Second Reading

European Union (Approval of Treaty Amendment Decision) Bill [HL] – in the House of Lords at 3:52 pm on 23 May 2012.

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Moved By Lord Howell of Guildford

That the Bill be read a second time.

Photo of Lord Howell of Guildford Lord Howell of Guildford Minister of State (Foreign and Commonwealth Office) (International Energy Policy) 4:19, 23 May 2012

My Lords, in bringing this Bill before the House, I am very much aware that I do so at a time when the spotlight is on the eurozone. As the Prime Minister said last week, it is vital for Britain's interests that the eurozone resolves its problems. I do not underestimate those problems. On Monday, a number of noble Lords gave their very expert views on the broader issues during the debate on the report of the European Union Committee on the euro area crisis. It was a very interesting debate.

However, this Bill is simple and straightforward. It provides solely for the parliamentary approval of an amendment to the Treaty on the Functioning of the European Union. The proposed amendment makes explicit the ability of eurozone countries to set up a financial assistance mechanism. In other words, it confirms that the eurozone can support fellow eurozone members in financial difficulty.

Although the United Kingdom is not in the eurozone, the treaty amendment is nevertheless important to us. The eurozone is in the process of setting up the European stability mechanism-or ESM. I apologise for these endless initials. The ESM will play an important role as eurozone countries work towards stability, which obviously we hope they will do. Eurozone stability is important for our own stability. When the Prime Minister agreed to the treaty amendment, he also secured an important commitment. The UK will not be liable through the European Union budget for any future eurozone bailouts once the European stability mechanism comes into force. In effect, that is another way of saying that the European financial stability mechanism will be closed down and there will be no further disbursements from that source.

Photo of Baroness Quin Baroness Quin Labour

The Minister has stressed, as have other Ministers, that we are not liable to contribute to any future bailouts. Will he none the less confirm that if we judge that it is in our economic interest to do so, as we did in the case of Ireland for example, bilateral help can be available?

Photo of Lord Howell of Guildford Lord Howell of Guildford Minister of State (Foreign and Commonwealth Office) (International Energy Policy)

There is complete freedom outside the treaties to take any decisions we want. I will come in more detail to what I have just said in reference to the EFSM, and during the afternoon we can discuss what other mechanisms of support for economies, whether in Europe or the eurozone or not, are justified, but that is the position in relation to what we are discussing today.

It is not the first time that this treaty amendment has been considered by Parliament. Before the Prime Minister signed the treaty last March, a Motion in favour of signature was passed by both Houses, with no opposition in your Lordships' House. At the time I committed to bringing the decision before Parliament again. Thus we are applying the more rigorous requirements for parliamentary control over European Union decision-making, as we committed to do in the European Union Act 2011. Parliamentary approval will enable the UK to complete its ratification process for this treaty amendment.

I recognise that 14 months is a long time in eurozone terms, so it may help your Lordships if I recap how the European Council came to decide to amend the treaty. In May 2010, in response to the first Greek crisis, two emergency instruments were established to respond to the financial crises. The first is the European financial stability facility. This is an emergency facility established intergovernmentally by euro area member states. It is used to provide loans to euro area member states in difficulty. The UK is not-I repeat, not-a member of the EFSF and has no exposure to the financial assistance provided by it.

The second is the European financial stabilisation mechanism, which I have already mentioned, which we inherited from the previous Government. Under this mechanism, the Council can agree, by qualified majority, to the Commission providing assistance using money raised on the financial markets, backed by the European Union budget. It therefore created a contingent liability for the United Kingdom, which is a very important point.

As uncertainty continued in financial markets, the European Council agreed in December 2010 to amend Article 136 of the Treaty of the Functioning of the European Union. The amendment confirms that member states of the eurozone may establish a permanent stability mechanism. This mechanism-the European stability mechanism, or ESM-which I have already mentioned, will provide a permanent means for dealing with events that pose a risk to the financial stability of the euro area as a whole.

Having gained Parliament's approval in March 2011, the Prime Minister returned to Brussels to agree to the decision at the European Council. The decision must now be ratified by all 27 members before the amendment to Article 136 can come into force. The target date for entry into force, as set out in the European Council decision, is 1 January 2013.

As I have already mentioned, the Minister for Europe and I committed to further consideration of the decision under the terms of the EU Act 2011 when it came into force. Under the provisions of Section 5 of the Act, the Foreign Secretary laid a Statement before Parliament in October 2011. He indicated that in his opinion a referendum is not required to give parliamentary approval. The proposed amendment to Article 136 applies only to member states whose currency is the euro. Consequently it does not transfer further competence or power to the European Union from the United Kingdom. The statement was open to judicial review, but in the intervening eight months no one has sought to challenge it in the courts.

To comply fully with the requirements of the EU Act, I am now presenting this Bill to the House. Should Parliament grant its approval, the Government intend to ratify the European Council decision by the end of this year.

Now I turn briefly to the European stability mechanism itself. The ESM is a stability mechanism funded by eurozone countries to provide financial assistance to eurozone countries. The intention is that it will replace both the EFSM and EFSF. It is being set up under an intergovernmental treaty that was signed on 2 February by eurozone member states. It must now be ratified by all 17 member states and is expected to come into force in July 2012.

The treaty amendment does not establish the ESM. The UK, of course, will not ratify the ESM as we have not signed up to the intergovernmental agreement, and the amendment certainly does not commit the UK to contribute to any bailout fund. However, let me make it clear what the decision does. The treaty amendment that we are asking Parliament to approve will put beyond doubt the ability of eurozone countries to set up a financial assistance mechanism. It does this by adding a third paragraph to Article 136, which states that eurozone member states may establish a financial stability mechanism to assist other eurozone member states in financial difficulties. Article 136 applies solely to member states whose currency is the euro. Therefore, the provisions of Article 136 do not apply to the UK.

Alongside the agreement to enshrine the legal basis for the mechanism in the EU treaty, the Prime Minister secured an important agreement. Once the ESM is established, Article 122(2), on which basis the EFSM was established, should no longer be used for such purposes. Our liability for future euro area financial assistance programmes under the EU budget will be removed. This is strongly in the UK's national interest.

The intensification of the crisis has led eurozone member states to agree to bring forward the introduction of the ESM to July 2012. When they announced this decision in January, we carefully considered the implications that it would have on our handling of the treaty amendment. Would it need to be ratified sooner, and was it still needed at all? We decided to proceed as planned, as it has always been the Government's opinion that without the agreement to amend the treaty there would be no European stability mechanism. The clear message from eurozone member states is that they still need this treaty amendment.

That brings me back to the central point of why this Bill is important.

Photo of Lord Davies of Stamford Lord Davies of Stamford Labour

I am most grateful to the Minister for giving way. He said that it was the intention that the ESM should now enter into force next month. Indeed, we support the urgency of that, as I understand it. Therefore, why are we taking so long to ratify this? If we really support the initiative and recognise its urgency, why cannot we ratify it as soon as Parliament has approved this Bill?

Photo of Lord Wallace of Saltaire Lord Wallace of Saltaire Lords Spokesperson (Cabinet Office), Lord in Waiting (HM Household) (Whip)

My Lords, I do not think that it has been the usual practice of this House to interrupt Ministers in the middle of their opening speeches, when they are also winding up and when the interrupter has his chance to take part in the debate afterwards. These are questions that the Minister can answer in his wind-up speech.

Photo of Lord Howell of Guildford Lord Howell of Guildford Minister of State (Foreign and Commonwealth Office) (International Energy Policy)

As I have sought to explain, the ESM treaty is an intergovernmental affair between eurozone members, and they are going ahead with it-and they want to go ahead with it-in July. Nevertheless, the individual eurozone members have said that they would want the comfort of cover via an amendment to the European Union treaties, and we are pressing ahead with that as best we can in our own time. The two things are not ultimately dependent; it is just that the changes that we are proposing give comfort, support, reassurance and legal reassurance to the eurozone members so that they can go ahead. Therefore, those who say, "You are not doing anything to play your part in contributing to orderly developments in the eurozone", are wrong. We are playing our part in doing so, although there are considerable benefits for the UK in making this move, which I have already outlined.

This brings me back to why this Bill is important. It represents Parliament giving a simple yes or no to amending part of the TFEU that does not actually apply to the UK at all. However, as I have made clear, by giving approval to this decision the UK avoids liability for future eurozone bailouts under the EU budget and gives the eurozone the legal clarity-this may reinforce the point I have just made-that it wants to back the European stability mechanism. We also uphold the commitment made by both the Prime Minister and the Chancellor to help the eurozone to get itself out of a crisis. Whichever way the situation goes, that must be to the advantage of us all.

If we were to refuse to agree the decision, the impact on our trading partners in the eurozone would not be positive, to put it mildly. We are under no illusion that the ESM alone will resolve the eurozone crisis, but, as the Prime Minister said last week, an effective firewall is part of the solution. It is safe to assume that markets would not view favourably any uncertainty about the eurozone's ability to establish a permanent support mechanism. That is just what would arise if we failed to ratify this decision.

As the Prime Minister, my right honourable friend the Foreign Secretary and the Chancellor have repeatedly made clear, a stable Europe is directly in the UK's interests. That must be so. We rely on the eurozone states for over 40% of our trade. London is Europe's international financial centre. Stable progress in the eurozone states is vital to stable progress in the United Kingdom.

Therefore, agreeing to this treaty amendment is in our best interests. As I have said, it means that the UK will not be exposed to any future programmes of financial assistance for the eurozone through the EU budget, specifically the European financial stability mechanism-that will be closed-and it helps our neighbours in the eurozone in their search for financial stability in the currency area. Your Lordships have already agreed that the Prime Minister could sign this treaty amendment, as he has done. I hope that we can now take the necessary steps to allow us to ratify it. I beg to move.

Photo of Lord Radice Lord Radice Labour 4:32, 23 May 2012

My Lords, I thank the Minister for his lucid explanation of the Bill. I certainly support the Bill as far as it goes and in so far as it confirms the eurozone member states' ability to set up the European stability mechanism. However, as our debate on Monday on the Select Committee report reminded us, much more will be required to solve the euro area crisis than this small Bill. Nevertheless, I welcome the Bill and the Second Reading debate as it affords the House another opportunity to discuss a very fast moving situation.

We debated this issue on 16 February and on 21 May. When we debated it on 16 February, it was a time of relative calm following a number of positive initiatives, including the agreement of the European stability mechanism, the fiscal compact and, above all, the European Central Bank's enhanced scheme for bank lending in the form of three-year, low-interest loans, which the noble Lord, Lord Lamont, described in that debate as a game-changer. I agree with him, although I think that the scheme just bought time. If it had not occurred, the situation would have been disastrous, but it certainly bought time.

Since then, we have had the inconclusive result of the first Greek election, problems with some Spanish banks, renewed turbulence in the markets and increased borrowing costs for some periphery countries. All this has encouraged some critics, particularly political commentators in the media, not only to say, "I told you so", but to envisage-indeed, sometimes almost to welcome-the break-up of the eurozone. They are wrong to do that. I accept that the credit crunch and the subsequent recession revealed shortcomings in the euro model. Monetary union was strong, but did not have effective fiscal co-ordination. The convergence that had been promised between the strong economies and the less strong has not occurred, or has not occurred fast enough, and the ECB is not a strong enough central bank. All the same, it is dangerous to talk about or even welcome the break-up of the eurozone.

Only the other day, Robert Chote of the Office of Budget Responsibility said about a possible Greek exit:

"The concern is that you end up with an outcome in the eurozone that creates the same sort of structural difficulties in the financial system and in the economy that we saw in the past recession".

He added that the UK could be plunged into recession for two years, with rising unemployment and a growing debt burden. If you think longer term, and if the eurozone broke up, there would probably be a series of competitive devaluations and all the impact that that might have on living standards. You very likely would have the spread of protectionism and barriers to trade-trade that has been such a strong part of the European Union and has been so beneficial, not only to the countries of the continent but to the UK. It could lead, like in the 1930s, to the rise of extreme nationalism because it has often accompanied the growth of protectionism. A break-up of the eurozone would therefore be a grave setback and a disaster to the continent of Europe and the UK.

My position is that we need a reform of the monetary union because that could provide a framework for recovery. Speaking on Monday, the Commercial Secretary to the Treasury said in an excellent speech that three things were required: first, the resolution to the eurozone crisis and the uncertainty about Greece; secondly, ring-fencing other vulnerable euro member states; and, thirdly, recapitalising European banks. He could, and perhaps should, have added the need to achieve a balance between, on the one hand, austerity and cutting deficits, and, on the other, growth. That is clearly a major problem, and is the issue being stressed by the director-general of the IMF, Christine Lagarde. Mario Monti, the Prime Minister of Italy, has also made that clear, and we now have President Francois Hollande, who was recently elected on a growth ticket.

Tonight, European leaders meet for an informal summit which the new French president will attend. We are told that they are likely to discuss a number of issues, including the idea of common Eurobonds, which, if introduced, would reduce borrowing costs for vulnerable states. That idea is, of course, opposed by Germany, precisely because it would raise German borrowing costs. There is also the idea of boosting the European stability mechanism, which we are debating, by borrowing from the ECB. That would be a game-changer and is something that I hope is pursued.

There are three other issues concerned directly with growth: first, European project bonds to raise money for infrastructure funds; secondly, extra funds from the European Investment Bank; and, thirdly, speeding up the application of European development funds. Those three measures are all very useful, but represent quite a small aid to growth. The most important assistance to growth in the eurozone in the near future would be continued expansion of the German economy, which grew over the past two years by 2% per annum, and in the past quarter by 0.5%. On this point, I think that the support of the German Finance Minister for an increase in wages for German workers-and it is fairly extraordinary for that to happen-is welcome news. Growth in German domestic demand would not only help Germany but suck in goods from other European countries, including the UK, to the benefit of their economies. I think we can all agree-although I may not carry the noble Lord, Lord Forsyth, with me-that it is essential that within the next few weeks European leaders come up, first, with a credible rescue plan and then with a longer-term growth plan to revive the euro area.

In conclusion-I am aware that a number of noble Lords want to speak-what about the UK, Europe's third-largest economy? What is our role? Of course, as the Government are always quick to point out, and as the Minister rightly pointed out, we are not in the eurozone and therefore, the argument runs, it is up to its members to sort out their own mess. That would be fine if more than 40% of our trade were not with the eurozone. What happens in the eurozone is extremely important to us, as both the Prime Minister and the Governor of the Bank of England have made clear. Indeed, they have used it as an excuse-although that word is perhaps unfair-for the fact that we do not have growth in our own economy.

A noble Lord:

It is an excuse.

Photo of Lord Radice Lord Radice Labour

All right, if the noble Lord insists. As I said, what happens in the eurozone has a major impact on our economy and therefore it is very much in the UK's interest for the eurozone to secure financial stability.

So what has Britain-this important power with the third-largest economy-done? Last December, we opted out of the fiscal pact. We all said what we thought about that in the February debate and I shall not go over it again, but it hardly made us more influential in the debate. Otherwise, we have confined ourselves to offering advice-too often, I am afraid to say, in quite strident and slightly contemptuous tones. The trouble is that, whatever we say, nobody in the eurozone appears to be listening. I happened to be in France the day after the election of President Hollande and he set out all the things that he was going to do, such as going to Germany, meeting the European leaders, going to the United States to meet President Obama and so on, and there was not one mention of the United Kingdom. I thought, "Good heavens. We've come to the point where we're not even mentioned in relation to the euro". It is not that they are saying nasty things about us; it is just that we are not in the game at all. That is a great pity because I think that sometimes our advice has been very sensible and ought to have been heard but has not been.

The question is: what do we do to increase our influence? My answer is that we have to try to sound as though we want to help, although quite often we do not sound like that. I have two practical suggestions, for what they are worth. In the debate last Monday, noble Lords remarked that the Prime Minister argues for growth on the continent while preaching the virtues of austerity at home. As Christine Lagarde said yesterday, we ourselves need to do more to boost our economy. She may say that she shivered but she then went on to say all sorts of things that she thought the Chancellor ought to be, but is not, doing.

First, if our economy started to grow, not only would this be good news for us but it would also be good news for the whole eurozone, because we are, after all, the third-largest economy. Secondly, instead of standing entirely aloof from the European stability mechanism and indeed boasting about it, which is keeping the Eurosceptic wing of the Tory party happy, I think that there is a case for a purely voluntary financial contribution from the UK as a symbol of our solidarity with our European partners when they are in difficulties. We are a member of the European Union and are affected by what happens. We could show some sympathy but we do not. If we made more of a contribution, we might find ourselves becoming more influential. In this eurozone crisis, which affects not only the member states but the interests of the UK, we are no more than bystanders-we have no real role. If we are prepared to make some positive moves-I do not know exactly what, but I have suggested some-we might play a more active role which I believe would be good not only for Britain but for Europe.

Photo of Baroness Falkner of Margravine Baroness Falkner of Margravine Liberal Democrat 4:46, 23 May 2012

My Lords, it is a pleasure in this Second Reading debate to follow the noble Lord, Lord Radice, whose expertise and passion about the European Union remains undiminished. I agree with a lot of what he said; I particularly agree with his comments regarding Germany's need to incorporate and use its fiscal levers to bring about a greater boost to growth within Germany. I am glad to see in that context that the noble Lord, Lord Sassoon, is in his place, and I hope that he will recall that I exhorted him to do precisely that last Thursday. Of course, in the intervening period the Prime Minister has come out saying many of those things himself, so it is a very good move. We are not preaching to the Germans; we are exhorting them to do what I think has considerable support in Germany itself, as the noble Lord, Lord Radice, mentioned, in terms of the Finance Minister.

I shall keep my remarks on the Bill very brief. With the informal European Union summit ahead of us tonight and the eurozone crisis continuing to unfold, there is little to be said about the Bill before us. It rightly allows for the eurozone countries to move forward to establish a permanent facility for those states that are in the eurozone. One could almost say that it has little to do with the UK, but also that it has everything to do with the UK. It is clearly and essentially in the United Kingdom's national interest to have the European stability mechanism established as soon as possible, to enable the eurozone sovereign debt crisis to be dealt with through the creation of a permanent mechanism. We may quibble about whether the extent of capitalisation is sufficient-at 5% of eurozone GDP it would appear not, but it is certainly a step in the right direction. It also creates the possibility that should further capitalisation be required, other methods of raising finance, such as eurobonds if politically acceptable to those countries-it is only about those countries in the eurozone-could be an option.

Let me come to the politics of the Bill here. Anyone who believes that there is some easy fix to the eurozone crisis through letting Greece default is mistaken. While our banking sector may not be significantly exposed to Greek banks which might fail, it is undoubtedly exposed to French, Spanish, and Italian banks which might be affected by their own exposures to Greek debt and the contagion effect thereon. We have, in effect, a banking sector that is still extremely fragile some four years after the financial crisis of 2008. However, it is not only the banking sector that would be affected. Half our trade is with the eurozone and a further 10% within the European Union as a whole. The eurozone's GDP is projected to be in deficit in 2012-marginally so, to the tune of 0.1%, but nevertheless, the drag caused by fiscal consolidation or austerity measures is very palpable.

Unemployment is predicted to rise to 11% but it is significantly higher especially among the young-all factors that impact on domestic consumption within those countries. It is British business which will take a hit as the southern countries slide deeper into recession; it is young British workers who will face stiffer competition from well educated European nationals who will come here to seek work in the northern countries; and it is the British consumers who will face a drop in confidence as those in countries around them are deeply affected by the crisis. As a trading nation dependent on a large service industry, we cannot insulate ourselves from our neighbours in the European Union.

The Bill is a first step to stabilising the crisis, but the European stability mechanism must be accompanied by a pro-growth strategy through faster adjustment. If this results in greater fiscal and political integration, we should accept that that is the right way forward for those countries that have chosen to be in the eurozone. Thankfully, we are not in that position, but that does not mean that we do not have to engage with the developments as they inevitably happen. It will be a rocky path to get to a resolution of the crisis, but for now we on these Benches welcome this enabling measure.

Photo of Lord Williamson of Horton Lord Williamson of Horton Crossbench 4:51, 23 May 2012

My Lords, as is always my practice when I see "European Union" on the Order Paper, I declare my interest. I spent the greater part of my career in United Kingdom public service on European affairs, and a smaller part of my career in the European Commission, and I have pensions from my work.

Before coming briefly to the purpose of the Bill-namely, the approval of an EU decision to amend Article 136 of the Treaty on the Functioning of the European Union, which applies only to member states whose currency is the euro-I will stress that the decision of the member states of the euro area to replace the two temporary decisions taken to confront the sovereign debt crisis with a permanent European stability mechanism is a good one. Strangely, the text of the decision does not appear in the Bill. However, indefatigable readers of government documents-of whom I am one-will find it in paragraph 7 of the Explanatory Notes, which carries the exact text of the decision about which we are talking.

The mechanism is extremely important and has been widely discussed. However, it will not be sufficient to recreate a stable situation in the euro area, as we can see not only from the situation of Greece but from the sovereign bond markets and, most recently, from the new and correct pressure for a growth pact or specific measures directed to growth. The emphasis on growth is right. However, to avoid overdosing the euro with tales of woe it is perhaps worth recalling that in 2011, 12 member states in the euro area had a growth rate equal to or higher than that of the UK, and that the eurozone grew twice as fast as the UK.

Now the situation is serious. The noble Lord, Lord Giddens, used the same phrase in two debates. He said that we were on the edge of a precipice. It was an important reminder, but of course we do not have to fall over a precipice when we are on the edge. That is what we and the euro area must think more about. We must see whether the existence, in some form or within very strict rules, of a lender of last resort, which understandably is ruled out by Germany at present, will ultimately be possible. That might be bolstered by measures such as the project bonds, which are a good idea.

We discussed these matters a number of times. We discussed them in relation to the gracious Speech, and recently in relation to the European Union Committee report. We are now discussing them again, and the Government are replying through three Ministers: the noble Lords, Lord Sassoon and Lord Astor of Hever, and the noble Lord who is replying today. Therefore, we have made a small contribution to joined-up government.

I turn now to the Bill. In a recent debate the noble Lord, Lord Phillips of Sudbury, reminded us that we put on the statute book 12,000 to 15,000 pages of law per year, while removing only 2,000 to 3,000 pages. It is therefore a real pleasure to have before us today a commendably short Bill of two clauses totalling 164 words, which makes it a great deal easier to deal with. I find it quite easy to deal with the Bill.

The European Union Act which was passed in the previous Session established the important requirement that any transfer of powers or competencies to the European Union would require a referendum of the British people, but a small number of tightly defined exceptions were included in the Act. One was the approval of the accession of a new member state. That does not apply to this Bill but later, according to the gracious Speech, we expect to be asked to approve the accession of Croatia. What does apply to this Bill is that where a decision does not apply to the United Kingdom, its approval can be confirmed by the Minister and no referendum is required.

The proposed amendment of Article 136 of the Treaty on the Functioning of the European Union with regard to the stability mechanism for member states whose currency is the euro clearly meets this criterion as we are, happily, not in the euro. The Bill complies exactly with Section 4(4)(b) of the European Union Act which we passed in the previous Session. For all those reasons, I can agree to the Bill.

Photo of The Bishop of Guildford The Bishop of Guildford Bishop 4:56, 23 May 2012

My Lords, I am very appreciative of the Minister's introduction to this debate. For your Lordships' pleasure, I hope, I think that I can assure you that I will be mercifully brief, because last Thursday I spoke to the treaty amendment Bill in relation to the gracious Speech.

I speak in strong support of the Bill. Although it will entail no automatic bailout from the United Kingdom in relation to the euro crisis, we cannot be-and indeed we are not-indifferent to it. We are implicated in it, as a number of speakers have already said, including the noble Lord, Lord Radice. It gives the euro states a kind of release mechanism to enable them to implement a desperately needed, effective mechanism for economic stability.

I speak as one of the co-presidents of the European Council of Churches. I find myself in regular discussions with a counterpart in Germany who rejoices in the wonderful title of Oberkirchenrätin-note the feminine German ending-and also with a Greek Orthodox Metropolitan who lives in Paris and looks after the Orthodox community in France. The German, Greek and British church leaders meeting in France are neither unaware of nor indifferent to the financial turbulence and instability throughout the continent of Europe and its personal human consequences. The last time we met I heard of the soup kitchens being established by the Greek Orthodox Church in Athens, to which thousands of people come daily.

This is a technical Bill but behind it are human faces. We think of Greece but, if we go over the precipice, we might have to think of Spain or Italy and, indeed, ourselves. So I strongly support the Bill. I repeat what I said on Thursday. We are involved in the rest of Europe not only economically but, of course, geographically; and we are certainly involved culturally and in terms of religion and faith communities as well.

I crave the indulgence of the House and the Minister because I may need to leave before the end of the debate as I am due to institute a new woman priest in Normandy. As the Minister will know, Normandy is just north of the Hog's Back in Surrey.

Photo of Lord Lamont of Lerwick Lord Lamont of Lerwick Conservative 5:00, 23 May 2012

My Lords, this is our second debate in three days on the eurozone, but that is hardly disproportionate considering the huge potential threat of the crisis in the eurozone to the world economy. The measure before us is already well known and publicised and, indeed, is already priced into the markets, so anyone who thinks that what is being debated today will make a crucial difference to the eurozone crisis is under an illusion. It may be a necessary first step, but it is already priced into the markets.

The Minister gave a clear and lucid explanation of the Bill, and suggested that we should welcome the new permanent bailout mechanism not just for economic reasons, but because it replaces the EFSM, the first bailout mechanism, to which Britain had to contribute. I hope he will forgive me if I probe this argument a little further to find out how completely copper-bottomed it is. In practical terms, the new mechanism makes the EFSM obsolete; if you have the ESM, you do not need the EFSM. But as far as I can see, there is no legal assurance or guarantee that the EFSM has actually been abolished. The document, 407/2010, which is the instrument that set up the EFSM, is not repealed. There is no amendment in this treaty amendment to Article 122 under which the EFSM was set up. The treaty amendment does not say, as one might have expected, that there should not be financial assistance to countries that have over-spent or over-borrowed under Article 122, the original provision that obliged Britain to contribute. If this seems a little suspicious, paranoid or swivel-eyed to the Minister, perhaps he will forgive me simply because the use of Article 122 to set up the temporary bailout mechanism was, in many people's opinion-including that of Madame Lagarde-an illegal use of it. The Government have always been coy about its legality, but given that she said that, we are entitled to be sceptical and to ask for further assurances.

Perhaps I may remind the Minister that the Council decision under Article 136 which set up the ESM says that member states whose economies are not in the eurozone "may decide to participate". There is a little bit of daylight there but it is far from clear that we will definitely not be involved in this. I might also mention that there are other bailout provisions in the treaties which apply to non-eurozone countries. Articles 352 and 143 provide for bailouts to non-eurozone countries. They cover us, we have no opt-out and, of course, decisions are made by qualified majority vote.

I should like to ask the Minister one or two questions about the ESM itself. First, according to a document dating from 2011 on the European Central Bank website, the ESM could be used to buy sovereign bonds on the primary markets. I imagine that that is not now correct and that it has been overtaken. However, I should be grateful for the Minister's assurance on that point. Secondly, again according to the ECB website, the debt of the ESM will be classified as the debt of EU institutions. It will not be classified as government debt and will not count as government borrowing, even though the ESM is going to issue securities and borrow from the markets, and even though those bonds are themselves guaranteed by the Governments of the eurozone. Can the Minister confirm that that is the case?

Thirdly, how confident is the Minister that the ESM will be able to maintain an AAA rating? The intention is to issue securities that are AAA rated, but because of recent downgrades, the ESM is now backed by only one large economy that has a universal AAA rating. This idea that a lot of Governments that have sub-AAA ratings can have their securities all wrapped up together and that those can then be described as AAA securities has a rather uncomfortable similarity to certain things that happened in 2007 and 2008, through the CDOs that led directly to the financial crisis.

Fourthly, perhaps I may ask the Minister about the capital of the ESM. According to the ECB website, this is put initially at €80 billion, rising to a callable amount of €620 billion. Again, this capital is being provided by countries in proportion to their GDP and populations. That presumably is something like 18% for Italy and 12% for Spain. But can Italy actually afford to make its contribution? Will the contribution be made in cash or in terms of guarantees? The whole mechanism seems rather like a lot of not very sound economies getting together to try to guarantee their own finances. Of course, at some future date Italy might very easily be in a position where it could not meet the capital requirement that was asked of it.

I have one or two comments to make about the current situation in the eurozone. I listened very carefully to the noble Lord, Lord Radice, who always speaks very eloquently and with a wealth of experience. He made the slightly familiar point that we were not being listened to-that was an implied criticism-and that we had lost influence. Perhaps listening is not the strong point of the eurozone Governments. They were not exactly prepared to listen when they were warned in the first place that this was an unworkable system that would lead to great financial problems. The noble Lord suggested that we must be constructive, get in there and be more influential. I am afraid that is a policy that has been tried and has failed many times before. I see no point in participating in, or at least reinforcing, a wrong policy merely in the interests of some chimera called influence.

Photo of Lord Clinton-Davis Lord Clinton-Davis Labour

What conclusion is the noble Lord coming to? Should we withdraw entirely from the euro?

Photo of Lord Lamont of Lerwick Lord Lamont of Lerwick Conservative

Well, we are not in the euro, so that is not a point that leaves me in great difficulty.

The euro has been a disastrous experiment. It has brought nothing but grief and problems. What has been the achievement of the euro? What have been its consequences? Twenty-one neo-fascists in the Greek Parliament is one consequence. The system that was promoted in order to produce harmony has produced nothing but acrimony and xenophobia. The European Union used to boast that its great achievement was to underpin democracy in post-dictatorship countries such as Portugal, Spain and Greece, yet we have seen the political life of Greece being torn up by the demands being made of it by the eurozone.

The main force that is keeping the monetary union together is simply the fear of the consequences of it falling apart. As well as looking at the costs and dangers of it breaking up, it is only rational also to look at the costs of keeping it together, because they can continue to mount, even to the point of threatening the stability of the German economy. Germany has contributed something like €200 billion so far to shoring up the euro. It may find that it has to do more and more of this as the years go by.

The Bundesbank is now worried about what are called the TARGET2 balances. These are the claims that the Bundesbank has on the central banks of the peripheral countries, because the central banks have had to step in to fill the gap where the interbank, international, commercial market has withdrawn. The claims on the Bundesbank's balance sheet in respect of the peripheral countries now come to something in excess of €500 billion, which is causing a lot of anxiety in Germany.

It seems clear that if Greece leaves the euro-whatever we think about that, there seems to be a distinct stench of inevitability about it-a €500 billion firewall is not going to be sufficient to stop contagion. It may be enough to deal with one country but will not be enough to deal with several. I noticed-and the noble Lord, Lord Radice, picked up on it-that Finance Ministers, including Mr Schauble, have been saying that Greece's departure might be difficult but not fatal. We must hope that they are right but it would not be the first time if they are proved wrong.

I certainly feel a degree of sympathy with Spain and the situation it finds itself in. Spain ran a perfectly responsible policy before the crisis and actually spends, as a proportion of GDP, somewhat less than we do as a country. The historic yield it pays on its debt is something like 3.6%, but today in the markets it is having to pay something like 6%. Spain cannot remain solvent if interest rates remain at these levels, as they are likely to do for some time to come. I say "likely to" because it seems very probable that the rates on sovereign debt will never return, in the near future, to the level they were at before the crisis began.

At the moment, we have a complete stand-off between Greece and Germany. Greece is, I think, overplaying its hand by threatening to bring the whole pack of cards tumbling down. At the same time, German public opinion is, I believe, hardening. Mr Hollande, for all that was said, will find this very difficult to move, as German public opinion is extremely resistant to further bailouts. The one thing that some people think could be done to ease the situation-the noble Lord, Lord Radice, referred to this-would be if Germany had higher inflation. To my astonishment, Mr Schauble referred to this. It may be the one thing that would help the eurozone but the one thing that would turn German public opinion absolutely against the euro is if it had to put up with inflation of 4% or 5%. That would be anathema to the German people. For all Mr Schauble said, I do not believe that is the course that Germany is going to follow.

The question is: which will blink first-Germany or Greece? My guess is that neither is going to blink, and therefore we will have a chaotic, unplanned exit from the euro. Greece and its politicians say they do not want to leave the euro, but clearly they need a third bailout and are very likely to default again. Greece may not want to leave, but what it is demanding is not on the table and is not available. If the second election produces the same result as the first, the eurozone has to grasp the nettle and show the door to Greece.

The truth about this mess and this situation we are in is that every option is unpalatable. Breaking up the euro carries dangers, while soldiering on risks the danger of hugely escalating costs. However, the worst option of all is the third one, which is that the crisis has no end and we have this sapping away of confidence. People talk about the need for a growth package, but growth depends above all on confidence, and as long as this crisis goes on, we will not get confidence and we will not get growth. It is time that the eurozone made some hard choices. Winston Churchill once said, "We have to face reality or reality will face us". It is time for the eurozone to decide to face reality, however hard that may be.

Photo of Lord Giddens Lord Giddens Labour 5:15, 23 May 2012

My Lords, it is an honour to follow the noble Lord, Lord Lamont. I am not sure how much I agree with the main body of his speech but I certainly agree with what he said at the beginning. This is a crisis of gigantic proportions. Enough of precipices, I would say, but this is the greatest social and economic crisis we have lived through and it is unfolding against the backdrop of a world economic recession which is still far from unresolved. As I argued in a speech that I gave a couple of days ago, this adds to the difficulties we are confronting in Europe, which do not simply come from within Europe itself.

I support this Bill, but, I have to say, perforce. That is because this one-page scrap of green paper is Britain's, and especially the Government's, ambivalence towards the European Union made manifest. I argue that it represents a position that is now disintegrating and for which there is no long-term future. I would like to sketch in the reasons why.

In a document that the Government sent round after the report that we debated on the euro crisis, they say:

"The decision not to be part of the Fiscal Treaty does not reduce our influence and has not damaged our reputation in Europe".

That statement is absurd. The noble Lord, Lord Lamont, seemed to say that it does not matter who listens to you. It surely does because if people stop listening to you, you have no influence in the circles that you want to influence.

Photo of Lord Radice Lord Radice Labour

To act as the mouthpiece of the noble Lord, Lord Lamont, as I understood it in his criticism of me, he does not think that influence is important.

Photo of Lord Giddens Lord Giddens Labour

That is what I was saying. Influence is very important because if you do not have it, how are you going to affect the course of developments in Europe? I have been around Europe talking to a range of European figures recently, as my noble friend has been as well, and it is true that virtually nobody listens to what the Prime Minister says. This is important. Britain is now marginal in Europe because we lecture Europe from the sidelines, and I have heard so much of that in the debates over the past few days. The Prime Minister wants what all other European leaders want: the stabilising of the eurozone. Yet he will have no influence over that process.

One can say that the EU is at a crossroads-except that, as has been observed, the EU is always at a crossroads. This time, however, the forks of the crossroad are far further apart than ever before. On the one side, there is the possibility of the disintegration of the eurozone. Having looked at the scenarios in detail, I cannot see any which would not be catastrophic if this course were followed. Some have argued for what has been called a velvet divorce, whereby the eurozone could be progressively uncoupled. However, as in real life, there are very few velvet divorces and I could not see a scenario in which that could be achieved. Whatever one thinks of the eurozone-I have certainly had mixed feelings about the euro from the beginning-its disintegration would be catastrophic for Europe as a whole, and certainly for the UK as well.

There is only one other path. I think the path that Europe will certainly try to follow is a move towards federalism, and in a fairly strong sense of that term. Fiscal union is being forced on the eurozone, more or less, by the markets but it would have to go along with the ECB becoming a lender of last resort. We have a good understanding of the financial apparatus that it would presume, although we do not know whether there is enough money around to back it. These moves in turn would have to be accompanied by greater political co-ordination.

From these there follows the need for a process of democratisation and a reshaping of the institutions and procedures of the EU. Therefore, in thinking of the future of the EU and in charting, as I have been doing over the past three months, the enormous number of debates going on outside this country in the member states of the European Union, we are not talking about evolution. We are talking about a sort of revolution. We are talking about the end of the Monnet method of slow accumulation. We are talking about big transitions over a short period towards a more integrated eurozone that would, in the end, drag in most of the rest of the European Union. Jörg Asmussen, who is a German board member at the ECB and, incidentally, someone who has had a lot of influence over Angela Merkel, yesterday called for just such a programme. I think he gave his speech in anticipation of the meeting today. He argued that eurozone members should join in a,

"banking union, fiscal union and political union".

Should the eurozone survive in a reasonably robust condition-and like the Government, I cannot see anything else that one can hope for-several other countries, such as Poland, have declared their intention to join it. At that point, British policy would surely have to change. There could be no more ambivalence, no more sitting on the fence and no more wanting the advantages of the EU without the commitments. Should, God forbid, the EU descend into chaos, the UK will be affected just as much as any country that has formally signed up to the euro. If a more federal Europe emerges, and I think that is the most likely outcome, Britain will no longer have the option of semi-detached membership. I think this also applies to the single market. I do not think that the idea that Britain can concentrate on the single market when the rest of Europe has moved to a much more tightly co-ordinated economy can work.

At that point, a momentous decision will have to be made: in or out. In my contribution to the debate on the Queen's Speech I argued that at such a point there should be a referendum. I think this is the first time ever that there have been voices from all three major parties arguing for the desirability of a referendum. We would have to have a referendum if Europe has moved down a federal path and become a different entity far away from the position it was in when the UK entered it.

If a referendum is held, the results might surprise some of our more vociferous political commentators. I quote from a recent, very interesting study that I commend to anyone interested in opinion in Europe. It is by Michael Bruter and Sarah Harrison and is called How European Do You Feel? but it goes well beyond that. It is the largest study ever carried out across the 27 EU member countries about attitudes towards the European Union, reform and the future. The reason it is so important is that its methodology is far more sophisticated than the surveys that you read in the press from day to day. If you read the results of surveys in the papers of what people think of the European Union, they are sometimes based on a sample of only 200 or 300 people. They do not give you an in-depth understanding. This study uses a range of sophisticated techniques and goes up to 2012. I think noble Lords will agree that the results are quite counterintuitive. They show that European identity is strong across all 27 EU countries, with a majority in this country endorsing the statements about Europe in the study. Far from declining, in 2012, it is getting stronger. It has gone up from just under six out of 10 in their measures to over seven out of 10.

In the United Kingdom, there are some very interesting findings in the survey. Opinion is polarised, but intriguingly so. Younger people are far more positive about the European Union than the older generation. There is, the authors say, a new, younger generation of very committed Europeans in this country. In their conclusion, they say that in the UK there are,

"two publics, one fiercely non-European, and"- this is important-

"one of the largest proportion of highly 'Europeanised' people in the whole of Europe".

I would welcome the Minister's comments on any aspects of what I have said, particularly on what plans the Government are making to respond to what is likely to be a quite different Europe from the one in which we have existed in such an ambivalent way until now.

Photo of Lord Lawson of Blaby Lord Lawson of Blaby Conservative 5:26, 23 May 2012

My Lords, it is always a great pleasure to follow the noble Lord, Lord Giddens, as I have done on a number of occasions both inside and outside this House. I will refer to one of the important things he said when I reach the logical point in my own contribution. However, I do say now that he should not confuse being European with accepting everything that the European Union does-or, indeed, the existence of the European Union itself. As many noble Lords on both sides of the House know, my main home is in France. I certainly consider myself a European, but, as noble Lords will discover, I will be critical of what is being put before us today.

Photo of Lord Giddens Lord Giddens Labour

If the noble Lord checks the survey, he will find that it contained a whole range of questions, such as whether respondents agreed with EU policy on Schengen-and more than 90% do. It contained a whole set of questions on actual EU policies, not just on EU identity.

Photo of Lord Lawson of Blaby Lord Lawson of Blaby Conservative

If 90% of people say that they agree with some particular European convention, that is probably a lie. I doubt whether 90% of people know about any European convention.

To come back to the Bill that we are debating, a few days ago an item appeared on the Foreign Office website which read:

"Foreign Office Minister introduces EU Treaty Amendment Bill to the House of Lords ... Foreign Office Minister Lord Howell said ... 'A stable and healthy eurozone is important for the UK's long-term growth and prosperity. This treaty change is firmly in the UK's national interest'".

That is the basis for the Bill before us. I have the greatest affection for my noble friend Lord Howell. Indeed, I can hardly blame him for saying that, because it is government policy. But it is, of course, complete nonsense. It is not a stable and healthy eurozone that is important for the UK's long-term growth and prosperity; it is a stable and healthy European economy which is important for the UK's long-term growth and prosperity. So long as the eurozone staggers on, we will not have a healthy European economy. That is the problem that we face.

Greece has been mentioned. It has a number of special economic difficulties and also a special political difficulty. Greece is, and always has been, a "phavlocracy". I owe this term, which is little used, to when I was editor of the Spectator, 45 years ago. I recruited an excellent Athens correspondent, because the colonels had just come in, and he explained that "phavlocracy"-a word the Greeks use-meant "government by corruption". The high economic cost of that is an additional problem but we are not debating a Greek problem. This is a fundamental problem of the eurozone project. It is not the tired old argument of growth versus austerity, as if somehow you can say, "Let's have some growth, what a good idea". It is the particular problem of the eurozone that we need to address.

The European Monetary Union was fundamentally flawed right from the start. It was predictable and indeed it was predicted. I think I was the first Minister to point this out in a speech at Chatham House in January 1989. I analysed the eurozone project and I concluded in these terms. It is a long quotation but it is important to put on record what I said at the time, well before the eurozone came into being. It was a few days before publication of the Delors report on which European monetary union was based, but we all knew what would be in it. As Chancellor of the Exchequer at that time, I concluded in these words:

"Nor would individual countries be able to retain responsibility for fiscal policy. With a single European monetary policy there would need to be central control over the size of budget deficits and, particularly, over their financing. New European institutions would be required, to determine overall Community fiscal policy and agree the distribution of deficits between individual Member States.

The setting up of a European Central Bank or a new European institution to determine Community fiscal policies go to the very heart of nationhood. What organisation would really be the government? It is clear that Economic and Monetary Union implies nothing less than European Government-albeit a federal one-and political union: the United States of Europe. That is simply not on the agenda now, nor will it be for the foreseeable future".

That is what I said as Chancellor of the Exchequer in January 1989. I elaborated on a number of further occasions, both in speeches and in articles, during the interim period until 1999 when it came into being. Then I gave up. I was seeking to persuade our European friends and partners not to make the huge mistake of going down this hugely damaging route. Once they had done it, I had failed and I gave up.

I was not the only one. My friend Hans Tietmeyer, when he was president of the Bundesbank in 1996, in the more measured terms that central bank governors are inclined to speak, said:

"Monetary union means a restriction on national sovereignty, on national manoeuvring room and the ability to go it alone. Participants lose the instrument of exchange rate adjustment ... In a monetary union, countries have to tackle and solve their economic problems and challenges in a similar way and with similar speed. If the countries decide fundamentally different answers, then great problems will arise".

He could say that again.

So why did this happen when everybody who was informed knew that this was fundamentally flawed? It happened because this was not economic at all; it was entirely political. There were of course some innocent worshippers at the church of Europe who believed that anything that was more Europe must ipso facto be a good thing. But most of the promoters were more sophisticated. Their objective, and they were clear about it, was full-blooded political union-a United States of Europe. That was the view of Jacques Delors and most of those who supported him. They thought that since monetary union and political union have to go together, if you want political union then you have the monetary union and it will inevitably lead to the political union which is the objective. That is a fundamental misreading of history; it is the wrong way around.

The example of Germany in the 19th century is interesting. German unification came in three stages. First, there was the zollverein, the customs union. Then Bismarck and Prussia forged a political union from blood and iron. It was only after they had political union that they had monetary union. That was the sequence. Doing it the other way around simply does not work.

One reason why you must have political union is that, as we all know, there must be transfers from the German taxpayers to the poor Greeks or whoever. However, you cannot make that work-nor does it have credibility-if it is on a sporadic and discretionary basis. You must have a single system of taxation, as there is in any currency union, such as the United Kingdom, which takes more money from the wealthier sections of the economy; and a single system of spending so that there is more spending on, say, social security in the poorer parts of the economy. The transfers become automatic and there is no discretion.

You must also have control of deficits. This simply means that you must have a single Finance Minister at the head of a single finance ministry in a single Government. That is the only way that it can work. Even then, it would, in my judgment, be economically harmful to the European Union. To use the economists' jargon, which the noble Lord, Lord Giddens, enjoys so much, it would be suboptimal.

There is a great literature about what is known as an optimum currency area. No one quite knows what an optimum currency area is. We all know that you do not get individual cities with their own currency but, equally, you do not have a world currency. That is too big and the first is too small. Where is it right? I think all economists would agree, as would the noble Lord, Lord Giddens-even though he is not an economist, he follows these things-that an area as big as the European Union, with its great size and diversity, is not an optimum currency area. In particular, to help the transfers and so on to work you need wage flexibility, which the United States has but Europe does not. Indeed, it is anathema to the European social model, which is opposed to wage flexibility.

Above all, you need labour mobility. That is what happens in the United States. If one area is not doing too well, people move to another area. However, what do you have in Europe? For cultural and linguistic reasons, when there is 25% unemployment in Spain-indeed, 50% youth unemployment-but little more than 5% in Germany, the Spanish do not move to Germany. They riot in Madrid and call on their Government to do something to help them.

Photo of Lord Davies of Stamford Lord Davies of Stamford Labour

Is the noble Lord aware of Mundell, the author of the seminal article that defined the concept of the optimum currency area? Indeed, he invented it. That article produced the key criteria that define an optimum currency area and an equation that became part of standard theory and won a Nobel prize for Mundell. Is the noble Lord aware that Mundell is on the record as saying that he regarded the eurozone as meeting the criteria for an optimum currency area?

Photo of Lord Lawson of Blaby Lord Lawson of Blaby Conservative

Yes, I am aware of that. I am also aware that he subsequently changed his mind on that point.

Those who promoted European monetary union were guilty of great arrogance and unbelievable irresponsibility. They were arrogant because the only way to have political union was with the consent of the peoples of Europe. The people of this country, the people of France, where I live nowadays, and the people of most, if not all, of the countries of Europe-Luxembourg may be an exception-do not wish to give up national self-government. They do not want to be part of a full-blown European political union. It is a sad thing but I am afraid that for all its, no doubt, high-minded motives, the European movement has been marked by the most appalling contempt for democracy throughout the years that I can remember. The irresponsibility is that political leaders must have known that if this gamble did not come off and they were not able to achieve the political union, the disaster which we see all around us was bound to ensue. That seems to me to be the most irresponsible thing that political leaders could ever have done.

What now? In my judgment, the least bad course-I say "least bad" rather than best because I accept that it is not good-is the orderly dissolution of the eurozone, which will begin with the departure of Greece in only a matter of time, and it will not be a long time. This dissolution is already happening before our eyes, even if the politicians do not accept it. Holders of euro deposits in Greek banks are taking them out at a rate of knots and they will do so increasingly. After that, I am afraid that the same thing will happen as regards euro deposits in the banks of other countries considered to be likely candidates for withdrawal-whether it be the Spanish or Portuguese banks, or wherever.

I agree that the dissolution of the eurozone will be far from painless. There will be a whole lot more sovereign defaults. We have already had getting on for an 80% write down of Greek government debt. That will be bigger. There will be other sovereign defaults. There will be banks in difficulty.

Photo of Lord Lawson of Blaby Lord Lawson of Blaby Conservative

I will come to a conclusion soon. There will be banks which may have to be saved. But we have handled something like this before. It may not have been on this scale but it was quite substantial. The first international economic issue I had to grapple with as Chancellor of the Exchequer in the mid-1980s was the Latin American sovereign debt crisis, which had many factors in common with this and the IMF played an important part.

In conclusion, there is a heavy cost in the course that I am suggesting but the EMU is a Doomsday machine. If the question is, "How do we keep it going?", that beggars belief. We have got to get on with it. I do not believe that this will happen, but if there is a serious move to a political union, we can no longer be part of the European Union. That is not the form of European Union which the people of this country are prepared to accept, or, I believe, one which the politicians will accept. It is a very serious matter. The noble Lord, Lord Owen, referred to this in a very thoughtful contribution in the Queen's Speech debate. He said that in those circumstances, we would have to leave the European Union, although with a referendum first. I do not believe that we will go to a political union. Therefore, the conclusion is that the European monetary union is doomed and the treaty change we are discussing today is supremely irrelevant.

Photo of Lord Empey Lord Empey UUP 5:43, 23 May 2012

My Lords, the nature of the debate today has drawn to our attention the great significance and importance of the issues we are discussing. While the Bill's Second Reading was never going to be confined to the minutiae of the legislation, it was always going to be a platform for discussion on the wider issues, and so it has turned out.

Never in my lifetime have I heard so many people express real fear and concern as I have with the turn of events in the euro area. People are genuinely afraid-as we have seen particularly in Greece, but in other countries as well-that the resources which they have built up over years will be taken away. As I understand it, that was exactly the circumstances that pertained in pre-Nazi Germany when people saw their lifetime's effort dissolve before their eyes as they had to wheel their savings to the bus in suitcases and handcarts simply to pay the fare. If this is so fanciful, how is it that we have 21 Nazis elected to the Greek Parliament? These people are not disguising what they are. The very badges that they wear, their symbols, although not the same colour as that used by the National Socialists in Germany, are basically the same thing. They are unashamed. These people are succeeding in a nation that was occupied by the Germans in the Second World War. So if alarm bells are not sounding somewhere in those circumstances, when will they?

On many previous occasions we could convincingly say that it was nothing to do with us. We cannot say that today. Whatever happens in euroland will impact directly on every household in this country. Nobody will escape if the financial situation deteriorates in the eurozone. Our exporters will be hurt. Perhaps above all, there is a feeling of lingering doubt about the real state of many financial institutions on mainland Europe.

I understand the rationale for the Bill, given the events of May 2010 and the creation of the EFSM. It seeks to limit our national liabilities should the political understandings about its further use not be honoured. However, few of us believe that it is as simple as that. Whether through the front door, which is now the ESM, or the back door, whether that be the IMF or the ECB, the search for a change in the status quo will continue to elude Europe. Sticking plaster will not work; there is a fundamental flaw in the eurozone as it is currently established. Continuing political weakness in the eurozone only adds to the risk. The political timetable ticks on for Chancellor Merkel as she surveys a recent spate of election results within her own country and without. The message from these polls is the same-people have reached and gone beyond their level of tolerance for austerity, whether it is justified or not. Those with the sweeter medicine to offer are winning, while those with the more realistic and justified difficult decisions to take are losing.

However, I have little sympathy for the position that Germany now finds itself in. Chancellor Merkel's predecessors knew of the risks that were being taken when Germany agreed to let countries such as Greece and other European economies into the euro. Subsequently, they all broke the rules at one time or another. While I have grave concern for the Greek people, the truth is that their Government were profligate in their spending on a bloated public sector in particular, and lied about the state of their economy. But the blame game is not going to change things. We have to deal with the present and, because the UK is so inextricably linked to the fate of the eurozone, it is definitely in our interests that the present mess is cleaned up.

I listened with some concern to the intervention made by the noble Lord, Lord Radice, when he indicated that perhaps we should at this stage make further financial transfers to the eurozone. I do not know what he hears from the people, but I think that that message would be a very hard sell. I understand his rationale; yes, we have partners and want to work together. But when we are not able to pay our own bills as we would like and when our own debt continues to rise and will do so for several years to come, I fear that that will be a very difficult sell. Yes, I know we have heard talk about influence before. Are we going to be marginalised? We are one of the best customers of the countries of mainland Europe. That is where one gets a lot of one's influence. If we were so influential, why was the euro established? That indicates that even at that stage the people who took the decision had a totally different agenda, as the noble Lord, Lord Lawson, said-and we all know what it is. I say "is" and not "was" because the agenda is still there.

Whether we discuss German-backed Eurobonds-I guess that we will talk about that tonight-or an orderly Greek withdrawal from the euro, we have an overwhelming interest in our European partners' successfully resolving this crisis. This Bill is but one small contribution to that process. It is a tidying-up exercise. Following the passage of the European Union Act 2011, we are at least getting to review significant decisions for the first time.

Would it be possible to ask those in key positions of responsibility for our finances both nationally and internationally-such as the Governor of the Bank of England, the head of the IMF and the governor of the ECB-not to make so many public statements? Every time they speak they upset the markets. They should confine themselves to commenting on their statutory obligations. Statement after statement unsettles the markets and drains their confidence. Ultimately, that hurts us all. I would like those who are in such key positions to maintain a period of dignified silence, if that is possible.

I am sure that we have not had our last debate on this and related matters. However, when we discuss eurozone matters again, I hope that there will be a clear and credible plan to resolve this crisis. It is certainly not visible to me at this stage.

Photo of Lord Flight Lord Flight Conservative 5:51, 23 May 2012

My Lords, the Bill looks to me to be essentially a no-brainer that commands the support of those on all sides. It is necessary to understand what it is all about and what the European institutions do. I am particularly concerned about what Britain's liabilities, and potential liabilities, might be.

It seems to me that we are facilitating a quid pro quo deal. Germany needs the amendment to Article 136 for its participation in the February intergovernmental treaty obligation to be considered legitimate by Germany's Federal Constitutional Court. The Prime Minister believes that once Article 136 is amended, any further liability that we have under the initial financial stability mechanism will cease. The issue arises whether this matter would invoke a referendum under the terms of last year's European Union Bill. However, the Foreign Secretary has confirmed that no powers are transferred, so that is not the case.

As I understand it, this issue arose during the interregnum period after Labour lost the 2010 general election and Chancellor Darling was still the interregnum Chancellor, as it were, when he committed the UK to supporting the initial European financial stability mechanism fund. I say candidly that this was a mistake and that the establishment of the fund was highly questionable. It was set up under Article 122, which provides relief in the event of natural disasters occurring, not relief for Governments who are having problems raising money. The fund was able to provide support worth €60 billion, of which €48.5 billion was committed to Ireland and Portugal. Some €11.5 billion remains unused, of which Britain's liability is 15%-a total of €1.34 billion. That liability is supposed to end once the formalities of amending Article 136 are completed, and all 28 EU members are signed up to that.

The mechanism of facilities under this fund has been that the European Commission borrows from the capital markets against the contingent liabilities of EU members to provide the finances. I ask the Minister whether members have actually paid up, or whether the Commission has paid but has not yet collected the money owed by the various members. I ask that in particular because my understanding of the arrangements is that the liabilities of members are joint and several. That is to say that if, by the time they have to pay, some members are unable to pay or are insolvent, their liabilities are transferred to members that remain solvent. That is somewhat like the last-man-standing rule applying to pension funds. There is therefore a question as to whether the UK has a material contingent liability relating to the initial fund.

Somewhat like the noble Lord, Lord Lamont, my first question on investigating this territory was to ask: what are the catches and the potential weaknesses in what seemed like a win-win proposal? The second point is that it is not at all clear when or if Britain's legal liability in relation to the outstanding balance of €11.5 billion comes to an end. It was a political deal that there would be no further drawings under the initial fund, and I think there is agreement that the fund is capped once Article 136 is duly implemented. It is not clear when that is going to happen. It is supposed to happen in July, but it may not be until January, by which time it is entirely possible that further developments will overtake the situation.

Subsequently, as noble Lords will be aware, the 17 eurozone members set up the European finance and stability facility in May 2010, but Britain is not part of it. The facility borrows capital from the markets, again backed by eurozone member guarantees, and pulls together total commitments of €400 billion, of which some €188 billion is already committed-€144 billion to Greece, with the balance going to Ireland and Portugal. I am clear that Britain has no direct liability relating to this fund, which is then to be rolled over into the new European stability mechanism, the establishment of which the Bill relates to, because amendments to Article 136 are required.

The amount to be rolled over from the second fund is therefore of the order of €220 billion, which is part of the €700 billion that the new ESM is providing as its firewall. This, again, is to be funded, I understand, by a mixture of paid-in and callable capital. I would be interested to hear from the Minister whether liabilities in relation to that mechanism are also joint and several, as I presume they are. I make the point alluded to by other noble Lords that if you continue on the joint and several liabilities front, the potential bill building up for Germany gets larger every day.

Considering all that, it looks as though the UK's position on potential liabilities is reasonable, but I am interested to know what other potential hidden catches there are. I have already made the point about whether our liabilities under the first fund can increase if other members are unable to honour their commitments. Given the history of the EU, I am also cautious about dealing with the potential reinterpretation of treaties that are signed. We have the immediate example of Article 122, which was used to establish the first fund when it was actually intended to relieve natural disasters.

I have already referred to liabilities in relation to the first fund but, as I understand it, there are two other major areas of potential liability. I believe that the ECB can call on up to €50 billion of foreign reserves held by the Bank of England, and, more fundamentally, I believe that the EIB can call on members for financial support, should it, for example, sustain significant losses on loans made to Governments in trouble. I believe that the maximum UK commitment here is €35.7 billion. Strangely, this is 39.6% of the total that all members would need to contribute, but we are shareholders to the tune of only 16%, so I am not quite clear why we have that greater liability. In short, I ask the Minister what the UK's total contingent liabilities are in relation to the eurozone. I think it is important that the House has the accurate figures.

I close by commenting that I agreed with virtually every word that the noble Lord, Lord Lawson, said. I think that his analysis was absolutely accurate and correct. It also seemed to illustrate that this situation is just like that of the gold standard in the early 1930s. Then, everyone was terrified, believing that you could not come off the gold standard or the whole world would come to an end. The gold standard did the same as the euro; it stopped countries in real trouble being able to devalue and get their economies going again on a competitive basis. When everyone had given up the gold standard, people said, "Why did we regard it as a religion for so long? We have been afforded relief at last". Although I appreciate that the break-up of the euro, which is inevitable, will bring pain-and the pain may be worse because of the EU's failure to organise an orderly break-up-within a given period, once it has happened, people will again say, "Why on earth did we stick with this currency, which prevented us from devaluing and has driven our economy into the dirt?". It is absolutely clear that the economies of southern Europe need major currency devaluation.

Photo of Lord Clinton-Davis Lord Clinton-Davis Labour 6:02, 23 May 2012

Some time ago, the noble Lord, Lord Howell, explained the purposes and effects of the Bill, and I wholly approve of the intentions that underlie it. It is a technical Bill, but I want to speak about other matters and I am not the only one to do that.

We have had the voices of doom and gloom from the noble Lords, Lord Lawson and Lord Lamont. The noble Lord, Lord Lawson, spoke of arrogance and irresponsibility, and he knows what he is talking about because that explains the whole purpose of his chancellorship. His period of office was not exactly crowned with glory. I think that writing off the European Union as he has done is irresponsible in itself. Our job is to save it, not drown it.

I approved very much of what my noble friend Lord Radice said, especially his remarks concerning the relationship between this country and the eurozone. The Bill has to be regarded against the background of the current crisis affecting the eurozone, and we cannot be immune from its possible deleterious effects. Of course, the crisis directly involves Greece. Ireland, Italy and Spain are also involved, and it would be idle to pretend that the entire European Union is not affected; of course it is.

Some argue that the euro is bound to fail-a scenario which I refuse to accept. Talk of that kind will inevitably lead to the collapse of the euro. I am rather more optimistic about its prospects of survival. Some argue that Greece will have no alternative but to leave the euro and possibly the European Union. I hope that that will not happen. It is, of course, for the Greek people to decide their country's fate, but to pretend that Britain would be unaffected and that contagion is remote is idle to contemplate.

Others contend that this scenario is to be averted if at all possible; that there is a duty on all members of the European Union, including ourselves, to rescue the European Union from its present plight; and that the Union with all its accumulated funds can and must overcome its present woes. In all this, of course, our country is pivotal and is inevitably involved. As a convinced supporter of the European Union with all its blemishes-what institution does not have any?-I continue to believe that the previous Labour Government were right not to join the euro, but that cannot mean that we can be just a non-playing bystander in the whole enterprise.

Notwithstanding that we face global instability, we now need the EU and we should strive to make it a success. We should support Presidents Obama and Hollande at the recent G8 summit in their quest to concentrate much more on growth, on a stimulus package and on promoting employment. In other words, budgetary solvency and the maximising of growth must be our equal priorities. Unhappily, the policies of the coalition are bewilderingly confused. At home, we have a programme of strict austerity; abroad the coalition urges the acceptance of the Obama formula-ineptitude writ large-and vividly illustrated by its desire during the recent French presidential campaign to shun Hollande, who won, and support Sarkozy, who lost.

To desert the European Union, to quell revolt on the part of Conservative Back-Benchers, and to hector the European Union from the sidelines does not amount to a realistic policy. Surely no Lib Dem could support that endeavour. An increasing number of allies are now calling for economic growth. Of course, Germany finds it difficult to forgo its past, and we have to sympathise with that dilemma, but somehow the European Union must develop, grow and tackle the deficit. This is a conflict that we cannot afford to lose and I do not think that we will, despite the voices of gloom and despair.

Photo of Lord Ahmad of Wimbledon Lord Ahmad of Wimbledon Conservative 6:10, 23 May 2012

My Lords, my right honourable friend the Prime Minister has consistently maintained that in all matters European he will put British interests first, while recognising that we, as a fully fledged member of the European Union, will continue to play our part. The Bill is therefore good news. It is good for us and good for the eurozone. It gets the UK out of future liabilities that the previous Labour Government signed us up to, with the EU budget lying as a guarantee, and rightly replaces them with a permanent European stability mechanism that is guaranteed only by eurozone members.

This is right for the eurozone and, most importantly, for Britain. It addresses the urgent need for the euro area to put in place a regime that will provide collaboration and support, and that will make eurozone members take direct responsibility for the monetary union of which they have chosen to be part. Importantly, it means also that there will no longer be a reliance on others who chose to opt out to provide treaty-mandated bailouts when crises hit. However, it is just a small component of the crisis that the eurozone faces.

The rules must be adhered to because they are important. My noble friends Lord Lawson and Lord Lamont referred to the time that the single currency was born. Let us cast our minds back to that time. Economic tests were set. They were established as stringent criteria for qualification. Were they applied in reality? Sadly, they were not. It was clear to me, as it was to many others, that the euro had many flaws. Joining together in a monetary pact and without fiscal union 11 members with different economies in different states of development and with different industrial structures was setting up a currency zone on weak foundations. A one size fits all approach, as the then Conservative Government said and as the Conservative Party has maintained consistently since, does not work. I am glad that the Labour Government led by Mr Blair listened to their predecessor and did not join the euro.

Even if we entertain for a moment the notion that the criteria for monetary union were sensible when they were set, their practical application was not. Allowing countries to qualify on the basis of very loose interpretations of the criteria set up the currency to fail-and it is failing. At the time, those who predicted that during the good times the disparities between the economies of member states would not matter but that they would matter in harder economic circumstances when the currency would be tested, were dismissed as doomsday merchants.

Let us fast forward to 2010 and where we are now, as countries in the eurozone and outside it seek to scramble it out of its crisis. Reforms and austerity measures are essential if we are to succeed in restoring some sense of stability to both markets and the eurozone. However, the members of the eurozone cannot ignore their obligations. It is no good for Greece to say that it wants to remain in the eurozone if it cannot implement austerity measures. I do not agree with the premise that a lack of integration has led to the rise of extremism. It is forced integration, with national identities being lost, that has led to the rise of extremist parties throughout Europe.

If-and it is a big "if"-some of these infant steps work towards restoring stability in the markets, perhaps we can then look to and advise on other measures such as the issuing of Eurobonds, which is currently on the agenda with the election of the new French President. Today the euro crisis predicted by the "doomsday merchants" is upon us. Countries are struggling on the brink of implosion because of widely differing levels of indebtedness and competitiveness. The architects of the euro did not put that down as a major objective-far from it. Countries such as Greece are heavily indebted and pay heavy risk premiums. As we all know, its debt is unsustainable. Some suggest that the solution is to refinance the debt through Eurobonds. However, as other noble Lords said, Germany is the key player in this. Why would Germany, which is currently benefiting from the current rate of the eurozone, seek to devalue? It does not wish to, but compromise and consensus must be the call. If the eurozone is to survive, compromise will be necessary.

It was said in this Chamber and elsewhere that the introduction of the euro would mean Britain losing its influence; that our lack of participation would marginalise our status both in Europe and on the world stage; and, indeed, that our lack of membership would render the City of London second to Frankfurt. It did not. When our Prime Minister rightly stood up for British interests and threatened to veto any legislation that would tax the City of London, again it was said that that would marginalise the UK. It has not. Britain's continued engagement and involvement in discussions on the creation of the ESM, our contributions through the IMF and our influence as an active and influential member of the G8 and NATO lay to rest the absurd suggestions that Britain lacks influence.

The Bill reflects the promise to put British interests first. It was a decision by the previous Labour Government, albeit at a time of crisis, which committed Britain to bailing out the eurozone even though we chose not to be a member. The Bill simply puts right that wrong. I therefore welcome the establishment of the permanent mechanism of the ESM but, in doing so, also welcome the fact that we no longer face the liability of bailing out a currency zone that we chose not to be part of, that we are not part of and that we should never be part of.

Photo of Lord Stoddart of Swindon Lord Stoddart of Swindon Independent Labour 6:17, 23 May 2012

My Lords, the House is indeed fortunate to have present in this debate two former Chancellors of the Exchequer, who were able to impart their considerable experience over a wide area of matters, particularly in regard to the setting up of the eurozone. I am grateful to them for their speeches today.

Why are we hurrying this Bill? Why are we introducing it just a couple of weeks after the Queen's Speech? There is no rush for it. Unless I am mistaken, the Irish are to have a referendum on the matter at the end of this month. The Germans will not ratify this policy until the autumn. I even noticed in today's Financial Times that Geert Wilders has applied for an injunction to block ratification until after the September elections.

I heard the statement made by the noble Lord, Lord Howell, and others that a,

"healthy eurozone is important for the UK's long-term growth".

I put in there that that does not hold water, but that clearly was not robust enough because the noble Lord, Lord Lawson, described it, in much more stark terms, as "nonsense". I think that that is a better description of it.

Photo of Lord Howell of Guildford Lord Howell of Guildford Minister of State (Foreign and Commonwealth Office) (International Energy Policy)

The issue of whether I was talking nonsense or not seems to have rattled through the debate. I think that we will all listen with fascination to the noble Lord's speech, just as we listened to the excellent speech of my noble friend Lord Lawson. However, there was an error in that perhaps they did not hear my actual speech. I made it absolutely clear that stable progress in the eurozone states is vital to stable progress in the United Kingdom. That is not quite what the noble Lord seems to be accusing me of saying.

Photo of Lord Stoddart of Swindon Lord Stoddart of Swindon Independent Labour

It was not an accusation because I thought that I was quoting him. I am most obliged to the Minister for clarifying what he did say. I really do not like getting across the noble Lord, Lord Howell, because I respect him very much and think that he is perhaps the only statesman that the Government have among their ranks.

Photo of Lord Lawson of Blaby Lord Lawson of Blaby Conservative

For the sake of clarification, I was not quoting what my noble friend said in his opening remarks, which were rather more careful. What I explicitly quoted is what appeared under his name on the Foreign Office website, and I quoted that correctly.

Photo of Lord Howell of Guildford Lord Howell of Guildford Minister of State (Foreign and Commonwealth Office) (International Energy Policy)

I appreciate that he was relying on a press release, but I had hoped that, as he is sitting here, he might also have listened to my speech.

Photo of Lord Stoddart of Swindon Lord Stoddart of Swindon Independent Labour

Now that we have that out of the way, perhaps I can get on with my speech. There is no doubt, as other noble Lords have said, that the eurozone was a political construct, not a financial one, to create a single European state. Because it was made up of nations with diverse economies, it was bound to fail, as it now has. The noble Lord, Lord Radice, accused those of us who gave pause when the project was starting up of gloating because it has now patently failed. I do not gloat, and I do not think that others who warned of the consequences do so because the eurozone is now in difficulties. We believed that it was always going to be in difficulties; and for trying to point that out, we were derided and insulted. Indeed, the former Prime Minister, Mr Blair, said that we were unpatriotic. There is no gloating about this. We are extremely sad that the present situation has arisen.

As I understand it, the Bill allows the eurozone to further integrate and consolidate a failed system by attempting to shore it up through fiscal, economic and political union under central control by the large countries. I believe that the claim that the ESM cannot and never will apply to the United Kingdom is spurious and quite untenable. Article 16 expresses the aim that within the five years the treaty will be incorporated into the EU treaty framework, which presumably will include this country. Furthermore, we have heard all this before. Let us remember the famous Blair "red lines" over the EU constitution. All of them were eventually crossed and incorporated into the Lisbon treaty. We have to be careful when we are given assurances that certain things will not apply to this country.

I really must comment on the behaviour of the Prime Minister. He does not inspire confidence that the United Kingdom will not be sucked into this system. He seems to be suffering from EU schizophrenia. On the one hand, he opposed the setting up of the eurozone and has said that the UK will never join it; but on the other hand, he wants to dictate policy from the outside and has threatened the Greeks that if they do not vote in the right way, they will be thrown out of the euro. No wonder he is seen by the eurozone countries as a bully-boy shouting from the sidelines. He claims to be a Eurosceptic, yet demands more power for the centre.

I would like the Prime Minister to understand that the influential and decisive voices of the EU-for example, Mr Jose Manuel Barroso; Mr Herman Van Rompuy; Mr Wolfgang Schaeuble, the German Finance Minister; and Mr Olli Rehn, Commissioner for Economic and Monetary Affairs-and the shadowy group of Foreign Ministers and many others are calling for complete political integration under a European government and the destruction or the sidelining of the nation states.

Why is the Prime Minister not shouting that very famous, "No, no, no"? Perhaps he is afraid of being stabbed in the back by the Deputy Prime Minister. The Prime Minister says that we will never join, but I remind him that others want the whole system to be extended into a single European state. This Bill will help those who wish to create a country called Europe, in spite of some voices this afternoon and in other debates who do not wish to see that happen.

Photo of Lord Dobbs Lord Dobbs Conservative 6:27, 23 May 2012

My Lords, this afternoon's debate has been thoroughly stimulating-and we still have a way to go-as was our debate on Monday. Perhaps I might be forgiven for spending just a few minutes trying to draw some threads linking Monday's debate to what we are discussing today.

Monday's debate was thoroughly thoughtful, and two contributions in particular stuck in my mind. The first was the claim by the noble Lord, Lord Willoughby de Broke, who sadly is not in his place, that in real terms more has already been spent on bailing out the eurozone than was spent on reparations and reconstruction after the two world wars. If that is so-and I look forward to seeing the figures-it is a statistic and a reality that should give us all pause for very considerable thought.

There was also an emphatic contribution on Monday from the noble Lord, Lord Judd-who sadly is not in his place either, but his words echo on-in which he spoke of the "ethical commitment" to Europe based on lessons he drew from his experiences of World War II. He put his points with eloquence and great passion. The speeches of both noble Lords got me thinking about the historical perspective that they raised. Can history teach us any lessons, even though the crisis that we are witnessing and going through today is very different?

Ardent supporters of the European Union base their very genuine beliefs on an ethical view. The EU, they say, is the best way to avoid the extremism and intolerant nationalism that led us down the road to disaster in the 1930s. It is a very genuine view but there is a danger of taking too narrow a view of ethics and events. The ethical side of the debate in the 1930s-and it was a very black and white debate then, too-was claimed by the anti-war lobby, the appeasers.

When Neville Chamberlain flew back from Munich waving his little piece of paper, he was applauded by archbishops and moralists, and summoned by the King from Heston Aerodrome to Buckingham Palace, where he was brought out on to the balcony to accept the cheers of tens of thousands of grateful people. In October 1938, Neville Chamberlain was the most praised, honoured and seemed to be the most ethical politician of his day. It did not make him right of course. Indeed his strong and rigid ethical views, which he held most sincerely, ended up blinding him, and leading him and the entire world astray.

The point I want to make is simply that while I have enormous respect for the sincerity of those who support the EU as being the only alternative, I do not believe that they are right. I hope that does not make me swivel-eyed. For instance, in October 1938, Winston Churchill was hugely unpopular. The Conservative Party was planning to deselect him in 1938-not something that we talk about a lot nowadays but it is absolutely true. He was derided as a swivel-eyed warmonger and a man of the past. We heard similar claims from one or two noble Lords in Monday's debate and mutterings about political reactionaries who apparently lurk at home wearing union jack waistcoats. I frankly thought that was a pity in what was otherwise a fine debate.

Then I began to think about what the noble Lord, Lord Willoughby de Broke, said and what happened after World War I and World War II. After World War I, we punished Germany with reparations and crippling austerity. The economic consequences were disastrous; the political consequences far worse. We should not be so naive as to think that such appalling outcomes are impossible today. Democracy is a delicate flower and in many parts of Europe the soils are thin.

Towards the end of World War II, a similar discussion about the future of Europe was held. In February 1945, the great leaders, Churchill, Roosevelt and Stalin, gathered at Yalta to map out the shape of post-war Europe. That summit too came desperately close to repeating the follies of 1919. Stalin wanted to tear the industrial heart of Germany, pack it up to the last bolt and rivet, and ship it back to the Soviet Union. He wanted to reduce Germany to a rural backwater. Roosevelt was of much the same mind and wanted to break up the odious German state into a number of powerless and pathetic provinces. However, the swivel-eyed, warmongering Churchill had a different vision. He was outnumbered and isolated at Yalta but he remembered the terrible mistakes of 1919 and fought furiously. Although Yalta was largely a disaster for the West, he was able to prevent Germany from being ripped apart and dismembered; although it was of course divided. It was a delicious irony that it was that old warmonger-the man who had stood out against the ethical orthodoxies of his day-who saved Germany and with it, eventually, free Europe.

Many of you will know the history of that time better than me, so I will come quickly to the conclusions that I want to reach and the lessons that I think we can draw. First, ethical values are not held simply by one side of this argument. Secondly, there is nothing to be gained but sorrows from pushing states too far down the road of blind austerity and crippling reparations. In 1919, and indeed in 1945, we talked of Germany; today we talk of Greece, Ireland, Spain, Portugal and Italy, but, for the moment, particularly of Greece. The ESM is a sticking plaster in that solution but it is not by any means a solution in itself. We all know that and I support it for what it is. However, I fear that sticking plaster that it is, there are few, if any, sticking places left. If-and, I suspect, when-Greece is forced out of the euro, whatever else happens we must not turn our back on the Greek people, any more than we turned our back on the German people in 1945. Otherwise, that fuse of extremism that we have heard so much about could all too easily be lit once again.

I would gently encourage-not lecture, I hope, but encourage-all the authorities in Europe, and particularly those in Germany, to remember the lessons of the post-Versailles period rather than naively insisting that all financial obligations should be met, no matter what. In the period between the wars, that policy proved to be no more than whistling into the teeth of the gathering storm, and the tune has got no better since.

I believe that the eurozone is set on a downward slope and cannot survive in its present form. There will be more pain but my final conclusion is yet one of hope. We have all been through worse than this, or at least our fathers did, and found the imagination not simply to survive but to flourish once again. Instead of sticking stubbornly to the premises and prejudices on which the creation of the eurozone was based, let us look forward to a different, more flexible, more creative and more tolerant Europe; a less bureaucratic, less centralised and less overmuscled Europe; a Europe that is so much more than a eurozone. Whether the ESM will play any part in meeting that hope, I know not. I can only keep my fingers crossed and my savings in sterling.

Photo of Lord Davies of Stamford Lord Davies of Stamford Labour 6:37, 23 May 2012

My Lords, I do not normally agree very much with what the noble Lord, Lord Dobbs, says about Europe and I disagree with some of the things that he said today. However, I enjoyed his speech and agreed with several of the things that he said; notably, first, that fiscal austerity, though necessary, is not enough and should not be pursued excessively; and, secondly, with his quite wise statement that the ESM, though important to a solution, is not a sufficient solution to the instability we face.

I have no problem with this Bill. I enthusiastically endorse it. I am very much in favour of it and very happy with the transfer of the basis for this form of firewall from Article 122 to Article 48. My one considerable sadness is that we are not part of it or have not made a voluntary contribution to it, as Poland and Sweden did to the previous financial stability facility. My reason for that is, partially, solidarity-I believe in solidarity, although it always seems to be a very long-term self-interest-and because of our immediate self-interest. We all agree that we face a desperate crisis. We are on the edge of a precipice and so forth, and we hope that there will not be collapse. We desperately hope that this firewall will be effective, so we ought really to be contributing to it. In my view, it would be a good use of the nation's reserves to make some contribution.

If one's neighbour's house is likely to burst into flame or if one fears that might happen, it seems sensible to contribute to the local fire brigade, instead of which there is the Prime Minister's approach. I agree with Members on both sides of this House who have criticised that approach, which seems to be not to make any positive contribution at all but simply to stand on the sidelines criticising loudly what is going on. He reminds me of a man who might be on the shore when he sees people in trouble in the water. He is not willing to take any risks by trying to help them and does not even want to get his feet wet. He just calls for a loudhailer and shouts at them where he thinks they have gone wrong. The Prime Minister is the last person to give any lessons to our European friends and allies on this subject, because he has got his own economic policies so wrong. He inherited growth and has produced recession. In the first quarter of this year the eurozone, despite its well publicised problems, had a positive rate of growth overall and we had a negative rate. I do not think any more needs to be said on that subject.

It has been generally agreed in this debate that the ESM is necessary but not sufficient. There are actually six pillars required for a viable solution to this crisis. First, of course, there is fiscal deficit reduction. That has happened on the continent, as here, but it should not be pursued excessively and certainly not to the point where the reduction in gross domestic product as a result of recession more than undermines the positive effect of reduction in the fiscal deficit on the debt to GDP ratio. When there is any danger of that happening, it is a time for Governments to think again. That rule should apply everywhere. It should apply here. We should be thinking again, as Christine Lagarde has said, and we should be thinking again about Greece. I hope there will be some revision of the austerity programme in Greece and some reduction, or at least elongation, of the deadlines in the bailout package. I hope it will be available for the Greek electorate to take full account of it and therefore be able to make a proper democratic choice at their forthcoming election.

The second central pillar of progress is supply side reform. Immense progress has been made in this direction under the pressure of the crisis. I have said before in this context that very often in human affairs-it is certainly true of the history of the European Union-people do the right thing but do it almost too late under the pressure of a crisis. We all know how that happens. It happens in our private lives and in business lives all over the place. That is just a fact of life. I thought that the 30 January European Council produced some very important supply side measures. I hope they are going to be pushed through by this Government and other Governments. I salute the progress that has been made by Mario Monti in Italy in producing labour market reforms and pension reforms. I think Italy is now the only country in the world which has a pension system that is formally linked to life expectancy, so that when life expectancy increases the pension age is automatically increased. The Greeks and the Spaniards have been tackling their labour market issues with a vengeance, which they would not otherwise have done. Of course, they should have done it years ago, but at least they are doing it now. Therefore, supply side reform is very much in place.

The third pillar is firewalls. I have a suggestion to make which I made in this House some months ago. It should be within the powers of the ESM to lend money to sovereign Governments who would be subject to a bailout and whose debt is trading at below the bailout price. That is certainly the case of Greece at present. We have missed a lot of opportunities over the past year or so for the Greek Government to buy back their debt at a much better discount-it was at 80%-than the bailout discount, which is about 50%, and then cancel it. It has been foolish that there has been nobody able, willing or empowered to lend for that very sensible purpose. I hope that may be taken on board as a positive suggestion.

The fourth essential pillar is banking recapitalisation. Nobody has been making the point in the public debate or in the debate in the press that banking recapitalisation is very problematic and dangerous in the present circumstances. At a time when we want banks to lend more money and want demand to be relaunched, banking recapitalisation produces a disincentive for banks to increase their lending. The easiest way, and some banks in the present circumstances will say the only way, that banks can achieve better capital ratios is by reducing their lending and maintaining the same capital base. It is certainly true that they cannot be expected to go for rights issues with their share prices on the floor as they are at present and for that reason other forms of tier 1 capital would be prohibitively expensive to raise. They cannot cut their dividends in the present market conditions as that would really shoot the value of their shares to pieces, which would be extremely destabilising. So what do they do? The only thing they can do is to reduce their staff costs. Of course, an individual bank cannot reduce its staff costs because people would just walk out of the door. It can be done only by governmental action to impose some limitation on the staff costs of undercapitalised banks, and that has to be enforced throughout the European Union. I hope that that thought will be taken on board.

It sounds very draconian, but the present circumstances require draconian measures. Of course, some people will say, "Don't worry". When I have raised this matter previously in the House I have had that response from the noble Lord, Lord Sassoon, who I am sorry is not in his place to hear it once again. He always says that it does not matter because the Basel criteria for capital adequacy come into force only in 2018 or 2019. I have been on the board of a bank so I know perfectly well that if you are told that you have to achieve certain capital ratios in five years' time, it is going to affect your lending decisions and your policies right away because you know you have to move on that trajectory. Therefore, that is not an answer to the problem. The problem is in fact very urgent. We need to make sure that banking recapitalisation is not pursued at the expense of a solution but actually contributes to one. I fear that in the present circumstances you cannot possibly get rid of these requirements because for Governments to go back on them would be very destabilising. Therefore, the only way through is the one that I have suggested.

The fifth essential pillar for a solution is the use of market mechanisms, allowing the price mechanism to work in the factor markets throughout the European Union and particularly in the eurozone. Where demand is less, demand conditions are much weaker and there is unemployment, factor costs should be allowed to fall and wage costs need to be allowed to fall in nominal terms. Where demand conditions are much stronger and unemployment is much lower, then the price mechanism should be allowed to work and nominal wages should be allowed to increase; indeed, real wages should be allowed to increase. That is precisely what is happening now, I am glad to see. The other day, as we all would have noticed, IG Metall came to a Tarifvertrag-a wage agreement-in Germany, involving millions of engineering workers with an increase of more than 4%. Equally, in Greece, wages are falling quite substantially in the public sector-by 20%-which is absolutely enormous. I saw the other day that in Spain over the past year wages had fallen by 1% in nominal terms, which of course means more than that in real terms.

That is already a considerable element of internal devaluation-or revaluation, in the case of Germany. I say to the noble Lords, Lord Lamont and Lord Lawson, that that is infinitely preferable to the kind of external devaluation which they always advocate. It avoids the great problems of external devaluation. It avoids the idiocy and distortion of changing every price of every good and service overnight by the same amount irrespective of demand for it, which is completely crazy. It avoids the inflationary impact, through import prices, of a devaluation. It avoids suffering from the enormously excessive swings of currency markets in times of uncertainty, so that you can be certain that the external devaluation or revaluation will be far greater than is required by the circumstances. Of course, it avoids completely the threat to the solvency of households, corporates or banks-this is very relevant in Greece-which happen to hold their liabilities in the stronger currency, in this case the euro, and risk having their assets and revenues translated into a weaker currency with great threat to their solvency. This kind of internal devaluation is infinitely preferable and it is the most sensible way to go.

Finally, we need a growth package. Austerity is not enough. That is the message which is coming through loud and clear. It is not a message which the Government seem to want to hear in this country, and not a message in which they therefore have any credibility when, in contradiction to their policies in this country, they convey it abroad. But, of course, it is necessary. I hope that we will have really good, dramatic news tonight. We need some news which affects psychology and confidence. I hope that there will be some good, imaginative thinking coming out of the informal European Council meeting which is taking place this evening.

I support the idea of increasing the EIB capital. That is a splendid move, but it does not go that far. I strongly support the idea of making sure that we are spending the unspent structure funds. It may be necessary in Greece, and I hope that this happens, to relax the co-financing terms of the structure fund programme. If Greece is under this fantastic fiscal pressure, where can it find the money to come up with even 10% of the investment cost of schemes that are being funded out of the structure fund programme? Of course, there is a good argument in most circumstances for co-financing, to avoid moral hazard and so forth. In the present circumstances, however, it seems sensible to reduce that to an absolute minimum or to find some other way, like appointing outside consultants to vet programmes to achieve that flow-through. Above all, I hope that there will be some new initiative, which I cannot anticipate but I hope will come out very quickly. That is necessary to make sure that there is a new boost to growth and demand, ideally through infrastructure spending, in the eurozone and particularly in those countries which have been affected most by the downturn: Greece, Spain, Portugal and Italy.

Photo of The Earl of Dundee The Earl of Dundee Conservative 6:50, 23 May 2012

My Lords, I join with most others in welcoming this Bill in its Second Reading. The introduction of a permanent stability mechanism is certainly timely. It also makes sense that the United Kingdom should not automatically have to take part. However, as a number of your Lordships have qualified, there will probably be occasions when on an ad hoc basis we and other states outside the euro area may want to contribute all the same.

Although in itself hardly contentious, the Bill throws up a number of matters with which inevitably its confined purpose is still associated, as already demonstrated in this debate. It is with a number of these that we may be much more exercised. Today I would like to touch briefly on three of them. First, there are certain further stability systems or mechanisms which now might usefully follow on. Secondly, there is the connected issue which seems to confuse and divide politicians and economists alike: in Europe, the balance that should be struck between measures of restraint and austerity and those to encourage growth, as indicated by the noble Lord, Lord Radice, and others. Thirdly, regarding the future political direction of Europe, there are the simple forms of guidance and leadership which this country and others should give. Indeed, today many of your Lordships have referred to the future scope of our influence.

So far, the success ratings of European systems and mechanisms may not have been too good. Previous attempts to enforce fiscal discipline in the euro area through the stability and growth pact came to nothing. This was because sanctions were not imposed for breaches of the pact. Yet at the moment perhaps a rather different attitude prevails all round. If so, that prospect would represent one of the silver linings to the cloud of current European economic adversity. Does the Minister believe this to be the case? If so, which adjusted proposals for fiscal discipline and macroeconomic stability does he consider would next benefit Europe and properly work?

The second issue is that of combined measures to achieve restraint and growth at the same time. The first task is to dispel some false dogma. This would claim that you either go for restraint or growth. You cannot achieve both together. Yet in discarding the notion that growth and restraint measures are mutually exclusive, it is perhaps a comfort to reflect that Harold Macmillan would almost certainly have refuted it as well in the same way in which, in his maiden speech in this House, he dismissed the parallel misapprehension that you either had to be a Keynesian or a monetarist. He implied that economists and politicians pedalling that intransigence had not helped him very much. For the future running of the country's economy, much wiser counsel had instead come to him from his nursery and from his nanny. She knew that you used your common sense and struck a balance. You had to chop and change. Sometimes you fed a cold and other times you starved a fever.

This year, in helping to forge such a balance in Europe, our Prime Minister and the Administration are to be congratulated. At the March European Council meeting a number of important United Kingdom suggestions for growth stimulation have already been accepted. These include deepening the single market in services, tackling the regulated professions and opening up that part of the single market. There had been no reference to deregulation. Now references have been provided with corresponding sectoral targets. There had been no mention of completing the internal energy market. Now there is a deadline to achieve this by June 2014.

Rather curiously, there had even been no mention of trade itself, the key facilitator of economic growth. Now for the June meeting there will be a specific focus upon trade, including trade deals. These provisions, all led by our country, thus constitute a considerable step in the right direction. And they demonstrate how this particular recipe for economic growth comes to function alongside other measures already in place in Europe to achieve economic restraint.

Clearly, there are many more opportunities for growth stimulation. Which of these does the Minister identify for the next stages? As already indicated, the agenda of the March European Council meeting revealed an alarming lack of attention to the relevant details. It is fortunate that our country was able to come to the rescue. What guarantees are there that future agendas will be more focused and pragmatic in the first place? Regarding existing agreed measures and their timetables, what system of monitoring is in place so that the aims themselves do not fall short and there is no procrastination over their corresponding action dates?

This links to my third theme of useful political leadership that our country and others can offer Europe. The March European Council meeting may also have heralded a political breakthrough. It produced a new and unprecedented coalition. Along with us, it brought together Spain, Italy, Poland and many different states from all over Europe. It did not just comprise the usual, traditional allies from the north. Therefore, not only with these new partners but in association with France and Germany, there is a fresh opportunity for our continued advocacy and guidance of a constructive and balanced package of measures to attain both economic restraint and growth. Does my noble friend agree that we may now be particularly well placed to lead such measures and persuade other states of their efficacy? If so, what plans are there to widen our new political coalition to strengthen support for our European economic prescriptions?

Then there is the Council of Europe, on the Parliamentary Assembly of which I have the honour to serve. It is a coincidence that our current six-month chairmanship happens to end today, on 23 May. It has been a fruitful chairmanship, first, in brokering agreement on methods to improve the efficiency of the European Court of Human Rights without undermining its standards; and, secondly, on enhancing delivery to local democracy from within the Council of Europe. I pay tribute to my noble friend Lady Hanham, the Minister responsible for this task within our UK chairmanship. As a result of her efforts, a goodly level of consensus has been reached on ways and means, thus standing to benefit local democracy in the Council of Europe's affiliation of 47 states.

A connected problem is the need for co-ordination and joined-up writing between the latter and the European Union's smaller affiliation of 27 states. In Europe there is a great deal of good will towards our country and recognition of our ability to broker consensus and improve results. Does my noble friend agree that we should, therefore, now work towards a different and proper degree of co-ordination between the Council of Europe and the European Union in a variety of fields?

In summary, today's Bill reveals sound logic and a counterbalance. For good reason, it removes our liabilities within the eurozone. Equally, through counterbalance and in wide context, it reflects our enormous commitments to Europe. However, these are not just commitments to obtain the recovery of its economy. Much more significantly, they are political resolves to protect freedom, democracy and good standards.

Photo of Lord Hannay of Chiswick Lord Hannay of Chiswick Chair, EU Sub Committee F - Home Affairs, Health and Education 6:58, 23 May 2012

My Lords, support for the Bill may come as something of a surprise to the government Front Bench from someone who has been generally critical of the coalition Government's performance on European Union issues and remains so. I regard last year's European referendum Act as a ball and chain around any future British Government's negotiating position, and the decision last December to refuse to join the negotiation of a fiscal discipline pact as an unnecessary and self-inflicted wound. It may come as a surprise that such a person should wholeheartedly support the legislation before the House today, which is designed to enable this country to ratify a change to the treaty on the functioning of the European Union to which our Government have already agreed and which has already been approved by both Houses, as the noble Lord, Lord Howell, said in his introduction.

I give this Bill unqualified support, and not just because the failure of Parliament to do so would create an appalling precedent whereby a British Government's word would no longer be seen as being as good as their bond, although that is surely a compelling enough reason. But the case for support runs rather deeper than that. It is based on a belief, which I have not heard mentioned in this debate, that the European Union for the foreseeable future will consist of both members within the eurozone-I am not speculating about how many of those there will be-whose currency is the euro and whose interest rates are set by the European Central Bank, and members outside the eurozone, such as ourselves but not only ourselves, who will continue to operate their national currencies and national interest rates.

I believe that it is crucial to achieve the maximum possible degree of solidarity and to reduce to the minimum the policy and institutional distinctions between those two groups. Only thus will we have any chance of ensuring that aspects of European policy as fundamentally important to this country as the single market and its further development remain firmly under the control of the European institutions and all 27, shortly to be 28, of its member states.

By enabling the operations of the European stability mechanism, which imposes costs on the members of the eurozone alone and not on us or those outside it, to be based firmly on EU treaty provisions, we are making another modest contribution to that solidarity. That is why I agree with the Government's assertion that the ratification of this treaty change is in Britain's national interest. It has to be admitted that that concept of solidarity is not much in evidence these days, particularly in debates on European matters in this country, even though our own future growth and prosperity is so closely bound up with that of the other members of the European Union-whether they are in the eurozone or not, or whether we are in the eurozone or not.

The emphasis is all on how to avoid solidarity and how to ensure that this country does not incur the slightest hint of a financial liability. In the case of the present treaty change, that issue does not arise, and I am not suggesting that it should. But I would suggest that it is an approach which is both short-sighted and misguided. The greatest financial risks to this country in the present circumstances arise from a possible breakup of the eurozone, not from its stabilisation and survival.

In the case of Ireland, we already faced and drew back from taking the dog-in-a-manger attitude which is so often commended in this country. Our rather niggardly approach to IMF replenishment-that criticism I am afraid applies to the Government and the Opposition-shows just how reluctant we are to recognise that need for solidarity. Yet, the awful example of the 1930s-I have heard some pretty odd interpretations for that decade in the debate so far today-when the countries of Europe and beyond definitively turned their backs on mutual solidarity and opted for protectionism, competitive devaluations and appeasement, are there to remind us of the possible consequences of such policies.

I confess that I was a little shocked but not the slightest surprised when at the briefing meeting on this Bill so helpfully organised last week by the noble Lord, Lord Howell, and his colleagues, the chairman of the European Scrutiny Committee in another place warned that the Bill was likely to run into major difficulties and opposition when it was presented there. I was not surprised because it is becoming ever clearer that a number of the Government's supporters in the other place are determined to spare no effort to widen the gap between Britain and its European partners-indeed, to bring about an eventual parting of the ways between us. I say to those of that point of view that the eurozone crisis is seen as an opportunity, and not a challenge and a threat. They are frustrated that the Government do not seem to share that view, which is an opinion that has been expressed today sometimes rather eloquently but, in my view, not in a way that I could share.

As we are debating this Bill today, the leaders of the European Union are meeting in Brussels to consider how best to reconcile the policy objectives of fiscal consolidation and the need for growth in all our economies. Let us hope that our own Government are playing a full and constructive role in that wider debate and that in the next phase of the development of the European Union Britain can come to the table with ideas and not just with objections. That is surely the only way in which to make a success of Britain's continued membership of the European Union and persuade the British people that that is the right course to take.

Photo of Lord Risby Lord Risby Conservative 7:05, 23 May 2012

My Lords, I may not be able to cheer your Lordships' House up particularly, but I may do so by saying that this speech will be very brief. This Bill may not be ground-breaking or contentious, but it is worth reminding ourselves why it is of some value. All member states' parliaments must approve the proposed Amendment 136 to the Treaty on the Functioning of the European Union, but legislation approved by an Act of Parliament last year, the European Union Act 2011, enhances our democratic oversight. This Bill does not involve directing powers from the UK to the European Union centrally, so no referendum is required. I hope, therefore, that all of your Lordships can reflect on how important last year's legislation was, given the current turmoil in Europe and the real future possibility of substantial structural or even constitutional changes in the EU which will most certainly affect us.

We may be out of the eurozone, but we cannot escape our geography or the economic and other links with our continental neighbours. We have to respond carefully and thoughtfully to the political and economic crisis that has descended on our continent. We do not know how this will work out, given the current disagreement within the eurozone, and although I cannot foresee what constitutional implications there may be for us, at least now either our Parliament or, if necessary, our people, will have greater opportunity to take greater ownership of any such possible process. Meanwhile we have to encourage and even at times assertively suggest ways forward to our European neighbours to find a solution to their crisis. Agreeing to this short Bill would at least get us out of future direct liabilities and allow the eurozone members to create a larger mechanism: the European stability mechanism. It seems to me desirable for all the EU states, in or out of the euro, to put this change through our Parliament and all theirs. However limited in the circumstances, it is at least a small and partial although important responsible reaction to current difficulties.

In a speech two days ago in your Lordships' House my noble friend Lady Williams of Crosby reminded us of the hugely comprehensive and all-embracing process to fulfil the Copenhagen criteria for EU membership. Nothing remotely comparable was ever laid out for eurozone membership, and to the extent that there were national budgetary constraints they were almost immediately flouted. If, indeed, a new eurozone fiscal pact emerges and there is the inevitable reduction of national sovereignty, I hope that the use of referendums that enables us to debate this appropriately and seek voters' approval becomes much more widespread. I say that because the Lisbon treaty, which finally emerged out of the constitutional convention, has not succeeded in dealing with the main injunction of the Laeken declaration, which is to try to close the democratic deficit which we now see under so much pressure in the European Union today.

In the end, politicians in all democratic European countries will make their ultimate judgments based on their own domestic constituencies. Mrs Merkel's position is perfectly understandable; it accurately reflects the view of her citizens, who see themselves as being punished, potentially, for their frugality and economic success. We ought to remind ourselves that many Germans paid, within living memory, a very high price for the unification of their own country, and many of their citizens remember this. Ultimately, you cannot buck the market. You cannot have a single currency with each member state with very different levels of competitiveness all paying hugely differential rates to service their debts.

The economy of Greece, so badly managed, cannot charge its adoption of the euro as the basis of its problems. The problems were certainly internally generated. In order to resolve their problems the Greeks have to contemplate the possibility of leaving the eurozone. Of course that course presents difficulties but I suspect that it is the lesser of two evils.

The most important thing now is that all key strategic decisions should be taken soon as regards exactly who will remain in the eurozone-if that is to be the course-and what new fiscal arrangements are to be put in place. Frankly, as long as those problems remain unresolved, everyone in Europe will suffer. At least in Britain, however, any possible anger or frustration felt by our people about the impact from our neighbours will be offset by the fact that at least we know that we will have a say on any possible constitutional change. I suspect that many of our fellow European citizens would like eventually to have the same opportunity, at a time of febrile social tensions in many parts of Europe arising from this wholly predictable crisis which is affecting the lives of millions of our fellow Europeans. Regrettably, it has begun to shake the very democratic underpinnings of the European Union itself.

Photo of Lord Anderson of Swansea Lord Anderson of Swansea Labour 7:12, 23 May 2012

My Lords, because of an administrative error my name was not included on the list. So please add my name to the end of the list.

I disagree with the noble Lord, Lord Risby, in respect of referenda. Under the 2011 Act, even the smallest incremental change as regards moving power to Brussels will lead to a referendum-a referendum in which perhaps Mr Murdoch will have far more influence than ordinary British citizens. However, no referendum is proposed on far weightier constitutional change, such as that relating to the future of this House. I hope that the noble Lord will comment privately at some stage on the apparent contradiction in the Government's position on those two matters.

Clearly any debate on Europe-however inconsequential or irrelevant, as the noble Lord, Lord Lawson, said-goes well beyond the confines of the Bill itself. We have had many historical analogies. We have heard from two former Chancellors, who sounded like elderly gentlemen sitting in deckchairs debating how things would have been so much better if people had listened to them. I remember the debate, for example, on the common or single currency. Things would have been so different had the common currency been accepted in the 1990s. However, the voices that were raised at that time were ignored, in part because of our lack of influence and the fact that we had marginalised ourselves.

It is also true, for those who are Europeans, that we should concede that a large part of the argument and the logic for the euro was politically driven; that it is extraordinarily difficult to have a single currency given the existence of so many economies operating at different levels; and that there is an inexorable move from that to political and fiscal union which one cannot ignore. Equally, I would hope that the opponents of Europe-the opponents generally-would concede that the European Union still has an enormous magnetism for those who are outside it, on its periphery. Perhaps they should ask themselves why that is so. Croatia is to join the European Union, and it will be followed by a number of the other Balkan countries. That is more likely than not to increase stability both within our own neighbourhood and within the Balkans. Other countries will want to evolve different forms of relationship with the European Union, despite its current difficulties. Those difficulties exist now but the period following the euro's formation was one of relative prosperity when the euro was seen to be a success. Alas it has not been able to weather the economic storms-which are not, in fact, confined to Europe.

The Bill itself is of relatively minor consequence. Its parliamentary passage is therefore, pace the chairman of the European Scrutiny Committee in another place, likely to be speedy and non-controversial. We, in common with the 26 other EU countries, will thereby be able to ratify it so that it can come into effect, one hopes, at the beginning of next year. The message is that this is a formal change imposing no liability on the UK, although questions were raised about whether the result of the predecessors of this mechanism may indeed provide such a liability.

It is worth examining the Bill briefly in terms of its genesis and context. The European Union Act 2011 was, in fact, in part a genuflection to the anti-European pressures on the Conservative Back Benches. I have made my point about the referendum. Technically, there is no liability accruing to the UK. However, in view of the spirit of solidarity, surely it is important-because of the relevance of the health of the eurozone to us-to seek to make contributions as and when necessary in that same spirit.

An observer from Mars reading the Bill would be wholly unaware of the multifaceted crisis affecting not only Europe but the West generally. Perhaps one of the major criticisms of the Queen's Speech was just how parochial it was. There was no mention of NATO or the Commonwealth, so beloved of the government Front Bench, save in the context of succession to the Throne and Jubilee visits. The truth is that notwithstanding this little Bill, there is a long-term crisis in Europe-the greatest since the Second World War. Even the Sunday Times, part of the Murdoch empire, wrote last Sunday about the need for federalism. We therefore have to ask ourselves whether we have now come to a 1957 moment when the country must choose.

I recall, when I was a junior diplomat shortly after that time, how desperately Britain tried to repair its failure to sign up to the Treaty of Rome. There was the cul-de-sac of EFTA; there was the wish to look for every possible means of joining with the six, using the mechanism of the Western European Union; and so on, until we were faced ultimately with the only logic-that it made sense for us to become full partners with the original countries.

There is in Europe today a social crisis-a crisis of unemployment, particularly of the young, leading to social unrest and migration from south to north, and possibly increasing levels of organised crime and terrorist networks. Politically, one sees the rise of nationalism, the lack of respect for the political class, the toppling of Governments and action of any sort against those in power-as happened even over the weekend in the Italian local elections. Clearly there is a vast challenge, and there are choices. No one seriously claims that the Queen's Speech or this little Bill in any way recognises or rises to the challenge. The Bill tells us a little about the priorities of the Government-the Queen's Speech even more. The Bill is not irrelevant, although it may be somewhat inconsequential. However, it perhaps gives the misleading impression that we can isolate ourselves from the troubles on the continent. We cannot. We must find bilateral and other means of assisting whenever we can.

There is no evidence that the Government, or indeed the population of this country, recognise the scale of the challenge. The foundations of Europe are being shaken and we need to confront that now. The speech of the noble Lord, Lord Dobbs, was on that theme. We need to confront these vast challenges-this, perhaps, 1957 moment-yes, in a spirit of historical understanding; yes, in a spirit of sensitivity to the problems of our fellow citizens of Europe in Greece; and yes, also with a readiness to look radically at solutions which we must ultimately face.

Photo of Lord Reid of Cardowan Lord Reid of Cardowan Labour 7:19, 23 May 2012

My Lords, I wish to make three simple observations in the gap. The first is that the recession and the problems of the eurozone may be related but they are actually distinct. The recession is a global challenge; the eurozone is a home-grown European problem because it is based on the wretchedly misconceived delusion that you can bring together 17 or more nations of varying productivity and competitiveness and so on and merge them by an act of sheer political will into an economic reality other than the one that exists. It is probably the biggest political misjudgment since Versailles and may lead to the same form of consequences. Incidentally, on that subject, not all red lines were abandoned by the previous Government, as has been suggested. One that was maintained was the demand for convergence before joining the euro, and it was maintained in bright red because it was a demand that could never be met in our lifetime, which is precisely why it was there.

The second point arising from that is that the problem is therefore chronic and not acute. It runs right through the eurozone itself. It is a fundamental problem and my great fear is that the cure will be worse than the disease. The noble Lord, Lord Dobbs, spoke of the treaty of Versailles and the economic consequences in Germany. However, it was not the economic consequences alone that led to the extreme social and political instability but the perception that they were being imposed from outside. Therefore, if the cure for the eurozone is further centralisation in Brussels, which is at the centre and is seen to be a frontage for Germany, it will not cure the problem. It was predictable and predicted that social and political instability would be added to financial instability, and that is precisely what is happening in Greece.

Thirdly and finally, it is not anti-European to point these things out. It is not anti-European to argue against the eurozone. It is not an act of friendship to encourage your friends to continue on a ruinous path which you believe will result in an even greater catastrophe for them. There is an old military adage, "Never reinforce failure". If something is fundamentally flawed and failing, it is no act of friendship for us to encourage people to go in that direction. I wish that we had spent just half the money that we have spent trying to bail out the euro with every member inside it on something similar to a Marshall Plan-a really radical plan which recognises the fundamental flaw and then assists our European colleagues who have made the terrible mistake of joining the wretchedly misconceived eurozone to exit from it. So far as I am concerned, that would be a real act of European solidarity.

Photo of Lord Liddle Lord Liddle Opposition Whip (Lords) 7:22, 23 May 2012

My Lords, this is a small Bill consisting of two clauses but, as we have heard in this excellent debate, it is about the huge topic of the future of the euro. As the noble Lord, Lord Howell, explained to us with his usual clarity, the Bill is an enabling measure. We are legislating here not on the substance of the European stability mechanism but only on the enabling treaty change to allow it to happen. Labour recognises the need for this enabling measure. As the noble Lord, Lord Lamont, said, it is already priced into the markets. No one should kid themselves that the establishment of the European stability mechanism is a sufficient response to the crisis that we have now. There is an enormous crisis in Greece and a growing calamity of collective austerity. To that extent but not much more, I agree with my noble friend Lord Reid.

My noble friend Lord Giddens said that he had had enough of talking about being on the edge of precipices. Perhaps I may say what I think is at stake here. At stake is a crisis that threatens the success of the post-war settlement that we have seen in Europe and the stability and prosperity that the European Union has brought to Europe. That is what is at stake in this crisis. I disagree profoundly with the noble Lord, Lord Flight, and his parallel with the gold standard. The difference between the European Union and the gold standard is that it is a political union, and politics can do something about it. If leadership is shown we can avert a crisis that threatens to break up the post-war settlement.

What we need, as the noble Lord, Lord Hannay, said, is a bit more solidarity and a bit less emphasis on limited liability. How should we go about trying to save the situation? First, the firewall needs to be a lot bigger in scale and more flexible in operation. The existence of the stability mechanism cannot be a substitute for a central bank. The central bank must be willing and prepared to intervene decisively in the bond markets to stem self-fulfilling speculation and panic. I do not think that we will get eurobonds at this stage; I do not think that the Germans will agree to eurobonds until there is established a European fiscal authority. However, we could have a more flexible stability mechanism.

Secondly, the stability mechanism should be preparing now to act quickly on recapitalising the banks in Europe on a pan-eurozone basis. If responsibility for sorting out the banks remains with the national countries-the sovereigns-the problems of countries such as Spain can only get worse because sorting out the banks increases the fiscal problem; dealing with the fiscal problem involves a squeeze that makes austerity more severe; and the impact of this fiscal squeeze on growth ultimately also deepens the problems of bad loans and zombie banks. We have to deal with this on a pan-European level and the ESM is the body to do it.

Thirdly, we need a more balanced strategy-not choosing growth over austerity but a balanced strategy. François Hollande's victory has changed the political weather in Europe. There is a growth plan under preparation in Brussels. We have heard about it in our debate-unspent structural funds to be used better, recapitalisation of the European investment bank and an experiment in project bonds. Put with that, the noble Lord, Lord Davies of Stamford, talked about the need for structural reforms and the need to revive the single market which Prime Minister Monti is so behind. That is a credible package. They are welcome initiatives but from our side we not think that they are enough. For one thing, their impact would take too long to work. Infrastructure schemes and renewable energy projects are rarely ready to go. Southern Europe needs stimulus to growth now.

Photo of Lord Davies of Stamford Lord Davies of Stamford Labour

I am grateful to my noble friend for giving way. He will be aware that in Greece the motorway building programme was stopped midstream because of the bailout conditions. Those projects are shovel ready-a lot of work has been done on them and they are all ready to go. Some financing there could affect demand very rapidly.

Photo of Lord Liddle Lord Liddle Opposition Whip (Lords)

The noble Lord, Lord Davies, is absolutely right. In addition to infrastructure, I think that we need a more moderate pace of deficit reduction. The Commission argues that the fiscal compact gives you all the flexibility that you need in a crisis situation. That should be done. Secondly, we should be mobilising the structural funds to tackle the employment issues, particularly the fact that in countries such as Greece and Spain, getting on for half of young people are out of work which is completely unsustainable socially and politically. It is also the case that a major competitive weakness of southern Europe is the low skills level of its workforce. That must be addressed from Europe through the structural funds-a crash programme of social investment in human capital.

Thirdly, the eurozone needs more balance between the strong and the weak in the urgent competitiveness adjustments that it must make. Stronger countries such as Germany have room for manoeuvre. Noble Lords talked about higher wages for German workers, which are certainly affordable. German wages have gone up very little despite the country's enormous export success. I am glad that there is now a consensus between the Social Democrats and Christian Democrats on the introduction of a national minimum wage. Germany would have to tolerate only a bit more inflation to help the south, which is suffering debt-trapped deflation. That would enable the ECB to meet and maintain its target level of inflation of around 2% across the whole eurozone.

Our hope is that the political ramifications of the Hollande victory will result in a wider and bolder set of actions to build a stronger firewall, recapitalise the banks, adjust the pace of deficit reduction, offer immediate help on jobs and increase demand in countries with surpluses. That will not get us out of the need to make harsh adjustments. However, if we continue with collective austerity it will lead to collective suicide.

What is the coalition's view? Is it still backing Mrs Merkel's priority of fiscal austerity, which has been its policy at home for the past two years? Or is it undergoing a latter-day Keynesian conversion to the need for growth in Europe? If the eurozone can have a plan B, can we not have one at home? That is what we need. It is very odd for a Eurosceptic Conservative Party to argue that it is all right to have additional public borrowing through the EIB and project bonds at European level, but that of course it would be a complete disaster to tolerate any flexibility in the public borrowing of the UK. I find this an amusing contradiction in the present situation.

That confusion and contradiction, with a sharp eye for public relations, have been characteristic of the Government's conduct of their European policy. As the noble Lord, Lord Williamson, said, they treat the eurozone as a convenient whipping boy to cover their own failures. As we know, last year growth in the eurozone was higher than in the UK. I am interpreting what the noble Lord, Lord Williamson, said.

Photo of Lord Williamson of Horton Lord Williamson of Horton Crossbench

It was a rather broad interpretation: the size of the Atlantic.

Photo of Lord Liddle Lord Liddle Opposition Whip (Lords)

I apologise to the noble Lord, but the point is surely valid. Growth last year in the eurozone was twice that in the UK. Therefore, to blame the eurozone for the present double dip is nonsense.

The big point that the Eurosceptics fail to understand is that we cannot avoid the consequences of the euro by being out of it. In or out, our future is deeply affected because of our exports and the interlinking of our financial system. As Robert Chote said, if Greece exits, who knows what will happen? We may never in the foreseeable future recover the level of output that we had in 2008. A policy of splendid isolation from the continent was never realistic for Britain, but in the world of globalisation and economic integration it does not work at all.

Nor is our isolation very splendid. We are losing influence and clout in Europe to a dangerous degree. I will give one telling illustration. The Prime Minister claimed that the reason he used the veto and walked out of the December European meeting was that his partners would not accept a set of proposals that he tabled at 2 am in order to protect the City of London. A couple of weeks ago, on the capital requirements directive, the Chancellor, George Osborne, and the British for the first time found themselves outvoted by 26 to one at ECOFIN on a key question of financial regulation. The Chancellor has now recognised that he has to go along with the majority. That is not an effective use of the British veto. It just shows how influence is draining away from us at the moment.

Photo of Lord Flight Lord Flight Conservative

I was under the impression that the Chancellor had eventually obtained agreement to his point, which was that there could be some flexibility in the capital ratio of banks, with a view to the UK being rather more demanding than the rest of the EU.

Photo of Lord Liddle Lord Liddle Opposition Whip (Lords)

I am sure that that is the Chancellor's interpretation.

I recognise that there are some distinguished Members of this House who are long-term supporters of British membership of the European Union, but I never believed that the euro could be made to work. We had wonderful speeches from the noble Lords, Lord Lamont and Lord Lawson, but I do not agree with what the noble Lord, Lord Lawson, said. He said that monetary union will work only if you have what the Germans call the coronation theory-the customs union first, the political union and then the monetary union to crown it.

I recognise that the euro was set up on a flawed basis. I thought that as the problems occurred they would be addressed incrementally and that reforms would be introduced that would make the system work. The trouble is that we have had a cushy decade of total complacency-it was a cushy decade for the UK as much as it was for the eurozone-in which the impetus for reform was completely lost. Short of federal union, if the eurozone took the kind of steps that Labour is advocating now it would have a viable future.

Photo of Lord Reid of Cardowan Lord Reid of Cardowan Labour

Would my noble colleague consider that perhaps the problem was not complacency but precisely the assumptions that he has outlined to us: that as problems arose, incrementally we would go towards a central state in Europe and no one would ask the peoples of the nations of Europe? That is precisely the problem because what is being suggested now is one of these huge incremental steps. I promise him that there will be a reaction of nationalism in Europe because it will require not only centralisation but the imposition of austerity from the centre. We will create the very conditions that caused such resentment in Germany in the 1920s and 1930s.

Photo of Lord Liddle Lord Liddle Opposition Whip (Lords)

I have the greatest respect for my noble friend Lord Reid, and in my life I have learnt an awful lot from him. However, his assumption that the only alternative to where we are now is a central state is fallacious. What have been lacking in the past 10 years are the incremental reforms of the kind that I have outlined that would have made the euro work.

I have gone on too long. I believe the consequences of a euro break-up, which some noble Lords seem to want to will on, would be horrendous. Eurosceptics make a fundamental mistake in thinking that for a country such as Greece, exit from the euro would solve its problems. A lot of British people think that it would be a classic devaluation, rather like our exit from the ERM in 1992. It would be nothing like that. Ordinary people's savings would be wiped out as the Greek banks collapsed. There would be severe additional spending cuts, because with all borrowing cut off the Government would be unable to finance the deficit. They would have to cut welfare benefits and public pay. The new currency would plummet in value because there would be no private inflows of capital to sustain the balance of payments. It would be an economic disaster zone.

There would be huge social tensions between the better-off, who had already got their money out of the country, and the wage earners, the poor and the unemployed, who would have to live on the devalued drachma. We would see-here I agree with my noble friend Lord Anderson-the emergence of a failed state on Europe's south-eastern flank, with incalculable consequences for relationships with Cyprus, Turkey and the rest of the Balkans. As my noble friend Lord Reid knows well, this is a part of the world on which we have spent blood and treasure over the past two decades to try to stabilise. Kick the Greeks out of the euro, and what are we going to do about stability in the Balkans? It is just too awful to contemplate. That is why the euro must, and can, be saved-if we adopt the right policies to do so.

The noble Lord, Lord Dobbs, spoke eloquently about his lessons of history. My lesson would be that a Greek exit would be followed by competitive devaluation, protectionism, a run on other countries, terrible contagion problems and an outbreak of nationalism. Conceivably, it could return Europe to the inter-war years, so I want Britain to play a constructive, committed and engaged role in trying to make this thing work, not a carping, hectoring and lecturing one. We need a rescue, we need the ESM, and that is why we need this Bill.

Photo of Lord Howell of Guildford Lord Howell of Guildford Minister of State (Foreign and Commonwealth Office) (International Energy Policy) 7:42, 23 May 2012

My Lords, I congratulate your Lordships on the sweep of their comments and magnificence of oratory in addressing this very modest Bill. I have listened with something verging on pleasure to the expositions of the noble Lord, Lord Liddle. They were very eloquent, but whether they related precisely to the policy of Her Majesty's Opposition I am not so clear, and whether they related much to the Bill I am not so clear about either. But it was good stuff and I thank the noble Lord for his contribution.

I want to emphasise that many of the issues have given us a marvellous opportunity to air in your Lordships' House the bigger issues surrounding the whole story of the eurozone and how it fits into the European Union, as well as how the European Union is or is not evolving to meet the challenges of the 21st century. I am not going to take the centre stage about Europe, much as I would love to do so, but will merely concentrate on aspects of the Bill.

There is no illusion about this Bill and we do not see it as magic medicine. We simply believe that it will help to order rather than disorder whichever way things go, and who can tell? Experts say they know the answer. We have been told by my noble friend Lord Lamont that it has all been priced into the market, which is wonderful if that is the case, but sometimes the market can get things terribly wrong. We believe that the Bill can make a net contribution, perhaps quite a substantial one, to the pattern of order rather than disorder. I put it no higher than that and make no greater claims for it.

Perhaps I may remind noble Lords of why we have a Bill before us at all. It is because of the increased public and parliamentary control over EU treaty changes that we committed to in the coalition agreement-it was the coalition that put that forward-and delivered through the European Union Act 2011. Therefore, this treaty amendment requires primary legislation. The amendment has already been considered and was debated by Parliament and passed by both Houses last March; there was no opposition in the House at that time. The arguments for the treaty amendment were relevant then and, in a sense, as the bigger crisis has grown and the uncertainties confronting us have magnified, the case for making a move of this kind as a contribution to trying to steady the situation and stabilise an unstable pattern is stronger than it was even when we debated it 14 months ago.

As I explained at the beginning, in return for agreeing to the treaty amendment the Prime Minister secured that once the ESM is established, Article 122(2), on which basis the EFSM was established, should no longer be used for such purposes. Therefore, our liability for future euro area financial assistance programmes under the EU budget will be removed, and that is directly in our interest.

My noble friend Lord Lamont asked just how solid this Article 122(2) decision is. He is right that it is a political decision and not a treaty agreement, but the decision itself, under Recital 4, says very clearly that Article 122(2) should not be used. That was a unanimous decision of all 27 members of the European Union and it would require a unanimous decision to undo it. My noble friend Lord Lamont can still say that is not as good as the absolute of being locked into a treaty, but it is almost impossible to imagine how we would proceed with undoing a unanimous decision, which very clearly has been made in very good faith and is underpinned by the unanimity rule of the European Union. I hope that reassures him. It probably will not reassure him completely, but that is a very firm and clear position.

Secondly, as the European crisis has gone from bad to worse, this is plainly having a chilling effect on the economy. I do not quite see how anyone can avoid that obvious fact. As the Prime Minister, the Foreign Secretary and the Chancellor have repeatedly made clear, stability in the eurozone states-and I choose my words carefully-is directly in the UK's interest. If there was growth in the European economies rather than the stagnation and indeed the shrinkage that are now being predicted, that would be one of the keys to growth in the UK economy.

We rely on the eurozone countries for a very large part of our trade-40% is the estimate; it is more for the total of the European Union-and it is only part of the picture. Restored, confident stability in the eurozone states is directly in our national interest, and the resolution of the eurozone debt crisis would be a major boost to confidence in the British economy. I do not know whether it is priced into the market; some people say that it is beginning to be so.

Those are my broad comments. I have not gone nearly as far as some of your Lordships in discussing the whole history of the scene, and there have been some fascinating speeches from my noble friend Lord Dobbs and many others about the past, but those are the immediate considerations that we are looking at with this two-clause Bill.

I will now turn to some of the points made. If I do not refer to every speech, it is not because I do not think that some of the speeches were quite brilliant but because they perhaps did not raise precise questions but merely added their wisdom to the general debate.

The noble Lord, Lord Radice, began by saying that we should not stand aloof. I do not think that we are standing aloof. This Article 136 change alone is proof that we are not standing aloof and that we are providing not just comfort but a sound legal base for eurozone countries to go ahead with the ESM. Eurozone countries believe, although others would dispute it, that the ESM is one of the building blocks of the essential firewall to hold the eurozone together; or, as some speculate, if one country was breaking away, the ESM would hold it together even more firmly against further contagion.

I therefore do not think that the suggestion of aloofness stands, combined as it is with the more general view asserted by several of your Lordships that we are disengaged from our role in the European Union region. That is not true. My right honourable friend the Foreign Secretary and indeed the whole Government have argued, rightly, that the great growth is increasingly going to come in Asia, Africa and the emerging markets. We must therefore pay attention to those, but not to the exclusion of the fact that we live in a very vital and potentially dynamic area full of creativity and attractions, and that we must somehow see its revival.

I have before me a list here of some of the growth initiatives that the UK Government are currently pressing. For all I know, these things may be discussed around the dinner table at the informal European Council meeting tonight. We have pressed very hard on the completion of the digital single market, which we think would see a 4% increase in the EU GDP over a 10-year period, and want to see it completed. We want to see full implementation of the services directive, which could add a further 1.8% to GDP. We are pressing for the completion of all open bilateral EU trade deals, which would add another €60 billion to the EU economy. A deal with the US, if we can bring it off, would be bigger than any other free trade agreement. We want the Commission to commit itself to a much more vigorous, new programme to reduce the overall regulatory burden. Those are just some of the growth points we are pushing and I think we will make some progress on all of them. To talk in terms of aloofness is not to represent the situation as it truly is.

My noble friend Lady Falkner rightly said that the Greek default is not easy-people talk about the possibilities of Greek default perhaps a little cavalierly, without being entirely clear whether we are talking about a nation going gently downstream through some mild rapids or being pushed over Niagara Falls. It might be either, and one has to be realistically responsible in analysing that and understanding that possibility.

I have already mentioned my noble friend Lord Lamont in relation to Article 122 and pricing in the markets. He asked me a series of very important questions about the ESM, which I am not deliberately ducking. I have here some very elaborate notes answering those questions on the ESM treaty, but we are not talking about that tonight. That is an intergovernmental treaty between the eurozone countries. We are talking about the treaty change that we are undertaking in Article 136. I hope that he will forgive me, and other noble Lords will understand, if I do not read out all the details about AAA securities and other aspects of the ESM treaty. I will write to him in so far as I can answer them, but they are matters for the eurozone and not for this Bill.

The noble Lord, Lord Giddens, whose speeches I always enjoy, came again to this familiar theme that somehow Britain is marginal. I must say that I find this whole concept of being marginal to the problems of the eurozone yesterday's argument and very dated. Many people now see this island, the United Kingdom -or these islands-as a safe haven, into which money, investment and wealth are pouring at a considerable rate. What does he mean by marginal? One could argue that a harbour that is reasonably well protected is marginal to the storm outside. It is not-it is merely the safe place to which people are going to come. Of course, he is right that if we are going to see the new fiscal pact lead to major political developments in the eurozone-and there is obvious dispute in this Chamber as to whether it will lead that way or to further fragmentation-then we are getting an evolving and new kind of Europe. I hope everyone will contribute to the debate on how that new kind of Europe should be best organised to meet the challenges of the 21st century. That is what I would say to the marginalists who keep on about isolation and so on. I do not think that is a realistic view of the situation.

The noble Lord, Lord Lawson, and I had a good-natured hair-splitting about whether I was arguing one thing or another. I hope that I have made it clear that we are talking about the eurozone countries. The euro currency is another matter but he must concede, as I am sure that all your Lordships concede, that in the states that happen to be European states-including our great neighbours France and Germany-what happens to them and their economies clearly affects our country in a very big way. I do not think that that can be questioned.

My noble friend Lord Flight asked about the EFSM and whether it is cash. It is €48 billion of loans to Portugal and Ireland, at the moment, and the intention is that they will be repaid. We would be liable for 14.6% of anything that was not repaid but that would balloon up to the sort of figure referred to in the document that he mentioned only if every single one of the countries, except us, defaulted. It is technically true that we would then be liable but that seems to be so unlikely as to be on the verge of absurdity. Exposure to the ECB is only for a capital contribution for its operating costs, which is €58 million-not billions but millions. By the standards of these huge sums we are talking about, that is a fairly limited sum. Because we are a non-eurozone member, our liability does not go beyond that.

I think that my noble friend spoke about the EIB, which is a bank where there have been no defaulted loans at all. It has €43 billion of our capital and we would be in danger of exposure to that only if the bank itself was in danger, which it clearly is not. He may or may not have spoken about the EU balance of payments facility, which has been raised. It may have been raised in the document we talked about, but it is only for non-euro members. The liability arises with members who are not members of the eurozone, so it does not really arise in this case.

The noble Lord, Lord Stoddart, then made a speech which did not surprise me. He is a valiant trooper and worker in his own seam and of his own view, which he has put over the years. I admire valiance and courage even when I do not agree with it. He asked why we were not having a referendum when the Irish were. Of course, the Irish are having a referendum not on Article 136 but on the fiscal compact, which is somewhat different.

My noble friend Lord Dobbs made an excellent speech which I thoroughly enjoyed. The noble Lord, Lord Davies of Stamford, began by saying that he was very happy, which alarmed me, but he soon got on to the unhappy part and seemed to be asking why we were not more part of this system. The implication was, "Why aren't we in the eurozone?". I do not think we need argue that out at the moment. We are very glad that we are not in the eurozone.

My noble friend Lord Dundee talked about co-ordination between the Council of Europe and the EU. His work on the Council of Europe has been marvellous and I see what he was getting at, but it does not directly arise from the actual Bill.

The noble Lord, Lord Hannay, is right that I was surprised and delighted-I think that is the phrase-that he gave support. I was all set to debate with him something he said the other night: that he did not understand the concept of network power. I will take him aside on another occasion and explain to him that this is a very important concept. I would like brilliant minds such as his to engage with it to realise how we handle the positions of this country in the future, which is not entirely by relying on the blocs and alliances of the 20th century but by moving on.

There were other excellent speeches, which I must be forgiven for not commenting on in detail, from my noble friend Lord Risby and from the noble Lords, Lord Anderson and Lord Reid. The noble Lord, Lord Reid, particularly echoed a fundamental view put so trenchantly by my noble friend Lord Lawson that this can never fly: that the eurozone is fundamentally flawed and will do nothing but bring more division and difficulty. That is a view but it is not the view of the Government, because we are not sure how things are going to work out. Anyone who claims that they are sure is misleading. We would like to see the eurozone system stabilised in one way or another. We think that there are great dangers for us all in not doing so. How that will be developed and what Mrs Merkel and the German Government will decide about the short-term question of their flexibility in relation to the Greek bailout terms are questions hanging in the air that I cannot answer from this Dispatch Box; and nor, I think, can anybody else. We believe that current events have demonstrated the importance of credible policy action to attempt to maintain and restore market confidence, which is clearly weak. We think now is the time to act. The eurozone has to take some kind of concerted action to sort itself out, and this legislation allows it to take a step in the right direction.

The treaty amendment is very much in this country's interest. The establishment of the ESM by the eurozone member states will remove the UK's liability for future euro area financial assistance programmes under the EU budget. Establishing the ESM, with the support of this Bill, will help eurozone member states find the path to the financial stability that in the end they must have. If they fail to have it, it will damage us all. That path to stability will have benefits for the UK and beyond. The ESM is only part of the way forward out of the eurozone crisis, but it is an important and valuable one. I therefore hope that your Lordships will share my views on this legislation.

Bill read a second time and committed to a Committee of the Whole House.

House adjourned at 8.02 pm.