To be published as HC 1817-iii

House of COMMONS



European Scrutiny Committee

Reinforcing the eurozone

Thursday 23 February 2012


Evidence heard in Public Questions 125 - 191



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Oral Evidence

Taken before the European Scrutiny Committee

on Thursday 23 February 2012

Members present:

Mr William Cash (Chair)

Mr James Clappison

Michael Connarty

Kelvin Hopkins

Chris Kelly

Penny Mordaunt

Jacob Rees-Mogg

Henry Smith


Examination of Witnesses

Witnesses: Rt Hon David Lidington, Minister for Europe, Ivan Smyth, Legal Counsellor with Joint Responsibility for the EU and Wider Europe, Foreign and Commonwealth Office, Marc Holland, Deputy Head, Europe Directorate, Foreign and Commonwealth Office, and Thomas Barry, Deputy Head, Europe Directorate, Foreign and Commonwealth Office, gave evidence.

Q125 Chair: Minister, thank you very much for coming today. I would just like to make one brief comment before we begin. We have on a number of occasions asked the Foreign Secretary himself to come, without any disrespect to you; I hope you understand that, Minister. The request to have the Foreign Secretary himself is because of the overarching importance of this: the precedent; the fact is that the veto has been used for the first time; and the enormous implications not only for the United Kingdom but also for Europe as a whole, in relation to the rule of law, some of which we will be examining as we go through the evidence and our crossexamination of you. We were disturbed, because it was a unanimous request from the Committee that the Foreign Secretary should come, and we remain concerned. We were glad to note that he was prepared to come on 27 March, albeit for a brief examination, but we do feel that the overarching question is of such importance, both legally and in terms of the impact politically on the United Kingdom, which after all is our function under the standing orders, that we really continue to believe that it would have been preferable, without any disrespect to you, for the Foreign Secretary to have come to enable us to ask him these questions. But we are very glad that you have come, and I will now move on to the first question.

We wrote to you on 12 January announcing that we would be opening an inquiry into the eurozone crisis. In that letter, we asked you to say what single market and financial services matters the Government was seeking to safeguard by exercising the veto. Your reply to us was, "I am afraid that we do not publish informal draft texts proposed during the negotiations." Now, we did not ask for the draft texts; we asked what safeguards the Government was providing for the United Kingdom, which is quite a different question. Do you think that what you gave us was a helpful reply?

Mr Lidington: It was the reply that successive Governments have given with regard to negotiating texts, as you know. Chairman, before I start, I am neglectful for not having introduced my officials. I should just, for the record, say I am accompanied by Mr Thomas Barry and Mr Marc Holland from our Europe Directorate, and by Ivan Smyth from our legal advisers.

To return to your question, Chairman, since that exchange of correspondence I am glad to say that there has been a discussion within the Government. I do not think I am breaking any great secrets to say this is partly because of the concerns and questions expressed both by this Committee and by a number of other Select Committees of both Houses of Parliament. The outcome of that discussion has been that Ministers have agreed to release greater detail of what it was that the Prime Minister was seeking on 9 December. What we were seeking then were safeguards for the position of the United Kingdom, our interests and the interests in particular of the single European market, if the proposed new Treaty were incorporated as an addition to the Treaty of Lisbon.

To provide the Committee with a little bit more detail, we wanted to see a general provision in the text of any amendment to the Lisbon Treaty that would, in terms, safeguard the integrity of the single market. We also asked for a number of more specific things in respect of the single market in financial services. Our reasons for so doing were that there is a clear relationship between aspects of financial services regulation, in particular banking regulation, and fiscal policy. The purpose of the proposed Treaty amendments in December was to give greater priority within the European treaties to the objective of securing the fiscal integration of the eurozone. We were also concerned, when we approached the European Council in December, about the fact that there were a number of specific financial services measures that we felt were threatening the integrity of the single market in order to safeguard particular interests of members of the eurozone, the most obvious example of this being the European Central Bank’s location rules on clearing houses, which, as the Committee knows, the British Government is challenging before the European Court of Justice as a breach of single market regulations.

When it comes to what specifically was asked on financial services, as the Chancellor has said, there were basically four things that we asked for. We wanted to see the principle of nondiscrimination on the grounds of currency embedded in the treaties and so governing any future financial services regulation. Secondly, we wanted assurances written into the treaties on the voting procedure for transferring supervisory powers to the European supervisory authorities. Third, we wanted comparable assurances on voting arrangements on financial levies and, fourth, we wanted the freedom for Member States to have domestic stability regimes that went further than European Union minimum standards. That fourth point sprang from our concern that what we had been seeing in the discussions on specific EU regulations was a wateringdown of the Basel III commitments on banking ratios, which at the time all parties to the Basel negotiations had agreed should be applied internationally.

I would also make clear to the Committee finally, Chairman, that we did not seek a UKspecific optout. The safeguards on financial services that we sought in December were, I believe, perfectly reasonable and they were safeguards that would have applied to the single market as a whole and to every Member State of the European Union.

Q126 Chair: Of course you appreciate, Mr Lidington, that we wanted this answer in January. We are glad you have given it today, but we did not want it today; we wanted it in January. Can you explain why it is that you and the Foreign Office were not prepared to cooperate then?

Mr Lidington: I cannot go into detail, and the Committee would not expect me to be willing to go into detail, about internal discussions that took place within Government. The position that was expressed in the letter that I sent to you in January was the position of the Government at that time. As the Government reflected upon the representations made by a number of parliamentary Committees, the decision was taken, after collective discussion, that more information should be made available.

Chair: I think we have got the message.

Q127 Mr Clappison: Minister, thank you very much. I think that was an excellent answer, which was very comprehensive and showed tremendous grasp of the details but, as the Chairman has just said, we would have appreciated that before we embarked on our inquiry, not least because it would have given us the opportunity to ask some of the expert witnesses we have had along to the inquiry about the points that you have just very properly made in your answer now. The answer to the Chairman’s letter, which you gave us back in January, was very short; it was not much more than a page long. It looks like an answer to a question that was not asked, and no answers to the questions that were asked. I appreciate you have a lot on your plate, but do you think it would be possible to go back to your officials, who presumably wrote this letter, and for you to go through it with them? Could you possibly have a look at the answer you have given us now, go through it with them and see if they could be a bit more helpful in future, if this was to crop up again?

Mr Lidington: I appreciate both the tone in which Mr Clappison posed his question and his understandable wish for there to be more information made available on this and future occasions. I would say, while of course my officials as always are responsible for drafting letters to put before me, it is Ministers who take responsibility for what they sign and send out in their names. The decision to respond, not just to this Committee but to other Parliamentary inquiries, about the detail of what was sought on 9 December was a decision made collectively by Ministers in Government, not by officials. The change that has subsequently taken place was a consequence of decisions by Ministers after collective discussion, too.

Q128 Mr Clappison: None of that would preclude you from having a word with your officials.

Mr Lidington: I talk to my officials constantly, and I am sure we will bear closely in mind the comments Mr Clappison has made.

Chair: James, did you have another question that you wanted to ask relating to that same letter, regarding the commentary on the latest version of the draft?

Q129 Mr Clappison: Yes, we did ask you to provide a commentary on the latest version of the draft international agreement before our meeting on 25 January. Do you think that your reply of 24 January met our request?

Mr Lidington: We had concerns about the point at which it was right to disclose what were negotiating texts being negotiated by other parties-we were present at the meetings, but we had taken the decision to stay outside the negotiations-and which had been supplied to us in what were expressly termed confidential terms. Again, after discussion, the decision was taken that, particularly since versions of these documents had been put into the public domain-in Brussels and probably some other Member State capitals-it was frankly ludicrous for us to refuse to withhold them from our Committees. The decision was then taken to provide this and other Committees of the House with copies of the drafts, including the eventual final draft, when that came out.

Q130 Chair: Of course you could have given us the answer you have just given at that time, but I think we now move on to the next question relating to the same letter. We now move on to the question that we put asking for the commentary to include the Government’s views of the legality of the role of the European Court and the Commission in the agreement. Bearing in mind that this letter was well before the Council meeting on 31 January, why did you not comment on this when you were asked?

Mr Lidington: What was happening in January was a negotiation between a number of other countries, and it was the early stage of those negotiations. I do not think that it would be terribly helpful or sensible for British Ministers to offer a running commentary on a document that itself was the subject of negotiation and discussion among those countries that were aiming to be party to it. It is possible to have a slightly more considered conversation on the text that they finally agreed, although even there I would add the rider that this is not a treaty to which the United Kingdom is a party or which binds the United Kingdom in any way.

Q131 Chair: You are not suggesting it does not affect us.

Mr Lidington: It is designed to help bring about stability in the eurozone. Instability of the eurozone is something that affects us, yes, and so any measure that is aimed at restoring stability to the eurozone has a potential impact upon the economy of the United Kingdom and, I would hope, a beneficial impact on the economy of the United Kingdom, but the Intergovernmental Treaty contains nothing within it that can bind the United Kingdom, because the United Kingdom is not a party to it.

Q132 Chair: On this legality issue, we know the Prime Minister has expressed his reservations with respect to its legality or legitimacy, particularly in the statement that he made when he came back from the Council meeting. Indeed, this is specifically referred to in the letter that you deposited in the library, I think last night, dated 22 February; it is Jon Cunliffe’s letter, which you arranged to be put in the library. It is addressed to Mr Corsepius, the SecretaryGeneral of the Council of the European Union, from Jon Cunliffe. It says that the United Kingdom "notes that the EU institutions must only be used outside the EU treaties with the consent of all Member States, and must respect the EU treaties". It then goes on to talk about matters that are "properly for discussion by all Member States in the EU context". It also goes on to say, "In view of the United Kingdom’s continuing concerns on these points," that is further to the letter of 10 January, "we must reserve our position on the proposed Treaty and its use of the institutions, in particular in Article 3(2), Article 7 and Article 8."

Now, given these reservations expressed repeatedly, both by the Prime Minister and in this letter, as regards your Department and the legal advice that you were receiving from that Department, it seems absolutely clear that you not only had severe reservations, but this matter would not have reached this pitch-this letter of 22 February being a most unusual letter, welcome as it may be-unprecedented I think in terms of the relationship between the UK and the EU in a matter of this kind. It is clear that you took very great steps to get the legal position properly examined and analysed. Furthermore, we had Professor Paul Craig, and you will have seen his evidence as well, one of the most pre-eminent lawyers in the country, as well as Martin Howe and others, who gave evidence to the Committee, all of which is on the website. There is a very clear picture, which is that there has been grave reservation, to the point of really disputing the basis on which this Treaty, this nonEU Treaty, has been composed. In those circumstances, it would not be surprising to discover that advice had been taken at the very highest level in the Government of the United Kingdom.

Against that background, could you explain, and if necessary ask Mr Smyth to speak on behalf of the Department’s legal department, whether you believe, in line with what Professor Craig and others have said, that effectively this Treaty is in breach of the rule of law with respect to the EU as a whole, for reasons that we will be examining later, particularly with respect to the use of the institutions? We regard this as a very important question and, if you would rather Mr Smyth answer it after you have had a shot at it yourself, I would be happy to hear what he has to say. How would you like to play it?

Mr Lidington: I will answer first. If Mr Smyth feels he wants to add to what I have said, then he is free to do so. First of all, Chairman, I want to just take a step back and, for the record, note that of course this Treaty is not yet in force. It has been signed but it has still to be ratified by those 25 countries that are party to it. We know they intend to ratify it-that is the avowed intention of their governments-but we do not yet know whether sufficient of those 25 will complete ratification for it to come into force on those countries that have so ratified. There is that element of uncertainty still.

Secondly, of course we support as a Government the intended objectives of this Treaty, which are economic in character and about trying to restore some stability to the eurozone. The argument that the German Government in particular has always put forward is that, if you construct some binding rules for the long term, that will give the international markets greater assurance about your commitment to bring finances under control in the short term. There is a debate to be had about how strong that argument is, but that is an argument that the Government of Germany in particular argues very forcefully. We do not want to stop our friends and neighbours in the eurozone from taking the action that they need to do to restore stability. We have said consistently, for many months now, that we do believe that the economic logic of having a single currency monetary policy and interest rate is that you move towards greater fiscal and economic integration as well.

Q133 Chair: I am sorry, Minister, but you are giving me an answer about the policy, which relates to the economic arguments. I am asking a question about the legality of the agreement and the end does not justify the means.

Mr Lidington: I want to come on to that, but I wanted to make it clear first, because that is an important consideration when the Government comes to judge where the British national interest lies. Now, of course it is open to any sovereign countries, whether they are inside or outside the European Union, in principle, to enter into treaties with each other that they then accept as binding on themselves under international law. In the case of European Union countries, of course there is a limit that is imposed on that freedom by the European Union treaties.

Q134 Chair: You agree it is about the rule of law?

Mr Lidington: No EU Member State is free to bind itself to agreements that breach the European Union treaties, which all have signed. When we come then from that point to look at the detail of what is in the Intergovernmental Treaty, a great deal of it is a set of undertakings by the parties to support particular measures to be brought forward under the existing European treaties and in accordance, therefore, with the procedures and practices of the European Union. Those aspects of the Treaty, in the terms, Chairman, that you have described, are perfectly acceptable. One can argue about the politics of them, but they amount to a promise by 25 countries that they want to support doing certain things under the European treaties. In those cases, the use of the European institutions is, by definition, already authorised, because we will be talking about a piece of secondary legislation brought forward in the normal manner by the Commission, under the European treaties, which would have to be agreed by all EU Member States under the appropriate voting procedures. The concerns that we have had, and the reason why we have reserved our legal position, are that there are elements of the Intergovernmental Treaty that give us some concern, lest they be used in the future either to set unwelcome precedents or to impinge upon the integrity of European law and the arrangements set out in the European treaties.

Q135 Chair: As it stands now, not just for the future? The future is important. But even in respect of this Treaty, would you not agree, in the light of what Professor Paul Craig has said, and in the light, no doubt, of the advice you have received, whether it is from the legal department or indeed from any other source, that there is a serious question to the point of your having to write a letter of such importance to the SecretaryGeneral, or for Sir Jon Cunliffe, on behalf of the Government, to write to the SecretaryGeneral of the Council in those terms?

Mr Lidington: The Cunliffe letter is the formal record of the position the Prime Minister made clear at the January European Council when the 25 countries signed the Intergovernmental Treaty. The Prime Minister said at that time that we were going to make clear our position in writing, and formally record that we were reserving our legal position then. He said at that time, in January, and Jon Cunliffe’s letter repeats, that the EU institutions can only be used outside the EU treaties with the consent of all Member States, and must respect the EU treaties and the responsibilities and rights that all share under those treaties. The Prime Minister said in January, and the letter now also reiterates, that the Treaty should not undermine the operation of the single market at 27. We said in January, and I would repeat again today, we do not want to hold up the eurozone from fighting a fire, from doing what is necessary to solve the crisis, as long as it does not damage our national interest, and that includes, critically, respecting the integrity of the European Union treaties, especially but not just as regards the single market.

Chair: Basically you are saying that it should not infringe the rule of law in the European Union. I would like to ask Mr Smith if he would carry through the next question.

Q136 Henry Smith: Chairman, thank you very much indeed. Minister, it is the case that, at the 31 January informal meeting of the European Council, as you say, the Prime Minister and the Foreign Secretary did say they had "a number of legal concerns on the use of the institutions" and that the UK could take legal action "if national interests are threatened". With that being the case, why did the Government not convey that to this Committee when it was requested to do so, at the time?

Mr Lidington: Are we talking about January?

Henry Smith: In January, when this Committee specifically asked.

Mr Lidington: The Government, in January, was looking to see what was going to happen in the negotiations on the Treaty. We came to a formal position expressed by the Prime Minister at the January European Council, when the final text of the Treaty had been agreed and the majority of Member States had signed it. It was at that moment, and not before, that we formally said that we are going to reserve our legal position. We had made clear all the way along, informally, the points that I have restated today about the role of the EU institutions within the treaties and the integrity of the single market.

Q137 Henry Smith: How do you think that reflects, if I may, on the aim often stated by you and the Foreign and Commonwealth Office that they have a commitment to parliamentary scrutiny over EU matters and other related European matters?

Mr Lidington: I do not resile from the statements I have made frequently in the past, about wanting to see the maximum possible transparency, but that always has to be weighed against the freedom of Governments to take part in diplomatic exchanges-it was not technically a negotiation but we are present at the confidential negotiations of others-and for those conversations to take place in private. One cannot simply have a running commentary on that kind of conversation.

Q138 Jacob Rees-Mogg: I just wanted to come in on the question you raised about the Treaty only being at the preagreed stage and it has to go through the ratification procedures. I wonder when the Government thinks it would be must helpful to our European partners to point out to them that the Treaty was unlawful, if that were the case. Would it be best to do it at an early stage, before it is agreed, or, so to speak, to blow the Treaty apart after it has been through its full ratification procedures?

Mr Lidington: We do not want to blow apart arrangements that are intended to have an economic effect that we believe would be beneficial for the United Kingdom, as well as for the European Union as a whole. We have therefore expressed our position in the way that we have now done, and said that, while we do not want to block our partners from undertaking these economic and political tasks, we also reserve our legal position very clearly in respect of certain aspects of this Treaty, particularly in regard to the proposed use of the institutions in certain Articles.

Q139 Jacob Rees-Mogg: You want, Minister, to veto but not to block?

Mr Lidington: We vetoed something different, which was an agreement on a European Union treaty, which would, at the point of ratification, then become binding on the United Kingdom and which would also, at that point, have begun over time to have influenced how the Commission and others set the priorities for the EU as a whole, balancing these new objectives of promoting the fiscal and economic integration of the eurozone against the previous Lisbon objectives, including the single market. It was having the importation of these new EU priorities into the treaties without the safeguards that we were seeking that led the Prime Minister to veto the proposal.

Q140 Jacob Rees-Mogg: What does "reserve our position" mean in the letter that has been sent?

Mr Lidington: It means what it says. It means that we have concerns about certain aspects of the Treaty, in respect of the proposed use of the institutions, but we do not want to stop our partners from getting on with the immediate firefighting task in hand, and it is in our interest as well as theirs that they succeed. We will watch very carefully what happens from now on, and we are ready to act if we believe that the institutions are being used in a way that is improper and harms our national interest, either now or in the future.

Q141 Jacob Rees-Mogg: In the interim, we would accept a treaty that is unlawful in EU law terms.

Mr Lidington: There is a treaty that 25 countries have chosen to sign and to agree among themselves. It has objectives that serve the United Kingdom’s national interests. We have the legal concerns that we have expressed; that is why we have reserved our position.

Q142 Michael Connarty: Minister, I think generally Mr ReesMogg is getting to the heart of the questions that would be asked by any sensible person outside of this arena, which does not necessarily accept the dances done by Ministers and Governments when they do not want to say what they really need to say. The question of whether this is an illegal arrangement or not is one that clearly is up for political debate. I would like to know how the Minister could expand on the question about reserving our position, the point made by Mr ReesMogg. Governments say, "We are doing this because we are doing it, because we think we should do it." What is the logic behind it? What is the problem with Article 3(2), which I have read? What is the problem with Article 7? What is the problem with Article 8? Is it only that the institutions are being used, which should only be used under EU treaties, for what is clearly not an EU treaty? Is that the heart of it?

Mr Lidington: I completely understand the point. Let me deal with those three, because Mr Connarty has put his finger on the three elements of the proposed use of institutions in the Intergovernmental Treaty that do cause us some concern. In the case of Article 3(2), we are talking here about the Commission’s role in proposing the principles underpinning the automatic correction mechanism. The question in our minds is whether that goes further than the powers and duties given to the Commission under the existing European Union treaties.

In respect of Article 7, first of all, on the reverse qualified majority voting mechanism, our concern is less with the content of this particular case, because we are not in the euro and, by virtue of our protocol, we are exempt from penalties and sanctions under the Stability and Growth Pact or excessive deficit procedures, than the potential this might have for a precedent possibly being set for the use of this mechanism in other areas of the European Union treaties.

In Article 8, our concerns centre on the possible role both of the Commission and of the European Court of Justice. Here we are talking about the role of the Commission to judge national budgets. The principle that we continue to assert is that we think EU institutions should only be used outside the EU treaties with the consent of all Member States, and any such use must respect the treaties, because it is the treaties that have primacy in any clash. With regard to the role of the European Court of Justice under Article 8, in part the answer there is the same as I have just given in respect of the Commission’s role under Article 8; it is about everybody having to agree to the institution operating outside the scope of the treaties, and that action in respect of the treaties, at all times.

Article 273 allows Member States to ask the institutions to act on their behalf in matters beyond the Treaty, but on the subject matter that is dealt with by the Treaty. There is nothing in the treaties that provides for a state’s obligation to write a deficit break into its law or constitution, so the question in our minds is if that takes the Court into new territory.

Q143 Michael Connarty: In judging the budgets rather than the legality of any country?

Mr Lidington: Yes.

Chair: We will now move on to the economic questions.

Q144 Kelvin Hopkins: Minister, there has been somewhat surprising unanimity in the oral evidence we have taken from economic commentators about the improbability of this Treaty doing much to resolve the eurozone crisis. We are hoping to examine this in detail with the Financial Secretary to the Treasury-that is next week-but meanwhile, what is your view of the relevance of the Treaty for the eurozone crisis?

Mr Lidington: I have never thought that new treaties were likely to be a silver bullet in solving the eurozone crisis. That view will not come as a shock to any of my ministerial counterparts around the Council table, because I have been saying it at General Affairs Councils frequently. One has to respect the fact that the eurozone countries are most directly concerned. It is Germany that has felt most strongly that there is a need for a treaty change or a new treaty to give additional strength and an additional legal basis to the action to integrate economies of the eurozone 17. Since it is Germany that is having to underwrite a lot of the financial support being given to other countries, and Germany has political and constitutional concerns of its own, I understand and sympathise with where the German Government is coming from. I appreciate they have an interest here.

Our judgment is that the key things for the eurozone are that, first of all, they complete the deal that they announced, first in July and then in October, where they came to deals to sort out the Greek debt, to recapitalise banks across the European Union and to provide a firewall of sufficient size to prevent contagion from one country-and it is no secret it is Greece that is in the spotlight-from spreading to other potentially vulnerable countries in the eurozone. Since the July and October meetings of the eurozone countries, there has been progress but, even now, the final details have not been implemented on any of those three aspects. The longer that time elapses without those deals being completed, the more market confidence inevitably is sapped. That is why it is important that the eurozone really does move rapidly forward to complete what they have previously agreed, and why the Prime Minister called again, the other day, for a firewall of sufficient size to be put in place as rapidly as possible.

I think that there is, then, an economic logic. It raises some political challenges for the eurozone countries in different ways, but there is an economic logic to say that, if you have a single currency, you need to move over a certain time span towards much closer fiscal and economic integration. That of course has political consequences in terms of accountability for major economic policy decisions, but that is one reason why I, as a Conservative politician, oppose the United Kingdom joining the euro: I always thought that economic logic was bound to apply.

Q145 Kelvin Hopkins: Dwelling on one point you made, there is increasing talk of a firewall, as if somehow Greece’s default and recreation of the drachma is now becoming thought to be inevitable. I certainly think that myself. This talk of a firewall certainly seems to indicate to me that the rest of the European Union is moving in that direction-that Greece is now beyond the pale and has no chance of survival inside the eurozone. They want to protect other countries. Anyway, I have another question. Similarly, our witnesses held that the Treaty was likely, because of the difficulty of measuring observance of the criteria, to be no easier to enforce than the Stability and Growth Pact. What is your view on this?

Mr Lidington: I will just be brief on Greece and then I will come to Mr Hopkins’ question. I am an opponent of Britain joining the euro, but one has to respect the fact that the elected Greek Parliament by a massive majority, and, so far as one can tell from opinion polls, the overwhelming majority of the Greek electorate as well, have voted for Greece to stay within the eurozone. The Parliament has voted to support the measures they think will make it possible for them so to do. One has to respect the sovereign rights of Greece.

To deal with Mr Hopkins’ question, he is tempting me to speculate on things that stem from the Treaty, to which this country is not a party. What is certainly true is that a great deal that is within the Intergovernmental Treaty now relies upon the continuing neutral commitment of its signatories to deliver on what they have promised. We shall have to see. It is an expression of political will, as much as anything else, but we hope that they do succeed in restoring political stability and economic growth. Getting political stability and getting finances under control is the first step. There is a much bigger question as to the measures that need to be taken, at both European and national level, to stimulate economic growth, which I would be happy for the Committee to explore with me, or you may want to address with the Financial Secretary next week. We want to support the eurozone countries in their judgments as to what they need to do to sort out the problems with their currency.

Q146 Henry Smith: On that point, I am tempted to ask you this question, Minister, although it is probably better directed to the Financial Secretary next week, as you say. What contingency plans are being made by Her Majesty’s Government with regard to the possibility of there being a breakup of the eurozone, whether that is one country leaving or more?

Mr Lidington: I know Mr Smith would not expect me to go into detail. We do make contingency plans for all kinds of contingencies, in respect of every country in the world. Those plans are kept under regular review. They look obviously not just or primarily at the economic conditions in a country. I, from time to time, am dealing with advice on how our contingency plans might be affected by terrorist threats in a particular country, anywhere in the world. We do monitor our contingency plans right across the world, all the time. It is one of the core objectives set by the Foreign Secretary of the FCO after taking office that our purpose is to look after the security of British citizens overseas. That is something we always have in our minds.

Q147 Kelvin Hopkins: Minister, it is a point you have touched on already, but I would like you to go into more detail, if you will. Overall, the views of the witnesses who have come before us implied that the eurozone could only survive if there were some form of closer political and fiscal union. This view seems to echo earlier comments by Government Ministers. Would you like to expand on this view, and would you like to convince me that countries as diverse as, shall we say, Portugal and Germany can survive together in a disciplined fiscal and political union?

Mr Lidington: It is certainly possible for territories with very different economic performances to survive in a currency union. We see that within any almost any Member State, within any nation state, that has its own currency. We can look at the United Kingdom; we can look anywhere else in Europe; we can look at the United States. We can say that there are particular parts of a country that are poor at one time and particular parts that are prosperous and wealth creating, but they have a single currency and they have financing arrangements that ensure that the poorer parts are not reduced to absolute penury.

When you sit down with German politicians in particular, they will say quite openly that the logic for them leads towards a greater integration of political decisions over economic policy, in the medium to longer term. I talk to some very sensible, levelheaded German politicians, who will say, "Look, we missed our chance," on what they describe as "political union" at the time of Maastricht. "It was too difficult then; actually, we are paying the price for not facing up to that now." They will say, "If we want a single currency, we need to have some political integration, too." Now this is something for the eurozone. The Committee may in the future want to invite some Ministers or former Ministers from eurozone countries to come and give evidence, because I think it would be better, if I dare say so, to hear directly from them about their thinking, rather than for me to offer a secondhand judgment on their motives and their chances of success.

Q148 Kelvin Hopkins: Just to pursue that a little further, it is absolutely right that within a country that accepts itself as a polity, like Britain, rich people in the richer parts of the country pay taxes, and public expenditure is recycled to other parts of the country. We accept that because we are a nation. Are the Germans seriously going to accept a longterm arrangement where they sustain, for long periods, countries that are much less well off than they are?

Mr Lidington: I said earlier that the process of fiscal and economic integration raises important political challenges for countries around the eurozone, whether on the periphery or the northern eurozone countries, and those do include questions about how those responsible for making economic policy are to be held responsible if you are moving towards some kind of supranational arrangement for fiscal and economic policy. I have to say that, as someone who is not a fan of Britain joining the euro, in the UK we have frequently, in the last half century, underestimated the extent to which, in a great deal of Europe-not just among the political elites but among electorates as well-there is support for the principle of European integration and European unity. There are different historical experiences in the 20th century that explain that. These are challenges that all the eurozone countries, it seems to me, are going to have to face, but it is for them and ultimately for their electorates, and the people whom they then elect, to decide how they are going to confront them.

Q149 Kelvin Hopkins: One more question: how likely is it that eurozone Member States and prospective eurozone Member States would and could move towards this prospect sufficiently quickly to contribute to a more solid resolution of the current eurozone crisis?

Mr Lidington: It has taken too long to deliver on the things that were agreed in July and October last year. There is limited value in British Ministers hectoring our eurozone friends in public about this. We want them to succeed. I certainly believe that the quicker that they go ahead with the immediate measures that they have already agreed to in principle, the better it would be for them. They then have to work out how to take forward their strategy for closer fiscal and economic integration in a fashion that their governments and voters will accept.

Q150 Chair: Minister, we are now going to move on to the legality questions in more detail. Mr Smyth is welcome to answer any questions you care to refer to him. In general, Professor Craig was concerned that the approach taken in enhancing the eurozone through a nonEU Treaty did raise very profound questions regarding the rule of law. In fact, in answer to a question I put to him-it is question 12 in the transcript of evidence-he replied, "Whatever one believes about its desirability or not, this new Treaty does raise an issue of principle, which you can call a ruleoflaw issue of principle that is concerned with whether we should bear with equanimity the idea of those decisionmaking rules being circumvented by a treaty outside the fabric of the Lisbon Treaty in circumstances where the rules as to how change should be undertaken within the Lisbon Treaty are not capable of being met, particularly given that the Stability and Governance Treaty can only work through the participation of the EU institutions in the way that is written into that treaty. That does," he said, "raise an issue of principle, which is a ruleoflaw issue."

Before we look at the agreement in more detail, can you tell me, first of all, whether the Government sympathises with this view and, secondly, how far up the legal tree you have gone in obtaining advice, including the advice you have received from your legal department, in getting at what is quite clearly a very important question about the rule of law?

Mr Lidington: There has been advice from across Government that has informed the position the Prime Minister took at the January European Council, subsequently expressed in the letter from Sir Jon Cunliffe to Uwe Corsepius. I am not going to get drawn into a detailed discussion of what the Government’s own legal advice and legal analysis says, not least because reserving our position means that we might, at some stage in the future, wish to go down the path of legal action. I am not wanting to say anything that prejudices or reveals a position that we might take in such circumstances. I think it is clear from what I have already said to the Committee that we have concerns about some elements of the Intergovernmental Treaty, insofar as the proposed use of institutions is concerned. That is why we have reserved our position, done so formally and have consistently reiterated our position that the use of the institutions outwith the treaties requires the agreement of all Member States and that, even then, the institutions must not act in a way that is contrary to their obligations to all Member States, set down in the treaties.

Q151 Chair: Of course, as a former Shadow AttorneyGeneral myself, I am sure you would understand that I would expect that matters of this kind would be taken by the AttorneyGeneral in terms of advice that he might give to the Government. I am simply asking you not to reveal that advice, but to indicate that the advice has indeed been given.

Mr Lidington: We have taken advice from across Government.

Chair: I think that is a moment when we will have to adjourn.

Sitting suspended for a Division in the House.

On resuming-

Chair: We are going to ask a number of questions now on, as I said, more detail in respect of the legal concerns that we have on the use of the institutions in the Intergovernmental Treaty. They are the same questions that we put to our expert legal witnesses and we would really be grateful if we could have some clear answers explaining the Government’s views. That is the idea. If you would be kind enough to refer to Mr Smyth at a given point in time, on some of the more detailed questions, that might be helpful, because there is a slight tendency to enlarge the issues, when we want to look at some of the more precise answers to the questions. Penny Mordaunt, would you like to ask the first question?

Q152 Penny Mordaunt: This is turning to Article 7, which incorporates the mechanism of reverse qualified majority voting. The question is: is it possible for a nonEU treaty to stipulate voting procedures in an EU institution?

Mr Lidington: There is nothing to stop a group of Member States either formally or informally from agreeing among themselves to vote in a particular way. What Article 7 does is require the contracting parties to support the Commission proposals under Article 126(6), and recommendations of the Council, unless there is a qualified majority not to do so. Yes, the straightforward answer is it possible for Member States to agree collectively to act in a certain manner. The existence of the Intergovernmental Treaty would provide a formal mechanism for that to happen, but there has been nothing to stop Member States from acting in such a fashion up to now, in any case.

Q153 Jacob Rees-Mogg: Coming on to Article 8, do you agree that the Commission, under Article 8, has de facto infringement powers? In other words, the trigger for legal proceedings is the Commission and Member States being obliged to carry out the recommendation. It may be helpful to read a bit of it, because it requires the Member States to ask the Commission. It does not say "the Member States may"; it says they will.

Mr Lidington: I will ask Mr Smyth to comment on that.

Ivan Smyth: "Will" is not, in treaty terms, mandatory language. If we were looking at this in treaty terms in the UK, if it was mandatory, we would be using "shall". The point about this is it is the Member States that actually initiate the action, based on the opinion that they may receive from the Commission.

Q154 Jacob Rees-Mogg: If they are obliged to under the Treaty, or if they are under very strong pressure to from the treaty-the "will" rather than "shall" point-then de facto it is the Commission that is bringing it, because the Commission gives the report to the Member States. The Member States then go back to the Commission saying, "This is what you must do." This is what the Treaty is requiring of the Commission.

Ivan Smyth: The Commission cannot compel the Member States to take that action. There is no sanction, if Member States decide, having read the opinion from the Commission, not to proceed with the matter.

Q155 Jacob Rees-Mogg: Just because there is no sanction, it does not mean that something is not an obligation.

Ivan Smyth: As I said, it is not a mandatory obligation on the states to do that.

Q156 Jacob Rees-Mogg: Is that only because there is no court that can enforce it?

Ivan Smyth: It is because the Treaty does not say that they must bring the action; it says they will bring the action.

Q157 Jacob Rees-Mogg: The only reason that the Commission is not, de facto, obliged to bring infringement cases is because it says "will" rather than "shall".

Ivan Smyth: No, it is because the provision actually makes it clear that it is the Member States that take the action.

Q158 Jacob Rees-Mogg: It says the Member States will ask the Commission to bring the action.

Ivan Smyth: But it is the Member States that actually take the action to the court.

Q159 Jacob Rees-Mogg: Following the report of the Commission, and if "the European Commission, after having given the Contracting Party concerned the opportunity to submit its observations, concludes in its report that such Contracting Party has failed to comply … the matter will be brought to the Court of Justice … by one or more Contracting Parties". If the Commission says it will be brought to the Court of Justice, it will be brought. It is the Commission that is saying to a Member State, "This is what you need to do."

Ivan Smyth: If you actually read the text, there is the double thing here. One is if there is a report from the Commission, then the Member States may determine it, but the Member States, of their own volition, may also bring an action.

Q160 Jacob Rees-Mogg: Yes, that is perfectly true that the Member States can do it off their own bat, but that does not mean the Commission is not being placed under an obligation to bring infringement proceedings.

Ivan Smyth: I am sorry, but the Article is very clear that it is the Member State that brings the action.

Q161 Mr Clappison: Can I come in on this? I am sorry I missed the other part of this; I was still in the Division. This is Article 8, isn’t it? This is the sort of thing that gives the law a bad name, when it is trying to hard something like this. Can I just take you through it? The European Commission is invited to present a report on the provisions. Looking it through, "If the European Commission, after having given the Contracting Party concerned the opportunity to submit its observations, concludes in its report that such Contracting Party has failed to comply with Article 3(2), the matter will be brought to the Court of Justice." It could not be clearer than that: it is the European Commission that is invited to present the report. It submits its observations and then there is a trigger for action through the Member States. Of course, as you say, the Member States could undertake this process of their own accord, but it is the Commission that is doing it, isn’t it?

Mr Lidington: With respect, Mr Clappison, if the countries concerned got to the stage that the Commission report had concluded that a Contracting Party had failed to comply with 3(2), then it is for one of the Contracting Parties, not the Commission, to bring the case to the ECJ. There has to be a separate decision by one or more of the Contracting Parties to take that further step and go to the ECJ.

Q162 Mr Clappison: It does not read like that, with respect, Minister, because it says the matter "will be brought to the Court of Justice of the European Union by one or more Contracting Parties". What does the word "will" mean there?

Mr Lidington: That is a question for the countries that are signed up to the Treaty.

Q163 Mr Clappison: Isn’t this why we are objecting to it in our letter from Jon Cunliffe, which is a very good letter? This is what we are objecting to in regard of Article 8, as well as Article 7. It is the role of the Commission.

Mr Lidington: I think I said earlier in the Committee’s proceedings the two concerns we have about Article 8 are, on the one hand, the Commission and, on the other hand, the European Court of Justice might be used for things that go beyond the scope of their remit under the European Union treaties. That is a slightly different point from the one that has been the subject of the question so far.

Mr Clappison: I will have another question on this in due course.

Q164 Chair: Minister, put simply, is the role of the Commission in Article 8 provided for in the existing treaties?

Mr Lidington: I think there is a serious question about that. If I go back to the evidence that both Professor Dougan and Martin Howe gave to the Committee, the role of the Commission that is given here, under Article 8, is outside the EU treaties, but similar to the role it performs under the EU treaties. Our position as a Government is that the EU institutions, including the Commission but the Court too, must only be used outside the EU treaties with the consent of all Member States, and that any such action by the institutions must respect the EU treaties and not contravene them.

Q165 Chair: Let me put a question and answer that I derived from the evidence on page 10 of the transcript with Professor Paul Craig, where I put it to him "whether the role of the Commission in Article 8 was provided for in the existing … treaties", the question I have just put to you. I asked him, "You have answered that, and I am now asking: in EU terms, therefore, is it lawful for this agreement to prescribe such a role to the Commission?" He just says "no". Does Mr Smyth have a different view or does the AttorneyGeneral have a different view?

Ivan Smyth: I think there is possibly a range of views on this issue.

Q166 Chair: There is a variety of views and it is a question of politically how you want to judge it. Is that more or less what you are saying?

Mr Lidington: We are reserving our position.

Q167 Chair: Is it the Government’s view? What is the Government’s view?

Mr Lidington: The Government’s view is that we are reserving our position on this. We have concerns about the proposed use of the institutions, as I have expressed already to the Committee. That is why we have taken the position we have.

Q168 Chair: Why do you disagree with Professor Craig?

Mr Lidington: I am not seeking to disagree with Professor Craig. What I am seeking to do is to explain what the Government’s position is: that we are reserving our legal position on this, because it is important that the principles that I have described, of institutions acting outside the treaties only with consent of all Member States and within the limits of action prescribed by the treaties, are upheld.

Q169 Chair: To go back to Mr ReesMogg’s question earlier, in the meantime, whether or not it is lawful is secondary to the question of whether it is expedient.

Mr Lidington: What also needs to be acknowledged, Chairman, is that the Intergovernmental Treaty itself says in terms that it is a treaty that is agreed with regard to all the obligations set out in the EU treaties, and the declared intent of the signatories of the Intergovernmental Treaty is that they shall act at all times within European law. What is also true is that, as a matter of legal fact, the primacy of European Union laws laid down in the treaties is not and cannot legally be affected by the drafting of an intergovernmental treaty binding, in international law, outside those European treaties. It is the express intention of the signatories that, if there is any conflict or overlap, the EU treaties should prevail.

Chair: I have a sense that somehow, one way or another, you will find yourselves on both sides of the equation. The political imperatives appear to be prevailing at the moment, as far as you are concerned. Could I ask Mr ReesMogg to ask the next question?

Q170 Jacob Rees-Mogg: One question to come back, if I may, to Mr Smyth: are the Contracting Parties able to refuse to act?

Ivan Smyth: As I have said before, there is nothing that compels the Contracting Parties here to take a case.

Q171 Jacob Rees-Mogg: So they can refuse to act. Okay, thank you. I now have my question; sorry, I am being rather greedy. To carry on, do you see, within Article 8, Minister or Mr Smyth, a conflict between the role of the Commission and the prohibition against it bringing infringement proceedings in the context of the excessive deficit rules in Article 126(10) TFEU?

Ivan Smyth: I think the jurisdiction of the court here is different, in a sense. What this is about is the requirement for Member States to enshrine, in their domestic law, an obligation to resort to the balanced budget rule. That is the obligation here and that is what the jurisdiction of the court attaches to.

Q172 Jacob Rees-Mogg: Article 126(10) says that the European Commission cannot bring infringement proceedings. Article 8 is getting them towards bringing infringement proceedings, unless the Contracting Parties refuse to act.

Ivan Smyth: As I have said before, in a sense this is not about infringement proceedings by the Commission. This is about Member States deciding to take it to an action. This is not an infringement proceeding by the Commission.

Q173 Jacob Rees-Mogg: To come back to Mr Cunliffe’s letter and the "continuing concerns", are those continuing concerns in relation to the way the Treaty is drafted and challenged on that basis, or are the continuing concerns in relation to how the Treaty might be applied in practice?

Mr Lidington: I think the trouble is Mr ReesMogg is asking us-I do not blame him-to come very close to going on to the detail of the legal advice the Government may have received, and I am not prepared to do that. We have had concerns about both. That is why we are reserving our position.

Q174 Jacob Rees-Mogg: The reason for my asking the question is that, if the Government has concerns about the way the Treaty is drafted currently, it would be important to bring those forward early because of the old legal maxim: he who is silent is seen to consent. If you allow time to go by on the drafting of the Treaty, your consent will have been implied. If it is on how it is applied in practice, then time is of course on your side. It seems to me it is crucial that, if you have these concerns with the current draft, something is done about it now.

Mr Lidington: I take that point seriously.

Chair: I am very glad to hear that.

Q175 Mr Clappison: I think that is a very helpful reply we have just had from the Minister. Very quickly on this point, going back to the Cunliffe letter, we say, "In this context, it notes that the EU institutions must only be used outside the EU treaties with the consent of all Member States, and must respect the EU treaties." Can I ask if we have given our consent to the use of the EU institutions in this Treaty?

Mr Lidington: No, we have not been asked so to do.

Q176 Mr Clappison: Have we given that consent?

Mr Lidington: We have not been asked and we have not volunteered it. At the moment, it is a hypothetical question.

Q177 Mr Clappison: As it stands, if we have not given our consent, then what the EU is doing is not lawful, in our view. The two conditions that are set here are, for the EU’s action to be lawful, it could only be done with our consent and must respect the EU treaties. If we have not given our consent, it is not lawful.

Mr Lidington: The Intergovernmental Treaty itself says that, if there is any conflict between it and the EU treaties, it is the EU treaties that shall prevail.

Q178 Mr Clappison: I am not asking that question. I am asking, quite simply, if we have given our consent to the use of the EU treaties. If your answer is we have not been asked to do it, we have not given our consent. We would agree with that.

Mr Lidington: That is right.

Q179 Mr Clappison: In the terms of this letter, if we have not given our consent, then the use is not lawful.

Mr Lidington: I think that is taking it a step further. The Intergovernmental Treaty is designed expressly to be compliant with the European Union treaties. That is laid down in the language of the Intergovernmental Treaty itself. I have never denied that we have concerns about the proposed use of the institutions. That is why we take the position we do.

Mr Clappison: I am very heartened by what is says in the Cunliffe letter. If the institutions are being used, unless and until we are giving our consent to that, then it is not lawful. I cannot see it could be more straightforward than that.

Q180 Chair: Inevitably, we shall be moving on to the question of what you will be doing about it, but let us get through the next question first. The evidence we have received suggests that the jurisdiction of the European Court under Article 8 is consistent with Article 273 of the TFEU, but Article 273 emphatically does not permit the Commission to bring proceedings before the European Court. Given the position that it is the Commission that triggers the legal proceedings in Article 8, do you see a conflict between Article 8 of the agreement and Article 273?

Mr Lidington: With respect, Chairman, there may be concerns about whether various items in the Intergovernmental Treaty are covered by Article 273. The particular point on which your question is based, I think, is at odds with what Article 8 actually says. Although it is true that Article 8 provides for the report on the failure of a state party to comply with 3(2) to be brought forward by the Commission, the responsibility and decision to go to the European Court of Justice lies expressly with one or more Member States and not with the Commission.

Chair: I would now like to move on Michael Connarty’s questions relating to enhanced cooperation.

Q181 Michael Connarty: Thank you very much, Chairman. We had a number of extended conversations, if you read the evidence, with our witnesses about what enhanced cooperation means. In your opinion, the same question, does Article 10 refer to enhanced cooperation within the eurozone or by the eurozone, within the wider context, do you think? In other words, does Article 10 envisage enhanced cooperation with less than the 17 eurozone states or the eurozone states acting as a bloc? Some of the witnesses had strong opinions about that problem.

Mr Lidington: Enhanced cooperation means enhanced cooperation as defined by the Treaty of the European Union and the Treaty on the Functioning of the European Union, with all the rules and safeguards laid down there, and the minimum number-at present nine-EU Member States that have to be party to any such enhanced cooperation initiative.

Q182 Michael Connarty: We noted through the amendments that had been coming through that Article 10 had become more squashy, shall we say, more what we would normally expect from eurowaffle. Rather than the word "will", it became "stand ready". Rather than "will", it became "when appropriate". It still has this problem. If Article 10 encourages use of enhanced cooperation by the eurozone as a bloc, is that consistent with the rules on the use of enhanced cooperation in the EU treaties? It does seem to take it further. Only nine states are required for enhanced cooperation, but this is a bloc of 17, or is it a bloc of 25, because is it expecting others to cooperate with the people now who have signed this, should they ratify this treaty, so they all act together as a bloc? It is very similar to the question that has been raised in the Council of Europe about whether the EU will act as a bloc should it sign up to the Convention.

Mr Lidington: Clearly what Mr Connarty is getting at is the risk of caucusing and, by inference, the risk of caucusing against our interests. Nothing in the Intergovernmental Treaty can amend or set aside what is written down in the EU treaties about how enhanced cooperation has to operate: the rule that it must be used as a "last resort"; that it must "not undermine the [single] market or economic, social and territorial cohesion; … it [must] not [constitute] a barrier to or discrimination in trade between Member States; [it must not] distort competition between [Member States]" and it must "respect the competences, rights and obligations of those Member States [that] do not participate in [a specific enhanced cooperation initiative]". Those rules all continue to apply, whether there is enhanced cooperation that springs from the Intergovernmental Treaty or springs from some other initiative among a variety of EU Member States. Clearly we could not block a proposal for enhanced cooperation that respected all those requirements. We would consider carefully whether to resist, including if necessary through challenge in the EU courts, any resort to enhanced cooperation that we considered did not satisfy all the conditions laid down in the treaties themselves for its use.

Having said that, and that is the formal position, I would add the rider that the history of enhanced cooperation so far is that it has been there in the EU treaties for a considerable length of time. There have been, to date, only two initiatives under enhanced cooperation: one on family law, I think, in which we did not participate; and one on the proposed European patent, which is very near but has not quite reached final agreement, in which we are a participant. I am not seeing evidence at the moment that what is here in the Intergovernmental Treaty is going to lead to some kind of caucus that is inimical to United Kingdom interests. If one looks at what has been happening elsewhere in the European Union this week, at the 11 other Heads of Government who join our Prime Minister in a joint letter about growth and competitiveness, mixing in almost equal numbers eurozone and noneurozone countries, there is evidence that the pattern of alliances and partnerships within the EU is much more complex and fluid than one would think, if one assumes that the 25 or the 17 will always act as a bloc.

Q183 Michael Connarty: The reality is, if this treaty is ratified, that this is enhanced cooperation driven by the Commission, not driven by a group of countries. All of the rest of it talks about the Commission being given powers and having roles. It says quite specifically in this "whenever appropriate and necessary". As you said, in Article 20(2) of the Treaty of the European Union, it says "as a last resort". If someone is to read this evidence, it is as if you, Minister, have ignored the fact that this treaty is a different beast from something that is already in the Lisbon Treaty. It has a different purpose. It has clearly some matters in it you have as a Government said you have some concerns about, but surely this is not the same as enhanced cooperation as we know it. We are concerned that this is a significant inconsistency, which might change the way enhanced cooperation is used; and I am a bit concerned, because you are normally very perceptive in these matters, that you are not sharing that same concern.

Mr Lidington: I simply believe that Mr Connarty’s fears are not supported by what we have here, because the Intergovernmental Treaty does not erect some new structure for enhanced cooperation. Instead, it is a commitment by the signatories that they will, in an unspecified way, support in the future measures under the EU treaties for the use of enhanced cooperation. There is not a new procedure. The procedure to which the Intergovernmental Treaty refers is the enhanced cooperation procedure laid down in the EU treaties, which has already existed for many years and which has been limited in its use.

It is also worth saying-and I think this perhaps helps to understand the EU political context for this-that in the discussions in various ministerial Council meetings last autumn, when ideas about treaty change surfaced in some countries but there were other proposals kicking around as to how the eurozone could look to move towards greater integration, the Commission and, I think, President Van Rompuy too, were keen to look at mechanisms that did not involve treaty change. They certainly saw the use of existing EU Treaty powers, including, where appropriate, enhanced cooperation, as a means of trying to provide extra help for the eurozone 17, given the particular nature of the challenge they faced with the single currency, without the need to resort to treaty change, with all the inherent complexities and risks of trying to negotiate and then ratify a deal among 27 sovereign countries.

Q184 Michael Connarty: Professor Hix was concerned-he expressed his fears in his evidence-that enhanced cooperation is becoming, let us say, used, "whenever appropriate and necessary" rather than "as a last resort". The eurozone might use enhanced cooperation and let it spill over into matters that actually influence the votes on internal market measures. Do you not share that fear?

Mr Lidington: Not unless one assumes that our partners are going to ignore the commitment that they have entered into that this Intergovernmental Treaty should be compliant with EU law and that, where there is any overlap or conflict between the Intergovernmental Treaty and the EU treaties, it is the EU treaties and EU law that shall prevail. Also, one ignores the reality I observe in the EU week by week, in which the 17, let alone the 25 parties of this treaty, simply do not act as a cohesive bloc but pursue alliances with other countries, including us, on a whole range of issues. Since the December European Council, many of the countries that have signed the Intergovernmental Treaty have been extremely eager to show that they want to work with us as a key partner on a whole range of measures, and especially the single market.

Q185 Michael Connarty: One of the things we need clarifying, because there is conflicting evidence, is whether the UK could block a proposal to use enhanced cooperation when unanimity in the Council is required-for example, on the financial transaction tax, which was given as an example. Would the UK block that and how would it do so?

Mr Lidington: It would depend on whether such a proposal for enhanced cooperation respected all the requirements laid down in the treaties. As Mr Connarty knows, it is in the nature of enhanced cooperation procedure that those countries that are not participants nonetheless attend the negotiating meetings of the participant countries and can make comments and have full status, but not voting rights, in those meetings. In those hypothetical circumstances, we would be vigilant to ensure that the rules laid down in the treaties-last resort, not distorting competition, so on and so forth-were all being observed. If, at the end of the day, we felt that they were not being observed, then we would be willing to use all the rights accorded to us under the EU treaties to challenge such use of enhanced cooperation.

Q186 Chair: Would you not agree, though, when you refer to the use of enhanced cooperation in the context of patents-where we are in the middle now of examining Baroness Wilcox on that-and also in relation to family law, that you are, effectively, by comparing that to this, engaged in a process of mixing apples and pears? After all, in the kind of context in which we have been discussing these questions, where enhanced cooperation has been agreed to in the past, it has been where all the Member States have agreed, by their own unanimity in relation to a European Treaty, that the procedure of enhanced cooperation will be employed. This is a different situation. This is where you have a situation where you have all but two but, nonetheless, no unanimity in agreement. That is precisely why this is not an EU treaty. I fear that you may be, and I would be grateful if you could comment on whether you agree with me or not, in danger or you are, in fact, mixing up a nonEU treaty situation with a Treaty situation.

Mr Lidington: No. The only provision for there to be enhanced cooperation is that laid down in the TEU and TFEU. No new system or process for enhanced cooperation is created by the Intergovernmental Treaty. What in effect we have in the Intergovernmental Treaty is an agreement by 25 countries that it would be rather a good thing if they could use enhanced cooperation from time to time. The implicit message is that this has been on the EU statute book for a while and we perhaps have not used it often enough. If I wanted to point again to a reason why I do not, at the moment, see evidence that I need to fear the consequences, Chairman, that you have foreseen, it is precisely on the issue of the financial transfer tax because, within the past couple of weeks, we have had a proposal from a number of Member States for an enhanced cooperation initiative on the FTT. That proposal was signed by nine Member States. It was not signed by every member of the eurozone, let alone by every party to the Intergovernmental Treaty. That in itself illustrates that countries are likely to go on making calculated judgments about their national interest, measure by measure, using the enhanced cooperation process set down in the EU treaties.

Q187 Chris Kelly: Minister, following on from Mr Connarty, Article 10 encourages Contracting States to use enhanced cooperation to ensure the smooth functioning of the euro area, which both you and I are thankful we are not a member of, "whenever appropriate and necessary", whereas the EU Treaty requirement is that it be used "as a last resort". This Committee is concerned that this is a significant inconsistency, which might change the way enhanced cooperation is used from what was agreed in the treaties. Are you also concerned by this?

Mr Lidington: The point about last resort is that is written into the European Union treaties. That principle, therefore, has primacy over anything that may be contained in the Intergovernmental Treaty. Article 2 of the Intergovernmental Treaty itself says at paragraph 1 that "this treaty," the Intergovernmental Treaty, "shall be applied and interpreted … in conformity with the treaties on which the European Union is founded." It says at paragraph 2 that the provisions of this Intergovernmental Treaty "shall apply insofar as [they] are compatible with the treaties on which the … Union is founded and with European Union law. [They] will not encroach upon the competence of the Union to act in the area of the economic union." There is an express limitation written into Article 2 of the Intergovernmental Treaty on the ability of this treaty to affect the primacy of EU law.

Q188 Chair: Do you see any particular obstacles to ratification in any of the Member States?

Mr Lidington: Chairman, you are asking me to trespass on some quite sensitive political issues in a number of Member States. There are, I think, two distinct but related questions here. One is ratification of the Treaty, for which each country will have its own sovereign arrangements. The other is the writing into law, preferably constitutional law, the deficit rule that is an obligation under this treaty. In a number of countries, those require a two-thirds or other special majority within the national parliament. In some countries, there is provision in their constitutions for referendums in certain circumstances. The Irish AttorneyGeneral has been asked by the Irish Government for his view on whether ratification of the Intergovernmental Treaty requires a referendum in Irish law. My understanding is that the AttorneyGeneral of Ireland has yet to respond on that. Prime Minister Fillon of France has suggested that the ratification of the Intergovernmental Treaty would be made by a decision of the French Government, subject to a referendum of the French people. Each country is approaching it in its own way.

Q189 Kelvin Hopkins: We have heard today that Hungary is being punished, if you like, with a substantial fine for not having its budgetary arrangements in order. We have heard that the Czech Republic takes a dim view of what has been happening. We also understand from the Chairman and others that, although a number of countries’ leaders have signed up to this, there is actually a lot of disquiet about the whole thing in any case. What are the chances of the whole thing being derailed?

Mr Lidington: There is no doubt that, in the months leading up to the December European Council, there were a lot of countries in the EU that said that they would much prefer to avoid having treaty change. The decision having been taken in December, and then in January by the signatories, makes the question slightly different, because there is, from that point on, a certain measure of collective credibility tied up with delivering on a promise that people have entered into. I think that there will be a political determination by all 25 Governments that they should go ahead with this. Those Governments, in the conversations that I have had with Ministers, seem confident that they can deliver their necessary parliamentary approvals with the required majorities.

I said right at the beginning of the Committee’s proceedings that this treaty has not come into force. It has been signed but it has not yet been ratified, I think still, by anybody. My officials may correct me if I am wrong, but it has certainly not been ratified by the 12 countries that are needed for it to come into effect. It will be signed at the European Council on 1 March. I had better correct my words. The final text was agreed at the January European Council; it is going to be signed on 1 March in the margins of the European Council meeting. The ratification process then has to follow.

Q190 Chair: Very quickly-no, it is only an adjournment so we can continue-in that context you may know I raised this issue in Business Questions today, calling for a debate on the floor of the House next week, in relation to the nature and lawfulness of this treaty, which of course is what we are examining now. Finally, I would like to ask two last questions. What overall do you think the United Kingdom achieved by exercising its veto? Secondly, in the light of all the legal advice and the evidence before this Committee, and I mean all the legal advice that you have received within your Department and, as you say, from across Government Departments and elsewhere, and bearing in mind that this is clearly not just a question of the single market and the City-although that was given as the main reason for exercising the veto-it is clear that this has now moved on and that we are now talking in the light of the evidence from legal advice and from Professor Craig, Martin Howe and others that there is an issue of the rule of law here as well. Do you not agree that there is a very profound case for going to the European Court and to take that step beyond the reservation, because this is clearly something of such importance that taking it to the European Court is required? In a nutshell, what do you think the UK achieved by exercising the veto? Are you proposing to go to the Court or not?

Mr Lidington: What we achieved by the Prime Minister’s exercise of the veto was to block a European Treaty that would, by definition, then be EU primary law, binding upon the United Kingdom. We did so because, while we were willing in principle to consent to such a treaty amendment, there was not agreement by some other countries to the safeguards that we regarded as essential for the single market and for financial services in particular. There are no obligations imposed on the United Kingdom. The Intergovernmental Treaty is not part of European law; it cannot in any way amend or supersede European law. The fact that it is intergovernmental means that we have avoided the importation without adequate safeguards into the EU treaties, and, therefore, the hardwiring-the aims and objectives-of the European Union, of the priority to the fiscal and economic integration of the eurozone, which the Intergovernmental Treaty is intended to provide. Although we supported that objective politically, we regarded safeguards for the integrity of the single market and financial services as essential in order to ensure that those vital interests were not overridden as, over time, attention was given to these new EU priorities.

In response, Chairman, to your second question, on which I am just retrieving my train of thought-

Q191 Chair: Are you going to go to the Court or not?

Mr Lidington: We have not ruled it in or out. Our decision to reserve our legal position makes it clear that that option is one that is still available to us.

Chair: Minister, thank you very much indeed.

Prepared 1st March 2012