Foreign Affairs CommitteeWritten evidence from the Foreign and Commonwealth Office

Letter from Rt Hon David Lidington MP, Minister for Europe

I welcome your Committee’s decision to hold an inquiry on the Future of the European Union: UK Government policy.

In providing written evidence I have focused exclusively on addressing the questions posed by the Committee rather than commenting on wider Eurozone issues. However, I appreciate that these issues and broader questions about the Future of the European Union are also of considerable interest to the Committee, and I am willing to discuss these with the Committee at a later stage.

Memorandum

To what extent should the December 2011 European Council and its outcome be seen as a watershed in the UK’s EU policy and place in the Union? 

1. The December 2011 European Council and its outcome need to be set in context. First, they must be seen in the context of the original decision to set up a single currency within the European Union, which led to the creation of the Eurozone. Greater fiscal cooperation within the Eurozone is a logical consequence of that decision and the December European Council is one moment in this process. As the Chancellor has said, Eurozone states need to accept the remorseless logic of monetary union that leads from a single currency towards greater fiscal integration.1 However, the UK has been clear that as a Member State not committed to joining the euro, it will not be part of this integration. Second, if integration in the Eurozone deepens, the interests of the UK and other non-Eurozone Member States must be protected. Third, since December, we have continued to engage actively in EU negotiations to shape the debate on a variety of EU issues and promote our national interests.

The logic of greater fiscal cooperation in the Eurozone

2. On the first point, in 1992, the UK Government negotiated the right to remain outside the euro area, even when all convergence criteria are met, and therefore the UK is under no obligation to take part in the euro in the future. The UK’s decision to remain outside the euro area has been proved correct. This Government has also enacted legislation (the European Union Act 2011) to ensure that approval in a national referendum would be required by law before the UK could join the euro.

3. Stability and growth in the Eurozone, to which 40% of our exports are sold, matter to our own economic recovery. We have been and will remain a supportive and constructive partner. We have been concerned for some time that certain aspects of the Eurozone arrangements were unbalanced.

4. As the Foreign Secretary outlined in his letter of 15 February 2012 to the Committee,2 as the Eurozone crisis grew more acute through 2011, it became increasingly clear to us that for the euro to survive, the Eurozone required greater fiscal and economic coordination as well as the implementation of the October 2011 Agreement: a larger firewall, the recapitalisation of the most vulnerable Eurozone banks and a sustainable solution to Greece’s debt crisis. Thus this Government has welcomed the greater fiscal and economic co-ordination in the Eurozone required to resolve the crisis, while maintaining the position that it should take place in a way that does not spill over into areas that are properly for the EU at 27, such as the Single Market. We also note that this greater co-ordination does pose questions for Eurozone countries on how it should relate to national democracy and accountability.

5. There is a material difference in terms of the value of and rationale for integration between those Member States in the Eurozone and those outside it. Given the UK’s role outside the euro and having not committed to join the euro, it is right and logical that we have said we will not be part of that closer fiscal integration. It is good that we have our own economic policy, our own interest rates and the ability to deal as we deem fit with the problems that face our economy.

Protecting the interests of non-Eurozone Member States

6. The UK considers that under the EU Treaties there is a proper role for the EU Institutions in supporting the Eurozone and strengthening its internal governance, in the way that the European Commission already suggests measures Member States, including Eurozone Member States, should take to correct an excessive deficit. But the interests of non-Eurozone Member States must also be protected and the EU Institutions must not be used in a way that undermines the integrity of the Single Market.

7. We want to ensure that the EU Institutions continue to operate fairly for all Member States and safeguard the Single Market. This is as important for those current and future members of the EU, for whom it will be many years before they join the euro, as it is for those members who have no current intention of joining. In preventing a proposal to amend the EU Treaties that did not include proper safeguards, the Prime Minister demonstrated how strongly we will defend the Single Market.

UK influence in Europe

8. On the third point, this Coalition Government is committed to playing a leading role in the EU, whilst advancing the UK’s national interests and protecting its sovereignty. Over the past two years, Britain has pursued an active and activist policy in Europe, through both the EU itself and through deeper bilateral relationships with European partners. As has long been British policy, this Government has strongly supported the deepening of the Single Market. It has built a coalition of Member States pushing for reform of the EU to deliver economic growth. It has been at the forefront of ensuring that the EU leads on the international stage, delivering a new climate change treaty in Durban and providing support for new democratic regimes in the Arab world.

9. Our approach has not changed since December and we continue to play a full, committed and influential role in the EU. For example, we worked closely with the European Parliament, other Member States and the Danish Presidency to reach agreement earlier this year on the European Markets Infrastructure Regulation (EMIR), which regulates post-trading of derivatives and the operation and governance of Central Counterparties and Trade Repositories. We welcome EMIR as an important element in delivering on our international commitment to reduce systemic risk in derivatives markets, and in negotiations we ensured that the final regulation upheld single market principles.

10. We are also leading a like-minded group on growth which spans both euro-ins and euro-outs. Together we are working to push the Commission to implement various reforms to help stimulate economic growth in the EU.

11. Furthermore, ahead of the March 2012 European Council, the Prime Minister and 11 other EU leaders set out an action plan for jobs and growth in a letter to Mr. Barroso and Mr. van Rompuy. This letter effectively became the agenda for the European Council and our proposals on free trade, deregulation and completion of the Single Market were included in the final communiqué from the summit, agreed by all 27 Member States.

12. In foreign policy, the UK has worked tirelessly to build a solid and coherent EU policy towards Burma and EU sanctions were part of the mix of international pressure which led to the Burmese Government’s decision to begin reforms. This is EU external action at its most effective—complementing and supplementing, not replacing, the foreign policies of individual EU Member States. We have also led the way on EU policy towards Syria. Working closely with our European partners, we have agreed 14 rounds of sanctions on Syria which seek to undermine the Syrian regime and deny it access to significant sources of revenue to fund its killing machine. On Iran, we have spearheaded the debate within the EU on the “twin-track” approach—pressure and engagement. This is now accepted by all EU partners. We have also worked intensively with Baroness Ashton’s team to build up the “engagement” track, for example through E3+3 meetings with Iran; and have worked extensively with EU partners to build up the “pressure” track, for example through oil- and other sanctions.

13. We will continue to work alongside our EU partners to tackle climate change building upon December’s successful negotiations in Durban, for which Europe has been widely credited. The UK was active in driving high EU ambition during those negotiations and this clearly demonstrated how we can work through the EU to achieve our international objectives as well as the value of a co-ordinated EU approach to climate diplomacy. By settling on a legally binding approach, Durban removed the biggest roadblock to reaching agreement on the measures that will be necessary to tackle the problem. 

14. The UK champions the EU’s further enlargement, including to the Western Balkans, Iceland and Turkey, based on all countries’ continued progress towards meeting the necessary conditions for membership. Croatia’s Accession Treaty was signed in December 2011 and it is expected to become a full EU member in July 2013; a Bill to seek Parliamentary approval to enable us to ratify that Treaty was announced in the Queen’s Speech on 9 May 2012. Serbia received EU candidate status in March 2012 after progress in meeting conditions related to Kosovo.

15. EU enlargement is a vital strategic goal for all of the countries of the Western Balkans: it creates stability, security and prosperity across Europe on a firm foundation of democracy, freedom, and the rule of law. Through tough accession negotiations designed to ensure that candidate countries fully meet the EU’s standards before they join, EU enlargement offers an unparalleled opportunity for these countries to move on from the conflicts of the past.

16. It follows that the Government does not believe that the December 2011 European Council represents a watershed in the UK’s EU policy and place in the European Union. The UK was prepared to support EU Treaty change with all 27 Member States in return for safeguards to protect the integrity of the single market. However, without those protections, what was on offer was not in the UK’s interests. Therefore the December European Council demonstrated how strongly we are prepared to defend our national interests.

Between now and 2020, what institutional architecture and membership should the UK seek for the EU? Should the UK embrace a formalised two (or more)-tier EU and start to develop ideas for multiple forms of EU membership?

17. We support a multi-faceted EU where Member States with a range of different interests and needs can work together in informal groupings, such as the like-minded groups, or in more formal groups, for example the Schengen countries. Multiple forms of EU membership already exist and it is in both the EU and UK interest that the EU has the flexibility of a network and not the rigidity of a bloc. The EU is not and should not become a matter of everything or nothing.

18. This Government’s priority is the delivery of outcomes which are good for Britain and good for the EU. Instead of speculating in this evidence on possible structures, therefore, we will show how we aim to deliver the FCO’s agenda of security and prosperity through the EU and our membership of it as we approach 2020, touching on some key principles which govern our approach to the EU reform agenda, such as accountability and subsidiarity. But of all the institutional issues which others are discussing in more detail, there is one which we think is worth raising here, as it is pertinent on the state of democracy in the EU—the role of national parliaments. In all European countries national parliaments embody national democracy. No other institution matches their legitimacy or their closeness to electorates. They play too small a role in the EU. Part of the answer to the EU’s democratic deficit must lie in their playing a larger role.

19. What do we want from the EU and how will we work with the EU to ensure we achieve it? First, we want an outward-looking EU that is more dynamic and competitive on the global stage. The speed and scale at which globalisation is shifting the balance of wealth and political power towards emerging economies poses a challenge to the position of the EU in the world order. This shift reinforces the urgent need for EU countries to reform to stay competitive, generate growth and maintain employment and standards of living. This crisis in the Eurozone has shown the absolute need to ensure that the foundations of Europe’s economies are strong.

20. The UK has led the EU debate on reforming the EU economy to deliver growth but we will go further over the remainder of this parliament by looking to keep the immediate need for structural reform at the heart of the debate on growth. We will push for an ambitious programme of deepening the Single Market and reducing the burden of EU legislation. We will also continue to contribute to the EU’s prosperity, for example through the City of London, one of the most significant global financial centres. It is in and through the City that many French pensions are managed, German manufacturing companies buy financial services, many energy risks throughout Europe are hedged, and provisions of capital for European infrastructure projects flow.

21. Second, we want an EU that is able to use its collective weight for our common interests, such as trade and security. The UK’s ability to influence events abroad is greatly enhanced by our place within the EU. Together we hold more sway than apart and we are stronger in assuring our security when the 27 EU Member States agree. So on issues where there is a common European interest, when the national interests of the 27 EU Member States converge, it makes sense for the EU Members to act together, pool our influence and speak with a united voice.

22. On trade, one voice representing half a billion consumers is heard more loudly in Beijing, Delhi and Moscow, than 27 separate ones. With UK support, the EU has already completed a Free Trade Agreement with Korea worth £500 million to UK exporters. But our ambition does not stop here. We also aim to conclude trade agreements with Canada, India, Singapore and Mercosur, as well as launch a comprehensive package of negotiations with the US, which would tackle the remaining barriers to almost half the world’s trade flow.

23. In security and defence policy, as in many other EU policies, there is a need for variable geometry. In Afghanistan, representations from certain Member States are involved in EU military and civilian missions supporting NATO in building stability and security, with a specific focus on police training. In the Balkans, others are working in EULEX as it seeks to bring justice and stability to Kosovo; and off the Horn of Africa, the EU mission, ATALANTA, is tackling international piracy.

24. The Government will work to make sure that the European External Action Service (EAS) acts to boost UK prosperity and security by complementing and supplementing—not replacing—the work of the FCO. The Lisbon Treaty makes clear that the EAS “shall work in cooperation with the diplomatic services of the Member States”. The EAS brings together existing EU external action mechanisms and experts from the Commission and Council.

25. While I did not personally support the EAS’s creation, now it is established I believe that our goal should be to ensure that it usefully complements and supplements our national foreign policy but does not in any way replace it. Therefore we believe the EAS can have the most effective impact on UK security and prosperity by focussing on: stability in Europe’s neighbourhood—South, East and the Western Balkans; relations with emerging and major powers such as the US and BRIC countries; conflict prevention, development and peace building—especially in Africa; and some key foreign policy challenges such as Iran and the MEPP. We are working at home to promote the EAS as a stepping stone in the career of talented UK officials, so we can ensure that the UK participates fully both in Brussels and in the work of delegations abroad. We remain very clear that the division of competences must be respected, in line with the Treaties; and any changes in representation must be agreed by Member States by consensus. The EAS will only represent the UK where we or the Treaties mandate them to do so—for example, on agreed positions in the CFSP.

26. Third, we want an enlarged EU that helps spread freedom, democracy and the rule of law more effectively in its neighbourhood. Despite the EU’s current economic troubles, the extension of European democracy is a success few dared to hope for 30 years ago. Then as now, the prospect of membership of the EU to countries such as Turkey—a key emerging economy—and those of the Western Balkans is providing the incentives to encourage and embed the necessary reforms to enable both the EU and the aspirant countries to benefit from the expansion of stability, security and prosperity across Europe. This is a key part of our vision for the EU.

27. Fourth, we want an EU which faces the challenge of legitimacy. Those within the EU saying that they had a positive image of the EU dropped from 52% in autumn 2007 to 31% in autumn 2011.3 This is not an isolated trend. The appeal of mainstream politics has weakened in most western democracies in the last thirty years. However, without the roots that sustain national democracies, it is particularly important that the EU addresses demand for greater accountability, transparency, efficiency and probity.

28. This issue of accountability is something we have also sought to address at home. We recognise that many people in Britain feel disconnected from how the EU has developed and the decisions that have been taken in their name on EU matters. To counter this, the Government is committed to ensuring that there is no further transfer of competence or power from the UK to the EU over the course of this Parliament.

29. To help rebuild trust and reconnect people to EU decisions, the European Union Act 2011 has established a referendum lock over any future proposals to transfer further competence or power to the EU, to which only the British people hold the key. It also gives the UK Parliament more control over key EU constitutional decisions taken by the Government.

30. Looking ahead, we will continue to make the case for a Europe which respects and builds on national identities. We will work to improve consultation of national parliaments, advancing transparency, accountability and control over EU spending, and to better assess the regulatory impact of EU legislative proposals before they are voted on. We will look to ensure that principles of localism and subsidiarity are more deeply embedded into EU decision making in line with the approach to decentralisation and flexibility we are seeking to achieve in the UK.

31. In many cases we can in fact achieve “better Europe” by reducing administrative and regulatory burdens at EU level—the UK was instrumental in securing commitments by EU Heads of State and Government (eg at the March European Council) to do just that. The Government is also committed, under the Coalition agreement, to examining the balance of competences between Britain and the EU, on which we will have more to say in due course.

32. In conclusion, under this government, Britain is developing its global role. In 2020 we will be a nation with closer ties to the emerging economies of the world than today. We will have more British companies with a foothold overseas, and exports, manufacturing and investment will make a bigger contribution to our economic growth. This reinvigorated and expanded approach will be built on our strong alliances in the EU and with the United States, building new networks without sacrificing the old. But a strong economy is the bedrock of international influence and the EU’s ability to contribute to a secure, peaceful and prosperous world ultimately rests on its economic strength.

What is the relationship between the new “fiscal compact” Treaty and the EU’s acquis? What impact might the conclusion of the “fiscal compact” Treaty have on other aspects of the EU and its policies, such as the EU budget, enlargement, or the Common Foreign and Security Policy?

33. The Fiscal Compact is not part of the EU Treaties. It is a self-standing international agreement between the signatory States. It is outside the EU Treaties and therefore does not form part of the EU acquis.

34. The Fiscal Compact does not have the force of EU law, for the UK, the EU or for the signatory States. The principle of the primacy of EU law is not affected by the Fiscal Compact, in fact it is the express intention of the parties to the Treaty that insofar as there may be any conflict or overlap between the Fiscal Compact and the EU Treaties, the EU Treaties shall prevail. Indeed, any other arrangement would be contrary to EU law.

35. The Fiscal Compact deals primarily and in some detail with fiscal discipline for the Eurozone States, and also touches on growth where its provisions are much less specific. The Fiscal Compact does not touch on the EU budget, enlargement, or the Common Foreign and Security Policy. These and all other EU policies will continue to be negotiated under the terms of the EU Treaties.

Should the UK Government support the incorporation of the “fiscal compact” Treaty into the EU Treaties? If it should, what demands and safeguards, if any, should it make its condition for doing so?

36. Any decision to incorporate the substance of the Fiscal Compact into the framework of the EU Treaties would require the consent of all 27 Member States of the EU. In any negotiation on Treaty change, we would protect and advance our own national interest.

37. The Prime Minister demonstrated this in agreeing to a change to Article 136 of the Treaty on the Functioning of the European Union (TFEU), which recognises that Eurozone Member States can establish a permanent stability mechanism—the European Stability Mechanism (ESM)—to safeguard the financial stability of the eurozone. By agreeing to the Article 136 Treaty change, the Prime Minister secured agreement in both the Council Conclusions and the European Council Decision that the ESM will replace both the euro area-only European Financial Stability Facility (EFSF) and the European Financial Stability Mechanism (EFSM), for which the UK holds a contingent liability, and that Article 122(2), the basis on which the EFSM was created, will no longer be needed for the purpose of safeguarding the financial stability of the euro area as a whole, and should not be used for those purposes. Consequently, the UK will not be exposed to any future programmes of financial assistance for the eurozone through the EU Budget, specifically the EFSM.

38. In his letter to the Treasury Select Committee on 27 February 2012 the Chancellor outlined the substance of the safeguards proposed at the December 2011 European Council when changes to the EU Treaties were discussed.4 These safeguards were not UK opt-outs, exemptions or any other kind of special treatment for the UK. What we proposed were safeguards for the whole EU that would have supported open competition for financial services companies across the Single Market, and upheld the existing commitment to ensure the ability of all Member States to supervise their domestic financial sectors, which is particularly important given the scale of the fiscal risks involved.

39. In the context of a more integrated euro area, it will be very important to ensure that EU rules respect the Single Market and vital national interests of all Member States whether they happen to be part of the euro area or not. Although it would be premature to outline now what safeguards the UK would propose if there were proposals to amend the EU Treaties in future, we remain concerned to maintain the integrity of the Single Market and vital national interests of all EU Member States.

22 May 2012