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European Council
3.30 pm
The Prime Minister (Mr. Gordon Brown): With permission, Mr. Speaker, I should like to make a statement about the European Council held in Brussels, which I attended with my right hon. Friends the Chancellor and the Foreign Secretary on 15 and 16 October, the main business of which was to consider European action to stabilise financial markets and how we can work together to reform our international financial systems. The Council also welcomed the co-ordinated interest rate cut by central banks around the world.
At the heart of our considerations was our shared understanding that the massive reduction in global financial activity and the fracturing of the global financial system has been the result of irresponsible and often undisclosed lending that started in American sub-prime markets. And while national action is necessary, the root problem can be dealt with only by changes in our financial systems, to recapitalise banks and to reform supervision around the principle of rewarding hard work, enterprise and responsible risk taking, but not irresponsibility and excess.
Market estimates suggest that in recent years some $2 trillion of US-originated loans, many of them toxic, were bought by European Union banks, so to strengthen our banks the Council welcomed the comprehensive action on liquidity, capital and funding guarantees of our Government here in the United Kingdom and of the eurozone countries under the leadership of President Sarkozy, President Barroso and the president of the European Central Bank, Jean-Claude Trichet. The Council also welcomed the joint commitment from the leaders of the G8 countries to hold a leaders meeting, and agreed the principles and priority areas for global action.
Stage one to recovery has been to stabilise financial markets, thereby securing a resumption of lending. In Britain almost £50 billion has been injected as capital into our banks. The Government alone have taken shares worth £37 billion in two of our largest banks. Across the world, more than £300 billion has now been approved from public funds to recapitalise the banking system.
At the heart of the British decision was that medium-term funding was conditional on bank recapitalisation, so we also welcome the agreement of the European Council that countries within the EU will provide medium-term state guarantees for new interbank loans. I particularly welcome the decision of the European Investment Bank, following proposals that we made at the G4 summit in Paris earlier this month, to mobilise and frontload €30 billion to support new lending to Europe’s, and then Britain’s, small businesses.
However, confidence today depends upon there being confidence about the future, so we agreed on the need to achieve a reform of the global financial system based upon five key principles—transparency, integrity, responsibility, sound banking practice and international governance, with co-ordination across borders. We will submit a detailed set of proposals to the international leaders meeting. I will be putting these proposals to all countries, including emerging market countries. I have
already put them to President Bush and will put them to both presidential candidates in the United States of America.
I can tell the House today that these proposals include insisting on openness and disclosure, with off-balance sheet vehicles brought back on to balance sheets, greater transparency around the use of credit derivatives, and a rapid adoption of internationally agreed accounting standards so that value-impaired assets can no longer be hidden; and then removing once and for all the conflicts of interest that have distorted behaviour and undermined trust, so that credit rating agencies no longer act as advisers to the companies they rate, and executive remuneration rewards not excessive or irresponsible risk taking, but hard work, enterprise, effort and responsible risk taking.
We must also ensure that board members have the competence and expertise to manage the risks for which they are ultimately responsible, and cannot walk away from their obligations. We will look at regulation that examines both solvency and liquidity and which ensures that the financial system supports wider economic stability. There will be a new international architecture for the global financial sector for the years ahead.
We want to move to early decisions with our international partners about the reform of the International Monetary Fund and Financial Stability Forum, including the creation of an early warning system for the global economy; about globally accepted standards of supervision applied equally and consistently in all countries; about effective cross-border supervision of global firms, starting with establishing 30 international colleges of supervisors by the end of this year; and about cross-border co-operation and concerted action in a crisis. We also want to see greater global macro-economic co-ordination, and to prevent the return of protectionism we want to see the reopening of the world trade talks. I welcome the proposals that have come from the Australian Prime Minister Kevin Rudd.
The events of the last few days have demonstrated that we need urgently to deploy in eastern Europe and emerging markets the IMF’s facilities and resources to the fullest extent, and also the resources of the multilateral development banks. We need urgently to prevent capital flight, engage in and support counter-cyclical policies and finance domestic growth where exports have declined and capital has flown outwards. We also need urgently to consider creating a new IMF facility for emerging economies in the current crisis. Rescuing eastern European countries is particularly urgent and I have asked the European Bank for Reconstruction and Development, the European Investment Bank and the World Bank, as well as the IMF, to consider what they can do immediately.
The Council also discussed in detail how each of our economies was being affected by the global downturn that started in America. Had we not acted to stabilise the banking system, the effect on households and business would have been even more severe. However, notwithstanding the action that has been taken, the world is facing a severe global economic downturn, with negative growth already seen in France, Germany and Italy this year, and in the United States last year.
The United Kingdom cannot insulate itself from this global downturn, but with interest rates low and falling and inflation expected to come down over the next year, these underlying economic indicators, particularly interest
rates, make us stronger than at any other previous downturn. Debt has been considerably lower than a decade ago, and lower than that of all G7 countries except Canada, enabling the Government to increase borrowing at the right time to support the economy. The Government will do whatever it takes for mortgage holders, for small firms and for employees, to help families and businesses through what will undoubtedly be a difficult period ahead.
Like all Governments across the world, we are considering how fiscal policy can support the economy at this time: carefully targeted, rigorously worked through investments that help people fairly through the downturn and lay the foundations for stronger growth in the future. In Britain’s case, we can start from a position of low public debt. We will bring the same focus and determination to the task of safeguarding jobs, homes and small businesses as we have done to avert the threatened meltdown of financial systems. That will be the central mission of this Government over the coming weeks and months. I welcome the support in the national interest of all prepared to give that support. Let us be clear: it is also action that we take globally to get to the root of the problem in global banking that will make the biggest difference.
The Council also reached important conclusions on energy and climate change, on Russia and Georgia and on the European pact on immigration and asylum. Next year in Copenhagen, the world has an historic opportunity to secure prosperity for generations ahead with international action on climate change. While there are those who will seek to use current global financial problems as an excuse to pull back from change—to pull up the drawbridge and renege on commitments—in fact it is now more essential than ever to push forward with an ambitious agenda on energy security and climate change.
As the Stern report showed, weak or delayed action will cost us more in the years to come, both financially and economically. The Council reaffirmed its commitment to reach agreement by December on its energy and climate change measures for 2020. We made clear the importance in doing so of achieving a fair balance, with all member states accepting new commitments. We made it clear that there must be flexibility for member states to meet targets in the most cost-effective way, and that Europe’s package must send the strongest possible signal to encourage the rest of the world to aim high at the Copenhagen summit next year.
As last week’s statement from the Secretary of State for Energy and Climate Change made clear, the Government are committed to the most ambitious of targets—cutting greenhouse gas emissions by 80 per cent. by the middle of this century, not just for the future of our environment but as a crucial part of our strategy for energy security. But we cannot fulfil our aspirations for climate change without nuclear power or without European and international co-operation. That is why we will fully engage with the European Union on the environment and will not pursue a policy based on unilateralism and detachment.
Faced with historically high and volatile oil prices, it is more essential than ever before that we act to end our dependency on oil. The European Council supported
greater diversification of energy sources, the completion of fully functioning EU energy markets, and improved critical energy infrastructure—for example, in the southern corridor. Our London energy meeting in December will seek to drive forward progress in the critical dialogue between oil producing and oil consuming nations. Today I would urge the Organisation of Petroleum Exporting Countries, at its meeting on Friday, to work through dialogue with consumer countries to stabilise the energy market as a whole.
The Council has expressed its grave concern over Russia’s actions in Georgia and called on all sides to implement in full the six-point plan agreed with European leaders. The Council therefore welcomed the withdrawal of Russian troops as an essential additional step in the implementation of the agreements of 12 August and 8 September and the launching in Geneva of the international discussions provided for by those agreements. The Council and the Commission will, however, continue to make a full in-depth evaluation of relations with Russia ahead of the EU-Russia summit. The Council also resolved to continue its support for its eastern neighbours in their efforts to achieve democracy and economic modernisation and to consider a future EU eastern partnership.
Finally, the Council considered the European pact on immigration and asylum, underlining the importance of ensuring coherence between Union policies, including free movement. Britain and Europe benefit economically from free movement, but free movement cannot be an unfettered right. It must bring with it clear responsibilities, with failure to meet them carrying clear consequences including, where appropriate, the loss of that right entirely. I discussed this point in further detail with a number of European leaders at the Council, building considerable support among member states and agreement to look further at the responsibilities associated with free movement where crimes are committed by EU residents in the EU but outside their country of origin, and we agreed to return to this issue at our December meeting.
This summit showed that in facing global challenges, whether the credit crunch, climate change or energy security, we succeed best not in isolation but in co-operation, not with unilateralism and separation from our European neighbours but in active partnership with them. That is why our policy will rightly remain one of being fully engaged at the centre of Europe. I commend this statement to the House.
Mr. David Cameron (Witney) (Con): I thank the Prime Minister for his statement. Rightly, the financial crisis was the most important issue at the summit, but before asking about that let me raise some other matters.
First, on climate change, does the Prime Minister agree that while the restating of the EU goals on climate change was welcome, disagreement over the action plan was disappointing? Will he confirm that there are no new powers in the Lisbon treaty to help on the environment? Indeed, there are just six words. Does that not illustrate that what is needed in Europe is not new institutions or treaties but just some political will?
Secondly, on trade, the last thing we need in a downturn is protectionism, as has happened so often in the past. Does the Prime Minister therefore share my dismay that the communiqué does not mention the Doha trade round at all?
Thirdly, on Georgia, given the Russian invasion, the breach of international law and the ethnic cleansing in Abkhazia and South Ossetia, for Europe it must surely not be a case of straight back to business as usual. Can the Prime Minister confirm that the criteria for resuming talks on the partnership agreement between Russia and the EU will include not only the implementation by Russia of the six points of the ceasefire plan but the return of Georgian refugees to their homes?
Next, there is immigration and asylum. The Council agreed a new EU pact—the Prime Minister did not really mention this—including joint border guards, sharing asylum seekers and a single asylum procedure. Can he assure the House that as those proposals are not consistent with running our own immigration and asylum policy the Government will not adopt any of them? While on the subject of immigration, can the Prime Minister tell us what his policy now is? We have long supported an annual limit on non-EU economic migration—do the Government now agree?
On the Lisbon treaty—which, by the way, did not get a single mention in the statement—I have a very straightforward question for the Prime Minister. I am not in favour of forcing the Irish people to have a second referendum—is he? Would the British people not think it completely indefensible to force the Irish people to vote twice when we have not been allowed to vote once?
On the financial crisis, may I welcome the specific mention in the communiqué of examining mark-to-market accounting rules? Does the Prime Minister now support suspending those rules? He mentioned the European Investment Bank and its funds. Will he confirm that, to date, only three British banks have access to that money and that they do not include the Royal Bank of Scotland, Lloyds or HBOS, all of which the Government have a major stake in? Can he tell us about plans to change that?
On international co-operation on financial regulation, are there not three keys to getting it right? First, with major financial markets in Hong Kong, Shanghai, Sao Paolo, Dubai and Mumbai, co-operation needs to be genuinely worldwide, so can the Prime Minister confirm that the forthcoming international summit will include not only EU and G8 countries, but China, India, Brazil, Mexico, South Africa and middle eastern economies?
The second key is that international co-operation is not about the minute detail of regulation, but about setting frameworks and issuing early warnings. On the frameworks, does the Prime Minister agree that currently, capital adequacy rules—setting how much capital a bank must hold—can actually make things worse? They allow too much credit during a boom and can be very restrictive in a recession, so does he intend to reform the Basel II accords, in order to make them less pro-cyclical and to rein in any return to an asset price boom in future?
On the early warnings, which the Prime Minister is fond of mentioning, he knows the International Monetary Fund has a key role, but is not the real question what Governments do in response to those warnings? Let me take a case in point, while he shakes his head—he might remember this one. A year and a half ago, the IMF warned the UK about rapidly increasing household debt, vulnerable financial institutions and the growth of potentially risky and
illiquid instruments. What steps does he think are necessary to ensure that Governments and regulators respond to those warnings?
The third key is that international co-ordination on financial regulation is necessary but not sufficient to ensure a stable financial system. Did the European Council discuss the need for effective domestic action? The Government keep saying—the Prime Minister I think said this at least three times in his statement—that this is a crisis from America, as if no one in Britain had any responsibility for anything that went wrong. Will he confirm that Britain is entering the downturn with the highest Government deficit in the industrialised world? That was not down to America; it was down to this Government, here in Britain.
Can the Prime Minister confirm that British household debt, which is the largest that any major economy has ever seen, is not something that we imported from America, but was down to bank lending and regulatory failure here at home? On specific institutions, will he confirm that the international measures discussed at the EU Council would not have stopped, for instance, the Bradford & Bingley lending more than 80 per cent. of mortgages as risky or buy-to-let mortgages? That was a UK bank, regulated by UK regulators, for which the UK Government are ultimately responsible.
So in the light of the need for both national and international action, could the Prime Minister begin his response by commenting on the figures published today for Britain’s budget deficit? Is it not the case that Britain is heading for a record budget deficit, contrary to what he said, put by some independent forecasters as high as £64 billion? Will he confirm that that has happened after 14 years of economic growth and when half the OECD countries are entering the downturn with a budget surplus? Is not the £64 billion question this: why, when business and families need more help, has he left the cupboard so bare?
The Prime Minister: Let me deal first with the issues that the right hon. Gentleman raised at the beginning. Of course the environment is a priority of the European Union, and anything that suggests that that is not the case is wrong. The environmental discussions formed a large part of what we did in Brussels on Wednesday and Thursday. I put the point to him again: if he wants environmental co-operation across Europe, he needs to be at the centre of the European Union, not threatening to renegotiate the treaty.
As for the trade round, the right hon. Gentleman will probably have seen the statement from the G8, which includes France, Germany and Italy, supporting a resumption of world trade talks. I believe that at the international leaders summit we will see the reopening of those trade talks.
As far as Russia is concerned, the right hon. Gentleman knows, as I have told him, that the Council was right to agree that this was not the right time to resume talks on new partnership agreements with Russia. How we make the decision on that resumption will be based on a number of criteria, including some of the ones that he mentioned.
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