20
Revised transcript of evidence taken before
The Select Committee on the European Union
Financial Affairs Sub-Committee
Inquiry on
Completing Europe’s Economic and Monetary Union
Evidence Session No. 2 Heard in Public Questions 15 - 26
Witnesses: Baroness Bowles of Berkhamsted and Raoul Ruparel
Members present
Baroness Falkner of Margravine (Chairman)
Lord Borwick
Lord Butler of Brockwell
Lord Davies of Stamford
Lord Haskins
Baroness Kingsmill
Lord Lawson of Blaby
Earl of Lindsay
Lord McFall of Alcluith
Lord Shutt of Greetland
Lord Skidelsky
________________
Baroness Bowles of Berkhamsted, former MEP and Chair of the Economic and Monetary Affairs Committee, and Raoul Ruparel, Co-Director, Open Europe
Q15 The Chairman: Good morning, Baroness Bowles of Berkhamsted and Mr Raoul Ruparel. Welcome to this evidence session of the Financial Affairs Sub‑Committee in our inquiry on Europe’s economic and monetary union.
You have a list of interests that have been declared by Committee members. This is a formal evidence‑taking session of the Committee and a full transcript will be taken. This will be put on the public record in printed form and on the parliamentary website. You will be sent a copy of the transcript and you will be able to revise it for any minor errors. The session is on the record; it is being webcast live and will be subsequently accessible via the parliamentary website. Would you like to make any brief opening remarks?
Baroness Bowles of Berkhamsted: No. If we get into the business I am fine with that.
The Chairman: Okay. We can go straight into the session itself then. You have both submitted quite interesting pieces of evidence coming from different perspectives, but in your assessment what do you make of the Five Presidents’ Report and the actions introduced in the short term by the European Commission, particularly in its 21 October paper? Beyond that, do you think the report does enough to strengthen the euro in its long‑term sustainability and do you believe that there are significant omissions that need to be corrected? I would also like you, in your responses, to touch on what you think should be in the White Paper in 2017. Lady Bowles, would you like to start?
Baroness Bowles of Berkhamsted: We will get into more details later, but broadly the situation that they have got to in the EU with EMU is that there has been an awful lot of activity following the various crises in a way that parallels what has been done on the financial services side. So they need to take a breather and, if you like, regularise some of the things that have been cooked up off treaty and to get those on treaty. The phrase that is used, “deepening by doing” gives the game away in the sense that, “We have made a lot of rules, we have tightened some rules, but we have not managed to get them fully functioning and fully going”. From that point of view, I can understand why it may be less ambitious than some people would expect. Of course, it then goes on to the subsequent phases, which will probably arouse more controversy. I suppose from the perspective of the UK that the things in it that concern me most are whether even in the short term—looking at these competitiveness authorities—they are going to create something that is going to set policy in a way that we might be excluded from, although in the more recent 21 October paper that came out from the Commission it did say it expected or hoped that the euro outs would have a similar structure. That is well worth looking at from the UK side, because, as far as I can see, we do not have a similar structure. We have the things done in various different places. If you send somebody along to a meeting who has only part of it in their remit, I know the European way is to ignore the things that you try to speak about that are the remit of another authority, even if they said, “Hey, you go and speak for us”. That is something we can adjust to.
With regard to the things that are left out, some of them are not left out but are just hinted at, such as, “Are we going to have some form of euro treasury or not, and how are we going to get the democracy done?”. They should have been a little more upfront about what they were doing in banking regulation. Ever since I clapped eyes on zero‑risk rates for sovereign debt, it has been something that I have been going on about. People thought I was a freak at first, but now it is accepted that it is not a very good idea, and it is even accepted internationally that it is not a very good idea. But the need to not have it resides in the eurozone because it is a partial monetary union. So you do not have the exposure to the markets if there is always this notion that you are going to get bailed out, that you can print your own currency—which, of course, you cannot in the eurozone—and that all sovereigns are equal when they are not, or if you say they are then you are basically saying you are always going to bail out. They are still trying to have their cake and eat it there, and to hide behind saying “We are waiting for international movement” is wrong. There should certainly be some kind of large exposures regime or something. They have to bite the bullet on that because, otherwise, it is really rather a fantasy.
Looking forward to the White Paper, they need to sort out the issue of what form this treasury will take. Are they going to have some kind of euro bills, and how are these, if you like, pooled reinsurance schemes going to work? What level of financing is going into them? They already have quite a lot of backstops, but ultimately there is only a limited amount of money. Those are my initial thoughts.
The Chairman: Thank you. Mr Ruparel?
Raoul Ruparel: Thank you for having me here. I would agree that much of the first stage of the Five Presidents’ Report is focused on reorganisation, efficiency and trying to improve what is already in place in the eurozone. For that reason, though, the key point is that there are no additional powers, no new institutions and no new rules of enforceability brought in stage 1, so for the most part it is about trying to improve what they have. For that reason, I do not think the first stage will make much of a difference to the eurozone. It might help on the margin, but the bigger question is what comes down the line.
Looking at some of the specific aspects in the first stage, this becomes quite clear. The competitiveness boards, which Baroness Bowles mentioned, are a sensible idea and they can provide some useful input, but, again, they are independent authorities outside the Commission. Many of these types of authorities already exist in a number of countries. We have the council of wise men in Germany, for example, that produces similar sorts of recommendations. Again, it will be a recommending body; it will not have any additional power to really make any changes. It could contribute to the debate but I do not think it would necessarily make a substantial change.
Similarly, with regard to the European Semester improvements, making it more focused, and making it more specific and not an all‑encompassing policy programme, is welcome and could help allow a bit more freedom nationally to set some of these policy objectives. That will help in terms of the democratic deficit we see in the eurozone, but ultimately the European Semester has been found wanting in terms of enforcing any real changes. If you look at many of the reforms and changes that have taken place in the eurozone over the past few years, they have been very heavily located in the bailout countries—Greece to an extent, Portugal, Ireland and Spain, the countries where there was this direct link between cash and reform. That has proven to be an enforceable link. There have been reforms, and many of those countries have improved their business climate and brought down their labour costs, but other countries who were not in bailouts—I am thinking specifically of France and Italy—have not made substantial improvements in these areas and have fallen behind the curve. I do not think the European Semester will make much difference. It needs to be improved, but it clearly needs more power and more enforceability. That also needs to be democratically anchored, of course, but at the moment the changes in stage 1 do not really make much difference.
Again, just briefly, the fiscal board suffers from a similar problem. The concept of trying to create a eurozone‑wide fiscal approach is a valid one, given that you have that on monetary policy already. But, again, if this has no power and it is selected on certain preferences, or if it is or is not weighted according to member states—we do not know how it will be set up—it is clear to me that it is not likely to make a huge difference. Again, it can contribute to the debate but I do not think it will substantially change what is happening.
The banking union is an area we will probably talk more about and I will not go into huge amounts of detail, but it is clear there is a very big focus on this idea of a deposit guarantee scheme. That is a necessary part of improving and completing the banking union, but it is probably not sufficient. There are lots of other things that need to happen. So far, it is clear to me that the sovereign-bank loop has not been broken in the eurozone; there is a very clear nexus in those countries and banking systems remain very locally and nationally focused. To break the banking loop, there needs to be far more done in terms of improving the bail‑in rules, having a clearer structural mechanism for sovereign debt and tackling this sovereign debt issue that Baroness Bowles mentioned.
Finally, on what the White Paper should look at, again this is an existential question, to an extent, for the eurozone, but for me it is about giving these eurozone countries more economic tools. When you join the eurozone currently, you give up a huge number of economic policy tools: you no longer have the ability to print or devalue your own currency; you no longer have the ability to set your own specific interest rates and monetary policy; you are increasingly seeing your fiscal policy being closed in and tightened by a number of rules; and we may even start to see more harmonisation on tax and legal frameworks. You are giving up a huge amount of policy control and not getting a huge amount in return at the moment, so that has to be the focus for this White Paper.
How do we give these countries the tools to respond to any future economic shocks? This could come in a number of forms. It could be through this fiscal integration—a eurozone treasury of some form. There are alternatives. It could come through this idea of a deeper financial integration and deeper capital markets, trying to mimic what happens in the US. Again, we might talk about that in more detail.
Fundamentally, it also has to take account of this trade-off. What has worked in the eurozone so far to enforce reforms, I believe, is this cash in exchange for reform. How does that structure become formalised—if it is desirable to formalise it? How do we have this democratically anchored, in particular the transfer between sovereignty and solidarity? How do countries that are giving up sovereignty get solidarity in exchange, how is that justified to their populations and how will that be democratically anchored for the long term? These are the issues that the White Paper has to touch on—more than touch on. It has to clearly spell out how this framework will work.
It should also be inclusive of non‑eurozone countries because, clearly, these sorts of changes are huge institutional and structural changes for how the EU works and how the treaties are formulated. To not have any mention of non‑eurozone countries would be a dereliction of duty, really. Whether it is in the same White Paper or if there is an accompanying White Paper looking at how these sorts of plans change the structure of the EU as a whole, it is important to have that discussion formalised.
The Chairman: Can I just press you both a little bit on what you have just said? Lady Bowles, you have commented on the national competitiveness authorities. Do you believe that the UK has an equivalent one, or should it have one because they are being set up for the eurozone? There was a lot you said there. I just want to unpack a little bit about the fiscal board proposals and the Semester reforms, which hinted at a strong emphasis on a collective euro area fiscal stand. Do you think this is going far enough? It does not sound to me like you think it is going far enough. How should it be done? Should it be done through diktat or bargaining? You talked about the compact between giving up sovereignty and so on. Could you just elaborate on that momentarily?
Q16 Baroness Bowles of Berkhamsted: My problem is that I am rather better at European institutions than UK ones, but as envisaged—it depends what scope they have—it says that they are going to look at it for the purposes of setting wages and things like that. Things like that are probably done more within the Bank of England and so forth. We have some things that might be in the Competition and Markets Authority and some things that might be in the Office for Budget Responsibility, although that has another parallel that everybody has to set up in Europe anyway—we were ahead of the game there in the UK. It is something that should be checked out—that they can go along and be in the room if they want to contribute.
The Chairman: And produce—
Baroness Bowles of Berkhamsted: It does not mean to say that the conclusions are necessarily always going to be the same, because, as Raoul has mentioned, they have more problems and more inflexibilities within the eurozone. It is also the fact that, by and large, on the single market issues and competitive issues, they have been the laggards. The countries that have reformed have, for the main part, had to become more liberalised. That is still a process. So, in a sense, on a lot of these issues they are trying to get to where we are. The danger is that if they settle on something, through knocking on into legislation and the way they think, that is subsequently going to close down on being more liberal.
Raoul Ruparel: On the fiscal board, it is a very interim measure and I do not think it goes particularly far. The idea is to try to create pressure on countries. It is basically targeted at Germany, to try to get Germany to reduce its current account surplus and to provide more investment spending for the eurozone—this idea that we need a fiscal stance for the entire eurozone. We already have this macroeconomic imbalance procedure, which should address that issue, particularly on the current account side. The Commission has consistently resisted going very far and penalising Germany for its current account surplus. So, again, will creating another organisation that has no new power and no new method of enforcement really change anything? Not for me.
With regard to the next step and more of a fiscal element to it, and this sovereignty solidarity transfer, it is very hard to know how this should be done, but, ultimately, fiscal policies remain national. They are nationally anchored in terms of democracy and it is a key part of what national parliaments do. Whatever fiscal element is at the eurozone level will be partial and limited. To me, it would be tied into specific circumstances. I am thinking here of this unemployment fund-type response; if you have a certain problem, the fund can pay out to aid you, or if you meet certain competitiveness criteria you get money in return or additional funds to help boost that. It is going to be partial and those decisions will have to have feed-in from national parliaments and national Governments or have some more democratic approach at European level, again possibly through groups of national Ministers or through the European Parliament. Again, it is very up in the air, but it is ultimately going to be piecemeal for the most part.
Q17 Baroness Kingsmill: I wondered if you had any ideas about institutions that might be appropriate for this or should it not be institutionalised? Is it something that is simply done at government committee-type/treasury sort of level?
Baroness Bowles of Berkhamsted: From a UK perspective?
Baroness Kingsmill: From a UK perspective, yes.
Baroness Bowles of Berkhamsted: I do not know, in the sense that probably people get a little uncomfortable in some respects if they say we should always be adjusting to fit what the eurozone does, but I made a similar suggestion when they were setting up the European supervisory authorities that we had everything in one place, which is not the case, because we seem to have created more things and chopped things up more. When you are speaking in these various different forums it does help if, as far as power is appropriate, you have the power to be speaking about those things. They are always looking for a reason to discount when they do not agree with you. So if you are talking about something, because you are the Competition and Markets Authority and it is something that resides with the Bank of England, they will discount it because they will say, “You do not really do that, do you?”, and then go their own way. It is just human nature of negotiation as to how it works; you garner all the weapons that you can to your side. I just do not believe that one should go in without a full array of armaments.
The Chairman: Mr Ruparel, did you have any points you wanted to make on institutional matters?
Raoul Ruparel: Just on these competitiveness authorities. To me, the motivating factor behind them is to create a greater level of national ownership of these types of reforms. The problem is not at the high level of these types of policy discussions; the ownership of these reforms is a problem at the grass-roots level, and that is why we have seen the rise of many populist parties in a number of countries in the eurozone in particular. I am not sure that creating these boards will tackle that ownership problem. Again, they can contribute to the discussion. From the UK perspective though, I do not see any harm in us taking part or us having one of these boards, but I am not entirely sure it is necessary. We already have a very vibrant economic debate in this country. We have a much more developed think-tank and NGO sector than the rest of Europe, and it might be duplication.
Lord Skidelsky: I would like to take up something that Mr Ruparel said. You suggested that the approach to fiscal union was very piecemeal and, basically, the new proposal did not add very much to what was already there; there were no new powers being envisaged. But it has also been represented to us that a fiscal union is really unnecessary; that if governments actually adopted proper fiscal rules and their credit markets correctly rated their credits, there would not be any need for a fiscal union; and that we know what good fiscal rules are. In fact, I quote from a paper we received from Professor Michael Wickens: “The successful implementation of these fiscal procedures would remove the threat of government insolvency, bailouts and inter-country fiscal transfers, the need for a banking union and ever closer political union. This is because the countries would be successfully managing” their own affairs. What is your comment on that? Do you think this whole thing is misguided?
The Chairman: We already have that question on the paper, Lord Skidelsky, under question 4. I wonder whether you might give your responses to Lord Skidelsky when we come to question 4, on the fiscal stance.
Lord Butler of Brockwell: I wanted, quickly, to follow up the reference to formalising. Is this code for treaty change? If so, how imminent do you see the prospect of treaty change and on what areas of this agenda?
Baroness Bowles of Berkhamsted: A lot of what was done, in setting up rescue funds and the bailout funds for countries, has been done off treaty and it is intergovernmental. That is a great thorn in the side of the Parliament because they, of course, get cut out of that. Nevertheless, they do have a voice and have a point. One of the problems of going off treaty and on to intergovernmental treaties is that it is dubious as to whether you have the full protections of the treaties. In particular, the two big issues for the UK have always been the single market and state aid, because there is a hole in the original treaties and if you have joint state aid it is not covered. I have put it in all the individual pieces of legislation so that it is to everybody’s interests. But, of course, the whole issue of treaty change is difficult when you have major elections potentially coming up in France and Germany. That is why the notion of treaty changes and things is really in phase 2. It is get down, knuckle under, do all the things that you have promised you are going to do, and meanwhile create these bodies that are more independent experts to try and apply pressure. It is trying to apply pressure a lot of the time on Germany to say, “Come on, you cannot enjoy all of these imbalances in your favour and not give a bit”. That is the game.
Q18 Lord Borwick: Can I, first, declare two interests in that my wife, before she became an MP, used to work part-time for Open Europe, and I am a trustee of a discretionary trust that has supported Open Europe’s research in the past. Can I ask about the direct or indirect impacts on the UK and other non‑euro area member states of these actions that are identified in the Five Presidents’ Report and identified by the European Commission? What do you think they will be?
Baroness Bowles of Berkhamsted: The areas that I am looking at are preservation of the single market and, to some extent, the development of macroprudential controls and what body that might be, which lurks in the background of a lot of things. Also, going forward on to the whole capital market union, will there be a single supervisor side of things? Because of the legislation that was done on banking union—if you like, the second round of that when we did the single resolution authority and the single resolution mechanism, which was the way of enacting the bank recovery and resolution directive within the eurozone—that was done on the basis of a single market to level up the disadvantage suffered by the eurozone in the sense that they did not have the same single source of funding and so forth as euro outs did. It was a little bit of a perverse justification and it was done in quite a hurry. I do not think that we had fully elaborated the special circumstances, because it now seems to be interpreted as meaning that anything to do with banking union can be done under a single market basis. I think that that is wrong.
On the other hand, we could not stop it because there is enhanced co‑operation as a possibility, but if you trigger the enhanced co‑operation then the Commission has this extra duty to make sure it is not harming the single market and so forth. The way it was done slightly bypassed making sure that that failsafe, “check that it is okay for the single market” duty was put firmly on to the Commission. They will say it was there and that was the spirit within which it was negotiated and, again, individual measures were put in. Among the think tanks in Brussels it is now said that the banking union is a single market issue, and that is not right. Again, I feel that there are parts of the Five Presidents’ Report where they are trying to say that the single market is more important to the eurozone, and that is not true. It is just they have been worse at it, so they are using their laggardness as an excuse to try and grasp the single market. That is something that I am quite concerned about.
Just vocalising it and being prepared to repeatedly vocalise it is something that has to be done. Although we have given the ECB a duty of care for the single market, they will say that what they are given under the treaty will override what we have given them in secondary legislation. These are all sorts of things that ought to be sorted out in our negotiations over the referendum and/or, if they are not then, will ultimately be sorted out when there is a treaty change, but there has to be somebody there who is playing tough on these games.
Raoul Ruparel: I would very much agree about that risk in terms of the legal precedent that has been set and everything being hung now on this banking union under the single market. This is quite a worrying turn of events. We have seen it just the last couple of weeks with the deposit guarantee scheme, which involves quite a significant amount of mutualisation and a focus on the eurozone. That is being justified under the single market article, which is entirely wrong. Even Germany has come out quite strongly saying that.
This also has another risk in that it could hollow out EU institutions and make them more eurozone-focused. Again, putting this kind of mutualisation and deposit guarantee scheme into the Commission gives it another big power that is only eurozone-focused, and if we continue doing this it could hollow out those institutions and move them from EU to eurozone.
There is this risk of caucusing now that the eurozone countries have a qualified majority. We saw that with the bridge loan for Greece, again a very specific and niche issue, but, fundamentally, they took a decision where the UK was not consulted; it was not in the room, at least according to the Chancellor’s coverage of events. Ultimately, there was an agreement reached, but this relied on good will from other member states. Fundamentally, the principle was that they chose this route because it was the route of least resistance for the eurozone, not taking much account of what it would do to other non‑eurozone countries and the political problems it would cause for them. That is a worrying precedent. Similarly, we have seen the potential splits on single market with the ECB push on clearing houses and the clearing of euros.
There are a number of potential impacts and spillovers here. Ultimately, we do not know where the eurozone is going to go. We do not know what treaty articles it will use for this integration. It does not have its own defined treaty articles or any ones that it will specifically use. That is why I think there is a need for a broad type of safeguard, similar to what David Cameron seeks in his renegotiation. To try and counter these potential legal problems and precedents, there needs to be some way to push back. I would go further than saying vocally push back; there needs to be a specific mechanism to counteract this.
Q19 Lord Haskins: The presidents are being charged all the time of ducking issues, of not grasping nettles and all this sort of stuff; but surely the political reality—this is the nub of the whole question—is that the presidents know very well that, if they do propose dramatic structural changes that require treaty change, it ain’t going to happen. It is not going to happen in the next 12 months or the next five years, because no unanimity is going to be achieved if referendums have to be called in France, Ireland and other places. The second element of it is that, if you go down that route, you create huge tensions between eurozone and non‑eurozone areas. Therefore, and slightly pre‑empting Lord Skidelsky’s point, what we are heading towards is non‑treaty change solutions that require much better self‑discipline by eurozone member states. That seems to me to be the only reality and anything that requires treaty change is not politically deliverable.
Baroness Bowles of Berkhamsted: It is my turn to go first. There is a lot of truth in what you said. I do believe that they want to get things on treaty, but, as you say, there are problems. Once they are more comfortable with it, if they do not come inside the treaty, it will be quite interesting to start to look at what the position of the euro outs is in international law. This is not my sphere of expertise but it is of other people. As you know, some of these structures have been challenged in the ECJ by German organisations, but if you start to do things internationally that then distort the original treaty—I am thinking aloud here—it is something that I would have wanted to look at as to whether there should have to be some changes enforced to rationalise them, because the earlier treaty stands before the later ones. As I said, that is probably in the back of some people’s minds as one of the reasons why they need to basically get back on board.
Things are moving. You should bear in mind that it took 100 years to get monetary union for the dollar. We have had one decade of trying to do the euro. To map out another decade of further steps is not an unreasonable thing for the presidents to have done, which is essentially what they have done. It will not be the end of it in 2025. There will then have to be another decade, because, especially following the crisis that we have had, the problem is that nobody wants to pick up somebody else’s deficit—that is still there—apart from the ones who have deficit, who quite like the idea of somebody else picking it up. That dynamic will stay.
Raoul Ruparel: In terms of this fiscal discipline approach, it is very hard to see it working for a number of reasons. The transition of going from where we are now, with still very high levels of debt overhang and competitiveness problems in the eurozone, to this point of pure fiscal discipline would be, to me, incredibly painful and long. It would include depressed economic growth. If you put that on top of the crisis we have just had, the political fallout would probably be uncontrollable and I do not think many countries could stomach that. The status quo and moving around from where we are now to a purely rules‑based system is probably not feasible, in my view, and some more structural changes are needed. I am not saying that has to be a fiscal union. As we have already hinted at, there are alternatives in terms of more of a private market mechanism, but even that involves significant changes in proper financial integration and clearer mechanisms for restructuring banks and sovereigns, and a proper belief that people will not fall back on their national state guarantees when a crisis hits. We do not have those three mechanisms. A rules‑based system is plausible but it still requires a number of changes to get there. If you are just trying to enforce the basic rules we have now, the transition would be painful and probably cause serious political problems.
Lord Lawson of Blaby: I was interested to hear Lady Bowles say that it took 100 years to get monetary union in the United States. It did not just take a long time—it took political union. It was exactly the same in Germany. It took the political union of Germany to get monetary union. It was exactly the same in Italy. It took the political union of Italy to get monetary union. I do not think there has ever been a case in history, for very good reasons, where it has not gone that way; political union has led to monetary union. That is just the historical background. Looking at what we are looking at now, may I ask both of you what, in a nutshell, is the point of it all?
The Chairman: Briefly, please. That is quite a philosophical-level question.
Baroness Bowles of Berkhamsted: As you well know, they are doing things a little backwards compared with your analysis just then. They are trying to have a monetary union before there is a political union. Although there is not a political union—some would wish it—there is a lot of political will that has been invested in the euro project, and, therefore, at the moment there is no desire among the eurozone countries to back off from that. They just want to continue further in small, uncomfortable steps.
Lord Lawson of Blaby: Why?
Baroness Bowles of Berkhamsted: Because that is what they have invested in politically. They believe in it.
Lord Lawson of Blaby: My question was: what is the point of it all?
Baroness Bowles of Berkhamsted: The point of it all is they think that it does support having a better single market—that is true—and you do not have to have currency exchanges. In my own professional practice, I rather like the fact that I only have to pay in euros instead of having to buy all these foreign currencies at the end of the month. There are certain advantages of having that common currency, and some people are more signed up to it than others. I do not think that they are going to go back on it at any time soon. Some people will always predict that monetary unions do not work, but that is not where they are. There are very few who would wish to disengage from it, and that is just a fact. You may not share it, many may not share it, but that is where they are. They just feel that, if they backed off from the euro, then that is the end of the EU as well.
Lord Lawson of Blaby: Could Mr Ruparel have a go at answering my question?
Raoul Ruparel: It is the fundamental question that the eurozone has not faced up to. The reason they cannot convince their electorates is because they do not have an explanation for why they are still going down this path, the point being that the path they are on now will continue to lead, in my view, to long‑term economic malaise and they will have to make the argument, “We need to take these steps to get over this economic malaise”. Whether they can make that convincingly I am not certain, but if they cannot bring their populations with them then they have to face up to the fact that they will have to find a different route. If they cannot convince them that the eurozone integration will lead to prosperity, they have to face up either to losing some members or having a completely different type of union.
I agree that is one of the problems. At the moment, the argument is along the lines of what Mrs Bowles has presented in that it is a negative one: “We cannot go backwards; we have come down this path and there is no route backwards”. I do not think that will be sustainable. Ultimately, if you have a continuously negative narrative of why we are doing this, it will be very hard to get the public support for it.
Lord Davies of Stamford: Are not the objectives of the operation extremely clear? One is to create a zone of currency stability in the European Union so as to avoid a debilitating and very damaging foreign exchange crisis, which we are all familiar with going back before the euro was created. Secondly, it is to produce an effective single market, because, as Mrs Bowles says—Lady Bowles now, I am glad to say—the costs of currency transactions are quite significant and the foreign exchange risk is again quite a significant factor, increasing the risk and cost of business. If you want to have a genuine single market, you need to have a single currency to go with it. Are not these objectives really quite clear and transparent? Is it not the case that the European Commission particularly—but the Five Presidents as well—has shown a very commendable degree of flexibility, imagination and initiative in moving forward, which is necessary to do, despite the difficulty that Lord Haskins has referred to of changing the actual treaty? If you cannot change the treaties, you have to find some other way forward, and that is exactly what they are doing. What is more, they are taking measures they can take now in the short term and measures for which there is not yet a political consensus. They are setting it out in this document—the Five Presidents’ Report—to give people an impression of the general direction of travel and take people generally along the path it is necessary to take to achieve those objectives.
The Chairman: Mr Ruparel, I think this is directed at you. Could you give a brief reply?
Raoul Ruparel: That may have been the original premise, but I do not think you can really make that case after the past seven or eight years. That is a very hard case to justify, in my view.
Lord Davies of Stamford: They had a financial crisis, but that is—
Raoul Ruparel: The eurozone had its own crisis. It was due to structural inefficiencies and flaws in the way the eurozone was created. It was not because of financial crisis that the eurozone is where it is now, in my view. It is very hard to convince the people of the eurozone that this has delivered what it promised in terms of currency stability, and if you look at the way the financial world and other countries have moved, the UK outside the eurozone has continued to have very high levels of financial integration. It is the euro offshore centre, if you like. It has continued to be a full player in the single market. A number of other countries in Europe have avoided foreign exchange crises; they have had a lot of currency stability. Central banks and the financial system have evolved since the premise that underpinned the eurozone. Making that argument, on the evidence we have now, is quite difficult. That is why they cannot convince people of the justification of the eurozone and that is why we are seeing a lot of anti‑euro sentiment, in my view.
The Chairman: Lord Shutt on fiscal union, and do remember Lord Skidelsky’s question as well on that.
Q20 Lord Shutt of Greetland: We have hinted about fiscal union already, but what is your understanding of what it is? It does sound rather grand. How would it be achieved and is it likely to be achieved? We have income tax, corporation tax, VAT and all sorts of duties. Is it about parity of rates? Is it about parity of a tax base or is it about something else? What is it?
The Chairman: Lady Bowles, when you are dealing with that, could you also briefly comment on whether you see the governance arrangements in terms of the balance of the European Parliament versus the other institutions to be about right, or whether you think they need to change?
Baroness Bowles of Berkhamsted: If you look at what it says this advisory European fiscal board should do, it seems to me that a lot of the fiscal union is about trying to make sure, again, that they obey rules and that everybody is doing their calculations in the same way so that there is greater comparability. That is one starting point. Then they want to move further together and maybe to fund some things out of some form of joint taxation, whether that is using VAT or a fraction of other kinds. At one point, they were targeting trying to get money from the financial transaction tax for doing these kinds of things.
If you go even further and into the issue of whether there is going to be a European treasury, there are lots of different ideas out there. Some of the more interesting ones are the ones that try to separate out, if you like, the current account spending and the debts and deficits that exist at the moment and say, “You have to try and sort those out under the stability and growth pact, but you can do investment spending separately to that”. We have nudged in that direction in the so‑called “two-pack” rather than the “six-pack”, but it was very difficult to define what investment spending is and it has to be the right kinds of things. If you take it to its extreme—this includes all the projects that you can do through the European Investment Bank—it is basically saying, “Let us start to do investment in European infrastructure collectively”. Of course, as soon as you do that, you have to have decision‑making bodies to assist. You cannot reflect everything back to the Commission. It already has things like the European stability mechanism that is raising bonds guaranteed by the loans in the ESM. This starts to point at some of the functions that treasuries do. That is the direction in which that could go.
It partly addresses some of the balance in that what has happened over the last few years—it has happened with the ECB and the Commission—is that it is becoming judge and jury on things, and so you need to get another institution in there to make sure that you make up the rules and then you decide. That is where a treasury might come in. The hardest part to balance is what you do over democratic oversight of any actual new structure such as a treasury. Do you use a part of the European Parliament that belongs to the eurozone? Giving euro out MEPs not a vote but they would still be part of it so that they could know what is going on is the model that has been churned around quite a lot over the last five years.
The alternative model would be to say, “Okay, do it among the national parliaments in an assembly, especially as budgets are so close to the heart of national parliaments”. That is the area at the moment where they feel that they are being stripped naked a little of one of their major functions by everything being grabbed to Europe, at least while they are being made to obey rules. Those are the conflicting models there, and each has advantages and disadvantages.
Raoul Ruparel: That all sounds like a fairly plausible model. It is likely that they would use their fiscal backing and underwriting of a high level fund to use that fund to respond to a crisis, similar to what we have with a bailout but a more formalised set-up where sovereignty is directly transferred to an extent as a joint mutualisation inside the treaties. That would involve, hypothetically again, having this type of unemployment fund, which I have already mentioned. Everyone makes small contributions or it has a joint underwriting from all the member states and can raise debt on the markets. Then, if a country gets into crisis, it receives funding from this organisation to help it respond to the crisis because it does not have its own fiscal room or because it is locked out of the markets. In exchange for that, it also commits to certain economic policy goals. Again, it is quite similar to what we have already, but in a more formalised nature, and trying to bring in a democratic point of linking it to national parliaments or some kind of eurozone parliament or eurozone congregation of parliaments. That is how I see it starting.
Over time, the idea is that it then progresses towards more generalised mutualised debt issuance in a Eurobonds‑type form, where the countries jointly issue debts underwritten by everyone; that moves away from creating national fiscal pressures to allow greater scope and using the weight of the eurozone as a whole to issue debts. Again, that seems to me quite a long way down the line at the moment.
As to the harmonisation of tax rates and bases, if you move towards the full picture of fiscal union that I have presented there in terms of issuing joint debts, that would become increasingly part of it. At the initial stage it is more in what Baroness Bowles presented, in that they raise certain taxes that are then transferred to a separate fund or a higher level institution at the eurozone level; it will not be full harmonisation but there will be elements of it. Also, I would rather see the move towards encouraging competition in tax rates. That remains important, but there is also a desire to have a level playing field. They have not quite worked out that tension yet.
The Chairman: You do not envisage, even in the long and distant future, a state where there is sufficient integration where there would be direct fiscal transfers.
Raoul Ruparel: It depends how you classify direct fiscal transfers, but there is a cautionary tale here. If you look at Italy, for example, transfers from north to south have not helped promote economic convergence or development. If you look at Germany, west to east, it has had the same problem. There is a feeling in the eurozone that this is not necessarily the way to go, and having those sorts of permanent transfers, as Lord Lawson suggested, requires political union and political acceptance. That is still a very long way off. Even then, if you have a mutualised fund that is providing fiscal support, it is indirect but it is clearly leveraging the joint underwriting. You get into questions such as, if the taxpayers in one country underwrite the debt going to another country, is that a direct fiscal transfer or not? That is a very existential question.
Q21 Lord Skidelsky: Could I just rephrase the question I started with? To what extent do you need fiscal union in any of the forms in which it has been described, in order to have a successful monetary union? Do you need a European‑wide stabilisation fund? Do you need a euro‑wide investment fund? Do you need a euro‑wide enforcer of the fiscal rules? In other words, do you need a treasury? Do you need a budget? In the forms in which we have talked about them as an inevitable evolution, is that an inevitability or an evolution of something that is part of what one thinks of as a political union, or is it something required to make this specific organisation—the eurozone—work properly?
Baroness Bowles of Berkhamsted: The whole project of the eurozone was founded on people obeying rules and the problem is that people have not obeyed the rules. The financial crisis and the additional debt burdens that that brought with it have just made matters worse. Greece was let in when everybody knew, really, that it was not up to speed. They thought that by driving things forward, if you like, in that political sense—even, if need be, there would be a crisis—that would then force greater integration. In my more cynical moments that is what I think anyway. The point is they need more than just obeying the rules and more to try and achieve convergence, because, otherwise, a monetary union between very divergent economies would always tend to fall apart if you do not accept fiscal transfers.
Throughout the report it makes it absolutely clear that the one thing they are trying to avoid is the transfer union. They do not mind, if you like, mutualising to some extent the good will that collectively the eurozone has a strength and can borrow at lower interest rates. Obviously, that is building on the strength of Germany and other countries. They do not mind, possibly in some limited way, being able to do that, but, even if they were to issue euro bills or have some other stabilisation fund, it is quite clear that the entry ticket to that is obeying a load of rules. I impolitely called it a troika for all, but that is still the attitude. Of course, it becomes unpopular when it is enforcing austerity the whole time. Austerity is not exactly popular in the UK, but it is nothing like what some countries have had to go through, which is why some are looking a little more intelligently at other ways in which you can decouple the investment spending, as I have rehearsed before.
Calling something a fiscal union—these are not unions—
Lord Skidelsky: No, they are not.
Baroness Bowles of Berkhamsted: They are actually ways not to have unions but ways to be corrective to behaviour, I guess.
Lord Skidelsky: We have an International Monetary Fund. We do not call it an international monetary union just because there are rules and conditions for receipt of help or finance. Why is everything called a union? Is it because the aim of this is political?
Baroness Bowles of Berkhamsted: Yes. It is a buzzword.
The Chairman: First, I wanted to ask you, being conscious of the time, whether you could stay until about 11.30. Would that be possible? Could I also say that we have quite a lot we really would like you to cover, so could you keep your responses fairly short? I look to the Committee to be quite disciplined as well.
Q22 Baroness Kingsmill: There seems to have been very little mention of the role of the ECB in the Five Presidents’ Report. What are your views about its evolving role in economic governance, keeping my question short?
Baroness Bowles of Berkhamsted: The idea is that the ECB should not be involved in economic governance. By necessity, it has had to be and has used provision of liquidity as, in a sense, a weapon to ensure compliance with some of the new requirements for the countries receiving bailout. The European Parliament has been very critical of the troika as a whole and some of the ECB behaviour, while acknowledging that at times if they had not done it then there probably would have been bigger problems. I did refer to them as liquidity loan sharks on one occasion because I felt that they had put countries into a difficult position by lending more than they should, and then threatening to withdraw it and collapse the country unless they signed up within the troika.
Baroness Kingsmill: You do not have a very high opinion of bankers, by the sound of things.
Baroness Bowles of Berkhamsted: No—actually I get on very well with the European Central Bank, but it is quite difficult to get powerful oversight of any central bank. You can haul them before a committee and you can grill them, but by and large there tends to be an imbalance of knowledge and it is quite tricky.
Baroness Kingsmill: What do you see as its role?
Baroness Bowles of Berkhamsted: In economic governance? Its role is monetary policy. It recognises that monetary policy for the whole of the eurozone is a crude tool, so it is looking forward to using macroprudential tools to try and help tailor the economy, maybe geographically, because you could use those with geographic variations. That is quite an interesting project to get a more responsive package.
Of course, it felt that, when the euro was threatened, it had to come in and be the steel that said, “You have to obey the rules”, because it wanted to support the euro. It is not supposed to be doing economic governance per se but it had it thrust upon it. I do not think the Five Presidents’ Report was therefore deliberately giving it a role in that. The role that is for the ECB in the Five Presidents’ Report is through those macroprudential controls, which have a big economic—or potential economic—effect.
Baroness Kingsmill: It is very difficult to imagine a system of financial economic governance that does not have a role for a central bank. Somewhere along the line, whether it is controlling the central bank, increasing its powers or giving it specific powers, it does seem to me that it is an essential element, an essential tool, of economic governance, as I say, whether you have to limit it or define its role in that respect.
Raoul Ruparel: This is a broader question about the roles of independent central banks. I agree that the ECB had to act in the crisis because no one else was acting. I have some sympathy for it, but it has played quite fast and loose with the power that it has had and there has been no accountability or oversight of it, really. If we look at a number of examples, in the Greek crisis, the provision of emergency liquidity assistance was at many points defining whether the Greek economy would stay in or out of the eurozone. There was no oversight or accountability of this. We have seen leaks of letters sent to Ireland and similar ones to Spain, encouraging them to take certain policy approaches, which was far beyond the remit of the ECB. We have seen a significant role for the ECB in the deposit write-down in Cyprus, again enforcing losses on depositors. That was a significant issue. Also, we have seen this issue of location, policy and clearing houses for the UK, where the ECJ directly reprimanded the ECB for trying to take on a role that is not defined under its treaty obligations.
While it has been forced into a role, it has coloured outside the lines on many occasions, and there is a need to have greater accountability and scrutiny of that. Exactly how that is done is an open question, but, for example, having the ability to call ECB members in front of national parliaments and national committees would be a useful one. Mario Draghi refused to go in front of the Irish banking inquiry, which I thought was a mistake given the very clear role that the ECB had played in that scenario.
Also, we have seen a number of crises. The acting of the ECB is very opaque. It is now publishing minutes, which is helpful, but we have seen questions around its releases, making market‑relevant comments to a select group of people and having meetings before monetary policy decisions with select market players. There is a lot of opacity to what it does and it still needs to be opened up significantly.
The Chairman: Of course, we bear in mind that one of the Five Presidents in the report that we are considering is Mario Draghi, so they clearly do have a role in that regard.
Q23 Lord McFall of Alcluith: The former Governor of the Bank of England a few years ago said that the problem is that banks are global in life but national in debt. If we are going to have a banking union then we have to have them global in both, and it seems there is a rocky road still ahead on that. The European Commission’s report of 24 November envisages stages in this process, but, underlying that, is there not the need to ensure the bail‑in rules in the tackling of sovereign debt issue, notwithstanding the proposal for stages? That seems to me an awfully long way off, particularly with Germany’s response to the latest proposal.
Baroness Bowles of Berkhamsted: I could say yes, in a short answer. A lot has been done to try and get to the eurozone level in bank failures through the BRRD rules, which of course are the same and largely invented by the UK, but by having progressive mutualisation of the resolution fund, which was very controversial and it takes quite a while. The quid pro quo for that is to make sure that there is some kind of bridging funding there so that you do not end up with a situation that, because you are a smaller, poorer country, you have more fire sales of assets than if you were a larger, stronger country. It is limited mutualisation that is going on. The report suggests further pockets of this limited and controlled mutualisation, which is forward-looking. Once you have banks that are all on the same rules, they have been through the same stress tests and have all been recapitalised to the same level, which is what has happened with the creation of the single supervisory mechanism, there is more confidence that you do not have lurking horrible things from the past that the new mechanisms are going to pick up. It is not a perfect solution but it is the only one that could be got to.
Lord McFall of Alcluith: Some would say that there is a failure of the market here and that capital has been mispriced. There is a view that those countries with higher debt should have higher borrowing costs and that should be greater in Germany. Would you support a proposal like that?
Baroness Bowles of Berkhamsted: Yes. In the early days, when I was chair, it was quite a common thing in and around the time of the monetary dialogue, with the ECB in particular, for everybody to be talking about bond spreads and them saying it was a bad thing that there was not convergence because they looked at it as a criterion for the economies of the countries converging. I kept saying, “I do not want them to converge because if you are being economically unsound you should be paying a price”. I was always on the other side of that argument, but it just showed that they were focused on this convergence as, if you like, more important than market discipline. When we started getting into difficulty, there was a switch, and I discovered that more people were singing the tune of “You need market discipline”. It is going to be very difficult, even now, to get market discipline, because with so many bailout funds it is quite clear that nobody wants anybody to go under and rock the euro, so I think the markets will still run it.
Raoul Ruparel: This is the crux of the question on banking union and breaking the sovereign-bank loop. For me, the fundamental issue is, if you have one of these national champion banks—hypothetically, Deutsche Bank or anyone along those lines—getting into trouble, do we really believe that the national Government would let them go under? That is the fundamental question here. That is cultural and almost an issue of national pride. I just do not believe that you can really enforce that. That is the big question about whether they can ever break the sovereign-bank loop fully, but they are taking steps to do it. This is why I think the focus on the deposit guarantee scheme in this stage is a bit misplaced. I would rather see them take more steps on enforcing the bail‑in rules, making sure those bank recovery and resolution directive rules are—
Lord McFall of Alcluith: The bail-in rules are theoretical at the moment. That is the problem.
Raoul Ruparel: Exactly. They need to be transposed and tested, and we have had a number of bank failures over the past few years—Espírito Santo, for example, in Portugal. We have had issues in Bulgaria and Austria, and they have all been handled in completely different ways. These rules have not been enforced and tested properly. Of course, they had not been transposed fully but there is clearly no unified way to deal with these. There are other issues in how to deal with sovereign debt and restructuring sovereign debt. That will have a huge impact on the banking industry, and not having a clear mechanism and idea for how that works in a crisis creates a huge amount of uncertainty and furthers this sovereign-bank loop, in my view.
Q24 Lord McFall of Alcluith: I have a final question. The Five Presidents’ Report anticipates the eurozone having a treasury and debt-raising powers, and some would suggest that needs political oversight. What implications does that have for the UK? Would it be, for example, the eurozone having its own parliament or maybe, God forbid, a grand committee along the lines that we have here in England and equally problematic?
Raoul Ruparel: Just to finish my previous thought on the banking union side, raising Germany is interesting because it submitted a non-paper, which has been leaked to the Financial Times, about the steps that should be taken as opposed to deposit guarantees to break this sovereign-bank loop, and it is quite interesting. I would encourage the Committee to read that.
The Chairman: Can you give us the reference, please? What is the date?
Raoul Ruparel: The non-paper is 8 September. I can give you the printout afterwards. I also think an issue that should be flagged up is deferred tax assets and deferred tax credits. This has become an issue, particularly in the southern European countries, where deferred tax assets, which are tax deductions created when an institution has a loss, have been converted via national legislation to direct claims on the state. For example, in Greece, these deferred tax credits, which are essentially direct claims on the state and to me a pre‑emptive bailout, are worth between 30% to 40% of the bank’s tier 1 capital, and that is even after the current stress test. That is in double digit billions. Does anyone really believe the Greek Government can guarantee double digit billions-worth of bank capital? I do not think so. Danièle Nouy, the head of the supervisory mechanism, has flat out said, “We do not agree with these issues, but we cannot tackle them because they are national legislation”. These kinds of issues are ones that are really deeply ingrained in the sovereign-bank loop and it shows how hard it is going to be to break.
On the oversight point, just quickly, it will create issues for the UK. I am not decided whether it creates more problems if it involves new institutions because the UK would be locked out of them, but at least the UK then has a veto over how they are created and has a role in the creation, or whether they are created inside the current institutions and hollow out those institutions to make them more eurozone-focused. There are problems in the approach but certainly questions for the UK.
Baroness Bowles of Berkhamsted: I have covered a lot of the point, but it comes back to one of the first points I was making that they needed to sort out banking regulation. When we were doing CRD IV, one of the big issues for the UK and the frame of mind we had at that time was that we did not think that the other European countries, or some of them, would be serious about having a sufficiently high quality of capital and various other things. Of course, in the ongoing negotiations, things to do with buffers and the creation of the banking union have upped their supervision a lot, but we are still left with this legacy that in the negotiations, for instance, to retain control of our own macroprudential policy and to have the discretion to put on the 3% additional funding, in the give-and-take we had to yield a bit on some of the issues around bank capital. The Parliament was very much on the same line as the UK here. It will be difficult to disentangle as well because that is—
The Chairman: If you wanted to develop that, perhaps you could write in to us, but we do have some other things to come.
Q25 Earl of Lindsay: Can I ask how important you think the capital markets union is to achieving financial integration, completing our economic monetary union? How effective will it be in genuinely widening our risk-sharing, and will that effectively underpin or strengthen the resilience of the EMU? Beyond resilience, is there also the possibility of it increasing the quantum of investment and lending that might be achieved within either the Community or the eurozone?
Baroness Bowles of Berkhamsted: The idea of the capital markets union is just an ongoing extension of what we were supposed to get with the single market in financial services, but there is unfinished business. To give it this buzzword gives it a little bit of emphasis and to move forward. The way it is presented within the report is to say, “Okay, if you have more risk-sharing through capital markets union, then there is a reduced risk of mutualisation and transfer union”, which I guess is true if you say everything is more stable. It is looking for a reason to justify capital markets as a good thing to many countries who are still deeply suspicious of them. I am sure there is an element of that that is within it.
It is very important that it increases the quantum, and this is a little bit of a battlefield that is already going on, with many saying we will always be reliant on banks. There is a tendency to defend banks, even though one loves to hate them, or hates to hate them, or whatever it is. Nevertheless, everybody still comes out wanting to make sure that their banks survive because they are important for the economy. The Germans rather like their banking model and they do not really want anything taken away and being done elsewhere. So it is quite important to emphasise that this is about increasing the size of the cake and not just moving the same-sized cake around.
The logic of it is, of course, that you diversify and have more people to pick up the pieces, but that has to be the logic that we have got to with bank recovery and resolution. The whole idea there is that things are spread out into the private sector instead of the public sector, so it is a kind of continuum with that philosophy. It is very similar to what we have been pursuing in the UK in that respect. We want there to be absorption elsewhere.
Raoul Ruparel: It certainly can help with, for example, the transmission of monetary policy in the eurozone. It is very reliant now on the bank level because lots of the funding runs through the banking system, particularly for corporates. Diversifying that and allowing broader capital markets that can then respond to any ECB actions on rates or liquidity could certainly help transmit those actions more easily to the real economy and to businesses.
In the broader picture, the point here is that this is also again another big cultural shift for many countries in the eurozone. Look at Germany: there is a huge amount of capital and deposits there but they are very risk-averse. They are all locked up, mostly in the savings banks, and so getting the capital markets union to work properly really means changing this attitude to risk and getting them to take on more risk and invest it in business or lending across borders. That will take a long time to change, in my view. So there is an existential question there.
In getting towards a private system that takes responsibility or absorbs the shocks, as we saw in the US, after the crisis, the US system in the capital markets there took a lot of the risk; it was not the fiscal side. We have to remember that has developed over a long time and you do have fiscal players in there. For example, Fannie Mae and Freddie Mac are buying up significant amounts of stuff off banks’ balance sheets and that allows the markets to be broader. All I am saying is that copying these kinds of models is quite difficult and it takes a long time.
The Chairman: Lord Davies, do you want to conclude briefly?
Q26 Lord Davies of Stamford: I was going to ask you whether you thought we should be a party to any of these institutions or initiatives that are arising. You have already dealt with the competitiveness authority, and both of you said that there was no harm in our having one. You differed about how much positive good it would provide. What about our being members, for example, of banking union? Why should we be members of capital markets union but not banking union? Where does that leave securitisation and developing a market in CDAs and collateralised debt obligations? Is that part of banking union? It greatly increases the liquidity of banks’ assets, or is it part of capital markets in that it provides a new instrument for savers? Which is it? Is that a sensible distinction? Why agonise about how our interests in banking union are going to be protected if we have the opportunity of joining it and have a vote ourselves?
The Chairman: Could you give one-sentence answers, please?
Baroness Bowles of Berkhamsted: Yes, it is called banking supervision, and, ultimately, if we are not in the monetary union, the shots at the end are by a body that we are not on in the ECB.
Lord Davies of Stamford: The Danes are joining the banking union, for example.
Baroness Bowles of Berkhamsted: Indeed, they may, but they are a smaller country and they see the access to these potential funds outweighing the disadvantages of loss of supervision. I do not think the Swedes will go the same way, for example, but we wait to see. I have always argued that you could do this for reinsurance-type of deposit guarantees or something like that, which you could join into if you wanted, but we would face the same dilemmas that Germany has in that we are one of the few countries that has a deposit guarantee scheme that works and can produce, whereas most of the others do not.
Raoul Ruparel: For that reason, I do not think we could ever join a banking union where the ECB has the final say. It would be a huge transfer of sovereignty and power, possibly triggering a referendum lock, but let us not get into that. The capital markets union is different because it is being built as a bottom‑up, breaking-down barriers, breaking-down regulation system, rather than a top‑down supervisory system as the banking union is.
The Chairman: Thank you both very much indeed and for giving us so much of your time. That concludes today’s public evidence. The Committee will now continue its meeting in private. Thank you.