Financial Assistance to Ireland and Portugal
The Committee consisted of the following Members:
† Dakin, Nic (Scunthorpe) (Lab)
† Elliott, Julie (Sunderland Central) (Lab)
† Hoban, Mr Mark (Financial Secretary to the Treasury)
† Leslie, Chris (Nottingham East) (Lab/Co-op)
Love, Mr Andrew (Edmonton) (Lab/Co-op)
† Moon, Mrs Madeleine (Bridgend) (Lab)
† Phillips, Stephen (Sleaford and North Hykeham) (Con)
† Rudd, Amber (Hastings and Rye) (Con)
† Ruffley, Mr David (Bury St Edmunds) (Con)
† Sharma, Alok (Reading West) (Con)
† Williams, Stephen (Bristol West) (LD)
Wilson, Sammy (East Antrim) (DUP)
† Wright, Jeremy (Lord Commissioner of Her Majesty's Treasury)
Sarah Thatcher, Committee Clerk
† attended the Committee
The following also attended ( Standing Order No. 119(6) ) :
European Committee B
Monday 10 October 2011
[Miss Anne McI ntosh in the Chair]
Financial Assistance to Ireland and Portugal
[Relevant Documents: European Union Documents Nos. 14331/11 and 14332/11.]
4.30 pm
The Chair: Does anyone from the European Scrutiny Committee wish to make a statement?
Stephen Phillips (Sleaford and North Hykeham) (Con): It may be of assistance if I take a few moments to explain the background to the documents before the Committee, and the reason why they were recommended for debate by the European Scrutiny Committee.
In May 2010, the European Council adopted a regulation to establish a European financial stabilisation mechanism—the so-called EFSM—to give financial assistance to member states in the form of loans or credit lines raised from capital markets or financial institutions, guaranteed by the EU budget. Financial assistance would be granted by ECOFIN to a member state on the basis of the programme of support drawn up by the European Commission and the International Monetary Fund. At the same time and additionally, a voluntary inter-governmental special purpose vehicle, known as the European financial stabilisation facility—the EFSF—was established by and for eurozone member states.
In May 2011, the Commission proposed and the Council adopted a decision, as in the first and second of the documents before the Committee, giving financial assistance from the EU of up to €26 billion through the EFSM to Portugal following the deterioration in that country’s public finances. The EFSM loan is part of the EU support package for Portugal only, worth up to €52 billion in total, which includes €26 billion from the EFSF and complementary IMF financing of 23.7 billion in special drawing rights, which equates to approximately £23.2 billion. The decision sets out the background, scale, timeline and conditions attached to the loan.
In December 2010, the Council adopted a further decision giving EU financial assistance of up to €22.5 billion through the EFSM to Ireland, following the deterioration in that country’s public finances. The EFSM loan is part of the total support package from Ireland’s EU partners of up to €45 billion, which includes €17.7 billion from the EFSF and bilateral loans of €4.8 billion from the UK, Sweden and Denmark. The EU package complements IMF financing of 19.5 billion in special drawing rights, which is this case amounts to about £19.9 billion, and is supplemented by a contribution of €17.5 billion by Ireland itself.
In May 2011, the Council adopted a decision—the third document before the Committee—which is a follow-up to the December 2010 decision. It outlines developments in Ireland, reflecting the first review of programme implementation conducted by the Commission, the IMF and the European Central Bank. In light of those
developments, including the change of Government, the decision amends some of the economic policy conditions, so that the programme reflects the changed situation. The European Scrutiny Committee recommended this debate so that members of the Committee may examine those uses of the EFSM.4.34 pm
The Financial Secretary to the Treasury (Mr Mark Hoban): Today we are debating decisions on EU financial assistance to Ireland and Portugal, which I will cover in turn.
As my hon. and learned Friend the Member for Sleaford and North Hykeham said, in November 2010 EU Finance Ministers agreed a €85 billion financial assistance programme for Ireland. Assistance is subject to strict policy conditionality and regular reviews by the Commission, IMF and ECB, which monitor implementation of the programme. As part of that process, the conditions attached to the programme are often revised to reflect new developments or to ensure that the programme remains on track. The document we are debating today amends the original decision, granting financial assistance to Ireland to reflect those changes.
I can reassure hon. Members that the amendments do not in any way weaken the policy conditions attached to the programme. This House has a particular interest in the matter, because as part of that package the UK agreed to provide a bilateral loan of £3.2 billion. By offering Ireland a bilateral loan, Britain is recognising the important economic relationship between Britain and Ireland. Ireland is the UK’s closest neighbour and an important international partner. The Government’s decisive action to bring our deficit under control has allowed us to be part of the solution, rather than part of the problem, and provide a bilateral loan to Ireland.
Let me now turn to Portugal and the two other documents we are discussing today: the draft and the final versions of the decision to grant EU financial assistance to Portugal. In May, EU Finance Ministers agreed a €78 billion financial assistance programme for Portugal to secure financial stability in the euro area and the EU as a whole. Again, the package for Portugal is accompanied by strict policy conditionality with the measures focused on deficit reduction, structural reform and the repairing of Portugal’s banking system. The conditions, together with the financial terms under which assistance is granted, are outlined in the documents we are discussing today.
Let me quickly mention how this assistance affects our public finances. Any liabilities for the UK resulting from loans to Ireland and Portugal from the IMF or through the EFSM are contingent liabilities. They will only impact on public finances if the country in receipt permanently defaults on its repayments.
Members may also be aware that Ireland and Portugal have successfully completed further reviews under their respective programmes, which we may discuss at a future date. Both the Irish and Portuguese Governments have been making some difficult decisions to bring their economies back towards a sustainable path. It is important that they continue to implement their adjustment programmes in a strong and decisive manner.
As we begin the debate, I want to be absolutely clear that responsibility for sorting out the problems in the euro area ultimately rests with euro-area Governments. We are not members of the euro, and we will not join during the lifetime of this Parliament, but no one should be under any misapprehension about the importance of the euro area to the UK economy. A strong euro area means a growing market for our goods and services; a weaker euro area puts at risk jobs and businesses in our constituencies. It is in our interest that the economies of Ireland and Portugal are strong and that their banking sectors are stable.
The Chair: We now have until 5.30 pm for questions to the Minister. I remind Members that questions should be brief and that it is open to them, subject to my discretion, to ask related supplementary questions.
Chris Leslie (Nottingham East) (Lab/Co-op): Good afternoon, Miss McIntosh. While I welcome the choice of discussion by the European Scrutiny Committee, it is a matter of slight exasperation and frustration that it is taking place at exactly the same time as a eurozone statement from the Chancellor, so I will try to be as brief as I can. I have four questions for the Minister and if it is convenient for the Committee, I will ask all four at this point, which may be useful in expediting the sitting.
First, the Minister helpfully gave us an update on the changes that the Republic of Ireland has been adopting, and we will no doubt come to debate those at another time. I understand that the UK’s bilateral loan was some £3.2 billion, the tranches of which are due to start once the third review of the IMF programme has been completed. Will the Minister give us a sense of where we are in the programme of the IMF reviews? So that we can get a sense of when UK involvement in that bilateral arrangement with Ireland will actually start, what is the likely time scale for the completion of that third review?
More specifically on the support for Ireland from the various funds—the EFSF and the EFSM—I understand that €19.5 billion of the Irish package came from the IMF, €4.8 billion or £3.2 billion came from the UK and similar amounts came from Sweden and Denmark. However, I want to ask the Minister about the ratio between the support from the EFSF and from the EFSM, which is the other temporary fund. The EFSF is a fund of €440 billion across Europe and it contributed €17.7 billion to the Irish package of support, but the EFSM, which involves the UK and is much smaller at only €60 billion, contributed €22.5 billion. Will the Minister explain why the EFSM was called upon more for the Irish package than the EFSF, even though the EFSF is a larger fund? Was there a particular reason for that? If the Minister will elaborate, that would be useful.
Secondly, regarding Portugal, the levels of support from the EFSM, the EFSF and the IMF were all around €26 billion. Again, it seems slightly unusual that, even though the EFSM, through which Britain is exposed, is so small, the amount given is of the same proportion as the two other larger funds. What did the UK say in those negotiations about the proportions being dedicated from each of those funds? Did the UK Government express concern that the EFSM, in which the UK has a very clear interest, was being called on
disproportionately? Why was the EFSM used so disproportionately in that way? Were any arguments deployed for a fairer split between those funds?My third question is on a matter separate from those arrangements. It is more a contemporary question about the EU-wide stress tests on the banking system—commented on by the Prime Minister in today’s Financial Times—which are related to the eurozone crisis and the situation in Ireland and Portugal. There could clearly be consequences for UK banks from the fresh round of EU bank stress tests. Does the Treasury have any contingency plans for further capitalisation of the Royal Bank of Scotland? What plans have been discussed with RBS? If there were a need for further RBS capitalisation, from which contingency fund—which Treasury fund—would that support come?
The Chair: Order. Could we pause there and allow the Minister time to reply? Then I will come back to you.
Chris Leslie: I have one more brief question. I will be happy to do that.
Mr Hoban: I am grateful to the hon. Gentleman for his questions. Let me deal with the first one about the disbursement of the bilateral loan to Ireland. It was agreed that the Irish could apply to draw down their loan on the successful completion of the IMF’s third review. That was completed on 2 September, and officials are working on the details prior to disbursement of the first tranche of that loan. I expect to be able to make a statement shortly to the House regarding that.
On the second question, about how the packages for Portugal and Ireland were constructed, a third was from the IMF, a third was through the EFSM, and for Portugal a third was through the EFSF. In Ireland, the tranche from the EFSF and the bilateral loans make up a third; so, the same sort of structure was agreed for each. That was discussed during structuring negotiations and it was felt to be a reasonable spread. Hon. Members will recognise that the amount in the EFSM is capped at €60 billion, so the extent to which that is used up does not mean that the mechanism can be topped up at a later stage. There is a judgment to be made about where that support should come from.
The third question is on a crucial area. We all recognise, as we have seen in the case of Dexia, that banks need to have enough capital to withstand the current stresses they are under. A stress test exercise carried out earlier this year is being reviewed by the European Banking Authority, one of the three supervisory authorities. We recognise the importance of that—a point made by the Prime Minister in this morning’s Financial Times, to which the hon. Gentleman alluded. My right hon. Friend the Chancellor will make the same point on the Floor of the House: that it is important that, where banks need more capital, it is available. How that is funded—by the private sector, by individual Governments or by some European facility—is a matter for discussion and debate. It would be inappropriate to talk about individual banks, but UK banks have a significantly stronger capital level and have holdings of higher quality liquidity than they did some time ago, which puts them in a much stronger position during this crisis. We need to keep the situation under review.
Chris Leslie: I am grateful for those answers, which shed some light on the disproportionate call on the fund to which the UK is liable.
My fourth question is on the capitalisation of European banks in Ireland, Portugal and elsewhere in the EU. There has been a suggestion that the European Investment Bank might be involved in, or called upon to support, recapitalisation efforts. The UK is a 16% shareholder in the European Investment Bank and provides some £32 billion of capital. Will the Minister take this opportunity to state the UK Government’s attitude to the European Investment Bank being drawn into any eurozone banking recapitalisation efforts?
Mr Hoban: Several ideas are floating around at the moment about where money could be found to capitalise banks in need of more capital. There are matters to be debated, and one of our concerns is about the use of the EIB. The EIB provides important finance to investment projects in eastern Europe, and it is seen as one of the most successful European institutions. The extent to which the EIB’s resources might be used to recapitalise banks would squeeze the money available for such projects, but some people have floated that idea. It is important for European member states to recognise the need to recapitalise banks, which will provide the strength that the banks need to withstand this crisis and put them in a position to lend to businesses. That should be our main focus, and there needs to be some thought about the sources of that capital. I am aware of the idea about the EIB, but I am equally aware that the EIB performs a valuable role. We would be reluctant to see that role squeezed out.
Stephen Phillips: I have three questions, but they are briefer than those of the hon. Member for Nottingham East. I shall pose them one at a time. First, will the Minister indicate what security the United Kingdom has for its liabilities under these documents, both contingent and actual?
Mr Hoban: As we discussed on the Floor of the House during our consideration of the Bill to authorise the loans to Ireland, the loans broadly rank alongside those of the IMF and other international creditors and have such preferred status. It is worth pointing out that the IMF has never failed to have its loans repaid, which is a good sign. We should take comfort from that. There is some debate in certain eurozone countries about the requirement for collateral on disbursements to Greece, but that does not apply to funds from either the IMF or the EFSM.
Stephen Phillips: I am grateful for the Minister’s answer. I think the answer is, “None,” but we can take some solace from the IMF’s having been repaid previously.
I will limit myself to one further question. Is it the Government’s view that this assistance to both Ireland and Portugal is enough to stop the rot, or is either Ireland or Portugal likely to come back, under these or other mechanisms, looking for more money to stabilise their excessive deficits?
Mr Hoban: On the financial assistance package for Ireland, strict policy conditionality was tied to those loans. There is a regular review of how the Irish Government have complied with that conditionality. Ireland has
gone through its third such review, which was carried out by the troika—the ECB, the EU and the IMF. Although some minor adjustments have been made to the programme, they are not in any way significant and do not cast doubt on Ireland’s ability to repay this debt. The evidence to date on Ireland has been positive, and the expectation is that the Irish economy will grow this year and in 2012. That is a positive sign.Portugal has completed only its first review under this programme—an explanatory memorandum detailing that is currently with the European Scrutiny Committee—but at the moment there are no signs of any need for further measures.
Motion made, and Question proposed,
That the Committee takes note of European Union Documents No. 9776/11 relating to a Draft Council implementing Decision on granting Union financial assistance to Portugal, No. 9780/2/11, relating to a Council implementing Decision on granting Union financial assistance to Portugal, and No. 9777/11 relating to a draft Council implementing Decision amending implementing Decision 2011/77/EU of 7 December 2010 on granting Union financial assistance to Ireland; notes the importance of financial stability in the Euro Area for the UK; welcomes the recent steps being taken by the Governments of Ireland and Portugal to promote growth and return their economies to a sustainable path; welcomes the Government's success in securing agreement that the European Financial Stabilisation Mechanism will cease to exist once the permanent, Euro Area-only, European Stability Mechanism becomes operational in July 2013; and that Article 122(2) of the Treaty on the Functioning of the EU, the basis for the emergency arrangements, will no longer be needed for such purposes.—(Mr Hoban.)
4.52 pm
Chris Leslie: I am grateful to the Minister for his brevity, which I will try to match. It is in the British national interest for the Portuguese and the Irish economies to be successful, and for their financial sectors to be stable. Indeed, the growth and stability of the eurozone area as a whole are important for Britain, as no doubt others are debating on the Floor of the House right now. The motion rightly praises recent steps that the Irish and Portuguese Governments have taken
“to promote growth and return their economies to a sustainable path”,
but although an emphasis on growth is important, it must be backed up by strong policy measures and support. For Ireland and Portugal, austerity measures alone always risk worsening economic stagnation and domestic revenue positions, and creating long-term resentment about the conditions that are imposed on the countries. Austerity measures also put at risk the ability of those countries to support the repayment of the bail-out loans. Although we need a balanced approach to fiscal policy, both in the UK and in Europe, we also have to make sure that growth is supported.
As we know, in the UK we are in a difficult position regarding growth. It would be better if the UK Government could show other countries by example that a pro-growth approach is also a good way of repairing their national balance sheets. Collective austerity alone will not work. If all big economies curtail demand, there will be no export-led route out of their difficulties for the countries that need to take urgent action on their deficits. As the IMF has warned, slamming on the brakes too quickly will hurt economic recovery.
In framing this motion, the Minister was doing well until the sentence in which the Government slightly overclaim the UK’s negotiating success, pretending that the UK Government were leading the way on this issue, when in reality they have been neglecting some of Britain’s key national interests. It is a rather vain overstatement of their role to claim, as the motion does,
“the Government’s success in securing agreement that the European Financial Stabilisation Mechanism will cease to exist once the permanent, Euro Area-only, European Stability Mechanism becomes operational in July 2013”.
Even the Prime Minister had to acknowledge in the Financial Times today that there has been much foot-dragging in the move towards a permanent bail-out fund. It is extremely lamentable and regrettable that the replacement of the temporary EFSF and the EFSM will not take place until July 2013. Frankly, a permanent European stability mechanism should come into force long before mid-2013. No success should be trumpeted, therefore, in this motion. It is a failure of the Government’s diplomatic and negotiating stance. We should have been in a position whereby negotiations pushed for the creation of a permanent, settled and significant EFSM fund far sooner than it looks as though one will be created. Ministers are only now waking up to the need for that to be pressed successfully. Although I can go along with most of the motion, the self-congratulatory nature of its drafting leaves a slightly bad taste in my mouth.
4.56 pm
Mr Hoban: That was commendably brief. The hon. Gentleman’s central point was on the introduction of the permanent mechanism—the EFSM. At this stage, even the changes to the EFSF have still not been ratified by all eurozone member states, and that indicates the challenges of trying to get such mechanisms in place.
The hon. Gentleman should welcome the fact that the Government have successfully ensured that the UK is outside the permanent mechanism. We will not be required to contribute to the EFSM, and there is no obligation for countries outside the eurozone to do so. That is a tribute to our negotiating success in Europe. I am sure that many members in the eurozone would rather that the UK was included to help share the load. However, it is not right for the UK taxpayer to do that, so negotiating for the UK to be outside the mechanism was a success, as was ensuring beyond doubt that the article of the European treaty that was used to justify the creation of the EFSM can no longer be used in the same way again. That is a further safeguard of the interests of this country and its taxpayers. There is a clear requirement to have the permanent mechanism in place. We all want that to happen soon, but we have to deal with realities rather than wish lists, and we are addressing the reality of the European process.
It is important that the Irish and Portuguese Governments remain on track with their programmes. Any Government implementing fiscal consolidation measures should consider measures that help promote growth, and those programmes will include them. That is particularly the case with Portugal—and in Greece, although it is not the subject of today’s debate—where there are measures that liberalise the economy and encourage the promotion of growth. We should not see pro-growth policies and fiscal consolidation as mutually exclusive. They should go hand in hand, as in this country.
We are in a position to help—for example, in the case of Ireland—because we have taken tough fiscal decisions, as well as action to tackle our deficit, and because that credible deficit reduction plan has yielded benefits in terms of market rates, and in terms of narrowing the spread between German Bunds and UK gilts. People recognise that the UK economy is a much better place as a consequence of our action. Although Standard & Poor’s downgraded the US from a triple A rating, last week, it reconfirmed the UK’s triple A rating, and warned that our rating was at risk if we listened to siren voices from the Opposition Benches calling for us to slacken the pace on fiscal consolidation—[ Interruption. ] We are not going to take any lectures from the hon. Member for Nottingham East or his lone supporter, the hon. Member for Scunthorpe, whom I welcome to his role as a Whip. We are following the right path. Those countries with high deficits or high levels of debt need to take the right steps to consolidate their fiscal position. If we had not done so, we would have been at much greater risk of being in the eye of the storm, as the Greek, Irish and Portuguese economies have been.
Stephen Phillips: Does my hon. Friend agree that the instances of Portugal and Ireland demonstrate the fallacy of borrowing even more money to get out of this crisis, as proposed by the Opposition, because all we see here is that borrowing more money eventually leads to someone else having to bail them out?
Mr Hoban: Indeed. My hon. Friend is absolutely right. These are the challenges that those countries face. If they had taken strong action to tackle their deficits and if they had been ahead of the curve in the way that the UK was, they might have been in a stronger position to withstand some of the challenges that they face now. As every day goes by, the wisdom of our actions when we came into government is confirmed. I do not think that any of us would want to change our current position to that of eurozone member states. Those actions have helped this country face the economic storms that are around us.
Of course, robust action needs to be taken in the eurozone to ring-fence the Greek economy and to recapitalise banks because we know that the problems we are seeing in the eurozone have a direct impact here in the UK. There are jobs in our constituencies that are dependent upon a strong and stable euro area. That is why we are encouraging the eurozone to take prompt action to tackle these problems, and why I am keen to make sure that Portugal and Ireland carry through their programmes and return to a path of fiscal responsibility, with their economies returning to a path of growth.
That the Committee takes note of European Union Documents No. 9776/11 relating to a Draft Council implementing Decision on granting Union financial assistance to Portugal, No. 9780/2/11, relating to a Council implementing Decision on granting Union financial assistance to Portugal, and No. 9777/11 relating to a draft Council implementing Decision amending implementing Decision 2011/77/EU of 7 December 2010 on granting Union financial assistance to Ireland; notes the importance of financial stability in the Euro Area for the UK; welcomes the recent steps being taken by the Governments of Ireland and Portugal to
promote growth and return their economies to a sustainable path; welcomes the Government's success in securing agreement that the European Financial Stabilisation Mechanism will cease to exist once the permanent, Euro Area-only, European Stability Mechanism becomes operational in July 2013; and that Article 122(2) of the Treaty on the Functioning of the EU, the basis for the emergency arrangements, will no longer be needed for such purposes.