play a key role in promoting sensible fiscal behaviour by member states by charging higher interest rates to those countries deemed to have lax fiscal policies. However, the markets have not always proven effective at this in the past. There is a need for a further mechanism to ensure compliance. This is where sanctions fit in. The Government have recognised this—and recognised it in our report.

The sub-committee concluded that the Commission’s proposals for a more graduated sanctions regime would help dissuade irresponsible fiscal behaviour. Sanctions will be easier to apply and more of a credible threat if they start off small and are available earlier in the process. Again, the Government have agreed with the committee’s assessment of this. As has already been said, one of the greatest failings of the current system of sanctions has been that member states have found it too easy to avoid sanctions when they have broken the rules. France and Germany breached the stability and growth pact in 2002-03 and this led to a conflict between the Commission, which wanted to impose sanctions, and the Council, which refused. In the end, France and Germany managed to persuade the European Council to relax the rules governing the stability and growth pact.

Several sub-committee witnesses argued that sanctions should be made fully automatic. This was the line taken by the European Parliament, which feels that automatic sanctions would prevent member states from negotiating their way out of sanctions. However, the sub-committee concluded that fully automatic sanctions were a step too far and would remove any room for judgment. We supported the Commission’s proposals for reverse-majority voting, which would require a majority to vote against sanctions to block them, as opposed to the current system where the majority have to vote in favour. While the sub-committee believes that this discretion is necessary given that the EU is a political union of sovereign member states, it is vital that the Council shows that it is willing to take tough decisions and levy sanctions when the stability and growth pact is breached. The Government agree in their response that the efficacy of the sanctions regime will depend on the degree of political will in the Council. Will the Council be willing to take tough decisions on sanctions when the crisis is over?

We considered various other suggestions on sanctions. At the insistence of Germany, the Van Rompuy task force report did not rule out the possibility of removing voting rights in Council from those countries breaking the stability and growth pact. The sub-committee did not believe that this would be an appropriate sanction and would raise significant questions about legitimacy and sovereignty. Can the Minister confirm that the UK will block this proposal from being taken forward if Germany proposes it once again? The Government also stated in their response that there are a,

“large range of other potential sanctions that could be more easily and swiftly implemented by the Council”,

rather than removing voting rights. Could the Minister indicate what those might be?

As I stated at the beginning, only member states within the euro area can have sanctions imposed upon them. However, the Van Rompuy task force report suggested that enforcement mechanisms should be extended to all member states, excluding the UK, in the multi-annual financial framework. The committee thought that this was quite inappropriate. The Government’s stated intention is that they would oppose these suggestions. Can the Minister confirm that they will stop any attempt to extend sanctions beyond the euro area by any such means?

My Lords, this is an important report and I take this opportunity to congratulate the noble Lord, Lord Harrison, on the way in which he has both shepherded his sub-committee into preparing it and set the scene in opening the debate today. Although he covered the ground thoroughly, I will emphasise two points.

First, standing outside the euro area, as the United Kingdom does, gave the sub-committee an interesting opportunity to view the issues raised in the Commission’s proposals in a rather objective way, while realising and acknowledging that we are not an island alone unto ourselves. That the UK’s financial investment sector had and has substantial investments in the euro area means that we are directly affected by whatever goes on there—that is apart from the fact that some 60 per cent of UK trade is within the European Union. The state of the economies of those trading partners has a direct impact. We need to be fully aware of and involved in all European Union policy developments in the area. In all fairness, this and the United Kingdom’s undoubted expertise in the financial sector have been acknowledged and welcomed. Not one witness who gave evidence to us suggested that we were in any way interfering in eurozone business.

Secondly, the report refers to the deepening problems and evolving policy responses. In the few short months since its publication, it is quite clear that things have moved on. The contagion theory has been proved. Ireland and Portugal have joined Greece in asking for help. We are looking at a moving target at the same time as trying to find ways to prevent any of this happening again in the future. Those who believe in the inevitability of the business cycle may well be proved right. This is unlikely to be the last report on the subject.

The main question I wish to ask the Minister relates to institutional reform. The sub-committee’s recommendation and the Government’s response indicate that, whatever happens in terms of strengthening and reinforcing institutions, we do not want any new institutions. I understand that there are some quite tricky negotiations going on between the Council and the European Parliament before next week’s 20 June meeting. This results from the European Parliament’s wish for a greater role in fiscal and macroeconomic surveillance, the right to call Governments to account and its support for the use of reverse-majority voting. Can the Minister confirm what, if any, objections the Government have to the European Parliament’s proposals? Is he concerned that the United Kingdom Government could be more sidelined as a result?

As has been said, in general our report broadly supports the six main proposals before us from the European Union. There can be no doubt that things will continue to change, that there will be more use of financial regulation in a more proactive way in future, or that there needs to be more co-ordination between monetary and financial policy. Although our report was published in March, today has turned out to be appropriate for our debate. Not only do we just precede the ECOFIN meeting next week but also we follow the Chancellor’s Mansion House speech last night. Today also sees the first meetings of the Bank of England’s new committee charged with spotting signs of danger in advance—just the sort of thing that we are talking about. I trust that the evidence collected for our report as well as the conclusions that we have drawn will make a useful contribution to their tasks.

My Lords, I, too, join colleagues on the committee in thanking the noble Lord, Lord Harrison, the staff of the committee and our special adviser for ensuring that an excellent report was produced on these important issues. I recognise the importance of the euro and the eurozone to the United Kingdom. I also recognise the various measures being put in place for strengthening Governments, dealing with short and long-term crises and establishing a new financial regulatory infrastructure are all extremely important institutional developments.

The markets appear to have considerable confidence in the future of the euro. I shall return to that in a moment. But—and there is a but in my mind—there is the position of Greece, certainly, and Ireland. I regard the sovereign debt situation in those countries as ultimately unsustainable. Our report draws attention to the distinction between solvency and liquidity, and there is a fundamental insolvency problem in Greece and probably in Ireland, too. Ultimately, that will have to be dealt with. Having a new institutional strength and institutional structures, and being determined politically to ensure that they work more effectively in future, will be constantly undermined if the markets simply do not believe that one or two countries are going to default. There is a real risk that that continued uncertainty will undermine long-term reform.

Sooner or later, that problem will have to be dealt with. I well understand, politically, why 2013, or a period two or three years hence, has been set, although I, like the markets, doubt whether the certainty of no default can bear fruit. There is an understandable reluctance for Greece to be seen to be getting away with what is seen as profligacy—of course I understand that. Any way in which that is dealt with, ultimately, will have to be seen in the context of major reforms and fiscal probity in Greece. Ireland is in a very different situation, indeed; there were entirely different causes. But ultimately, those countries in one form or another will have to have some of their debt written down, however that takes place.

I pose one or two questions to the Minister. The European Commission is reported to have examined the consequences of various ways in which Greek debt at least might be adjusted—although I have not had the opportunity to read it myself. Were Her Majesty's Government party to any consultation on the production of that document, and have they formed, or are they in the process of forming, any assessment of the possible consequences of the possible adjustments in debt of Greece and Ireland? It would be very helpful to the committee to know that.

I end where I started. The markets appear not to believe that the almost certain default by Greece will undermine the euro. They do not believe the mantra that if Greece defaults, the euro is under serious threat. That is not what they say. They have been wrong before and they may be wrong on this occasion. However, if they are right, ultimately Greece may be able to default in part, in a controlled way, and even Ireland may be able to do so—and I believe that the Irish and Greek politicians will be greatly relieved.

My Lords, when I was reading the Van Rompuy report last night, on the very day when Greece appeared to be on the verge of spiralling out of control, I had a feeling that we had all been sleepwalking through a surreal nightmare in the past few years and were continuing to do so.

I have always liked the expression, “Closing the stable door after the horse has bolted”. It seems as if this is what we are trying to do. But a number of horses have escaped from this eurozone stable and have yet to be recaptured. There is no point in making the stable secure if there are no horses inside. That is why resolving the immediate crises in Greece and Ireland, particularly, is so critical. Better economic governance is an academic exercise until that has been achieved. However, assuming—and this is a big assumption—that by 2013 the horses are all back in their stables, there is the question of whether the proposals from the Van Rompuy taskforce are sufficient to make the doors more secure or whether we might have to consider knocking the eurozone stable down altogether and rebuilding it into something called “fiscal union”.

There is one very good reason why the present proposals may work. That is, to coin another equestrian metaphor, “Once bitten, twice shy”. I do not believe that in the short term the various guilty parties will repeat the errors that they made which created the crisis in the first place—though having experienced three other banking crises in my business career, I am quite sure that over time the banks will behave badly once again.

The idea of a European semester is a good one, in which all member states would present, discuss and co-ordinate their fiscal policies on a regular basis. Early signs of misbehaviour within national economies will be identified and, consequently, the markets will react before it is too late. But I have reservations about the proposals to strengthen sanctions against breaking the stability and growth pact. I am sure that when some unfortunate Commission official turns up at the Élysée Palace to collect the fine for some French misdemeanour, he or she will get a pretty dusty answer. The most effective sanctions should, of course, come from the markets, which failed lamentably to do so in the run-up to the present crisis. Incidentally, I was very surprised to hear President Obama in Westminster Hall the other day speak about the crisis in the past tense. If the semester process is not opaque, the markets will be much better equipped to respond appropriately. There will be no more dodgy Greek statistics, no more skulduggery in the Anglo Irish bank, no more raising Greek debt as being of the same quality as German debt, and no more sleight of hand between Goldman Sachs and the Greek Government—as well as a greater understanding of the link between private, corporate and sovereign debt.

The Commission rightly wants to see more pressure on countries that run large deficits to reduce them, but I remain sceptical as to whether it will be able to bring much pressure on countries that run large surpluses, although I agree that excessive surpluses are not desirable.

I have two other worries about how events may be moving. First, let me quote from Monday’s Financial Times and a piece by Larry Summers, who was until recently President Obama’s European guru. He said that the financial crisis was,

“caused by too much confidence, borrowing and lending, and spending”,

but that ironically and paradoxically, it will be,

“resolved only by increases in confidence, borrowing and lending, and spending”.

Therefore, this may not be the time to raise their levels of equity too quickly. It is better to wait for the upswing—if, and when, it comes.

The noble Lord, Lord Harrison, had a very steady hand as the crisis migrated through Sub-Committee A, and we are grateful to him for that. Both the euro and the euro area are in crisis; they are both in a critical condition and need intensive care. The euro is, in my view, wildly overvalued and several of the member states are, as we know, on the brink of default. The European Central Bank is so loaded up with toxic debt that it is in danger. The Irish Finance Minister, Noonan, recently asked the IMF to get a haircut for the AngloIrish debt; that would not be very wise or safe for the ECB.

What I find astonishing is the undertaking given at Seoul at the G20 by several Finance Ministers, including my right honourable friend George Osborne, that there would be a guarantee of European sovereign debt up to 2013. We asked a number of our witnesses about it, and no one was able to spell that out. I really think that the Minister has a wonderful opportunity to enlighten us in that regard. Given that Her Majesty's Government are a part of it, we should know exactly what the commitment means and how it would work. Nobody appears to know.

The Government are absolutely right to say that the UK will not sign up to the EU permanent crisis mechanism. I congratulate the Government on setting up the Financial Policy Committee, with its twin remits: first, to reduce systemic risks and, secondly, to enhance the resilience of the UK financial system. Systemic risks, of course, cover both the fault lines in the financial system infrastructure and the cyclical threats from unsustainable levels of leverage, debt or credit growth. That is our solution and we are in that playing an important part in dealing with further threats to this country.

As so often, the EU's reach is greater than its grasp and Mr Trichet’s proposal for a European ministry of finance is such an example. He said that,

“a ministry of finance … would exert direct responsibilities in at least three domains: first, the surveillance of both fiscal policies and competitiveness policies, as well as the direct responsibilities mentioned earlier as regards countries in a ‘second stage’ inside the euro area; second, all the typical responsibilities of the executive branches as regards the union’s integrated financial sector, so as to accompany the full integration of financial services; and third, the representation of the union”—

the EU—

“confederation in international financial institutions”.

Personally, I do not think that really is a runner—certainly not as far as the UK is concerned. However, Mr Trichet is perfectly logical and having identified the fundamental flaw in the concept of the euro, he is sensibly putting forward what could help.

Personally, I believe what should happen is that individual euro countries should be enabled to leave the euro area without having to leave the EU but should be able to continue to use the euro, if they wish. It would probably be sensible for them to do so. Nobody is going to be prepared to buy recreated Mickey Mouse currencies. Finally, if China and the US, particularly China, are to be the world's economic locomotives we have to try to see that northern Europe, at least, can prosper and sustain those unfortunate countries in the south, which are going to suffer greatly from the inevitable deflation.

My Lords, first, on behalf of the opposition Front Bench I congratulate my noble friend Lord Harrison and his committee on an excellent report. It shows that this House can bring an intelligence and clarity to complex issues that are unusual in the political world, and I sincerely congratulate them on that. Secondly, when my noble friends Lord Woolmer and Lord Haskins make the point that the recommendations of the Van Rompuy taskforce do not address the fundamental crisis that the euro faces, they are of course right. In my view, it is a crisis of solvency not liquidity that at some stage has to be addressed.

This economic governance package is not about the immediate resolution of the present crisis but about trying to make sure that we prevent future crises happening. From our perspective, the proposals here are an advance on the stability and growth pact. The stressing of the need to monitor the debt to GDP ratio, not the deficit, is good. The new emphasis on economic imbalances is good, as it is on credit conditions, the risk of asset bubbles and the new streamlined processes for monitoring member state budgets. Where we have ended up on the sanctions regime, which was mentioned by the noble Baroness, Lady Maddock, is right as well.

However, we have some reservations about this and some questions to ask the Government. First, on debt, Mr Hoban’s letter says that the Government were concerned that on debt to GDP, the proposals might involve too much of a target-based, semi-automatic approach. However, they say that the proposals have been modified to make sure that that is not so. Could we have more of an explanation of how they have been modified? On this side of the House, we believe strongly that one should not take short-term actions on deficits which make the long-term position on debt worse, not better. It may be that that is what the present Government are doing in terms of their “too far, too fast” economic adjustment in this country but we would like to know more about avoiding that target-based semi-automatic approach.

Secondly, on the long-term challenges of debt to GDP, is there not a need for an emphasis on positive policies, social investment policies, to overcome issues such as the rising costs of ageing, so that we activate more people in the workforce and invest more in research, education and infrastructure to raise productivity? Is that not a positive absence from these proposals? Thirdly, are there not other measures that the EU could be taking to promote growth in the sovereign debtor countries—for example, bringing forward unused structural fund money or trying to develop, through the European Investment Bank, a cross-border infrastructure investment—which might help to revive the economies in countries such as Greece and Spain? What view do the Government have of that?

Finally, although I must sit down in a moment, the noble Lord, Lord Hamilton, made a very thoughtful speech on the role of the UK. I have disagreed with him on the EU Bill but his speech today was extremely thoughtful, as was that of the noble Baroness, Lady Hooper, about the impact on the UK. The Government have looked rather Janus-faced to me on these issues. They say at the start of their letter that economic shocks do not respect geographic borders and that it is very much in our economic and political interests to engage, but then they express reservations about engaging. What were the reasons for the Government deciding, for instance, not to join the euro-plus pact, where they might have been able to exert a positive influence on eurozone policies? What would be their attitude to future treaty changes that might lead to further steps towards fiscal union?

My Lords, may I ask a very short question? Being very much impressed by the speech that has been made, what is the position of the Opposition? I am not quite sure what the policy of the Government is, but with vast extraterritorial commitments now, should there be a moratorium until we can retrieve our debt without borrowing more money to pay the interest? I do not say that they should be excluded for ever. I am not expert on these things but I would like to know what the noble Lord has to say.

Given that that is not a short question, while I have the greatest respect for the noble Lord, Lord Campbell of Alloway, I cannot conceivably deal with a question of such complexity without breaking the rules of the House.

My Lords, I thank the noble Lord, Lord Harrison, and all the members of the sub-committee for their work on this issue and their excellent and timely report. I learn new things about the way in which this House operates on almost every occasion when I stand at the Dispatch Box. After seeing how the topics had been parcelled out and questions were fired at me from left, right and behind, I now understand what effective committee work is all about. In the brief time that I have, I will not be able to give detailed answers to all the questions. I thank all noble Lords who have contributed to this debate, in which the usual degree of repetition was absent; we have covered a very wide range.

The euro area has had and continues to have a very tough time. The weak economic growth of the euro area is a symptom of the fundamental problem that is faced: weak economic governance. That is the starting point that the noble Lord, Lord Woolmer of Leeds, and other speakers have drawn attention to. In answer to the noble Lord’s question about the current situation—there were also other references to restructuring packages—the Government’s position on possible further bailouts for Greece is unchanged, and, incidentally, is the same as that of the French Finance Minister, Madame Lagarde: we do not want to be part of any second European assistance package for Greece. Indeed, no such proposal has been made. In answer to the broader question asked by the noble Lord, Lord Harrison, it would be wrong to rule in or out the participation of the private sector in any package for Greece or anywhere else. This important issue continues to be debated, though, and it should be.

I was interested in and pleased by my noble friend Lord Marlesford’s discussion in this area, reminding us of what we are doing in this country, particularly with the proposals that the Government are bringing forward today to ensure that we have mechanisms in place to identify systemic risks and deal with them effectively. I thought for a moment that I had fallen asleep, it was 4.30 pm and we were already talking about the financial regulatory structure in the UK, which we will be doing later today. Following last year’s EU economic task force and in the context of the ongoing difficult situation, the Commission brought forward six draft pieces of legislation on fiscal and macroeconomic surveillance that aimed to strengthen current monitoring mechanisms and to give early warnings of economic problems in member states. It proposes tough sanctions for euro area countries that step out of line. I will come back to sanctions in a minute.

I stress that we are not part of the single currency but, as the committee’s report notes, a stable eurozone is firmly in the UK’s interests, as is ensuring the success of measures to bring it to economic stability. I trust that there is no doubt about that. I am sorry that the noble Lord, Lord Liddle, thinks there is anything Janus-faced about it; we are working hard and co-operatively to ensure that the measures are appropriate.

Many commentators agree with the committee that the euro area’s problems were caused by tensions between centralised monetary policy and decentralised spending decisions. The proposed legislation seeks to address that through increased co-ordination. In broad terms, the Government welcome the pragmatism of the proposals. We support the refinements to the stability and growth pact that will help to prevent countries from running unsustainable deficits in good times. As the committee report notes, a gradually escalating system of sanctions will mean that member states think twice before breaching the pact.

The noble Lord, Lord Haskins, rightly noted that the most effective sanctions will and must come from the market. A number of questions were nevertheless properly raised about sanctions. We agree that a limited use of reverse qualified majority voting should ensure that member states cannot avoid sanctions through political deal-making at ECOFIN of a sort that was seen from member states in the past. On the questions asked by my noble friends Lord Hamilton of Epsom and Lady Maddock, we think that reverse QMV is one way to address the sanctions question. There should be limits to the use of reverse QMV. We do not think that it would be right to remove voting rights more generally. That would require a treaty change, and the UK would have the right to veto any such proposals.

I reassure the House, specifically my noble friend Lady Maddock, that the UK is not subject to sanctions under the stability and growth pact. The treaty is clear that they apply only to euro area countries. In addition, the UK’s opt-out protocol that was negotiated at Maastricht is clear that we are exempt from such fines.

Another issue that my noble friend raised was the extension of sanctions in the next financial perspective. I assure her that the Van Rompuy task force report clearly stated this with regard to sanctions under the stability and growth pact and under the next financial perspective. Sanctions may be rolled out for other euro area member states but not applied to the UK, so I hope that the position is clear.

I should perhaps clarify a point regarding the fiscal proposals. The noble Lord, Lord Liddle, asked about this. The Government did not disagree with the principle of a benchmark for assessing the pace of public debt reduction. Getting debt on to a downward path is of course essential for the eurozone members just as it is for the UK. However, we had concerns that the original Commission proposal was too rigid and might not take sufficient account of debt dynamics that are beyond a member state’s control. I am pleased to report that we have sought amendments in council to clarify that the benchmark really will be a benchmark rather than a concrete rule.

The Government agree with the committee’s view that while fiscal discipline is important, it will not be enough to prevent or manage future crises. That will require the EU to have the right macroeconomic warning mechanisms to identify them and the right tools to manage them. Economic imbalances are already monitored under the broad economic policy guidelines and the Europe 2020 initiative, but that has lost momentum in recent years. The Commission proposes a more systematic way of identifying economic imbalances through a scoreboard of economic indicators. I am sure that noble Lords will agree that transparent analysis of member states is important, and these indicators will help to achieve that.

I understand the note of caution that the committee has sounded in its report. Yes, the success of this monitoring will depend heavily on the degree of political will in council, but ECOFIN will now be forced to consider the evidence from the indicators on the scorecard. The Government agree with the committee’s recommendation that the composition of the scoreboard should be subject to regular review, and we are negotiating to achieve that. The Government also agree with the committee that all these systems must be intelligently interlinked. We want to see Finance Ministers having realistic discussions of policy problems, drawing on evidence from Europe 2020, the stability and growth pact and European Systemic Risk Board recommendations, if necessary. We want clear, frank recommendations for member states, and help and support for them when they act to improve their economic position and boost growth.

Finally, the proposals for a euro area crisis resolution mechanism, or European financial stability mechanism—the ESM—as it is known, are being debated in parallel to these legislative discussions. The need for them was stressed by my noble friend Lord Hamilton of Epsom and the noble Lord, Lord Woolmer of Leeds. The Government very much support the ESM, which will provide euro-area countries with the financial equivalent of a parachute. We agree with the committee’s view that conditionality is vital and that there must be no question of this being free money for fiscally irresponsible member states. Like the committee, we welcome the explicit recognition that the IMF will play a technical and advisory role in all future uses of the ESM.

The Hungarian presidency wants to finalise this package of legislation by the time that presidency ends on 30 June. My noble friend Lady Hooper pressed me on the details of this. I regret to say that the ECOFIN discussion on this was at an informal dinner earlier this week that was not minuted. There are some difficult issues, of which my noble friend is clearly aware, which need to be resolved. The Hungarian presidency is working on them, and the European Parliament intends to schedule a vote on the package next week.

I emphasise again the importance to the UK economy of achieving lasting economic stability within and beyond the eurozone. This is the central aim of this legislative package. Throughout the negotiations, the Government have striven to achieve genuine strengthening of economic governance while preserving this Parliament's sovereignty over all aspects of economic and financial policy. I am satisfied that we are on track to achieve those objectives and that the report of your Lordships’ European Union Committee has made a most useful contribution to that process.

Sitting suspended.