House of Commons - The future of the European Union: UK Government policy

The future of the European Union: UK Government policy - Foreign Affairs Committee Contents

3 The Eurozone and the EU

Government policy

54. The arguments surrounding the December 2011 European Council exemplified in microcosm many broader arguments about Government policy concerning the UK's place in the EU in an era of closer Eurozone integration. The Government's policy rests centrally on the claim that, as a long-term proposition, UK interests can and should be served by the UK remaining in the EU but outside the Eurozone, even as the Eurozone integrates more closely. The overarching direction of stated Government policy since mid-2011 has been to support closer integration in the Eurozone, while continuing to distance the UK from the single currency area. The Government's position breaks down into several more specific propositions, namely:

the UK's economic interest will be best served if the Eurozone survives;

greater financial sector, fiscal and economic policy integration in the Eurozone will support the long-term stability of the single currency area and is therefore desirable;

greater financial sector, fiscal and economic policy integration in the Eurozone is inevitable, because it is demanded by the "remorseless logic" involved in creating and sustaining a single currency;[141]

the UK's economic interest is best served by remaining outside the Eurozone. The FCO told us that "the UK's decision to remain outside the Euro area has been proved correct";[142] and in its Programme for Government, the Coalition committed itself to ensuring that the UK "does not join or prepare to join the Euro in this Parliament".[143] Under the European Union Act 2011, UK adoption of the Euro would require approval in a referendum.

the interests of non-Eurozone states in the EU—with respect to the Single Market, above all—can and should be protected.[144]

55. The Government's positions on several more specific issues have been manifestations of this overall stance:

With respect to the 'fiscal compact' treaty (the TSCG), the Government is allowing other Member States to use the EU institutions to enforce greater fiscal and economic policy integration in the Eurozone, despite its doubts about the lawfulness of this procedure (see paragraphs 45-46), while standing aside from the new treaty itself.

In 2011, the Government agreed to EU Treaty amendment to allow the Eurozone to create its own permanent bailout facility—the European Stability Mechanism (ESM)—via a separate treaty, so that the pan-EU liability for Eurozone rescues which was created under the EU Treaties (in the form of the European Financial Stabilisation Mechanism, EFSM) could be wound down, and the UK thereby divested of liability for new Eurozone bailouts.[145]

The first stage in the proposed Eurozone banking union required a unanimous decision among all Member States,[146] but the Government negotiated an agreement with the rest of the 27 which allowed the banking union plan to proceed, while making clear that the UK would not be participating itself (see paragraphs 82-87).

Assumptions about Eurozone integration

56. Sir Colin Budd quoted the view of the late Sir Percy Cradock, foreign policy adviser to Margaret Thatcher as Prime Minister, that UK EU policy had historically been one of "mistaken assessments [...] [and] delayed awakening to reality".[147] By contrast, most witnesses felt that the Government was correct to judge that the Eurozone was likely to integrate more tightly, as a result of the determination of its Member States—and above all, of Germany—to preserve the single currency. Sir Howard Davies told us that establishing a common currency "creates a mindset [...] [in participating countries] that they will do whatever is necessary to defend [it]".[148] We formed a sense of this determination from our own visits to Berlin and other European capitals. Dr Niblett argued that the political logic that had led to the creation of the single currency in the first place, and to its creation with a larger rather than smaller number of participating states, remained intact.[149]

57. Against the background of a history in which the UK has often appeared to underestimate the political determination of continental European states to move ahead with integration, we judge the Government's expectation of further integration in the Eurozone to be a correct assessment of the longer-term direction of travel. We commend the Government for its realism in this respect.

58. Maurice Fraser cautioned against any expectation that movement towards fiscal—let alone political—union in the Eurozone would be rapid or radical. He argued:

there is little support for [..] ambitious ideas such as fiscal federalism [...] or [...] the mutualisation of existing debt [...] We are still in an EU of nation states and, for as long as this remains the case, it would seem unlikely that the Member States would fail to draw from the Eurozone crisis the obvious conclusion that countries should in future avoid moral hazard and take full responsibility for their own economic management. As for the more radical ideas for European economic governance intermittently advanced by France, [...] these have attracted little support across Eurozone members, given their potential to undermine the comparative advantage of many Member States. Nor, crucially, are such ideas likely to be acceptable to Germany.[150]

Ruth Lea also saw "few signs" that the Eurozone was moving to fiscal union.[151]

59. In light of such considerations, witnesses expected movement towards a more tightly integrated Eurozone to be a matter of many years. Professor Minford reckoned that instituting the required new Eurozone measures could take up to a decade.[152] In June 2012, the European Council tasked its President, Herman Van Rompuy, with presenting by the end of the year "a specific and time-bound road map for the achievement of a genuine Economic and Monetary Union".[153] For some months, it was expected that the December 2012 European Council might agree a plan for major steps towards closer Eurozone integration in coming years, including possible EU Treaty amendment. In the event, in its December 2012 conclusions, the European Council focused on shorter-term steps being taken within the current Treaties, and asked President Van Rompuy to come back to its June 2013 meeting with a "roadmap" on a more limited range of issues.[154] The Financial Times commented on the meeting that "on fiscal and economic issues, the path ahead remains as vague as it was".[155] Sir Jon Cunliffe stressed to us that:

if you look at the outcome of the European Councils, it is very uncertain how far and how fast [the Eurozone states] will go and in what order; there is still a lot of agreement to be worked out between the euro countries themselves. It is not as if there is a joint picture, plan or road map at the moment. Those details are being worked out, which is what makes the future so uncertain.[156]

60. However long it might take to establish a more stable policy and governance framework for the Eurozone, witnesses stressed that, in Dr Niblett's words, this was likely to be "the overriding objective of most EU Member States for the next few years".[157] Dr Niblett suggested that this would affect the UK's relations with traditional EU allies both inside the Eurozone (such as the Netherlands) and outside (such as Poland).[158]

61. The issues facing the Eurozone states as they contemplate closer integration are technically and politically very difficult. As yet, the Eurozone has no 'grand plan' towards a desired or necessary end point. Rather, there are serious differences of approach among its members, and serious strains arising between and within them as a result of the steps being taken to tackle the crisis. We expect further Eurozone integration to take place incrementally to a great extent, and over a considerable number of years. The Government must reckon with the fact that reforming the Eurozone in coming years will take up much of the time and political resources of its EU partners.

Eurozone enlargement

62. The Government has appeared to wish to position itself as the leader of the 'non-Eurozone' in the EU, grounded in the Single Market.[159] However, one of the notable features of the TSCG is that, although its prime purpose is to strengthen fiscal discipline in the Eurozone, it has been signed by all except two of the non-Eurozone states (the UK and the Czech Republic) (see Annex 3). Charles Grant told us that UK officials were "quite surprised" that more non-Eurozone states did not align themselves with the UK outside the TSCG.[160]

63. All states joining the EU since the 1992 Maastricht Treaty have had to accept, as part of their Accession Treaties, an obligation in principle to adopt the Euro. This is because the Maastricht Treaty made Economic and Monetary Union (EMU) part of the EU's acquis; and, under the EU's established enlargement practice, all states acceding to the EU are obliged to accept all of the acquis (with the exception of limited transition periods on some issues which may be negotiated as part of their Accession Treaties). A Member State adopts the Euro, at an unspecified time after its accession to the EU, when the Council decides (on the basis of reporting by the European Commission and European Central Bank, ECB) that the Member State concerned has met the necessary criteria (the 'Maastricht criteria'). Only the UK and Denmark have Euro opt-outs which may be permanent if these states never wish to adopt the single currency. However, the EU cannot enforce other Member States' Treaty obligation to adopt the Euro. Member States which do not wish to join the Eurozone may simply ensure that they do not meet the criteria required to do so, as Sweden has done since its accession to the EU in 1995.[161] Currently, ten of the 27 EU Member States are outside the Eurozone. The figures will shift to eleven of 28 when Croatia joins the EU on 1 July 2013. In March 2013, Latvia initiated the process for accession to the Eurozone, aiming to adopt the single currency in January 2014.[162] The following table shows the development of the balance between Eurozone and non-Eurozone states in the EU since the Euro was established in 1999:

Table 1: Eurozone and non-Eurozone states in the EU, 1999-2013

EU

Eurozone

Non-Eurozone

EU

1999

11

(Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain)

4

(Denmark, Greece, Sweden, UK)

15

2001

12
(+ Greece)

3
(- Greece)

15

2004

12

13
(+ Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia)

25

2007

13

(+ Slovenia)

14

(- Slovenia, + Bulgaria and Romania)

27

2008

15
(+ Cyprus and Malta)

12

(- Cyprus and Malta)

27

2009

16

(+ Slovakia)

11

(- Slovakia)

27

2011

17
(+ Estonia)

10

(- Estonia)

27

2013

17

11

(+ Croatia)

28

Source: www.eurozone.europa.eu/euro-area/euro-area-member-states

The current balance between Eurozone and non-Eurozone states is also shown as part of the broader picture of differentiated integration in and around the EU in Annex 3.

64. Some witnesses did not regard the Government's apparent aspirations to lead a non-Eurozone group in the EU as credible, because of the obligation of most other non-Eurozone states to join the single currency, and the steadily-growing group of states doing so.[163] For example, Graham Avery said that the UK was in a "diminishing minority in the 'outer circle'".[164] However, the Foreign Secretary told us that, as a result of the Eurozone crisis, "the assumption that those outside the Eurozone are just reduced to a very small number may now be [...] rather out-of-date".[165] Owing to the way in which the Eurozone crisis has exposed states' unreadiness to be part of the single currency area, and the costs that this has imposed on other Eurozone countries, Sir Howard Davies expected the European Commission and ECB to police entry to the Eurozone much more tightly in future. He reckoned that it would be 10-20 years before the UK found itself as one of only two or three EU countries outside the Eurozone.[166]

65. Charles Grant warned that most countries outside the Eurozone wished to join it, even though the process might be a long one, and that this tended to trigger a political dynamic that posed difficulties for the UK. Such countries "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", he said.[167]

66. Assuming that it remains in the EU, the UK is likely to be part of a sizeable group of Member States outside the Eurozone for at least another decade. However, most other non-Eurozone states are under a Treaty obligation to adopt the Euro at some point, and appear to wish and expect to do so. The assumption that they will one day be in the Eurozone does not at all rule such states out as allies for the UK in particular EU policy areas. However, it is likely to push their longer-term orientation in the EU away from the UK and towards the Eurozone 'core'.

Eurozone integration: a risk for the UK?

67. The central dilemma facing the Government with respect to further Eurozone integration was summed up by one witness as follows:

The success or failure of the Eurozone is a matter of central economic importance to the United Kingdom [...] There is a more than plausible case [...] that the success of the Eurozone can only be achieved by greater political and economic integration among its members. Yet when the current British Government calls upon its neighbours to pursue more vigorously such integration, it is spectacularly reversing centuries of British foreign and European policy, central to which was the avoidance of united European structures potentially hostile to the United Kingdom.[168]

68. Witnesses who were concerned about the Government's stance towards Eurozone integration saw a prospect essentially of a 'two-tier' EU, in which the EU would increasingly become synonymous with the Eurozone, and the UK would be left outside. Such witnesses tended to assume that a 'two-tier' Union would necessarily be inimical to UK interests. Dr Niblett acknowledged that there were previous instances of the UK declining to participate in areas of integration. However, he suggested that a position outside the Eurozone under current circumstances might be qualitatively different from such past experiences of differentiated integration, because "close and regular cooperation between EU members on an issue as fundamental as fiscal policy will change the dynamics of EU integration and the UK's place in Europe in ways that are hard to predict".[169] At the least, several witnesses including Graham Avery, Sir Colin Budd and Brendan Donnelly felt that the increasing dominance of Eurozone matters in the EU would inevitably leave the UK marginalised from the defining debates of coming years.[170]

69. For some witnesses, tighter Eurozone integration—and what they saw as the UK's increasing isolation—represented the delayed workings-out of the original decisions in 1992 to participate in the currency union or not. Some witnesses implied that the logic of developments was that the UK should either countenance joining the Eurozone, or leave the EU.[171] The argument is essentially that a country must either be 'fully in' the EU, or out. For example, the campaign organisation Nucleus suggested that the Eurozone now might be seen as akin to the then-EEC in the 1960s, when UK policy-makers came to the view that the UK's influence would be limited as long as it remained outside.[172] However, Dr Niblett explicitly examined and rejected the argument that the UK 'might as well leave' if it were not going to join the Euro. This was despite the fact that he was among the witnesses who saw the consequences of the "logic of EMU" as being the most profound, for the UK and Eurozone states alike. Dr Niblett argued that, closer Eurozone integration notwithstanding, the UK could still find partners in the EU to pursue its objectives across a range of policy fields (see paragraphs 75-78).[173]

70. According to the Financial Times, when the Chancellor first announced the Government's support for further Eurozone integration in July 2011 he recognised explicitly that his position "turned British policy on its head, since it end[ed] the Government's long-standing desire to frustrate the creation of a two-speed Europe".[174] For the Government, therefore, it appears that the consequences of remaining in the EU but outside a more tightly integrating Eurozone may not be as uncomfortable as some observers believe, or at least are 'less bad' than any of the alternatives. This is part of the Government's broader enthusiasm for 'flexible integration', which we consider in paragraphs 133-143.

The Eurozone and the Single Market

71. The Government has been concerned above all about the risk that further integration in the Eurozone might 'spill over' into the Single Market and jeopardise the UK's ability to participate meaningfully in Single Market decision-making. The risk arises when Eurozone states, in order to try to put the single currency area onto a more stable footing, take steps which affect policy areas which are part of the Single Market, such as financial services regulation. Charles Grant argued that Eurozone integration would only be a risk for the UK if the Eurozone started to operate as a bloc on Single Market issues.[175] Professor Minford saw the risk to the UK of 'spillover' as especially large because he considered that, in the face of the economic crisis and the need to support recovery in the periphery countries, the Eurozone acting alone was likely to adopt protectionist policies which it would then be able to transfer to the Single Market.[176]

72. Regardless of the additional dynamics triggered by the Eurozone crisis, Open Europe reminded us that from 2014 the Eurozone states will command sufficient weighted votes in the Council of the EU to muster the qualified majority required to take Single Market decisions alone. This is owing to a change made by the 2007 Lisbon Treaty to the threshold for qualified majority decision-making.[177] Professor Minford argued that qualified majority voting made it "very hard to keep what will happen in the Eurozone apart from what is going to happen in the European Union".[178]

73. Witnesses identified two possible mechanisms which might reinforce any tendency for the Eurozone to come to dominate Single Market decision-making:

i) EU institutional 'capture' or 'colonisation'. In the arguments surrounding the TSCG, the Government was concerned above all to prevent the EU institutions from being used to pursue further Eurozone integration in ways that might undermine their role in the governance of the Single Market for all Member States. We were warned about this risk by TheCityUK, the representative organisation for UK-based financial and related professional services businesses, which predicted that "fiscal integration within the Eurozone is likely to lead to [...] an EU policymaker presumption that the needs of the Eurozone and of the Single Market are the same".[179] Mats Persson, the Director of Open Europe, told us in July 2012 that the risk was "difficult to substantiate" at that stage, but that it remained a risk nevertheless.[180]

ii) Separate Eurozone institutions, especially outside the existing EU legal framework. Nucleus argued that the holding of Eurozone summits had "dramatically shifted the centre of power within the EU to an organ in which the UK has no place and no voice".[181] Liberal Democrat MEPs also felt that the Eurozone summits would exclude the UK from the discussion of important matters.[182]

74. Overall, witnesses felt that the Government was correct to identify the risk that more far-reaching integration in the Eurozone might lead to Eurozone 'caucusing' on Single Market matters—that is, to the UK effectively being presented with 'done deals' reached in its absence. In these circumstances, witnesses largely judged the Government's broad strategy, of seeking to protect the decision-making position of non-Eurozone states in the Single Market, to be correct.

The Eurozone and other EU policy areas

75. Witnesses who were inclined to endorse the Government's broad position tended to see a less stark and all-encompassing divide in the EU between the Eurozone and the rest than did observers who were more critical of the Government's approach. Maurice Fraser and Dr Niblett both stressed the diversity that exists among even Eurozone countries, and even on Single Market issues, and the potential that this offered the UK to be able to find allies.[183] Sir Howard Davies also argued that the picture was more complicated—and more promising for the UK—than an 'us and them' standoff with the Eurozone. He argued that, rather than a 'two-tier' EU, the prospect was for an EU of "variable geometry".[184]

76. Mr Hague told us that the Eurozone states were not caucusing across a broad range of EU policy areas, and that Member State alliances continued to vary widely from issue to issue. He spoke in particular about his experiences in the Foreign Affairs Council, where he contended that an observer would be unable to tell which Member States were in the Eurozone and which not.[185] Sir Jon Cunliffe echoed this portrayal, saying that alliances were "dossier-specific". He also noted that, inasmuch as there was a "northern economic liberal alliance" in the EU, it contained both Eurozone and non-Eurozone states.[186] Similarly, the FCO pointed out that leaders from both Eurozone and non-Eurozone countries signed the Prime Minister's letter to European Council President Van Rompuy and European Commission President Barroso in March 2012, which pushed for liberalising EU reforms aimed at generating growth.[187]

77. The FCO supplied us with a table comparing the voting records of other Member States in the Council of the EU in relation to the UK's positions. The table was based on VoteWatch Europe data for 2009-2012. The data showed that the percentage of votes in the Council in which any given Member State voted with the UK ranged only between 85% and 90%. In other words, there was no large split between one group of Member States consistently voting with the UK and another group consistently voting differently. Moreover, there was no correlation between Member States' tendencies to vote with the UK and their membership or not of the Eurozone: the country that 'only' voted with the UK on 85% of occasions was a Eurozone state (Germany), as were six of the nine states that voted with the UK 90% of the time.[188]

78. In the face of more far-reaching Eurozone integration, it could be difficult for the UK and other non-Eurozone Member States to preserve their capacity to shape decisions affecting the Single Market. The Government is correct to have identified this risk for the UK and to have adopted a strategy of seeking to mitigate it by protecting the rights of non-Eurozone states. However, tighter integration in the Eurozone is far from rendering the UK's position in the EU impossible or worthless. The Eurozone is not a homogenous bloc, and Member State alliances around the EU continue to vary from issue to issue and to straddle the boundary between the Eurozone and the rest.

Government stance towards an integrating Eurozone

79. Our inquiry brought home to us the extent to which the Government's stance towards further Eurozone integration involves it in a delicate balancing act:

The Government wants the Eurozone to move ahead with further integrative measures that will stabilise the single currency area and help it return to growth; but, where they might impinge on the Single Market, the Government also sees such measures as a potential threat to UK interests that requires mitigation or compensation.

The Government seeks to stress the extent to which it is distancing the UK from the Eurozone, but also that the UK has an interest in Eurozone developments. The Prime Minister, at least, sometimes appears to argue that his wish for a "new settlement" for the UK in the EU is warranted by the scale of the effect of closer Eurozone integration on the UK's position.[189]

80. Our evidence suggested that the Government has not always got this difficult balance quite right—for example, in connection with the December 2011 European Council, when the Government was seen by some other Member States to have requested 'more' than was warranted by the impact on the UK of the proposed Eurozone measures, which the Government in any case said that it supported (see paragraphs 38-42). Witnesses made a number of suggestions which they felt would enable the Government to exercise influence more effectively with respect to further Eurozone integration. These were:

The Government should not allow itself to be perceived as obstructing measures that the Eurozone states feel that they need to take in the interests of strengthening the single currency area. According to some witnesses, such a perception risks undermining the credibility of the Government's stated support for the Eurozone.[190] (Sir Howard Davies warned that any perceived UK obstructionism was likely to be especially aggravating given the perception in many parts of the EU that the financial crisis was of 'Anglo-Saxon' origin in the first place.)[191]

The Government should beware of the UK being seen as an unnecessary additional distraction or problem, at a time when the Eurozone is under intense pressure and facing formidable challenges already.

The Government should try to avoid any risk of being seen to be 'lecturing from the sidelines'.[192] A number of witnesses suggested that the Government should seek to speak and act in a spirit of 'solidarity' with the Eurozone.[193]

Overall, witnesses including Sir Howard Davies and Maurice Fraser argued that the Government could achieve much simply by adopting a constructive approach.[194] Charles Grant also stressed the importance of tone and language, saying that they made "a huge difference as to whether [the UK is] seen to be a trusted and desirable partner or a pain in the neck".[195]

81. The Government's stance towards greater Eurozone integration requires it to tread a very delicate line—both encouraging further Eurozone integration but also preventing the process from damaging UK interests; and distancing the UK from the Eurozone while maintaining that the country has an interest in developments in the single currency area. The Government can minimise the risk of causing aggravation and maximise the prospect of exercising influence by adopting a constructive and cooperative tone and approach.

A case study: the Single Supervisory Mechanism

82. Giving evidence in July 2012, Sir Howard Davies noted that the proposed EU banking union would be the first concrete case to engage a number of the broader questions about the relationship between the Eurozone and the Single Market which lie at the heart of Government policy.[196] The Government has indicated that the UK will not participate in the proposed banking union.[197] Sir Howard told us that, from outside the banking union, it would "require considerable skill" for the UK to maintain a position in the Single Market in which it did not face discrimination against it.[198]

83. The first step towards the prospective banking union is the proposed establishment of a Single Supervisory Mechanism (SSM) for the banks of Eurozone countries and other participating states. The European Commission published proposals in September 2012 under which the ECB would be instituted as the Single Supervisor. Only Eurozone states have decision-making powers in the ECB. The SSM proposals raised questions about the rights of non-Eurozone states in the European Banking Authority (EBA), the pan-EU body which was established in 2010 to coordinate national banking supervisors in the operation of a 'single rulebook' of banking standards. The EBA Board of Supervisors takes decisions on regulatory matters by qualified majority vote. However, the Commission's SSM proposal provided that in the EBA Board the ECB would "coordinate and express a common position" of states participating in the SSM—who have the qualified majority of votes required to take decisions in the EBA Board. The Government told the House of Lords EU Committee's inquiry into the issue that this would "effectively require participating Member States to caucus in adopting positions and voting in the EBA".[199] Sir Jon Cunliffe told us that the risk of "caucusing arose by virtue of the nature of the proposal".[200]

84. In December 2012, EU Finance Ministers agreed that—once the SSM comes into operation—instead of a qualified majority, decision-making in the EBA would require a double majority: a simple majority of Member States participating in the SSM, and a simple majority of Member States not participating in the SSM. The system is to be used until there are only four non-SSM states.[201] Ministers also agreed on a clause in the new legislation on the ECB which states that "no action, proposal or policy of the ECB shall, directly or indirectly, discriminate against any Member State or group of Member States as a venue for the provision of banking or financial services in any currency".[202] The Financial Secretary to the Treasury, the Rt Hon Greg Clark MP, told the European Scrutiny Committee that UK Ministers had been "very closely involved" in the SSM negotiations. He hailed the 'double majority' deal as a "landmark agreement" which "protect[ed] against the risk that participating Member States [in the SSM] will systematically impose a common view on other Member States". Mr Clark further said that the ECB 'non-discrimination' clause was a "significant achievement" that "guard[ed] against any restriction of the UK's role as a financial centre in the Single Market".[203]

85. The Foreign Secretary told us that the SSM deal was an "important precedent".[204] The FCO also told us that, in future negotiations on EU financial services legislation, the Government would "strive for targeted protections based on the specific proposals that are under negotiation".[205]

86. We note that a provision "entrenching the principle of non-discrimination within the Single Market", in particular with respect to the Member State in which a firm is located, was one of the legal safeguards which the Government requested as part of the failed negotiation on EU Treaty change in December 2011.[206]

87. The agreement on the Single Supervisory Mechanism (SSM) which was struck among EU Finance Ministers in December 2012 was significant on several grounds. It shows what the UK can achieve, in terms of protecting its position in the Single Market, through close and constructive engagement and innovative policy solutions. We note that the deal went some way towards entrenching the kind of safeguard against discrimination in the Single Market that the Government failed to secure in the December 2011 negotiations on the 'fiscal compact'. We also note that the arrangements that were agreed to protect non-Eurozone states—on this occasion, for 'double majority' voting in the European Banking Authority—responded directly to a concrete proposal (in this case, one which gave rise directly to a risk of caucusing). Finally, we note that the SSM agreement protected the interests of non-Eurozone states by moving away from qualified majority voting: the deal established a decision-making rule that operates on the basis of the different statuses of two different groups of Member States, those participating in the SSM and those not.

Eurozone integration and the TSCG: inside or outside the EU?

88. The Government's case against agreeing to EU Treaty change in December 2011 rested to a great extent on an argument about the relative risks to the UK of two alternative institutional formats for further Eurozone integration: inside the EU legal and institutional framework, or outside? We noted in paragraph 73 that witnesses identified both as potential risks to the UK's position. Addressing the House after other Member States had agreed to conclude the TSCG outside the EU framework, the Prime Minister stated explicitly that, without the safeguards that he had requested, "a treaty within a treaty would have been far more dangerous [for the UK] than a treaty outside the EU".[207] The Government's view was that, in the absence of relevant safeguards, it was better to keep the provisions of the TSCG away from the EU, where they would not have the force of EU law and would, presumably, be less capable of being pursued through the EU institutions. The European Scrutiny Committee endorsed the Government's position. It concluded that, in the event that the Government felt obliged to mount a legal challenge to the 'fiscal compact' on the grounds that it was infringing the EU Treaties, it would be easier to do so if the 'fiscal compact' were not itself incorporated into those Treaties.[208]

89. The alternative view which we heard was that Eurozone integration outside the EU framework posed more of a risk to the UK than such integration inside. This was because, if Eurozone integration proceeded outside the EU, the UK had no locus over it. Inside the EU framework, the UK would be more able to rely on its own Treaty-based rights and the Treaty obligations of the EU institutions towards all Member States.[209] There were also concerns that Eurozone integration outside the EU framework would make decision-making and accountability even more complex and less transparent than otherwise,[210] and would risk creating new parallel institutions.[211]

90. Jean-Claude Piris, the legal adviser to the European Council and Council of the EU until 2010, advocated the formalisation of a 'two-tier' structure, based around the Eurozone and the rest. He argued that unanimous agreement on the degree of further integration required in the Eurozone would be impossible to achieve among all the EU Member States, not least because of what he saw as the stance of the UK Government, and that further Eurozone integration would have to proceed on an inter-governmental basis, on the model of the TSCG. However, M. Piris argued that this should not involve the creation of new institutions, "in order not to make the picture of Europe more complex than it is already". He argued that a more tightly integrating Eurozone could and should use the EU institutions (although he acknowledged that precise arrangements for the European Commission and Parliament could be problematic), and that it would be advisable for the UK and other non-Eurozone Member States to "accept that these institutions work for the Eurozone as well as for the EU". M. Piris said that any new inter-governmental arrangement for the Eurozone could be made subject to the jurisdiction of the ECJ, to "guarantee the group's strict compliance with the letter and spirit of the EU Treaties".[212]

91. Article 16 of the TSCG provides that "within five years, at most" of that treaty entering into force, steps should be taken to incorporate it into the EU legal framework. This would probably require EU Treaty change. In that case, the process would represent a potential means of opening the EU Treaties to renegotiation and thus of giving the UK leverage (see paragraphs 117-127). We asked our witnesses whether the Government should support EU Treaty change to incorporate the TSCG into the EU legal framework when the time comes. Only Nigel Farage MEP and Ruth Lea were opposed, on the grounds that it would reinforce what they saw as the tendency towards the accretion and centralisation of EU powers, and would make it more difficult for the UK to maintain its distance from further integration.[213] Other witnesses felt that the UK would have little to lose, and potentially something to gain, by supporting the incorporation of the TSCG into the EU Treaties.[214]

92. We recommend that, when the issue comes onto the agenda, the UK Government should support the incorporation of the provisions of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG) (the 'fiscal compact' treaty) into the EU legal framework, including through EU Treaty change if necessary, assuming that this could be achieved as part of an overall Treaty amendment package that includes appropriate safeguards for the UK. With appropriate safeguards, the incorporation of the TSCG into the EU Treaties would, at the least, not be more damaging to UK interests than the existence of the TSCG outside the EU Treaties; and it would also open the way to an EU Treaty renegotiation process.

141 It became commonplace to refer to the "remorseless logic" of Economic and Monetary Union (EMU) after the Chancellor used the phrase in his landmark interview with the Financial Times in July 2011: "Osborne urges eurozone to 'get a grip'", www.ft.com, 20 July 2011. Mr Osborne and other Ministers have used the phrase repeatedly since. Back

142 Ev 79 Back

143 Cabinet Office, The Coalition: our programme for government, May 2010, p 19 Back

144 Ev 79-80 [FCO] Back

145 Ev 83 [FCO] Back

146 Under Article 127(6) TFEU, governing the conferral on the ECB of tasks relating to the prudential supervision of credit institutions and other financial institutions; see Ev 84 [FCO]. Back

147 Ev 60; the quote is from Percy Cradock, In Pursuit of British Interests: Reflections on Foreign Policy Under Margaret Thatcher and John Major (John Murray, 1997), p 123 Back

148 Q 10 Back

149 Ev 151. Jonathan Eyal of RUSI has made a similar argument: "The EU's Alternative Futures", RUSI Journal, Vol. 157, No.1, February/March 2012, p 45. Back

150 Ev 159 Back

151 Ev 121 Back

152 Q 107 Back