EU: Financial Transaction Tax (EUC Report)

Lord Harrison Excerpts

Tuesday 17th December 2013 Grand Committee

Asked by

[Lord Harrison]

To ask Her Majesty’s Government what assessment they have made of the Report of the European Union Committee Financial Transaction Tax: Alive and Deadly (7th Report, HL Paper 86).

[Lord Harrison (Lab)]

My Lords, I am delighted to introduce the new EU Committee report, Financial Transaction Tax: Alive and Deadly. I thank fellow members of the Sub-Committee on Economic and Financial Affairs, which undertook this inquiry, for the contributions they will make today, and other distinguished Members of the House.

This is an update report on the Commission’s contentious proposals for a financial transaction tax, following on from our March 2012 report, Towards a Financial Transaction Tax?. That report found the Commission’s proposals seriously wanting, and likely to fail the five objectives that the Commission had set itself. We contended then that there was a significant threat of relocation of financial activity outside the EU as well as the City of London, were the FTT to go live. You would have imagined that we would have rejoiced when the proposals for such an EU-wide FTT later ran into the sand—far from it. Let me explain.

In June 2012, a breakaway group of 11 member states, led by France and Germany, announced their intention to proceed with an FTT under the enhanced co-operation procedure, whereby nine or more member states can take a proposal forward without binding those who do not wish to participate. The UK Government made clear, with my committee’s support, that they would not participate. However, we were deeply alarmed that the proposal could nevertheless have a serious detrimental impact on the UK. We grew even more agitated when the Council vote approving use of the enhanced co-operation procedure went ahead without a text having been published—a veritable case of buying a pig in a poke.

Three weeks later, on 14 February 2013, the Commission did indeed publish its detailed proposal, but the revised version included new and disturbing anti-avoidance provisions, including the significant issuance principle. When we took evidence from Commission official Manfred Bergmann in March 2013, he told us, to our open-mouthed astonishment, that there would be no legal obligation on UK authorities to collect the new tax. This contradicted our view that the United Kingdom could indeed be obliged to collect the tax on behalf of participating member states under the EU regime, which requires all member states to assist each other in the recovery of tax. In our view, the proposal failed to meet the key criterion for enhanced co-operation, which requires that any proposal must respect the competences, rights and obligations of all non-participating member states.

We urged the Government to launch a legal challenge against the proposal. The Government belatedly took our advice, and in April this year challenged the use of enhanced co-operation. In the mean time, we asked the Commission to provide urgent clarification of the feared legal obligation that the United Kingdom authorities would have to collect the tax. This, the Commission signally failed to do for a full six months.

Later, a leaked Council Legal Service opinion concluded that the deemed establishment principle, on which the proposal was based, did not comply with the treaty requirements for enhanced co-operation on several grounds: notably, that it would represent extraterritorial taxation; it could discriminate to the detriment of other parties caught by the deemed establishment principle; it failed to respect the competence of non-participating member states; it would distort competition; and, finally, it would inhibit the free movement of capital.

In light of these significant developments, we undertook this short update inquiry, taking evidence from Heinz Zourek, Director-General, Taxation and Customs Union, European Commission. Our findings are clear: in our view, the Commission has failed to demonstrate that it has taken full account of the interests of non-participating member states. The Commission confessed that it had brought forward a deliberately contentious proposal with the studied intention of challenging participating member states to excise those elements they found inimical—an unworthy and divisive tactic. Moreover, it undermines the Commission’s obligations to defend the interests of all member states and throws into doubt use of the enhanced co-operation tool in the future—a significant by-product of this study. In contrast, we found the Council Legal Service opinion highly persuasive. It demonstrates in concrete terms how the proposal would breach European Union law in respect of the integrity of the single market. Moreover, we jib at the Commission’s artificial distinction between imposing the financial transaction tax and the collection of the tax from member states.

We published our report last week but already events have moved on. Media reports emerged that the Commission had finally produced a legal reply to the Council Legal Service. In addition, the Financial Times last week reported a compromise proposal emerging from the Lithuanian presidency, seeking to limit the tax’s broad scope while still retaining the element of restraining the impact on high-frequency trading. However, we understand that the compromise did not address key issues of extraterritoriality or the dubious legality of the tax. What update can the Minister give us on these negotiations? Does he predict, as we do, that the political weight behind the FTT—often misunderstood in this country—means that a proposal will nevertheless emerge in some shape or form? What efforts is he making to ensure that the potential damaging effect of such a tax is limited not only for the United Kingdom and other non-participants but, indeed, for all European Union member states?

I should warn the Minister that we do not let the Government off scot-free either. While we welcomed their legal challenge, we are frustrated that it took so long for them to sit up and take notice of the repeated, and increasingly admonitory, warnings that we have spelt out in no fewer than 12 letters to his ministerial colleagues over the past 18 months. What update can he give us on the progress of the Government’s legal challenge? When does he expect the Court of Justice to reach a decision? What assurances can he give us that the Government are taking the proposal, and its potential implications for the City of London, the United Kingdom and, indeed, the entire European Union, seriously? Are the Government engaging positively in negotiations in Brussels as they unfold, especially with other non-participating member states?

The financial transaction tax is a real and present danger to the City of London, Europe’s premier global financial centre, and to all of us who derive pensions and savings from its teeming financial activities.

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[Lord Newby]

My Lords, we will probably have to agree to disagree on this. As the previous Financial Secretary pointed out in the correspondence that the noble Lord, Lord Kerr, quoted, it was clear from discussions that took place in the lead-up to the ECOFIN meeting that a qualifying majority of member states was prepared to support the authorising decision. Moreover, abstention had no bearing on the prospects for our subsequent legal challenge. The noble Lord, Lord Kerr, talks about building alliances, an issue that arose when we last discussed this matter, but we have to accept, as the noble Lord, Lord Liddle, pointed out, the strength of the political will across much of the EU to introduce this tax. The UK standing up to say, “We are going to vote against it” would not have affected that. It is inconceivable that this would not have gone ahead at that meeting, whatever we had done.

[Lord Harrison]

Perhaps the Minister can be helpful. The committee has made that point time and again. Would it be useful if the Minister demonstrated the activity of the Government in Brussels in talking to other member states: what canvassing they did and with whom they spoke? We would like to see the ocular proof of the Government’s enthusiasm to block this tax.

[Lord Newby]

My Lords, I will not go through a blow-by-blow account of which member state we spoke to at which point. The view was taken, which I believe was the correct one, that at that stage this proposal was unblockable, because of the political will to which the noble Lord, Lord Liddle, referred. We may think that other member states are misguided. History may prove they are misguided. But there is a slight tendency in the UK to believe that we always know best. We may well know best in this case, but the French and the Germans think they know best, and it is a bold UK Government—or committee of your Lordships’ House—who are unambiguously sure that they know better than a large number of major EU member states.

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[Lord Newby]

My Lords, I have 12 minutes, of which I have used 11, and I have not answered a single substantive question posed by noble Lords. It is just possible that I might do so if I am allowed to respond to some of the points that have been raised.

I was asked where matters stand in terms of discussions in the Council. A Lithuanian document was produced last week which I think has been rather mischaracterised as to its significance. It is a short document and I have it with me. It was discussed briefly at last Thursday’s working group, but many participants were reluctant to discuss it, taking the view that the technical discussions should not run ahead of and potentially prejudice the more substantive discussions, so consideration of it was limited. There has been no substantive breakthrough in the negotiations recently, largely because of the situation in Germany. As noble Lords will be aware, the German coalition deal has now been ratified and we expect more progress in the new year.

The noble Earl, Lord Caithness, asked about the timing of the resolution of the difference between the Council and the Commission legal opinions. The conflicting opinions of the Commission and Council legal services were discussed by the 12 December working group and it is now for the Council members and the 11 participating member states to weigh these as they begin to consider a compromise proposal. We are not aware of any challenge from Luxembourg.

On the timing of the legal challenge, we have exchanged written arguments with the Council. Several member states and other eligible parties have intervened. Written proceedings will come to a close in January, and it is then down to the court. But, as noble Lords will be aware, oral proceedings would ordinarily take place after written proceedings close.

On the argument that has repeatedly been made about our engaging positively with other member states, the UK has been closely engaged with these negotiations from the start. We have held numerous meetings with other member states about the FTT. UK officials are closely engaged in the Council working groups, of which there have been five, including submitting detailed written technical questions to the committee. It simply is not the case that we have not been and will not continue to be fully engaged.

I have gone over my time, for which I apologise. I thank the noble Lord, Lord Harrison, and members of the committee again for the report, and for generating what has been, as usual, an extremely stimulating debate.

[Lord Harrison]

I apologise; the noble Lord’s comments have provoked a number of interventions. Can he promise the Committee that he will write to us on those many questions which he was eager to answer, and give us full and ample replies to those which he was not able to reach?

[Lord Newby]

I would be delighted to do so.

Economy: Infrastructure

Lord Harrison Excerpts

Tuesday 23rd July 2013 Lords Chamber

[Lord Deighton]

Again we are dealing with a hypothetical question because in 2010 our plans for capital investment were broadly similar. Since then, because of our ability to focus on government efficiencies and the delivery of other programmes more cheaply, we have been able to transfer, first, the £10 billion to which I referred into capital spending within our fiscal envelope and, then, a further £18 billion through 2020-21. These capital expenditure investments are very focused on the most productive areas—economic infrastructure—but they are also all fully costed and within a fiscal envelope that is affordable.

[Lord Harrison]

My Lords, given the palpable failure of the regional growth fund, can the Minister report on the Government’s proper ambition to try to switch access to finance for small businesses from the current 80% secured from their banks in the United Kingdom to the 80% secured from the capital markets which applies in the United States of America?

[Lord Deighton]

I share the noble Lord’s observation that the current performance of the banks in supporting small and medium-sized businesses needs support. That is why we introduced Funding for Lending and amended it to make it more effective in cheapening banks’ funding for those areas. It is also why we have the business bank in place. I agree that some of the schemes need time to bed in, and they need to be activated faster and more effectively, because this is a critical part of our plan to get the economy growing again.

Banking: Regulation

Lord Harrison Excerpts

Thursday 11th July 2013 Lords Chamber

Asked by

[Lord Harrison]

To ask Her Majesty’s Government to what extent their response to the Parliamentary Commission on Banking Standards is aligned with proposed European Union legislation on bank regulation.

[Lord Newby]

My Lords, none of the measures in the Government’s response to the Parliamentary Commission on Banking Standards are prevented by proposed European Union legislation on bank regulations. As the detail of these measures is developed, HM Treasury will ensure that they are appropriately aligned with any relevant European Union legislation.

[Lord Harrison]

My Lords, given the slender reference to the European dimension both in the Tyrie report and the Government’s response, could the Minister illustrate what obligation there is at present, under CRD IV and Basel III, for us to report the British banks that have a high-risk assessment to the European Banking Authority? Given the flat-footed nature of the Government in responding to the financial transaction tax and the European banking union, may we have an assurance that preparatory work is being done in anticipation of the Liikanen proposals coming to fruition this autumn, and indeed the recovery and resolution directive that will cover all 28 member states?

[Lord Newby]

My Lords, I think that I can give that assurance as far as the Liikanen proposals are concerned. As the noble Lord probably knows, the Government believe that there is no incompatibility between what he is proposing and what the Government are doing in respect of banking and the banking reform Bill. I am confident that the Government are acting with all due speed on these measures, and indeed in some areas we have moved more quickly than the EU as a whole has been able to do.

EU: Budget Report

Lord Harrison Excerpts

Thursday 25th April 2013 Lords Chamber

We need a new strategy for a competitive Britain, and that can be based only on investment. Austerity is the enemy of investment. The way out of the hole that the Government have dug can be led only by a Government with an entirely new approach that halts Britain’s convergence towards a stagnant eurozone.

[Lord Harrison]

My Lords, I welcome the good news this morning that our Chancellor has avoided the epithet of “the triple dipper”—of taking Britain into that sorry state and in that, as a good man of the north-west, rivalling Blackpool’s big dipper in effecting the number of dips in the UK economy. As has already been identified, within those more positive figures, it is sad to see that housing construction decline fails to be addressed and that manufacturing has been identified as another weakness.

First, I want to draw attention to some of the points made by the noble Lord, Lord Newby, which are more positive. I encourage the noble Lord that if he—as his colleagues often do—tries to make the excuse that the eurozone’s trials and tribulations affect the UK economy, please do not accuse the previous Government which won their spurs in the way in which they reacted to the 2008 crisis. When this Government refer to the wider and broader financial crisis, I ask that they do not use the excuse that the United Kingdom is affected by the eurozone. The noble Lord, Lord Newby, did not do that, but I encourage some of his colleagues to turn their attention to that.

Secondly, the noble Lord, Lord Newby, mentioned two vital areas where we could revive the economy if we were to put our minds to it. He evoked the single market—I am a single market fanatic, and am happy to say so—and he identified the single market and digital services. Why are we not in there ensuring that it happens? The message that we are giving out is our potential withdrawal from the European Union, from the world of the single market and from all that it offers. We need to hear from Ministers how they are redoubling their efforts to ensure that we are being effective with the single market, which offers the true route to improving economies and finding jobs. I was very pleased to hear a government Minister talking about the importance of trade, which is the unbidden subject in political circles. He outlined the advantages if we were to complete the Doha round to bring wonderful opportunities for British businesses, European business and industry, and worldwide trade and industry if we made the effort. I declare an interest as the parliamentary representative of the Ministerial Conference in Bali in December. Again, can we hear some more positive notes, not just from the noble Lord, Lord Newby, in this area?

The negativity about the euro really does not help. There is no need to worry colleagues because the Government say that they will not take us into the euro and we are forbidden by the very criteria that we will examine this morning. Let us consider the debt criterion which is 60% of GDP. We stand at 90%, which has gone up from the 79% when Labour left office. The deficit stands at 6.3%, which is more than double the criterion of 3%. Let us make an effort. Incidentally, while I have the Floor, I will say that Latvia will join the euro next year because it satisfies those convergence criteria; Lithuania is making its bid later. Britain, which just tells the rest of the world that we are not interested in these things, cannot do so because we do not satisfy the criteria by which any measure would be a sensible thing to accomplish in terms of running a proper and safe economy.

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The noble Lord asked about the FTT and was very pleased that the Government had started a legal challenge. I am extremely pleased that he is pleased. We note developments with every passing day. Noble Lords will have seen today that the President of the Bundesbank has engaged in this debate. There are a number of inherent flaws in the FTT that are becoming increasingly clear in those countries that have signed up for it.

[Lord Harrison]

I must say that we spotted these inherent flaws in our 2011 report and repeated them. The problem was that the Government were supine in their approach. It was only by our goading, and at the very last moment, that they began to act. The point that I make in so many of these areas is that the UK has to intervene early.

[Lord Newby]

My Lords, I am all in favour of increased early intervention in all matters European, but it is fanciful to believe that anything that the UK could have done or said at a significantly earlier stage would have stopped a very significant move in many European countries that was led by the trade union movement, which is desperately keen to get an FTT going. We have been extremely critical of it, but it is for other countries to decide. We will see how discussions go in the coming months.

The noble Lord asked about a debate to approve the basis of the national reform programme. We do not think that there is a legal obligation to debate the basis for the national reform programme, and we are not aware of any occasion on which it has been submitted for parliamentary clearance, including under the previous Government. Of course, the national reform programme does not include any material that has not previously been published and debated.

I now move to the other end of the spectrum of considerations from high economics to the question from the noble Baroness, Lady Noakes, about why there was no speakers list. I absolutely share her view, and I raised the question myself, because I would have welcomed having some sense of how many people were going to speak. I was told that, because these are Motions, it is not the normal practice of the House to do it. However, I would be very happy to take to the Procedure Committee a suggestion that we have a speakers list for this kind of debate, because I think that it would be helpful to the House.

The noble Baroness also asked why we bothered to have this debate at all, and said that we should repeal Section 5. As any Minister would say, I am sure, I can see some advantage in doing that, but it is highly unlikely that we will. The main thrust of her comments was that it was all a waste of time and why bother, not just with this debate but with getting involved in all this EU stuff. We support the European semester as a means of ensuring that what we consider to be necessary structural reforms take place across Europe, because, simply, we believe that it is in our national interests to see strong economic recovery in Europe.

The noble Baroness and a number of other noble Lords said that we placed too much emphasis on trade with Europe and not enough on trade with the rest of the world. In my view, it is not an either/or. We have about 40% of our trade going to the EU, and we cannot afford to see trade with the EU suffer. What we need to do is to see trade with the rest of the world growing strongly, as we have been doing, while, one hopes, seeing trade with Europe growing strongly as well.

The noble Lord, Lord Layard, queried whether this Government have as their overriding objective a better life for the people. I assure him that this Government do have that as their overriding objective, which is hardly surprising. I cannot agree either with his view that we should be borrowing a lot more or, indeed, with the comment of the noble Lord, Lord McFall, that the markets have turned against the Government. Last Friday, borrowing costs for the UK were 1.69%; for the US, they were 1.71%; for Italy, they were 4.22%; and for Spain they were 4.62%. For Italy and Spain, the proportion of borrowing to national income is very significantly less than it is in the UK. So I do not think that the markets have turned against the UK at all. It is only because we have a very clear deficit reduction policy that that remains the case.

The noble Lord, Lord Hollick, prayed in aid the last Chancellor, and he and other noble Lords referred to the IMF. For me there is a slight irony in this, because for most of my political career Labour politicians have been explaining why the IMF was the worst possible organisation in the world. They said that it had all the wrong priorities and had never once got it right. So it is interesting that they have changed their view. I would say only that their description of the view of the IMF is somewhat less nuanced than the view of the IMF itself. As Christine Lagarde reiterated last week, the IMF supports the UK’s policy of deficit reduction and said that the pace of consolidation was in line with the IMF’s recommendations for advanced economies.

The noble Lord, Lord Marlesford, urged us to put up the tax on petrol. We think that the arguments for freezing petrol tax in terms of its impact on small businesses, rural areas and elsewhere, are very strong, and that is why we have done it. He was also very keen that we switch our efforts to other economies than the eurozone. Of course, the significantly increased funding for UKTI will allow us to put a lot more effort into developing our exports to those new markets.

The noble Lord, Lord McFall, suggested that we should investigate the possibility of a UK digital university. That sounds an extremely sensible idea. The way in which universities are making material available free is a huge potential benefit, and the quicker that that happens the better.

The noble Lord, Lord Davies of Oldham, basically said about job creation, “Well, there may be jobs, but they are not proper jobs”. In my view, the debate about what constitutes a proper job, or a job, is a false one, because for the person who is doing it, it is a job, and they would rather have it than not. Incidentally, it is not true to say that in recent months the bulk of jobs that have been created are part time. Certainly, the latest figures that I saw suggested that there had been a reduction in part-time jobs and a significant increase in full-time jobs. I completely agree with him about skills, and the need to upskill the labour force. I point out that under this Government there has been a massive increase in the number of apprenticeships, which by common consent is the area where for many decades this country has lagged behind the rest of the developing world.

Ultimately, the return to sustainable growth is the only way for EU member states to pay down their debts and improve the way in which the single market works. The UK Government are leading the EU growth agenda and making the case for ambitious EU reform. On that basis, I am pleased to commend the Motions to the House.

EUC Report: MiFID II

Lord Harrison Excerpts

Tuesday 26th March 2013 Grand Committee

Moved by

[Lord Harrison]

That the Grand Committee takes note of the Report of the European Union Committee on MiFID II: Getting it Right for the City and EU Financial Services Industry (2nd Report, HL Paper 28).

[Lord Harrison]

My Lords, I am delighted to have the opportunity to introduce this debate on the report of the European Union Committee entitled MiFID II: Getting it Right for the City and EU Financial Services Industry. This report was based on work undertaken by the Sub-Committee on Economic and Financial Affairs, which I have the honour to chair. The report was published in July 2012, and was based on evidence received from a number of practitioners and experts in the operation of financial markets. The committee was also assisted in its work by Professor lain MacNeil, Alexander Stone Chair of Commercial Law at the University of Glasgow, who acted as specialist adviser for the inquiry. I thank him and all the witnesses who contributed so richly to this report.

This proposal for a directive and regulation on markets in financial instruments is a complex legislative package, as our seven-page glossary indicates, but it is also extremely important. The original MiFID package, which came into effect in November 2007, is the foundation of the EU regulatory framework for investment firms. These firms encompass a wide range of activity such as global investment banks trading complex securities, fund managers investing pension funds, stock-broking firms and small high street financial advisers providing financial advice to the general public. The Commission’s objectives were to open up trading in securities to competition, to apply equivalent regulatory rules to different market models which perform similar functions and to enhance, standardise and harmonise investor protection across the European Union.

The new proposal, known as MiFID II, seeks to respond to deficiencies in the MiFID I regime exposed by the recent financial crisis. It focuses in particular on addressing problems that have arisen from the expansion in over-the-counter (OTC) trading, including the transparency of such trading. It seeks to shift trading from the more opaque OTC market to more transparent organised markets, in line with the September 2009 G20 commitment to tackle the less regulated and more opaque parts of the financial system by the end of 2012.

The committee’s starting point was to ask whether a review of MiFID I was even necessary. We found that it was, particularly given the technological advances that had taken place since it came into force. Some witnesses told us that the Commission’s proposals were a “good starting point” for negotiations. However, we warned of the damage that would be created by hastily or poorly drafted legislation. These concerns were heightened by the evidence we heard that, while some of the proposals were based on sound principles, there were significant flaws in the Commission’s draft. We identified six such central flaws.

First, we warned that the proposal for a new category of organised trading facility risked creating an overly complex regulatory framework which did not distinguish clearly between organised venues and OTC. We feared that the implications of the proposal had not been fully assessed. We were particularly concerned about the proposal for a ban on “own capital”—that is, the ability of the trader to use his or her own resources to trade on other people’s behalf—and the amount of detail left to delegated acts.

Secondly, while the post-trade transparency provisions held much merit, the pre-trade transparency proposals did not take into account the markedly different characteristics of each sector of the market, particularly in terms of liquidity. The requirement for disclosure could compromise the ability for competition to flourish. We warned against a one-size-fits-all approach to transparency that could have a negative impact on bond markets. We called for a more flexible approach that, while recognising the benefits of transparency, would allow the market to operate effectively.

Thirdly, the Commission also proposed to regulate algorithmic and high-frequency trading. HFT remains a deeply controversial activity and there is a wide spectrum of views about its utility. We recognised the case for circuit breakers, but were concerned that the scope of the proposals was too broad and did not adequately differentiate between algorithmic trading and high-frequency trading. In particular, we warned that the proposal to require algorithmic trading strategies to be in place throughout the trading day was likely to have a detrimental effect on financial markets.

Fourthly, the Commission’s proposals on third country access were deeply flawed. They created a risk that third country firms could find themselves locked out of EU markets, creating the spectre of regulatory retaliation. Such effects could have a particularly damaging effect on the City of London. At the very least, lengthy transitional regimes for existing third country firms were required.

Fifthly, the Commission proposed a number of steps to strengthen investor protection and corporate governance, yet the proposal to restrict the ban on inducements to independent advisers was in our view unworkable, since advisers would simply take steps to avoid being classified as independent. Likewise, the Commission’s proposals on corporate governance were overly prescriptive and did not take account of the diverse size, capacity and business models of the range of market participants.

Finally, we found that, while the European Securities and Markets Authority had a vital role to play in co-ordinating regulation of financial markets across the European Union, there was less consensus about the degree to which it should engage in direct regulation of the financial markets, as suggested in the Commission’s proposals for ESMA to take on product intervention powers. In the light of these flaws, we urged the UK Government, the Commission, the Council and indeed the European Parliament to take all the steps necessary to ensure that the legislation was fit for purpose before it came into force.

What has happened in the nine months since our report was published? The Government’s response, received in October, expressed sympathy with many of the points raised in our report, and we are grateful to the Financial Secretary to the Treasury, the right honourable Greg Clark MP, for keeping us updated on negotiations in the months since. We are aware that negotiations have moved forward, and that significant amendments have been advanced. For instance, progress has been made in Council on improving the provisions on third country access, although we understand that the European Parliament continues to take a contrary view. Perhaps the Minister might tell us a bit more about that. We are grateful to City UK for sending us extra material that will be valuable to us in our thoughts on third country access.

What update can the Minister give us on the progress of negotiations in relation to the six areas of concern that I have identified? What is his understanding of the European Parliament’s position on these issues? To what degree does he believe that the concerns that we raised, and which the Government have said that they share, will be addressed in the redrafted legislation? In relation to HFT, what is his assessment of the findings of the Foresight project, published in October 2012? On a personal note, I am still considerably worried about HFT, although the Foresight group took a much more relaxed view. What is the Minister’s view?

It has also become clear from the Minister’s correspondence that the timetable for agreement had been pushed back, with the scheduled agreement in Council repeatedly postponed. We understand that the Irish presidency decided not to take MiFID to general approach at ECOFIN on 5 March because a number of issues remained open. Which issues remain contentious, and what update can the Minister give us on when agreement on the package will be sought?

MiFID II’s impact on European financial markets, not least the City of London, will be considerable. The Government and their European partners must do all that they can to ensure that the financial markets, and the economies that rely on them, are strengthened rather than undermined by these provisions. However, MiFID II must not be viewed in isolation. There are other pressing issues whose impact on the City, the UK and the EU as a whole are just as great, if not greater.

Last year my sub-committee also conducted an inquiry into the Commission proposals for a financial transaction tax. Contrary to the opinion of many so-called experts, the idea has not died but remains very much alive, in the form of a proposal by 11 European Union member states to introduce a tax under the enhanced co-operation procedure. Only last week, witnesses to my sub-committee told us that the political will in the EU behind this proposal had been underestimated. Indeed, I recall that the CBI spokesman Richard Woolhouse told us that there were now stirrings of recognition in the City that the FTT in its enhanced form could indeed come about.

Do the Government share the complacency we identified? What steps are they taking to ensure that a full and effective analysis of the effects of such a tax on the UK will be conducted? The Minister might like to know that, this afternoon, I talked about this with Mr Lidington, our Minister for Europe, and I tried to sound the alarm bells. As an expert on the City, he will know of some of the new elements introduced in the issuance principle which mean that those trading in, for example, Volkswagen shares in two non-participating countries could be subject to the tax. London could have a much greater responsibility in terms of collecting the tax, perhaps for participating countries.

The euro area crisis has not, of course, gone away. In February, my sub-committee wrote to the Financial Secretary to the Treasury, reporting on the assertions of some experts that the worst of the crisis was over. We were sceptical. We warned that,

“the biggest enemy in the current climate is complacency, whether it be that of European leaders that the euro area has definitively turned a corner, or whether it be that of observers in the UK that the implications of these developments for the United Kingdom can be safely ignored. Positive signs of progress there may have been, but there remains a long way to go before the euro area crisis can be judged to have come to an end”.

I regret to say that recent developments in Italy and, more particularly, in Cyprus have borne out our judgment. The inconclusive Italian election results were a clear demonstration of the political and social pressures to which the euro area crisis is giving rise. More alarming still is the crisis over the Cypriot bailout. The way in which this issue has threatened to spin the entire currency zone back into crisis mode is a clear demonstration of the perils of complacency.

These issues demonstrate the vital importance of the UK Government remaining at the heart of EU discussions, whether it be on the euro area crisis, proposals for a financial transaction tax, or the MiFID II package. The Government may not agree with all the proposals, nor wish to participate in them, but the UK is not immune to the effects that overspill on to us. On MiFID II, as on all these issues, the Government must remain at the negotiating table, ensuring the best possible outcome not only for the City and the UK, but for the EU as a whole. We need to find friends in Europe to be able to do that important and sometimes desperate task. I beg to move.

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[Lord Harrison]

My Lords, I am minded to say that never in the field of markets and financial instruments has there been so interesting, so sexy and so stimulating a debate as has taken place here this evening. I thank all who have participated in it, especially the two Front-Benchers, but also my colleagues such as the noble Viscount, Lord Brookeborough, and the noble Lord, Lord Kerr. I would particularly like to thank our officers, Rose Crabtree and Stuart Stonor, for the work that they do for us behind the scenes, which is very considerable.

I was going to end on a humorous note, saying that I wake up every morning and thank the Lord that the noble Lord, Lord Hamilton, is not like other men. That has been well demonstrated. In fact, he reminds me of the story that William Hazlitt tells in one of his essays about going for a walk with Coleridge. He says that he set off with Coleridge down a Somerset lane. He, Hazlitt, would walk in a straight line; Coleridge was forever diverting, off up on the left, off up on the right, forward and backward and then eventually coming back to join his friend Hazlitt. This debate has been a little bit like that. I began to puzzle why it strayed off the beaten path of MiFID in the way that it has. I think that it was for an important point, and I know that the Minister does not have the opportunity to come back.

I hope that the Minister takes away the intensity of feeling that those of us who were posted away to Committee Room 3 to look at some of these difficult and brain-tingling matters are getting with a greater and greater sense of urgency. This country is not recognising some of the real confrontation that is being borne in upon us by having adopted what I understand to be a negligible position—that of the head in the sand— where we say that these things can be decided by others, but we must progress and let them progress in the way they so wish, and it will not have an effect on us.

I will finish on this one point about Mr Bergmann, who was referred to several times this evening. It was quite clear to us that the defence that the Commission mounts—that this is wholly legitimate under subsidiarity and in other ways because it does not infringe the single market—is simply wrong. It does infringe the single market, and it infringes not the gang of 11 who are going forward, but the gang of 16, who are not participating. If we as the UK are not alert to that and if we are not very careful, we will lose our goose that lays a golden egg. In losing that golden egg of the City of London, we will lose it not just for the United Kingdom: we will also lose it for the European Union. That is why we must take such care. We are in conversation with the FST, Greg Clark, and I was in conversation with David Lidington this afternoon. I hope that the noble Lord, Lord Newby, will take it upon himself, with his deep knowledge of the City of London that he has demonstrated so often, to express the urgency and concern that has caused this debate on the narrow subject of MiFID to spill over into the other dossiers that are before us which cool and chill our hearts.

Motion agreed.

Taxation: Tax Collection

Lord Harrison Excerpts

Tuesday 5th February 2013 Lords Chamber

Asked by

[Lord Harrison]

To ask Her Majesty’s Government whether they have sufficient resources and staff in place for the full collection of tax.

[Lord Newby]

My Lords, this Government are investing in HMRC so that it will collect £9 billion a year more from its compliance activities by 2014-15 than at the start of this Parliament. The number of HMRC staff in compliance roles fell under the previous Government. Under this Government there will be around 2,500 more staff tackling tax avoidance and evasion.

[Lord Harrison]

My Lords, given that the Public Accounts Committee found that £1.1 billion was lost to the Treasury by foolishly cutting 3,300 staff from the compliance and enforcement unit of HMRC, can the Minister give us a greater assurance that that folly will not be repeated, especially with the new comprehensive policy that has been announced on offshore tax evasion? Will the Minister say when that will be published, what its focus will be, and whether that, too, will be properly resourced to do the job that is required of it?

[Lord Newby]

My Lords, it is important to recognise that the big cut in staff in HMRC took place before 2010. The number of staff fell by 25,000, and 10,000 staff working in compliance roles—that is, the very staff about whom the noble Lord is concerned—were cut during that period. We have added 2,500 staff in that area since we came in and they are generating a very significant amount of additional funding. On international tax evasion and avoidance work, a whole raft of initiatives is under way. There is a new unit within HMRC and we are working very closely with the OECD. I am sure that a number of further announcements in this area will be made during this calendar year.

European Banking Union: EUC Report

Lord Harrison Excerpts

Thursday 24th January 2013 Lords Chamber

Moved By

[Lord Harrison]

That this House takes note of the Report of the European Union Committee on the European Banking Union: Key issues and challenges (7th Report, HL Paper 88).

[Lord Harrison]

My Lords, some 20 years ago I led a vote in the European Parliament for the Monetary Sub-Committee, and included among my group was Pierre Moscovici, who is now the Finance Minister of France. It was a vote to approve Alexandre Lamfalussy as the new president of the European Monetary Institute, the forerunner of the European Central Bank, of which Mario Draghi is now the distinguished head. In my middle-aged enthusiasm, I then issued a press release that declared, “Europe’s new bank manager elected”. It met with a quiet voice in the world urbi et orbi.

Now, however, I am delighted to have the opportunity to introduce this debate on the report of the European Union Committee entitled European Banking Union: Key Issues and Challenges, and I wonder whether I was right. The report is based on work undertaken by the EU Sub-Committee on Economic and Financial Affairs, which I chair. The report was published in December, immediately before the banking union proposals were discussed at the European Council, and we were pleased to have the opportunity to inform the Government of our views as negotiations commenced. I thank Greg Clark, the Financial Secretary to the Treasury, not only for listening to us beforehand but for reporting to us immediately afterwards.

Our report was based on evidence received from a stellar cast, including representatives of the banking sector, economic experts, think tanks, the German ambassador to the UK, the vice-president of the European Central Bank and the Financial Secretary to the Treasury. On a visit to Brussels in October, the committee also met with senior MEPs, the chairman of the European Banking Authority, the European Commissioner for Internal Market and Services, Michel Barnier, and the President of the European Council, Herman Van Rompuy. The committee was also assisted in its work by Professor Eilis Ferran of the University of Cambridge, who acted as our specialist adviser for the inquiry. I thank all our witnesses, who contributed so richly to the inquiry, as well as Stuart Stoner, our clerk, and Rose Crabtree, the policy adviser to the committee.

One of the characteristics of the euro area crisis has been its oscillation between periods of relative calm and moments of febrile crisis. One such crisis happened in June last year. Concerns over the systemic link between struggling banks and indebted sovereign states came to a head. Spanish 10-year bond yields had reached a euro-era high and recapitalisation of its seriously indebted banking sector seemed inevitable.

European leaders, so often criticised during the crisis for their lamentable lumbering tardiness, at last sprang into action. At that month’s European summit, they agreed that the European stability mechanism rescue fund could recapitalise banks directly rather than via sovereign states. The only proviso was that an effective single supervisory mechanism of euro area banks had to have been established under the authority of the European Central Bank. At the same time, President Van Rompuy was asked to take forward,

“a specific and time-bound road map for the achievement of a genuine Economic and Monetary Union”.

That was the genesis of the so-called “banking union”, by which European leaders sought to restore much-needed credibility and stability to the euro area banking system.

The single supervisory mechanism proposals were duly published by the Commission in September, but the further steps towards banking union initially envisaged by President Van Rompuy—a single European resolution scheme and, in particular, a single European deposit insurance scheme—were quickly put on the back burner because of the fears of Germany and some others that they would mark a too pronounced step towards debt mutualisation. Our committee expressed regret that the Van Rompuy model was so quickly undermined.

In the light of this change, our report necessarily focused on the first element of banking union—the single supervisory mechanism. We sought to address a number of the key questions. Was it appropriate for the European Central Bank to take on a supervisory role? What would be the impact on its governance structure? Which banks should be directly supervised by the ECB? What accountability mechanisms were needed? What would be the impact on non-euro area member states, and when could such reforms be realistically and reasonably introduced?

Our conclusions were as follows. We noted the worldwide trends, including here in the UK, towards combining supervisory and monetary policy functions in one institution. In our view, giving supervisory responsibility to the ECB was indeed the only viable option. Yet this would create a significant concentration of power in one institution. Again, it was vital to ensure that there was no conflict of interest between the ECB’s twin tasks of exercising monetary policy and the supervision of the banks. The ECB needed to be fully accountable for its supervisory role, including to national Parliaments, and I am pleased that the vice-president of the ECB came before my committee to report on the proposals.

We believed that it was unrealistic to expect the ECB to engage in intensive supervision of all 6,000 euro area banks, yet the crisis has demonstrated that it is not just the largest institutions that can pose a systemic risk, as exemplified by Northern Rock in this country. We concluded that, while the ECB would concentrate on the day-to-day supervision of only the largest and most systemically important banks, it should retain the power quickly to assume responsibility for the supervision of smaller banks as and when required. However, this model could work only if there was close and positive co-operation between the ECB and national supervisors, and I would ask the Minister whether he could comment on that necessity.

One of the key features of the banking union proposal is that non-euro area member states should have the right to participate, but this presented significant dilemmas. How could non-euro area participating member states enjoy equality with euro area member states within the ECB decision-making process, and how would all this impact on those member states that wished to remain outside the banking union, of which of course the United Kingdom has declared through the Prime Minister that it will be one? He has said that,

“you do not need a banking union because you have a single market; you need it because you have a single currency—so Britain should not, and will not, be part of that banking union”.—[Official Report, Commons, 22/10/12; col. 699.]

Yet banking union has profound implications for the UK. We were particularly concerned about the impact on the European Banking Authority, the regulatory agency tasked with developing the single rulebook for financial services throughout the European Union. We feared that a dominant ECB could undermine the EBA’s authority in defending the EU-27 and the single market—in particular, given the likelihood that banking union participants would caucus around a single position advocated by the ECB inside the European Banking Authority’s decision-making process. This raised the spectre of the United Kingdom being consistently outvoted in setting the rules by which the financial sector operates. Given this threat of marginalisation, we urged the Government to do all that was necessary to ensure that the City of London’s leading position was not imperilled and that the integrity of the single market was not compromised. At the very least, the European Banking Authority’s voting arrangements had to ensure that it was able to defend the interests of the single market as a whole.

The Commission’s proposals as originally drafted failed sufficiently to address several of these concerns and it was clear that it had been constrained in its drafting by the need to avoid treaty change. The original plan had been to reach agreement on the package by the end of 2012. In light of the weakness of the legislation, this struck us as wholly unrealistic. Even the revised aim of agreeing a legislative framework by the end of 2012 seemed extremely ambitious.

We were therefore pleasantly surprised when the news broke after our report was published that a deal had been struck, which, the Government assure us, “will preserve the EU’s single market and protect the interests of those remaining outside the banking union”. The commitment to break the vicious cycle between banks and sovereigns was reasserted, as was the intention to bring forward in 2013 a single resolution mechanism proposal. A “double majority voting” principle was agreed whereby decisions in the EBA will be subject to a majority of both participating and non-participating member states in the banking union. The Government have also pointed to the so-called “non-discrimination clause”, which, they argue, “guards against any restriction of the UK’s role as a financial centre in the single market”. That is all very promising but, as ever, the devil is in the detail, and I would ask the Minister to respond to a number of questions.

In recent days, Mario Draghi, Christine Lagarde and Barroso himself have all suggested that the euro area may have turned a corner and the worst of the crisis may be over. Yet we have seen in the past that when the crisis appears to ease, the foot can all too easily come off the accelerator of improved supervision. Last week the Financial Times reported that the commitment in Brussels to break the vicious circle between banks and sovereigns and to take forward proposals for the single resolution mechanism may be weakening. Can the Minister confirm this? What update can he give us on the deal agreed in December? Is everything on track? When will the single supervisory mechanism be operational? What is the likelihood of the further steps towards banking union coming to fruition in the near future?

I also have some questions on the detail of the December deal. The new voting rules in the EBA will be subject to a review only if and when four member states remain outside the banking union. What update can the Minister give us on the position of the other nine non-euro area member states? How likely is it that they will choose to participate, thus triggering a review of the voting mechanisms? What will the UK do in such an eventuality? How does the Minister respond to the scepticism about the double-voting mechanism expressed to my committee only last week by Martin Wolf, chief economics commentator at the Financial Times? In his view:

“The idea that the entire eurozone could agree that this is how we are going to handle the banking industry in order to preserve the currency union and the UK then pipes up and says, ‘We do not like it because it will affect the City’ … in polite terms they are going to say, ‘Go away’”.

The consequences of all this for the UK will be profound, and we warn the Government against undue complacency. Pleased with the deal they may be, but they must continue to be vigilant to the risk of these steps towards integration for the single market and the UK’s place within it.

Finally, it would be remiss of me not to comment on the Prime Minister’s speech yesterday. He said that the single market was the core and the “essential foundation” of the European Union—which I very much agree with—and that Britain must remain at the heart of the single market. He also cited the December deal on banking union as illustrative of the sort of safeguard needed to ensure that the UK’s access to the single market is not compromised.

However, the question of a referendum, which has been dangled in front of us, worries me considerably. In the case of the 1975 referendum, the then Prime Minister, Harold Wilson, asked the then Foreign Secretary, James Callaghan, to go round and get the assurances of other capitals in the community that that was all right. The second problem is that referendums are a newfangled way of dealing with the assessment of public opinion in this country. It begins to take away from the tried and true parliamentary approach that we have had for so long in this country—an example of which is the very report that is before your Lordships this evening—when those who have some expertise assess the matter to be presented before the British people. We need to be very cautious about changing what are tried and true parliamentary approaches.

I look forward to the speeches that are to come and I am sure that all sides of the House look forward to the reply of the noble Lord, Lord Newby. I beg to move.

--- Later in debate ---

[Lord Harrison]

My Lords, I thank all Members who have spoken this evening in what I think has been a stimulating and enlightening debate. I am very grateful to the Minister for promising to write to us on those points that he has not had time to take up. At one point I began to worry when I was accused of being “genial” and “courteous”; but, on a lighter note, I must say that I began to think of the power and persuasiveness of our report when one noted Eurosceptic wandered into the Chamber and, so persuaded by what he heard, came and joined the Labour Benches.

I will finish on two comments made by the noble Baroness, Lady Falkner, which the noble Lord, Lord Liddle, identified. The first is the, perhaps, paucity of contributions from the distaff side of the House. I can tell the noble Baroness that the austerity seminar that our committee is holding next week will feature Vicky Pryce, not only to speak on financial services but also to report on Greece. The other point made by the noble Baroness that the noble Lord, Lord Liddle, identified, which is hugely important, is that these matters are not European; they are British and European. Every report we ever write has a large section on how the United Kingdom will be affected by what is going on within the European Union. It is time that we in this House took these matters seriously and that we had debates at appropriate times for all Members of the House to respond. I close with that hope and thank everyone for contributing tonight.

Motion agreed.

Financial Services Bill

Lord Harrison Excerpts

Monday 15th October 2012 Lords Chamber

[Lord Peston]

The Minister said that that was a very good idea. I cannot imagine why it is such a good idea. What business is it of the European Union what the taxpayers of an individual country decide they will spend on compensating people who have lost money because of the misbehaviour of banks? Why is it a European issue? I do not want to pursue this because it is a European question that is broader than what the Bill is about. I merely made the rather tart remark that occasionally the overpaid officials in Brussels have to justify their overpaid existence by finding things to do. Otherwise, they might eventually be asked to retire—although I might say that then they get incredibly good compensation arrangements. I was just being my normal tart, nasty self.

[Lord Harrison]

My Lords, I came to listen to the Statement. However, it may be of interest to some of my colleagues that we on Sub-Committee A of your Lordships’ European Union economic and finance committee are studying the banking union proposals and the recovery and resolution directive. The deposit guarantee scheme is an integral part of Herman Van Rompuy’s proposals, and of the response that we have got from the four presidents. That is the reason I am here today. I was slightly taken aback when my noble friend Lord Peston mentioned charities. As I understand it, the deposit guarantee scheme is a separate matter. The proposal has yet to mature. This will be done in Brussels over the coming weeks and months. I do not know whether that helps.

[Lord Newby]

My Lords, it is extremely helpful—and it will be done over the coming months. First, it is a single-market measure, not a eurozone measure. The aim is to establish a level playing field for consumers across the EU that is funded not by the state but by the financial services sector wherever the scheme is in operation. This means that as people move around the EU, as they increasingly do, they will know that they will get broadly the same degree of consumer protection wherever they are. That is a good idea, not a bad one. However, whether it is a good or a bad idea, this is the framework within which the deposit protection level operates in the EU, and therefore in the UK. Within the discussions about the directive that are going on at the moment, the level of compensation and the bodies that are eligible for it are being considered.

I say to the noble Baroness that we have listened very carefully to her concerns, and that the Government will consider whether it is appropriate to review the eligible limit to charities in the context of our overall negotiating priorities on this proposal. This is just one of a number of issues that we are considering in the round and as part of the negotiating posture we will take up. I assure her that we will give careful consideration to whether this is the way of achieving what she wants to achieve.

I move on to Amendment 187CA in the name of the noble Lord, Lord Hodgson of Astley Abbotts. This amendment would amend FiSMA to require the regulators to ensure that levies imposed on a particular class of firm reflect the claims made, or likely to be made, on that class. Before I address this amendment directly I would like to use this opportunity to draw noble Lords’ attention to the fact that a draft of the statutory instrument allocating rule-making responsibility for the FSCS between the two regulators will be published on the Treasury’s website this week as part of a broader consultation on draft secondary legislation required by the Bill. I will place copies of this paper in the Library of the House.

I am not entirely convinced by the case for Amendment 187CA. FiSMA already requires the regulators, as the noble Lord, Lord Hodgson, said, to take account of the desirability of ensuring that the amount of levies imposed on a particular class reflects, so far as practicable, the amount of claims made, or likely to be made, in respect of that class. Ensuring that classes are levied in a way that fully reflects claims, or likely claims, as proposed in the amendment is likely to be an impractical and disproportionate approach to evaluating how the fund should be funded. The current drafting in FiSMA reflects my noble friend’s concern but also leaves sufficient flexibility for the expert regulators to use their judgment.

The FSA’s recent consultation document on its funding model in the new regulatory system gives a good indication of the complexity involved in determining the funding model of the FSCS. I have it here, and its 100-odd pages demonstrate that this issue is somewhat more complex than might immediately be apparent. It demonstrates, among other things, how difficult it would be to ensure, in any strict sense, that levies fully reflect claims, or likely claims, on a particular class while delivering a fair and equitable scheme.

I suggest to the noble Baroness that the correct way to address her concerns is to contribute to the consultation on this document, which is open until 25 October. On that basis I would ask her to withdraw her amendment.

Eurozone

Lord Harrison Excerpts

Monday 9th July 2012 Lords Chamber

[Lord Sassoon]

My Lords, as we have discussed many times, 40% of our exports go to the eurozone. It is our most important trading bloc. The priority has to be to strengthen the eurozone countries. That is what they want to do and that is what we want to see them do and we must help them to achieve that.

[Lord Harrison]

The United Kingdom often blames the eurozone for the problems with the economy as it is being run by Her Majesty’s Government here. Why do we not do more to help? Does the noble Lord, Lord Sassoon, agree with Mr David Lidington, who stated in replying to the Select Committee’s interrogation last week that he welcomed more Europe if it meant the implementation of the full ambit of the single European market?

[Lord Sassoon]

On the question asked by the noble Lord, Lord Harrison, about the cause of the weaker growth in this country, the Office for Budget Responsibility and other commentators have identified the eurozone as a major source of threat to our growth and of weakness. Significant parts of the eurozone are plainly now in recession. I agree with my right honourable friend David Lidington about the need for more Europe in many areas including, particularly, more completion of the single market. That is why it is important that the four-presidency proposal referred to in the Council conclusions at the end of June will include,

“concrete proposals on preserving the … integrity of the Single Market”.

That is critical, as are the many growth initiatives included in those conclusions.

European Union Committee: Multiannual Financial Framework

Lord Harrison Excerpts

Tuesday 19th June 2012 Grand Committee

[Lord Harrison]

My Lords, it is always a great pleasure to follow the noble Lord, Lord Bowness, and to do so here in the Moses Room as we plot a path to the promised land of growth, jobs and prosperity in the European Union through the agency of the reports before us today on the European Union financial framework 2014-20. I am very grateful to our new chairman for introducing it so expeditiously. We wish him well in his new tasks and duties.

The Sub-Committee on Economic and Financial Affairs, which I chair, focused in particular on the issues on cohesion policy set out in Chapter 3 of the report. To aid our scrutiny of the various cohesion fund proposals, and in addition to the work undertaken by the Select Committee as a whole, the sub-committee took evidence in December from the expert Professor John Bachtler, Professor of European Policy Studies at the University of Strathclyde. We are enormously grateful to him for his assistance.

Cohesion policy encompasses European Union action to address economic and social imbalances and to help less favoured regions to compete within the vital single market. Cohesion funds form a substantial proportion of the MFF proposals: €336 billion, or 36.7% of the total, compared to 35.7% in the current MFF. Spending on cohesion policy is currently supported through three structural funds. The European regional development fund—ERDF—finances direct aid for investment in companies, infrastructure, financial instruments and technical assistance measures. The European Social Fund finances projects in the labour market that improve skills, social integration and access to employment opportunities. Both these funds are allocated on a regional basis. The cohesion fund finances developments in transport networks, environmental projects and energy and transport projects with environmental benefits, and is allocated at a national level.

The overall scale is determined by two factors: objectives and eligibility. In terms of objectives, the new cohesion policy architecture retains the overarching objectives of convergence, competitiveness and European territorial co-operation. However, the Commission has proposed a change to eligibility to introduce transition regions as an intermediate category between more developed—competitiveness—regions and less developed—convergence—regions. The cohesion fund will continue to support member states with a gross national income of less than 90% of the EU 27 average. As originally drafted, the Commission proposal was that the ERDF would be available to all three categories, but transition and more developed regions would be required to focus 80% of their ERDF funds on certain areas such as renewable energy and small business competitiveness and innovation. The ESF would be available to all three categories of regions, and the Commission proposed that at least 25% of the overall cohesion funding must be committed to it, with more in more developed and transition regions. In each member state, the Commission proposed that at least 20% of the total ESF resources should be allocated to promoting social inclusion and combating poverty. I am well aware that there has been some progress in negotiations in relation to these requirements, so perhaps the Minister would be able to provide us with an update on these discussions.

There are two divergent views regarding cohesion policy’s aims. Some favour a pan-European development programme, while others see it as an explicitly redistributive tool. The transition regions proposal would allow regions in richer member states to remain eligible for structural funds including, in the UK, such regions as Cornwall, Devon, South Yorkshire and Merseyside. I have a past strong interest as Member of the European Parliament for the second largest authority in Merseyside and I invite colleagues to see the transformation that those European funds have effected in the Merseyside region.

The Government have argued that cohesion funding should be restricted to poorer member states after 2020. However, the Government accept that, for 2014-20, all regions should be receiving funding. The aim of EU cohesion policy is,

“reducing disparities between the levels of development of the various regions and the backwardness of the least favoured regions”.

The committee concluded that the new transition region should be supported, provided that it allowed for a more appropriate targeting of funding. Indeed, we found that there was a strong argument for cohesion policy being targeted at poorer member states and for it to operate at a pan-European level. Our conclusion was that, while the European Social Fund is of benefit throughout the Union, other funds, such as the European regional development fund, should be further targeted at poorer member states with a view to withdrawing it from better-off member states in the long term.

The Commission has been clear that it views cohesion policy as a primary vehicle for achieving the Europe 2020 objectives, although our previous report on the EU financial framework from 2014 noted the difficulty in turning cohesion policy into an all-purpose instrument for delivering Europe 2020. Professor Bachtler told us that there was a “tension” between treating cohesion policy as a “delivery agent” of Europe 2020 and its “traditional mission” of “reducing regional disparities”. However, the Government were of the view that targeting Europe 2020 would still mean progress in reducing regional disparities. The committee recognised the importance of Europe 2020 objectives, many of which dovetail with the traditional mission of cohesion policy. However, we stressed that cohesion policy is not merely a delivery tool for Europe 2020 and warned against its core aim being undermined by an unremitting focus on the Europe 2020 agenda. We concluded that the distinct identity and fundamental objective of cohesion, as enshrined in Article 158 of the Lisbon treaty, must be safeguarded. We also stressed that, as an expression of EU solidarity, cohesion policy is one of the most important elements of the MFF in improving public awareness of European Union action.

One of the key questions that we considered was whether, in the current economic climate, a reduction in cohesion funding would be justified, or whether spending on cohesion policy should be encouraged because of its potential to boost economic growth. Professor Bachtler emphasised the importance of cohesion policy at a time of austerity, when national budgets for regional development might be cut back. Although the Commission was keen to retain cohesion as a well funded policy area—albeit that funding had been held level in cash terms—the Government argued that the cohesion budget “should fall significantly” from the proposed levels.

The committee concluded that the economic context had strengthened its belief that cohesion policy should play a more defined role in helping member states in financial difficulties to address structural weaknesses and competitiveness challenges and that it can act as a necessary counterbalance to the effects of austerity measures. We supported the overall envelope proposed for cohesion policy, since it has an important role to play in improving growth and, in the context of a rigid seven-year framework, it is vital that funding remains available to meet changes in the economic climate.

Cohesion policy has been criticised over the effectiveness of spending and for the complexity of its management and implementation. The Commission has sought to address this through what Professor Bachtler described as,

“more concentration, more co-ordination and greater results orientation”.

The Commission has proposed a common strategic framework to improve synergies between the various funds through thematic concentration—the targeting of funds on specific chosen objectives. We agree that the Commission’s proposals represent a much needed attempt to improve the impact and effectiveness of European Union funds and to encourage a more strategic framework. We also support the proposed common strategic framework, although we are aware, from recent correspondence with the Government, of concerns over the precise form that it will take. It would be useful if the Minister provided an update on these discussions. We also recognise the case for thematic concentration on a smaller number of priorities, but remain to be convinced that the Commission’s proposals ensure sufficient flexibility for regions and local authorities to focus investment on their own development needs. I am aware that amendments have been made to the provisions on thematic concentration. Is the Minister content that these provide the necessary flexibility?

The Commission also proposes conditionalities that would place more restrictions on funding allocations. The Government have expressed support for ex ante conditionality, such as the need for compliance with EU regulations prior to funding. The committee endorsed the Commission’s proposals for conditionalities, although we had concerns about the appropriateness of macroeconomic conditionality tools, since withdrawing EU funding from an ailing economy might in some circumstances make matters worse. What is the Minister’s response to these concerns, particularly in the context of the continuing euro area crisis?

The Commission also proposes the introduction of a performance reserve, whereby 5% of the cohesion budget will be set aside and allocated to member states and regions whose programmes have met their targets in a mid-term review. The Government expressed concerns as to whether such a reserve would reward wealthier member states at the expense of poorer ones. To what extent does the Minister believe that the Commission has addressed the Government’s concerns? For our part, we expressed the view that a performance reserve could be beneficial if implemented correctly. However, we found that the proposed 2019 date for the allocation of funding would be too late to have any meaningful impact and we called for a final review and for the allocation of funds to be brought forward. In that respect, I also agree with colleagues who have already spoken about the proposed seven-year period and the five-year period that the committee has supported. Is it the Minister’s understanding that there will be any kind of break within the seven-year period to make a reassessment of the needs of the European Union—for instance, if we needed to instil more growth at that stage, as Europe comes out of its current doldrums?

The committee also heard from the Federal Trust director, Brendan Donnelly, about the wholesale examination of the budget and zero-based budgeting. I know that there has been some sympathy in the Government about this. Mr Donnelly suggested that that might not lead to an increase in the overall budget but might even lead to a decrease. I invite the Minister to talk about that. If you had such a budget, could you then concentrate better on ensuring European Union added value as an element of that?

I ask the Minister about something that has troubled the committee when we have been looking at the budgets so far provided, as we do on an annual basis, in the 2007-13 period. Repeatedly, the Government talk about their aspiration and ambition to make savings in those budgets as they develop. It would be good to have some evidence from 2010-11, for instance, of where savings were actually made in the European budget as a result of the Government pressing the other 26 member states and ensuring that they had allies to do so.

Finally, I invite the Minister to say a little more, within the context of this budget, about how we help small businesses. There are real opportunities to get growth again through small businesses. Will he understand that the essence of helping small businesses is the ambition, which has been expressed by this Government but not always carried out, of ensuring that the single market is developed, completed and made active for those smallest of businesses that wish to ply their wares and services within the European Union as a whole?