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Grand Committee

Wednesday, 2 July 2014.

Arrangement of Business


3.45 pm

The Deputy Chairman of Committees (Baroness McIntosh of Hudnall) (Lab): I remind your Lordships that in the event of a Division in the Chamber, the Committee will adjourn for 10 minutes from the sound of the Division Bell.

Genuine Economic and Monetary Union (EUC Report)

Genuine Economic and Monetary Union and the Implications for the UK

Motion to Take Note

3.45 pm

Moved by Lord Harrison

That the Grand Committee takes note of the Report of the European Union Committee on Genuine Economic and Monetary Union and the implications for the UK (8th Report, Session 2013–14, HL Paper 134).

Lord Harrison (Lab): My Lords, I am delighted to introduce this EU Committee report, ‘Genuine Economic and Monetary Union’ and the Implications for the UK. What is genuine economic and monetary union? In June 2012, the IMF revealed that there was a nearly €40-billion hole in the balance sheets of the Spanish banks and the spectre of contagion threatened to overwhelm the eurozone as a whole. European Union leaders recognised that urgent action was needed.

The result was a report written by the outstanding and now departing President of the European Council, Herman Van Rompuy, entitled Towards a Genuine Economic and Monetary Union. It envisaged a stable and prosperous EMU based on four essential building blocks. The first was an integrated financial framework, otherwise known as banking union. The second was an integrated budgetary framework. The third was an integrated economic policy framework. The final building block was ensuring democratic legitimacy and accountability. On the basis of this report, the Council invited the President of the Council, the Commission, the Eurogroup and the European Central Bank to prepare a specific and time-bound road map for the achievement of genuine economic and monetary union. The final report was published in December 2012, complementing the Commission’s own November 2012 blueprint for a deep and genuine economic and monetary union.

The Sub-Committee on Economic and Financial Affairs, which I chair, heard evidence on these proposals over several months, including on visits to Brussels, Berlin and Frankfurt, where we visited the European Central Bank and the Bundesbank. Our report was published in February. We are grateful to Professor Iain Begg of the London School of Economics, who

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acted as specialist adviser to the inquiry. I am also eternally grateful to Stuart Stoner, our outstanding clerk, and to Rose Crabtree, policy adviser for the report but a poacher turned gamekeeper who is now working for the PRA.

Our committee found that banking union was the most urgent of the four genuine economic and monetary union pillars. It was vital to tackling the effects of the financial crisis, securing the long-term stability of the eurozone and repairing the damage to the single market in financial services. For our December 2012 report on banking union, we consulted Michel Barnier, the appropriate commissioner, and Herman Van Rompuy. The report was with Chancellor George Osborne at the December Council.

Indeed, significant progress towards banking union has been made. A single supervisory mechanism has been agreed and will become operational under the European Central Bank this November. A single resolution mechanism has been agreed but, regrettably, only a partial banking union is in prospect. For the third leg of banking union, the single deposit insurance mechanism was quickly dropped because of political pressure. What is more, the final agreement on the single resolution mechanism that was reached shortly after our report was published remains sub-optimal.

Our concerns about the SRM focus on two issues in particular. First, the resolution mechanism itself—the process by which a failing bank would be dealt with—remains highly complex. Key players, including the Commission, the Council, the European Central Bank and national authorities, will all have a role to play. Indeed, it has been reported that more than 100 individuals and organisations might need to be involved in a resolution decision. Yet anyone with experience of these issues knows that bank resolution needs to be a quick and decisive process with the confidence of markets, investors and consumers. It is not to be undermined. I ask the Minister whether it is really credible to save a failing bank over a short weekend, before the markets open on a Monday morning, while consulting more than 100 other people or institutions.

Secondly, we were deeply concerned about the limited funds available to rescue failing institutions. The compromise agreement reached in the spring—by frontloading the mutualisation of funds and allowing the single resolution fund to borrow on the financial markets—was a step in the right direction. That is all helpful in avoiding the need for the taxpayer to pick up the bill. Yet even at its full strength of €55 billion, we fear that the resolution fund would be underpowered and ill equipped to deal with the scale of bank failures witnessed in recent years. In the committee’s view, direct recapitalisation of banks by the European stability mechanism was vital to break the vicious circle linking bank and sovereign debt. Again, perhaps the Minister can give us his view.

We also found that the second and third building blocks of genuine economic and monetary union—the proposals for an integrated budgetary and economic policy framework—were politically unrealistic at present. German concerns over moral hazard and the assumption of liability without effective controls mean that debt mutualisation remained highly contentious. That was

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not to say that these issues were not unimportant. A system of substantial fiscal transfers by a central budget is a characteristic of most currency unions and some degree of debt mutualisation may be inevitable if the single currency is to prosper. In the mean time, we warned that the imposition of so-called austerity policies could aggravate the problems facing weaker economies.

The fourth strand of genuine economic and monetary union—democratic accountability and legitimacy—is explored in the context of the recent report from the European Union Select Committee, chaired by the noble Lord, Lord Boswell of Aynho. On the role of national parliaments in the European Union, that report found that there was an asymmetry between the growing powers of institutions such as the Commission, the European Central Bank, the Eurogroup and the troika, and the ability of citizens to hold them to account for their actions. We found that a serious democratic deficit now exists, as the results of the recent European elections partly testify. While the European Parliament has a key role to play, we found that the principle of democratic accountability could be strengthened only if national parliaments also had an enhanced role and we were therefore extremely concerned at how little emphasis was placed on the role of national parliaments in the genuine and economic monetary union proposals. Incidentally, the ECB and the Eurogroup have clearly advanced as institutions within the European Union. I am pleased to say that our committee interviewed Dr Constâncio, vice-president of the ECB, in our investigation into the banking union report, and we recently visited the ECB and the Bundesbank.

Our report concluded by considering the implications of all this for the United Kingdom. The Government stressed that the United Kingdom’s role had not diminished and that it continued to play an integral role in the European Union, notwithstanding the fact that eurozone members are pursuing an increasingly integrationist agenda. However, the evidence to the committee heard in Brussels and Berlin tended to contradict that assertion. Responsibility for defending the UK interest lies not only, if principally, with the Government but with us as parliamentarians and, I might say, the City of London as the foremost European global financial centre. The European Union institutions have their own obligations to ensure that the United Kingdom’s concerns are not lightly dismissed, and noises off from Angela Merkel, Mark Rutte and Fredrik Reinfeldt hint that that might be recognised.

Our report concluded by observing that the eurozone remains on the road towards greater integration, and the implications of this for the United Kingdom are immense. A strong and prosperous eurozone is in the interests of all European Union members, as is a strong and engaged United Kingdom and a strong City of London. Achieving all those outcomes simultaneously will require close care and attention, together with good will, on all sides. When I talk of good will, the recent Juncker debacle did not help.

I point out that Mr Juncker was head of the Eurogroup—the group that together oversees the 18 members of the eurozone. One thing that I have tried to do as chair of this committee over the past

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four years is to support our Chancellor when he says that the welfare of the eurozone provides the opportunity for the United Kingdom’s economies to prosper. We have always been told by George Osborne that the European Union needs to integrate more closely and get on with the job of making sure that its members are working together. It is therefore incongruous to describe Mr Juncker as an integrationist when that is the very thing that we have asked the EU to do.

I also say to the Minister that, important though the position of the European Commission President is, others are important too. What plans do we have for the replacement of Herman Van Rompuy, who has played such a behind-the-scenes but effective role? What positions are we likely to get with Andrew Lansley, if he is indeed to be our United Kingdom Commissioner? Is there really any hope that we can get an economic role now that we are outside of the European Union? Cathy Ashton—my noble friend Lady Ashton—will possibly be replaced by Mr Sikorski, currently Foreign Minister of Poland. Although a former member of the Bullingdon Club at Oxford, he has said some choice things about the way that we, the British, have gone about these negotiations.

Sharon Bowles, whose praises must be sung as chair of the European Parliament committee on all these matters, is someone who we need here. She is coming before our committee on 22 July to give us help on, and her understanding of, the subject of our new report—financial structures within the European Union. However, we must be clear, too, about our reform of the European Union. That is unclear at the moment but so often is familiar to us. The single market was a creation of the European Union by a member of this House. Can we pursue that in financial regulation through the digital economy or services directive?

Finally, can we try a little harder to find friends other than “phoning a friend” with Angela Merkel? We need to spread much wider than that. We have already recognised the position of the United Kingdom, which is outside the euro, outside Schengen, outside the fiscal compact—I heard no one from the Government say that the Czech Republic is now a member of the fiscal compact, thereby isolating us even more—and, indeed, outside the very important European Semester.

The constant theme of my committee over the four years that I have had the honour of chairing it is that the best way of ensuring that the United Kingdom’s voice is heard within the European Union is to keep close to our partners and close friends in the European Union. We need man-to-man marking when we are engaging with the other 27 friends. We need to be friends on Facebook with the other 27 and not for ever threatening withdrawal as an instrument of European Union policy—a kind of foreign policy of coitus interruptus. We need to make the case for the European Union and the United Kingdom’s role within it with passion, persuasion and precision. We need to succeed in the European Union not secede from it.

4 pm

Lord Lamont of Lerwick (Con): My Lords, I am a bit of an interloper in this debate, not having been a member of the committee. I congratulate the committee

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on the report and congratulate the noble Lord, Lord Harrison, on having chaired the committee. The report is useful and interesting. For those of us who try to follow what is happening in the eurozone and the EU, it is a good volume to have telling us all about the things that are going on.

I do not wish to follow the noble Lord, Lord Harrison, in all the directions that he went down, least of all his remarks about the goings-on relating to the nomination of the President of the Commission. I said to him the other day that I had worked with Mr Juncker. Although I found Mr Juncker helpful during our negotiations, it was absolutely right to oppose his nomination because of the important principle of the power of the European Parliament, which was threatening to usurp the decision. Giving that power to the European Parliament was a significant transfer of sovereignty and for that reason I think that the Prime Minister’s tactics in handling the situation were 100% right.

The noble Lord has on various occasions bemoaned our loss of influence. I am always puzzled by the argument about the loss of influence. Of course, if you are not part of something, you do not have so much influence. We do not have a lot of influence on the Federal Reserve Board. If you are not part of something such as the ECB, you lose a bit of influence with it. Although nobody other than my noble friend Lord Dykes speaks in favour of joining the euro today, the implication is always that we ought to join the euro, which is a bad thing, in order to have a bit of influence. Influence is not by itself an objective of policy.

The substance of the report, genuine economic and monetary union, is a puzzling concept, as the noble Lord, Lord Harrison, said. At Maastricht, the aim was always, as the report notes on page 11, to have a centralised monetary union and a decentralised economic and fiscal policy—what the report calls an asymmetry. But during the Maastricht negotiations and talks relating to it, whenever this was raised and whenever one said that surely the logic of monetary union was that there ought to be fiscal transfers, one was told that this monetary union was different. It would work on an entirely different basis; it would be like the gold standard. The impartial discipline of gold and the impartial discipline of the modern version of gold—euro budget surpluses—would ensure that this monetary union would work.

The concept of debt mutualisation, which features a lot in the report, was explicitly ruled out. It was a cardinal principle at the time, very much on Germany’s understandable insistence, that there should be no bailout mechanism. Of course, when the euro got into trouble, we had a bailout of both Greece and Ireland, which Madame Lagarde pointed out was probably illegal under the treaty because the treaty specifically prevented bailouts.

As regards mutualisation, the committee refers to Germany having different priorities. That is one way of putting it, but it is perfectly understandable that Germany always was and always will be cautious about its own money being at risk to bail out other countries. Equally, it was always explicit that there should be no monetary financing of deficits.

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The noble Lord, Lord Harrison, concentrated on banking union, which is fundamental to a currency union, the resolution mechanism, deposit insurance and supervision. He is right that the resolution mechanism is suboptimal. Perhaps it should be more centralised. On supervision, subsequent developments have moved more in the direction of the committee, with the ECB supervising more directly the larger banks and national supervisors supervising the smaller banks. Germany is described as reluctant on deposit insurance, but the reluctance is extremely understandable. On page 39 of the report, someone from Germany is quoted as asking why Germany should pay to bail out banks that Germany has not supervised. I regard that as a historical legacy, which is how the Germans regard it.

A key to the future of the euro will be the asset quality review and the stress tests of the banks, but we have been here before. When stress tests were carried out previously, we were told that the banks were all hunky-dory and financially sound. However, several banks that had passed the stress test, including in Spain and Italy, got into deep trouble. It is important that these stress tests should be much more rigorous and credible. The monetary transmission mechanism in the eurozone is not working well, particularly for small businesses.

A lot of the argument in the report is about breaking the link between sovereigns and the banks, but the two are bound to be linked, even with the nirvana of debt mutualisation. I think that “nirvana” is rather a good word to describe debt mutualisation. I looked up what it means. Hindus say that nirvana means blissful egolessness, which seems a good way to look at debt mutualisation.

You cannot abolish the financial danger just by mutualisation. The European stability mechanism has limited resources. It can gear itself up, but who are the guarantors? The second largest guarantor of the ESM after Germany is France, whose own finances are in difficulty. The third most important guarantor is Italy and the fourth is Spain. Therefore, countries in debt, with deep fiscal problems, are guaranteeing themselves. Of course, behind them stands the economic colossus of Germany, but not even Germany could bail out Spain and Italy if they got into trouble together.

We are told that all that has gone. Outright monetary transactions, which are described on page 30, have taken care of all that. I think that Enoch Powell once remarked that a politician’s words were his deeds. He might now say that a central banker’s words were his deeds, because by just uttering the magic words, “Whatever it takes”, Mr Draghi certainly calmed the markets. He did not actually buy any bonds, but the acute phase of the crisis happened and it calmed markets. But did it calm them too much? We are now in a situation where 10-year yields on Spanish and Irish debt are lower than those of the United States. Yet the report says that it is important that the markets should not misprice sovereign risk. It also raises the danger that calming the markets in this way means that the impetus has gone out of structural reform. As it says on page 13, the air has escaped the balloon.

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Now we have had the new measures that Mr Draghi has announced, but I suggest that the words are again very important—not the measures but the words. The words that we ought to concentrate on are three particular series of words: “The decision is unanimous”; “We are not finished here”; and “within our mandate”. The impression was given that all the tensions with Germany over committing funds, over mutualisation and over monetary financing had been put aside and that the situation was solved.

The negative interest rate was the first measure. I doubt whether that will have a great effect on the eurozone. Banks hold only €120 billion at the central bank at the moment. A 10 basis point cut will give them a charge of €120 million. I doubt whether that will transform the situation. Then we were told that there would be purchases with asset-backed securities, but that market is not really developed in Europe at the moment. It will take a long time before such securities, in securitised form, are available for the central bank to buy.

Then there was the targeted long-term refinancing operation—the LTRO, €400 billion-worth. Again, the effectiveness of that, which is modelled on the Funding for Lending scheme, will depend very much on the health of the banks and the results of the stress tests. Italy, for example, has €160 billion-worth of non-performing loans, which is why it has to pay 1.2% more for deposits than Germany. I do not think that the LTRO will transform things by itself.

Perhaps the most significant thing was when Mr Draghi said that the bank would be ending the sterilisation of assets that were purchased in order to ease the monetary transmission mechanism. That is almost a little bit of QE. The road to Delhi begins with a single step. Perhaps that is the measure that the Germans should worry a little about, but it will take time before there is an assessment as to whether those asset purchases can take place. None of this will produce a transformation of monetary conditions; none of it will weaken the exchange rate.

What triggered all that was of course the very low inflation figures for the eurozone and for Germany in particular. Without the flexibility of the exchange rate, the lower Germany’s inflation rate is, the more other countries have to cut their costs, cut unit costs and cut price levels to become competitive. I agree that some remarkable changes have taken place, but that has to go on for a very long period. The level of total indebtedness is 133% of GDP in Italy, 175% in Greece and 130% in Portugal. With that constant pressure on the price level—some see it as deflation; the Germans just see it as the periphery becoming more competitive—the outlook for growth in the eurozone is dismal and looks likely to remain dismal for a very long time.

I have always been an opponent of the euro, but I have never, ever said that I thought that it would break up soon. I have always had great arguments with my noble friend Lord Hamilton of Epsom about that. Of course, surviving and working well in the interests of the citizens of Europe are completely different things. It may be that the euro is a bit like a shoe that does not

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fit a foot. You go on wearing the shoe. Gradually, your foot gets distorted and you suffer pain; eventually, it completely alters its shape and you can get the shoe on. Perhaps the euro is like that and perhaps it will work in 30 years’ time. However, even if it did work in 30 years’ time, that certainly would not mean that we were wrong not to join.

4.14 pm

Lord Liddle (Lab): My Lords, I congratulate my noble friend Lord Harrison on his committee’s excellent report. I have done that before but this is the first time that I am not doing so as Labour’s Europe spokesman. It is a great privilege to be able to address this body knowing that I am free to tell Labour what its policy ought to be rather than putting the best face on what its policy is, so I am looking forward to this speech. I should also say what a privilege it is to listen to the noble Lord, Lord Lamont. I do not agree with him on the euro but his reflections, as a former Chancellor, are extremely interesting and I would be the last person to argue that the euro does not still face difficult problems, which have to be resolved.

The euro’s future is of fundamental importance to Britain. In all the past arguments about whether we should join, the one where the pros have been conclusively proved right is that we in Britain cannot escape the consequences of the eurozone by being outside it. It has a material impact on our economy. We also have to be conscious of the fact that our circumstances might at some point in the future change. I am not arguing that there is any immediate prospect of our joining the single currency. I do not expect to see that for a very long time but Britain’s prospects could change, which might necessitate us joining the single currency.

The real danger for Britain is a repeat of what happened when we did not seize the initiative in Europe right at the start, in the 1950s. We have to be careful that a construction might be put in place that does not entirely suit our national interests. We saw that with the common agricultural policy, which led to the arguments about whether we should enter on the Tory terms in the 1970s and the renegotiation under Harold Wilson, which then led to Mrs Thatcher’s struggles for the British budget rebate, all of which poisoned our relations with our partners. We must try, as an insurance policy for Britain, to make sure that the development of the euro is one that suits us.

I want to stress the most important recommendation of this report and I am very disappointed by the Government’s reply. The recommendation is:

“The Government would be wise not to close the door on the possibility of participation in some elements of Banking Union in the future, and must stress the City of London’s strategic importance for the EU as a whole”.

I have no doubt that the Government will stress the City of London’s importance but if they want to influence the key ways in which the City’s future is determined, they must play a role in the banking union. Be in no doubt: the ECB will be the body that determines the rules by which financial markets work in Europe. It will be that body and the idea that,

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because we have some minority protections and a European Banking Authority we can sit back and relax, is for the birds.

What about the alliance of the euro-outs, which is supposed to protect our interests? Where are we with Mr Reinfeldt, after Mr Cameron’s ride in the boat with him? Is he not going down to defeat in the September election in Sweden anyway? As for the Poles, what are the prospects for Britain having any influence over Polish policy after what we now know of the expletive-laden remarks of their Foreign Secretary about his old Oxford friend, the Prime Minister? Can we really rely on Hungary and Mr Orbán when he is the man who plays footsie with Jobbik—the fascists in Hungary—who rigs the constitutional court in Hungary and who has passed laws that are offensive to press freedom in Hungary? Is that our only ally in Europe? Are we really proud of that? Do we think we can defend our interests on a crucial issue such as this simply by having an alliance with Hungary?

Lord Flight (Con): Would the noble Lord not agree that the collaboration between the Bank of England and the ECB has been and remains substantial? Indeed, quite a lot of the ECB regulatory arrangements have been modelled on what has happened here. Whatever the constitutional position may be, the practical position is that the two work hand in hand.

Lord Liddle: I am very strongly in favour of practical co-operation between the Bank of England and the ECB but, fundamentally, it is politics that matters. It will not all be decided in an independent regulatory context. The politics will matter, and we are not well placed at the moment.

The banking union is a significant development. I am a bit more bullish about it than the committee. I think it is a glass half full, rather than a glass half empty. Some academics I greatly respect, who are experts in the field, such as the Peterson Institute’s Adam Posen and Nicolas Véron, believe that we should consider that to be a very significant development. That is why it is so important that we try, as far as we can, to get inside—beyond simply co-operation between the Bank of England and the ECB.

On the wider issue of genuine economic and monetary union, the British love playing this intellectual parlour game of what are the necessary conditions for monetary union to proceed. They never think about the United Kingdom itself: is it a satisfactory monetary union? Clearly, in the United Kingdom we have a London economy which is a tremendous success and something that we all admire, but an out-of-London economy that continues to struggle. We all know that if we imagine them as separate countries, the London pound would be far stronger than the out-of-London pound. The country functions only because of massive fiscal transfers from its richer parts to the poorer.

You can argue that those transfers are not there in the eurozone—of course, they are not, except for the structural funds—but one of the problems with our fiscal transfers in Britain is that they have been extremely opaque. They are about to become less opaque as we go for devo-max in Scotland. I forecast that we will

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have more political arguments about the functioning of the United Kingdom economy in the decades to come as we have arguments about whether the extent of the fiscal transfers from London and the south-east to the rest of England are sustainable in the long run.

I make that point because I think that the mistake in looking at EMU is to neglect the extent to which its survival has depended on political will. Eurosceptics in this country always underestimate the strength of that political will. An enormous number of things have been done, including the European stability mechanism, the six-pack and two-pack legislation, the fiscal treaty, the ECB supervisory powers and the banking union. A lot has been done; let us not underestimate it. At the moment, politics is making a big difference to the chances of the monetary union overcoming its problems. We are seeing less emphasis on austerity and more fiscal flexibility. In part, we saw that with Mr Juncker going around making sympathetic noises to the Italians and the Spaniards to get their support for his nomination as Commission President.

More fundamentally, there has been a shift in Germany as a result of the formation of the grand coalition, with the disappearance of the Free Democrats from the coalition and the presence of the Social Democrats. The German Vice-Chancellor, Sigmar Gabriel—a Social Democrat—has said that he believes that the south needs more fiscal space and more fiscal flexibility. What the Germans are trying to do, of course, is to link that flexibility to support for needed structural reform in the countries of the south. They are also doing something to rebalance the eurozone themselves, with policies such as the introduction of a minimum wage, which will boost spending power in Germany.

The one remarkable thing in the crisis is that, thankfully, unlike the 1930s—this is the huge historical difference from the 1930s—there has not been a political collapse and a reversion to dictatorship in any of the EU countries, despite the very brutal circumstances that they have had to face. Reforms have been made and democracy has just about survived.

We will need to see further developments before the euro is safe. German rebalancing will have to go further and they will have to be more flexible. We will have to see some debt forgiveness because as the noble Lord, Lord Lamont, said, it is difficult to see how those levels of debt are sustainable in the long run. We will have to see more of a European-led investment policy. That is one way of doing things in favour of growth but making them conditional on reform.

I see the eurozone rescue as an incomplete project but I think the politics are working in the right direction. The political will has been demonstrated. My fear is that as a Euro-out we are not really putting our minds to how we will retain influence over this construction in the years and decades ahead. This report has been an extremely valuable contribution to what is an extremely important issue for the future of the United Kingdom.

4.27 pm

Lord Maclennan of Rogart (LD): My Lords, I, too, begin by indicating the value of the report and the work of the committee chaired by the noble Lord,

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Lord Harrison. The report is a useful gathering together of evidence from experienced people. Its conclusions seem to me to merit our support.

A strong and prosperous Europe and a strong and prosperous eurozone are in the interests of all members of the European Union. It is necessary for the Government to indicate as clearly as they can how they would engage with the strengthening of the eurozone. The long-term goals of fiscal transfers and, possibly, debt mutualisation—they may be unrealisable in the short term—have been envisaged and mentioned in the report, but they are not seen as immediate solutions. However, there are ways in which we, as a country with an extraordinarily strong banking system in the City, could give further support to the recovery of the eurozone. To my mind, that would be to the benefit of the City and the country more generally.

One witness strikingly described the process as,

“the euro continuing as an injured patient with a massive sticking plaster in the form of bailouts”.

That was an entertaining image but there is a degree of truth in it. I hope that, in coming back into the discussions about the future of Europe, the Government will seek to engage with their partners in the eurozone and seek ways of assisting the process of banking union. I strongly agree with the report that supervision and becoming a lender of last resort are compatible. The structures of these different organisations are well set out in the report, which describes how they can be both separate and together in making their respective decisions.

The noble Lord, Lord Liddle, made an important remark about will. The will to sustain the eurozone probably was best expressed by the president of the bank, Mario Draghi. He said that the bank would do “whatever it takes” to save the euro. That certainly had an immediate effect of calming the markets. It also made other countries feel less excluded from the discussions and more able to put forward recommendations. The bank has acted wisely in a number of respects—for example, in purchasing sovereign bonds not directly from the sovereign states but on the open market. That has done quite a lot to stabilise the situation.

I hope that the Government will respond to the committee’s recommendation that it may be ill advised to assert that:

“Banking Union is the sole province of the single currency for all time”,

and that participation could mean,

“further promoting and shaping the Single Market in Financial Services and the UK’s position within it”.

At the beginning, a number of proposals were put forward on outright monetary transactions which do not seem to have yielded anything very noticeable as of yet. None the less, they are still an instrument that is perfectly sensible to use.

The single resolution mechanism, by which the predicaments of those who are extremely tested could be resolved, has not come forward sufficiently developed to be enlisted in the battle against the collapse of southern states. However, the UK Government should, I believe, shape their arguments in terms of ensuring

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the overall stability and efficiency of the EU markets. That practical reform would give the Government much more influence in the direction of the single market than the sort of postures taken over the past few weeks in respect of the nomination of the President of the Commission. Deposit insurance is another method of supporting the banking system that, as yet, has not come to fruition. None the less, it could be of assistance.

I hope that the Government will also do their best to assist the bank with its comprehensive assessments of the banking system, its supervisory risk assessment, its asset quality review and its stress tests. All of these seem sensible means of reassuring the banking system. We ourselves have not been immune from the troubles that have afflicted other countries.

Notice also has to be taken of the evidence that was given to the committee about the lack of sufficient fiscal backstops to plug any gaps in the bank balance sheets exposed by the review. I hope that that, again, will be something that we can open up and show that there is a will to help.

The report has been produced at a difficult time for the European Union. Although the process has not been completed, as outlined on different sides by the Commission, by the bank and by Governments, I none the less think that the report was very timely. It has given us guidance and indicators as to how to proceed. We want to hear from the Government about their willingness and commitment to strengthen the eurozone. Some of the Ministers who gave evidence recognised that that was necessary for British industry. When they talk about the objective of the single market, they are also speaking of the need for that. I hope that my noble friend Lord Newby will be able to give us some reassurances about the Government’s position and not simply cast discredit on the steps that have been taken.

4.39 pm

Lord Jay of Ewelme (CB): My Lords, I, too, congratulate the noble Lord, Lord Harrison, and the sub-committee on this report. As one would expect, it examines highly complex issues succinctly and clearly. I hope that, as another interloper in the debate, I shall be forgiven if I do not follow the noble Lord down all the burrows that he explored in his introduction.

I was British ambassador in Paris in the years leading up to the introduction of the euro in 1999. In those days, I had many conversations on EMU with some of the most acute monetary and financial minds around, some of whom, such as Jean-Claude Trichet, went on to play quite an important part in the evolution of the euro from its start. What was clear then—I was reminded of this recently when re-reading some of the notes that I had taken of those conversations—was that EMU was widely seen as an essentially political construct with real financial and economic risks, not least to France, which had managed its economy for the previous 10 years or so through, at least in part, a series of competitive devaluations. However, what was also clear was that there was an absolute determination to make EMU work and an absolute conviction that it would work. I entirely agree with the noble Lord, Lord Liddle, about the absolute political will that EMU, once started, would continue and would work.

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One can argue that that approach to the formation of the euro was misguided, that it was risky and that it underestimated the difficulties that would come with a financial crisis. If the noble Lord, Lord Lawson, were still in his seat, I expect that he would be nodding at that. One can argue, too, that Britain was right not to take part, and I would argue that. However, particularly given the measures taken—for example, to shore up the Irish and Greek economies during the recent financial crisis—it would, in my view, be quite wrong to doubt the continuing political determination of the member states of the euro to make the euro work in the future.

I do not pretend for a moment that that would be easy, as the report makes clear. Sitting on various French company boards over the past few years, it has been brought home to me clearly the difficulty that France may have within the eurozone unless it takes the sorts of measures to raise its productivity—particularly vis-à-vis Germany—that its political tradition will make very hard to carry out. There will of course be difficulties for others, too—in particular, some of the newer European Union and euro members. However, as I say, it would be quite wrong to assume that because maintaining the eurozone will be difficult, it may fall apart. If that were to happen, it would be enormously damaging to our own economic interests and also, in my view, to the political cohesion of the European Union and of Europe, which is not a happy prospect in the centenary of 1914. So, again as the report makes clear, given the way in which our economy and financial system are so closely linked to the eurozone economies, our own interest must be for the eurozone to succeed and, crucially, to succeed within a European Union in which the single market remains intact and indeed is strengthened.

I have to say that some of us feared when the euro was introduced that one consequence of Britain’s non-participation—right though that was—would be a risk to the integrity of the single market as the inevitable integration within the eurozone happened over time. I think that time has probably borne that out. However, that merely strengthens the argument that the maintenance and strengthening of the single market, as well as a properly functioning eurozone, is a key British interest.

I am glad to see that Commissioner Barnier is reassuring about the importance of the single market in his letter responding to the committee’s report. However, that will require constant work and vigilance, and political nous. This will be, in part, a technical, a financial and a diplomatic negotiating task. It would be greatly helped if we made sure that we had in Brussels—in the Commission and elsewhere—more British people who really understood the British economic and financial system and the importance of a strong single market of all 28 member states. Will the Minister tell us what measures the Government are taking to strengthen the participation of British officials in the European institutions?

It will also, of course, depend on a strong, committed, influential British commissioner in Brussels. I was very glad to hear the noble Baroness, Lady Warsi, say in the Chamber earlier today that there was a strong

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list of candidates waiting in the wings. I look forward to them coming forward and one being chosen to fulfil those crucial functions.

The task is also, of course, a political one. As a Cross-Bencher, I wish to stay neutral on this point, so I would simply advise all Governments, before pursuing this rather delicate, difficult and sinuous task, to take advice from my noble friend Lord Kerr of Kinlochard.

As the report makes clear, the British interest requires a strong eurozone within a strengthened single market. That is in no way inconsistent with stronger British economic links with the emerging economies—with China, India, Brazil and Indonesia. It is perfectly possible, as Germany shows, to do both. There is no contradiction at all between those two. I believe it should be a fundamental British economic and foreign policy interest to work for a strong eurozone within a strong and strengthening single market. Could the Minister confirm that that is a goal, not just to be stated, but to be implemented?

4.47 pm

The Earl of Caithness (Con): My Lords, the fact that I am the sixth speaker yet only the first after the chairman to have served on the committee shows that, once again, the House of Lords produces high-quality, interesting reports, of which this is undoubtedly one. I pay tribute to the way in which the noble Lord, Lord Harrison, who introduced the debate so well, chaired our committee and to those who helped us to prepare the report, whom the noble Lord has also mentioned. We were extremely well served. It is one of the features of this House that we are well served and are able to provide reports that are read right across the EU.

What a joy to hear batsman number three, the noble Lord, Lord Liddle, coming in free from the shackles of the Opposition Front Bench. Perhaps he should never have gone there. It would have been much more interesting if he had not.

We have heard a little bit of criticism of the Government. We have heard it all before. I remember more than 20 years ago, when I was a Minister, being criticised because we were not participating enough in Europe. Nothing has changed. I think that behind the scenes we are probably participating as much as we ever did in Europe, although there is no need to be complacent. I agree with what the noble Lord, Lord Jay, says: the number of British people working in the important institutions and holding key jobs has declined. I hope that my noble friend will say something when he sums up on how that is going to be corrected.

Part of what we have achieved was revealed at the recent Council of Ministers meeting. Once you get away from the frothy headlines, which have already been discussed, you see that thanks to Britain the whole procedure of appointing the President is going to be reviewed for the first time ever. All 27 other Heads of Government have agreed expressly that they will address our concerns. It has been agreed that there are different paths of integration for different countries. Unless one takes a firm stand, one cannot shift the other Heads of Government in the way that Britain seems to have been able to in the recent past.

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On the report, I agree with a lot of what has been said, but I want to focus on something that my noble friend Lord Lamont raised—the question of the single deposit insurance scheme. I was intrigued when it was first introduced by the Council President, Mr Van Rompuy, in June 2012. The banking union had three elements, one of which was the single deposit insurance scheme. That was included,

“to strengthen the credibility of the existing arrangements and serve as an important assurance that eligible deposits of all credit institutions are sufficiently insured”.

As we have heard, that was quickly watered down under political pressure—we set that out in paragraphs 104 to 113 of our report. In summary, that is because it is so contentious and requires all participating countries to pay into the system and to accept responsibility for any ensuing liabilities of the scheme, with the corollary that the fiscally stronger would be expected to shoulder some of the burden of the fiscally constrained.

As a result, the November 2012 Commission blueprint on deep and genuine economic and monetary union made no reference to a common scheme, instead stating that effective and solid national deposit guarantee schemes would put the banking sector back on a solid footing. The deposit guarantee schemes directive, which sought to strengthen these national schemes, was agreed in December last year.

Our witnesses were split as to the necessity of a common scheme. Some argued that it was necessary to prevent capital flight from troubled countries to those that were perceived to be safe. Others suggested that, while desirable, a common scheme was not necessary or could even add to the risk of moral hazard. The committee concluded unanimously that the common deposit guarantee scheme was necessary for banking union to succeed and for the eurozone to thrive. While recognising the extreme political reluctance to countenance such a significant move in the direction of debt mutualisation, the committee thought that it was an important step if the foundations of the single currency were to be reinforced.

Taken together with the flaws in the single resolution mechanism, which the noble Lord, Lord Harrison, mentioned, we concluded that notwithstanding the significant progress made so far—and it has been significant—only a partial banking union is in prospect. Consequently, the vicious circle linking bank and sovereign debt remains a threat. The whole purpose of the banking union proposal was to break that link, but it is still there.

In their response to the report, the Government agreed,

“that the common deposit insurance for those Member States participating in the Banking Union would lead to more effective and integrated financial regulation across the euro area. However, the Government will consider any formal proposals on this matter as they arise”.

I must say to my noble friend that I thought that that was a little parsimonious. Could he expand on that? Given its importance, it deserved a better response.

In its response, the Commission stated that,

“at this stage, it is not envisaged to set up a common European Deposit Guarantee Scheme (DGS) within the Banking Union.

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The funding of national DGSs should be improved by the Deposit Guarantee Schemes Directive that is about to be adopted by co-legislators”.

I referred to that. The Commission continued:

“Voluntary lending arrangements between adequately prefunded national schemes could strengthen the overall protection of depositors across the internal market, help tackle asymmetric banking shocks, and mitigate their cross-border spill-over effects. The Commission agrees with the need to take further steps to break the link between bank and sovereign debt, which includes the instrument of direct recapitalisation of banks by the European Stability Mechanism”.

It was also said that this was music for another day and some time into the future.

However, what remains is a problem. The question is whether the existing banking union will be robust enough in times of crisis. Time will tell, but it is at the very least a hostage to fortune. At the moment, we are in the lull before a storm that will be even greater and more destructive than the storm that we have just come out of.

4.55 pm

Lord Desai (Lab): My Lords, I, too, join all other speakers in congratulating my noble friend Lord Harrison and his committee on publishing an excellent report. I want to concentrate on an analysis of what has not happened and what has gone right in this economic and monetary union. Perhaps I should say that when a perfectly good phrase such as “economic and monetary union” acquires the adjective “genuine”, you really have to worry. What is that “genuine” going to do to me that did not happen before?

I recall that when we were discussing the Maastricht treaty in your Lordships’ House, it was quite clear—to me at least—that the single currency was a deflationary union. That became clear in the way that the duties of the central bank were described. Economists used to refer to inside and outside money and there was no outside money in this thing. The money could be generated only by private economic activity because Governments were not allowed to monetise debt. People who signed up to this were blinded by the reputation of the Bundesbank and the success of German economic policy, not realising that that was the result of lots and lots of hard work. They had a tough economic regime, which was never Keynesian. Germany never adopted a single Keynesian policy throughout its post-war development. Quite a lot of the rest of us have been relying on the state to print money here and there in one form or another, and bail us out.

Given that this was the difficulty, you almost have an economic and monetary union that is like the gold standard, but without any guarantee that gold will come in and out. Countries really have to deflate their internal domestic cost to keep pace with the most economically efficient country, which is Germany. Clearly, that has not happened and, as far as the eurozone is concerned, we will therefore be in a continuous deflationary position. I do not see any small way out from that. Where the problem with economic and monetary union arises is that the governance mechanism which is available is not adequate to the ambitious task that the programme has set itself. Again, economic and monetary union is probably feasible when you

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look at having an EU 12, or maybe an EU 15. With an EU 28, however, the governance mechanism is very slow moving and a lot of it requires consensus, which is difficult to establish within a system that has a great diversity of economic circumstances within its countries.

What we have therefore seen is that in a crisis such as we have just been through, the system has a certain ability to respond. Although we have had no agreement on Eurobonds being issued with debt mutualisation, we have a stability mechanism that has some ability to issue bonds. That came as a result of responding to a crisis and, after various acronyms such as EFSF, EFSM and so on, we finally have some small ability to issue bonds. Similarly, the European Central Bank—the one body in the economic and monetary union which does not have to rely on continuing negotiation and consensus— has been able to act quickly and innovatively. Indeed, the eurozone was saved solely by the ECB being able to act on its own without having to go to the Commission, the Parliament or the Council.

“Okay, whatever it takes”, are some of the most powerful words in the history of the economic and monetary union. As the noble Lord, Lord Lamont, said, once a banker has said that, he does not have to do anything. The fact that he gave a guarantee that he will do it calms the markets down and no one comes to borrow any money from him. In a sense, the European Central Bank has proved to be a pivotal institution to the economic and monetary union because it can speedily respond. I know that there are differences within the governing council of the ECB. The Germans, obviously, are constantly worried that the deflationary mechanism might be diluted. But it is remarkable that it has proved to be the most flexible and innovative institution.

However, we have a problem: the decision-making procedures between the Commission, the Council, the Parliament and so on are not fit for the purpose of achieving a harmonious economic and monetary union any time soon. We all know that we need a system of fiscal transfers but that will not be easy to achieve. It is not quite clear how one can aggregate the political will of the citizens apart from the political will of their Governments. One great problem of the system is that there is no direct involvement of the wider citizenry of Europe in the European political framework. They are engaged in their own national Parliaments and they elect European parliamentarians. I do not know who my MEPs are or how many there are. I consider myself a quite politically conscious person.

One thing that may have to be done in the long run is holding more direct elections of the more important positions, such as the European Commission President. We have just gone into battle about whether the Parliament or the Council has a right to elect. Obviously, the Parliament electing is a more democratic procedure than the European Heads of Government electing or negotiating over dinner. Again, it is not a transparent process. If, for example, the President has to compete in a Europe-wide election in which all the citizens vote, the whole process would have greater legitimacy than it has now.

We may not be able to construct a system of fiscal transfer yet but no one has proposed even a mild expansion of the budget. The European Union budget

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is one of the smallest budgets imaginable. I think it used to be 1.27% of European GDP but I think it has now gone down. Why does no one propose that it should be increased to 2%? That would allow a little fiscal room for transfer, which currently is not available. If we think of the United States and the full-blown federation, it took the US several decades, a civil war and a great depression before it became an integrated federal union with some fiscal transfers and so on.

It may be that the European Union is on the path, over the next 100 years, to achieving an economic and monetary union but it is not going about it in a fast way. For example, the conclusion of the four Presidents’ report in Box 1 says that the idea is to quickly implement the single market. In 1992, when I was young and innocent, I thought that the Cecchini report had told me that, if a single market was implemented, Europe would be richer by several million dollars. Here we are 22 years later, still talking about implementing the single market mechanism. So something is clearly wrong.

As and when we come to the next report of this brilliant committee, I think that we ought to find out whether we can learn anything from the history of the United States. It is the only comparable body where a federation was created from a diverse political union, albeit that it was a 13-member federation. I think that we have a lot to learn from the United States.

I want to make a final short comment on what my noble friend Lord Liddle said about the single currency that is the sterling area and why there are these problems of unevenness between the London pound and the other pound. If you think about it, the current dissatisfaction in Scotland is not about the currency; it is about fiscal transfers. The currency is all right; the disagreement is about whether the fiscal transfer system is adequate. We really ought to advise the European Union, “Whatever else you do, don’t devise a fiscal transfer system that eventually encourages people to leave the Union”.

5.05 pm

Lord Dykes (LD): My Lords, I share the gratitude expressed by previous speakers in the debate to the noble Lord, Lord Harrison, the chairman, and his colleagues on the economic sub-committee for a masterly report. I note in the second paragraph of the summary the very realistic description of the tensions within the eurozone, which have been referred to and which are still considerable.

Since the eurozone crisis of the three or four weakest members—it is basically a strong international currency with four or five weaker members struggling to get stronger—began to calm down in early 2010, I, like others, have noted that whenever disarray and nationalism have been replaced by the member states in the eurozone working closely together, the markets have usually reacted very positively, markedly, as we see nowadays, with resumed very moderate yields on 10-year and other bonds.

We need also to express admiration for the bravery of the authorities in the four or five weakest member states. I think of Ireland, Spain, Italy and, above all, Greece, where there were remarkable parliamentary

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votes, with big majorities, on the austerity programme and where the fascist party was kept at bay. I also include in that, in a different way, Cyprus, where there was an esoteric technical problem as well. The steadfast way in which these countries have gone about recovery, despite enormous social losses, has been very encouraging. They were treated in the British press—in the comics in Britain that masquerade as newspapers, with their anti-European outlook with the utmost scorn, at the very same time, ironically, that HMG were pursuing their own extremely rigid austerity programme.

Furthermore, was it not an extraordinary spectacle to witness the contrast between the US and the EU in their respective struggles for post-crisis control? In the US, the political crisis arose again because it could not increase its already massive and excessive federal debt of $17 trillion. In the eurozone, of course, the very reverse was the case, with attempts to reverse debt whenever possible. Although the liquidity increases achieved by the ECB programmes have unfortunately been modest in comparison with those of the US, and the ECB has not dealt with sovereign debt in the way that many had hoped, it has increased its resources to deal partly with future crises. However, it still has not secured enough power for the future for such operations. Mario Draghi, the quite remarkable former head of the Italian Treasury, has achieved a lot as ECB president with sheer will-power, as has been referred to by other speakers. His words of encouragement calmed the markets. The euro itself as an international currency is, as we see, physically forging ahead in the whole world—although less of course in Asia still.

However, we note that in a number of member states the role of lender of last resort is still denied psychologically to the ECB. Never, therefore, has the threat of continued and indeed worsening deflation been more evident. The old fears of historical inflation—mostly expressed in Germany—are in absolutely no danger of being realised again in the post-war period as far as anyone can ascertain with careful and meticulous analysis.

This fear towards countries that have been fighting hard to curb indebtedness, including France, where I live, goes even as far as rejecting the idea of communitarian sharing of debt burdens. This is surely yet again, alas, old-fashioned nationalism. If Europe wallows in nationalist struggles between member states—particularly the leading ones—the markets notice it at once and failure is almost guaranteed, just as when the global economy gives rise to protectionism and goes backwards in history.

Germany, after all, was responsible for some of the earlier problems when its own short-term public sector debts far exceeded the limits laid down in the pact. It was helped then by the rest of the Community, quite rightly, because of the enormous respect for the economic powerhouse that it had created and for its economic and financial leadership. What if, for example, in 10 years’ time that great country Germany were to suffer an unexpected sovereign debt crisis? I do not, of course, expect that, but I am convinced that, if so, the whole Union would back ECB intervention to save it. Presumably by then the ECB would have the necessary resources.

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As time goes on and even the weakest eurozone members recover their strength—a remarkable exercise, particularly in Spain, for example—it is going to be necessary for the ECB to receive full powers of action as the authoritative central bank of the Union. This is very much what is already owed to the smaller and more recent member states, which joined in 2004 and afterwards. The Union cannot after all be run exclusively to appease the more traditional and backward members of the Bundesbank board, worthy though they may be. I am sure that Angela Merkel understands this, but of course she is surrounded by the Bildand the Axel Springer press and mainstream local public opinion in Germany. Therefore, I welcome, as I am sure others here today in this short debate will do, the exhortation in the fourth paragraph of the committee report summary that,

“some degree of debt mutualisation may be inevitable if the single currency is to prosper”.

I agree and perhaps it should be more than that.

If outsiders are able to perceive that the eurozone central banking authority is not plenipotentiary, including in debt management, the next crisis will not be fully resolved. The euro must be a long-term project to which all zone members are fully committed. The member states that have recently joined, such as Latvia and Slovenia, and the others waiting to join are owed nothing less. We must think about the smaller countries in the Union as well.

I commend particularly in this excellent report the warnings in paragraphs 197 and 198 on page 68 of the continuing and future dilemma that must eventually be resolved in what is a historic new control structure born out of a massive and greedy speculators’ crisis, which started in the USA. We need to remember that. The SSM and the SRM are still headachy problems that need full and extensive, not just partial, solutions.

In the final analysis, however, this is not just about the central banking architecture for a community or club of nations willing to show European solidarity, which the Prime Minister totally fails to comprehend. It is at the heart of the political union as well. This is a political project, too. The currency is as much international politics as it is just money and bonds. If ever the euro ceased to be, that would be the end of the most unique political project in world history—apart from perhaps the creation of the United Nations after the war. The monetary authorities of the People’s Republic of China were the first of the great third countries of the world to realise this twin characteristic, years ago. I remember being in Beijing when they started purchasing massive quantities of euros for their second stage reserves, when it first started.

All member states achieving the necessary fiscal discipline and restraint can benefit from the long-term plusses in the Germanic, strong currency system, which creates high currency strength and high savings and investment ratios and spreads worldwide confidence. Recent daily international interbank payment transaction figures are remarkable. They show the euro creeping towards the US dollar as the second reserve currency, with 32.5% of the world total of those daily transactions against 39.6% for the US dollar. The UK has just

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under 3% of the total and has of course devalued seven times since the war—three times by official action and four times in the marketplace.

Despite the crude nationalism here against the remarkable single currency, in a UK that is still fearful and traumatised after being driven out of the preliminary exchange rate mechanism in 1992—a very painful experience for my noble friend Lord Lamont—I still hope that, eventually, the UK will in the future find the courage to join. I do not expect my noble friend the Minister, when replying to this debate, to give a date for that yet, but I hope that it will not be too long in happening.

5.14 pm

Lord Kerr of Kinlochard (CB): My Lords, it was a pleasure to take part in the work that led to this report. It was very enjoyable, largely because of the exemplary patience displayed by our chairman, the noble Lord, Lord Harrison, which produced a unanimous report, and because of the diligence of our clerk, Mr Stoner, who is extremely good at marshalling our arguments with rigour and, sometimes, imagination.

I take two texts for my sermon—I have a Scottish Presbyterian background. My first text comes from the Book of Job—that is, the Treasury. The Government’s response to our report states that,

“the government is clear that we are not joining the Euro”.

Yes, I think we got that. It goes on:

“Therefore it is right that we have said from the outset that we will not take part in measures designed to support full economic and monetary union”.

Yes, we have got that. It goes on:

“The Government has been clear that it will not participate in the Banking Union”.

There is a false logic there. It is perfectly possible that the banking union—although the impetus for it arose from the crisis in the eurozone—could be a good thing, irrespective of whether one was a member of the eurozone. Indeed, I notice that, of all the non-eurozone member states who are negotiating the texts of banking union, only the British and the Swedes are negotiating not on the basis that they intend to join.

If I were to dare to part company with the noble Lord, Lord Lamont of Lerwick, I would say that there was a moment in his speech when I thought that he was slipping into the error of equating banking union with economic and monetary union. As he rightly pointed out, our report, although entitled Genuine Economic and Monetary Union, was largely about banking union, because that was the key subject on the agenda. I would argue that it is not necessarily the case that non-members of the eurozone should decide that they have no intention of becoming members of the banking union.

On that, I would say that the committee was in a state of intelligent schizophrenia. It is intelligent because it is an extremely intelligent committee; it is schizophrenic because we all agree—the Government are of the same view—that the creation of an effective banking union, reducing the risks of future crises and making them easier to manage when they arise, is a good thing. We all agree with that. We on the committee

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felt, however, that it was hard not to acknowledge that the UK’s non-participation in banking union could have a deleterious effect on the City of London’s position as the transaction capital of Europe and one of the great three global financial centres. We felt that it was possible, over time, that that position could be eroded by non-participation in the structures of banking union. That is the point brought out in the passage of the report cited by the noble Lord, Lord Liddle, where we state, at paragraph 227:

“The Government may be ill-advised to assert that Banking Union is the sole province of the single currency for all time. It would be wise not to close the door on the possibility of some level of participation in Banking Union in the future, in particular as a means of further promoting and shaping the Single Market in Financial Services and the UK’s position within it”.

That is my view. However, I recognise that I will not persuade Job in the Treasury of that today and, perhaps, not for some considerable time.

Lord Lamont of Lerwick: Does the noble Lord remember that the Book of Job says, I forget in which exact chapter:

“There is a path that no fowl knoweth, and which the eye of the vulture hath not seen”?

Lord Kerr of Kinlochard: I cannot say that I think of that every morning as I arrive, but I will bear the noble Lord’s words in mind.

I want to make five minor topical, practical points arising from the report. First, in strict logic, the position that the Government take up—that banking union is nothing to do with us but is a matter for eurozone countries—could mean that the Government do not object to the proposal, much discussed in Brussels at the moment, that the heavily overloaded Commission’s single market directorate-general should be split, with banking and financial legislation moving to the financial directorate-general, the primary concern of which is of course for the health of the euro, leaving the single market directorate-general handling the classic single market agenda. That would be disastrous, from a number of points of view, not least from the point of view of UK interests. The British Bankers’ Association states:

“It is of utmost importance to maintain the structure of the relevant Commission services dealing with financial services so that their work is permeated with the priority of preserving the single market focus. We suggest that the UK Government should proactively defend the unity of DG MARKT and oppose any plan to move financial services out of it. It would be a mistake to move the work e.g. to DG ECFIN which has quite different priorities”.

I strongly agree and I hope that the Minister will be able to reassure us that we shall—to the extent that our current influence allows—work to ensure that that does not happen.

In my view, it is highly desirable and important that the current head of the single market directorate-general, the most senior of that very small and dwindling band of British personnel in the Commission, should stay where he is. I strongly agree with what has been said already today about the need to reinforce that. Retaining the unicity of the director-general is much more important than who is the single market commissioner—the issue

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that dominates the headlines. What matters is that it is the director-general and that he covers all the work that is of interest to the City of London.

My second point is also quite topical. I hope that the Government will, to the extent that their current influence allows, seek to discourage a second suggestion much debated in Brussels now, which is that the next finance commissioner should also be the next president of the Eurogroup, replacing Mr Dijsselbloem, the Dutch Finance Minister, when his term ends next summer. Combining the two jobs would be a prescription for serious schizophrenia, with a real risk that eurozone concerns might override single market integrity. This is not a moot point in the US sense. In our report we use “moot point” in the British sense, which means it is a key issue. In America, a moot point is a point so boring and irrelevant that it is worth discussing only in a moot court—a fine example of the difference between the two languages, as is “tabled”. If we said that our report had been tabled, people in Congress would say, “Oh, bad luck”, because it means shelved in America.

The moot point is that we have seen two recent examples of just what I am worried about—eurozone concerns overriding single market integrity. In the Cyprus crisis, when the eurozone imposed capital controls, that was a fundamental strike—which may have been necessary in the crisis—against a fundamental principle of the single market. It affected non-eurozone citizens. A British citizen with money in Cyprus could not move his money because of capital controls introduced by the eurozone. The result was that the case was quite rightly taken by the British Government to the Court of Justice against the ECB for its attempt to argue that clearing systems trading euro-denominated paper must be within the eurozone. That, too, is a clear breach of the single market and I applaud the Government for contesting it. It would be dangerous to see the two jobs of presidency of the Eurogroup and finance commissioner in the Commission combined. That may be difficult to prevent, given diminished influence, but I urge the Government to have a go.

Lord Davies of Stamford (Lab): Does the noble Lord agree that in a crisis—this is true whether supervision and regulation are done on a national basis or on the basis of the Union as a whole—the need to prevent the crisis and deal with it must override market rules? That has always been the case in this country and in the United States. It has always been the case in any country run by good governance rules.

Lord Kerr of Kinlochard: I hasten to add that I do not know the detail of what happened over that weekend when the capital controls were introduced. The noble Lord may be quite right. I merely say that there is a risk here: we see it in the case we are bringing in the court and saw it over the Cyprus capital controls.

The third point, about the European Parliament, is very topical. The committee was lucky enough to take evidence from Sharon Bowles, who chaired the relevant committee in the European Parliament. She did so extremely well and has now retired from the Parliament. There were two other senior British Members of the

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European Parliament on the committee. I do not know who will be on the reformed committee, but it is crucial in relation to financial legislation. The new chairman of the committee is a highly effective, intelligent Italian, but I do not know whether there will be British members. Presumably, we cannot look to UKIP to do any work and, given the sad fact that the Conservatives are not in the EPP family, I do not know whether there will be a Conservative on this committee. There were two Labour members on the outgoing committee—they were both extremely good but have retired. I hope that the parties will get together and, in the national interest and the interest of the City, will ensure that there are some people on that key committee who are aware of the importance of the City and the importance for the City’s health of good European legislation.

The fourth point is not quite so topical. I urge the Government to think very carefully about the implications of the change in Council voting weights which happens in four months’ time. The UK’s voting weight goes up from about 8% to about 12% but comparable increases for other large member states, such as Germany, France and Italy, mean that the eurozone will, for the first time, have a clear qualified majority. That is in the Council but also in the ESMA—the European Securities and Markets Authority—although not in the EBA because of the dual-majority system. That is rather fragile but, for as long as it lasts, this will not apply there.

The voting weight change in the Council reduces the viability of a purely defensive strategy of the kind that the United Kingdom has adopted on the banking union dossier. We have argued, as the Minister has, that our aim is to protect the interests of non-eurozone single market members, in particular the interests of the UK financial community. We have been doing that by objecting to various things and looking for support. We have often been able to obtain that support, but it will be more difficult in future. We will need to change our tone and our posture: we will need to be a little more proactive and a little more constructive. In particular, we should be trying to field City experts to advise our partners, in a non-polemical way, on how they can best, in their interests, keep their transactions capital—London—healthy and ensure that the EU remains in the big league, playing host to one of the big three global markets. The saga of our handling of the ludicrous financial transactions tax proposal shows that we are not very good at that. Recent events show us deliberately distancing ourselves and not being very good at adding up votes. That will prove even more unwise when the eurozone caucus has a qualified majority, as it will have from 1 November.

My last point is a more difficult one to put in the hard-edged way that I have tried to put the previous one. Networks of regulators and supervisors matter: informal contacts and knowing the guy at the other end of the telephone. In some ways, that matters a lot more than the formal. Informal contacts used to develop organically and naturally, but that is harder to do now. The Governor of the Bank of England naturally cannot be on a close terms with his fellow central bankers on the continent as were Gordon Richardson, Robin Leigh-Pemberton or Eddie George, who met them in meetings all the time, with so much of the central

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bank’s work being done on a eurozone basis. For example, the meeting this coming weekend sounds a very important one—but there will be no Brit in the room.

I agree with what the noble Lord, Lord Flight, said about the relationship between the Bank of England and the ECB being very good. I believe that it is, and that it is very important to go on ensuring that it is very good. As we staff new supervisory and regulatory structures in this country and they work out their modus operandi, we and they really should be aware, too, of the cardinal importance of informal co-operation and advice from and to concerned colleagues. Intelligent and well informed advice, privately conveyed but not in a hectoring tone or as if we knew better, will be well received. London’s expertise is still well recognised among the experts and such practical links will become even more important, the more we slide into self-isolation at the political level.

5.30 pm

Lord Hamilton of Epsom (Con): My Lords, I pay great tribute to our clerk, Stuart Stoner, who has been quite remarkable in the way that he has reconciled all our different views. I also pay great tribute to our chairman, the noble Lord, Lord Harrison, because while he and I do not really agree on Europe, he has managed to accommodate my views in the most agile way.

The noble Lord, Lord Liddle, raised the question of past Prime Ministers poisoning relations with Europe. I think he was referring mainly to Conservative ones and that my late friend Lady Thatcher was probably high in his mind. However, I remember that one of her great achievements was in the rebate of much of the money that we were sending to Europe. You could not have accused Prime Minister Blair of being anything other than a Euro-enthusiast. He did a deal where he gave back half of our rebate in return for the reform of the common agricultural policy. That policy spent 39% of the EU budget last year, so we got absolutely nothing in return. I found that this had slightly poisoned my view of the EU—not that it was not poisoned before—so this poison is going both ways. It is a bit paranoid to suggest that it is one-way traffic.

We have had economic and monetary union; we now have genuine economic and monetary union. I would argue that neither EMU nor GEMU are genuine. The problem with the single currency and the introduction of monetary union is that it was one part of a construct to lead Europe towards being federal. What was also critical within those building blocks would be to have a central elected Government, with the power to tax and transfer money from the rich to the poorer parts of the eurozone. You would also have to have a federal reserve bank as the bank of last resort, which would issue most of the debt for the eurozone. These were two drastic omissions in the construct of what was hoped to be a new European nation. If you leave those two bits out and merely have monetary union on its own, it is extremely vulnerable.

Let us face it: if the European Central Bank had been allowed—the noble Lord, Lord Desai, pointed out that it was the Germans who stopped this

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happening—the eurozone crisis would have been a fraction of what it actually was. Right from the beginning, the European Central Bank could have moved in to bail out banks and help nations, saving sovereign debt, rather than reaching this point where some of us wondered whether Greece was going to go completely bust and so forth. This crisis has been caused by the way that the whole thing was set up in the beginning.

Is anything going to change? Things are slightly changing in the European Central Bank but the democratic deficit is still there and will not get any better in the immediate future. There are in fact no plans to elect anybody; we have just appointed Mr Juncker and there was not an awful lot of democracy about that. So you have no democratic accountability and, to quote the noble Lord, Lord Desai, again, you have economic policies that may be leading towards deflation. We may be looking at a period of 10 years when there is no growth whatever, which is what the Japanese saw. If the eurozone does not grow, and we are starting with very high levels of unemployment, I do not think it is going to survive.

My noble friend Lord Lamont said that he has always had an argument with me about this. He thinks it is going to muddle its way through. Well, there are the economic problems and the stress tests coming up on the banks. Opinions differ on this. The noble Lord, Lord Davies, always says to me that the markets are buying banks all over Europe, so they do not think there is a liquidity problem with them. Well, the market has been wrong before. We will have to see.

Deflation and low growth are the real problems. I think that the next crisis for the eurozone is going to be not an economic crisis but a political crisis. We have just had the European elections which have demonstrated right across Europe, not just in the United Kingdom, growing Euroscepticism and disillusion about the way that Europe is operating. Just to show that they are completely unmoved by these results, they appoint Mr Juncker as President of the Commission, which demonstrates that this is business as usual, meaning, “We are not going to have our minds changed by electorates and people saying things. We are not going to change anything. We are going to carry on the way we always have”. Well, if it goes on like that, I can see growing political problems in the eurozone.

If it fails to grow and we do not see any economic growth, even if we do not see a period of deflation, all the economists agree with the noble Lord, Lord Desai, that we are going to see arthritic growth, but it is not going to be very great. We are starting with very high levels of unemployment, particularly youth unemployment, and that is not a position that you can sustain over a very long period. Let us face it; if it cannot deliver economically, what is the point of the eurozone? People will increasingly ask that question.

We have a referendum coming up in 2017. All my Eurofanatical friends in this House—I find I do not have many friends who really share my views—always say to me, “Don’t worry. The result of the referendum is going to be exactly the same as it was last time. Why should it be anything else? All the major parties will support staying in, trade unions will support staying in, and the CBI and everybody you can possibly think

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of”. Yes, but the last time we voted—indeed, I voted—to stay in the European Union, it was quite different. Britain was poverty stricken. We had appalling labour problems, and we looked across the channel at Europe which was prospering. The chances are that in 2017, those roles will be completely reversed. There will be a prospering United Kingdom and a strife-ridden, low growth, pretty appalling Europe exporting as many of its people as it possibly can. I gather that we are suffering from—or benefiting from, possibly—an enormous influx of Spaniards as we speak. More and more people are wanting to come to this country. Migration flows are causing an enormous problem. I think anybody who sits round and thinks that this eurozone is just going to float through all this without any problem has some very nasty shocks coming their way.

5.38 pm

Lord Davies of Stamford: My Lords, I shall start with three introductory comments. First, like other noble Lords, I pay tribute to our excellent chairman who managed to guide us all, although we came from very different vantage points, to clear and decisive conclusions. There is not much point in having a parliamentary report that does not come to clear and decisive conclusions, but it is a very good thing to achieve. Secondly, I thank Stuart Stoner, our excellent clerk who has already rightly been paid tribute to by many noble Lords. Thirdly, I thank my colleagues on the committee, including the Eurosceptic Tories, with whom I always disagreed. We have had a very stimulating time and have all learnt a lot. It has certainly been great fun working with colleagues from all parties and perspectives in producing this report.

We have had some very interesting speeches from many noble Lords this afternoon. I thought my noble friend Lord Desai’s speech was particularly interesting. He raised a number of issues which I do not have time to go into now, but which need to be engaged with. I shall make one or two points on his comments on the need for stabilisation in the eurozone. I think he may be slightly overpessimistic because although I totally agree with him that it would very desirable if the European budget were increased to 2% of EU GDP—I will come on to that in a second—the European Union has found a way of getting much more stabilisation leverage out of the existing structural funds and cohesion budgets by the practice of front-end loading, which it has just adopted for the first time in this new seven-year framework period. It means that money allocated for seven years overall can be spent very largely and substantially in the next two or three years, when it is quite clear that there is going to be a lack of demand from other sources in the eurozone economy, so that is a very positive thing.

My noble friend Lord Desai might be slightly pessimistic in his comparison with the United States. The position is not entirely unfavourable to the EU. First, there is less scope in the United States for fiscal stabilisation at the level of individual states. All American states—possibly with the exception of one and therefore 49 American states—have a balanced budget law. Although the constraints in the Maastricht treaty for

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fiscal deficits by member states are considerable, you cannot go to more than 3% even in exceptional circumstances. That at least provides some scope.

Secondly, I think that I am right in saying that federal grants in aid in the United States, if you measure them in terms of the proportion of the percentage of per capita income of the beneficiary state, come out less. If I recall correctly, the greatest beneficiary in the United States of federal grants is Arkansas. The receipts are less on that basis than the receipts of structural funds and cohesion funds in the poorer member states in the EU. An element of automatic stability is already there. There should be more. I totally agree with my noble friend that it would be excellent to go to 2% of GDP.

I was very attracted by a suggestion that the committee came across—not just me—when we went to Berlin. A German economist suggested that an excellent way to increase the budget of the EU would be to transfer to the EU responsibility of unemployment funds. There would be an obvious element of automatic stabilisation which would be quite powerful. That suggestion, which is referred to in our report, needs to be taken further. I look forward to speaking to my noble friend about a number of those issues and I very much encourage him to continue to talk about them because he has set out an agenda which should be pursued very seriously.

I cannot resist responding to my old friends and sparring partners, the noble Lords, Lord Lamont and Lord Hamilton, who are particularly distinguished Eurosceptics. There are several blatant contradictions in what they are saying. They say that there is not enough democracy in the European Union and that the member states are not taking the recent European elections seriously enough. At the same time, almost in the same sentence, they say that it is quite wrong to take the European Parliament so seriously or to take democracy so seriously and that the European Parliament should not have anything to do with the choice of President of the Commission. You really cannot have it both ways. Either you think that the European Parliament is a legitimate, democratic voice, in which case it should be listened to and the changes in membership of that Parliament may be something that everyone should take on board. Alternatively, often you hear in other Eurosceptic rhetoric that it is not a democratic organisation at all and that its proceedings and membership should therefore be discarded from attention. You certainly cannot plead that it should be taken into account when you wish to do so.

I have exactly the same problem with the point made by the noble Lord, Lord Lamont, about fiscal integration. He complained that fiscal integration was not included with monetary integration at the time of the Maastricht treaty. I remember distinctly that at the time he opposed any suggestion that there should be any degree of fiscal integration. You cannot have it both ways. Either it is necessary or it is not necessary. You cannot logically complain at the absence of something and then complain a few moments later at its presence when it is delivered.

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Lord Lamont of Lerwick: Of course you can. You can be against transferring fiscal authority out of the UK but say that the only way in which you can make a monetary union work is for you to transfer it out of your country to a central organisation. There is no contradiction in that whatever.

Lord Davies of Stamford: I am sorry, I take a different view. It seems very contradictory to me. Either you should not have fiscal integration or you should. It is very important that politicians are coherent about these things and I do not think that the Eurosceptics are coherent, not least on the matter of democracy in the EU.

Incidentally, my noble friend Lord Desai made the excellent suggestion that we should have an election for the President of the European Union. I have always been in favour of that, and I quite agree that the EU lacks democratic accountability. You hear all the time from Eurosceptics that the EU lacks democratic accountability, but the moment you suggest any measure at all, whatever it might be—changes at parliamentary level, say, or the direct election of the President—that would supply much greater accountability, they are always against it. Again, there is a blatant contradiction running through their views on the subject. I have to say that if you pursue politics on a contradictory basis like that, you do not do great credit either to your reputation for intellectual clarity or to the good faith of your arguments.

Lord Marlesford (Con): Surely the noble Lord, Lord Davies, is wrong. The point that my noble friend Lord Lamont is making is that the eurozone requires integration. We did not join it because we were not prepared to take part in that integration. The European countries joined because they were prepared to integrate but then they did not actually do it. That is what all the problems were about.

Lord Davies of Stamford: I repeat that you cannot at the same time complain about something when it is absent and then complain when it is present; that does not make any sense to me at all. Equally, I do not think that I have heard any response to my points about democratic accountability. If there is a desire for more democratic accountability in the EU, which there is, and if it should be addressed, which in my view it should be, then you cannot turn down every possible proposal that is made in order to achieve that, which is what the Eurosceptics tend to do.

I think that our report makes three conclusions. The first is that the general direction of genuine monetary and economic union is probably right. We support it and think that it is a sensible thing for the eurozone to be engaged in. We feel that it should go further and be completed. We think that it is troubling that one or two elements of the agenda have not been implemented and will not be in the immediate future, notably the retail bank deposit insurance system that we have just referred to and which has been referred to several times today; we are broadly in favour of that and think that it is a very good scheme.

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The second general conclusion is that this process is not without risks and costs for our country. That point is made very clearly in paragraphs 185 and 186 of our report, to which I draw the Committee’s attention. It is also made in another document, the British Bankers’ Association report, which we have obviously all been sent. I have been sent a copy, and it has already been referred to and quoted from. I shall quote from it in case some people here have not received it:

“EU, government and industry studies have shown that deepening the Single European Market offers a growth potential that is achievable without further increasing public debt … However, the understandable moves towards stronger Eurozone governance may make it more difficult for the UK financial sector to play a full role. For example, development of Eurozone caucusing, outside the EU-28 format, on matters that impact directly the Single Financial Market could, even unwittingly, damage its integrity”.

The document goes on to raise other risks, not just caucusing but the risk of the eurozone having a permanent president, the risk of the new configuration of the European Parliament being less likely to defend British interests—largely because the Conservative Party withdrew from the EPP, so that is entirely its fault—and other risks.

The fact is that the British public have been bamboozled, and this report goes some way towards redressing that and illuminating them, which is very necessary. They had been persuaded to believe that somehow we can have a half-in and half-out approach, with one foot on one side of the fence and one on the other in our relations with the EU at no cost, or that we can gain all the benefits from the EU without actually subscribing to all its programmes and disciplines. The sheer fact is that you can never do that in life, and you cannot do it in this case. Personally, I would prefer any measure of relationship with and access to the European single market and the EU than none. I am the sort of person who would always prefer half a loaf or even a quarter to no bread at all. However, I am very conscious that we are losing some portion of the loaf by the course that we are adopting. That comes out very clearly in the conclusions to the report, and we have fulfilled a useful function in writing it.

Lord Hamilton of Epsom: As the noble Lord, Lord Kerr, said, we are not part of the eurozone group, so are we not inevitably half in and half out, whether we want that or not?

Lord Davies of Stamford: As the noble Lord, Lord Kerr, said, as I shall say myself and, indeed, as the report states, we are not just out of EMU. We could not join EMU if we wanted to because we do not qualify under the fiscal provisions. Our fiscal deficit is excessively high—more than twice the level required the last time I looked at the figures. We cannot join anyway; we just have to face that.

Quite apart from that fact, it is true that the public in this country have been poisoned against the whole notion of EMU by a very effective press campaign, and it would be quite difficult to join EMU in the short term even if we qualified, which we do not. As we do not, it is a theoretical issue. Quite apart from that, we could, if we wished, join a banking union. We

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appear, for reasons which are unconvincing to me, to have decided not to join a banking union. As a result, we will find that we are not really, truly in the single market.

I put that the other day—this is a matter of public record because it was an open committee session—to the chairman of the Financial Reporting Council, Sir Win Bischoff. He agreed with me unequivocally that, as a result of what is happening, we will have a fragmented single market. We will have our own banking regulation based on our own bank regulation Bill. We have secured a derogation from the bank regulation directive, which I think is very undesirable. That means that, although there will be no fundamental differences in the way that banks are regulated in the eurozone and here, there will be small differences from time to time. There will be different responses because different people will be doing the regulating. There will be greater compliance costs. British banks such as HSBC and Barclays with major operations on the European continent will have to go through parallel procedures in different countries, whereas they could have just reported in one coherent way on a consolidated basis to one regulator, which would have been much more desirable.

More serious than that, there will be regulatory arbitrage, with distortions: people being tempted—no, being driven—to practise certain operations and activities in some markets merely because regulation there is slightly lighter than in other areas within the single market. That is not a single market at all. There will of course be a great lack of clarity and, therefore, investor and depositor confidence as a result of the confusion and complexity, which is, again, quite unnecessary.

It is a perfect example of how you can impose costs on yourself for no useful purpose. We all say that we want a single market. We are all in principle against regulatory arbitrage—all British Governments always have been—but we have deliberately created a fragmented structure which has higher costs and prevents a single market taking place. That really cannot make sense. It is about time that we realised that our policies—I say our policies; I mean the policies of the Government of the day, the coalition Government—contradict the national interest. Because we are not in the eurozone, we face the danger that problems may be created for us by the eurozone itself through its members caucusing for meetings of ECOFIN or other bodies due to the greater weight given to the eurozone organisations—a point made by the British Bankers’ Association. Not only may we be the victims of other people doing things that we do not like very much but we are creating problems for ourselves, which seems particularly irrational.

The report is a very useful piece of work and it deserves wide consideration. I hope that it may be the beginning of a reconsideration of the rationality of our policies in this area, because it is a great shame that for reasons of, I think, essentially party politics or emotion, we are often dysfunctional in our pursuit of the national interest.

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5.54 pm

Lord Davidson of Glen Clova (Lab): My Lords, I join all noble Lords in congratulating my noble friend Lord Harrison on chairing the committee, which has produced a welcome assessment of this important and complex subject. The committee, composed of highly experienced and able members, offers views that no sensible Government can easily reject or ignore.

The UK’s engagement with the EU on this subject is of course important. It has potentially dramatic consequences for our globally significant financial sector. History teaches that financial regulation can have serious unforeseen consequences and effects on the sector and the economy. Therefore, this report’s contribution to understanding the implications for the UK of the EU institutions’ proposals is both useful and timely.

Today’s expert and sometimes lively debate, and the exchange that has proceeded, provides Her Majesty’s Government, I suggest, with quite a lot to think about. My noble friend Lord Liddle, unshackled, has also provided something substantial for Labour to consider in this area, paying due regard to his expertise and knowledge. No less, there is to consider the contribution of my noble friend Lord Desai and his view on EMU as a deflationary union, for the UK’s major trading partners are within the EMU. This obviously creates interesting and difficult questions for the future.

I also note the possibly critical view from the noble Lord, Lord Hamilton, of the future of the European Union, given its structure. These observations would be foolish to ignore. They are obviously not accepted by everybody but they should certainly not be treated lightly. My noble friend Lord Davies also made a very interesting point in relation to the warning that he offered between the UK’s regulation in banking and the European zone, and how government can impose costs in a dysfunctional way, as he put it. This is of course one of the problems that government in the UK have faced for quite some time.

We agree that banking union is vital to tackle the effects of the financial crisis, at least in the eurozone. We also agree with the committee that the current proposals fail to break the bank/sovereign debt nexus, as that was the principal rationale for the GEMU project. As the noble Earl, Lord Caithness, observed, that is quite significant. What the committee describes as “sub-optimal” about the SRM—leaving the fiscal backstop substantially in the hands of the individual member states, the resolution fund not being finalised until 2026 and, even then, with only limited, probably inadequate, funds, as my noble friend Lord Harrison observed—leaves the concern about the bank/sovereign debt nexus possibly reduced but certainly not removed. Certain member states in such circumstances will almost inevitably not resist the temptation to game the system, and that of course was the very behaviour that caused the problems of the last crisis.

One is therefore slightly surprised at Her Majesty’s Government’s somewhat reticent response to the report’s clear view that,

“what has been agreed is insufficient to break the vicious circle linking banking and sovereign debt”.

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Are the Government of the view that this failing has been resolved or that it will be resolved in due course in negotiations on EMU, or is this simply an issue that HMG accept they cannot influence? Is the concern expressed to the committee by Mr Nigel Farage, MEP, and backed up by Professor Alexander, that certain ECB refinancing operations have perversely reinforced the bank/sovereign debt nexus a concern that HMG share, I assume, or are we simply to disregard what Mr Farage has identified?

The single supervisory mechanism agreement of 2013 is welcomed by the committee but with the caveat that the ECB being expected to supervise some 6,000 euro area banks is “unrealistic”. Even if the ECB is to be confined to larger banks only, as the noble Lord, Lord Lamont, points out, the Government’s assertion in response that the SSM,

“is critical to restoring market confidence”,

and that it,

“ensures that the Single Market of 28 countries is not harmed”,

may seem rather overoptimistic.

The Government expressly recognise that size is not important when it comes to monitoring risk. Economic historians might point out that the UK’s secondary banking crisis of 1973, which featured small banks, precipitated a major crisis. Do the Government not share the committee’s concern about the ECB’s capacity to supervise? Are they confident that the member states’ authorities will, throughout every member state of the eurozone, have the capacity to supervise themselves? Can an absence of ECB capacity to supervise really “ensure”, to use the Government’s word, that the single market is not harmed?

The whole project of the banking union seems to have the Government’s support, observing as they do,

“that the UK stands to benefit from greater financial and economic stability in the EU”,

that banking union provides. That recognition of the interlinked nature of banking is sound. Supranational structures for financial supervision and resolution are of course central to the project. It is correct to say that banking union is another step toward successful ever-closer union, one supposes. Is one nevertheless to assume that the Prime Minister’s oft-expressed but never really specified desire to reform some aspects of the EU would leave this area out of any of his proposed negotiations?

Is it correct that this step to ever closer union will proceed without the Government attempting to revisit the issue; without attempting to renegotiate? Some clarity from the Government on this important subject would be welcome. Perhaps answering the query of the noble Lord, Lord Kerr, as to the logic of keeping the UK out of the banking union, might also be interesting and informative.

Turning to the issue of integrated economic policy, I note that the committee expresses the view that debt utilisation,

“may be inevitable if the single currency is to prosper”,

and that it is “a logical development”. Do the Government agree? I ask because I confess that I was not able to detect the Government’s attitude from their response.

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I assume that they are not, as the noble Lord, Lord Dykes, put it, wallowing in nationalism on this particular point. It would be interesting if we could have clarity. This is particularly interesting given Germany’s resistance to implementing the concept. Do the Government share the German view? Are they simply unconcerned about the issue, or do they accept that any influence they might have on this issue is inevitably limited?

Influence has been the subject of one of two observations. The noble Lord, Lord Lamont, is sceptical about the utility of influence and there is something to be said for that. Per contra, however, my noble friend Lord Liddle, the noble Lord, Lord Maclennan, and the noble Lord, Lord Jay, from a different perspective, all stress that it is important. They were joined by the noble Earl, Lord Caithness. The noble Lord, Lord Kerr, pointed out the importance of influence and he should know. He also gave useful guidance as to where influence actually lies and how one can use that influence in a way that might possibly overcome the scepticism of the noble Lord, Lord Lamont, about the issue.

The noble Lord, Lord Hamilton, when he characterised the exchanges of poison, as it were, between the respective parties, made a useful point, possibly impliedly, that the diplomatic exchange between the UK and its EU partners could be improved substantially by toning down the rhetoric. Engagement, of course, is always helpful and positive engagement is even better.

As for the implications for the UK, the committee rightly recommends that HMG do not treat the banking union, as the noble Lord, Lord Kerr, quoted, as,

“the sole province of the single currency for all time”.

In trying to decipher the Government’s response, it is not entirely clear what position they now adopt. Clarification would be welcome.

Not unnaturally, the Government note the value of the City of London. Some of us might prefer that they also recognised the substantial contribution made to the UK’s financial sector by other parts of the United Kingdom—Leeds and Edinburgh spring to mind—but that is not my main point. The contribution of the City is substantial and is one of the truly global successful sectors of the UK economy. I am sure that the Minister will agree that government action or inaction can have significant effects on our global position. One notes that in the peroration to the government response they state that,

“a strong and engaged UK (and a strong City of London)”,

are in the interests of all EU members. We agree. It may be, however, that we differ over the meaning of an “engaged” UK. Again, positive engagement is what we would hope for. Where the Government state that the UK’s interests are,

“to be framed in terms of the overall stability and efficiency of EU markets”,

we are in accord. Where they state:

“The Government values the importance of the City of London in Europe”,

we again agree. Is one to assume that, from the point of view of maintaining the City’s global position, the Government are wholly convinced that the UK must remain in the EU? As one is sometimes unsure where they stand on this issue, might the Minister make it

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clear whether Her Majesty’s Government consider that the UK’s financial sector is strengthened by the UK’s membership of the EU?

I look forward to hearing the Minister’s replies to all these questions—or if not all, at least to some of them. In conclusion, I repeat our welcome of this careful and useful report. We trust that the Government will pay it due and proper attention.

6.06 pm

Lord Newby (LD): My Lords, I begin by thanking the committee for its work on this report and all noble Lords who have spoken in today’s debate. It has been like a high-level seminar on the subject rather than a usual parliamentary debate. Although I would love to think that students around the UK and Europe will read our debate today, I fear that it will not get the attention that it deserves. It is also quite a novelty when replying to a committee report to find that quite a lot of the speakers were not on the committee. Very often, one is faced with just the members of a committee, who have tendency to repeat what is in the report and basically say how clever they were in producing it in the first place, whereas in this case not only were they clever—naturally—but they managed to draw in star outside participants to the debate, which I for one have greatly enjoyed.

The Government have consistently said that they support closer integration in the euro area to make the single currency work. The Government agree that a stable euro area is in the interests of all EU members, not just those in the euro area but those outside it, including, of course, the UK.

The work towards creating a genuine economic and monetary union, which the European Council tasked Herman Van Rompuy to take forward in June 2012 at the height of the euro area crisis, is an important part of this process. As we have seen on banking union, the UK will fully engage in any and all discussions, as and when they are taken forward.

At the same time, the Government have been clear that we will not join the single currency and, as such, we will not be part of this closer integration. Our priority is therefore to ensure that the single market is fully protected and that measures remain voluntary for those outside the euro area. We agree with the report that this will require “continued vigilance” and we have been closely involved in the negotiations, particularly over banking union, to protect UK interests.

We also want to ensure that, as the euro area continues to integrate—

Lord Davies of Stamford: The Minister has said that the Government are opposed to our joining EMU or GEMU—we know about that—but will he explain why the Government appear to be against our joining the banking union alone?

Lord Newby: Yes, my Lords, I will come to that.

We also want to ensure that as the euro area continues to integrate, the EU continues to operate fairly for those who remain outside the euro area, whether by

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choice, like the UK, or because they have yet to meet the criteria to join, like some other euro-outs, although I take the point that we do not meet those criteria either at this point.

As the Chancellor and Germany’s Finance Minister Schäuble set out in their joint Financial Times op-ed piece in March, non-euro area countries must not be,

“at a systemic disadvantage in the EU”.

We must ensure that EU institutions continue to work in the interests of all member states and last week’s Council conclusions, agreed by heads of state and government, contain important text about the need to address UK concerns.

Lord Davies of Stamford: I apologise for interrupting the noble Lord a second time. He said that the Government feel it is important that non-euro area member states not be at any disadvantage in the single market as a result of not being part of the eurozone. Does he not accept that the burden of our report, and indeed of the BBA document which has been quoted extensively this afternoon, is that willy-nilly, whether we like it or not, we will be at some disadvantage—probably increasing disadvantage—by virtue of being outside the EMU or banking union entirely, and we cannot do anything about that if we are determined not to join those systems?

Lord Newby: I think that the noble Lord, Lord Lamont, explained at the start of his speech the trade-off between influence and being a member of the EMU. I will come to this later but, obviously, in certain respects, we are going to be outside the room by not being members of either the eurozone or the banking union. We have to work very hard to ensure that we maximise our influence in those areas, of which the single market is the most central, in which we have a common view with many, if not most, of our EU partners about the need to reform and the direction that reform should take.

I will attempt to deal with many of the questions that I was asked by individual noble Lords during the debate. The noble Lord, Lord Harrison, asked whether the single resolution mechanism was too complex and therefore would not be effective. By definition, all resolution processes are complicated but the role of the single resolution board is very strong. This may be a vain hope but, from our own experience, we hope that the plethora of legislation and new structures will reduce the likelihood of major crises of which we have been previously largely unaware emerging at great speed.

One of the problems in the UK when RBS had to be effectively nationalised over the weekend was that the storm arose with great speed. If you contrast that with the position of the Co-op Bank last autumn, when it faced major, potentially life-threatening problems, a resolution was undertaken, not formally using the legislative framework but largely using the mechanisms that were envisaged there, and with the Treasury and the Bank playing a major role over a number of months in getting the Co-operative Bank into a position where it was able to resolve its own problems.

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The involvement of political bodies other than the single resolution board is inevitable because of the significance of the decisions that are taken and the fact that if major banks are in real difficulty—a weakness we have seen in the UK—there is a political component and you have to take that into account as you are taking decisions. We would hope that the scope of the decisions that have been left to the Council is very circumscribed and that most interventions, even involving the single resolution board, would not require going up to that level.

The second question that the noble Lord, Lord Harrison, raised was whether the resolution fund is too small. On its own, it demonstrably is, if there were a major simultaneous problem with a number of the largest eurozone banks. The key thing here is that it does not have to bear the whole brunt of the resolution process on its own. Arguably, it does not have to bear the main brunt of it. That is the whole point of the resolution recovery directive and the bail-in procedure. The fund is not capable on its own of solving a major crisis, but it is one of a number of tools and not necessarily the largest or most important.

The final question, I think, that the noble Lord, Lord Harrison, asked related to the replacement of senior positions in the EU. As he knows, over the coming weeks, the European Council President will be taking soundings on this and I am no more able to suggest whom we might put forward, than my noble friend was at Question Time today. The UK is fully engrossed in those negotiations with the aim of making sure that we have candidates who will be able to deliver on the priorities agreed by the heads of the European Council last week.

Among other things, the noble Lord, Lord Lamont, has introduced a definition of nirvana that means that I will never think of the concept in the same way again. He ended his speech by saying, I think, that his feet tended to have to accommodate themselves to the shape of the shoe. My experience and expectation is that my shoes will amend themselves slightly to take account of the shape of my foot. I think that that is a rather important distinction in the way that we view our involvement.

This brings me to one of the central points of discussion, which was the importance of political will in terms of the future of the euro. In certain respects, the euro has defied logic because of the strength of the political will supporting it. I strongly agreed with the noble Lords, Lord Liddle and Lord Jay, about that. Once the political elites of the major eurozone countries have made up their minds that this thing was going to continue, it was going to continue barring the most unforeseen disaster. Those who predicted its demise simply did not grasp a very straightforward political fact.

The noble Lords, Lord Liddle and Lord Maclennan, asked linked questions about how we could play as full a part as we can in both the banking union and the mechanics of the eurozone. Obviously, we have ruled out membership, so the question is the extent to which we can play a role. I thought that the point of the noble Lord, Lord Kerr, about the role of informed co-operation and advice was very important here. We

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have very good relations with the ECB at all technical levels and UK officials are playing, and will continue to play, a big role.

The noble Lord, Lord Kerr, developed the concept of playing a bigger role in the banking union by saying that there was no logical reason why we should not be in it while remaining out of the eurozone. I am sure that that is logically the case. Why has it not happened? There are a number of reasons. First, the banking union has flowed from the eurozone crisis. I think it is inconceivable that we would have had such a banking union if all had been well with the eurozone, so the two are inextricably linked. I would also be interested, as a newcomer to the theoretical concept, to know whether there has ever been a banking union with banks that had two different basic currencies, or several currencies, because presumably the Swedes and others might also join.

The noble Lord, Lord Jay, made an important point about having more British people involved—

Lord Kerr of Kinlochard: I do not quite follow the logic of the Minister’s answer to my point. Because something has emerged that is driven by a wish to support the eurozone, that does not necessarily mean that it is bad or something from which we should be determined to distance ourselves. I do not think that the point about currency is relevant to whether we should be in a single supervisory mechanism. The non-eurozone countries that are negotiating do not think it is, nor do I see why, logically, it should rule us out from being in a single resolution mechanism. I understand that a separate argument would apply in respect of resolution, which is that it means somebody pays. Resolution costs money. However, we are not into these kinds of arguments. I am not saying that we should join either the single supervision mechanism or the single resolution mechanism today; I am merely arguing that it annoys the foreigners when we take the blanket approach that this is nothing to do with us. That undercuts the role—which I am glad the Minister acknowledges is very important—of the City quietly advising the ECB, and on these new structures being developed on the continent, as to how the job is best done.

Lord Newby: I was simply trying to understand, partly for myself, why we have taken this view on the banking union. An element of it was a political view and an element of that was borne out of the way in which the banking union itself developed; namely from the eurozone, of which we are not a member. At some point, we may decide that we want to be a partial or full member of a banking union—although I suspect that point is some way away, whoever the Government are. While I am on the subject, the noble Lord, Lord Dykes, made a point about timescales. However, as he is not in his place, I will have to pass over it.

The noble Earl, Lord Caithness, asked about the common guarantee scheme. He said that the Government were being rather spartan in their response—which, indeed, we were. However, the reason for this is that any common deposit scheme would be for the eurozone rather than the UK. If the eurozone decides that it wants to go down that route, that is fine but we will not be playing any part in it.

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The noble Lord, Lord Desai, pointed out that the eurozone operated on a sort of gold-standard basis by being a deflationary tool. The first example in recent times in Europe of real wages falling significantly was with the monetary union between West and East Germany. I would not say that Germany got a taste for it, but it got an understanding of how that could work. What has been surprising is the extent and speed to which Ireland, Spain, Italy and Greece have been able to adjust, in particular, real wages downwards in order to begin to make their economies more competitive within the eurozone. The noble Lord made another interesting point about how important the three words—“whatever it takes”—issued by the head of the ECB were. The fact that they were so effective says a lot for the credibility of the ECB because markets believed it, which is encouraging in terms of the strength of the ECB.

Along with other noble Lords, the noble Lord talked about the challenge of what used to be called—although I am not sure it has been today—the “democratic deficit”: the fact that there is a low engagement in European elections and a low understanding of many of the issues. A number of suggestions were made about how to deal with this, possibly by having more direct elections or voting for the President of the EU. I am possibly the only person in the Room who has gone on a demonstration carrying a placard in favour of direct elections for the European Parliament, which I did as a student. We had very high hopes for the European Parliament then, not just as a technical body in terms of scrutinising legislation, which, on balance, it does extremely well, but as a symbol of a uniting Europe, which I was all in favour of. We thought that having a Parliament elected by the peoples of Europe would bring that concept to life but it has not, so I am rather sceptical about whether we can solve that problem by more elections. I fear that we may have to rely more on the role of national Parliaments, which is the subject of another report by your Lordships’ committee.

The noble Lord, Lord Kerr, raised a number of extremely interesting points about the way that appointments might be made and how the directorates might change. I absolutely see the strength of his very important institutional points and will take them back to my colleagues in the Treasury, who are rather more closely involved in those negotiations than I am.

The noble Lord, Lord Davies, spoke about the threat to the single market in financial services of the banking union and about different legislative frameworks. In fact, what we have to a very large measure is that wherever you go across financial regulation, it is regulation under directives. Our own legislation is very much framed within the plethora of directives which I always think of Sharon Bowles presiding over. She has been the one person who has understood all this stuff. Although under a directive the way that we do something and the way that the European Central Bank does it may be slightly different, it is no more different in this area than in any other area of the single market, where we implement things by directive and the detail of the way it is done varies from country to country. I am not sure I share the noble Lord’s concern in that respect.

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Lord Davies of Stamford: I am sorry to say I am not convinced by the Minister. We do, of course, have a derogation from the directive, as the Minister presumably knows.

Lord Newby: I remain of the view that the directive approach applies in financial services in the same way, broadly speaking, as it does in many other areas.

I am just about out of time but, briefly, the noble and learned Lord, Lord Davidson, made a point about whether the ECB had the ability to supervise. It has a big job on its hands and is taking on new responsibilities. As we have seen, getting the Bank of England fit for purpose has taken a lot of time and effort. Indeed, the only thing that will demonstrate whether it has succeeded is how it performs in a crisis. We hope it does not have to do that for some time but it is clearly taking on the job of supervising a very large number of banks, whether it is 250 or 6,000, or whatever it is. It is very big new job, and I wish it well in it.

I conclude by saying again how much I appreciate the work of the noble Lord, Lord Harrison, this committee and all speakers in today’s debate. It is clear that Europe will be at the centre of our political debate in the period ahead. That debate is often conducted in extremely depressing, ill informed and—to borrow a word from the noble Lord, Lord Hamilton—poisonous terms. During all this, I am sure that your Lordships’ European Union Committee will continue to be a voice of reason and common sense and that Governments of whatever persuasion will continue to value its reports. For my part, I look forward to participating in further debates upon them.

6.30 pm

Lord Harrison: My Lords, with the passage of time all committee chairmen tend to fall into their anecdotage. However, before I tell my concluding anecdote, which I hope will sum up the tenor of the debate we have had, I will say that I will resist the opportunity to play footsie with the noble Lord, Lord Lamont, or indeed with the Minister who has replied. I will also resist the opportunity offered by the noble Lord, Lord Desai, to take some of my committee to the United States both for the purposes of literary examination and comparison with the regulatory structure there. To my noble friend Lord Liddle I say that despite all the quotations from the Book of Job I do not see myself as a man of constant sorrow; my job is to help the process of change with the committee that I have.

My anecdote is the following. Some 20 years ago I wrestled to the ground Pierre Moscovici, who was later to become the Finance Minister of the incoming French Government, for the purposes of leading the socialist group on the monetary sub-committee—I am very familiar with sub-committees. However, one dark afternoon in Brussels in the European Parliament we met Alexandre Lamfalussy, who was later to be president of the European Monetary Institute and the forerunner of Trichet, Duisenberg, Draghi and all the rest. I, in my pomp and circumstance, then wrote to the Wirral Globe, Cheshire Observer and Chester Chronicle that I had just elected Europe’s next bank manager. Some

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20 years later, I think I was right, but no one was paying attention at the time other than my good local newspapers.

I tell that anecdote because the tenor of this debate has been that we have to be on our pins, toes and high heels to be able to speak with those who might be our friends and who might change things. I thought that view was best put by the noble Lord, Lord Kerr, when he talked about knowing the guy at the other end of the telephone. That is the job of UK Governments now and in the future for the purpose of defending UK interests. I say to the noble Lord, Lord Hamilton, that what united the committee across the political waves was the belief that that was and remains important, and that we will continue to pursue it in the future. I am happy to continue the seminar in the Peers’ guest room shortly afterwards, should any noble Lord need a glass of European wine, and I thank all noble Lords who have contributed.

Motion agreed.

Disabled Students

Question for Short Debate

6.33 pm

Asked by Lord Addington

To ask Her Majesty’s Government what plans they have to co-ordinate the assistance given to disabled students at school, in further and higher education, and in the world of work.

Lord Addington (LD): My Lords, I thank those—we happy few—who have waited here. It is slightly later than normal. One should never underestimate the passions and the length of passion when it comes to Europe in this House.

This Question about the co-ordination given to disabled students throughout the educational process and into the world of work was inspired by changes to what, I think, had been a very comforting place to be in that process, for a disabled student—that is, in higher education. We had a system that seemed to provide just about everything needed and it was changed—or threatened with change—by a Written Ministerial Statement on 7 April. Everything is up for grabs. What particularly attracted my attention was that those with specific learning difficulties were mentioned twice. That was the only disability group that was.

As I have put on record before, specific learning difficulties is usually shorthand for dyslexia. I have been told by interventions from Ministers that it is now thought to include other groups as well, such as those with dyscalculia, dyspraxia and so on. It gets mentioned because it is thought to be an area where the amount of money spent is excessive, primarily because we are given a standard computer when going through the education process. I say “we”, though of course this system started in 1990 and I missed it, in my higher education experience, by a couple of years. The computer was something that was taken as an example of waste. I will come back to this, but that inspired me to look at the entire system.

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The system had to be looked at as we had just been through the Children and Families Act. Both school education and further education are now covered under a unified system, up to the age of 25. However, because the disabled students’ allowance was in existence, we did not really look at that. There was an assurance given to us at the time, both informally and, I think, formally, that we did not need to look at it.

So what has happened when it comes to school and further education? For the first time, the education system has a duty to go out and identify those with special educational needs—to find them, not have them brought to you—and not have people struggling. The system is supposed to find them, find out what is the matter and give them the help required. This is a massive cultural shift—a far bigger cultural shift than, I think, many people realised at the time. It means that there is a duty not to say, “Oh, little Johnny”—or little Jane—“is not succeeding”. Rather, there is a duty to identify why. This would have been much easier if there was a duty for all teachers to be better trained to identify the more hidden disabilities. I try to get away from this cliché of my own, but special educational needs runs on something that I have always referred to as “reverse battlefield medicine”. The most severe cases are dealt with first, usually because they can be spotted. I hope those listening can identify the difference between a disability that leads to an educational need as opposed to a special educational need—that is somebody who has a need resulting from being in a wheelchair as opposed to someone who has autism, dyslexia or is deaf. Those conditions, if they are obvious, get dealt with pretty quickly. The legislation now says, “We should try to get these people to achieve”. So we now have a situation in which all this is going on, and we have established that this system does not change at further education.

My history in your Lordships’ House follows me throughout this debate. We managed to deal with apprenticeships. It had been decided, wrongly, by the Department for Business, Innovation and Skills, that they were not covered by the Equality Act. It became apparent, and it was confirmed that they were covered. Dyslexics had been prevented from taking the English requirements with any chance of succeeding, but the process was changed and now you have to give assistive technology. I have just heard from the British Dyslexia Association that that has been challenged by one or two of the exam boards because it is regarded as giving some form of unfair support. I do so hope that the noble Baroness will be shoving her thumb into that eye very quickly, because my fingers are getting a little bit too dirty from doing that. I hope that this will be done quickly.

Having had the situation where we are working towards taking exams and we are providing support, we go to the DSA. Did the DSA provide a lot of support? Yes. Did it provide some that I felt might have been wasteful in certain cases? Yes. Did it become slightly too bureaucratic? Yes. I have heard of cases of people with mental health problems who have been refused it because they did not have the documentation, despite the fact that they had documentation saying that they had mental health problems. Often you have to be assessed again to get this assistance, despite the

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fact that you are statemented, under the old system, or have a plan, under the new one, and have received support so far through the system because of your condition. These assessments are extremely expensive—they cost hundreds of pounds if not thousands—and put pressure on certain student categories. If we are to have reform in this area, I hope my noble friend will be able to say that this will be looked at, and that further unnecessary assessment on entrance will be dealt with.

If this is the system that we are working towards, do we have a working practice that will allow for the growth of independence throughout the system? If you start by being identified as having learning problems in the classroom, you expect to get a great deal of support as a small child starting this process. A standard part of the educational experience for many people is the enhancement of independent working and independent training—with guidance, but that decreases. One of the important things about the university system is that one works independently for oneself. Here we get to the nub of what I am trying to say. How are we ensuring that that growth of independence carries on? How are we making sure that we have a system that uses parts of all of this and combines them to ensure that the candidates can get through the process themselves?

I am a convert to, and a great advocate of, using assistive technology, particularly in the case of dyslexics. There are others outside here who will say that other disability groups will not benefit as much, but I suspect that all can benefit to a degree. I also know that no one person in any one of these spectrum organisations is identical to the next, so there must be a degree of working together. However, the idea that the assistive technology that allows me to send any notes that I have sent to any person in this room, by dictating into a microphone attached to my computer, which is running a bit of software, would not be beneficial to someone who is a recognised dyslexic and will be dyslexic throughout their life, and that they will not be supported when they are taking their GCSEs, is ridiculous. Later, they may have to take an exam using an amanuensis or a computer, so why can they not have access to it earlier? Why are we not encouraging them to maximise the benefits of this technology earlier?

We then come to the process that is identified and used within the independent sector quite frequently, a process that is now made available as standard to people who get on to the DSA. This point is twice picked out in the statement made on 7 April, which says, “We will not provide you with the standard computer, and the software will now be provided by the higher education institute”. This is a huge cultural shift. Why has this been decided? Because everyone has a computer. However, let us put it like this: everyone has access to computing technology at some level. Whether you have a computer that is powerful enough to run the software properly is another matter, and that is the vital point. Other forms of software for the blind or hearing impaired also require a basic level of capacity to run the software, to allow the user to have the independence that has been denied by a disability plus their social background. That disability will have been identified throughout the education system, and

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in future will be identified earlier and in greater numbers, so the user will have a background knowledge that can prepare them to work independently. Why is this decision not coming to the fore? Why are we not doing something about it? If you deny students this technology, you are making the problem greater.

Having heard that I have a lot of time, I have now taken too much time. I leave the Government with one question: if we can provide a computer for roughly £300, and the software might cost us the same again, why are we not concentrating on that? We are providing non-medical support in terms of hours provided. In 1990, dyslexics probably needed someone to dictate their essays to, but they do not now.

The figures I have for that range between £50 and £65 an hour. They are offering 30 hours a week. How many properly equipped computers can you get for a person in their third year—who has, presumably, already been trained in how to use it properly and given a skill that they will need in later life to be able to function in most office environments? Why are we not looking at that as a structure and a way forward?

I finish by saying that when we say “complex”, a term mentioned in the statement, I always took that to refer to multiple needs, not severity. That language has already been challenged, but that led people into a spin. Unless the Government can start to address those questions in a way that the sector understands, they will get into more trouble here. There are savings to be made. We can modernise and bring the system up to date. Please, streamline it and make sure that people get the support that they need to function, not an idea taken from an imperfect understanding.

6.46 pm

Baroness Uddin (Non-Afl): My Lords, I begin by commending the noble Lord, Lord Addington, on his consistence and persistence in support of these matters, and apologise to him for not having made the list—I just missed the deadline, so I am very pleased that I am able to speak in the gap.

In the context of today’s debate, we must put individuals at the heart of reform. Indeed, the Government have themselves acknowledged the need to do better when it comes to disabled people. Only last March, legislation was passed to improve the co-ordination of services offered to those with special educational needs, via the Children and Families Act. Just two months later, the Care Act became law, seeking to personalise care and put recipients at the heart of the system within integrated care services.

The intention is noble; the reality is, too often, a disgrace. As with the reform of so many public services—to the NHS, to higher education, to the justice system—the Government have used much-needed public service reforms as an opportunity to withdraw funding entitlements to many who relied on them to live a life with dignity. In a growing number of instances, entitlements have been restricted to all but the most severe cases. Most recently, the Minister for Universities and Science announced what he described as the modernisation of the DSA. In this case, modernisation would appear to amount to the removal of allowances from all but those with “complex” learning difficulties—

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passing the buck to universities, whose assistance to students will be discretionary as long as they do not infringe the Equality Act.

I am not opposed to reform per se. Indeed, the fact that public expenditure on the DSA has risen in all but the past year suggests that there may be a case for reviewing the criteria for entitlement, but the hasty withdrawal of entitlement without consultation is dangerous, particularly when you are dealing with a category of people who already face hurdles to participating in education, employment and society as a whole.

Let us take those with autism spectrum disorder. According to government sources, more than half a million people in England have autism, but only 0.2% of undergraduates studying for their first degree are declared as autistic. Employment outcomes are almost as bad.

There is a suggestion that, henceforth, medical advice will be required to explain how a student’s disability will affect their ability to study on their chosen course. That risks becoming a classic case of clumsy guidance failing to take into account the spectrum of conditions and the nuances of humanity. Let us take the young man with autism who, even under the present system, was recently refused DSA on the ground that he had not provided recent medical evidence about how his condition would affect his chosen course. Despite providing copies of his original diagnosis, statement of special educational needs and individual education plan from his college, he was told that a medical report conducted after the age of 16 was required. Put aside the fact that that requirement would appear to run contrary to the 2014-15 guidance, which states that medical evidence need state only the nature of the disability and, ideally, explain its impact. As is the case with many disabilities, such as autism, there is no medical involvement following a diagnosis where the condition is developmental, not physical. Can the Minister clarify what forms of evidence will be required from individuals with autism when they come to apply for a disabled students allowance in September and who will undertake those applications? The cuts to DSA should not proceed until we are sure that they will not harm access to higher education and jobs for those thousands who have benefited and are likely to benefit.

Finally, in 1980, when my then five year-old was entering the special education system, I had the audacity to ask whether there was any special equipment which would help his learning disability. People were absolutely aghast that I would dare to ask such a question. Some of that experience remains for many parents. We are in an age when the medical and computer technologies are at the highest level and will get better. It just seems such a shame that we are not going to support all those who can benefit from them.

6.51 pm

Baroness Jones of Whitchurch (Lab): My Lords, I am very grateful to the noble Lord, Lord Addington, for tabling this Question for Short Debate and for raising a number of crucial issues about the lack of continuity as young disabled people progress through

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the education system and into the world of work. I am also grateful to him for prompting me to revisit some of the detailed work that we did on the Children and Families Bill and look again at its progress towards implementation. When I looked back at the Bill, I was reassured to see that it came out of our scrutiny process in much better shape, and with more clarity about rights and responsibilities, than when we started. In that case, it was a job well done. I agree with the noble Lord that if we get the implementation right, it will turn out to be a transformative Bill and make a big difference to the lives of many young people with disabilities and special educational needs for many years to come. The challenge for us at this stage is about implementation.

The theme quite rightly established in the Bill was the need to be proactive. There is the need to have joined-up provision and the need for agencies to talk to each other and take joint responsibility for services. This was encapsulated in the notion of the education, health and care plans. It would be interesting to have an update on the progress being made to establish these local joint mechanisms, which are needed to make the care plans a reality. Perhaps the Minister could update us about what is being put in place to monitor the rollout of the Act to ensure that it becomes a reality on the ground and, in particular, to look at what local authorities are doing to fulfil their obligations in this regard.

In the mean time, the noble Lord, Lord Addington, has identified some rather glaring gaps in our new model of information-sharing and joint working. It was interesting that in the initial response to the consultation on the code of practice, which we received a copy of and which was in the Library pack, the FE sector said that it was rather in the dark as to how the plans would affect it. I am not totally surprised about that because during the course of the Bill, I did not really get the sense that it was engaged in the debate or really understood what the implications for that sector would be. It is helpful that the code has now been redrafted to spell out the FE sector’s statutory duties more clearly. For example, there are the reciprocal duties to co-operate with local authorities on arrangements for all young people with SEN; to admit a young person if the institution is named in the education, health and care plan; and to provide the right support for students with SEN disabilities.

The list of types of support which should be provided and the access to funds are also spelt out. However, underpinning the code there is also an expectation that local authorities will provide top-up funding. It is clear that there is a potential pinch point for students caught in the middle of these funding negotiations. As all noble Lords will know, local authority funding is in a particular crisis at the moment. Can the Minister explain what rights young people have to be provided with that funding to ensure that they have the right facilities when they go into college and can make their college years a success?

The code also makes it clear that colleges should be involved in transition planning between school and college to ensure a successful transition into college life. However, underpinning that again, what guarantees

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do young people have that the assessments of their needs that were made during their school education will be carried automatically into their time at college? What is to stop an FE college asking for new assessments to be made—trying, if you like, to delay the inevitable or to put off its responsibilities? In addition, there is also all the extra bureaucracy and resources involved and, obviously, the extra upset that will be caused to young people, who feel that the original assessment that was made about them is now being challenged. Where, then, is that reassurance of continuity which was at the heart of the Act and can we be assured that that will follow through in the way the FE sector receives students?

Meanwhile, the noble Lord, Lord Addington, and the noble Baroness, Lady Uddin, quite rightly raised concerns around the changes to the disabled students’ allowance that were recently announced by the Universities Minister. That announcement goes completely against the spirit and intent of the Children and Families Act. By any measure, it is a blatant cost-cutting exercise because, as we know, it has been judged that it will result in potential cuts to DSA funding in the region of about 60%. One can see why it is attractive to the department at this stage. As a result, only those students with complex disabilities will receive support. Many students will lose access to vital equipment which helps with their day-to-day learning and will lose vital specialist support. I do not claim to understand completely all the technical challenges which the noble Lord raised this evening. They made sense when he was explaining it but I would not be able to repeat it all.

Lord Addington: If they made sense only when I was explaining them, I have failed.

Baroness Jones of Whitchurch: As I said, the noble Lord explained it very well and it made sense, but I obviously have a lot more to learn about the technical facilities that are out there and about how they can be embraced by people with disabilities. However, it is clear that unless the funding is there and the DSA takes account of those up-to-date technologies, we will have failed. The noble Lord made the point that students with dyslexia and dyspraxia, for example, are likely to be particularly badly affected. I also accept the point the noble Baroness raised about autism. Both of those areas are sometimes difficult to define.

One of the concerns about this is that students will undoubtedly be put off from applying to higher education, which of course used to be the case in the old days; they never went to higher education because they never felt that the support would be there. There is a danger that they will fall back on less appropriate post-school choices. The problem with that is that, if nothing else, it runs the risk of being even more expensive for the Government to support. We therefore have a challenge to ensure that every child gets the right to have the best education and the best outcomes that they will be able to succeed in.

Can the Minister explain what discussions took place between the Department of Education and BIS before the announcement was made? Does she accept

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that the cutbacks in DSA funding go against the whole principle of supportive and integrated progression in education for young people with SEN and disabilities? Are we sure that BIS understood all the good work that was done around the Children and Families Bill? Has it got the message and taken it on board in the way that it is beginning to review the DSA?

Finally, the support that young people receive from nought to 25 should mean a smooth transition into the world of work. We worked hard during the passage of the Children and Families Bill to put those mechanisms in place as well. Again, the noble Lord referred to better access to work placements and apprenticeships, on which we spent considerable time. However, since there are now worrying signs that Ministers in BIS have not bought into that agenda, can the Minister reassure us that that active liaison is taking place between the departments to make sure that, not just in the letter but in practice, funding and support will be made available to all young people so that they all have the best opportunities to make the best of their lives and to thrive and succeed at work? I look forward to her response.

7 pm

Baroness Northover (LD): My Lords, I start by thanking my noble friend Lord Addington for securing this important debate and for his, as ever, knowledgeable and passionate speech. I also thank the noble Baronesses, Lady Uddin and Lady Jones, for their contributions. I especially thank the noble Baroness, Lady Jones, for her kind words about the potentially transformative effect of the Children and Families Act, on which we both worked.

Our reforms for children and young people with SEN and disabilities are aimed to create a new system to support young people through school, further education and training and focus much more strongly on independent living and helping them to find paid employment. My noble friend Lord Addington is absolutely right to focus on that. The reforms are aimed to create a more streamlined and transparent system at school, which provides support tailored to individual needs and does not require endless reassessment—which noble Lords mentioned.

I am personally grateful to my noble friend Lord Addington, whose help with my own then teenage dyslexic son opened his eyes to what was possible through assistive technology. I have to say that I was a form of assistive technology, finding myself reading my son’s economics textbook to him. I would read a chunk; he explained it to me; and I trust that we both benefited—I certainly did. I did object that economists were taking for granted the way that people acted. I certainly identify with the noble Baroness, Lady Uddin, about the battles that one used to have—I hope, now, less so—to gain support for children with particular needs.

Lord Addington: I interrupt my noble friend merely to say that I had forgotten to declare my interests. I hope that my noble friend will forgive me if I do that now.

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Baroness Northover: I am sure that those are taken as read.

I say to the noble Baroness, Lady Jones, that we agree that it is vital that education, health and care plans are based on a co-ordinated assessment process in which professionals from across agencies work closely together, so that families do not have to repeat their stories and support can be provided promptly. I hope that she will be reassured that the pathfinder programme has demonstrated strong progress and that the pathfinder champions are sharing what they have learnt about effective approaches in every region as all areas prepare for implementation of the reforms from 1 September. The noble Baroness is absolutely right: the key thing is how it is implemented, and we will keep a very close watch on that.

From year 9, annual reviews of education, health and care plans, EHC plans, must focus on preparing for adulthood, enabling that transition, setting out clear plans that enable young people to move into higher education and work. The draft code of practice also sets out the new legal duties of further education colleges, including how they identify SEN and provide support. We know that work can transform lives by giving people an income and, above all, a sense of purpose and value. It enables them to become as independent as possible, both economically and socially. For that reason, we have introduced supported internship and traineeship study programmes specifically designed to support young people into work.

I assure my noble friend Lord Addington that the Children and Families Act requires services to work together to support children and young people with disabilities. As I said, the pathfinder work is encouraging. The DWP’s access to work fund has been extended to support internships and traineeships, and its Disability Confident campaign encourages organisations to employ people with disabilities. More widely, the cross-government disability strategy, Fulfilling Potential, was developed jointly with people with disabilities so that they can better reflect what is important in their lives to enable them to live independently in accessible and inclusive communities.

During the passage of the Act, my noble friend Lord Addington raised important concerns about the availability of reasonable adjustments in apprenticeships. As a result, the skills funding statement now contains a clear reminder that the Equality Act requires training providers “to make reasonable adjustments”. The Act, which raises the bar on previous legislation by clearly setting out the rights and protections for groups risking discrimination, also applies to employers, requiring them to make reasonable adjustments for employees.

Encouraged by my noble friend, without actually poking people in the eye, the Government also made a commitment to support disabled apprentices who were unable to pass key skills in English and maths but completed all other aspects of their apprenticeship. These individuals can now take the relevant functional skills qualification and, if successful, can apply for their apprenticeship certificate. The National Institute of Adult Continuing Education has recently launched an online toolkit to help people with disabilities to

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access apprenticeships and to help employers gain access to skilled and dedicated workers.

Noble Lords have spoken about the need for young people in higher education to get the right support. Securing a place at university is a fantastic achievement for any young person, which improves their employment prospects. We are right to have high aspirations for young people with disabilities, as the noble Baroness, Lady Jones, made very clear. I assure my noble friends that, as the draft code of practice states, local authorities should plan a smooth transition to higher education before ceasing an EHC plan. Once a higher education institution place has been confirmed, the local authority must pass the EHC plan to the institution at the earliest opportunity.

My noble friend Lord Addington and the noble Baroness, Lady Jones, spoke about repeat assessments and transition. In the present system, a young person with a statement moving to college would need to have an entirely new and separate learning disability assessment, which carries none of the protections of a statement. As noble Lords know, that would change with our reforms and young people will be able to keep their EHC plan in college. Local authorities will be required to review an education, health and care plan at least annually. The year 9 review will look forward to the young person’s transition to adulthood, including further education, and each review thereafter will build on that. Our plan is that there will be much greater consistency and better transitions.

A college can ask for a reassessment but the local authority does not have to undertake one if one has been made in the past six months or it does not believe that it is necessary. I say to the noble Baroness, Lady Jones, that the local authority will set out what the colleges are expected to provide from their funds. Local authorities will top up funds for individual students who require them so that they get the support that they need. Decisions will be made on a case-by-case basis and we will keep a very close eye on how this is working.

Once a student with disabilities has joined a higher education institution, regardless of whether they previously had an EHC plan, they can seek support through the services provided by the higher education institution under its duties under the Equality Act, and through a DSA needs assessment. A comprehensive DSA needs report should include discussion with the student, the strategies that have been used in the past and the strategies that are being recommended for DSA funding. I assure my noble friend Lord Addington that although the student may provide evidence of the support that they received from their school, they are not required to as the needs of all people with disabilities can change, as he indicated, over time.

Disabled students’ allowances are being changed, as noble Lords have noted. Once a disabled student has joined an HEI, a range of support is available through the HEI’s duties to make reasonable adjustments under the Equality Act and DSAs. That will not change but the balance of support in future will. We must ensure that the HEIs fulfil their duties under the Equality Act, which, perhaps I may remind noble Lords, improved things for those with disabilities. We

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must make sure that all public institutions fulfil their responsibilities, which includes higher education institutions.

Baroness Uddin: My Lords—

Baroness Northover (LD): I would like to be able to answer but I am right up against time. If I have not answered adequately, I can write or we can discuss matters afterwards.

There are key changes proposed to the DSA. It will no longer be available to fund standard computers, but DSA funding will still be provided towards higher-cost computers required due to a disability. It is worth remembering that these days most students, if not all, will be buying their own computers. This is a change from when we were at university. The key thing here is to support students for whom a standard computer will not suffice, in the way that my noble friend Lord Addington indicated, and the difference in cost will be covered.

Where HEIs provide specialist accommodation for students with disabilities, that cost should not be passed on to the student. The DSA funding will no longer be available to these students because there should be no extra cost to the student.

Students with dyslexia will continue to be supported through HEIs’ reasonable adjustments and DSA. HEIs should consider how to support these students better to reduce reliance on DSA. HEIs should consider how they meet a variety of non-medical health needs—for example, note-taking and library support—to reduce reliance on DSA.

DSA will be available for more specialist support—for example, sign language interpreters—and we are

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consulting on the fine detail of the division of responsibilities. All institutions will now be expected to provide the same high level of support for students with disabilities. The detail of what support will be funded through DSA will be provided in guidance this autumn.

With regard to co-ordination between BIS and DSA, my honourable friend Matthew Hancock has a joint position between the two. However, as I say, it is surely right that all public institutions in the UK recognise their duties under the Equality Act, which raised the bar for how those with disabilities should be treated, and we need to ensure that they recognise that. My right honourable friend David Willetts is responding to a debate in the other place today on this very subject, and I know that he will mention the wide range of groups with which BIS has been in discussion, as it will be over the next few months before the guidance is issued.

The application process for DSA will remain the same. Students will continue to have a comprehensive DSA study needs assessment to explore the impact of their disability on their ability to access learning. That is the key thing.