Financial Stabilisation Mechanism

The Committee consisted of the following Members:

Chair: Hywel Williams 

† Brown, Lyn (West Ham) (Lab) 

† Goodwill, Mr Robert (Scarborough and Whitby) (Con) 

† Hemming, John (Birmingham, Yardley) (LD) 

† Hoban, Mr Mark (Financial Secretary to the Treasury)  

† Hopkins, Kelvin (Luton North) (Lab) 

† Kelly, Chris (Dudley South) (Con) 

† Leadsom, Andrea (South Northamptonshire) (Con) 

† Leslie, Chris (Nottingham East) (Lab/Co-op) 

Love, Mr Andrew (Edmonton) (Lab/Co-op) 

† Murphy, Paul (Torfaen) (Lab) 

† Sharma, Alok (Reading West) (Con) 

Wilson, Sammy (East Antrim) (DUP) 

† Wollaston, Dr Sarah (Totnes) (Con) 

Alison Groves, Committee Clerk

† attended the Committee

The following also attended, pursuant to Standing Order No. 119(6):

Cash, Mr William (Stone) (Con)  

Cryer, John (Leyton and Wanstead) (Lab)  

European Committee B 

Tuesday 1 February 2011  

[Hywel Williams in the Chair] 

Financial Stabilisation Mechanism 

4.30 pm 

Mr William Cash (Stone) (Con):  On a point of order, Mr Williams. I should like to seek leave to move the adjournment of the Committee because I have grave doubts about the legality of the proceedings. In particular, I will quote the remarks of the French Finance Minister, Madame Lagarde, who, in respect of this provision, stated on 17 December that the Greek and Irish bail-outs and the creation of a temporary European rescue fund had been “major transgressions” of the Lisbon treaty. She said: 

“We violated all the rules because we wanted to close ranks and really rescue the euro zone”. 

In the circumstances, with £8 billion at stake as regards the British taxpayer, this matter should be more carefully examined. I have been in correspondence with the Minister and I have answers—unsatisfactory answers—to certain questions where I have asked for the legal advice to be provided. 

I have also asked for the other advice from the Treasury to be provided, but I have been completely prevented from having that information. I will not go into the details of the answer that I got, but I think that in the circumstances we should adjourn the Committee. The matter is still under scrutiny and, as Chairman of the European Scrutiny Committee, I am deeply disturbed by the fact that it is being dealt with in the way it is. 

The Chair:  I thank the hon. Gentleman for that point of order. I am disturbed to hear that he has not had satisfactory answers. However, my understanding is that as he is not a member of this Committee, he cannot move a motion. 

Kelvin Hopkins (Luton North) (Lab):  Further to that point of order, Mr Williams. I certainly have a great deal of sympathy and understanding for what the hon. Member for Stone (Mr Cash) has just said. I would like to move the adjournment of the Committee formally. 

Motion made, and Question put, That the Committee do now adjourn.—(Kelvin Hopkins.)  

The Committee divided: Ayes 1, Noes 6. 

Division No. 1 ]  

AYES

Hopkins, Kelvin   

NOES

Goodwill, Mr Robert   

Hemming, John   

Hoban, Mr Mark   

Kelly, Chris   

Sharma, Alok   

Wollaston, Dr Sarah   

Question accordingly negatived.  

The Chair:  I understand that a member of the European Scrutiny Committee wants to make a brief explanatory statement about the decision to refer the relevant documents to this Committee. 

4.34 pm 

Kelvin Hopkins:  Thank you, Mr Williams. It is a pleasure to serve under your chairmanship. It might help the Committee if I take a few minutes to explain the background to the documents and the reason why the European Scrutiny Committee recommended them for this debate. 

At an extraordinary meeting of ECOFIN on 9 May 2010, agreement was reached for a regulation—document (a) —creating a European financial stabilisation mechanism, or EFSM, as part of a comprehensive package of measures to preserve financial stability in the EU. The regulation was based on paragraph 2 of article 122 of the treaty on the functioning of the European Union, which allows EU financial assistance to be granted to a member state facing 

“severe difficulties caused by natural disasters or exceptional occurrences beyond its control”. 

It provides for the EU budget to guarantee EU borrowing to support member states in need, up to the level of €60 billion, or £51.64 billion. Support under the EFSM would be provided in parallel with funding from the International Monetary Fund and would be subject to joint EU-IMF conditionality. 

The financial regulation governing EU budgetary matters allows the Commission, in exceptional or unforeseen circumstances, to submit draft amending budgets to alter the EU budget for the current financial year. Its draft amending budget No. 7 to the 2010 EU budget—document (b)—proposes the creation of a new budget line for the guarantee provided by the EU under the EFSM and a corresponding article on the revenue side of the EU budget. The DAB proposes a token entry—a so-called “pour mémoire” entry—for commitment and payment appropriations as well as for revenue. If it became necessary, the Commission would propose a transfer or amending budget to provision the budget line with the relevant appropriations. The DAB was adopted on 13 September 2010. 

The regulation establishing the EFSM requires the Commission to report every six months on the operation of and continued justification for the mechanism. Document (c), the first of those reports, concludes that the need for the EFSM persists. 

When the European Scrutiny Committee considered the first two documents, in September 2010, it accepted the need for the urgent adoption of both those measures, despite the breaches of the scrutiny reserve resolution. However, it decided that the documents should nevertheless be debated, given the possible budgetary liability to which the UK might be exposed. The Commission’s first six-monthly report, from December 2010, gives a useful overview of the latest situation regarding the EFSM and is therefore highly relevant to this debate. 

The Chair:  I call the Minister to make an opening statement. 

4.37 pm 

The Financial Secretary to the Treasury (Mr Mark Hoban):  Thank you, Mr Williams. It is a pleasure to serve under your chairmanship. 

I will just say a few words to introduce the debate on behalf of the Government. We recognise that 2010 was a year of unprecedented instability in the eurozone. It became abundantly clear that countries within the euro area had no support mechanisms in place for times of economic upheaval. There was no formal assistance mechanism for struggling member states and no way to bolster ailing market confidence. 

In short, the eurozone had no plan B, and a eurozone with no plan B has serious implications for the UK. More than half our trade is with Europe. We may not be part of the euro or intend to be part of it, but the fiscal and economic stability of the single currency remains of crucial importance to the UK. 

In the last few months, however, we have seen some significant changes. We have worked with our European partners to secure agreement for a European stability mechanism—a sensible and sustainable long-term arrangement for the euro area. The UK will not contribute to the European stability mechanism; instead, euro area countries will look to other euro area countries for support. The treaty change necessary to create this permanent mechanism does not involve a transfer of power from Westminster to Brussels, to which we could not possibly agree. This permanent mechanism will close down all previous mechanisms, including the European financial stabilisation mechanism, which we will discuss in today’s debate. 

Rather than looking backwards, the Government intend to look at what the future arrangements should be for the eurozone. We have demonstrated that forward-looking approach in the successes secured through the establishment of the ESM. Nevertheless, I know that hon. Members, particularly those serving on the European Scrutiny Committee, will be keen to debate the UK’s involvement in stabilising Europe in the course of 2010. The hon. Member for Luton North referred to the scrutiny reserve being placed on these documents, so it is important that we have this debate. This is not the first time that the matter has been debated in the House, but it is the first debate solely dedicated to it. 

The European financial stabilisation mechanism was set up in 2010. The decision was made by the previous Chancellor of the Exchequer at an emergency ECOFIN meeting on 9 May. The terms of the stabilisation mechanism are set out in EU Council Regulation No. 407/2010, and it is compatible with the treaty on the functioning of the European Union. Whether we like being involved in this mechanism or not, the simple fact is that until 2013 we must live with it. However, we should bear in mind that where the stabilisation mechanism exposes the UK to budgetary liability, that will arise only if a member state benefiting from funding from the mechanism defaults on repayment. 

We have ensured that the UK has no involvement in funding the European stabilisation mechanism. We have moved on from the EFSM and learned from the turbulence of 2010, although I am sure that we will have a robust discussion this afternoon about the mechanism. 

Chris Leslie (Nottingham East) (Lab/Co-op):  I am learning about the procedure of European Committees, and I am always grateful to the hon. Member for Stone (Mr Cash) for drawing the legal issues to Members’ attention. Although we did not support the Adjournment

motion that he suggested and which was moved by my hon. Friend the Member for Luton North, there is an interesting discussion to be had about the legal rights in respect of this set of issues. To me, however, that is a second-order issue compared with the actual impact that these funds will have on stability and the economy, within the eurozone in particular. 

My questions to the Minister are in five groupings. The first is about what effect what we might loosely call EU rescue funds—the EFSM, the European financial stability fund and whatever they eventually wrap into the European stability mechanism—will have on bond purchasing powers across the EU. 

For example, what is the Minister’s view on the current funds, or the eventual ESM, being used to buy the bonds of struggling countries, either on the open market or directly from the countries themselves? Does he envisage that any revamped ESM might begin to behave as some sort of eurozone debt agency, and what would be the implications of that? Does he share the views voiced by Germany, for example, that bond buying, or bond issuing by euro funds, might allow “profligate” countries to have a free ride on the creditworthiness of some of the more stable, triple A-rated countries within the eurozone? That is my first set of issues for the Minister to address. 

Mr Hoban:  I am grateful to the hon. Gentleman for his question. At the moment, the mechanism, to which all members of the EU contribute, and the facility, to which only members of the eurozone contribute, are set up to give direct financial assistance to member states; they are not set up to acquire sovereign debt issued by other member states. I do not believe that there is a proposal on the table currently to allow the permanent mechanism to do that. There is a significant debate about the issue in Europe. There are no formal proposals, and it would be inappropriate for the Government to comment until any such proposals are made. 

Mr Cash:  I would be grateful if the Minister answered the question that I put to him in a written question, to which I received a reply about 40 minutes ago, relating to the advice received. The question was whether he would place in the Library a copy of the legal advice, and other written advice received by Treasury Ministers, about the mechanism. The answer that I received, with which I am anything but satisfied, stated: 

“Treasury Ministers received advice on this issue, including legal advice, as part of the normal process of policy development. Policy development and information relating to recent policy announcements need a degree of freedom to enable the process to work effectively. The release of information so soon after discussions took place would result in less full and frank discussions in the future, harming the policy formulation and development process.” 

On that basis, I suggest, there would be almost no answers to any questions at all. 

Mr Hoban:  My hon. Friend asked for documents to be placed in the Library, which is not the standard practice. He and other hon. Members will be aware of matters that relate to the release of Cabinet papers, such as the 30-year rule. He will be aware of routes through the Freedom of Information Act and of exemptions that apply, and he will know that we are following usual Government policy. 

Kelvin Hopkins:  In a document to the European Scrutiny Committee, the Economic Secretary stated that 

“the Government believes that financial problems within the euro-area should be primarily resolved by euro-area Member States—however, it is in the interests of all Member States to support a stable and fully functioning euro-area”. 

Is that not simply a get-out that will result in Britain being sucked in to bail out big countries when they get into trouble? Would that not be a bottomless pit when we have our own financial problems? 

Mr Hoban:  The hon. Gentleman should reflect on the package that was put together for Ireland, in which funding came from a series of sources. It came from the mechanism; from the facility; and from bilateral loans from the UK and others. It also came from the IMF, all of whose members contributed implicitly to support for the bail-out. If there were a future bail-out involving the IMF, anyone who contributed would be involved. Under the permanent structure that we have put in place, however, we have made it clear that support for euro countries should come from other euro-area countries. 

John Hemming (Birmingham, Yardley) (LD):  The Minister explained that under the new mechanism Britain will not be underwriting just over an eighth. Will the moneys that have been loaned under the previous mechanism transfer to the new one, or do we remain contingently liable for such sums? 

Mr Hoban:  My understanding is that the moneys that are lent now will remain outstanding under the previous mechanism. 

Chris Leslie:  I want to move on to ask about the Irish bail-out and the loans that we discussed on the Floor of the House. The Financial Times and others have speculated recently that the Irish loan arrangements from the EU might be reopened, either to extend the repayment period or to cut the interest rate. Is it likely that the UK’s bilateral loan arrangement would be similarly revisited in parallel? I know that the classic answer to a hypothetical question is, “That is hypothetical; we will address it when the time comes.” However, if such changes are made, either to the repayment period or to the interest rate levels on the European loans, it would be useful to know whether that is the sort of matter that we would have an opportunity to debate again in the House of Commons. 

The likely future Irish Finance Minister, Michael Noonan, has been speculating in the press that the interest rates on the Irish loans from the European Union are too high. There has been much discussion about that, so I want the Minister to tell us not about the detail, but the procedure. Will we be able to return to that matter in a parliamentary context? 

Mr Hoban:  The hon. Gentleman has provided his own answer: that is a hypothetical situation. I am aware of the comments that have been made by the man who wishes to be the Irish Finance Minister. It is unclear whether he is seeking to renegotiate how the Irish fiscal retrenchment package works or the loans themselves. The loan agreement has been agreed, however, with the

Irish Government and has gone through the Irish Parliament, so it would be a significant departure if they sought to renegotiate it, and they would have to deal with circumstances as they arose. 

I shall take the opportunity to shed further light to my answer to the hon. Gentleman’s first question. Article 125 of the treaty on the functioning of the European Union prevents member states from bailing out other member states through a grant or loan, so we would need to bear that in mind in any proposals under a mechanism. The assistance given under the mechanism and the facility is a loan rather than a grant or gift. 

Mr Cash:  Would the Minister be good enough to give me a simple answer to a question arising from the explanatory memorandums and other papers supplied by the Government? According to those documents, the arrangements for the European financial stability mechanism are similar to those applied in the case of Hungary, Latvia and, I think, one other country. Does the Minister know from what provisions those countries obtain their money? How can he justify the similarity of the arrangements? 

Mr Hoban:  The EU member states that my hon. Friend refers to are outside the euro. They had received financial support to enable them to deal with balance of payments problems. There is a precedent for the European Union’s giving financial support to member states in particular circumstances. 

Mr Cash:  Further to that answer, bearing in mind the fact that the Hungarian, Latvian and other facilities were made available under the all-embracing article 308—now article 352—of the treaty related to the functioning of the European Union, how can the Minister compare them with the use of article 122, which is regarded by the European Scrutiny Committee and its legal advisers as legally unsound? 

That article, which is the basis of this document and which we assert is legally unsound, is based exclusively on matters relating to national disasters, emergencies and things of that kind. It was never contemplated that it would be used for the purposes of putting right horrendous financial and economic mistakes of the kind that have led to the bail-outs. 

Mr Hoban:  I understand how my hon. Friend and his Committee have construed article 122(2), but I am not aware that there is a significant body of legal views that supports his contention. The article states: 

“Where a member state is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, on a proposal from the Commission, may grant, under certain conditions, Union financial assistance to the member state concerned.” 

It is not clear to me that article 122(2) relates exclusively to natural disasters. 

Mr Cash:  I was seeking an Adjournment earlier. Sadly, the Adjournment motion was defeated, thanks to the failure of certain members of the Committee to abstain, or at least not vote for the proposal. The reason why I wanted an Adjournment was clear. 

How does the Minister equate what he has just said—about there not being any apparent evidence for the assertion of the European Scrutiny Committee and its legal advisers that the use of article 122 was legally unsound—with what Madame Lagarde clearly stated on 17 December? She said that all the rules had been violated. She clearly took some relish in the fact that the law did not seem to matter as long as the eurozone was rescued, as she put it. She made it quite clear that there had been a major transgression of the rules of the treaty. She is the French Finance Minister. 

Mr Hoban:  I am accountable for my words, not for those of Madame Lagarde. Without seeing the quote or the context, I cannot express a view. What I had said in response to my hon. Friend’s question was that there had not been a substantial body of criticism for the use of article 122. The only legal action that I believe has been taken to suggest that the mechanism was in violation of the treaty was a private action, which was struck down. 

The Chair:  Order. I remind hon. Members that this is a narrow debate on the European financial stabilisation mechanism itself and the possible consequences for the UK Exchequer. Also, questions should be brief. 

Chris Leslie:  My third set of questions relates to the conditions attached to either the EFSM or other stabilisation mechanisms, most of them relating to the austerity measures that often accompany such loans. Is the Treasury making any assessment of the impact on our economy, particularly trade, of any added austerity conditions or measures that are agreed in relation to further capital support loaned to eurozone countries as part of the stabilisation funds? For example, did the Minister notice that Ireland’s growth forecast has been downgraded from 2.3% to 1% this week? 

Will the Minister acknowledge that whatever happens in the eurozone, especially if all the eurozone countries contract their economic activity contracts simultaneously because of austerity conditions, it will hit the UK’s growth prospects further still? Is he content that new budget rules in the eurozone, which might fine member states that exceed set sovereign debt levels, could have an impact on our economy? I just want to get a sense of the Treasury’s assessments of that eurozone-wide set of austerity measures. Are his officials making any assessment of that at all? 

Mr Hoban:  The responsibility for making economic forecasts rests with the independent Office for Budget Responsibility, not the Treasury. 

Chris Leslie:  Oh. 

Mr Hoban:  The hon. Gentleman may be unaware of that. I thought that as a member of the shadow Treasury team he was aware that the OBR undertakes that process. There is a challenge. There is widespread recognition that unless member states tackle their deficits, there will be continuing instability in the eurozone, which will cause a seepage of confidence and have an impact on economic growth. The hon. Gentleman referred to sanctions. Eurozone members, and non-eurozone members like us ran up significant deficits when times were good and we are paying the price for that now. 

There is concern about the lack of fiscal discipline, but measures are in place to reassert that. We have introduced our own measures in the UK. In the eurozone, there was concern that without a proper sanctions mechanism the eurozone would repeat the mistakes of the past. It is important that the advice provided by the Van Rompuy task force results in action to tackle these matters, which is why the eurozone is moving down the route of a series of graduated sanctions. 

Chris Leslie:  We ran up deficits as a result of the banking bail-out, with a consequential effect on the economy, but that is a debate for another time. I am not simply abrogating responsibility for the forecasting issues to the OBR. The Treasury has a negotiating role and the Minister has a representational role as the stabilisation funds change, so he will be mindful of the effect that excessive austerity conditions on further amendments to those stabilisation funds could have on our economy. Does he wish to deny that there is any impact on his negotiating position as it goes forward of that particular effect on our own economy? 

Mr Hoban:  For the recipient of any payment package, it is important to ensure that any additional debt is sustainable. That is clearly part of the position taken by the IMF and others when assessing the impact of the package. One reason why we took part in the Irish bail-out was because of the impact of instability in Ireland on the Northern Irish economy and the UK financial sector. 

Mr Cash:  Will the Minister be good enough to explain why, in his statement about the European Council last December, the Prime Minister responded to a question from me about the use of article 122 by saying that 

“in two ways the previous Government made a bad mistake”? 

Why, as we point out in our report on another document, does the Minister for Europe take a different view and argue, as does the Minister, that the use of article 122 is compatible with the requirements of the treaty? 

Mr Hoban:  I go back to the answer that my right hon. Friend the Prime Minister gave to my hon. Friend. He said: 

“That argument was had and was conceded under the previous Government in two ways. First, they agreed the establishment of the mechanism. Secondly, if we go back to the Nice treaty, it was the then Europe Minister, the right hon. Member for Leicester East (Keith Vaz)…who argued from the Dispatch Box that it was perfectly okay for article 122 to go to qualified majority voting”.—[Official Report, 20 December 2010; Vol. 520, c. 1193.] 

Kelvin Hopkins:  I refer the Minister to my first question. I want him to come back on that, because he referred to Ireland in his response. Was it not the case that Ireland was a one-off situation, that the House understood it was personal support for a very close neighbour with whom we have the closest possible links and that it was seen to be not general support for the eurozone, but specific support for Ireland because of its close historic and economic links to Britain? 

Mr Hoban:  It was because of our close links with Ireland, which was the justification for the bilateral loan. The point I made, and to which the hon. Gentleman has referred, is that it is primarily the responsibility of the euro area to draw out the engagement and involvement

of the International Monetary Fund in supporting Ireland, as the IMF has supported other countries that needed to borrow to ensure that they are able to retrench their fiscal position. 

Kelvin Hopkins:  The IMF is another matter. We contribute to the IMF for many purposes across the world. No doubt we could continue to support the IMF, and the IMF may choose to help to support the eurozone. That is completely different from Britain contributing directly to the EFSM as part of the European Union. Supporting the IMF is one thing; supporting the eurozone directly through the EFSM is something entirely different. 

Mr Hoban:  We were banned by virtue of the decision taken on 9 May by the previous Chancellor of the Exchequer from being part of the EFSM. We had no choice in that matter. We were locked into it. The choice was whether or not we gave a bilateral loan to Ireland. It was the hon. Gentleman’s colleague, the right hon. Member for Leicester East (Keith Vaz), who was content for article 122 to go to qualified majority voting. Had he decided to go for unanimity, we would not be in the position we are in today. 

Kelvin Hopkins:  I have one more question. I would not have supported that, and I am pleased to be reminded of it, but is the Minister saying that we are trapped, whatever we do, if the eurozone goes belly-up and countless billions are needed to support Spain, Portugal and possibly Italy, too? Would we have to shell out from our already stretched finances, because we cannot get out of it? 

Mr Hoban:  The hon. Gentleman needs to bear in mind two things. First, these are loans, not gifts—gifts or grants are banned by article 125—so we expect the money to be repaid. Secondly, the EFSM is limited to €60 billion, so there is a cap. We bear our share of that in proportion to our contribution to EU funds, but it is capped at €60 billion, so we are not contributing to a bottomless pit. It should be recognised that the facility is for a much more significant sum, €440 billion, but we are not part of that facility. It is a euro-area only arrangement. 

John Hemming:  To clarify, at the moment under the mechanism, some €20 billion has been loaned to Ireland, of which we may have to pay an eighth if Ireland does not pay, and Greece is not part of it. Is that right? 

Mr Hoban:  Ireland was the first country to use the mechanism. 

Chris Leslie:  I want to ask about the role of UK Ministers in decisions on the EFSM, particularly going forward. Which Ministers are involved in the discussion? Presumably the Minister is involved, or is it simply the Chancellor of the Exchequer? Does the UK play a part in eurozone-specific discussions and negotiations? If so, what is it? Is it that of an observer or a participant? I want to know the technical nature of the UK’s locus in those negotiations as they progress. Has the Treasury

set out the principles underlying its representations in those discussions and negotiations, and what are they? What are the key points that the UK Government are seeking to achieve in those mechanisms? Finally, if treaty amendments are envisaged, when are they likely to be introduced in Parliament? 

Mr Hoban:  The hon. Gentleman raises some helpful issues. The parameters for the mechanism were laid down at the December Council. I might expand on them in the debate, but as a consequence we secured agreement that the existing mechanism would come to a close no later than 2013 and that we would not be required to participate in the European stabilisation mechanism. Those were key negotiating objectives that we were able to achieve. 

Having set out the mandate in the December Council, work is currently under way at an official level on the design of the permanent mechanism. The aim is to conclude discussions by the time that the spring Council is held. Such work is at an official rather than a ministerial level, but will doubtless come up for debate at Ecofin—either the Chancellor of the Exchequer or I will attend those meetings. 

We are taking part in the discussion, as are all member states—it is not restricted to members of the euro area. That is important, because the mechanism that is designed, although aimed at and financed by eurozone member states, might have some spill-over effects that could affect the whole Union. It is right that we participate in the debate, although it is not our intention to join the euro. As the Committee knows, the European Union Bill, which receives its fifth day of debate in the House today, will require primary legislation to authorise any treaty change. The mechanism is not a transfer of power from Westminster to Brussels, so it does not require a referendum, but it will require primary legislation, which will be introduced in due course. 

Chris Leslie:  If the UK is fully involved in the discussions, do we have a veto on the outcome of any final mechanism, or is it being debated under a qualified majority arrangement? What power might the UK have over the final design of the stabilisation mechanism? 

Mr Hoban:  I will not go into the ins and outs of the dynamics of the discussions. They will work in different ways at different times. However, member states recognise the UK as a significant economy, with a global financial centre that helps to meet the needs not just of the UK but of the European economies, so we have a voice. The hon. Gentleman probably recognises that the extent of our influence is restricted by the fact that we will not contribute to the mechanism. 

Mr Cash:  Returning to my previous exchanges with the Minister, will he concede or comment on the fact that the Prime Minister, on 20 December, said that the previous Government agreed to the establishment of the mechanism, and that the Chancellor of the Exchequer acquiesced in that? Indeed, the legal opinion has been endorsed by the Minister for Europe. Furthermore, with regard to question of the attitude of the then Europe Minister when the Nice treaty was going through, he might have said that article 122 prescribed qualified

majority voting, but he did not say that it should be used for purposes outside the framework of the legalities of the treaty. 

Mr Hoban:  My hon. Friend has his own view about the legality of the use of article 122, which he has made clear, but the then Europe Minister did argue that QMV was appropriate for article 122. We cannot dispute that, so that is the appropriate route. 

My hon. Friend mentioned the Government acquiescing in the creation of the mechanism. I am not sure what he means, because the decision was taken by the previous Chancellor of the Exchequer before the current Government was formed. We are locked in by that decision, so I would not describe that as acquiescence. 

Mr Cash:  The Political and Constitutional Reform Committee heard evidence, including significant reference to all this, only a few days ago. The proceedings are now published in the fourth report of the session, if anyone is interested. The whole episode is discussed, indicating that at that time, the Chancellor 

“cautioned against committing the UK to proposals that have a lasting effect on the UK’s public finances”. 

In such circumstances—and there is more in the report—why is it that, subsequent to that statement, which presumably comes from the former Chancellor or somebody, the whole process has been endorsed in relation to Ireland and therefore is open to further use in respect of, shall we say, Portugal, Spain or any other member state, which could draw on this pot of £60 billion, to which the British taxpayer is now committed? 

Mr Hoban:  To make the position clear to my hon. Friend, we are committed to that fund, proportionate to our share of the EU budget. We are not committed to the whole £60 billion. I have not seen the evidence session to which the hon. Gentleman refers, but we are locked into this mechanism. As I have said, I do not think that there is any substantial body of legal advice or dispute about the legality of it, and this is where we are at. 

Mr Cash:  I want to follow up that particular point. It would be possible, would it not, to seek an action for a declaration in the United Kingdom courts to clarify this? After all, we are talking about sums of around £8 billion, which can be drawn down. It is taxpayers’ money, and I am sure the Minister, as a responsible Financial Secretary, would not want to see that money used in a manner that was unlawful or unacceptable. Will he give provide further reference on the private action that he has mentioned? 

Mr Hoban:  I know that my hon. Friend is concerned about the legality, but, as I said to him, there is no significant body of legal evidence or dispute about the legality of it. Why pursue a court action when there is no substantial dispute about it? 

Mr Cash:  With respect, the Minister himself said that there was a private action, which he said was struck out. I would be grateful if he gave me full details, as it is material to the answer that he has just given. 

Mr Hoban:  I can write to my hon. Friend with the details. 

Kelvin Hopkins:  I understand from my documents that ECOFIN has agreed to complement the regulation with a special-purpose vehicle, the European financial stabilisation facility. That is an agreement between euro-area member states only; we have chosen not to participate in it. I do not know how much it is worth in terms of borrowing or lending capacity, but would it not be right for us to say as a country, “That’s the fund for your support in the eurozone. The other fund should be for other purposes”? 

Mr Hoban:  As I mentioned in response to an earlier question, the European financial stability facility has a value of some £440 billion. We have chosen not to be part of that. It is an intergovernmental agreement between Governments of eurozone member states, and it is that facility that the permanent mechanism is seeking to replace. But funds have been discussed in the context of the Ireland package, and clearly there was a view in ECOFIN that some funds should be drawn down from the mechanism as well as the facility. 

Kelvin Hopkins:  Is this just a case of the eurozone countries drawing Britain into supporting the eurozone countries, rather than the eurozone countries supporting each other? 

Mr Hoban:  That is exactly why we fought at the December Council for a permanent mechanism to which we did not have to contribute. That is the right place to be, and I am pleased that the hon. Gentleman supports us in that, but we are dealing with the legacy of the decision taken by the right hon. Member for Edinburgh South West (Mr Darling) on 9 May. 

John Hemming:  On 9 May, the then Chancellor of the Exchequer underwrote the mechanism to the tune of €8.28 billion, or £6.76 billion. So far, some of that has been committed to Ireland. Do we have any control over how much more might be committed from the mechanism? 

Mr Hoban:  There are no requests on the table at the moment for money from that mechanism. 

Chris Leslie:  I was interested to note that the Minister was not able to specify whether the UK’s role in the debate and negotiations on the future stabilisation mechanism came about through unanimous consent, the potential of a veto or qualified majority voting. 

Has the Minister seen the latest developments, particularly from France and Germany? They have started to talk about economic government, suggesting that the eurozone countries, plus any volunteers that may wish to join them, impose certain austerity conditions on future funds—for example, on pensions and retirement ages, on corporation tax levels or on what are called debt breaks, to prevent higher expenditure. The eurozone countries may be going in that direction, and Britain may not be part of that move, but would the UK have the right to veto such a development? 

Mr Hoban:  The hon. Gentleman opens out things beyond the mechanisms that we are debating today—and, yes, I suspect beyond the European stability mechanism that is envisaged. He raises a serious question, which is how to instil fiscal discipline in eurozone member states when there is a sense that they will be supported by other eurozone member states. That is the subject of a live political debate in a number of eurozone countries. It is one reason why the Van Rompuy taskforce was set up to consider the mechanisms that could be used to enforce fiscal discipline. Sanctions were proposed for eurozone-only countries to beef up the excessive deficit procedure. 

The process is being debated at the moment, and I am sure that the European Scrutiny Committee will want us to discuss it. It has already put a scrutiny reserve on the six documents that will form the basis. However, the issue is so volatile—that is not quite the right word, but so many ideas are bubbling up that it would be unfair to spend time discussing one in particular. 

Mr Cash:  Will the Minister confirm that the proposal currently being referred to—it may be one of the “bubbling up” points—is supposed to be concluded by late March with regard to the €440 billion rescue fund? Substantial movement is taking place in the eurozone as a whole. 

Would it not be more appropriate for us to act in respect of this misconceived and damaging commitment, made on behalf of the United Kingdom in relation to this particular mechanism, rather as the Irish Government did when they unlawfully agreed to allow the European Commission and others to enter Dublin before making the request? Should we not consider taking similar action, arguing that the mechanism is unlawful, and refusing, as of now, to make any further payments in respect of any other countries? 

Mr Hoban:  I do not feel that I am ever going to be in a position to satisfy my hon. Friend on the question of legality. He has his view, and I have mine. There is nothing that I can add to clarify the situation. 

Kelvin Hopkins:  Is it not possible in extreme circumstances to renegotiate the agreement—to draw back from where we are now? 

Mr Hoban:  In a sense, we have, and hon. Members who are particularly interested in this should stop and think about what we achieved at the December European Council, which my right hon. Friend the Prime Minister referred to in his statement. My hon. Friend the Member for Stone (Mr Cash) was there—I know that, because I have the transcript in front of me. 

We have succeeded in reaching a situation where the European financial stabilisation mechanism will expire, no later than 2013. It will be replaced by a permanent mechanism that only eurozone member states will contribute to. As a consequence of the agreement in December, there will be no possibility of article 122 being used again in the mechanism. 

The Government have sought to move on from the position that we inherited in May, to learn some of the lessons and to look for permanent solutions that do not involve the UK’s having to contribute to the European financial stabilisation mechanism. That is the right thing to do, and I hope that the hon. Gentleman accepts that and will be voting for the motion. 

Kelvin Hopkins:  I am pleased that the mechanism is going to expire, but the show may be over by then—whatever is going to happen to the eurozone will happen before then. It will either survive or be in much more serious trouble than it is now. Hopefully, we will not in future have such liabilities and commitments to the eurozone. If anybody defaults on the loans, I understand that they will be guaranteed by the EU budget, to which we contribute. Even after the mechanism expires, therefore, there might be a situation where the EU makes loans to countries in trouble, they default, the budget takes up the slack and we contribute more to the budget. Is that not the case? 

Mr Hoban:  The European financial stabilisation mechanism does create a contingent liability for the UK. If a member state defaulted, we would have to contribute our share to the budget in proportion to other countries. But we are not required to contribute to the mechanism; we do not have to put a single pound into it. It is for the eurozone member states and it is financed by eurozone member states. In respect of loans made by that body, I do not believe that that will have an impact on the UK in the way that the hon. Gentleman suggests. That is a success that we achieved in December at the European Council meeting. 

Mr Cash:  A couple of weeks ago, the Prime Minister remarked at a press conference, after he had met Mr Fillon, that he would not be lured into similar arrangements. Will the Minister accept that that was without prejudice to the fact that if there were any such arrangements or economic governance, that would be under a treaty that we would be involved in, despite the fact that we would be excluded from the considerable and damaging impact that it would have on us if the other member states went ahead? 

Mr Hoban:  I am not sure whether my hon. Friend is arguing for us to be involved; it seems that that was an argument for us to be involved. I am not sure that that is where I thought he would be on the matter. 

Mr Cash:  I am arguing strongly that we should not be party to a treaty. We should veto that treaty. Indeed, The Times has said that any such treaty should be subject to a referendum, and I happen to agree. We should, therefore, not be involved in that sense, and we certainly should not be involved in a treaty of that kind. 

Mr Hoban:  The treaty change that is on the table is one to set up the permanent mechanism and to ensure that there is a permanent facility in place for the eurozone to bail out or support other eurozone member states. My hon. Friend is going on to a debate beyond where we are at the moment. I know his particular concerns about EU economic governance, but what is on the table is not what my hon. Friend is envisaging. 

John Hemming:  Does the Minister agree with the hon. Member for Luton North that we should congratulate the Government on working to extract ourselves from the mess created by the underwriting of the previous Chancellor in May this year? 

Mr Hoban:  As ever, my hon. Friend is wise and sagacious, and I encourage the hon. Member for Luton North to look closely at the wording of the motion and join us in welcoming the fact that the United Kingdom would not be required to contribute to the European financial stability mechanism. I look forward to his voting with us if the motion is put to the vote later. 

Motion made, and Question proposed,  

That the Committee takes note of European Union Document No. 9606/10, relating to a Council Regulation establishing a European financial stabilisation mechanism, and European Union Document No. 12119/10, relating to a draft amending budget No. 7 to the General Budget 2010—Statement of expenditure by Section—Section III—Commission; supports the Government’s view that whilst it is in the interests of all Member States to support a stable and fully functioning euro area, financial assistance for euro area Member States should primarily be provided by other euro area Member States; and supports the Government’s position that the United Kingdom should not be required to contribute to the European Stability Mechanism that will permanently replace both the European Financial Stability Mechanism and the European Financial Stability Facility.—(Mr Hoban.)  

5.25 pm 

Chris Leslie:  I do not wish to detain the Committee longer than necessary. Clearly, we shall not be opposing the mechanism, as our predecessors in the former Administration were involved in its agreement on 9 or 10 May. However, I would like the hon. Member for Stone to pick up on the point he made earlier on the Floor of the House where there was indeed some discussion about the cross-party bipartisan agreement that had been discussed. It is not quite the case that the new incoming Ministers involved were not consulted at all. 

Mr Cash:  I can confirm that, from the evidence I have from the Political and Constitutional Reform Committee report, there was consultation with the present Chancellor and the Secretary of State for Business, Innovation and Skills. In his evidence to the Justice Committee, the previous Chancellor said that their view was that as 

“I was still the Chancellor they were not offering an opinion as to what I should do”, 

but, as I said earlier, the present Chancellor said that he 

“cautioned against committing the UK to proposals that have a lasting effect on the UK’s public finances”. 

In other words, there was a going along with it, despite deep reservations. 

Chris Leslie:  Whatever those reservations and cautions, the fact is that there was dialogue and a level of consultation. My understanding is that the Minister’s interpretation of matters is a completely binary issue of being opposed to it and so forth, and that is not quite the case. Nevertheless, we have to hope that the eurozone is turning the corner and that the bond market contagion issue is a thing of 2010, not of 2011. Markets are looking, I hope, more to other parts of the world—there is talk of what is happening in the middle east and Japan—but could easily return if the wrong path for reform were chosen. 

It is true that the EU has been using a set of rather ad hoc funds, including the financial stabilisation mechanism that we are debating today, for some time. There has been criticism from the IMF in particular, and elsewhere, that Europe needs to pull together for a permanent

mechanism. It would be a little disingenuous of the Minister to suggest that that was driven at the insistence of our great Prime Minister and that it was a British initiative entirely. Actually, it was something that was necessary and would have been pressed on the EU more broadly on an international level. 

However, it is necessary to have the crisis funds overhauled in such a way. I tried in our question session to ask the Minister specifically about where the issue is heading, in terms of bond purchase and the effect on the Irish loan arrangements and in particular in terms of the austerity conditions that it could impose on the eurozone—and indirectly, therefore, on our economy. I am not quite convinced that the United Kingdom Government have a long enough line to represent British interests in the debates, given the role that they have on the future forms of the mechanism. 

Kelvin Hopkins:  I agree entirely with my hon. Friend. There is a serious danger that all the European Union countries would start deflating together; that would just drive us into a black hole of recession. What was his view when the Prime Minister came back, early in the new Parliament, claiming success and that the cuts programme announced by the Government was being echoed and reflected in other countries in the European Union? 

Chris Leslie:  That showed the lack of understanding of the current incumbents within the Government, whether Liberal Conservatives or Conservative Conservatives, about the effect of public spending reductions at such a rapid pace on economic activity. Unfortunately we have seen its effect on growth in this last quarter in the UK. My worry is that the simultaneous shrinkage of public expenditure levels across the eurozone will have an undoubted effect on our economy, yet there is no Treasury analysis of what that might be. The Treasury is saying, “It’s a matter for the Office for Budget Responsibility”. I hope that Ministers will at least commission the OBR to take a view on that. 

I am concerned that the Minister does not seem to have a clear view about what leverage the UK might have on the future design of the stabilisation mechanism—is it a veto leverage or is it done by qualified majority voting, and how will that develop in future? The Minister has done his best in today’s Committee, but we need stronger leadership and a better sense of where we are heading on these issues. 

Mr Cash:  Despite the hon. Gentleman’s attempts to throw sand in everybody’s eyes, the bottom line is that his party was responsible for making this decision. However, does he accept that one cannot have growth on the back of a bankrupt Europe? The public sector is involved in this, because the bottom line is that there is no money to pay for public expenditure that does not come from taxed private enterprise. As I said on ConservativeHome today, with the exception of Germany the problem of growth is at the heart of this, which is why we should not be throwing good money after bad on unlawful schemes such as this one. 

Chris Leslie:  I agree with the hon. Gentleman that growth is absolutely at the heart of the matter, but pulling up the drawbridge, sticking our fingers in our ears and closing our eyes to our near trading neighbours

is absolutely not the way forward. Our fate and theirs are intertwined, and if those countries shrink back, as my hon. Friend the Member for Luton North has said, that will affect our ability to trade with them. Those concerns need placing right at the heart of negotiations for the stabilisation mechanism. There are echoes of the problems at the Department for Business, Innovation and Skills in not recognising that growth is important, and we know that the Government are failing to recognise that. Specifically in these negotiations, I do not yet get the sense from the Minister that he recognises the role that a proper growth policy and growth strategy needs to have in his negotiating stance on the permanent stabilisation mechanism. 

John Hemming:  Without questioning the fact that growth is important, does the hon. Gentleman know of any country that has managed to spend its way out of a sovereign debt crisis? 

Chris Leslie:  I do not think that is under contention. The point is that different countries have different strategies, but collectively the eurozone has a big impact on our economy. Surely the hon. Gentleman cannot deny that? Therefore, the economic activity within the eurozone—this is a bit like an ABC lesson for Government Members—has an impact on our economy, too. All I want to establish is his Government’s policy stance in taking forward negotiations on the future stability mechanism, in respect of ensuring that growth is positive, not negative, within the eurozone. 

Kelvin Hopkins:  On that point, in 1945, Britain’s gross debt was 2.5 times its GDP. It was reduced simply by sustaining full employment and public expenditure for decades afterwards, and it came down to 40% of GDP at some point. 

Chris Leslie:  History has a number of lessons for us to learn and reflect on, as my hon. Friend says. I do not wish to make any further comment. We are clear where this fund is going. It is a pity that it has taken such a long time for the European Committee to debate this particular financial stability mechanism, when we are now at the point where it is almost redundant and we are moving to a permanent mechanism. I hope that the Committee has an earlier opportunity to debate that, if indeed the Council agrees this new permanent arrangement in the spring. 

Mr Cash:  I am sure that the hon. Gentleman is not implying any criticism of the European Scrutiny Committee, because it was not set up when the decisions were made. It was set up only in September, and we immediately recommended the matter for debate. In addition, the reason it has taken so long since then—to the present day—is because the Government have not brought the matter forward until today, in terms of the usual channels. So, there is a slight history behind all that. 

Chris Leslie:  I knew that the usual channels would be involved in this somewhere or other. On that point, I conclude my remarks. 

5.34 pm 

Mr Cash:  As hon. Members will appreciate, I made some reference to all this in a debate on the European Union Bill on the Floor of the House. I regard the matter as being extremely serious for a variety of reasons, many of which will have become apparent during the questions that I asked. 

As I said in the House, I do not want to engage in a witch hunt, but I believe that it is extremely important that we get to the bottom of questions of this sort and that we find out how the decisions were taken. Therefore, I was profoundly disappointed when I received the answer to a question 40 minutes before the beginning of these proceedings. To paraphrase, it said that it is not in the interests of the Government for me to be given answers to such questions. That is not terribly surprising in the circumstances, because this is a very tangled skein. It is an unfortunate situation, exposing British taxpayers to £8 billion worth of underwriting, if I can put it in those terms, and it is quite possible that the money will be called upon. We do not yet know what will happen to Portugal and/or Spain. If something is going to happen, it will happen before March 2013. That seems pretty likely. In those circumstances, the commitments that were entered into by the previous Government and acquiesced in by this Government expose us to making, I think, 13.8% of the payment that we have made available. 

Leaving aside the Irish money that has already been committed, and with some adjustments for exchange rates and so on, that could amount to another £5 billion to come out of the Exchequer. If that is the case, it is a serious matter. Therefore, as far as I am concerned, it is important that I, as Chairman of the European Scrutiny Committee, with other members of the Committee here present, run through exactly what has happened and what our concerns are. When I say “our concerns”, I am speaking for myself, as I am not officially a member of this Committee. However, I have the opportunity, under the procedures, to make the point, and I intend to do so. 

During consideration in Committee of the European Union Bill, on 25 January, I tabled and argued for an amendment that would insist on us having a referendum on the dangers of our being involved in bailing out other member states, specifically with reference to the financial stability mechanism and other issues. That financial mechanism, which the former Chancellor signed us up to, was heavily criticised by the European Scrutiny Committee as legally unsound, and I have already said that I believe that it is still open to the Government to take such action in the courts to avoid our continuing to be expected to stump up for this when there could well be a satisfactory answer. The Minister has said that he would be glad to let me have the details of the private action, which would need to be closely scrutinised to see whether the course of action was appropriate. I have no idea at this juncture whether it is. 

That agreement was entered into by the former Chancellor and, in effect, endorsed by the coalition Government. I take the gravest exception to that, because it will cost us up to £8 billion. The history of all this, which is an example of how not to conduct government, is as follows. We are not members of the eurozone and there is no reason why we should submit in this way, particularly given the presumption of those in the eurozone, and the attitudes of Mme Lagarde and others, that they

could run their affairs better. Their sole objective is not the rule of law, but simply to violate the rules and then say, “Ah, but we are doing this to save the eurozone.” It is a very strange attitude, and the sort of thing that really troubles me about how the European Union functions. 

I raised the matter with Mr Rompuy, and indeed with Mr Barroso, in relation to economic government. The hon. Member for Luton North was at that meeting, and he will remember Mr Rompuy saying, “We didn’t exactly comply with all the rules and procedures.” That was a reference to this—exactly the same as Mme Lagarde’s. The Minister asks who is questioning the legality. We know from the President of the EU and from Mme Lagarde, to mention but two, that there are serious problems. Indeed, I would go further and say that I believe our own Prime Minister has a grave concern about this as well. He just takes the rather pragmatic view that we are in it and we had better try to do what we can. 

Kelvin Hopkins:  I entirely support what the hon. Gentleman is saying. However, the attitude of, “When it comes to the crunch, never mind the details, just get on with what you want to do,” is completely alien to how we do things. We ought to take exception to that sort of attitude, whoever has it, especially in the European Union. 

Mr Cash:  It is not just that, although I do not want to enlarge on my concerns about the manner in which the European Union functions, although there is an element of pragmatism involved. 

As I pointed out in a question, the mechanism has an effect that will come up and hit the outgoing Irish Government—I think the Irish Parliament has now been dissolved—very hard during the election. A press release that came out this afternoon suggests what one prime election issue will be, and we are involved, because we have given Ireland a proportion of the money under the arrangement. I mean not the Irish loans legislation, if it has been passed yet, but the moneys under the EFSM. The centre-right Fine Gael party and the centre-left Irish Labour party have both said that they want to renegotiate the deal. Mr Kenny said: 

“I’m confident that this can and will be renegotiated”, 

and he gave details, which I do not need to go into. He recognised that Ireland cannot renegotiate on a bilateral basis. Why? Because although we have provided the money under what I call an unlawful scheme, it is now a bone of contention in the Irish Government, and all hell will be let loose over the next few weeks, as the matter is debated. 

Why did Mr Cowan, when he was saying that Ireland did not need the money or a bail-out—Mr Socrates is saying the same in Portugal at the moment—allow the invaders from the European Commission, the International Monetary Fund and company to come in under a regulation that specifically stated that QMV for that purpose arises only at the moment of final decision and not when the request is made? And the request was not made, as I said in the House at the time, when Mr Cowan allowed them in to bully the Irish into the scheme, exactly as they managed, with a slightly lighter stick, to trap us into acquiescing in this process, so exposing the British taxpayer in relation to the £8 billion that I have referred to. 

I am troubled that such an attitude is part of the Commission’s presumption that it can run its affairs better and impose its views on us, and that it will then get it horribly wrong. If I may presume to say so, since the Maastricht rebellion we have been making such points and have been demonstrably proved correct—it is a matter of attitude and of self-government. We should veto any economic governance treaty, or a treaty of the kind proposed by Mr Fillon. I strongly believe that we must veto any such treaty, and I have said that to the Prime Minister and others, but if it is not to be vetoed, at least we should have a referendum, because we will be dreadfully exposed. 

It is a profound mistake to imagine that in bailing out scandalously badly governed countries, which are profligate with their expenditure, we have any obligation to stabilise them. That is like pouring drink down the throat of an alcoholic. The very concept of bail-outs was specifically prohibited under the Lisbon treaty and in all the treaties since Maastricht—a fact that is conveniently glossed over. Indeed, Germany was in grave breach of the stability and growth pact, and the rule of law in Europe now depends on rules of convenience. 

On the specific question, the pot of €60 billion set up under article 122 relates to emergency and natural disasters, and the Minister mentioned related matters. As far as any reasonable person can see, they have no connection with financial misjudgment and failures of economic governance—I do not think anybody believes that. It is now being stated in Government documents that refer to the new proposal, which will come in after March 2013, that the existing EFSM will not be needed. What weasel words! It is not that the mechanism is not needed, but that they know it is blatantly unlawful. It is incredible that responsible Governments can take such an attitude. Indeed, unless the mechanism is challenged, it will continue until March 2013, thereby exposing us to unacceptable exposures of the kind that I have described and which the hard-pressed British public should not have to endure. 

I also mentioned in my questions that the Government pretend—I can put no other construction on it—that a similar situation arose with Latvia, Hungary and Romania. That is simply not true. The legal footing for those arrangements, which I checked out, was article 308 of the treaty—now article 352—which we debated on the Floor of the House during consideration of the European Union Bill only a few days ago, I think on Thursday last week. I am not saying that anyone listened to the debate—a great pity, perhaps—but I am saying that use of article 352, or 308, is notorious. It is a catch-all: if they do not have the power to do something on the face of it, they somehow or other catch on to some other thing, which will give them a justification, and then they use that general power under article 352 to enable them to do something that would otherwise be unlawful. So, we are back in the same territory, and it is typical of how the whole operation has been conducted. 

In the meantime, the chaotic, crisis-ridden European Union is floundering around to renegotiate even the specifically dedicated eurozone facility of €440 billion, to which the Minister referred, with talk of incorporating the Portuguese and Spanish bail-outs. I do not know whether the Minister is in a position to comment, but a report in the Financial Times on Monday this week

actually said that they are talking about including a Portuguese bail-out in the deal, with a smaller group of officials advocating a flexible line of credit for Spain. 

They not only have €440 billion that they could have used in the first place, and have trapped us into a commitment to make those payments, but now they are talking about extending the bigger zone to Portugal and Spain, which are part of this particular arrangement. It is a very tangled tale, and a very unsatisfactory one. 

We understand that the discussions will be concluded at the end of March, although there is an opportunity for Britain to put its foot down this Friday at the European summit. I am interested to know whether the Minister has any idea as to whether that will be part of the summit negotiations, because it certainly should be. 

All that is connected to a vital matter of principle, which is that economic governance in the French proposals, which I described earlier, would be endorsed without the need for a referendum, even though it is shamelessly obvious that they would have an enormous impact on our country. As I mentioned, that is openly acknowledged by Mme Lagarde, who went out of her way to declare enthusiastically: 

“We violated all the rules because we wanted to close ranks and really rescue the eurozone”. 

She went on: 

“The Treaty of Lisbon was very straightforward. No bailout.” 

They are not the slightest bit interested in subscribing to the rules. 

Mr Hoban:  Does my hon. Friend accept that the mechanism is a loan and, therefore, not a bail-out? 

Mr Cash:  I am prepared to say that it is a loan in those circumstances, but the consequences of it being drawn down for the purposes of our commitment as described in the EFSM mean that we are liable. The liability is the issue. I also believe that it is something that the Office for National Statistics is more than likely to include on the country’s balance sheets. We do not know, because it has yet to decide the matter, but that is a separate question. 

Going back to Mme Lagarde— 

The Chair:  Order. I ask the hon. Gentleman to confine his remarks to the subjects being debated. 

Mr Cash:  I would not in any way disagree with your ruling, Mr Williams, but I simply say that Mme Lagarde’s comments refer to the mechanism. What she says is relevant when she, along with the former Chancellor, is one of the parties to the agreement, and she could have taken a different position but did not. However, I will not pursue that. 

What I will say is that I have asked for legal advice and for Treasury advice, which was presumably supplied by Mr Jon Cunliffe, our proposed ambassador to Europe. I understand—I said this in the debate, when we were dealing with the question about the Bill now before the House—that that took place in the middle of a general

election, or just shortly after it. There was a vortex, and there were people whose minds must have been on many other things. 

One of the things that troubles me here is the fact that, although for the purposes of the mechanisms and the procedures accountability lies with Ministers, in reality, the decisions were almost certainly taken by the officials. I believe that that is one of the reasons why it is not possible for me to be given—or they refuse to give me—the advice that I asked for in the questions relating to the fund. I cannot get the legal advice. 

I know that there are certain conventions, but I have been supplied with legal advice from the Attorney-General in the past, which has been put in the Library of the House, so it is not an absolute rule. It depends on the consent of the Minister, and this Minister—I say this with great respect to him—is not prepared to allow me to have it. It is his consent that could be given, and he is not going to give it. Okay, that is the way the rules, on the face of them, apply. The same does not apply to other advice. It is that other advice, which I believe came from the Treasury, and perhaps from the Committee of Permanent Representatives in the European Union, which has brought us to the position in which we ended up: being committed to this, in what was an extremely difficult situation, at the time when the mechanism was being devised, with all the consultation arrangements that I have already mentioned and all the uncertainties that it has created. 

Our position basically was that we have had meetings and there was a degree of consultation. The answer “no” could have been given. I remember writing a short note to the Chancellor, saying: “Tempus fugit. You’re going off to a meeting. You must vote against the proposals and, at the same time, you must also challenge their legality.” Well, the position is as we find it today, and I am afraid that the British people are exposed to this very considerable amount of money for that purpose. Even the explanatory memorandum was produced only on 15 July, when the present Government were firmly in power, and it could only be considered, as I indicated in response to the hon. Member for Nottingham East, on 8 September. We have had to wait until today, four months later, for a debate. 

I also refer to the inconsistencies between the remarks of the Prime Minister on his return from the European Council, on 20 December, and those of the Minister for Europe. With respect to the Economic Secretary, he knows what the Minister for Europe has done. I can tell from the Economic Secretary’s responses that he has been fairly well briefed on the matter. He knows the track and the route to the navigation on it, and he knows perfectly well that the Minister for Europe has indicated, in relation to this specific matter, in a reply to the European Scrutiny Committee, that the proposals are compatible with the TFEU. However, we are saying that it is legally unsound. There is a serious difference of opinion. 

We are not a policy committee, but a Scrutiny Committee, and we have a specific function to advise the House in respect of matters of legal and political importance. There is a gulf between the decision that has been taken by the former Government, the present Government and the officials, and the European Scrutiny Committee’s assessment of all this. This is not a light matter, which is why I am taking the trouble to explain it in some detail. 

The Prime Minister himself, quite rightly, in my opinion, said to me on the Floor of the House that I had made a good point. He does not often say that, but he did on this occasion. He may think that I make a good point more often than not, but he does not always want to say it. However, he knew that at the root of the matter, there was a real problem, and we are committed to it, and we should not be. 

Basically, I believe that we have been deeply influenced by an obsession with the attitudes of our partners in the coalition Government. I think that has a lot to do with it. As I put it to the Prime Minister at Prime Minister’s Question Time on 24 November 2010, we tend to surrender at every turn and repatriation has been taken off the agenda. The Irish Parliament has been dissolved and the main issue in the election is the failure of the Irish Government over all this. I am afraid that it is typical of how Europe works. No wonder it is a failure and there are those of us who are determined to sort it out, have a proper referendum on proper terms and renegotiate the European Union into an association of democratic nation states. 

5.55 pm 

Kelvin Hopkins:  I will not speak for long. These matters are serious and need to be aired properly. They are confusing to many people. We are indebted to the hon. Member for Stone, the Chair of the Scrutiny Committee, for the enormous amount of work he has done. I am personally indebted to him for explaining some of these complex issues on many occasions. The Minister has answered many questions and I am grateful for his replies, which have also helped to shed some light on the difficulties. 

The Minister suggested that I would have been wholly supportive of the Labour Europe Minister when negotiating his deal but he must know me well enough to know that I would not have been supportive of that. Indeed, I am on the record as having been very critical of Tony Blair when, at the end of our presidency, he went to Brussels, ostensibly to negotiate a reform of the common agricultural policy, yet came back without any reform and having agreed to a reduction of our rebate. The Economist, not a magazine of the left, said that it was such a bad deal that no deal would have been better. 

There is an understanding that we do not trust our Governments, whichever colour they are, when it comes to matters European. There is a tendency to do things in Brussels, come back and face the music for a little while and when it dies away carry on. People say they are in favour of the European project and therefore anything goes. But that is not good enough. We want to make sure that Governments are held to account by this House on these very important matters, especially when billions of pounds are potentially at risk. I hope that the Minister will understand that it is right to take him to task on these matters because of our serious concerns. 

We talk casually about £8 billion, which is 16 times the amount of money we spend each year on education maintenance allowances. These are substantial sums that would be better spent in other ways. I have argued many times that the euro is not a sensible arrangement, even for European member states. By having separate currencies, separate interest rates and separate fiscal policies, countries can manage their economies sensibly.

We have kept out of the euro and we can manage our economy in a way that eurozone members cannot. We are not members of that arrangement which demands a particular interest rate and would tie us into an exchange rate with other members of the eurozone and other countries elsewhere in the world. I think we have done a very sensible thing. The greatest achievement of the previous Prime Minister when he was Chancellor was to keep us out of the euro. Everyone is immensely grateful for that. Ministers on both sides have said that there is no possibility that we will join the euro. If we had been in the euro we would have been like Ireland but magnified a dozen times. It would have been appalling. 

Mr Cash:  Will the hon. Gentleman perhaps bear in mind that the circumstances that led up to the fact that we are not in the euro had a great deal to do with the rebellion on the Maastricht treaty, which created circumstances in which it became impossible for the then Government to do anything other than try to opt out? 

The Chair:  Order. I think that is straying slightly from the subject of the debate. 

Kelvin Hopkins:  Yes indeed, although it is right to have a little background. When it comes to the eurozone, my argument is that it would be a sensible approach—I have said it in the Chamber, and I say it again here—to think seriously about a practical way of deconstructing the euro, particularly for those countries that clearly cannot sustain membership, such as Ireland, Greece, Portugal and Spain. A gradual deconstruction could happen, with individual countries reconstructed. When the Soviet Union broke up, separate currencies were created. When Czechoslovakia broke up, separate currencies were created. When Ireland established the punt, instead of having the pound, it could flex its currency, which it did. The punt had a slightly different parity compared with the Irish pound. 

Those things are necessary to manage economies. Economies have to be managed at a national level, not at a supranational level. We can have international agreements, as we do, such as the fixed exchange rates of the post-war era. We did not have no exchange rates but fixed ones that could be flexed as countries got into difficulty. Indeed, we devalued twice in that period as a necessary policy. I suggest to the European Union that someone should be talking or thinking about how practically to deconstruct the euro, particularly for those countries that cannot sustain long-term membership. That is what we should be doing, rather than thinking about how we bail out countries that cannot sustain membership in the long term. If I was in Greece or Ireland, I would be arguing for re-establishing their national currencies, devaluing and starting to regain control of their economies. That is the way forward. I hope that the Conservative coalition Government will be saying those things privately, if not publicly, in the European Council. 

6.2 pm 

John Hemming:  There are many important issues behind all this. Ireland is relatively unusual, because it was fully funded until some time next year. The reason

that it went off the EFSM was because sovereign interest rates started going up. It is probably in a position where it can renegotiate, because it may not have drawn down any of the money. One of the difficulties when dealing with currencies is that there are different exchange rates. The first report from the European Scrutiny Committee uses two different exchange rates—one of €1.16 to the pound and one of €1.22 to the pound—which adds to the confusion. It is clear that when the previous Chancellor signed up to this, he was committing us to a liability, if we use the figures in the report and forget that the exchange rate varies, of £6.8 billion or €8.3 billion. The agreement to allow Ireland to draw down gives us a potential liability of £2.7 billion is there. It is true that that could increase by £4.1 billion before we move on to the ESM. 

I would have thought, however, that the Opposition would welcome this motion, because what it says is that we take note of the document. It welcomes the fact that the Government’s position is that the UK should not underwrite the eurozone. Whatever view one takes on the euro itself, I do not think that there is a good argument for the UK to underwrite the eurozone. The Government’s position is one that all parties should support, which is that if there is a problem in the eurozone, we are not underwriting it. We may do bilateral loans, and we may take on an element of risk through being part of the IMF, but we should not take on additional risk through this process. 

It is true that the funds are not raised from the UK; they are raised by the European Commission borrowing against the European budget. If we take Ireland as an example, our liability only exists if it draws down the funds and, for some reason, it does not pay them back. Many years in the future, we will probably not be paying 13.8% of the European budget. We would be paying a different figure—that figure is not set. At that point, we may be liable. There is a slight risk down the line, but it is not a very real risk, because Ireland will be able to pay the money back if it draws it down. I cannot see any validity in the Opposition opposing this resolution. The resolution is only saying that we should not underwrite the eurozone. I would have thought that everybody could agree with that. 

6.5 pm 

Mr Hoban:  Let me start by addressing a couple of points raised by the hon. Member for Nottingham East. I know that there has been a change of shadow Chancellor, but I had not realised that the impact would be so great and so quick. Previously, there was always a discreet distance between Opposition Front-Bench Members and the hon. Member for Luton North. Now there is not a cigarette paper’s worth of difference between them; they appear to be unreconstructed Keynesians in thinking that the best thing to do is to spend our way out of the problem. 

On growth, the mechanism is a narrow tool—the hon. Member for Nottingham East might be surprised to hear that adjective used of it—to deal with some of the fiscal problems in the EU. The Van Rompuy taskforce contains a series of measures around growth, and an excessive imbalance procedure to look at some of the instabilities in economies and how they should be dealt

with to make sure that European economies grow. A lot of work is being done on bottlenecks to growth, which is all part of the response to the economic and financial crisis in which Europe saw itself. The hon. Member for Nottingham East should see the mechanism as one of a range of interventions, rather than the only tool to deal with the crisis. 

It is clear from the discussions at ECOFIN in other circumstances that all member states recognise that we face two challenges. One is to tackle the deficit, and the other is to lay the foundation of growth. That applies as much in the UK as anywhere else. I am not going to mention what we have done to tackle growth Mr Williams, because you would rule me out of order. However, there are a series of measures around that. 

This issue should be looked at in the round, so I will say a little about the methods. We have been clear about the importance of not joining the euro. We do not plan to join it in the lifetime of this Parliament, and we stand by that position. That clearly gives us the flexibility to adapt our fiscal and economic policy to manage the crisis. As the Chancellor has said, “I told you so”, however intellectually justified, is not much of an economic policy. Simply looking backwards means that we are less likely to move forwards, and that is a dangerous approach to take in the fast-moving European environment. 

A strong and stable euro area is important for Britain and British business. Over 40% of UK exports go to the euro area and we know—it has been repeated ad nauseam—that we export more goods and services to Ireland than we send to Brazil, Russia, India and China combined. 

It is clearly in our interests to support the euro area’s endeavours to put its house in order. However, the Government are also clear that the euro area must work to stabilise itself, and that is what the Government have sought to achieve. We want every European country’s economy, whether in or out of the euro, to be strong and stable. Crucially, we believe that it is not in our country’s long-term interests to be permanently liable for bailing out the eurozone. 

That is why we supported the creation of the permanent crisis resolution mechanism, which ensures that the euro area’s responsibilities are absolutely clear. That has been achieved, and in 2013 the European stability mechanism will come into effect. It will support euro area countries and be funded only by them. They are the only countries that will be required to support the European stability mechanism. 

In shaping the debate on that mechanism, we had clear priorities. First—this is the point alluded to by my hon. Friend the Member for Stone—we had to ensure that there was no transfer of powers from the UK to the EU. We would never have accepted such a transfer. Therefore, the treaty change applies only to euro area member states. There is no transfer of power or competence from the UK to Brussels under this treaty change. 

That judgment will not be for Ministers alone. If, as we expect, the treaty change is agreed at the European Council in March, it will be ratified in accordance with the process set out in the Government’s European Union Bill. Ministers will need to make a statement explaining why the treaty change does not transfer power or competence from the UK to Brussels, and Parliament will need to pass primary legislation before the UK can ratify that change. 

The permanent mechanism puts no obligation—legal or political—on the UK to contribute to it, either directly or indirectly via our contributions to the EU budget. Importantly, although article 122(2) was used on 9 May to create a temporary funding mechanism, the new permanent ESM should be clearly defined as a euro-area mechanism and article 122 should not be used again for such a purpose. 

Our view is that once the permanent mechanism is in place in 2013, the EU financial stability mechanism that it replaces has to be permanently extinguished. Therefore we ensured that the recitals—the preamble—to the current draft decision by Heads of State and Government at the December European Council stated that article 122 

“will no longer be needed” 

and “should not be used” to ensure financial stability for the euro-area as a whole once the permanent mechanism is in place. Some would prefer to keep the EFSM on ice so that it can be reactivated in future. We did not accept that argument, so we secured agreement that there would be no EFSM mark 2. The existing EFSM, and therefore UK liability for bailing out the eurozone, will end when the new arrangements take effect in 2013. 

We are not members of the euro and it is not our responsibility to deal with all the euro-area’s problems, but the euro-area is our neighbourhood and it is clearly in the UK’s economic interests to live in a stable and prosperous neighbourhood. The EFSM was created at the height of the Greek crisis. Markets were increasingly questioning the EU’s response to the situation. Indeed, there were fears for the stability of the entire euro-area, and the risk of contagion was real and dangerous. European Finance Ministers decided to create a broader package to restore confidence and stability. ECOFIN agreed to establish the EFSM and, at the same time, euro-area Finance Ministers agreed to create the European financial stability facility, which is backed entirely by euro-area countries and does not create any liability for the UK. 

Kelvin Hopkins:  We hear from Members on both sides of the House about the importance of the eurozone’s survival. The fact is that we have a massive trade deficit with the euro-area, and we would really like the eurozone to grow faster. The euro constrains growth. If the euro-area grew faster, it would buy more of our exports, so we would have a better trade balance if the euro were deconstructed. 

Mr Hoban:  I am not going to get into whether the euro can be deconstructed, but I agree with the hon. Gentleman on one point: it is better for Britain for the euro-area to grow so that we can trade more with it. That is one reason why we have a vested interest in the stability of the euro-area, and that, in part, underpinned our judgment on extending a bilateral loan to Ireland. It is in our interests for it grow, which is why we have engaged in things such as the Van Rompuy taskforce. It is an important feature that wherever we are in the debate on Europe, we all agree that a growing Europe is a bigger market for our goods and services, and a better market for jobs and wealth. 

  Mr Cash: The problem with the Minister’s argument is that our balance of payments for that area between 1999 and 2009 was minus-£5 billion overall, whereas we are plus-£11 billion for the rest of the world. The

difficulty is that we are seeking to grow out of a declining, low-growth system that is incapable due to the rules applied and the manner in which it operates. 

Mr Hoban:  I am in danger of being dragged by my hon. Friend down a route that you will not permit me to travel, Mr Williams. However, I can say that one of our objectives in negotiations—I see this particularly in discussions about financial regulation—is to ensure that regulations are designed to help Europe grow, not to condemn it to low growth rates. 

I shall move on to the process. The EFSM was created in exceptionally turbulent conditions before the Government took office. Cabinet Office protocol was followed during its creation, and the EFSM was agreed at ECOFIN by qualified majority voting. There was consensus between the parties about the process, but not necessarily about the outcome. It was a matter for the previous Chancellor to decide—he was the man occupying the office at the time. 

My hon. Friend the Member for Stone and the hon. Member for Luton North have articulated concerns about the use of article 122. The EFSM was created following agreement by a qualified majority of member states at the ECOFIN meeting on 9 May 2010. The terms of the mechanism are set out in EU Council regulation 407/2010, and it is compatible with the treaty on the functioning of the European Union, article 122(2) of which states: 

“Where a Member State is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, acting by a qualified majority on a proposal from the Commission, may grant, under certain conditions, Community financial assistance to the Member State concerned.” 

The Council decided that, in these circumstances, those criteria applied. 

The agreement we have reached on the ESM ensures that article 122 will never again be used for that purpose. As the Prime Minister said, we have a good “belt and braces” approach—a no need, no use approach. The use of article 122 ever again is ruled out in such circumstances. In the ESM, we have secured a stabilisation mechanism that better meets the needs of the euro-area and the UK, but until the ESM comes into force—in 2013 at the very latest—we still have to deal with the previous Government’s legacy: the EFSM. 

I regret that, and I regret that the need to create and announce a mechanism quickly meant that we were forced to override parliamentary scrutiny in the case of the EFSM. The Government take the opinion of the European Scrutiny Committee very seriously, but these were exceptional circumstances. In those two or three months, Treasury Ministers were signing one explanatory memorandum a day to send to the European Scrutiny Committee, such was the flow of European regulation across the desks. 

Notwithstanding those very important issues, the EFSM has provided rapid and practical support to member states that badly needed it, and it has been a considerable factor in obtaining economic stability. It is worth remembering that the EFSM is funded by borrowing from capital markets, and it is only in the event that a beneficiary member state defaults that the EU budget, and so the UK, will be called upon. This is not a liability for the UK; it is a contingent liability. 

Looking ahead to the ESM, we have a mechanism that will fulfil that function more effectively. Euro-area states will contribute to addressing euro-area problems. The UK should be—and is—a good neighbour to the euro-area, but we are not in the euro, and that is how things should remain. 

Question put and agreed to.  

Resolved,  

That the Committee takes note of European Union Document No. 9606/10, relating to a Council Regulation establishing a European financial stabilisation mechanism, and European Union

Document No. 12119/10, relating to a draft amending budget No. 7 to the General Budget 2010—Statement of expenditure by Section—Section III—Commission; supports the Government's view that whilst it is in the interests of all Member States to support a stable and fully functioning euro area, financial assistance for euro area Member States should primarily be provided by other euro area Member States; and supports the Government's position that the United Kingdom should not be required to contribute to the European Stability Mechanism that will permanently replace both the European Financial Stability Mechanism and the European Financial Stability Facility. 

6.17 pm 

Committee rose.