Genuine Economic and Monetary Union (EUC Report)

Earl of Caithness Excerpts

Wednesday 2nd July 2014 Grand Committee

[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.

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. 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.