UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1817-iv

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

European Scrutiny Committee

Reinforcing the eurozone

Wednesday 14 March 2012

Right Hon Mark Hoban MP and Peter Curwen

Evidence heard in Public Questions 192 - 261

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the European Scrutiny Committee

on Wednesday 14 March 2012

Members present:

William Cash (Chair)

Michael Connarty

Julie Elliott

Nia Griffith

Chris Heaton-Harris

Kelvin Hopkins

Chris Kelly

Jacob Rees-Mogg

Henry Smith

________________

Examination of Witnesses

Witnesses: Right Hon Mark Hoban MP, Financial Secretary to the Treasury and Official, HM Treasury, and Peter Curwen, Director (Europe), HM Treasury, gave evidence.

Q192 Chair: Minister, thank you very much for coming this afternoon. I am sorry that the last occasion was displaced by other business, but I would say that we are very glad to have you. Before I come to the substance of the evidence session, I would like to ask you some questions about the attendance of Treasury Ministers before this Committee. Can you tell us the reason for the apparent reluctance of Treasury Ministers to give oral evidence to us about the significant economic policy developments in the EU?

Mark Hoban: Well, first of all, may I introduce Peter Curwen, who is Director, Europe, and who is with me today? Mr Cash, firstly, this is the first time I have been invited to give evidence, and I am always-I should choose my words carefully-very happy to give evidence. I take part in a large number of the debates that you elevate either to European Committee B or to the Floor of the House. I am always very willing to take part in these discussions if that would be helpful to the Committee.

Q193 Chair: I first wrote to the Chancellor himself inviting evidence on 14 December last year. Two further letters had to be sent before we elicited a response on 21 February. I would not describe this as a speedy response. Although you might say that you cannot speak for the Chancellor, those were the letters that were written. Is there something about the response to the eurozone crisis that, generically, the Treasury does not wish to discuss with the Select Committee charged with scrutinising European affairs?

Mark Hoban: No, we are always very happy to engage with the Committee, and I think sessions like this are very helpful. Clearly, the Chancellor has a busy diary in the run-up to the Budget, which makes his attendance problematic, but as the Minister who is most closely engaged with this, I am very happy to engage with the Committee.

Q194 Michael Connarty: Does the Minister accept that he is here to speak on behalf of the Treasury, or does he think he is here to give his personal opinion?

Mark Hoban: I am here to speak on behalf of the Government.

Q195 Michael Connarty: Excellent, as long as it is not your opinion as opposed to the Government’s position.

Mark Hoban: I only ever have the Government’s view these days.

Q196 Chair: I will turn now to your own letter, which is dated 13 March, which is only yesterday. Your letter says, in terms, that the amendment of Article 136 of the TFEU is not necessary for the euro member sates to establish the European Stability Mechanism. This seems very much at odds with reasons for the amendment given or implied since it was first proposed in October 2010, so I am going to ask you the following question in relation to that letter. In your letter of 13 March you say the amendment to Article 136 is not necessary for the eurozone member states to have their treaty to establish the ESM, but by contrast the European Council conclusions, from 28 to 29 October and again 16 to 17 December 2010, and, yet again, the European Council decision on 24 March 2011 on the treaty amendment suggest that the amendment is indeed necessary. Furthermore, the Prime Minister’s statements to the House after those two European Councils, and the Minister for Europe’s speech in the debate to authorise the Government to agree to the European Council decision to amend Article 136 also strongly suggested that the amendment was a necessary precursor to the ESM Treaty. Now for those who may be inclined to think that the facts and the arguments are sometimes rearranged in the course of the development of policy to suit the circumstances of the present time, can you explain why the Government thinks this is the case, why it was not explained to Parliament from the very first, and, secondly, if the amendment to 136 does not have to come into force before the ESM Treaty can be adopted, why on earth has the European Union gone to such lengths to make the amendment?

Mark Hoban: I think our position is this: we do not believe that it is legally necessary for the Article 136 change to be made before the ESM comes into force. It is desirable, but I do not think that it is necessary. However, from the perspective of at least one member state, it is important, or they believe it to be important, that the treaty change comes into force before the ESM came into force. That was the requirement, apparently, by the German Constitutional Court that sought legal certainty. As far as I am concerned, it would be good but it is not necessary.

Chair: Your letter only arrived yesterday, so for practical purposes you can be assured that we will be looking at this in detail in our report, because there does appear to be not only a change in tack but a change in principle in the attitude adopted by the Government. Of course, when those things happen, there are those who believe that this is done in order to circumvent the problems that might otherwise arise. It may be on ratification; it may be on other matters, but we will certainly be looking at that.

Q197 Michael Connarty: It does appear, Chairman, that what has been said is that this is just a larger example of enhanced co-operation, rather than anything unique. ESM is just an agreement to have enhanced co-operation in this field if it does not require an amendment.

Mark Hoban: Our understanding, and what we believe to be the case, is that, for the purposes of the German Constitutional Court, they do require the treaty change to be made prior to the ESM coming into force. That does not apply to our position.

It was suggested to me I could send the letter this morning, but I thought it would be helpful to the Committee to send it yesterday, so the Committee had an opportunity to look at it.

Q198 Chair: I am not sure I would regard that, if I may say, as something that we would regard as a favour.

Mark Hoban: I was aiming to be helpful, Mr Cash, rather than unhelpful, and to at least be able to have a preliminary airing of the points today, and obviously look forward to the Committee’s report, and respond to it.

Chair: But you do get the burden of what I am saying, which is that there is a possibility, and we will be looking at this carefully, that the facts and the attitudes-contrary to previous statements, both of principle and of analysis, that have been put forward by the Government in the past-are now being rearranged to fit in to the desired framework. As far as we are concerned, I am quite sure that will be regarded as a matter for serious comment in our report, if that conclusion is arrived at.

Q199 Michael Connarty: The Minister has not really answered. If it does not require this amendment before the ESM comes into being, is it any more than just a very large enhanced co-operation? Basically, rather than having a minority of members involved for an enhanced co-operation, almost all the members are involved in an enhanced co-operation, apart from the UK and a few others.

Mark Hoban: There is an issue here, and clearly there is some difference of view about whether or not the treaty change is necessary. Because there is that difference of view, it is better that there be legal certainty. That is one of the reasons why it is proposed that the treaty amendment should go through, to find that legal certainty so that the ESM treaty can come into force. I do not see it as enhanced co-operation; it has not gone through that enhanced co-operation process. It is a separate treaty.

Q200 Michael Connarty: Let us be quite frank-the Prime Minister made a great song and dance about how he vetoed the treaty. What we are now saying, in fact, is that there was not really anything that he was required to veto. In a sense, you say it is not necessary to have a treaty amendment. Therefore, the whole point was that there was nothing to stop.

Mark Hoban: No, Mr Connarty, the treaty we are referring to is the one that set up the ESM, not the Fiscal Compact, which the Prime Minister did indeed veto.

Q201 Michael Connarty: Which he did not veto?

Mark Hoban: No. The Prime Minister vetoed the Fiscal Compact. What we are talking about here is the amendment to Article 136.

Q202 Michael Connarty: But had it been a treaty-

Mark Hoban: It is not a treaty, so we are where we are on that one. The point we are trying to link here is the amendment to Article 136 and the acceleration of the ratification of the treaty that sets up the ESM. Frankly, we have some interest in accelerating that ratification process, because it means that, once the treaty is in force, the facility that we contributed to can no longer be used for new contributions. We have an economic interest in this process happening on a timely basis.

Q203 Chris Heaton-Harris: Could it be said that the establishment of the ESM is an extension of the competence of the EU in the economic field?

Mark Hoban: We set out very clearly in our approach, or how we believe the response to the economic crisis in the eurozone should be established, that there are three things that are needed: one is the resolution of problems in Greece; one is the resolution of the problems of the banking system; and then a firewall. The ESM is a firewall, with €500 billion of funds there to act as a break and prevent contagion from spreading. It is a helpful way of trying to resolve the crisis in the eurozone, and one to which we do not have to contribute and one to which we will not contribute.

Q204 Chris Heaton-Harris: What I am after is whether this is an extension, albeit a small one, of economic co-ordination in the eurozone?

Mark Hoban: Clearly, in a way it is, because member states are contributing towards a bail-out fund, or a firewall. There is, in that sense, co-operation.

Q205 Chair: There are a whole series of statements-you are familiar with all of them, I know-made by various parties in relation to Article 136. There are speeches, there are statements; it was one of the issues that kept on coming up. We remember it very well from the time when the ESM was being discussed. You will understand our concern at this change. Can you explain why this change of position has occurred?

Mark Hoban: What has happened is a discussion of the ratification process. There was clearly originally intended to be a sequencing of events. You would have the Article 136 change, and then you would have the ESM coming into force. That change to Article 136 was seen by member states as a need to create some legal certainty. However, as the crisis has developed, what we have seen is a recognition of a need to move from the existing bail-out fund to the ESM, and an appetite by those member states contributing to it to bring forward its establishment. The only way to do that is to bring forward the ratification of the ESM.

Clearly, in the knowledge that Article 136 will be amended by treaty, there is a sense that that does create some legal certainty, but at the same time they wish to bring forward the creation of the ESM. It is in our interests for that to happen, given that it extinguishes our liability for future bail-outs through the existing mechanism.

Chair: I know the Government has taken as a matter of policy, of course, that it is in the interests of the EU as a whole, and the UK in particular, to engage in the bail-outs. Of course, the original EFSM was itself severely criticised by me, amongst many others, on the basis that it was not lawful in the first place, because it was using Article 122 for a purpose it did not appear to be designed for. You will understand that we have something of a concern that we are seeing some kind of repetition of this.

Q206 Chris Heaton-Harris: In one of the last paragraphs in your letter, you talk about the parliamentary process and timings on that. I wonder if you could be slightly more precise about the timetable for this House to have some sort of say, or approve of the action.

Mark Hoban: This is a Foreign Office matter, and I think the Minister for Europe has dealt with this before. It is a matter for the Foreign Office and the usual channels to bring forward the Bill.

Q207 Kelvin Hopkins: There has been surprising unanimity in the oral evidence we have taken from economic commentators about the improbability of the intergovernmental treaty doing much to resolve the eurozone crisis. The Minister for Europe, whom we saw last week, was somewhat sceptical about the immediate utility of the fiscal pact when he spoke to us. What is the Treasury view of the relevance of this treaty for the eurozone crisis?

Mark Hoban: There is clearly a range of interventions taking place to resolve issues in the eurozone; there are some shortterm measures to tackle the immediate crisis-the Greek bail-out, reform and strengthening of the banking system, and creation of the firewall. Given that we would agree that an effective monetary union should be underpinned by closer fiscal integration, clearly the intergovernmental treaty has a role to play in tightening that fiscal co-ordination.

It is a necessary step, but I do not think it is sufficient to resolve the situation. There are broader economic issues that need to be tackled within Europe to put the European economies on a much more stable longterm footing, as well as putting their fiscal position on a long-term footing. What we are seeing is a process where you are looking at issues just beyond the narrow scope of fiscal matters, where eurozone states are looking much more carefully at some of their own balances, for example, and some of the issues that affect the stability of their economy, and tackling those. This is an important part, but, in itself, it is not enough.

Q208 Kelvin Hopkins: My thoughts are that even the second bail-out is an exercise in buying time for Greece, but that this will not, in the end, solve the crisis, but you may comment on that. You mentioned the term firewall, as the Minister for Europe did last week, and it occurs to me that the firewall might be drawn between Greece and other countries that have difficulties to stop the contagion spreading, or is this firewall genuinely intended to include Greece, and to protect Greece for the long term?

Mark Hoban: Some of the funding that will go to Greece comes from existing EU facilities, and in the long term will be replaced by the ESM, or supplemented by the ESM. It serves two purposes: one is to meet the needs of the eurozone member states in trouble, but also to provide reassurance to markets that there is sufficient capacity there to withstand problems in other European member states. It is there to provide some stability to the eurozone.

Q209 Kelvin Hopkins: So you reject my scepticism, and that of other Members of the Committee and commentators who have been to see us, about what is happening at the moment?

Mark Hoban: There has been a package agreed with Greece, if that is what you are referring to, of structural reforms and fiscal constraint, and the forecast indicates that debt sustainability will achieve an appropriate level in the medium to long term and a view that the package should work. In fact, it is in Europe’s interests for it to work, because we have seen what has happened over recent months, where continuing instability in the eurozone does have a chilling effect on economies not just in the eurozone but outside too. I am not limiting my remarks in that context particularly to the UK; when I meet international counterparts, the impact of the eurozone on the wider global economy is a factor that is mentioned often.

Q210 Kelvin Hopkins: I will not ask you to comment, but there has been a suggestion this week that youth unemployment rising to over 50% in Spain is increasingly likely to cause social unrest there, but that is another problem. Similarly, our witnesses held that, because of the difficulty of measuring observance of the criteria, the treaty was likely to be no easier to enforce than the Stability and Growth Pact. What is your view on that?

Mark Hoban: It cropped up at the meeting of ECOFIN I attended yesterday on behalf of the Chancellor. People understand the lesson that should be drawn from what has happened in the past. There is an appetite to put the eurozone’s public finances on a much more stable footing. That does require much greater surveillance, much greater scrutiny, not just of the fiscal position but also broader macro-economic indicators, and there is an appetite to do so. That struck me very strongly yesterday. I think member states in the eurozone recognise that, if they do not stick to this, there will be a price to pay in markets.

Q211 Kelvin Hopkins: There has been concern this week, certainly from me, that Hungary has been punished for fiscal laxity, if one likes, with fines, and they are not even a member of the eurozone. The Stability and Growth Pact is being applied to states outside the eurozone. Is this not something of great concern, given that we are outside the eurozone ourselves?

Mark Hoban: It does not apply to the UK, by virtue of the opt-outs we secured under the Maastricht Treaty, but it does apply to other member states, and the action taken against Hungary yesterday demonstrates a commitment to taking action. What is important is that member states are able to, and should take action to, tackle their structural deficit. Hungary has committed to bring forward measures to do so. The sanction that is in place is a suspension of its cohesion funds, rather than a fine in terms of taking money away from Hungary.

Q212 Kelvin Hopkins: It comes to the same thing in the end, though, doesn’t it?

Mark Hoban: If the Hungarians deliver, the suspension will be lifted. One of the positive outcomes from yesterday is a deadline by which the suspension will be reviewed, of 22 June, whereas before it was a rather openended process. Certainly the Hungarian Finance Minister was yesterday very positive about the actions they would take to tackle their structural problems. It was very clear from Commissioner Rehn that there are a number of other member states in the excessive deficit procedure who could be subject to sanction, both inside and outside the eurozone, if they have not resolved their problems by the time of the spring forecast. We will see a gathering momentum on this, and a recognition that Europe and those eurozone member states, and those subject to the sanctions regime, do need to get their house in order.

Q213 Michael Connarty: The Government’s position is that it reserved its position on three items: Article 3(2), Article 7, and Article 8. When pressed on it in evidence last week, the Minister concluded that the problem was that it was going to use the European Court of Justice as the court that would judge on the budgets of Governments, and that is why we reserved our positions. A court cannot really judge a question on a budget-you must continue to budget, unlike a criminal act; you can rule against someone committing a criminal act, or breaching a civil law, but you cannot really rule on budgets. Apart from exhortation, and the conclusion that you had that, if they do not get their house in order, they are in real trouble, what does it amount to, other than just what has already been there before, the Stability and Growth Pact, and waving a big stick that is a court that cannot be used?

Mark Hoban: To be clear, and Peter will correct me if I have got this wrong, the ECJ’s role is to assess whether or not the balanced budget rule that is introduced as part of the intergovernmental treaty will have a status such that it is akin effectively to a constitutional requirement to balance the budget. It is more of a legal judgment, rather than a quantitative judgment, and that is the role the court has been asked to play in this.

Q214 Michael Connarty: Our Government is reserving our position on these items; we do not think that is correct, because it should not be used. The Court is an institution of the EU, which should not be used for something that is outside the EU treaty, which this will be. The one big stick that has been added to this is the European Court of Justice, but it would appear it is a big stick that cannot be used in this particular context.

Mark Hoban: We have reserved our position on the use of European institutions in this process, so we will watch and see what happens.

Q215 Michael Connarty: Which part of the Government is right: the Treasury or the Foreign Office?

Mark Hoban: We share the same view.

Q216 Chair: Wearing the hat of the Treasury in this context, you will be conscious of the danger of delay in taking appropriate action, either in the Court or politically. That can boil down to whether or not the Court, if it got to the Court, might then at that stage say, "Well, you did not do anything about it when you had the opportunity to do so, and therefore you have not mitigated your concern": that is one aspect. The other is crying wolf in saying that you have got reservations about the legality of something, which, to say the least, is pretty serious territory in the context of the European treaties, and the breaking of the rule of European law is not something to be done at all, let alone lightly. I would like to get it on record, from you as a Treasury Minister. We have heard from Mr Lidington-you have obviously read the transcript-and we have heard from the Prime Minister. Now I would like to just get it on the record from you: do you believe that this is a lawful exercise, this treaty, of the use of the mechanism that is being employed?

Mark Hoban: As I say, we have our reservations, and we have made that very clear, as the Minister for Europe did in his evidence before you.

Chair: Kelvin, have you got another question to ask? Jacob, you ask the next one.

Q217 Jacob Rees-Mogg: Can I continue with one final question on the treaty to see if you take, Minister, the same position, as I am sure you do, as the Minister for Europe? I asked him last week, on the question of the legality of the pact, whether it was not better to challenge it now, because of the legal maxim that he who is silent is seen to consent. Mr Lidington replied, "I take that point seriously," which I was rather encouraged by. I wonder if this is a concern of yours-that by doing nothing, it may be that the status of the treaty is inadvertently enhanced.

Mark Hoban: We do take those matters seriously, which is why we have been very clear in stating our reservations about it.

Q218 Jacob Rees-Mogg: Thank you. Now on to the more substantial question: I think you said that the pact was necessary but not enough. I wonder if you feel if it has failed its first test by allowing Spain to break though the limits that have been set and allowing it a higher budget deficit level at its first test. If you do think that it has not done very well at its first test, what do you think might be able to shore up the euro in its place?

Mark Hoban: The issue with Spain is slightly more complex than you suggest; the requirement for them to meet their Maastricht criteria is 2013, not 2012, so I would say that the glide path has been slightly softened but the runway has remained unchanged.

Q219 Jacob Rees-Mogg: To follow on: what do you think they need to do as the next steps to make a compact, treaty, or pact that would have more effect in supporting the member states in difficulties and shoring up the future of the euro?

Mark Hoban: Clearly there is a sanctions regime in place for breaches, but where the debate is heading to is much greater engagement and surveillance of individual member states’ economies and their fiscal position, and much greater engagement by the Council and the Commission. There is a much more intrusive regime in place, both in terms of monitoring and sanctions, than has been the case in the past. One of the comments that was made yesterday was that the most recent European Council was one, for the first time in 18 months, that focused on getting Europe moving again. There has been a lot of focus on the fiscal crisis, and what we need to do is see more emphasis on competitiveness, on growth, because we cannot solve these problems simply by tackling austerity, although tackling austerity is important. There is more that can be done at the European level.

I thought it was noteworthy that, in advance of the March Council, the Prime Minister, along with 11 other heads of state and government, signed a letter to Herman Van Rompuy setting out some positive agenda for growth. There were two aspects of that I thought were noteworthy: it included both the ins and the outs, but also included Spain and Italy among the signatories. That is a recognition across Europe of a need to drive economic growth and trying to look at some of the barriers to growth across Europe.

Q220 Michael Connarty: I love to hear a Government Minister speak about growth; I wish he could convince his Government to get some, instead of focusing on austerity all the time, which he seems to be critical of in the European context but not able to do anything about in the UK context. Moving back to the topic before us, the overall views of the witnesses implied that the eurozone could only survive through some form of closer fiscal and political union. This view seemed to echo earlier comments by Government Ministers, but the Minister for Europe was reluctant last week in his evidence to say so categorically. Does the Treasury believe that the eurozone does need closer fiscal and political union than it has at the moment?

Mark Hoban: We have said that there should be closer fiscal union, closer fiscal integration; that has been a position that we have been very clear about for some time now. The compact is a sign that the eurozone accepts that; they are moving closer in that direction. We still see the EU as being made up of 27 nation states, and the fiscal union is part of that, but I do not think that should equate with political union.

Q221 Michael Connarty: Politics is the use of power; if the power does not lie behind this fiscal union, is it any more than, as we have said, a set of urgings and target settings, because it would appear the evidence in Spain’s case is that maybe those targets do not mean anything unless you put political power behind it?

Mark Hoban: It is for your member states to exercise that political power. You can have a fiscal framework within which people operate, but the decisions about what sort of structural reform should take place, what sort of changes should take place to the tax system to encourage growth-we have taken measures in this country to encourage growth through tax reforms-and where your priorities lie in spending, and future spending commitments-we have chosen to invest quite heavily in increasing the number of apprenticeships-are political decisions that individual member states take, whether you are inside or outside of the eurozone. Members of the eurozone have signed up to a fiscal compact; that does not limit their ability to make decisions within those constraints that affect the direction of travel of their economies.

Q222 Michael Connarty: It looks like what happens is that a country has to get to the point where they are hanging over the precipice, and only being bailed out, as Greece has been, makes them do the things that are required to safeguard their economy in the long run, as well as the eurozone of which they are part. That does not seem to me like a formula for steady progress; it seems to be one where countries may all have to, one after the other, get to the precipice, fall over, and be hauled back, by bail-outs by the eurozone. That is hardly a prospect that is attractive to anyone in or outside the eurozone. Surely a consistent agreement on a political basis-we are outside, but those who are in and those who sign up to this compact-must be more than just targets and urgings, and only being forced to do something when, in fact, they are about to cause a major crisis of default.

Mark Hoban: That would be a criticism that could be justifiably levelled at the European Union, and particularly the eurozone, if they had not done anything in response to the eurozone crisis other than simply bail out Greece. The fact that you have seen enhancements in economic governance and you have got the intergovernmental treaty means they are trying to learn some of the lessons by having sanctions in place at an earlier stage and having much greater surveillance of countries threatened with financial problems. Rather than simply waiting until the edge of the precipice, action is taken before they get to the precipice, and we then try to stop them from hurtling over the precipice.

There is a much more pre-emptive regime in place, and eurozone member states have learnt some hard lessons as a consequence of the failure to tackle some of these fiscal issues in the past, and they know that they need to demonstrate they are prepared to tackle them now if they are going to maintain market credibility.

Q223 Chair: Minister, you will have noticed-in fact, I think you referred to it just now, but you did not mention the name of the country in question-the remarks of Olli Rehn regarding Ireland, which have caused certain amounts of disturbance in Irish circles. They were really quite offensive remarks suggesting that they should do what they are told, in effect. Do you also know of the remarks by Viviane Reding, the Vice President of the Commission, in the context of the desire that she expresses to have full political union followed by a treaty? Are you concerned in any way about the manner in which these different indicators are demonstrating a move, not only on a question of whether or not there should be closer fiscal and political union in the eurozone but towards much deeper integration within the European Union as a whole. In particular, are you concerned by the attitude of Germany towards this? After all, it is hardly a secret that Germany stands to gain a great deal from the continuation of the European Union as it is now. The question that I put to you is, do you have any concerns that the Treasury and the Government’s attitude towards closer fiscal and political union, whether in the eurozone or elsewhere, is driven by German national interests, although quite often dressed up as the interests of the European Union, as if somehow or other the two were distinguishable?

Mark Hoban: Greater fiscal integration is something that is in the interests of countries both inside and outside of the eurozone and the European Union. We have seen the chilling effect that uncertainty in the eurozone has had on economies, and clearly if the euro is to survive, there needs to be closer fiscal integration. I do not think anyone could disagree with that. We have a monetary union in this country; the same currency is used across the country, and we have fiscal union to underpin that. There does need to be recognition that, as originally designed, monetary union did not have that key component; that has been rectified now, and it is in Europe’s wider interest for that to be the case. I do not think any country would particularly benefit from the destruction of the euro.

Q224 Chris Heaton-Harris: Minister, could you provide us with a Treasury definition of what fiscal integration actually is?

Mark Hoban: I think it is much greater co-ordination on levels of debt and deficit, and ensuring there is a mechanism in place to tackle those across the eurozone. I hate to use a cliché like "uncharted waters", but we are seeing people working their way in the eurozone to what fiscal integration looks like, and what is needed to underpin monetary union. I suspect if we had asked people when the euro was set up what their understanding of fiscal integration would be in terms of its underpinning, it would be a much looser and more permissive regime than we have now. Over time lessons will be learnt from crises and operating experience to try to determine what closer fiscal integration looks like.

Q225 Chris Heaton-Harris: Would it include taxes?

Mark Hoban: It is quite interesting; we were talking about the financial transaction tax yesterday, and it was very clear from the debate that, whether you were inside or outside the eurozone, a great deal of store was set by member states in having national sovereignty over taxes. That was a very clear message from a variety of member states. I do not think fiscal integration needs to mean taxes.

Q226 Kelvin Hopkins: May I take you up Minister on what you said a minute or two ago-that no country would benefit from the destruction or dismantling of the euro? Surely, if countries were allowed to develop a parity appropriate to their own currency, their own economy, and interest rates appropriate to their own economic performance, many of them could devalue and then reflate their economies behind that devaluation, and many countries would find the brakes suddenly taken off their economies simply because they are outside the euro. I personally would urge them to seek to withdraw from the euro and have the freedoms that we have to choose our own parity and our own interest rates.

Mark Hoban: Mr Hopkins, I think we were right to maintain those freedoms. I think it is a bigger challenge for those who are in the eurozone; there are quite significant economic and financial risks they would face from leaving, let alone the spill-over effect on other eurozone member states. I am not as convinced as you are that the future would be rosy.

Q227 Kelvin Hopkins: Well, it is right for Britain, but not for Greece.

Mark Hoban: We are where we are.

Q228 Henry Smith: Minister, would you recognise that, if the very different economic situation in the so-called core northern member states was allowed to develop differently from the peripheral member states, it would be good for growth in both those socalled core northern states as well as the peripheral member states?

Mark Hoban: I think that across Europe there needs to be a focus on growth and productivity and competitiveness, and there are actions that individual member states should take and actions that Europe should take. I do believe that it is possible for all member states to engage in some structural reforms that will gradually lead to greater commonality in individual countries’ economies. It is a challenge to get there, and it is something that does need to be taken very seriously across Europe. I thought the March Council demonstrated it was beginning to happen.

Q229 Julie Elliott: Minister, getting back to closer fiscal and political union: 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 eurozone crisis?

Mark Hoban: Clearly the intergovernmental treaty is a sign of commitment to closer fiscal integration, and while I expect we would all wish they got there faster than they had, it is a good sign. What is important is that member states look quite carefully at some of their imbalances; we have got an excessive imbalance procedure now that looks at a dashboard of measures to look at some of the challenges in countries’ economies. Focusing on those imbalances will be helpful in moving economic growth forward, and trying to understand where individual countries have weaknesses and where they need to make progress.

Whether it is people running a net trade deficit or running a persistent trade surplus, or whether it is level of private debt or public sector debt, there are measures people should be looking at to look at the imbalances in their economy and tackling those. That is nothing new: it is something that the IMF and the OECD do on a regular basis, but there is a particular focus now in the EU in doing that and trying to remove some of the differences that Mr Smith referred to.

Q230 Chair: Clearly there has been a bail-out deal agreed for Greece, but have you heard any suggestions that some pressure is being exerted on the statistical department of the Greek Government? I imagine that it is some form of ONS or equivalent. Have you come across any reference to the fact that there are pressures being brought to bear to produce results statistically that are also leading to disagreements within the framework of the Greek economy: the Greek Government; the Greek ONS officials, the equivalents; or their statisticians?

Mark Hoban: Not that I am aware of. I do not know whether Peter has.

Peter Curwen: I do not have anything particularly in reference to that. Of course, the Greek statistics were part of a problem that was identified.

Q231 Chair: There are rumours around, so I hear, that there are some suggestions of pressures being brought to bear to deal with some inconsistencies in some of the figures that have been put forward by different people in the framework of the Greek economy.

Peter Curwen: You could make the case that Eurostat should have been more diligent on Greek statistics earlier, but they are now completely on top of what is going on in Greece. The Greek statistical institution that you referred to, the equivalent of the ONS, is monitored regularly, and the independence of Greek statistics is now central to what Eurostat is looking at.

Q232 Chair: That is precisely why I asked the question, because if there was any suggestion of undue pressure being brought to bear to produce statistics that were not consistent with the Eurostat requirements, that would be something that obviously we would be wanting to look at as a Government as well, I assume.

Peter Curwen: Yes. Eurostat reports regularly to the Economic and Finance Committee of the European Union, on which I sit, and that feeds in reports to the Finance Ministers’ Meeting of ECOFIN on Greek statistics-indeed, on all statistics. I am not aware of the particular concerns you refer to.

Q233 Chair: Could you look into it? I was given some information a few days ago that suggested there were some difficulties arising, but you are probably in a better position than we will be to find that out. Maybe the Minister could write to me about it.

Mark Hoban: Perhaps, Mr Cash, you could write to me with the information, suitably anonymised, and then we will pursue it.

Q234 Chair: I cannot give you a specific; I have said it was a rumour.

Mark Hoban: Right.

Chair: I said it was information that was provided to me, but it appeared to be from quite a good source.

Q235 Chris Heaton-Harris: Minster, if closer integration of the eurozone were in prospect, what would be the implications, even dangers, for member states outside the eurozone?

Mark Hoban: This goes back to the debate that took place at the December Council: that where there is closer fiscal integration among a group of member states, those matters should be best dealt with by all 27 member states. Obviously competitiveness, productivity and the single market are part of that. That is the risk, as it were, but that is why the Prime Minister vetoed the treaty in December.

Q236 Chris Heaton-Harris: Does the Treasury have any worries about the potential for caucusing of votes at Council meetings in the future?

Mark Hoban: What I would say is reflected in a way in the letter from the 12 heads of state and government sent prior to the March ECOFIN, where you have member states from north and south, large member states and smaller member states, and states from Eastern Europe and Western Europe. They were brought together by a shared view about the way Europe’s economy should develop. I certainly found, both prior to the December Council and subsequently, that where member states share a similar economic philosophy, they want to co-operate and work together. Those member states that are trading nations, that are outward looking, that prefer liberal, open markets, do work together, whether inside or outside the eurozone.

Q237 Chris Heaton-Harris: That is the case now, but in this future Treasury world where we have fiscal integration, surely there are going to be some areas where you have 17 countries that have exactly the same idea as to in which direction they would like to go, and the voting weights in the next four years will change rather dramatically, and not necessarily in the favour of those outside the eurozone.

Mark Hoban: I think that the philosophies that underpin the governments and cultures in those 17 member states do vary, and you see it now; just because someone is in the euro does not mean they have to share the same view on CRD4, which we happened to be discussing this morning. There are differences of views, and I do not feel that that is likely to change; sometimes we are talking about quite deep-seated attitudes towards business and the economy.

Q238 Chair: Is there any formal or informal analysis within the Treasury about whether or not closer integration of the eurozone is in the interests of the UK, and could we have sight of it?

Mark Hoban: The Chancellor has been clear that we think that closer fiscal integration is helpful for the eurozone, and has a beneficial impact on the UK economy. One just needs to look at the OBR forecasts last November, where, in providing explanations for its revision to the economic growth forecast, they cited three reasons: firstly, the size of the boom and subsequent bust; secondly, inflation driven by high commodity prices; and thirdly, the impact of events in the eurozone.

If we are able to have fiscal stability in the eurozone, that is to the benefit of the UK economy in the OBR’s forecasts. You can demonstrate that if you look at the forecasts from a number of business organisations; they highlighted that the downside risk comes from events in the eurozone, so clearly stability would be to the benefit of the UK economy.

Q239 Kelvin Hopkins: We now have a situation of severe austerity being inflicted on some countries and low growth; there is a kind of stability of the graveyard, which we could have to deal with if the economies collapse. Stability of itself is not necessarily a good thing. What we want is growth, and a rising level of demand for our exports. Surely releasing some countries from the vice of the eurozone, and allowing them to reflate their economies, would be much more beneficial for Britain than what is happening now.

Mark Hoban: There needs to be a twin-track approach. Those countries with fiscal problems need to tackle them, but all countries across the eurozone and across the European Union should identify progrowth policies. Those do not need to be policies that involve the spending of more taxpayers’ money. It could be regulatory reforms; planning reforms; changing labour market laws; reprioritising spending on more productive areas of the economy; or tax reforms that favour enterprise.

There are a lot of measures out there you can do in a fiscally neutral way that promote growth, and if at this time the rules were relaxed I think there would be quite a negative market reaction. Look at the market rates of those countries that are not seen to have got ahead of the curve and tackled their financial problems; you see what would happen as a consequence of that type of policy.

Q240 Kelvin Hopkins: If you do not have fiscal reflation, you could have monetary reflation, but that means the ability to depreciate your currency and reduce your own interest rates, and they cannot do it.

Mark Hoban: The ECB is responsible for economic policy and monetary policy across Europe, and there are other means, not just around interest rates. We saw, both before Christmas and the end of last month, the ECB use its longterm repo operation to pump €1 trillion into bank balance sheets. You cannot underestimate the impact that has had in reducing stress on the eurozone banking system and providing a bit of stability. I do not think they are, to use the words of a former Chancellor, necessarily just a one-club golfer.

Q241 Kelvin Hopkins: I understand that some of these banks are taking the money from the ECB and then depositing, for safety, all their deposits back in the European Central Bank to protect their balances.

Mark Hoban: What they have been able to do, Mr Hopkins, is, through the LTRO, prefund some of their funding needs for 2012. In the absence of the LTRO, we would see continuing pressure on bank funding markets, and that would lead to a squeeze on lending to the rest of the economy. The steps that the ECB have taken to provide liquidity have been hugely helpful.

Q242 Henry Smith: You were speaking a few moments ago, Minister, about other ways to stimulate growth across member states, such as deregulation. Do you really see any evidence of a co-ordinated effort across member states to engage in deregulation? Obviously there will be some shining examples from some states, but perhaps others are less willing to reform in such as way.

Mark Hoban: Each member state will take their own actions, but one thing that we were keen to do through the letter that the Prime Minister signed along with 11 other heads of state and government was to get the EU itself to focus on barriers it puts in place to growth, and think about some of the regulatory challenges-think about the ways in which we can either kick-start the Doha trade round or sign bilateral free-trade agreements with other countries to free up world trade. If you talk to politicians from Spain and Italy, they will talk about some of the structural reforms that are happening there: labour market reform in Spain and the liberalisation of professions in Italy. They are big changes, but we need to ensure that not only member states do what they think is right but the European Union does what it thinks is right too.

Q243 Henry Smith: How optimistic are you that the institution, if I can put it like that, of the European Union is serious about reform in such a way? The Prime Minister is absolutely right, of course, but it is one thing to articulate that and it is another thing for the institution of the European Union to take that on board.

Mark Hoban: That is a fair comment. It does require a mind shift by the Commission. I saw Commissioner Barnier last week; he was talking about a second Single European Act to try to look at trade liberalisation. There is work going on in the European Commission at the moment thinking about the economic cost that comes from regulation, and what can be done to reverse that. I think there are some positive signs there. In the same way that member states look to the European Union to tackle its budget, because they are suffering from austerity at home, they are also looking to the Commission to find ways in which they can reduce the burden of red tape on businesses as they are doing in their own domestic economies too.

Q244 Chair: You have given us a fairly optimistic or, at any rate, a positive view of the impact of closer integration with respect to member states outside the eurozone. Your argument, and the Government’s argument, is that it is beneficial that there should be closer economic and political union, certainly fiscal union, because the closer they get, the less the likelihood of an implosion. That is basically the position: the "remorseless logic" as the Chancellor put it. To come back to Mr Heaton-Harris’ original question, and it is not something that you have really tackled, if I may say, in your answers so far: don’t you see what dangers there are, which the Prime Minister identified by exercising the veto in the first place? If veto equals a recognition of danger, what are those dangers, and to what extent do you see them impacting on the UK?

Mark Hoban: The concern that we had in December was that there were ideas floating around suggesting ways in which the eurozone could have acted on matters that would have affected the single market or financial services. Those proposals did not get into the intergovernmental treaty. We were seeking safeguards in case they got into a treaty that affected all 27 member states. We have been very clear, and it goes back to the reservations that the Minister for Europe outlined in his evidence session three weeks ago, about the impact on the single market. We think we need to ensure that matters around the single market are dealt with by all 27.

It is also important that we have good bilateral relationships with member states who share similar views with us, whether inside or outside the euro, and that we remind the Commission, as we do from time to time, that their role is to protect the interests of all 27 member states and they are the guardians of the single market.

Q245 Chair: Do you have any sense that there is a danger of any one country, Germany in particular, being predominant in the eurozone? As they move further towards fiscal union, which is quite clearly the intention of Angela Merkel and others, the consequence would be, because of the dependence of some of the countries within the eurozone on Germany as well-in terms of export, import, and so forth, and politically-that this would create something much more in the nature of a German-driven economy in Europe as a whole. That would present a danger to other member states outside the eurozone, and perhaps the UK in particular. Our trade imbalance with Germany is notoriously huge, and I wonder whether you see that exacerbated.

Mark Hoban: One of the challenges for the eurozone is to look at a whole series of economic imbalances and try to tackle those, and that applies to deficit as well as surplus countries. There is a range of member states with strong voices in the eurozone. You have a number of larger counties, and you have blocs of smaller countries that co-operate well together. It would be wrong to present it as a monolithic organisation with a single view. From my own contacts with opposite numbers in member states inside the eurozone, that is clearly not their view.

Q246 Chair: With regard to the President of the Bundesbank’s statements regarding the securitisation of loans in Greece and in Spain, Wolfgang Münchau said in the Financial Times the other day-I am paraphrasing him slightly-that this was the equivalent of suggesting that the Luftwaffe might seek to invade them, or something of that kind. There is some tension that is coming out of all this, and this is the question I am putting to you. To say that there is a remorseless logic towards greater fiscal union has a certain logic of its own, because it implies that you would not want an implosion. Is there not another side to the equation as well, and that is also a potential danger?

Mark Hoban: I have read Wolfgang Münchau’s articles from time to time; they often are colourful in the way in which they present their arguments. Clearly, Germany has a strong economy: it does very well in exporting, manufacturing, and financial services. We could all learn something from how the German economy operates and benefit from that, whether you are inside or outside the eurozone.

Q247 Kelvin Hopkins: A major factor in the German success is that they managed to keep a relatively low parity for their currency over a very prolonged period. If the eurozone was dismantled, there would be a rapid appreciation of the new Deutschemark, or the euro mark-2, which would be beneficial to our economy as well.

Mark Hoban: I think that there are some countries who seem to thrive regardless of where their currency is, and will find ways of reinventing their economy-tackling labour costs and things like that. We have seen the German economy respond to those sort of challenges in the past. One of the challenges of the eurozone is to use the excessive imbalance procedure to look at where divergences are across particularly the eurozone economy and think about how they are tackled: how those countries that have a deficit in goods might turn that around and increase their exports; how countries that are saddled with high amounts of public sector debt tackle that. I think there is a lot that needs to be done to tackle imbalances in the eurozone economy.

Q248 Chris Kelly: Article 10 of the fiscal pact can be seen as encouraging the use of enhanced co-operation by the eurozone as a bloc. Professor Hicks fears that this emphasis on enhanced co-operation by the eurozone is likely to spill over into bloc voting on internal market measures. In my opinion that could potentially damage vital UK national interests. Do you share this fear, and, if so, in which policy areas do you think it is likely that states under this agreement will wish to use enhanced cooperation?

Mark Hoban: As I have said, I am sceptical of this bloc voting approach that might be used to undermine the internal market or areas like that. I sometimes think the only common factor for eurozone countries is the fact they have the euro; you do see a wide range of business practices and approaches to free trade, and things like that, that divide them. I do not necessarily see a bloc like that.

On the issue of enhanced co-operation, this is covered in some detail in the treaty on the function of the European Union. Enhanced co-operation should be open to all member states, not just a particular pre-defined bloc. Of course, it cannot be used in a way that undermines the internal market, or economic, social, or territorial cohesion. Even within enhanced co-operation there are some constraints, even if a group of members states wanted to pursue that route.

Q249 Chris Kelly: Further to Mr Heaton-Harris’ follow-up question earlier, what about taxation?

Mark Hoban: Member states could use enhanced co-operation to deal with tax issues. I go back to the example of the FTT, which is famously mooted to be the answer to many of the world’s woes. It may be that a group of member states would want to use enhanced co-operation, but there are safeguards around that, and they have to get the permission of others to use that method.

Q250 Chris Kelly: Presumably we would not give such permission?

Mark Hoban: No one has approached us yet. Based on the questions at yesterday’s ECOFIN, which have been well documented in today’s Financial Times amongst others, it is hard to see quite where the European Union was going to go on the FTT.

Q251 Nia Griffith: Could I ask you a couple of questions, Minister, about the veto? First of all, please accept my apologies for not having been here at the beginning. What do you think the UK achieved overall by exercising its veto?

Mark Hoban: I think there was a risk that this would become a treaty of the European Union, where there was a risk that measures would be introduced into the way in which the European Union works that would affect the single market or competition issues. By exercising the veto, this treaty has been reached outside the European Union treaties.

Q252 Nia Griffith: Do you think it has had any adverse effect on the way the UK is perceived or the way that the UK can participate in negotiations on other issues, such as financial services or the multiannual financial framework?

Mark Hoban: It is a curious sort of thing, and I deal with both of those issues. We have a very good relationship with a number of member states on the European budget, including Germany and France. Our cooperation has remained as strong since December as it was before December. We are seen as a group of fiscal disciplinarians in European Union terms on financial services. We had a significant success on the regulation on European Market Infrastructure, where in the final stages we were not the member state that was isolated; it was a member of the eurozone that was isolated.

Look at the pattern of contacts between governments post the December treaty. The German Foreign Minister was across here very quickly after the December Council meeting. The Prime Minister has met a number of his opposite numbers, including the Prime Minister of Spain. The Chancellor has engaged in meetings with his opposite numbers. I have done a series of bilateral visits to member states. The example that demonstrates that we are not isolated is the letter of 12 that was signed prior to the March Council, where alongside the Prime Minister it was signed by the prime ministers of Italy, Spain, the Netherlands, Poland, and a range of member states. I do not think that our influence has been diminished as a consequence of the December meeting.

Q253 Nia Griffith: Do you see us then in some way, if you like, going along very much on the same track, but in a sort of parallel way?

Mark Hoban: In what way?

Q254 Nia Griffith: In the sense that in terms of a lot of what was put in place in order to make the eurozone more stable, if you like, we are complying with anyway in our own financial way. Does that make sense? As you say, we are being prudent, etc. We are travelling in the same direction.

Mark Hoban: The advantage we have is that we have the freedom not to. Obligations make best endeavours, and it has not always been the case the British Governments have sought to tackle their budget deficits.

Q255 Chair: To what extent do you think the eurozone’s preoccupation with this fiscal pact has detracted from attempts to address other policies that might lift member states out of the present economic difficulties?

Mark Hoban: I do not think we should underestimate the extent to which the fiscal crisis has dominated a number of European Council meetings, and led to more European Council meetings than would normally be the case. This is a big issue, and the impact it has had across Europe has been huge: I do not think we should underestimate it, and it was right to spend the time to do it. I do believe that there should be a twin-track approach; we should be tackling our fiscal problems, as we are here at home, and introducing growth measures, as we are here at home, but the European Union needs to focus on the growth agenda too.

One of the merits of the letter was to demonstrate that concerns we have are shared by a number of member states, and that is the direction in which the European Union should be going in the future. Certainly the conversation yesterday at ECOFIN was that we have spent, as a group of finance minsters, a lot of time talking about the financial crisis, but we need to do what we can to focus on growth at a European level, whether through specific initiatives, or through monitoring imbalances.

Q256 Chair: Growth is not an issue for the European Union in itself alone; it is also a question in relation to the individual domestic economies. The object of the exercise, one might imagine, would be to be a member of the current European Union for the purposes of enhancing the national interest of the electors of this country as part of a process of increasing growth. Would that not be right?

Mark Hoban: I am fully signed up to that. I think we should be pursuing pro-growth measures within the European Union as well as at home. In areas such as trade the EU can lead, and can not only open up its own markets to trade from overseas but can work to open up overseas markets. That is a very constructive way in which the European Union can complement measures being taken nationally to promote growth.

Q257 Chair: Has the Treasury studied the question of the current account transactions as between the UK and the other 26 member states and, indeed, the interaction of the current account transactions, goods, and services between the member states themselves, and drawn any conclusions from that?

Mark Hoban: By and large we see our country’s future as being intimately bound up with economic growth, not just in the eurozone but elsewhere, because we are, by our nature, a trading nation. We have always thrived by being able to export: identifying what areas we are good at and how we exploit those international markets. I spoke at the launch of Mexico Week this week, and only 1% of our exports go to Mexico. That is one of the fastest growing economies, and we should be capitalising on that, and I think that we can. I think that there are huge volumes of trade out there, Mr Cash, that we should be capitalising on. I am sure you have heard me say this before, but perhaps I will repeat myself just this once: last year we exported more to Ireland than we did to Brazil, Russia, India, and China combined. That is not a healthy situation to be in, and we can do more.

Q258 Chair: Understood, but, at the same time, there are statistics from the ONS that demonstrate-to go back to my earlier question about the transactions on goods and services, import-export-that in 2009 our deficit with the other 26 member states was minus €14 billion, but by the end of 2010 it had gone up to minus €51 billion. That does not demonstrate an enormous amount of confidence in our ability to be able to use the European Union as a means of enhancing growth for the UK, because the trade deficit appears to be so absolutely vast. Is that improving, and are you going to be looking at that in the context of this treaty and also the impact that the fiscal union within the eurozone would have on this situation as regards the UK?

Mark Hoban: I do not think the fiscal compact will prevent us from exporting; it does not have an impact on the internal market. What I do think is this: economic stability within the eurozone would be hugely helpful, as it is one of our largest export markets. There is clearly more that we should be doing to promote exporting to not just the EU but elsewhere. I am hosting an event in my constituency next month to encourage SMEs to export more, not just in Europe but around the world. There is more we can do and should do, but I am not a defeatist Mr Cash. I think you said earlier I was optimistic; I am optimistic, and I do think we can raise our game and do more. One thing that Europe should be very cautious about is doing anything that would close the shutters around Europe.

Q259 Chair: You do appreciate that the imbalance, on the figures that the ONS have come up with, does suggest that within one year we went from minus €14 billion to minus €51 billion, and that does not bode very well if that were to be a continuing position.

Mark Hoban: I would look at it as we should be able to reverse the position; we should be able to go back to that lower deficit in 2010.

Q260 Chair: Well, I am very glad that Mr Curwen was able to give you some good advice on that point. I too am an optimist, but I also believe that trading, as you rightly suggested, elsewhere in the world is also highly advantageous, because of the enormous development potential. Mr Kelly would like to ask a final question.

Q261 Chris Kelly: Not so much a question, Mr Chairman, but I am pleased to hear that the Minister is involved in Mexico Week. He will be interested to learn that I took our right hon. Friend the Chancellor of the Exchequer to Bri-Mac Engineering in Dudley South in my constituency, which is an engineering business that exports high-quality bearing products to Mexico, a country with much lower labour costs than our own.

Mark Hoban: That is a perfect demonstration, Mr Cash, of why we should be optimistic, because it does demonstrate we can succeed in overseas markets. I do not see that our economic future is limited simply to the boundaries of Europe; we should be exporting to Europe and beyond to places like Mexico.

Chair: On that very encouraging note, I will bring the proceedings to a conclusion. Thank you.

Letter from Rt Hon Mark Hoban MP, Financial Secretary to the Treasury, HM Treasury