Foreign Affairs Committee - Minutes of EvidenceHC 87

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Oral Evidence

Taken before the Foreign Affairs Committee

on Tuesday 10 July 2012

Members present:

Richard Ottaway (Chair)

Mr John Baron

Sir Menzies Campbell

Ann Clwyd

Mike Gapes

Andrew Rosindell

Mr Frank Roy

Sir John Stanley

Rory Stewart


Examination of Witness

Witness: Charles Grant, Director, Centre for European Reform, gave evidence.

Q32 Chair: I welcome members of the public to this second evidence session of the Committee’s inquiry into the future of the EU and UK Government policy. It allows us to question directors of two of the UK’s most influential EU-focused think-tanks and, from the Netherlands, the author of one of several proposals currently being floated for fundamental rearrangements of the EU. Our first witness is Charles Grant, the Director of the Centre for European Reform. Mr Grant, welcome, and thank you very much for coming. Would you like to make any opening remarks?

Charles Grant: I would like to make a couple of opening comments. One is to try to dispel what I think is becoming received wisdom on one issue; the other is to question what is also becoming received wisdom in many British political circles. The first one is the assumption that if the eurozone integrates significantly, that, by definition, fundamentally changes Britain’s own relationship with the European Union. People from all political parties seem to accept that as a given, but I would question it. I would argue that if France and Germany choose to integrate their economic policies, and if Spain is banned from borrowing more than 1% budget deficit every year, that does not necessarily change Britain’s relationship, in terms of the single market. I agree that it might, if the integrated eurozone caucus had a unified position on many issues, such as financial regulation. That would affect Britain, but in my view, that danger is most likely if Britain blocks future attempts to amend the EU treaties that would facilitate eurozone integration, and perhaps we can talk about that later. It seems that that would spur eurozone countries to go outside of the EU’s structures, and it would lead to them caucusing, making it much harder for the British to influence what they do in the eurozone. It could lead to quite a profound change in the relationship, namely through a loss of British influence.

My second point is more fundamental. The Government certainly seem to be moving towards a view-I have heard some people in the Labour party say similar things, and Mr Persson, who you are going to see later, says this as well-that what Britain should do is get a better deal. It should go to its partners and try to get a deal that effectively opts out of what some people regard as the sillier things that the EU does, perhaps then putting it to the people in a referendum, or not. However, my contention is that it is not feasible, as far as I can see, to assume that the British can negotiate special treatment, in terms of opt-outs from the bits of EU policy that they do not like-whether it is fish, agriculture, social, or whatever-because our leverage is very low, and if we wanted such opt-outs, others would too. It would not be in the British interest to allow other countries to opt out of bits of the single market. I have talked to other governments about that, and I think that the British are under an illusion if they believe that a special set of arrangements is available to us. I think we are in a weaker position than we imagine in asking for such arrangements. Those are the two opening points I wished to make.

Q33 Chair: Can I start by asking about the UK’s influence, and then about its relationship? You described the December 2011 Council as a disaster. Can you give any concrete examples of where you think we have lost influence since then?

Charles Grant: I did describe it as a disaster, and it may well turn out to be. I agree that in the short term-the six months since then-it has not proved to be particularly harmful, as far as I can see. It created a lot of ill will towards us, which undermines us in certain ways. However, it has not been as bad as I thought it would be, because in the subsequent negotiation of the fiscal compact, although the British are not part of it, other EU countries, notably Germany, fought hard against French wishes to ensure that the Commission would play a very big role in the new arrangements of the fiscal compact. Although it is outside the EU, it is intimately linked to the EU systems, which is good for the single market and good for British interests. I do not think the way that the fiscal compact has so far turned out-of course, it has not even been ratified yet-is particularly harmful to British interests. So, what happened in December upset and annoyed people, and we may need their goodwill at various points in the future, but I cannot give you a precise example of British interests being damaged yet because of it.

Q34 Chair: You have downgraded the assessment of disaster.

Charles Grant: Yes.

Q35 Chair: Do you feel that we need to be at the table for every discussion that is going on in the EU?

Charles Grant: I think we probably need to be at the table in most discussions when they are about economics. Whatever the eurozone does in future in terms of financial regulation and economic policy co-ordination, although we will not be part of these new binding arrangements, particularly those limiting fiscal policy, we should have a voice and be in the room, perhaps without a vote, just to express our views, because our economy is big and important in the overall EU economy. As we are the host to Europe’s largest set of financial markets, we’ve got to have a voice. The British Government’s objectives should be to be present in the room with the right to speak, certainly when financial issues are discussed, but I would say whenever economic issues are discussed.

Q36 Chair: You said that if Europe went to an inner core it would make the EU "less congenial"-that was the phrase you used. In that case do you think that we are right to be encouraging the development of such an inner core?

Charles Grant: Yes, because my starting point is that the break-up of the euro would be very damaging to the European economy and pretty damaging to the British economy, indeed the world economy. I hope the euro’s break-up can be avoided. None of us knows if it can be. The best way to avoid its break-up is for the eurozone countries to integrate more in their economic policies and probably that means some more political integration as well. As I think I have said, it is true that it makes the EU less congenial to the British because they have tended to see the economics of the EU as the main reason for being in it. However, my line would be that as long as the integrating eurozone does not inflict its centralisation of economic policy-making on countries outside the euro, such as Britain, it need not harm our interests at all. As I said before, we need to have a voice in the room, but also-and we shall probably come on to this-we need to find ways of influencing the outcome of the eurozone discussions to make sure that whatever decisions they take are relatively congenial for the British. Perhaps we can talk about how Britain should influence the discussions.

Q37 Chair: Do you think we have more in common with Germany than we hitherto expected? One of the surprises to me has been that we often seem to have common ground in groping our way forward with Germany. That rather surprised me. Does that surprise you?

Charles Grant: No, because we have always had common ground with the Germans in certain respects. They have always been relatively free trade oriented; they have always believed in a rules-based system of EU governance; and they have always wanted a relatively outward-looking EU. They have been a bit less protectionist in their instincts than the French, but what so many countries say to me, especially the smaller ones when I talked to them recently is: "Why is Britain either leaving the EU or at least being less influential in the EU?" We are forcing the Germans to work much more closely with the French, faute de mieux, and there is a risk that the Germans will become less free trade oriented, because of the diminished British voice in the European Union. On your point about having a similar view, while the background is that the Germans have often had a similar view to us, things have got worse in the last six months. This is partly in answer to your first question about December. I spend time in Berlin talking to quite senior advisers in the German government and they are very fed up with us. They are annoyed that we are a distraction. When they are trying to sort out the serious business of the eurozone crisis, we sometimes lecture them in a patronising tone from the sidelines.

We criticise them-in my personal view a lot of that criticism of the way they handled the eurozone crisis is correct-but when we criticise them from the sidelines we are not, as they perceive it, being very constructive. Then we come along and say that we want to redefine Britain’s relationship with the EU, possibly opting out of certain things. This does not create a lot of good will. I have noticed in the last six months, since December, a greater degree of frustration with the British. Just one example: there has been a sort of gentleman’s agreement that the British will never be outvoted on financial services legislation. It is majority voting and we could be, but we have never been outvoted on a key issue, just like the Germans have never been outvoted, I think, on their car industry and the French on farming. I have now heard it said in Berlin: "We are so fed up with the British, why should we do them these favours and give them special dispensations? Maybe it is time that we outvoted them." That gives you a flavour of the increasing frustration with the British that I perceive in Berlin.

Q38 Sir Menzies Campbell: Might I take you back to your opening statement to see if I understand completely one of the points you made? Excuse me if I put it in more pejorative terms than those you chose. Would I be right to infer that it is your opinion that the more obstructive generally the United Kingdom might be in the European Union, the more likely it is that it will encourage integration on various levels among other members of the European Union, which either excludes the United Kingdom, or is against United Kingdom interests?

Charles Grant: Yes. My view is that the British being difficult cannot stop them integrating if they wish to integrate, but it pushes them down a path that is less good for our interests. That path is being outside the EU, setting up new intergovernmental structures, as they did with the fiscal compact. Although as I said previously, the Commission does play a rather large role in the fiscal compact, that was not how the French intended it to be. The French initial view of that fiscal compact was of a very intergovernmental body dominated by the big member states, because the French have quite a negative view of the Commission.

What I picked up in Germany recently is a fear that when there are new treaty changes on the agenda, as there may well be for the banking union, for example, Germans fear that the British will come along, as they did in December, and say, "No, you can’t have this done through the EU." The Germans will reluctantly go outside the EU as they did before. They point out that if you go outside the EU with a banking union you risk fragmenting the single financial market, and that could be quite harmful for British interests. It will certainly cause great annoyance.

Q39 Sir Menzies Campbell: Mention of the fiscal compact takes me neatly to my next question. Have you conducted any analysis as to why it was that all of the non-eurozone countries, with the exception of the UK, were willing to sign up to the fiscal compact?

Charles Grant: Ultimately, just the Czechs stood by us, though in December they appeared to be on the other side. A lot of British officials were quite surprised that most of the countries outside the euro did not want to be associated with the UK in resisting the fiscal compact treaty. Perhaps that is a measure of how, even before the December summit, Britain’s standing and reputation had fallen. We think in this country that the central Europeans are our friends because we helped to get them into the EU, we let in their labourers and so on. Actually, in recent years, our standing has really declined in central Europe, because we are perceived as so peculiar, so on the edge, that those countries, sometimes reluctantly, have decided that Germany in particular, and France and Germany more generally, are where they need to be.

One of your other witnesses, Howard Davies, quoted a Polish official saying, "We can see the eurozone ship is sinking, but we want to jump on to it anyway." I have heard Polish officials say the same thing. That is the view: most of the countries outside the euro want to join it in the long run. They think that Germany is the power that matters in Europe. They don’t want to annoy Germany too much; they think they need to be in Germany’s camp; and the British are seen as increasingly marginal.

Q40 Sir Menzies Campbell: One way to deal with the perception that you have observed is diplomatic effort. What is your view of the quality of British diplomatic effort in the EU in recent years? I don’t just mean the quality of the permanent representative in Brussels. I mean generally, within the EU and, if you like, intergovernmentally with countries that are members of the EU.

Charles Grant: Obviously, our diplomats are generally very good at their job. My criticism would be this: if you want to influence outcomes in the EU you need friends and allies, and we haven’t always been very good at making those friends and allies. Successive Governments, Labour and Conservative, have to their credit understood the importance of France and Germany. Gordon Brown’s and David Cameron’s Governments have paid attention to France and Germany, as they should, but we haven’t paid enough attention to some of the smaller countries, particularly the central Europeans.

We have natural allies in the Netherlands and the Nordic countries and, arguably, central Europe where we haven’t cultivated. Not enough junior Ministers go and visit those countries to get to know their opposite numbers. Not enough senior officials go to them, while the French and the Germans send their Ministers and officials all the time to those countries. We haven’t invested to a sufficient degree in the long-term relationships that we should have. Obviously, right now the current Government have pretty good relations with Sweden, which is good, but I don’t think we have done this with enough countries.

Q41 Sir Menzies Campbell: My last question could almost be one for a PhD thesis, but perhaps you will be as economical as you can with the answer. Why should the United Kingdom remain a member of the European Union?

Charles Grant: The short answer to that question is that if we left the EU we would not have full access to the single market. We would face tariffs and non-tariff barriers. If we went for the Norwegian option, we would not be able to shape the rules of the single markets. Being a full rule-making member of the single market is profoundly in Britain’s interests. That is the main thing.

Secondly, global trade, global economic issues, free trade agreements and climate change talks. If we are part of the EU and influencing the EU’s position, we are one of the big boys, or big people, and we can really influence the result. Thirdly, foreign policy. We are, for all our problems, one of the most influential players in foreign policy on Iran, Syria, Russia and China. We can and sometimes do help to set the agenda. As part of a big bloc, we have more influence. If we want to open up Chinese markets, it is much better to be part of the EU in doing so.

Finally, enlargement, which is perhaps the EU’s greatest success, spreading democracy, stability, security and prosperity across much of the continent. If we stay in the EU, we can continue to push for enlargement. Obviously, we would not have that ability if we left the EU.

Q42 Mr Baron: I completely agree with what you have said. We have not put enough diplomatic resource into the EU. There is an attempt by the Government to catch up, but there is a long way to go. However, I accept what you say.

May I come back to the question asked earlier about where our long-term interests lie? One could paint the opposite picture to what you have described. We have had 40 years of ever-closer union in the EU. The treaty of Rome embodied the principle of that ever-closer union. We have had Governments and Prime Ministers talk about clawing back powers before, but it has never transpired. What we have in front of us now is a eurozone crisis. I think most would agree that if the euro is going to succeed, at its core there will be some sort of fiscal union and compact. Even now, although that is not due to come into effect until the spring, most of the core countries-Germany, France and Holland-are already in contravention of that fiscal compact if one looks at the figures.

In your view, would it be impossible for Britain to adopt a relationship similar to that of, say, Norway and Switzerland, with a relationship based on trade rather than on ever-closer political union? After all, these countries seem to be growing faster than the EU. Their currencies are certainly stronger. Their finances are in better shape. Despite their position, they are embracing more trade outside the EU at a faster rate than Britain in faster-growing parts of the world. Do you see that as an impossibility?

Charles Grant: I do not see either model working for Britain. The recent research published by Open Europe, which is generally regarded as a Eurosceptic think-tank, points out that neither the Norwegian nor the Swiss option would be very good for us. The worst would be the Norwegian option, whereby you have to accept the rules of the single market without having a vote in setting them, which would surely be inconceivable for the City of London. Also, Norway has to pay into the EU budget, although it is not in the EU.

Switzerland, I suppose, is perhaps a less bad option, because you can negotiate a bilateral deal that suits Switzerland, but of course the Swiss do not take part in much of the services that the EU does, so financial services is not included. If we went for a Swiss model, London would not remain the centre of Europe’s financial services markets. We would lose that, or part of that. I do not see either as being a particularly appropriate model for Britain.

The other point I would make is that neither Switzerland nor Norway is a middle-sized power with global interests, which wants to try and influence the world around it. The fact that they are not part of EU foreign policy making is not a big problem for them. If Britain gave up being a member of the EU, as I said before, we would lose the ability to shape and set the global agenda with like-minded countries that share many of our interests and most of our values.

Q43 Mr Baron: Let us put Norway and Switzerland to one side. You have touched on the possibility-remote though you thought it would be of us succeeding-of repatriating powers to the UK. Can you just go into a little more detail as to why-this, after all, is what the British Government have stated is their intent-you think that would be such a hard pounding? Why do you think we could not achieve this, given particularly-I would put one point in our favour-the balance of trade with the EU, which is strongly in their favour? It is in their interests to make sure that they do try to accommodate the British at the end of the day, because it is a very large marketplace for them and the balance of trade is very much in their favour.

Charles Grant: I disagree on that last point. The EU is a much more significant market for the UK than the UK is for the EU. About half our exports go to the EU. I do not have the exact figure for non-British EU exports to the UK, but it is much lower than that. If there was a sort of stand-off on trade and people started putting up tariffs, we would lose much more than they would. I do not regard it as harmful that we have a trade deficit with the European Union. Trade deficits are only harmful if they are unsustainable. If you have a capital account surplus and foreign investment and so on it makes up for that trade deficit. In terms of economics, it is not a bad idea at all to have a trade deficit.

Q44 Mr Baron: We can perhaps disagree about the balance of trade, but what about on that central point of why you think it would be so difficult to reclaim powers back from the EU? That is important because it is the Government’s stated position.

Charles Grant: No, I agree that it is hugely important, which is why I mentioned it in my opening remarks. In order to change the treaties you, of course, need unanimity. In my conversations with governments-and reports of other people’s conversations with the EU governments-I have heard of one government possibly considering that it might agree to grant Britain some sort of opt-out. I have heard that one Dutch politician has said that.

One is not enough for unanimity. You would need 27-or 28 with Croatia joining-to say this. It would not be in their interests to grant it. The French are great believers in social Europe-for better or for worse. They would say that if Britain was allowed to opt out of the 48-hour working week, information and consultation and the rather small number of measures that had been passed under what used to be called the social chapter, that would lead to what they call social dumping. Companies would relocate from France to Britain attracted by the relatively weak social legislation. So the French have no incentive to allow us to opt out of social policy. Many other countries-at least half or two thirds-would agree with the French on that.

The leverage we do have, I guess, is that we pay net into the EU budget roughly £9 billion1 a year. That is significant, but not overwhelming given the size of the EU budget overall. They would lose that if we left the EU, although, of course, if we went for a Norwegian status, we would still pay something net into the budget.2 When I talk to governments, they basically say, "Why should we give Britain a special deal?" If we allow the British to opt out of the things that they do not like, such as social policy, the French will try to opt out of the EU rules that prevent you keeping out Chinese shoe exports and the Germans will try to opt out of the rules that ban them from subsidising their coal industry. Everybody has bugbears and things about the EU that they do not like. It is essentially a package deal and you have to accept the rough with the smooth, except for the euro and Schengen, which are slightly different and we have been allowed to opt out of.

I do not wish to imply that nothing should be reformed in the EU, that everything is fine and the difficulties I have described mean you should not try to reform it. My think-tank is called the Centre for European Reform because we believe that a lot of things need changing. My argument would be to try to change them from the inside. On agricultural policy, sure, let’s build up alliances and make that a priority in the coming budget talks and try to get it changed in ways that suit Britain. It has, of course, been reformed dramatically over the years-not enough-but it has not been a British Government priority to reform it, which I regret.

Q45 Mike Gapes: May I take you back to your earlier remarks about the fiscal compact? That is an intergovernmental agreement. You hinted at the frustrations that that mechanism has caused, but I would like you to be more explicit. Does this indicate that it is now politically impossible to get unanimous European Union treaty change and that this will be the model for the future?

Charles Grant: I do not think so, although in a way that is a question for British politicians to answer because unanimous treaty change requires a British signature and passage through the House of Commons. You are professional politicians, and I am not. You can judge whether the House of Commons is likely to pass a new EU treaty, but I think there will be new EU treaties. As I said, there will probably be several treaties for banking union and other changes that emerge in the coming years. Most countries will sign these treaties. I do not think it is impossible to get unanimity. The Germans, as I said before, are worried about the British. The British are the only country likely not to sign such a treaty at the moment. Things may change after the next Italian elections, or whatever, but at the moment that seems to be the case. Britain is the country that others are worrying about, and it is we, rather than anybody else, who will drive the other EU countries to push ahead with intergovernmental mechanisms outside the EU.

Q46 Mike Gapes: The Prime Minister has said explicitly in recent articles, including his Sunday Telegraph remarks, that he desires to repatriate powers. Is there a possible quid pro quo if that comes to a head at the same time as some possible treaty change? Is it possible to sequence that? Given your answer just now to Mr Baron, are you aware of any support for that view within member states of the European Union that might be prepared to give us a little bit, almost as a face-saver to the Prime Minister, while getting their big treaty change?

Charles Grant: That is a very good question. As I said before, I do not see our partners being willing to offer significant opt-outs from EU policies. However, they might be able to offer us something that could be called a deal to allow Mr Cameron to say that he has a piece of paper and that it is a good piece of paper. For example, as you know, in 2014 the British Government has to take the JHA decision on whether to accept ECJ purview over the acquis communautaire in justice and home affairs. Under the Lisbon treaty, Britain can choose to opt out of all that acquis communautaire and JHA, including the arrest warrant, Europol, Eurojust, and so on. Whether that is a good idea, we can discuss, but that could be one element of it. There could be an agreement on the working time directive, which is not about treaty change but about a particular piece of law. A few other bits and pieces could be dressed up in a package deal that Mr Cameron could come back and present as an achievement. I think some of my Eurosceptic friends may not be satisfied with that as it would not significantly change Britain’s relationship with the EU, except perhaps on the JHA point. I think our partners, for peace of mind and for allowing them to focus on what they think is important, would give us a few crumbs like that, but not the significant opt-outs from EU policies that, as I understand it, many Conservatives, although perhaps not all of them, wish on farming, fish, social policy, and so on.

Q47 Mike Gapes: Are the Government, as far as you are aware, doing anything to facilitate that? Behind the scenes, are they trying to nod and wink that, actually, a deal is possible on a limited-what you refer to as "crumbs"-basis?

Charles Grant: I have not picked up any information that the Government are nodding and winking along those lines. My guess is that the Government have not yet decided what they would ask for, but I am not a member of the Government, so I am not the best person to ask?

Q48 Ann Clwyd: You mentioned your regret that reform of agricultural policy has not been given greater priority. Of course, such reform has been given considerable priority by previous Governments, albeit in the face of great opposition from the French and the Germans. Is there any indication that their opposition to reforming the CAP is weakening in any way, or does their opposition still remain as resolute? Would a British Government not just be hitting their head against a brick wall?

Charles Grant: The EU is fairly evenly divided on this. There are perhaps more countries that are in favour of reform, but the French, the Spanish, the Irish and the Poles are among those who are strongly against.

I disagree slightly with your analysis of previous British Governments. If I was being very cynical, I would say that for 20 or 30 years British Governments of left and right have pretended to want radical reform of the CAP and the French have pretended to want to get rid of the British rebate. The reality, however, is that the British have preferred to hang on to the rebate, because the Treasury calculates that it is better for the British taxpayer to keep the rebate and not worry too much about CAP reform, and the French have wanted to protect the CAP. So I do not think that it actually has been a really big priority, and I think that we could have made it a bigger priority, but the Treasury has very strong views that what matters most is the British net contribution to the EU. Of course, if you did achieve radical CAP reform, the rebate becomes less necessary, because one of the reasons that you need the rebate is because the CAP is unfair to Britain.

Q49 Rory Stewart: I think your theory is very convincing, but the problem is that it seems from the outside as though, broadly speaking, British people have been dissatisfied for 30 years. It is not just that somehow British politicians are being irresponsible. It is reflecting a genuine disquiet. It is therefore very difficult to imagine in the long term the British population really accepting the kind of model that you are presenting, which is that we are in a straitjacket, that we do not really have any choice, that our best option is to remain in, that we do not have much movement and that we might get a few crumbs off the table. If that is the case, will there not eventually be a point at which we regretfully have to recognise that somehow this is a relationship that does not quite work? Even if in an ideal world it should work, something about British national identity or British public opinion is not going to be comfortable over the next 20 or 30 years with the sort of philosophy that you are advocating.

Charles Grant: That is an interesting point. Yes, I would not be at all surprised if Britain leaves the EU, say, before the end of the next Parliament. I would regret that, but there seems to be a bit of momentum in that direction. However, public opinion can surely be shaped and led by intelligent people, whether business leaders or politicians. Are you going to go back to your constituents in the north-west and give a speech in the marketplace on the economic benefits of EU membership? How many business leaders have yet woken up to the fact that Britain could leave the EU? I happen to know personally that a number of them are just waking up to this fact and they are very concerned. You may see some of them explaining that Britain should stay in the EU because of what they and I perceive as the economic benefits, but it has not happened yet.

I think that public opinion is going in the direction that you suggest towards accepting some sort of withdrawal, but when people think about the stakes involved, I hope that they change their minds. It is up to responsible politicians, business leaders and, indeed, journalists to explain the facts. The case for staying in the EU is quite complicated and not very easy to explain in 20 seconds in the pub. The case for getting out of the EU is rather simpler and easy to explain in 20 seconds at the pub.

Q50 Sir Menzies Campbell: Following on from that question and answer, have you given any consideration to the process of withdrawal, how long it might take and how difficult or easy it might be to negotiate?

Charles Grant: I have not given a lot of consideration to that, but obviously one of the virtues of the Lisbon treaty is that it contains a clause setting out a procedure for withdrawal. It would obviously be a bilateral negotiation whereby Britain and our partners would decide which bits of the single market we were allowed access to in return for accepting all the regulations applying to that bit of the single market. While that was happening, the impact on the British economy would be quite dire. I would imagine that a lot of people would be moving their headquarters out of Britain, particularly in financial services. A lot of the car industry may also choose to relocate. There would be economic problems while that was happening. The quicker it would be, the better, but I have not thought greatly about that.

May I make a last comment? Going back to one of the earlier questions, Britain needs to think carefully. Whether it is a full member of the EU, a half member, a quarter member or a three-quarters member, it needs to think about how it influences the outcome of decision making in the EU. It has not paid enough attention to that. We briefly touched on the need for friends and allies, which is important and is up to Ministers and officials to pursue. Two other things matter in order to increase our influence in the EU: the first of these is the tone of our comments and the language we use. If it is seen to be constructive rather than snide that makes a huge difference as to whether we are seen to be a trusted and desirable partner or a pain in the neck. The final thing is policies. If we come up with good, constructive policies for reforming the EU so that it works better-whether it is on agriculture, the regional funds, energy markets or liberalising services market, which, in my view, should be the number one priority for the EU right now-and try to corral others to help us push them, we will be seen to be constructive and we will have good will. In that way, when we have problems that need to be sorted out, people will help us sort them out and look after our interests.

Chair: On that glass-half-full note, we will end. Thank you very much, Mr Grant. Your contribution is much appreciated.

Examination of Witness

Witness: Mats Persson, Director, Open Europe, gave evidence.

Q51 Chair: Our second witness is Mats Persson, the director of Open Europe. Would you say that you are on the other side of the coin from Mr Grant, to whom you have been listening for the last few minutes?

Mats Persson: There are a lot of sides to that coin these days. That is one of the interesting things with the eurozone crisis; it has shaken things up a bit. I do not think that you can any longer define the debate as being in two camps-anti or pro-particularly in Britain. I think that debate has been concluded.

On the other side of the coin, I would say that I take a different approach to some of these issues, but I still think that the UK has a future in Europe. Like Charles and a lot of others in this debate, we are very keen to find a model that works for Britain and for Europe.

Q52 Mr Roy: Can you explain the relationship between the All-Party Parliamentary Group for European Reform, the Fresh Start group and Open Europe?

Mats Persson: In the last year or so, we have produced a series of reports going through individual policy areas, and proposed various reforms that should be taking place in those areas-in some cases, reforms within the areas and in other cases, reforms involving a redistribution of powers between Brussels and the UK. The reports have been discussed in various APPG meetings. It has been an extremely useful forum for discussions. A lot of good ideas have been coming out of that process and that does help the debate.

Q53 Mr Roy: Tell me about the actual relationship between them. Open Europe is obviously the secretariat for one of them.

Mats Persson: For the APPG, yes. We are involved in setting up and providing the content for the meetings. We give a presentation of the recent report, alongside other experts in that particular policy area, ranging from across society and the think-tank community, and MPs and peers attend those meetings.

Q54 Mr Roy: What involvement has there been between the Government, the FCO, the all-party parliamentary group and the Tory MP group?

Mats Persson: It has been a very constructive dialogue. Obviously, we have been working independently, and all our material has been produced in a strictly independent capacity. Naturally, as you would expect in these kinds of questions, there has been a lot of dialogue and good interaction. I would not say that all of what we have done has the support of the Government, but there is a general interest from the Government in what we have done.

Q55 Mr Roy: What influence does Open Europe have on the Government?

Mats Persson: Hopefully, the right influence.

Mr Roy: That is a hope or an expectation. I am asking about the reality.

Mats Persson: Quite. If I may beat my own drum for a bit, I think we have managed to take the debate forward, in the sense that we have tried to stake out a way between the status quo and full withdrawal. What we produced over the last year has illustrated why such a third way, if you will, is fully possible.

Q56 Mr Roy: So has the relationship changed in the last three years between Government and yourselves and these organisations?

Mats Persson: I do not quite understand the question. We have become more influential, which is a good thing for us and for Britain and Europe.

Mr Roy: That remains to be seen. Thank you very much.

Q57 Chair: On the point just raised a second ago by Mr Roy, the Fresh Start group is publishing a green paper later today.

Mats Persson: That is correct.

Q58 Chair: William Hague is attending. Have you been involved in preparing that green paper?

Mats Persson: It draws quite heavily from ideas that we have produced and our proposals and reports over the past year.

Chair: That is a yes.

Mats Persson: If you read the actual paper, you will see a lot of references to Open Europe. That is just a fact. It has been a good two-way process.

Q59 Chair: There is no reason why you should not have been involved.

Mats Persson: No. It has been, and it has been quite extraordinary in the sense that it has whetted the appetite among MPs to look into these questions as well. It has worked out really well.

Chair: All dialogue is welcome. Rory.

Q60 Rory Stewart: You listened to Mr Grant’s presentation. I believe that you have suggested that there is a colonisation of the EU by eurozone interests. Could you substantiate that? What evidence is there? That was not quite the evidence we heard earlier.

Mats Persson: No, I said I think there is a risk and the risk is unknown. It is quite difficult to substantiate at the moment There are few examples of it that we can point to, going back in time. It is quite interesting because that also raised the question people asked almost all the time about loss of British influence. They have a perpetual worry about Britain losing influence in Europe. It is time for those people also to point to concrete examples of where influence is being lost. It is quite interesting and it is the right question, for example following the December veto.

While we would argue that the veto was not ideal in many ways, the kind of reaction that we saw following the veto was in some cases almost hysterical-that Britain was now definitely on its way out of the European Union. That reaction was very much overstated and exaggerated.

I would say that the risk of colonisation of European institutions for the purpose of pursuing the eurozone agenda, to which British interests are secondary, is unknown, but it is a real risk. That is all I can say. If you look at the creation of a banking union in particular, that is where you have that risk coming to the fore.

Q61 Rory Stewart: We have tried before, obviously in December, to try to get concessions in exchange for supporting treaty change and we failed. What makes you think that we are likely to be able to achieve concessions in the future when we come to treaty change?

Mats Persson: There are a number of factors. At the most fundamental level, I disagree with Charles and others who say that negotiation is a kind of path towards Britain leaving altogether. I would reverse that and say that the status quo is the biggest threat to UK withdrawal, because, as you pointed out earlier, British public opinion is becoming increasingly sceptical to the current arrangements, having started from an already sceptical base. So without some changes in substance to the basic membership terms, Britain is on its way out of the European Union.

I would say that you need to revise the UK’s EU membership in order to save it, so I disagree fundamentally with that point. That is where it becomes interesting because, sure enough, if you go to national capitals and say: "Britain wants x, y and z", of course people in that national capital will say: "No, we won’t give it to you." That is for your negotiations. I do not know of any government who would say: "Yes, of course. Reduce your budget contributions. Increase the effect of your rebate." This is subject to negotiations.

A similar thing is the idea that you will want to reduce the costs and maximise the benefits of EU membership. I do not know of a single government who go to their electorate and say, "Look, we want to maximise the cost and minimise the benefits of EU membership." Of course you want to maximise the benefits and reduce the costs-that goes with the territory; it is what you are elected for. Any government will say, "From our point of view, we want to keep the costs to a minimum and maximise benefits." Britain must do the same. If Britain goes to the negotiating table and says, "This is what we need to stay in the European Union over a longer period of time", I think they will get concessions.

The second point I want to make quickly is that it is interesting to note Germany’s position in this and the position of some non-eurozone countries, such as Sweden and Denmark. I think that while a lot of these countries will not like Britain renegotiating, what they fear more is Britain leaving the EU altogether. If we learned anything from the last EU summit, it was that Angela Merkel is now somewhat vulnerable to a Mediterranean bloc. She is much more alone in the eurozone 17 than in the EU 27, and she needs Britain there to counter-balance a potentially quite protectionist Mediterranean bloc. She will want Britain inside and will therefore be willing to give concessions.

Q62 Rory Stewart: Just to pin this down more specifically, Charles was essentially saying that all you could ever get were breadcrumbs. You might get some concessions on the working time directive, or JHA, on which we have an opt-out under Lisbon, but any idea that you might get something substantial is misleading. Presumably, you disagree with that.

Mats Persson: Yes, I disagree.

Q63 Rory Stewart: Can you give some concrete examples of what we might get?

Mats Persson: Structural funds: if you pitch that correctly, there is no reason why you would not be able to do something with structural funds. Out of 27 member states, 23 would benefit from having structural funds limited to richer member states only. It is a win-win situation. For the other four, which happen to be the poorest Mediterranean countries, you can have an alternative arrangement that makes the structural funds much more targeted than they are at the moment.

Roughly 30% of structural funds in Spain still go towards infrastructure. Spain needs a lot of things, but more roads and railways are not one of them. There is a win-win on structural funds, for example. We also mentioned the 2014 JHA choice: Britain can do that unilaterally without changing common treaties, and then it can opt back into individual pieces of regulation or law on a case-by-case basis.

Those are two, and I think a third that you could potentially get is a single market safeguard, working with non-eurozone countries. A range of different pragmatic solutions can be explored because here, Britain is not alone; there are a lot of non-eurozone countries. We all talk to European governments and we know what they say-"Britain should not be getting concessions. However, we are very keen for the single market not to be undermined."

If you have a single market safeguard that works for all non-eurozone countries, Britain can get that as well, and that would be very meaningful. Let’s say that you would be able to refer a proposal to the European Council where unanimity applies if non-eurozone countries see it as undermining the single market, as involving eurozone caucusing or as being discriminatory against non-eurozone countries.

There is a range of different pragmatic solutions. Those are three examples that you could get reasonably soon.

Q64 Rory Stewart: Finally, you understand this stuff much better than I, but apparently the enhanced co-operation procedure can only be used to reinforce the integration process. Will you explain how it could be used by some member states to repatriate powers?

Mats Persson: That would require a treaty change, an institutional change, but you could also use the principle of that mechanism to allow powers to flow in the other direction. That would simply involve treaty change, where you say, "A limited number of member states could pursue powers back over this section of the treaties." I think that would be institutionally possible. Of course, it would require a treaty change, but I think that those are the kinds of ideas that we have to work with.

Q65 Chair: Just to pick up on an issue raised by Mr Stewart, you mentioned structural funds as something that you may get. Would that require treaty change?

Mats Persson: No.

Q66 Chair: Would the single market safeguards require treaty change?

Mats Persson: Possibly.

Q67 Chair: Would you get unanimity on that?

Mats Persson: I think you could-if it is presented and communicated in the right way, unlike the December demands leading up to the December veto, and if it is prepared and the right lines are built around it, you could achieve that and get unanimity. Again, if the options are between the UK starting to fall out altogether or some concessions with Britain remaining inside, I think the Germans, Swedes, Danes and others will play ball.

Q68 Mr Baron: Mr Persson, I have one question to follow on from what Mr Stewart asked you about the repatriation of powers. I share your greater optimism than Mr Grant’s that it is achievable-after all, that is the Government’s stated position-but I believe that one day, we will have to have a referendum in this country. I believe we could legislate now for a referendum in the next Parliament, and I am not alone in my party in believing that. Would a referendum on the statute book now increase the bargaining power of a Prime Minister trying to repatriate powers or not?

Mats Persson: I am somewhat agnostic on that question. To me, it is very difficult to tell whether it would help or not. In theory, if you come to negotiations with a strict negotiation mandate from home, that helps, but it could also create various problems, of course. The question is what exactly your mandate involves. I must say that I am going to ride the fence slightly on that one. I think the referendum will probably have to happen sooner or later, because there is so much political momentum behind it, but at what point you call it is a difficult one.

Q69 Mr Baron: Surely you call it after you have tried to claw back powers.

Mats Persson: Yes, you would probably have to have a validating referendum. Otherwise, it would be a bit like holding a referendum on who we want to win Wimbledon, which is a bit difficult.

Sir Menzies Campbell: Not at all.

Mats Persson: In terms of the sequencing of a referendum, there are two ways to do it. Either you have a validating referendum with some sort of mandate preceding it, perhaps in an election manifesto, or you can do a two-stage type of thing, where you have a three-way first, and the two first ones come up against each other in a second referendum, perhaps following negotiations.

That could be another interesting option to explore. It would be unconventional for this country, but it could be a potential way of doing it. So I think there are a couple ways of doing that, which have to be looked at and explored in detail, but in terms of legislating for it now, I am not sure. Obviously, I like the drive and enthusiasm for reform.

Q70 Mike Gapes: To follow up on what Rory Stewart asked you, you seemed to imply that there was support in other European countries for the British Government agenda. Can you specify which countries?

Mats Persson: I am not saying there is support for the British Government agenda; I am saying it is subject to negotiations.

Q71 Mike Gapes: So you accept that at present, there is no support in other European Union countries for the position that the British Government are taking?

Mats Persson: I accept that if you go to Paris, they will of course tell you that-

Q72 Mike Gapes: I am not talking about Paris. I am talking about other European countries-let’s say central Europe, southern Europe and the Baltic states. Is there any support there for the British Government position?

Mats Persson: Define "the British Government position".

Q73 Mike Gapes: As expressed by David Cameron at this moment.

Mats Persson: To repatriate powers?

Mike Gapes: Exactly.

Mats Persson: He has not done anything yet.

Q74 Mike Gapes: As expressed, for example, in recent articles in The Daily Telegraph, or the well-known position of the British Government. Is there any support in other European Union states, at present, for that position?

Mats Persson: If they can avoid negotiations, they will do it.

Q75 Mike Gapes: So the answer is no?

Mats Persson: The answer is that if the option is between Britain withdrawing and Britain renegotiating, I think there will be support.

Q76 Mike Gapes: But you’re not giving me any countries that do support it.

Mats Persson: Do you want to get down to policy areas? This is what needs to happen. We need to go from this abstract concept-

Q77 Mike Gapes: I am asking you to answer the question I have asked. Is there any other European Union country, at present, that is supporting the position that the British Government are putting forward?

Mats Persson: On the single market safeguards, as I said, I think there is support from non-eurozone countries, in principle.

Q78 Mike Gapes: But you are not naming any.

Mats Persson: Sweden and Denmark.

Q79 Mike Gapes: They explicitly support the British Government position?

Mats Persson: They will support measures to prevent the single market from being undermined, yes. Of course they will. They are as worried as anyone else that the single market might be undermined. Actually, the Germans, if you put it to them correctly, might support the undermining of the single market, for fear of being pushed into the arms of the Mediterranean bloc.

Structural funds are a tricky one, because Hollande has changed the rules of the game a bit, but I think, in principle, go and talk to Swedish Ministers. They would love to repatriate the structural funds.

The Czechs have sided with the UK Government on the fiscal treaty. You can look at some other things. If you look at the EU patent, for example, which involves more of Europe and is a very important step, the British Government received a lot of support for that. How many countries have signed up to the budget freeze that they have called for-10 or 11? Hollande may have withdrawn his signature; we are not sure.

I can go down the list. It depends on how you frame the issue. If you say, "The British Government want this, this, this and this-just accept it," they will say, "No, of course we don’t accept it." You need to frame it in the right way and start to negotiate. That is how the EU works-by compromise and negotiation.

Q80 Sir Menzies Campbell: What is the difference between you and the previous witness, then?

Mats Persson: I am Swedish.

Sir Menzies Campbell: That is obvious, but-

Chair: Order. I call Ann Clwyd.

Mats Persson: I am sure Charles has a lot of things to say about it, but the difference is that, again, I see the status quo as the threat in relation to UK withdrawal. I want to revise the UK’s EU membership terms in order to save them. I think that is very straightforward. We are willing to take concrete steps to achieve that. We think sometimes you have to go into negotiations in quite a tough way. You have to do it in a shrewd and smart way. You have to negotiate and be willing to play hardball sometimes to get something back.

Sir Menzies Campbell: And-

Chair: Order. I call Ann Clwyd.

Q81 Ann Clwyd: You seem very confident about talking about British public opinion. I do not know how you gauge that. Is it through opinion polls? How can you speak for British public opinion?

Mats Persson: I would not dare to say that I can speak for British public opinion. Are you saying that British public opinion is less or more sceptical than what I-

Q82 Ann Clwyd: You were suggesting they were more sceptical.

Mats Persson: Most public opinion polls would put British public opinion in the strongly sceptical camp.

Q83 Ann Clwyd: But wouldn’t you say that the British public know even less about the European Union now than they did when we had the first direct elections to the EU, in 1979? I was a Euro MP at that time, and the British public knew very little about the way the EU worked. I suggest to you that they know even less now-first, because of the system of election to the European Parliament. MEPs have less contact with their electorates than they did initially, in 1979, because of the system of election.

Mats Persson: So you are saying that there is a correlation between ignorance and Euroscepticism.

Q84 Ann Clwyd: I’m asking you.

Mats Persson: I don’t think there is. I think there can be, but one does not flow automatically from the other. That reminds me a bit of what I heard an MEP say in the EU ACTA debate. She was saying, "Yes, there is a lot of campaigning against this EU ACTA treaty, but as MEPs, our role is not only to legislate for citizens. Because they’re busy with other things, we also have to think for them."

Q85 Ann Clwyd: Yes, but I am saying that you have less contact with them now because of the system of election. It was only comparatively recently-I think it was at the last election-that in Britain we went to the list system. Now, people have bigger electorates and are therefore more remote from their electorates than they were previously. I do not know whether that is your experience.

Mats Persson: Possibly. I think that could be a factor. I do not necessarily see how it would have a major impact on the British public’s Euroscepticism, though, because that goes deeper than just the electoral arrangement of the day. I think that runs very deep. You are looking at quite strong historical and cultural forces that make Britain as Eurosceptic as it is. The point you raise may have something to do with it, but at the end of the day, Britain is a Eurosceptic nation, whether we like it or not, and it will remain so for a very long time.

Q86 Ann Clwyd: I am trying to suggest to you that there is considerable ignorance about the EU. Everybody now knows about the eurozone-I would say that comparatively few people understand it-but, in general, people do not hear enough about what goes on in the European Parliament and what subjects are discussed, because of lack of coverage in the British press compared with other countries. Stories from the European Parliament fill the front pages of French newspapers and German newspapers; they very rarely appear on the front pages of British newspapers.

Mats Persson: You know what? I will actually take issue with that. We go through the European press every morning, in 12 or 13 different languages and it is quite interesting that the UK media has had a lot of coverage of Europe over the past two and a half years compared with a lot of other European countries. Go to my native country, Sweden, and there is much less coverage-at least, there used to be before the eurozone crisis-of Europe than here in Britain. The German media are very interesting, because naturally they will have a lot of coverage of the EFSF, the ESM, TARGET2, SMP and so forth and so on.

If you talk about the public not understanding the eurozone crisis, with respect, politicians have not done a particularly good job of getting on top of that either, so I would be a bit cautious about that. I hear what you are saying, but I think that in the British media, in terms of the cumulative coverage, there has actually been quite a bit. However, I agree that they should do more to cover the European institutions.

At the end of the day, I still think that, even if the British public was absolutely 100% on top of comitology, for example-if they knew exactly what that involved-that would not change one bit of their Euroscepticism; it would probably make them more Eurosceptic, because comitology is a wholly undemocratic process, but that is for a different day. I agree that there are, of course, areas of EU membership that are beneficial, and perhaps the UK media could do a better job of covering them, but I would still not count on the British public becoming less Eurosceptic.

Q87 Ann Clwyd: Finally, can I ask you about two possible risks that might arise through the repatriation of certain powers: first, that other member states would raise their own demands and the EU would effectively unravel; and secondly, that the UK might damage its reputation for adhering to international treaty obligations? How would you assess those issues?

Mats Persson: Both of those are valid points, and they have to be acknowledged. I would say that, on the first one, it is true that a sort of tit for tat game may be triggered. The big risk there is, of course-this is where I agree with the risk, at least-that the French will start to talk about watering down state-aid rules, which would not be good for Britain. Against that, you have to consider what the options are.

If you do not actually do something to revise UK membership terms and change the basic EU structure, then it may unravel anyway. Is there anyone who thinks that the one-size-fits-all principle is still a solid overarching principle for European co-operation? We have seen, with the eurozone crisis, that you probably need a more flexible model if this is going to work. I actually think that that flexibility may prevent the EU from unravelling, and if you negotiate in the right way, you may not have that tit for tat that a lot of people are warning against.

On the second one, I do not think that that will damage the UK’s credibility, because if it negotiates properly, then it would not break treaty obligations; it would just renegotiate a treaty, which happens from time to time. There is nothing unusual about renegotiating a treaty. At the end of the day, the EU cannot be the end of history. We cannot possibly have discovered the end of history with the European Union moving only in one direction perpetually. We cannot have that philosophical discovery right at our doorstep. Just like a lot of other international arrangements throughout history, the European Union needs to be subject to change and institutional change, including with a two-way street when it comes to powers.

Q88 Ann Clwyd: And perhaps with the European Parliament meeting in one place of work.

Mats Persson: That would be a very good start. Unfortunately, it would require a treaty change, but it would still be a very good place to start.

Chair: And we would have a common electric plug throughout Europe. Ming, did you want to make another point?

Sir Menzies Campbell: No; the moment has gone.

Q89 Chair: Thank you very much, indeed, for coming. We appreciate your views and we look forward to keeping in touch with you.

Mats Persson: Thank you so much. Thanks for having me.

Examination of Witness

Witness: Michiel van Hulten, independent consultant, Brussels, and former MEP, gave evidence.

Q90 Chair: Our third witness this morning is Michiel van Hulten. Mr van Hulten, you have been listening to the last two witnesses. Would you say that you bring a third dimension to the debate? You have over the years floated a number of different ideas for restructuring of Europe. Do you consider yourself an alternative to the two points of view we have listened to?

Michiel van Hulten: First of all, thank you very much for inviting me. I am Dutch, but I was largely UK educated, and my wife is British, so I feel a great deal of affinity with this country, and the discussion you are having. I would consider my ideas a little far-fetched compared with the two previous speakers, so I hope you will allow me to make some brief introductory comments to set them in context.

Chair: Of course.

Michiel van Hulten: The first thing I want to say is that throughout my career I have worked closely with British colleagues-first in the European Parliament and then later in two think tanks, Policy Network and the European Council on Foreign Relations. What struck me as a student when I was at the LSE, and what I still find striking today, is that British individuals and ideas play such a central role in the debate about the future of Europe. It is one of the great ironies of European history that the member state which I think has been consistently the most critical of the European project, and where some of the most outlandish and outrageous myths about Brussels are sometimes peddled, is also the one which contributes some of the most thoughtful, constructive and frankly necessary ideas about how the European Union should evolve. I think your inquiry attests to that.

The intriguing question to me, when I was thinking about this testimony, was why these ideas find so little support among countries and people on the continent. I think the simple answer is because the UK has never truly, fully become a member of the European club. It has always been at best half-hearted about the project to which it signed up almost forty years ago. That is why at the European Council in December last year it proved remarkably easy for the rest of the European Union to move ahead without the UK. This was not just a major policy disagreement. I think it was the culmination of years of frustration about a member state which professes to want to be at the heart of Europe but in reality does not subscribe to some of the core objectives pursued by the other member states.

If this was the only challenge facing the EU, the solution would be easy. The UK and the EU could each go their separate ways, and everybody would be happy. The reality, however, I think, is that several other forces are threatening to pull the EU as a whole apart. The most obvious one is the current euro-crisis, which pits members against non-members-but, even more significantly, northern members against southern members. All across Europe people are losing faith in the European project, because it imposes too much austerity, because it costs them too much money, because it is undemocratic and because it is bureaucratic, as they see it.

I think the EU project is deadlocked and in danger of collapse. Seen from the continent, the UK now looks likely to leave at some point in the next decade, but members of the eurozone themselves cannot agree on a viable way forward either. The debate between them is getting increasingly acrimonious. The accession of Turkey has been put on hold because of our internal difficulties within the EU. Popular support for the EU and its policies is at an all-time low, not just in the UK but across Europe. If nothing is done, the most likely outcome, I think, is that member states will leave the EU one by one, some voluntarily, some against their will, all as a result of the political and institutional gridlock that we are facing today within the existing treaty framework.

I think that to allow the European project to fail at this juncture in history would be madness, and a Europe without the UK would be unthinkable. There are clearly important issues on which Europeans fundamentally disagree, but there are also many-many more, I would say-objectives which we share: the commitment to the continued stability and security of our continent; increased prosperity by reducing barriers to trade and promoting free competition; strengthening Europe’s ability to make its voice heard in the world; and addressing cross-border global problems effectively.

I am convinced that a durable solution to the current crisis is possible, and it will require at least two things: first, a fundamental redesign of the architecture of European co-operation to remove the destructive tension currently tearing it apart. Rather than creating a two-speed Europe-as Joschka Fischer, the former German Foreign Minister, has called it, a vanguard and a rearguard-or gradually forcing countries out of the existing EU framework, we should replace the existing EU with a wider Europe organisation focused on regional security and global trade, and a second body with a separate decision-making structure to bring together those countries whose economies are so aligned and intertwined that it no longer makes sense to have independent fiscal and economic policies. I call that a two-layered Europe, and I have set out, in an article for the ECFR, what the broad outlines of that would be.

The second thing that I think is required is a popular mandate. Solving the euro crisis and building a new architecture will need thorough public debate and approval in national referendums. We need to learn the lessons of the last 20 years, in particular-I say this as a Dutchman-the lessons of the 2005 constitutional debacle, as well as the current euro crisis. Only by giving people in every country a real say can we build a new framework that can withstand the test of time. This process should proceed on an opt-in basis, which is that member states can opt or refuse to join, but they cannot block other countries from moving ahead.

Finally, Europe needs to find a new way of dealing with the tensions that are causing it to break up, not by creating various types of second-rate membership or by forcing countries out, but by recasting the entire European edifice in such a way that all current members can stay and new ones can join.

Q91 Mr Baron: Mr van Hulten, for many of us who disagreed with the concept of the euro from the start, one sensed that in order to make monetary union work, you needed a fiscal union, and fiscal union is a very short step towards political union. I have a lot of sympathy with regards to the two-tier suggestion that you have proposed-two-tier rather than two-speed. Two-speed implies that you are all aiming off at the same destination and you are just going to take different times to get there. A two-tier recognises the inherent contradiction at the heart of the euro. Could you set out your proposal for the two-tier structure in a little more detail? How would it be funded? Would the outer core be a genuine free trade area? Who would have responsibility for external trade?

Michiel van Hulten: In my article I called the outer area the European area of freedom, security and prosperity. This area should be based on the principle of unanimity, in recognition of the fact that one of the reasons why countries are members of this particular area is that there is no support in those countries for a system based on qualified majority decision-making. I also think that in this particular area, democratic control should be exercised by national Parliaments rather than by an overarching European Parliament, because again, I do not think that there is the support and legitimacy for it. This body would operate as the global trade negotiator for the body as a whole. Of course it would have to reach decisions internally.

In my view, the countries that operate in the second, more integrated layer would effectively operate as one country, so a little bit like the United States within NAFTA. Effectively, you would have maybe four, five or six voting entities within this larger area, one of which is a European economic and political union consisting of those countries that decided to pool their sovereignty and go for a fully fledged federal system with a federal Parliament and Government, which decides by qualified majority on its internal policies.

Q92 Mr Baron: Can I suggest to you a scenario? The eurozone crisis has yet to fully play out. There is a question mark as to whether the euro can survive. Some would suggest that no amount of moving this huge amount of debt around the system from bank to government and back again can conceal or erode its scale. Okay, a little bit of financial repression and austerity will help, but you still have this enormous debt that needs dealing with. One day, there has to be a day of reckoning, and we are seeing Spanish bond yields above 7%. It may come about of its own inclination, mightn’t it? If you do see an implosion and the eurozone breaks up and perhaps even threatens the very existence of the euro even among the hard core, how does your two-tier approach fit into that sort of scenario, a scenario which the markets are increasingly suggesting is likely to happen?

Michiel van Hulten: When I first wrote my article about this around half a year ago, I thought that the integrated core could consist of the 17 eurozone countries. That is very unrealistic right now. At the time my main question mark was over Greece. Now it is clear that Spain and Italy are also in serious trouble. The main thing that I want to get away from with the approach that I am suggesting, which I described earlier as farfetched because it is obviously an incredible undertaking to rewrite the entire institutional framework of Europe, is the situation we are in now where countries are classified as either good or bad, based on their attitude to European integration or their economic situation. If we don’t deal with those huge tensions we face a much bigger crisis than if we address them now. For some countries that may mean that they will have to start at a position that is back to where they were several years ago, i.e. prior to joining the euro. It will be easier to secure support in countries like my own, the Netherlands, and Germany for a frame-work where we start out with a smaller eurozone core that can later be expanded rather than trying to sustain the present system, which I think is unsustainable.

Q93 Mr Baron: Your suggestion has traction in the sense that it addresses the fundamental contradiction that exists at the heart of the EU, not just the eurozone at the moment. But what support are you seeing for this idea? Have you had any suggestion of support from other EU countries and politicians? Is this gaining traction generally? How likely is it to transpire?

Michiel van Hulten: I think that the kind of idea I am discussing is being discussed in various forms. I mentioned Joschka Fischer. He talked about the idea of a two-tier Europe. Jean-Claude Piris, the former head of the Council’s legal service whose written evidence you have taken, suggested something similar. Charles Grant told me on the way in that David Owen has written a book in which he suggests something similar as well. The idea of creating a new type of framework is gaining traction. What I do not think is gaining traction-at least I have not heard it from anyone else-is the idea that we need to replace the whole EU. The reason I say this is that the EU right now has so much baggage in terms of its reputation and institutions. Ms Clwyd mentioned the seat of the European Parliament, which is a good example. I think that restarting the process and dealing with some of the concerns that people have today and putting those into a new framework is the right way forward rather than trying to tinker with an existing treaty. We are going to open up a whole Pandora’s box. We were discussing before the question of repatriation of powers and what the UK can achieve. It is very clear that almost every member state has its own gripes and wish list in relation to the European Union. Trying to achieve that by changing the existing treaties, which require unanimity, is almost impossible. If you move to a new treaty negotiation based on opt-in, as was the case for the fiscal treaty, without giving member states veto power, it becomes much easier.

Q94 Sir John Stanley: The UK is in a nearly unique position in Europe. Along with France she is one of the five members of the Security Council of the UN and in terms of involvement in international defence and military operations, apart from France, she is unmatched in terms of capability and reach compared with other EU countries. Against that nearly unique position of the United Kingdom, what is your response to the view that if the UK formed part of an outer layer-or second division, however you would like to term it-she would suffer the worst of all possible worlds by having significantly reduced political influence in the EU while at the same time having much greater vulnerability to the inner core, in terms of her financial, economic and commercial position?

Michiel van Hulten: It is obviously not an ideal scenario. The idea of having a two-layer Europe is, in a way, second best from an ideal perspective. Ideally, we would have 27 member states that all shared the same outlook, were all happy to welcome Turkey into the European Union, and could all agree on the policies. We are starting from a second-best position. But this is one of the reasons why I am also saying that we cannot afford to lose the UK, because of the UK’s enormous importance in foreign policy and defence. We have seen that with the Libya crisis recently, and we are seeing it now with the positive role played in the Syria crisis, so that is why it is incredibly important to make sure that the UK remains a core partner in Europe in the field of foreign policy, as well as in other areas.

The fact that economic policy will then to a large extent be divorced from foreign policy is, I think, a handicap. There are no two ways about that. But what I am hopeful of is that by removing the constant tensions and the ill will that exist at the moment from the discussions on core economic integration, it will be easier for countries to move forward on issues such as foreign policy, where those tensions do not exist in the same way.

Q95 Mike Gapes: May I take you back to the actual mechanics of how your idea would work? What you are proposing would be fine if we were in 1947 and were trying to create European architecture, but the fact is that European architecture already exists and you cannot bring down the whole edifice. What possible interest is there for major European Union countries-let’s say Italy or Spain-to destroy a structure in which they can see considerable benefits in the hope of creating some alternative structures in which they might be less influential or might well be economically worse off? I just cannot see how that is going to happen. Are you suggesting that you establish one structure while the other still exists, and you run the two in parallel? I cannot see how that would be particularly useful, in terms of costs and efficiency, and ministerial or civil service time.

Michiel van Hulten: Of course, you are right. It is a blue-skies blueprint, but 10 years ago who would have thought that today we would have a fiscal treaty not involving the UK? No one would have predicted the crisis we are facing today, and we are finding inventive solutions to the problems that we are facing.

The main point of my proposal-my idea-is to get a point across, and the point is that we should stop playing a blame game in which we say that the problems of the European Union are due to certain countries behaving in a certain way. That is the danger at the moment. We are descending into acrimony and finger-pointing, and we have to acknowledge the fact that there are certain inherent truths such as that there is and always has been a huge debate about Europe in the United Kingdom, and that there are huge economic problems in southern Europe, and growing problems in other member states. If we play a blame game, those problems are going to get worse.

We need to think about the objectives, about what we are trying to pursue, what things we agree on, what the major European and international goals are, and how we can best make an architecture to fit that. It is absolutely right that it is going to be a challenge but, given what we have done since December, I think it is possible.

Q96 Andrew Rosindell: Thank you for coming today, and thank you for your reports, which contain some very interesting information. What I would like to focus on is how you feel the UK is viewed by the rest of the EU.

We have been told by successive governments-Foreign Secretaries and Ministers for Europe-that Britain punches above its weight, that we have greater influence than we really should have because we are Britain. Is that really true, or is it just a smokescreen to tie us in to the ongoing integration within Europe? If we were not there, how would that affect Europe or the development of the EU?

Michiel van Hulten: I think it is true to say from my limited experience-I started following this up close when I came to Brussels as a Council Secretariat official-that Britain does punch above its weight, or at least did until the December meeting of the European Council. That is partly to do with the country’s size and global importance, but it is also to do with the fact that the UK has always had the best civil servants and has always been the best prepared at meetings. It has had some of the best debates about Europe.

The fact that there is such a debate about Europe in this country, between those who favour further integration and those who favour the opposite, has the added benefit of ensuring that whatever policy the Government come up with has been thoroughly tested. Other governments do not have that advantage when going to Brussels.

Things have changed in the past few months and Charles Grant was right to say in his testimony that there has not been a measurable impact in terms of lost votes or lost decisions since that has happened, but there is a feeling that patience has run out and people are no longer willing to listen to the UK in the same way as before.

Under the Labour Government, there was a feeling that things were improving, the rhetoric was changing and the UK was speaking more like the other European countries, but if you look at the voting behaviour and the developments since then, the reality is that in substance not that much has changed.

Q97 Andrew Rosindell: If patience is running out and people are no longer necessarily prepared to listen to Britain in the way that they might have done under the previous Labour Government-and, probably, the previous Conservative Government-do you think our EU colleagues would therefore acknowledge that a different type of relationship may be the solution for Britain? Would that be acceptable to them, or would they try to make it difficult for that to happen, to keep us tied in?

Michiel van Hulten: A lot of people are prepared to acknowledge that we need a different type of relationship, but I do not think that they would see that as facilitating a number of the demands that the UK Government are making about the repatriation of powers. I do not think that people are prepared to give the UK the membership rights of the EU on lesser or easier terms than the rest of the European Union.

If the UK wants to discuss its withdrawal from the EU, member states will have to discuss that, but it is not realistic to think that, in certain key areas where competition is effective and progress has been hard fought, such as the working time directive or other social measures, you will find support among the governments or populations of other member states in giving the UK a competitive advantage.

Q98 Chair: Is it fair to describe what you are putting forward as a slightly academic approach? David Owen put forward the idea of-"two tiers" is the wrong phrase-an inner and outer core. If you are having trouble getting the repatriation of a power or something like that, how on earth are you going to get unanimity on the complete rejigging of the whole European Union?

Michiel van Hulten: I agree that it is a slightly academic approach, although I think that it is getting less academic by the day. The bigger the problems are getting in the EU as a whole, the more there is a need for a fundamental discussion. I do not think that the UK will get very far with demands for repatriation.

Where I think that the UK could play a constructive role is by arguing that the current architecture is no longer working and that we all need to think about replacing or reforming it to take out the tensions and the problems that we are facing. There are not many allies for repatriation. There are a lot of allies in many member states, including the Netherlands, in the sense of people who think that the EU at the moment is broken and needs to be fixed. If the UK can become a leader of those countries, of those people, I think that a lot can be achieved.

Q99 Chair: Can you think of any EU member who is attracted to the idea of a two-tier or outer layer of Europe?

Michiel van Hulten: I think it is attractive to the countries that are moving ahead now, the strong eurozone countries, because it will make life easier for them to design their own policy. I have no idea whether-

Q100 Chair: They are the inner layer.

Michiel van Hulten: That is right. I imagine it could also be interesting-I do not know this-for the EFTA countries, because they are now in a situation in which they, as has been said before, have simply to implement the rules that are decided in Brussels. If we can create a new architecture where they also are given a decision-making role within the system they are a part of, that would be attractive to them.

Q101 Mr Baron: I was going to question you further on your thoughts about repatriation, but you have made it clear that you think we stand very little chance of repatriating powers. That leads me to ask whether you think we should play a slightly hardball game to try and achieve our objective of repatriating powers, which would certainly ease the Government’s position. It certainly chimes with what the British public want.

Allied to that, to what extent do you think that a referendum, perhaps some years away in the next Parliament, could help the Government to achieve that, if at all? There is a significant body of opinion, certainly within the Conservative party, that believes we should legislate now, in this Parliament, and have the referendum in the next Parliament, which would give us time to play out the eurozone crisis and give time for the Government to try to claw back some powers. Whether it is successful or not, only time will tell. We could have an informed debate as to what the exact question should be-whether it is in or out, or something else.

Michiel van Hulten: Playing softball on repatriation is certainly not going to get anywhere. Hardball is the only way, but of course the consequence of that may be that the answer in the end is no, at which point the UK would have no option but to leave the European Union.

Q102 Mr Baron: Can I question that? That would not necessarily be the case. You could have hardball and fail. The decision would not be to leave. The decision would surely be to have a referendum to give choice to the British people, having tried your level best to repatriate powers.

Let us agree with your and Mr Grant’s scenario that it will be almost impossible to repatriate powers, despite the best of intentions. If we get to the point where we have tried and failed, or we have had a few crumbs but nothing significant, is that not the point at which to have a referendum? Would legislating in this Parliament help to arm the Government in their negotiations in trying to claw back those powers?

Michiel van Hulten: I do not think European partners will be impressed by the threat, if you like, of a referendum. The debate has been going on too long for that. It is obviously not for me to say whether the UK should hold a referendum, but I have said in general terms that I think that we are at a point in European integration where we need a new popular mandate-not just in the UK, but in every EU country-because we have made some major changes.

The EU effectively started out as an international organisation like the UN. It is now, I would say, a quasi-federal government, and yet the peoples of Europe have never been asked and have never properly debated whether that is what they want. I think that, certainly in a lot of countries, if there is a proper debate, that is what they will choose to do, so I am confident in advocating that. But I am also confident that if we do not have a popular mandate, the EU is simply not going to function. I do not think it is optional. I think it is something we have to do if we are going to-

Q103 Mr Baron: Very finally, a referendum in perhaps a few years’ time, once the eurozone crisis has played out, is the right thing to do, if only to renew the popular mandate.

Michiel van Hulten: Speaking for Europe as a whole, I think we need to weather and solve the current crisis. We need to agree on new terms of engagement and a new structure, and that new structure then needs to be put to the people for a vote to get their approval.

Q104 Mr Roy: Just a couple of points. Has the UK lost any power to influence since December last year? Has a perceived hardball attitude actually worked to our benefit?

Michiel van Hulten: I can only talk about atmospherics. In the atmospherics, the UK has lost influence. The December decision was perceived as saying, "You guys move ahead. We’re not going to be part of this." Inevitably, that changes the nature of the game and the relations.

Even from a personal point of view, we see that. When leaders walk into the European Council chamber at the beginning of meetings, you see the way that people greet each other and who has the tête à tête. You can see that there is a different dynamic going on, so, of course, it has had an impact. The UK still has voting weight in the Council of Ministers; that does not change. The UK still has allies in key policy areas. It still has disagreements in key policy areas. In the practicalities of the day-to-day work of the Council of Ministers, the difference, at least so far, is very small.

Q105 Chair: Mr van Hulten, can you let us have a copy of your report, VoteWatch Europe? It makes for rather interesting reading. Where there are league tables, the UK is either at the very top or the very bottom, depending which way the question is framed. Do you think that that tells us anything about the UK’s relationship with the rest of Europe?

Michiel van Hulten: Yes. As I have said, I am speaking in a personal capacity, but, on this issue, the secretariat has asked me to say something on behalf of VoteWatch, and I am authorised to do so. You have the data tables that go with this report, and I have brought sufficient copies. VoteWatch is an organisation that monitors decision making in the EU institutions. Until now, we have only covered the European Parliament-that was since 2009. As of yesterday, we also cover voting in the Council of Ministers. Basically, we show how member states have voted, how often they are in a minority and how often they are on the winning side.

One difference between the Council of Ministers and the Parliament is that the Council only ever votes in favour. The reason for that is that if the presidency establishes that there is not sufficient support for a proposal, the proposal is not put to the vote. So it is a slightly odd situation when you compare this with the European Parliament.

I make that caveat, because as you will see in the figures that you have in front of you, the UK, in the last three years, has backed 90% of EU legislation. That may come as a surprise to some people, but you need to factor in the fact that proposals that the UK and other countries oppose and for which there was a blocking minority are not covered by our data, because that information is not made public by the Council.

What the data show is that you can look at it from two different perspectives. From the UK perspective, the UK votes in favour of 90% of European legislation that comes before it in the Council, so it is a good European; 90% is very close to 100%. If you look at the votes that were contested-all votes where at least one country voted against-you see that the UK is in a minority 29% of the time. What that shows is that the UK, broadly speaking, is supportive of most proposals, but stands out when compared with other member states as the country that votes against most often and by quite a big margin.

Q106 Mike Gapes: On that point, could you also say that although other countries might have been inclined to express their reservations, there is a cultural thing here in that when we have a reservation, the British attitude is that we are more prepared to register that fact? Even though other countries know what the outcome will be, they are more willing to go along with it, even though they have reservations.

Michiel van Hulten: Yes. One of the chief authors of the report is Sara Hagemann from the LSE, who is vice-chair of VoteWatch. That is exactly the point she made to me before this meeting. She said that some countries, and the UK in particular, strategically vote no to make the point that they are opposed, whereas other countries may vote in favour despite the fact that they are opposed because they want to show that they are good Europeans. That is absolutely true.

When I was analysing the data ahead of this meeting, I was particularly interested to know whether there had been a change in the last three years. Obviously, you had a change of Government in 2010, so the first year of our data covers the Labour Government. The second two years cover the current Government. Interestingly, and somewhat to my surprise, there is not that much of a change. If you look at the first year under the Labour Government, the UK voted against, or abstained, on 10.7% of votes. Under the current Government, it is 8.1%. If anything, the current Government are slightly more pro-European from the point of view of these statistics than the previous one.

Chair: On that cheerful note, we will end. Mr van Hulten, thank you very much indeed. That was really helpful and an interesting contrast with our previous speakers.

[1] Witness correction: £7 billion

[2] Witness clarification: the UK would still pay about half as much into the budget as it does today.

Prepared 10th June 2013