Oral evidence: Costs and benefits of EU membership for the UK's role in the world,
HC 545
Tuesday 8 December 2015
Ordered by the House of Commons to be published on 8 December 2015
Members present: Crispin Blunt (Chair); Mr John Baron; Mr Mark Hendrick; Mr Adam Holloway; Daniel Kawczynski; Yasmin Qureshi; Andrew Rosindell; Nadhim Zahawi
Questions 140-225
Witnesses: Dr Scott James, Senior Lecturer in Political Economy, King’s College London, Professor Iain Begg, Professorial Research Fellow at the European Institute, London School of Economics and Political Science, and Dr Angus Armstrong, Director of Macroeconomics, National Institute of Economic and Social Research, gave evidence.
Chair: Welcome to this afternoon’s session of the Foreign Affairs Committee. We are one witness light, and I sincerely hope they are not sitting in a queue, as I fear you may have been—my apologies for you not having been met properly. We would be very grateful if you introduced yourselves for the record.
Dr James: Dr Scott James. I am a senior lecturer in political economy. I am currently the deputy head of the political economy department at King’s College London.
Professor Begg: I am Iain Begg. I am at the European Institute of the London School of Economics. I should probably put it on the record that I am currently advising Sub-Committee A of the Lords European Committee, and I have funding both from an ESRC project and a European Commission project.
Q140 Chair: Thank you very much for making that clear. As you know, this session is to deal with the future of the eurozone and the implications for the United Kingdom. Let me open the questions by asking you—Dr James, perhaps you can kick off, followed by Professor Begg—whether the eurozone is likely to adopt further economic integration measures to ensure its sustainability.
Dr James: I think we will see a further deepening of eurozone integration over the next few years. My sense is that the pace of that deepening will tend to slow over the next five to 10 years, as the eurozone economy slowly recovers. We have seen a very rapid process of deepening and integration, with banking union, the plans for capital markets union and the “Five Presidents’ Report”, which came out last year, and which the Commission is now seeking to implement—we have seen, quite recently, the report come out from that. But I think the pace of that will tend to slow. None the less, that has important implications for the United Kingdom and how it engages with Europe and an increasingly integrated eurozone over the next few years.
Professor Begg: You have already heard the key elements. I would elaborate in two ways. One is that the “Five Presidents’ Report” is going to be implemented in three stages. We are in the first, and the Commission came out with a series of five initiatives that are going to take place over the next few months. The second will see a White Paper being issued early in 2017, and that is when the real deepening will take place. What it leaves vague is the degree to which there will be a common fiscal stabilisation capability—in other words, trying to deal with one of the gaps in economic and monetary union. It is supposed to culminate in 2025, so there is a 10-year programme there.
I would make an additional point, which may be relevant to this Committee’s focus: to portray this exclusively as eurozone against non-eurozone may be a mistake, for the simple reason that a number of the components of the deepening that are being implemented at the moment, including banking union and—one of the new ideas—having competitiveness boards, are open to non-eurozone members, who can opt in in the same way as the UK has, in many cases, opted out. That opting-in process may mean that the UK is in a much smaller minority than we sometimes think in the non-eurozone countries. There is also always the possibly that other countries will join the euro in the drip, drip process we have seen since 1999. Let us not forget that, although it looks as though the new Polish Government is saying, “No. Under no circumstances”, Polish Governments do not last long, and they can change their opinion quite rapidly.
Q141 Chair: How confident are we that the “Five Presidents’ Report” is actually going to get delivered? Obviously, it has given itself a really healthy timescale, but I have seen some analysis that says that the report itself resulted from a compromise and has not resulted in the concerted push to implement it that was hoped for; and that the urgency to follow this through in the wake of the Greek crisis is now absent—and there is a certain amount of German opposition in particular.
Professor Begg: There is clearly going to be German opposition to anything that smacks of mutualisation of debt. That is one of the reasons the Germans are so uneasy about the proposals for having a form of deposit insurance or reinsurance as the third leg of banking union. They see that as a way of mutualising debt and opening the door potentially to eurobonds—that is to say a joint and several debt instrument covered by all countries of the eurozone.
That tension will stay there. There is a parallel tension about creating anything that is going to result in permanent fiscal transfers, because the German experience of rescuing the new Länder of East Germany when German unification happened has meant that there is a reluctance to countenance a similar commitment to countries which the Germans see as—not quite lost causes—a permanent drain on their resources.
So, yes, there are major tensions around this; but at the same time there is a recognition across the eurozone that the absence of a fiscal stabilisation capacity has been weakening for the whole project. The thrust of the “Five Presidents’ Report” is to try to get there by indirect methods, one example being the proposal to have a fiscal board, which is being put forward as a kind of supra-fiscal council, like the OBR in the UK, with the purpose not just of overseeing what national fiscal councils do but trying to get towards a common euro area fiscal stance—something that has been missing since the euro was conceived.
Q142 Chair: Let’s put it this way: if the eurozone fails to adopt the necessary measures to ensure its stability, presumably it is your analysis that it will just remain vulnerable to crises going forward. That question is to both of you.
Dr James: I will probably just respond to the first point about the pace of integration. I think the “Five Presidents’ Report” tells us something actually quite interesting, because, if you compare it with the “Four Presidents’ Report” from the year before, it is notably less ambitious in terms of the scale of what it is trying to do. It does not talk about having a centralised EU budget capacity.
Chair: I interrupt you to welcome Dr Armstrong. I am sorry about any delay you may have had trying to get into this building. You are very welcome. Dr James.
Dr James: I was just saying that if you compare the “Five Presidents’ Report” with the “Four Presidents’ Report” you see, I think, a slackening off of some of the pressure on the eurozone to integrate; I think you see a slightly less ambitious plan in terms of what it wants to achieve. You do not see any explicit talk of debt mutualisation or eurobills, or any centralised EU budget, which was hinted at in the “Four Presidents’” plan.
I think it is also important to remember there are two dimensions to eurozone integration; it is not just deepening but broadening. From the UK’s perspective those two aspects are equally important, and, if anything, it is the broadening of the eurozone, and the expansion of the eurozone to new countries, and the shrinking of the number of euro-outs, that is going to be the more important dimension.
Professor Begg: Your question is will it be sufficient to make the eurozone sustainable. There has undoubtedly been over the years a propensity, to use a metaphor that is often employed, to kick the can down the road—to do the minimum necessary to make things happen. I sense that they are going a bit beyond that now, and that if you look at the accumulation of governance reforms that has taken place since 2010 it is a bit like throwing a jigsaw puzzle on the table and trying to put it together. I would say that that puzzle is now 80% there, and that there will be a concerted effort to try to complete the picture, to have a more coherent form of governance, and in so doing to address what are now broadly recognised as the flaws in the way the euro was set up in the first place. In that sense I would be fairly sanguine about the prospects of its being sustainable.
There is still the propensity at a European level—this was clearly the case in the “Four Presidents’ Report” in 2012—to over-egg it and put in things that the Commission, in particular, wanted to see as a form of policy entrepreneurship and trying to do additional things, whereas the “Five Presidents’ Report” is much more cautious. There is the irony, though, that if you look at the members of the cabinet of Van Rompuy in 2012 and Juncker in 2015, you will see one name in common—he wrote it.
Q143 Mr Hendrick: In response to Professor Begg’s point about bringing everybody into line in terms of fiscal policy, I thought one of the attractions of the euro when it was first launched was that while you had a central monetary policy and a fixed interest rate, it left member states the flexibility to affect their economy using fiscal policy in a way they could not with monetary policy, because they had lost control of it.
Obviously, the stability pact played a role, to some degree, in trying to ensure member states were responsible with the budgets, but with the degree of integration they are beginning to talk about, it looks as though member state Governments would have very little control in future over certain key areas of fiscal policy, if it is overseen in the way that is being suggested. Would you like to comment on that?
Professor Begg: The dilemma we have here is that in any other monetary union—be it the UK, the US or Japan—you have a fiscal authority that is at the same level as the monetary authority, and basic theory of economic policy tells you that you need coherence between the two kinds of policy. The trouble with individual countries in the eurozone having complete autonomy to set their own fiscal policy is that when you add it up to a common policy, it may or may not make sense relative to monetary policy, and that puts an excessive load on monetary policy to accommodate that accidental outcome of fiscal policy.
The co-ordination effort is intended to redress that, but it is going to be a very tricky balancing act between maintaining what you described—namely, the autonomy to use it—and having the fiscal policy instrument as one that can be used in emergencies, for asymmetric shocks, while also having the common approach that has been lacking from the beginning, which has been weakening to the way the whole thing functions.
Q144 Mr Hendrick: If the UK is on the outside, as it presumably will be for a great deal of time, and monetary policy is set to suit countries in the eurozone, how can the Prime Minister ever have his way in terms of not letting the eurozone basically control fiscal and economic policy for the whole of the European Union?
Professor Begg: Because the UK would retain its own currency and its own fiscal policy, as a complete autonomy.
Q145 Mr Baron: May I push back a little bit on the idea that economic integration—that was the Chairman’s question—is going to lessen, rather than speed up? Correct me if I am wrong, but I do not think there has been an example of successful monetary union without fiscal union. If we accept that, surely we are going to speed up with our economic integration, because you have to have fiscal union as part of the overall package. There is a disconnect there at the moment, which is one reason we are seeing the stresses and strains.
Professor Begg: I have spoken too much already.
Dr James: I agree completely. There will certainly be economic pressure for there to be some sort of fiscal union and a strengthening of the various instruments you see in the “Five Presidents’ Report” that try to do that—the macroeconomic imbalance procedure or the fiscal stabilisation mechanism, for example.
The problem is principally political, in that Germany will simply object to or is already objecting to many of those things and will try to constrain them. Its vision of the extent to which you need to supranationalise fiscal policy is very different from the degree to which the French, for example, would like fiscal policy to be supranationalised. Germany’s vision of a fiscal framework at the European level is very much rule-based and based on controlling and constraining national Governments and making sure their behaviour is rule-based, whereas the French perspective is that you need a centralised EU budget that can engage in fiscal transfers and address the pro-cyclicality of the rest of the EU eurozone framework. So I think the whole framework will be pulled in two different directions.
Q146 Mr Baron: Precisely. That is perhaps my point. Until you have harmony on the fiscal front, you are not going to fundamentally address this disconnect between monetary union and fiscal union. Unless you do that, you are going to have these constant fissures, and you will not get true stability. It will only take another debt crisis or a sharp slowdown in growth or whatever to expose that yet again. There has to be an element of honesty about this, and we were blatantly told by Brussels Eurocrats on our last visit to Brussels that the situation as it is at the moment is untenable and we need proper fiscal union if we are going to save the euro. Am I being unfair about this?
Dr James: No. I think that that is a fair assumption.
Dr Armstrong: I apologise for being late. Can I first say that I think this division between monetary and fiscal policy is a little bit artificial? Monetary policy, as we now know, as it was first envisaged for Europe, was basically a monetary rule for inflation and price level targeting. We have now found out that the ECB has a wholly different set of powers post crisis. In the UK we are almost clear about this. We have a memorandum of understanding when it is required to have emergency liquidity assistance. The Bank of England carries out the technical act and the say-so is given by the Chancellor of the Exchequer, but clearly this becomes a fiscal operation to support the financial system, which, in some extreme circumstances, overlaps with monetary policy.
What we have seen in Europe is that the fiscal sphere has already overlapped into the monetary sphere and the ECB’s powers have extended well beyond simple monetary policy. So we are already in that world of fiscal policy. This is where we get to the pooling of fiscal reserves for the stability mechanism. Who underwrites the European banking system next time there is a banking crisis? We are already there well before we start worrying about harmonisation of national fiscal policies. We are already in this debate.
Q147 Mr Baron: May I come back to you very briefly? I would disagree in one respect. Yes, I agree that the ECB has taken on greater powers than before—money printing and a variety of other things—but if you are going to create sound finances, you need countries coming together and agreeing basic parameters, otherwise you will always have those at the edge who do not have those agreed parameters putting unnecessary strains on the system. We have not got there yet. There is not an example of monetary union working with that system in place, so may I suggest that you are being slightly optimistic?
Dr Armstrong: I was not being optimistic. I was trying to point out that the dichotomy between monetary and fiscal policy is false; they already overlap in the monetary sphere. That is not to say that the ECB’s having mutualised risk sharing in the financial system is enough to say that the rest of the eurozone is necessarily going to prosper. I am not saying that at all. I am just saying that we have already crossed the Rubicon of having to have pooled fiscal resources.
The broader question of the degree of harmonisation across all the states in Europe raises the age-old question of the extent to which you need to have localised control versus free-riding problems where you get the sort of issues that we have had. But it is interesting that just having centralised fiscal control in itself does not necessarily guarantee that monetary union works either. For example, last year we nearly lost part of our monetary union because of arguably too much fiscal centralisation. So what is really necessary is a level of economic development across the Union that requires more than just a set of rules.
Professor Begg: A short reply to Mr Baron. We have to be a bit cautious about adducing history in this. In a European context I can think of at least six definitions of fiscal union, each of which has dilemmas attached. Rules is one and the German approach, as Dr James has said, is one approach. A second would be rescue funds: do you have a rescue fund such as the European stability mechanism now in place or take it a bit further and have an equivalent of the IMF, a European monetary fund?
A third is that you could have debt mutualisation in different forms—that is taking it a bit further. Fourthly, you could have transfers across jurisdictions as we have in the UK where, in case you do not know, the implicit fiscal subsidy to Northern Ireland is enormous: tens of percentage points of GDP go there. You could have a common budget across the area, with discretion about how it is used.
The sixth is collective stabilisation policy, which can be done either by co-ordination or by diktat from above. I am sure you are aware that in both the UK and in the US, sub-national levels have no fiscal discretion at all: they have to balance the budgets. Whereas in the EU it is the other way around: the nations have discretion and the European budget has to balance.
Q148 Nadhim Zahawi: Welcome, gentlemen. You have fielded some of our early questions and concerns on further economic and political union, but I might turn that on its head. What do you see as the main obstacles for both economic and political union inside the eurozone today?
Professor Begg: We are all trained to think in terms of something called an optimum currency area, going back to the analyses of 50 years ago by people like Bob Mundell and Peter Kenen. I think that what is now overlooked is the degree of integration of financial markets, which completely transforms the context from the days in which we used to think of this as a trade policy question. But, even more so, the phrase I have been toying with and may get around to writing a paper on is the optimum political economy. Germans do not think like Greeks, and until they start thinking and analysing problems the same way, you are not going to get an optimal outcome, which I think is the biggest current obstacle to getting a solution. That would be my explicit answer to your question.
Q149 Chair: But Liverpudlians do not think like the people of Surrey.
Professor Begg: I hesitate to say—
Chair: The point is that there are massive fiscal transfers out of Surrey, which are entirely hidden because there is democratic accountability because the people of Surrey vote for a Parliament here that decides the fiscal transfers.
Professor Begg: Yes, but indirectly there is probably a transfer out of London to Surrey because of commuters.
Q150 Chair: The point I am making is about the eurozone in the absence of democratic accountability. To reinforce Nadhim’s question, there is in-built instability if there is a complete absence of democratic accountability over the movement of money between different parts of the eurozone.
Professor Begg: You could always give the European Parliament the power to set the EU budget.
Chair: Absolutely, and that would be the way to achieve it.
Professor Begg: That would not be very popular in Westminster, though.
Chair: Hence the obstacle.
Dr James: I suppose what I would add to what Professor Begg said is to look at this almost as a framework of managing competing visions of political economy. The Germans have a vision of what a political economy should be like, how it should be structured and the fiscal basis for that: the classic late 20th century social market economy. The French clearly have a significantly different vision of political economy.
Up until now, those tensions have been managed by the eurozone framework and, present crisis aside, I think they have been managed relatively effectively. What the eurozone does and what the framework seems to capture quite well is a hybrid political economy. If you tease out the different aspects of the eurozone framework and what the EU tries to do economically, you can see all the different aspects of it. You can see the bits of the French political economy, the Swedish political economy and the German influence.
I think those tensions are manageable. You have those tensions within nation states. The difference, of course, is that where you have a political union, you can have competition between legitimate political actors for a particular vision of political economy that can be played out through the political process. So I see the obstacles to further eurozone integration principally being political and an absence of that legitimate form of competition between different visions of political economies being the principal roadblock.
Q151 Nadhim Zahawi: Let me challenge you on that. That may be true to the political elites—you get the flavour in what is produced at the European level from a bit of French, Swedish or German—but there is clearly already a disconnect with the people in emotionally buying into a transfer union. Back to the question about our own country, in 1707 the Scots decided to give up their Parliament and join us here. Emotionally, this country bought into a transfer union. How we organise ourselves is how we decide to do these things, but we bought into it. I do not see the people of Europe being aligned with the political elites on this project. We are beginning to see it in France, clearly in Greece, and now in Portugal with a sort of communist-socialist coalition that is pushing back on austerity. Who is going to stand behind the currency other than the German people, and how will you convince them to buy into it? The elites may design hybrids, as you elegantly put it, but I say to you that those hybrids are brittle and easily taken apart the moment they interact with democracy.
Dr James: I would say two things in response to that. First, clearly the process of European economic integration thus far has relied on two things. One is the so-called permissive consensus, which has clearly broken down. Because of the eurozone crisis, the idea that the public will simply go along with what the political elites want them to do clearly no longer applies.
Nadhim Zahawi: They won’t.
Dr James: The other basis for the legitimacy of the product is its output legitimacy. In a sense, as long as it delivers, the economy keeps going and it appears to work, there is less public opposition.
Q152 Nadhim Zahawi: Let us take an example. Is it working on energy policy?
Dr James: To some extent, yes. There is far more that Europe could do but energy is one of those areas where European integration could be much more effective and could promote the single market more effectively.
Q153 Nadhim Zahawi: It’s clearly not working on energy. That is not just my view. It is the view of the senior leaders of that industry across Europe.
Professor Begg: It’s working very slowly because of the agreement—
Nadhim Zahawi: That is a more diplomatic way of putting it. Everything is working very slowly.
Professor Begg: The agreement on interconnectors, common pricing policies and common market structures is taking a long time because so many countries regard it as a vital interest. I will give you two separate answers.
Q154 Nadhim Zahawi: And the German Energiewende project added costs to energy, which the French pushed back, saying, “We don’t want that cost on our consumers or our businesses”?
Professor Begg: Yes, and then the Germans hypocritically imported nuclear electricity from the French.
I will give two short further answers to your question. Consider the case in Greece—you mentioned that specifically. The paradox is that the Greek people support staying in the euro. They are against the austerity package—hence the votes for Syriza—but they support staying in the euro.
The second example is a rhetorical question posed by the Belgian Foreign Minister in a meeting I was at the other day: would we, Belgium, have been better off in 2009 when we had all the crises with the Fortis and Dexia banks if we had only had the Belgian franc? His rhetorical answer was clear.
Q155 Nadhim Zahawi: I don’t disagree with you, but the real question is not whether the Greek people, with all the pain, still chose to stay in. The real question is whether the German people will emotionally buy into it and allow a transfer union. At the end of the day, if they do not—I do not know when that point will come—the unravelling process begins because they hold the cheque book.
Professor Begg: Up to a point.
Dr Armstrong: I have hopefully a simple answer. Political union is a pre-requisite of a successful economic union. It is as simple as that. Political boundaries almost always define the limits of currency boundaries. There is no way that China is an optimal anything from one end of it to another, but it is certainly a political body and that is what you need.
Q156 Nadhim Zahawi: How do you deliver that across the eurozone?
Dr Armstrong: Across the eurozone, you would presumably need to have some degree of representation that reflects the expression of local communities—in this case, countries.
Q157 Nadhim Zahawi: We saw the demonisation of Herr Schäuble in Greece. Do you really think—
Dr Armstrong: I’m not saying that is what we have got at the moment. You asked me what we would need to do that.
Q158 Nadhim Zahawi: I challenge that and will say it the other way. You begin with an economic levelling of the playing field, and you let people trade and get the up side before they start buying into the politics. It is almost wrong-headed to think of it the other way around, because it is impossible to convince someone who is taking pain from a German politician to think, “That is a really good idea. I want that person to lead my country.”
Dr Armstrong: Funnily enough, the example you began with of Scotland and the rest of the UK was an exact example. Political union was decided almost overnight because of events, but there wasn’t—
Q159 Nadhim Zahawi: But there was a lot of killing before that.
Dr Armstrong: There were a lot of deaths, and Scotland had its own problems. The point is that that was not the end result of a glorious economic integration. There were actually very big differences between the two countries, but the political union led to the economic union as much as anything. Today, there is almost no difference at all between the two of them.
It is an interesting question. How do you know which one came first? Going to the question that Mr Baron asked earlier, there are no cases of successful monetary union without political union that have survived the test of time. I was thinking about previous monetary unions, such as the Austro-Hungarian empire. Just how much fiscal policy they would have had in those days to make it work is an interesting question, but of course it failed anyway because of the many problems it had.
The point is that I think that in the long term political union is required to make a monetary union work. You asked what that involves. I think it involves political representation that reflects all the people who are willing to be part of that political union. At the moment, that lies with the European Parliament. I am sure you have a view about how accountable you feel towards it. There is the challenge of the eurozone.
Q160 Nadhim Zahawi: One last question. On a scale of nought to 10, where 10 is the absolute success of the monetary union and zero is its breakdown and failure, where would you say we are today? That is to all three of you.
Professor Begg: The metaphor I used earlier was of a jigsaw puzzle that is 80% complete, so eight out of 10.
Nadhim Zahawi: So you think eight out of 10.
Professor Begg: Don’t overlook the fact that American monetary union took 100 years and a civil war. We may be being unrealistic in expecting this to happen as rapidly as it has.
Nadhim Zahawi: So there’s a whole load more pain before we get there.
Mr Hendrick: It can’t afford to fail.
Dr James: I would go marginally lower at seven out of 10.
Dr Armstrong: To clarify, there is the question of how far we are today, and I would probably give seven or eight, but before the crisis it was a very low number. It was patently incomplete. Today, the changes that they are at least proposing are pretty impressive. It is radical stuff. Not many nations or economic areas have tried that. They certainly have gone as far as any economist could have expected them to have gone. The question is: can you implement it?
Q161 Daniel Kawczynski: I have one question at the end for Professor Begg, but this is for the panel. What will be the impact on the United Kingdom if the eurozone continues to be beset by the sort of crises it has been through recently?
Professor Begg: It is very simple really. If it continues as a crisis and the result of that is slow growth and demand, British exports suffer, because such a high proportion of our exports continue to go to the EU. Never mind whether it is the Rotterdam-Antwerp effect or any other kind of adjustment to the calculation, it is still—
Q162 Mr Holloway: What is that?
Professor Begg: Sorry, it is something that often comes up. Trade goes through Rotterdam and is then re-exported to the rest of the world, but we count it in the first instance as an export to the Netherlands. The fact is that somewhere between 40% and 50% of our exports go to the EU, so if the EU grows slowly, we suffer.
Q163 Daniel Kawczynski: Is there anything else apart from exports that you can envisage?
Professor Begg: That is the direct connection. Then there is the indirect connection through the City. A significant proportion of the City’s business is acting as the financial centre for the eurozone and for Europe as a whole. If there is continued disarray in the eurozone, again it will be bad for the prospects of the financial sector—it could go on in a similar vein.
Dr James: I would point to the political implications for the UK of either further eurozone integration or a stalling of further eurozone integration. I think that the implications for the UK are very mixed. I know that there has been a great deal of talk about the potential for eurozone caucusing, but so far I do not think there is much evidence for it, apart from the EFSM—the bridging loan provided to Greece—which I see more as the exception to the rule. I do not see a great deal of eurozone caucusing. Again, the financial transaction tax provides an interesting example. Clearly, the eurozone has not been able to agree on it, and the countries that decided to try and go ahead with it have not been able to agree among themselves. The assumption underlying those sorts of questions—that the eurozone is a coherent bloc and the non-euro states are another coherent bloc—is a false one to make.
Dr Armstrong: I think that the question was, what would happen to the UK if the stasis persisted? The question is whether that would be a stable equilibrium for the eurozone. What tends to happen is that you have very poor economic growth and your currency falls over time, but what we see is the biggest current account surplus in the world being Germany’s, which presumably is leading on to a bigger current account surplus in Germany, because it is extremely good at exporting intermediate goods. That would again raise some questions about imbalances between the regions in the eurozone. There is still a considerable problem with non-performing loans in the banking sector in some European countries. If you have no economic growth, that will not come down. So this starts eating into the fiscal space as well. There is a very interesting question: if you have no growth in Europe, is that a sustainable equilibrium in terms of the union? My personal view is that they will still get through, but we cannot deny that there are risks.
Q164 Daniel Kawczynski: If, during this Parliament and slightly beyond, they go through the same sort of crises that they have done over the past four or five years, are you saying that that will put at risk the whole structure of the European Union?
Dr Armstrong: It puts at risk the question of whether the eurozone with its current membership is a resolved issue.
Q165 Daniel Kawczynski: How do you see the eurozone looking in 20 years’ time?
Dr Armstrong: That sort of just continues the previous question. It is either a much smaller currency enjoyed by far fewer countries, or a currency area that has all the institutions that you would expect of a successful monetary union. I do not think that there is a middle way position over a 20-year period—it is not a stable equilibrium. Either there has to be a full institutional framework to support a monetary union, or there will not be the number of countries in the euro that there are today.
Q166 Chair: Do you both agree?
Dr James: Yes, with a 20-year horizon. If you look back to where the eurozone was 20 years ago, the basic contours of where we are now was more or less there, so I would say that 20 years from now you will be looking at the “Five Presidents’ Report” fully implemented, perhaps a bit more of a centralised fiscal capacity, but probably not more, and perhaps another three or four members of the eurozone.
Professor Begg: I am trying to get the crystal ball out.
Chair: That is all we are asking.
Professor Begg: The one thing that I would expect to arrive over that time horizon would be eurobonds, equivalent to the US T-bond, because they are a logical consequence of having a functioning single currency. You can go back to 1790 when Alexander Hamilton introduced the bond in the US to realise that it was a fundamental element in constructing the dollar.
We should also be aware that several countries in Europe will start ageing quite rapidly over that time period. They will therefore have to think afresh about the approach to debt sustainability in ways that we just haven’t imagined yet. Germany in particular is going to age rapidly from about the end of this decade onwards, which will have major consequences for the way they administer fiscal policy.
Q167 Daniel Kawczynski: Professor Begg, you referred at the outset to Poland, which is obviously one of the bigger countries—
Professor Begg: I am looking at your name.
Q168 Daniel Kawczynski: Yes—originally from Poland. Poland has not joined the eurozone, and you stated that its Governments sometimes change their minds or are likely to fall. In this case, the Law and Justice party has a majority and the President is from the same party, so I want to check my understanding of why you felt that the Government may not be stable. Do you believe that they will join the eurozone or that this new political change in Poland will mean that they don’t?
Professor Begg: Let me start by amplifying what I said earlier, which is that we have seen frequent change in the content of Polish Government from Kwaśniewski’s period, the initial Law and Justice period, 10 years of Civic Platform and now back to Law and Justice. Before 2009, both the central bank and the Government were very keen on joining the euro. They then started to vacillate. I have heard Marek Belka, the governor of the central bank, say that the euro is now a different contract from the one that Poland signed up to when it joined the EU because of the bail-outs, which have created a new element in the narrative. That is one of the reasons why they have become hesitant, but I was making the rather banal point that to think that the Law and Justice approach, which is probably more hostile to the euro today, will still be in place in five years’ time is to misread Polish history.
Q169 Daniel Kawczynski: You referred to a crystal ball, but do you believe that these central and eastern European countries and their populations still want to buy into the concept of ultimately joining the eurozone, or are they seriously reconsidering it, bearing in mind all the difficulties that have taken place?
Professor Begg: I hesitate to speak for somebody in Małopolska or Lublin, but I would say that it will be strongly influenced by the continuation of the supply networks we see connecting Poland, the Slovak Republic, Hungary and the Czech Republic to Germany. If these become more intense than they are at present, I think you will see a recognition that having a common currency is going to be helpful to them. Whether it feeds down to the average Polish or Czech voter, you would probably know better than I do.
Q170 Mr Holloway: What sort of governance arrangements do you think will emerge for eurozone and non-eurozone countries, given the UK’s current renegotiation?
Professor Begg: The danger in the way it has been portrayed in the letter to Donald Tusk that was addressed three weeks ago is that we, the Brits, are making a distinction between two groups: the eurozone and the non-eurozone. Neither group is coherent. We have discussed the lack of coherence within the eurozone already, but within the non-eurozone you already have several countries that are agreeing to take part in the fiscal compact, which is the fiscal discipline, and also in banking union. Britain is becoming increasingly isolated in this, so to portray it as simply two groups for which there will be two sets of governance arrangements is probably too unsubtle for the way it is evolving.
Dr James: I suppose that I would add two things to that. One is that the fundamental challenge of what the UK Government are trying to achieve in terms of renegotiating the terms of membership is trying to redesign the rules of the game while not knowing how many players you are likely to have in 10 or 20 years’ time, or the preferences of those players in 10 or 20 years’ time, and trying to guess what those might be and trying to put rules in place to deal with that. Fundamentally, I would imagine that the outcome will be some form of emergency brake for non-eurozone states.
What the eurozone countries, certainly Germany, will not sign up to is some sort of veto. The fundamental problem with double majority voting is that, over time, it may become in essence a UK veto, but it may simply become less effective, as Professor Begg was saying, because the two groups are not coherent anyway. Double majority voting does not necessarily protect British interests in that sense.
Dr Armstrong: The best that can be hoped for is an emergency brake, but this idea of a permanent veto is a real problem.
Professor Begg: We should be clear—if the Foreign Office is making it clear—that a veto is no longer on the table for Britain anyway.
Chair: We are just waiting to see whether there will be a Division in the House, but let us proceed—it is not going to be opposed, but it probably will be. Andrew, do you want to kick off?
Q171 Andrew Rosindell: Some of those campaigning to leave the European Union argue that eurozone integration will inevitably lead to greater political integration, leaving the UK in a permanent minority on key political issues within the EU. Do you agree?
Professor Begg: To put it as broadly as “key political issues”, no I don’t. There are some aspects of economic governance where you can expect more of a division, but key political issues could include, “What do you about Syria?”, where we are more likely to find common cause with the French than we are with the Austrians.
Dr James: I agree with Professor Begg. There are some areas in which the eurozone clearly have shared interests, in terms of further integration, but on broader political issues, there is very little evidence of consensus or a shared viewpoint across the eurozone.
Dr Armstrong: I would support that.
Q172 Andrew Rosindell: But surely, everything at the end of the day is about money—about finance—and clearly, if the financial control is through the eurozone, ultimately, that will have a knock-on effect in terms of political decisions as well. You cannot really separate the two, can you?
Professor Begg: Let’s not forget that, in the way that the EU is set up, there is a requirement of unanimity on the EU budget at the level of the member states. Britain, even as one out of 27, has often been the single one saying “No” to something, and that will continue.
Q173 Andrew Rosindell: Putting it the other way round, if what you are saying is correct, how is it sustainable that an organisation with so many countries effectively has a single currency, given that the euro is the currency of the majority of them? Surely that will ensure that the political impetus for major decisions will be based on the interests of the eurozone countries, rather than of countries that are outside the eurozone. So those who choose not to join the eurozone or, in our case, choose never to join the eurozone, as seems likely, are permanently on the outside of the inner core of decision making, which is bound to have an effect on other things.
Dr Armstrong: Financial regulation is the obvious area where this has become a problem for the non-eurozone—non-banking union—countries. I can see how you can get that issue there, but I am not sure how many political decisions are made with respect to the currency of the Parliament. Do we sit here and say, “Shall we pass this Act?” “Well, what does it mean for sterling?” We don’t do that. Apart from financial regulation—I completely understand that line of argument; if that is the one you are implying, that does raise questions for the UK—I am not quite sure I see why it necessarily follows that because you have a single currency area, the political decisions are somehow biased in favour of that currency or currency area. I don’t quite follow that, apart from on financial regulation.
Q174 Chair: You don’t see that, with a core of the eurozone countries—their interests are so much more closely aligned than the non-eurozone countries—there would be a natural division of interest?
Dr Armstrong: On things like financial regulation, yes, I can understand that, but apart from that—if the line of argument is about financial regulation, I completely understand where it is going, but many other political decisions are made for which I am not quite sure why that line is there.
Dr James: I would just add to that and go back to my point about the fact that the eurozone contains so many competing visions of political economy. Again, you don’t have consensus. What you have in the eurozone are different visions of what eurozone integration should look like. The eurozone will have to manage those competing visions more effectively, but that does not mean that that will translate into a consensus or a single coherent vision of what integration should look like.
Even on financial integration, again, I would flag up the financial transaction tax—the one attempt by the eurozone to use enhanced co-operation—which thus far hasn’t really worked. There is clearly no consensus among the 19 eurozone states, and there isn’t much agreement among the 11 that have decided to pursue it.
Q175 Andrew Rosindell: You think that we can be economically integrated but politically disunited, and that that is sustainable. Is there anywhere else in the world where that works—where you have economic, financial integration, but politically people are doing different things? Is there any other political union that you can give an example of, anywhere in the world, where that actually works?
Professor Begg: The United Kingdom.
Dr Armstrong: There are lots of places.
Q176 Andrew Rosindell: What about political union between separate nations? The United Kingdom is a united kingdom and has been for more than 300 years. It was not politically created overnight; it is something that has evolved over a long time.
Professor Begg: In that case, the simple answer is that there is no parallel grouping of countries with the degree of integration that the European Union has. It is one of a kind.
Dr Armstrong: There are lots of areas with economic integration but without political integration, obviously.
Q177 Mr Baron: Following on from what Mr Rosindell has been saying, granted it was three or four years ago, but when we last visited Brussels we were told by Brussels bureaucrats—for me, this is one of the key questions we have to address—that Britain’s position outside the eurozone but inside the EU was, in the longer term, not sustainable because the institutions of the EU will favour the eurozone as it pushes for closer fiscal and political union. You are casting doubt on that, but for monetary union to work you need fiscal union. I take professor Begg’s point about fiscal transfers, but I think it is broadly accepted that, to reach that point of proper fiscal union, the bottom line is that, if you really want a rock-solid fiscal union, you have to get into the nitty-gritty of talking about the same tax rates, the same deficit balances and so forth between the countries, so that there is harmony there to make the system work. At the end of the day, that has to lead to political union.
Chair: Which is in the words of the “Five Presidents’ Report”.
Q178 Mr Baron: Yes. It is even written into the original treaty of Rome: ever closer political union. Let’s start from the basics. Do you accept that, if the monetary union is going to work, it will inevitably lead to political union, at least among those countries participating in the euro?
Professor Begg: Let me try to answer that in two different ways. First, we have parallel projects here. One is the single market, which, as we all know, is the thing Britain is supposed to love most about Europe. On many interpretations, the single market is the core of the European Union and the currency is seen as an add-on to make the single market work better. I happen to think that that is a misreading of what is going on, because the expression “economic and monetary union” has first in it the E—the economic union. That is the direction in which I think we are perhaps neglecting to analyse this. Economic union could well mean the harmonisation of certain tax rates. For example, there has been a push from Brussels, and even from the Germans and the French over the years, to at least have common co-ordinated corporate tax rates.
Q179 Mr Baron: Professor Begg, if you don’t mind, you are answering a slightly different question.
Professor Begg: I don’t think I am.
Q180 Mr Baron: I think you are, and I will tell you why. I have asked about monetary union, not economic union. I would disagree with you: I don’t think we have a single market. If you try to get a British utility company to take over a French or German one, it will not happen, I promise you, so I don’t believe that we currently have a completely free single market. Rather, my question is that, if we accept that monetary union, not economic union, leads to fiscal union—none of us can think of an example of where monetary union succeeds without fiscal union—then that leads you on to political union. That is certainly what the bureaucrats in Brussels would have us believe—if you have fiscal union, you have to have political union. I return to the original question: does the panel accept that, at least within the eurozone, they are heading towards political union?
Professor Begg: Yes, to a degree, but you are going to miss an element of this if you neglect the E in it, for the simple reason that the deepening that is going on involves things that could move away from a single-market analysis—accepting the flaws in the single market that you correctly mentioned—towards a much deeper form of economic union, as you see in the United States. That is distinct from political union.
Q181 Mr Baron: Therefore, may I pursue that? If it is generally accepted that the eurozone is heading towards political union, can I bring us back to the original question, something that the Committee is trying to grapple with? If you have got the majority of the EU heading towards political union and no safeguards—because I can’t see any safeguards as yet; the institutions of the EU will not help with that process. It is unrealistic to expect them not to, given it is the vast majority of member states heading towards this political union. Isn’t Britain going to be in an untenable position? Isn’t that what the Brussels bureaucrat was telling us?
Professor Begg: Yes, I think it does become an uncomfortable position for the UK to be in. In a sense, it is the UK saying we want shallower union at a time when the rest are saying they want deeper union. I would still insist on having the different components of it, which come together to distinguish the UK above all other countries from what the eurozone is leading towards.
Q182 Mr Baron: But we are kidding ourselves. I think there has got to be an element of honesty in this debate. If you accept that the majority of the EU is heading towards political union, and that the institutions are going to be used towards that end—it will be a gradual process, nothing overnight, but that is where we are heading and it is even written into the treaty—isn’t this the difficult decision for the UK to make? Do we want to sign up to this agenda of political union or not, and everything that that brings? That is the central question we have to address at the end of the day.
Professor Begg: I think I am agreeing with you in saying, yes there is a tension there for the UK, which is going to be very difficult to resolve. I would not pin yourself just to saying political union; that is a mistake.
Q183 Mr Baron: You think it is complete union, economic and political.
Professor Begg: Yes.
Mr Baron: I don’t think we disagree on that. I am just focused on the politics because it stands more chance of affecting foreign policy, which is what we are about at the end of the day.
Q184 Mr Hendrick: On that point, are some commentators overplaying the degree to which political union can take place? We look, for example, at the common foreign and security policy and the requirement to get unanimity for a particular decision. Often what we see is the lowest common denominator in terms of an agreement rather than the highest common factor.
What we would be moving towards are situations like those we saw, for example, in Libya, where maybe Britain and France choose to take action whereas all the other member states say they want nothing to do with that. You get this enhanced co-operation—member states doing what they want to do with other member states that want to do it—rather than the idea of a political union with everybody having to agree to something that they do not really agree to.
That is how it is painted, as if we are being forced into a political union that we really do not want to be a part of. It seems to me as if it is going towards an à la carte situation, certainly in terms of foreign policy, rather than a requirement for unanimity, which in the end means any policy is watered down to the lowest level.
Dr James: May I just emphasise the importance of getting away from the idea that at any point in the foreseeable future this is going to be a coherent economic or political union? This is a very different type of political union. We are talking about political unions, perhaps assuming that this is going to be some sort of coherent nation state or sovereign state. We should bear it in mind that the eurozone as a “political union” is never going to be a stable entity, because it is going to keep expanding, or it may shrink in future.
Q185 Mr Hendrick: It is not going to be a United States of Europe, is it? That’s my point.
Dr James: No. Certainly not in the foreseeable future.
Q186 Mr Hendrick: That is how it is dressed up by the opponents of the European Union. That at some stage in the future it is going to look like the United States. My contention, for the reasons I have said, is that it never will.
Professor Begg: I heard a very nice expression a few years ago, which is a united Europe of states.
Q187 Chair: Perhaps we can finish this session with you by asking this question. If we left the European Union after the referendum, by the end of 2017, would that assist the rest of the EU countries in effecting political integration to support the eurozone? Would having got rid of this difficult, tricky partner, in the form of the United Kingdom, be of assistance to our former partners in getting their political act together to sustain the eurozone?
Professor Begg: I don’t think you can give a comprehensive and single answer to that, because Britain would be missed in some respects, particularly from the perspective of the Germans, as a supporter of their orientation towards the global economy and a counterweight to the French propensity, shall we say, to have more protectionist approaches. The Italians would miss us in other respects as a voice for a better approach to some of the Balkan problems. Others would miss us for all sorts of reasons. It is very hard for me to say that there is a single answer—that, yes, they would feel better off without us.
Q188 Chair: That was not quite the question. It was: would this accelerate political integration?
Professor Begg: No.
Dr James: No. I would agree.
Dr Armstrong: I think it would not. I can think of three reasons. First, the UK helps Europe have faster growth, because we grow faster than Europe—we have done for some time. We have a more liberal approach to markets, which would be missing. But, also, we play a very important role as the financial centre for the eurozone, and, while most of the elements that make that up are ultimately moveable, it would be quite a task to replicate that somewhere else. That would increase the transactions cost and make it even more difficult for—
Q189 Chair: So if we left, it would not accelerate the political integration in Europe. Would it in some way destabilise the European project that we had left behind?
Dr Armstrong: On the spectrum I that mentioned earlier—whether this was a stable equilibrium, or whether you would go to one of the two extremes—I think you would go towards the slower growth, more vulnerable of the two outcomes if the UK left.
Dr James: I think that there is a differentiated impact. On a day-to-day basis, I don’t think it would make a huge difference, in the sense that I don’t think the UK is as awkward a partner in the EU institutions and the EU project as, sometimes, it is made out to be—there are plenty of other candidates in the EU that would fit that title quite well. So, on a day-to-day, short-term basis, it probably would not make a great difference. Longer term, it has huge strategic and symbolic implications—strategic in the sense that you might see the centre of political gravity in Europe shifting south and east. I think it would disrupt the Franco-German alliance, rather than reinforcing it, because, very often, the French and the Germans don’t agree on a great deal of things. Symbolically, it would be tremendously important, because this would be the first historical example of European integration going into reverse—a state leaving.
Professor Begg: One further irony is that if you ask that question in other capitals, they would say, “The EU, over the last 10 to 15 years, has moved more in the direction of the British than we would like.”
Q190 Mr Holloway: Overall, do you think Britain will do better or worse if we leave the EU?
Professor Begg: There are only two words you can answer that with: it depends.
Q191 Mr Holloway: On what?
Professor Begg: On what the definition of “out” is.
Q192 Mr Holloway: Do you guys think the same?
Dr James: Yes.
Dr Armstrong: Yes.
Chair: Gentlemen, thank you very much. We will move on now to our second panel. I am very grateful to you for your evidence.
Examination of Witnesses
Witnesses: Professor Sir Alan Dashwood QC, Emeritus Professor of European Law, Cambridge University, and Professor Panos Koutrakos, Jean Monnet Professor of European Law, City University London, gave evidence.
Chair: Professors, welcome to our second session on Brexit and its consequences for our position under international law. I would be grateful if you both introduced yourselves for the benefit of the record.
Professor Sir Alan Dashwood: I am Alan Dashwood, a retired professor from Cambridge, currently a professor at City University and a barrister.
Professor Koutrakos: I am Panos Koutrakos, Professor of European Law at City Law School.
Q193 Chair: How, in practice, do EU-only and so-called mixed arrangements differ with respect to the obligations that they place on individual member states?
Professor Sir Alan Dashwood: EU-only agreements are concluded by the Union under its exclusive competences, which are quite limited. There is rather a short list of competences that are exclusive in principle which is found in Article 3(1) of the treaty on the functioning of the European Union. For external purposes, these consist of the common commercial policy and the customs union—they are really two sides of the same coin, and that is the most important instance—together with conservation of marine resources and monetary policy for the member states whose currency is the euro, which of course does not concern us. In those areas where the Union will enter into international agreements in its own name alone, the member states become bound, but only as members of the Union, because Union agreements bind them; they are not directly parties to the agreement.
In the case of mixed agreements, which are concluded by both the Union and the member states, the member states are themselves parties—they exercise their national competences in order to become parties to the agreement—but it will often be uncertain to what extent the agreement has been concluded by the Union and to what extent by the member states. This is often left unspecific, partly I think in order to avoid disputes at the moment when agreements are being negotiated. Mixed agreements are often quite complex bundles, which will include an element of the common commercial policy, for example, and therefore that bit of the agreement will belong to the exclusive competence of the Union; they might also include something about development co-operation, which is an area of shared competence, and the member states may very well take the view that they concluded that part of the agreement. If it is a really complex matter, there might be something that impinges on security matters, which the member states will have intended to conclude themselves. I hope that is helpful.
Q194 Chair: Yes. In terms of the genesis—whether it is mixed or EU-only—are the obligations placed on the member states in that sense identical?
Professor Sir Alan Dashwood: You have to look at it from the point of view of the third country or countries concerned. If there is nothing in the agreement to identify the parts of it that have been concluded by the Union and the parts that have been concluded by the member states—that is usually the case—the third countries concerned are entitled to assume that the agreement binds the Union and the member states jointly and severally. In some cases—this is relatively rare and not always helpful—there is something that is known as a competence clause, which attempts to define the matters for which the Union is accepting obligations and those for which the member states are accepting obligations. As I said, they are not always very helpful, because the situation is legally complex.
Q195 Chair: Professor Koutrakos, is there anything that you want to add to that?
Professor Koutrakos: Not really, other than that, in the context of mixed agreements, in addition to the specific obligations imposed on the basis of the clauses of the agreement, there is an additional obligation on member states in the duty of co-operation. This is a broad duty which is imposed on member states. It is actually a duty which is imposed on the Union institutions, too. The idea is that, in their interactions in the process of the negotiation, conclusion and application of the agreement, they co-operate. This binds the member states even in areas that fall within their own competence. Under the agreement, they have to take this duty into account.
Q196 Chair: In the case of mixed agreements, such as the partnership and co-operation agreements with third countries, if we left the EU, would we retain the obligations?
Professor Sir Alan Dashwood: It is a difficult question but, in my opinion, almost certainly not, because these are bilateral agreements which are concluded by the Union and its member states of the one part, and by the third country—say, Bosnia—of the other part. The member states are, therefore, parties to agreements of this kind not in their own right but as member states of the Union. That is a matter that would have to be addressed in the context of withdrawal negotiations, or possibly subsequently if it proved too complicated to resolve during the two-year period which the treaty allows.
Q197 Chair: Professor Koutrakos, would you agree with that?
Professor Koutrakos: I think that that is right. The argument might be made that the parts of the agreement that fall within national competence might continue to exist, but actually, as Sir Alan said, both the wording of the agreements and the fact that they are package agreements which the partner country has accepted suggest that it would be very difficult for those agreements to continue to exist.
Q198 Chair: So the view of both of you is that we would have to renegotiate those agreements from scratch if we left?
Professor Sir Alan Dashwood: Yes.
Q199 Nadhim Zahawi: What are the major ways in which the current EU external legal regime constrains the UK’s international action? How free, in practice, is the UK to conclude agreements in areas of non-EU competence with third states and international organisations?
Professor Sir Alan Dashwood: The constraints are related to what I already said, and Professor Koutrakos also, when I was talking about exclusivity and exclusive competence. Professor Koutrakos mentioned the duty of close co-operation. In areas of exclusive EU competence, the member states are not able to act unilaterally, because it is a competence which, under the treaties, belongs exclusively to the Union.
I should add that there is a form of exclusivity that is not specifically provided for by the treaty, at least not initially. It now appears in the treaty post-Lisbon. When the Union has adopted internal legislation on a certain matter, the member states may no longer enter into international agreements relating to the same subject matter.
That goes back to quite an old case known as the ERTA case. ERTA stands for European Road Transport Agreement. It is a case that dates from the end of the 1960s when it was decided by the Court that competence to enter into that agreement, which was a multilateral agreement about the social conditions for commercial vehicle drivers—driving hours and that sort of thing—belonged exclusively to the Union. What was then an EEC regulation had been adopted relating to the same subject matter—it is almost identical in its content.
If there has been internal legislation in an area of shared competence, that restricts the freedom of the member states to act externally, because otherwise there would be a risk of their taking on international obligations in an area that is already covered by EU law. Perhaps Professor Koutrakos would like to say a word about close co-operation.
Professor Koutrakos: The duty of close co-operation imposes constraints on what member states may do within the context of mixed agreements. For instance, the Court has told us that Ireland did not have the right to bring an action against the UK before the organs of the United Nations convention on the law of the sea, because this violated the duty of co-operation. Instead, it should have brought this matter before the Commission. In another example, in the context of the Stockholm convention on persistent organic pollutants, the Court told us that Sweden did not have the right to make a proposal for a specific substance to be qualified under the regime of the convention.
The duty of co-operation is also of a broader scope. It may impose constraints on what member states may do in the context of international organisations to which the EU is not a party. An example is the IMO—the International Maritime Organisation. The Court told us that Greece did not have the right to make a proposal under some conventions of this organisation because it did so in an area that fell within Union competence, even though the Union was not a party to this organisation. It was merely due to the rules of the membership organisation.
Q200 Mr Hendrick: How often do member states and the European Commission clash over competences in international law?
Professor Sir Alan Dashwood: Reasonably often, I would say. There are two particularly sensitive areas. There was a time when clashes could usually be explained by the different voting procedures of the Council provided for by legal bases. Member states, and therefore the Council, tended to favour legal bases that provided for unanimity, and the Commission tended to favour legal bases that provided for qualified majority voting. That is more or less a thing of the past, because qualified majority voting has become so widespread, so the clashes about the choice of legal basis are usually related to the common commercial policy because of the Union’s exclusive competence in that field. The Commission, as I suppose you might expect, has a strong preference for using the common commercial policy—that’s trade—as a legal basis wherever a plausible case for this can be made, whereas the member states and the Council will very often be arguing for a different legal basis.
One area where there were quite a lot of disputes in the late 1990s was at the interface between the common commercial policy and environmental policy, because so many multilateral environmental agreements use trade-related mechanisms—bans on imports of certain products and that sort of thing. Although the agreement has an environmental objective, the instrumentality is quite often trade-related, so there were disputes about the interface between those two legal bases, some of which the Commission won and some of which the member states won.
Q201 Mr Hendrick: How is that resolved? Is it through the Court of Justice?
Professor Sir Alan Dashwood: It has to be resolved through the Court of Justice, yes. There are also disputes in relation to the choice of the common commercial policy or an internal market legal basis, because competence for the internal market is shared, so that opens up the possibility of having a mixed agreement. Those are the two areas where there is an interface that has been contested.
Professor Koutrakos: I have just two brief points to add. First, such disputes do not arise only between member states and the Union; there is also a strong inter-institutional dimension. Institutions themselves may fight over legal bases. This is not just in the area of external relations; it is also in the area of the internal market—internal legislation. It’s just the nature of the beast. The allocation of powers for institutions and different legal bases, all of which may as time goes by become interrelated, raise questions about which is the right legal basis and therefore which institution has power, so this is not really an issue specific to this area.
The second point I would like to mention is this. While ultimately these disputes are solved—addressed—by the Court of Justice, there is a very considerable practice, on the basis of which the Union institutions and the member states are trying to avoid these disputes for as long as they can. So there is a proliferation of practical arrangements, ad hoc arrangements, which enable the institutions and the member states to get on with the negotiation of international agreements, leaving the issue of competence aside. Quite often, when the issue of competence arises—it needs to be raised before the Court—it is at the end of this process. This seems to suggest that the system has an in-built degree of flexibility, which allows the question of principle—who has the competence to act in this area?—to be set aside, so that the institutions can get on with treaty making.
Q202 Chair: In which direction does the European Court of Justice go when it rules on a delineation of competences? Mythology suggests that it will always rule in favour of the EU institutions and the Commission, rather than the member states. What is your expert opinion and experience?
Professor Sir Alan Dashwood: May I just put a slight gloss on that? Disputes about legal bases are very often between the Council and the Commission, so they are inter-institutional disputes, but of course the member states will be standing behind the Council. More often than not, the Court decides in favour of the Commission—but not invariably.
Q203 Chair: Are we talking 70:30, 90:10? Is it, as some people suggest, institutionally on the side of the Commission and ever closer union, or is this not an area—
Professor Sir Alan Dashwood: I bear the marks of these things because I quite often appear for the United Kingdom before the Court of Justice, but—
Q204 Chair: Do you think you are pushing water uphill in front of those Justices because they are kind of programmed around ever closer union and therefore supporting Commission competence?
Professor Sir Alan Dashwood: I do not feel that. It really depends very much on the case. I was talking about those environmental cases, and I had no difficulty in arguing those. The ones that I do find difficult—you can understand this, I think—are those that relate to UK opt-outs or opt-ins, because you are asking for special treatment. Now, this is special treatment which has been guaranteed by the treaties, and you are entitled to it, but you have to make a really good case, and more often than not I have failed to convince the Court of Justice.
Q205 Chair: So if you have produced a case where we, in treaty, are guaranteed an opt-in or opt-out, whatever it is, and then the Justices just say, “Well, unlucky”—
Professor Sir Alan Dashwood: I am sorry; I did not quite mean to say that. No; you know, these are always cases where there is room for interpretation.
Q206 Chair: In which case we are then left with a rather sore feeling, as the United Kingdom, that the interpretation has not been as would have been no doubt presented by our political leaders whenever they negotiated that particular opt-in or opt-out. So they will come back to the UK and say, “Great triumph: we have got ourselves an opt-out on this,” and we then find it gets reversed in the European Court of Justice.
Professor Sir Alan Dashwood: The cases that one ends up litigating are usually rather complex ones that the negotiators probably wouldn’t have thought of at the time.
Q207 Mr Hendrick: On that point, do you feel that the Commission in particular sees itself, rather than the Court of Justice, as having the duty to uphold the treaty, and therefore when member states, through the Council, pick up on something, they try to interpret the treaty in a way which they think the Court of Justice would in any case?
Professor Sir Alan Dashwood: The Commission certainly does see itself as the guardian of the treaties, and I think justifiably. That is its job.
Q208 Mr Hendrick: But that would be the reason why, in answer to the Chairman’s question, the outcomes would weigh in favour of the Commission rather than the complainant through the Council.
Professor Sir Alan Dashwood: The Commission will be putting forward a view which, in its conception of the Union, is helping to promote the well functioning of the system. The Court may quite often agree with it, but not invariably. It depends on how good a case we have to make, and it is just very difficult to make a case in favour of opt-ins and opt-outs, except where they very obviously apply.
Professor Koutrakos: I want to make just a couple of points. When it comes to the Commission, it is not always a question of ideology. Sometimes it may be, but there is also a question of efficiency. The argument that the Commission quite often puts forward in this context is that it is much easier for it to negotiate with third parties if it did not have at the same time to negotiate with the 28 member states. And it is the complexities of mixed agreements which would make this argument. That is the first point.
The second point is that one of the reasons why we do have these disputes is that sometimes the text of the treaties is not particularly helpful. For instance, an area which is under discussion at the moment is what orders for entering investment mean precisely. This is an area where the Union has exclusive competence, under article 207 of TFEU, but there are questions about the scope of this provision. It is the role of the Court, and the member states have asked the Court, to interpret such terms. It is in this context that such disputes arise.
The other thing is that there are phases in the developments of the Court’s case law. That is the case generally, but also in the area of external relations. For instance, in the ’90s, when the Union concluded the World Trade Organisation agreement, the Court offered an opinion about the competence of the Union to conclude that agreement. While the Commission had asked for exclusive competence over almost everything, the Court interpreted exclusivity in a much subtler way. What I am saying is that many of these cases are very case-specific, and it is not always easy or useful to draw very general conclusions.
Q209 Mr Hendrick: If you look at, for example, competition law and state aids, I get the impression that often it is a toss-up which way these cases go. A member state might have a very good case for wanting to subsidise a particular industry or set of rules or regulations that it wants to bring in, and other member states may obviously object. Looking at competition law as it is constituted, the Court of Justice will often rule either way—not necessarily for the Commission or for the member state. Would you comment on that?
Professor Koutrakos: I think that is right, in this case.
Professor Sir Alan Dashwood: It certainly is right. These cases start off in the general court, because they are normally being brought by a company that has had a fine imposed and is contesting the validity of the Commission’s decision. They may go up to the Court of Justice or Court of Appeal. The Commission loses quite a lot of cases in the area of competition, which of course is a much more technical area.
Q210 Yasmin Qureshi: You were asked specifically about the fact that you have represented the United Kingdom. Do you still act as legal counsel for the UK?
Professor Sir Alan Dashwood: I am not at the moment instructed, but I hope I may be in the future.
Q211 Yasmin Qureshi: Okay; my next question might be difficult for you then, because this might have an impact on your profession. When the United Kingdom Government present a case on a particular issue—whether that is to do with a treaty, competence or the Commission—as you said, sometimes you are not successful. Nation states will try to push as far as they can. That is not necessarily to say they are legally correct, but they know that. In terms of the decision of the Court as the ultimate arbitrator, looking at this purely academically or as an independent person, do you feel that on the whole, the European Court gets its decisions right on the basis of treaty obligations and case law?
I will give you an example. I do not do it any more, but as a barrister, I often put in applications knowing full well I was probably going to be rejected, but you have to go through certain things. When the judge went against me, I knew that the decision was probably right; I was just trying to push things. In reality, how often do you agree with the decision given by the European Court?
Professor Sir Alan Dashwood: I find—perhaps you have had the same experience—it quite difficult to be entirely objective about a judgment when I have been arguing with might and main and lose. It is quite difficult to be so broad-minded as to say, “We did our best, but obviously the Court was right.”
Q212 Yasmin Qureshi: That is why I said that, if you are still practising, you may not want to comment on that. I used to make applications that I thought should succeed, but often you make applications because your client expects that, and there may be some room for manoeuvre—it is not that the applications are outrageous—but, on reflection when the decision comes you think, “Actually, it sort of makes sense in the context.”
Professor Sir Alan Dashwood: Yes, there have been cases where I have thought, “This can go either way,” and we do our best, and in the end we lose. You have to remember that, when you are acting for a member state, you do not necessarily lose completely, because a member state is interested not so much in the particular outcome of the case as in the legal principles that it establishes.
Sometimes, if you argue the case carefully, although you understand that there is a real chance of losing, you can limit the damage by ensuring that the court will decide the case on a fairly narrow ground. But there certainly have been some cases where I thought the judgment was outrageous.
Q213 Daniel Kawczynski: Can you name one?
Yasmin Qureshi: What about the 30/70 or 10/90 figures?
Professor Sir Alan Dashwood: There are not many of those, but there are some.
Q214 Yasmin Qureshi: Moving on from that, how successful has the UK been in resisting the so-called competence creep by the European Commission in international law?
Professor Koutrakos: There are areas where the UK has been successful. The thing to remember is that the concerns the UK may have in certain areas may be shared by other parties. Also, when we are talking about international agreements, the decision about the conclusion of these agreements is made by the Council: the representatives of the member states.
It may well be the case that in those areas where the UK feels strongly about things, it may have built a coalition in the Council. An example: there is a request to the Court about the conclusion of the Marrakesh treaty to facilitate access to published works for persons who are blind. The Commission brought the request to the Court and, about the conclusion of the agreement, the Commission argued that the agreement ought to have been concluded exclusively by the Union, and the Council did not adopt such a decision. The Commission did not manage to convince the Council to get a qualified majority vote. So there is an area where indirectly there may well be influence in the direction of treaty making.
The UK is quite sensitive when it comes to representation: statements made by the European Commission in areas where competences are shared. The Commission thinks that those statements ought to be made by just one actor who speaks for everybody. It is quite important for the UK to be seen to be making such statements, so an arrangement was reached a few years ago. Our partners are not very happy about this, because it makes things a bit more cumbersome and messier, but this is an area where the UK did have an influence.
These are the two points that I would like to make: there are such areas; and the UK is not always on its own. It is a question of building coalitions within these organisations. It is not as if the Commission is the most powerful institution that does everything. The Commission must work with the member states in the Council.
Q215 Yasmin Qureshi: As you are probably aware, initially the United Kingdom had concerns about competence creep by the European External Action Service. Were those concerns justified? If so, were we able to resist that competence creep?
Professor Sir Alan Dashwood: It is quite difficult to be precise about this because not a great deal has been published. I used to be a Brussels insider when I was in the Council’s Legal Service but that was long before the European External Action Service. The impression that I have from talking to our civil servants is that, on the whole, they co-operate well with the EEAS and they consider that it adds value. The most obvious example of this is the E3+3 talks with Iran. It might be too much to say they have been successful, but the approach has been constructive and positive. On the whole, the EEAS does not represent the threat of competence creep that is kind of constraining the external action of member states.
Professor Koutrakos: I agree with that.
Q216 Daniel Kawczynski: From a legal perspective, how would leaving the EU affect the UK’s relations with countries that currently have far-reaching agreements with the EU, such as countries that are members of the European neighbourhood policy?
Professor Sir Alan Dashwood: Just to go back to something I said before: although these are big, complex agreements, they are bilateral agreements between the Union and its member states, and the third country concerned. It would not be possible for the United Kingdom to preserve intact its present legal position under these agreements, nor would we want to—at least, I suspect that we wouldn’t want to—because we would be bound by the obligations that fall on the Union. In my opinion, if we were no longer on the Union side of the agreement, it would be necessary for us to negotiate a new relationship with these countries.
Professor Koutrakos: I think that is right. That gets us back to what we were discussing earlier. These are mixed agreements and the implications for the UK would be messy as they would entail the renegotiation of aspects of the agreements. This will take time and there is the question of what the UK would get in substance, and to what extent that will be equivalent to what it has as part of this package deal—the current agreement. It would also depend on the willingness of the partner countries because these are bilateral agreements.
Q217 Daniel Kawczynski: Will it be relatively complex for us to do that?
Professor Koutrakos: I should think that it will be very complex.
Professor Sir Alan Dashwood: Take the example—this is not the ENP agreement—of the free trade agreement with South Korea, which has been very favourable to the UK. I read somewhere that our trade with South Korea has increased by something like 165% since 2011 when that agreement entered into force. Now, that is a bilateral free trade agreement. The UK will not be able to—well, it could not—stay as a part. Although it is a free trade agreement, it is still a mixed agreement because it goes a little further than the core area of the common commercial policy. Nevertheless, I don’t believe that the UK could retain the rights and obligations that apply to it under the agreement. We would have to renegotiate and, of course, we would be renegotiating from a much less favourable position because we wouldn’t be able to offer the South Koreans access to the internal market, which is the quid pro quo for the extent to which they were willing to open up their market. I think we would find that difficult, and we would probably be in a somewhat less favourable position.
Q218 Daniel Kawczynski: Forgive my ignorance, but surely if we had a trade deficit with that country, rather than a trade surplus, that would be an influencing factor, wouldn’t it?
Professor Sir Alan Dashwood: I suppose it would, but we wouldn’t necessarily arrive at a package deal that was as favourable that the one that the Union is able to obtain.
Q219 Mr Hendrick: Following on from that, I remember when we ratified the Korean free trade deal in this House. That, of course, would be the case in other parts of the world where we have deals. That is one of the stronger cases we can use in the referendum for the UK staying in. Even though we wouldn’t have any particular obligation under these agreements, earlier you gave the example of a development agreement in a third country where the Department for International Development is doing some work. If we left the European Union, although we wouldn’t have a legal obligation through the European Union to continue with that development, I presume that the United Kingdom would still want to continue with that work, and I am sure that the country that is the beneficiary of it would be perfectly happy about that as well. These things can cut both ways, in the sense that if it suits the UK to carry on with the agreement with that third country, that is fine. I agree with you about free trade agreements like the deal with Korea. There is no way that the UK could have negotiated a deal like that on its own, because obviously the weight and mass of the European Union’s market was the major attraction.
Professor Sir Alan Dashwood: As far as development co-operation is concerned, you are right, of course, that third countries would want the UK to go on helping them, but we would still probably have to negotiate new arrangements. For instance, the Cotonou agreement, as you know, organises the relationship between the EU and the African, Canadian and Pacific countries, which are largely former French and British colonies. I do not believe that it would be possible for the UK to continue as a party to the Cotonou agreement, or indeed that we would want to, because it obliges us to contribute substantially to the European development fund. Of course, that doesn’t mean that we wouldn’t be able to—
Q220 Mr Hendrick: We could still spend the same amount of money, but not contribute to the fund.
Professor Sir Alan Dashwood: We could do it, but we would have to create a new set of arrangements with the countries concerned. I have a slight worry about Cotonou. There are member states of the Union that are very jealous of the special treatment of the former French and British colonies.
Q221 Mr Hendrick: The banana regime, if you remember.
Professor Sir Alan Dashwood: Yes. They might want to wrap the whole thing up.
Q222 Mr Hendrick: Exactly, because there are many member states that didn’t have colonies and want to have relationships with other countries that are not covered by the ACP countries.
Professor Sir Alan Dashwood: And I suspect that we would end up picking up the bill, as far as the former UK colonies are concerned.
Chair: Daniel Kawczynski has the final question on the consequences of all this.
Q223 Daniel Kawczynski: In the eventuality that we pull out of the European Union, does the Foreign Office currently have the capacity to undertake the renegotiations that we would ultimately require? If not, what would it take to build them up, and what would the cost be?
Professor Koutrakos: I am unable to comment on the cost of it. I can only say that the renegotiation of these agreements would be both messy and long. It would require expertise in areas where national capitals have not been able to be very active for a long time, because those are areas where competence was transferred to the European Union quite early on, and that would be an added complicating factor.
There is another factor that complicates things further, and it ties in with what we were discussing earlier. The trend in international treaty making is for package deals, which become more comprehensive, and the scope of which is broader. Sir Alan mentioned the agreement with South Korea. They have the free trade agreement with Canada, and of course the Transatlantic Trade and Investment Partnership. Both the scope of these agreements and the range of these areas are quite challenging. They are challenging for the Union, let alone for one Administration which is not used to negotiating big parts of these agreements. Many people say, “It is possible; it can be done,” and they refer to the free-trade agreement between Switzerland and China. However, the scope of that agreement is nowhere near as broad and comprehensive as, say, the scope of the agreement between the EU and South Korea. That adds yet another complicating factor in all this.
Q224 Daniel Kawczynski: May I briefly touch on the Canada thing? You are giving the impression that it will be quite difficult for us to renegotiate these trading agreements, but if it was just the United Kingdom by itself with Canada, don’t the history and the historical emotional ties between the countries facilitate a better agreement for Britain with Canada? Or is it purely done on a commercial basis?
Professor Koutrakos: I would have thought that the parties wanted to find as wide a market as possible to which they would have access.
Q225 Daniel Kawczynski: So even though we share the same Head of State, and all the other things that tie us together, the Canadians would not give us the same terms as they would give the rest of the European Union. Is that what you are saying?
Professor Koutrakos: Well, I am a lawyer, and from a legal point of view the only thing I would say is that the market to which the UK would give access when it negotiated with a partner country would be much, much smaller. That would make things much less attractive.
Chair: I am afraid that we have run out of time. Thank you both very much indeed. We are very grateful for your evidence.
Oral evidence: Costs and benefits of EU membership for the UK's role in the world, HC 545 2