The future of the European Union: UK Government policy · 2013. 6. 10. · The future of the...

HC 87-II [Incorporating HC 115-i-iv, from Session 2012-13

Published on 11 June 2013 by authority of the House of Commons London: The Stationery Office Limited

£22.00

House of Commons

Foreign Affairs Committee

The future of the European Union: UK Government policy

First Report of Session 2013–14

Volume II

Volume II: Oral and Written evidence

Ordered by the House of Commons to be printed 21 May 2013

The Foreign Affairs Committee

The Foreign Affairs Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Foreign and Commonwealth Office and its associated agencies.

Current membership

Richard Ottaway (Conservative, Croydon South) (Chair) Rt Hon Bob Ainsworth (Labour, Coventry North East) Mr John Baron (Conservative, Basildon and Billericay) Rt Hon Sir Menzies Campbell (Liberal Democrat, North East Fife) Rt Hon Ann Clwyd (Labour, Cynon Valley) Mike Gapes (Labour/Co-op, Ilford South) Mark Hendrick (Labour/Co-op, Preston Sandra Osborne (Labour, Ayr, Carrick and Cumnock) Andrew Rosindell (Conservative, Romford) Mr Frank Roy (Labour, Motherwell and Wishaw) Rt Hon Sir John Stanley (Conservative, Tonbridge and Malling) Rory Stewart (Conservative, Penrith and The Border)

The following Members were also members of the Committee during the parliament: Rt Hon Bob Ainsworth (Labour, Coventry North East) Emma Reynolds (Labour, Wolverhampton North East) Mr Dave Watts (Labour, St Helens North)

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The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including news items) are on the internet at www.parliament.uk/facom. A list of Reports of the Committee in the present Parliament is at the front of this volume.

Committee staff

The current staff of the Committee are Kenneth Fox (Clerk), Peter McGrath (Second Clerk), Zoe Oliver-Watts (Senior Committee Specialist), Dr Brigid Fowler (Committee Specialist), Louise Glen (Senior Committee Assistant), Vanessa Hallinan (Committee Assistant), and Alex Paterson (Media Officer).

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All correspondence should be addressed to the Clerk of the Foreign Affairs Committee, House of Commons, London SW1A 0AA. The telephone number for general enquiries is 020 7219 6105; the Committee’s email address is [email protected].


Witnesses

Tuesday 26 June 2012 Page

Sir Howard Davies, Professor of Practice, Paris Institute of Political Studies Ev 1

Tuesday 10 July 2012

Charles Grant, Director, Centre for European Reform Ev 10

Mats Persson, Director, Open Europe Ev 15

Michiel van Hulten, Independent consultant and former MEP Ev 20

Tuesday 11 September 2012

Professor Patrick Minford CBE, Professor of Applied Economics, Cardiff Business School Ev 26

Wednesday 6 February 2013

Rt Hon William Hague MP, First Secretary of State and Secretary of State for Foreign and Commonwealth Affairs, Simon Manley CMG, Director, Europe, Foreign and Commonwealth Office, and Sir Jon Cunliffe CB, UK Permanent Representative to the EU Ev 34


List of written evidence 1 Dr Jóhanna Jónsdóttir, European Free Trade Association (EFTA) Secretariat Ev 51

2 Mrs Anne Palmer, JP (retired) Ev 55

3 Dr Martyn Bond, Royal Holloway University of London Ev 57

4 Sir Colin Budd KCMG Ev 60

5 Jean-Claude Piris Ev 63

6 Sir Michael Franklin KCB, CMG Ev 66

7 The Church of England, The Archbishops’ Council Ev 67

8 Professor Clive H. Church, Dr Paolo Dardanelli and Sean Mueller, Centre for Swiss Politics, University of Kent Ev 70

9 Civitatis International Ev 74

10 Graham Avery CMG Ev 77

11 Foreign and Commonwealth Office Ev 79; 83; 85

12 Nigel Farage MEP on behalf of the UK Independence Party (UKIP) Ev 99

13 Scotch Whisky Association (SWA) Ev 103

14 Liberal Democrat European Parliamentary Party Ev 107

15 Professor Michael Dougan and Dr Michael Gordon, Liverpool Law School, University of Liverpool Ev 110; 113

16 Open Europe Ev 114

17 Ruth Lea, Arbuthnot Banking Group Ev 120

18 TheCityUK Ev 123

19 Professor Richard G. Whitman, University of Kent and Chatham House, and Thomas Raines, Chatham House Ev 126

20 Professor René Schwok and Cenni Najy, University of Geneva Ev 128

21 Liberal Democrat Parliamentary Party Committee on International Affairs Ev 135

22 Professor Richard Rose FBA, University of Strathclyde and European University Institute Ev 143

23 Professor David Phinnemore, Queen’s University Belfast Ev 147

24 Dr Robin Niblett, Director, Chatham House Ev 150

25 Brendan Donnelly, Director, Federal Trust Ev 154

26 European Movement Ev 156

27 Maurice Fraser, European Institute, London School of Economics and Political Science (LSE) and Chatham House Ev 157

28 Nucleus Ev 161

29 Sir Peter Marshall KCMG, CVO Ev 165; 170

30 Professor Pauline Schnapper, Sorbonne Nouvelle University, Paris Ev 172

31 Business for New Europe (BNE) Ev 173

32 Lord Howell of Guildford Ev 177

33 Frank Vibert, Department of Government, London School of Economics and Political Science (LSE) Ev 180

34 Dr Simon Usherwood, School of Politics, University of Surrey Ev 184

35 Erna Hjaltested, European Free Trade Association (EFTA) Secretariat Ev 185

36 Dr Richard Corbett, Member of the Cabinet of Herman Van Rompuy, President of the European Council Ev 185


37 HE Laetitia van den Assum, Ambassador of the Kingdom of the Netherlands Ev 189

38 VoteWatch Europe Ev 189

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Foreign Affairs Committee: Evidence Ev 1

Oral evidenceTaken before the Foreign Affairs Committee

on Tuesday 26 June 2012

Members present:

Richard Ottaway (Chair)

Bob AinsworthMr John BaronSir Menzies CampbellAnn ClwydMike Gapes

________________

Examination of Witness

Witness: Sir Howard Davies, Professor of Practice, Paris Institute of Political Studies, gave evidence.

Q1 Chair: Sir Howard, welcome. Thank you verymuch for coming along, it is very much appreciated.Members of the public, we are now switching fromour report on the Commonwealth to our first evidencesession for the inquiry into the future of the UKGovernment’s European Union policy. The witness isSir Howard Davies, who has huge experience in UKeconomic policy and the international financial sector.Sir Howard, may I start proceedings with a fairlybroad question? What do you think should happen, inso far as the Government’s relations with the EU areconcerned, and what do you think will happen?Sir Howard Davies: Gosh, I thought I was talkingabout the Commonwealth. I had better change tack!I begin, Chair, by thanking you for the invitation tocome and by getting any statements of conflict ofinterest out of the way. I am advertised as Professorof Sciences Po, which is exactly what I do, and I teachcourses on financial regulation and central banking. Iam also a non-executive director of the Prudential andof Morgan Stanley in New York, and I am an adviserto the Government of Singapore InvestmentCorporation and to the Chinese banking and securitiesregulators—but I do not speak for any of them, ofcourse.As far as what I think should happen, my view—coming at this from the perspective of someone whohas been involved primarily in the financial sector inrecent years—is, I hope, that we can remain a fullmember of the single market, because that is in ournational interest. I fear that if we were not, we couldsee quite a lot of businesses choose to put themselvessomewhere else. However, I do not think that if weare not in the euro we should take part in what isbeing called a banking union—we might come on totalk about what that means—because that bankingunion does arise from the tensions in the eurozonein particular, which, while they affect us, we are notcentrally engaged in. I think it will be quite difficultto achieve continued full membership of the singlefinancial market without any discrimination against usif we do not move towards the banking union. It willrequire considerable skill in negotiating that. That iswhat I hope will happen.As to what I think will happen, well, I think that willhappen, but it will be quite difficult, because it

Mark HendrickAndrew RosindellMr Frank RoySir John StanleyRory Stewart

involves some complicated balancing acts, and it willrequire the Government to be prepared to facilitatemoves by the rest of the eurozone that we might notwish to be engaged in. So it will require us to beconstructive in helping them to solve their problems,in return for remaining as associated as we can bewith the single market.

Q2 Chair: Thank you. You remember that all thisarose out of the December 2011 summit and theexercise of the veto, because Britain was not offeredthe safeguards that it requested from the EU. What isthe significance of these safeguards to Britain?Exactly how important are they to us? Is there anyroom for manoeuvre?Sir Howard Davies: If I might question slightly yourpremise, Chair, I am not sure that all this did arisebecause of what happened at the December summitactually. This is a long-running problem of a flawedstructure of the eurozone that is being worked out.When the eurozone was constructed, it was thoughtthat a monetary union could be established, with asingle currency and a single central bank, but withonly a light-touch fiscal union in the form of thestability and growth pact. For a while, in benigneconomic and financial conditions, that appeared tobe working. But, when stresses emerged—arising notoriginally from the eurozone—it became clear thatthere was a flaw at the heart of the single currencyzone in that there was no ability to transfer resourcesfrom the centre to the periphery and peripheralgovernments and their banks, which are locked in aloveless embrace to try to support each other withoutthe ability to draw on resources elsewhere. That is theunderlying dynamic.The December summit, which was an attempt to puttogether the outlines of a fiscal framework for thesingle currency, was one step along the way. At themoment, that does not look hugely significant. As forthe safeguards we asked for, interestingly, people didnot quite understand at the time in Europe where thiswas leading. Curiously, if you look back at thosesafeguards—I have read the letter the Chancellorwrote to you about it—actually we were then puttingin requests that were appropriate more to the bankingunion now. I do not think that many of our partners

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Ev 2 Foreign Affairs Committee: Evidence

26 June 2012 Sir Howard Davies

saw the logic of asking for these protections inrelation to the single financial market on the back ofa treaty about fiscal union. Those safeguards are morerelevant today when, this week as we understand it,they are talking about a banking union. Somethingalong those lines would be quite useful. We perhapshave not started our negotiation on this at the righttime or quite in the right way, but some of thesubstance of those safeguards is rather important.

Q3 Chair: Yes. The first one is unanimity and thetransfer of powers relating to the prudentialsupervision of credit institutions and other financialinstitutions or financial market participants. Do youthink that that was an unreasonable request?Sir Howard Davies: We are not going to get thatbecause there are various ways in which the eurozonecan construct a single European prudential supervisor,which we can have nothing to do with, frankly. If theydecide to go for the European Central Bank as theprudential supervisor, which is likely, you can extendarticle 127 of the Maastricht1 treaty quite easily tocover for it in prudential supervision. I am not awarethat we could do much about that.

Q4 Mr Baron: Sir Howard, welcome. Can I suggestto you that what has complicated the issue this timeround is that we have a recession that is adeleveraging recession rather than a destockingrecession—it has been built on debt. Although I agreewith you that the processes and safeguards were notput into place sufficiently well enough when the EUwas born, we all know that you cannot have monetaryunion without fiscal union. What seems to behappening here is that the eurozone leaders areshuffling the debt around the system between bankand Government, but no amount of shuffling canconceal or erode its scale. What really needs tohappen is for sweeping supply-side reforms to beintroduced that would create a better growthenvironment. That is the best way in the longerterm—the more sustainable way—of closing the gapbetween what governments earn and what they spend.Do you agree with that?Sir Howard Davies: I agree with that. The problem isthat we may not get to the long term if we do not dosome of the other things as well. Whatever packageemerges in the European Union, a programme ofsupply side reform, particularly in countries like Spainand Italy, is absolutely crucial.On your first point about shuffling the debt, you arecorrect to point to that, but the difficulty is that, unlesssome kind of additional capacity is brought intocountries like Spain and Italy, this pack of cards willultimately collapse. That is why some form ofmutually guaranteed borrowing is required. TheGermans have baulked at the idea of eurobonds, soanother sideways route into this is some kind ofbanking union, where you have mutual guaranteesbetween the deposit guarantee schemes of banks inEurope to create the comfort to avoid bank runs inthese countries, and some kind of resolution authoritythat allows central European institutions to lenddirectly to banks rather than via their government.1 Witness correction: Lisbon treaty intended

That is the bit that people are attempting to put inplace this week. It is a short-term crisis managementresponse, but I completely agree that, in the longerterm, it is the divergences in competitiveness that havecreated the major internal balance of payments crises,and those will require structural reform.

Q5 Mr Baron: Do you not agree, though, that anelement of time has been bought with the £1 trillion ofloans to the banks, but that what the markets urgentlyrequire is a very strong signal that the eurozone getsthe message about the need for greatercompetitiveness? At the moment, as we see withSpanish bond yields and so on, the feeling is, certainlyfrom the market’s point of view, that all these minisummits to save the euro—we must have had morethan 20 of them now—are nothing more than stickingplasters, and that you need seriously to send out asignal that you are going to address the structuralimbalances and the supply side need for reforms tokick-start a more growth-oriented response.Sir Howard Davies: I think that will help the moodmusic, but I don’t honestly think that it is what themarkets want. I think that what they want is someguarantee that if they keep their money in Spanish andItalian banks, they might get it back. Competitivenessreforms and supply side reforms in the long term arenot going to give them that assurance. What they arelooking for is a central European institution—probably the European stability mechanism—that putscapital into those banks directly and not via asovereign which itself is fiscally challenged.

Q6 Mark Hendrick: The last time we sat at a tabletogether, Sir Howard, was in 1998 when I was aMember of the European Parliament and its Economicand Monetary Affairs Committee. At the time, wetalked about the convergence criteria, which led to thestability and growth pact, which you have just saidwas a fairly light-touch approach to creating somestability. Do you think that if the stability and growthpact had been enforced strictly, with penalties, andthat if all the member states of the eurozone at thetime had been far more disciplined, the financial crisisand the eurozone crisis could have been avoided?Sir Howard Davies: I actually don’t think that. I thinkit would have been somewhat less extreme. On thedifferent countries in the eurozone and how they havegot into difficulty, you might argue that case inrelation to Greece, because it clearly did runextravagant deficits and conceal them, but it is hard toargue that case in relation to, for example, Ireland orSpain, where the leverage—the debt—was really inthe private sector and associated with a large propertyboom, which itself was fuelled by the fact that theythen had much lower interest rates than before, as aresult of joining the single currency. There, the fiscalstability and growth pact would have constrainedgovernment debt to some degree, but actually,government debt was not particularly the problem inSpain, and it certainly wasn’t the problem in Ireland,which had a surplus running up to the crisis.I think it was not the only point, so the need to addressthe financial sector issues is just as important as theneed to address the fiscal union. For example, the way

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in which Ireland and Spain should, in retrospect, havedealt with their problem was by increasing capitalrequirements on banks and restricting banks’ lendingto risky property development, because they clearlyhad a property bubble to a massive degree. That canbest be addressed by tightening up capitalrequirements in banks, rather than simply by interestrates. That is the macro-prudential mechanism thatpeople now talk about in the jargon.I think that we are going forward. You need to lookat fiscal reforms, but you also need to look at financialsector reforms, to allow different countries to be ableto respond to different financial circumstances wherethe single interest rate and single currency may affectthem in very different ways.

Q7 Chair: What was your sense of the reaction,particularly in the financial sector, to the use of theveto? Were financial institutions pleased? Were theyhorrified?Sir Howard Davies: I think they were quite nervousabout the implications because they see a continuedset of negotiations about the regulation of financialmarkets in Europe. On the whole, they think that theBritish Government and a few others of a liberalpersuasion—I mean small “l”, although, of course,also large “L” here—see the best guarantee of a pro-competition framework of regulation as one overwhich the British Government exercise a degree ofinfluence. Also, the British Government understandsfinancial markets because of the City of London. Sothey were nervous about whether the veto wouldresult in a diminution of British influence in thosedecisions. At the moment, it is a little bit early to saywhether it has or not, but that was the principalreaction.

Q8 Chair: You have just pre-empted my nextquestion. Do you think that we are in a stronger orweaker position? Do you think we have lost anyinfluence as a result of the use of the veto?Sir Howard Davies: We are probably not in a strongerposition; actually, it would be hard to argue that wewere because we asked for a set of assurances andplayed our cards and did not take any tricks. That doesnot seem a great way to start. As to whether it is likelyto be a long-running disadvantage, I have to say that,from where I currently sit and the people I currentlytalk to, that fuss in the middle of the night inDecember has almost vanished—receded into themists. There have been several summits and crisessince and there will be several more, too, so I do notthink that it is looming as large in the minds of otherdecision makers as perhaps it does here.

Q9 Mike Gapes: Nevertheless, the stability, co-ordination and governance treaty is due to come intoeffect on 1 January or earlier if 12 states ratify it.Within five years, the intention is that it should beincorporated as part of the European Union treaties.What is your view? Would that be a good or bad thingfor the UK? How should we respond to it at that time?Sir Howard Davies: I think more about what is goingto happen between now and Friday than I do aboutwhat is going to happen in five years’ time. To answer

your question, on its face I would say that it wouldnot be a good thing because I do not think there ismuch chance of our being in the eurozone within fiveyears and there would therefore have to be some othernegotiation about how we were going to be affectedby fiscal rules that were essentially constructed froma eurozone perspective and got folded into the treaty.We would then need another negotiation about howthey affected us and what kind of opt-out we wouldhave. I have to say, Mr Gapes, that at the moment theposition is not stable—neither the position within theeurozone nor the relationship between the UK and theeurozone. This is highly unstable and an awful lot ofthings will have to happen between now and whenthat five-year period arises.

Q10 Mike Gapes: Could this be the breaking pointfor the UK’s relationship with the rest of theEuropean Union?Sir Howard Davies: Yes, I think it could be. Youmight argue that the breaking point was when wedecided not to go into the euro, whereas everybodyelse pretty much is still a “pre-in”—they still believethat, or are saying that, they will go in, although wecould argue about the Swedes. That was a keydecision, and I have always thought that weunderestimated the integrationist dynamic created bythe single currency. It is not just another technicalthing such as another directive in the single market; itis a fundamental change that creates a mindset in theother countries that they will do what is necessary todefend the currency.If that means doing things that they would otherwisenot be very enthusiastic about—such as guaranteeingeach other’s banks, etcetera—they will do it, becausethe alternative looks much worse. An integrationist,“ever closer union” dynamic has been in play withinthe eurozone, going much more rapidly than it is forus. The question is whether we can negotiate a stablerelationship between the eurozone, with its tendencytowards increasing integration, and the UK retainingthe key elements of our relationship with the singlefinancial market. That should be our negotiatingobjective, I think.We are not in a particularly strong negotiatingposition, I would say, in trying to achieve that andtherefore a constructive approach, recognising theproblems of the eurozone, encouraging it to solvethem and saying that we are prepared to do what wecan and be as obliging as we can, short of writing acheque, seems to me to be the tone that we shouldbe adopting.

Q11 Mike Gapes: So, in essence, do you support theincorporation of this treaty into the EU treaties?Sir Howard Davies: I am not sure in what position Iwould be supporting that, or not, because I am not avoter in a eurozone country. I think it is logical.

Q12 Mike Gapes: Could I put it a different way?Some of our witnesses have suggested that we shouldvehemently oppose this because it is not in Britain’sinterest; others think it is necessary for the futurestability of the European Union. What side do youcome down on?




Sir Howard Davies: I think I would say that it isnecessary for the future stability of the eurozone,probably. I cannot quite see that the eurozone cancontinue to exist on the basis of intergovernmentalagreements. I think that will have to be anchored backinto the treaty. As for whether it is good for the UK,that depends on what kind of deal we can negotiatefor our relationship with the eurozone.

Q13 Sir John Stanley: Sir Howard, our Committee’sparticular focus is, of course, the Foreign andCommonwealth Office. I wonder if you could tell usyour view, given the European situation that we facetoday, of the imperatives, the policy priorities, as faras the Foreign Office is concerned in dealing with ourpresent position vis-à-vis the EU.Sir Howard Davies: Sir John, I left the Foreign Office36 years ago, so I may be slightly out of touch onquite how the Foreign Office operates. I think that theapproach needs to be to work with the grain of thosepeople who believe that there is advantage in UKmembership of the broader EU, even if the questionof our euro membership is deferred sine die. I thinkthat there are two important areas where that is true.First, there is the single market. There are countriesthat recognise the UK’s importance in having pushedforward a broadly free-trade, pro-competition and pro-competitiveness agenda. We tend to be supportive ofthat and are good at structural reform. As Mr Baronwas saying, that is going to be an important theme.Secondly, there is foreign and defence policy, where,bluntly, if the UK is not involved, there isn’t muchforeign and defence policy for the European Union.There are countries, including Germany, but also a lotof countries in the east, that regard it as really ratherimportant that we are kept on board for all thoseaspects of policy in which our weight and strategicinterests in the world are of great significance to theEuropean Union.So I think we need to keep working on those otherdossiers, which are positive for us and are where otherpeople see our value, and do the best we can in themuch more difficult areas where the construction ofthe eurozone demands integration that we do not wantor, indeed, need.

Q14 Sir Menzies Campbell: To pick up on that lastpoint, it is not the United Kingdom alone, but theUnited Kingdom together with France that givescredibility in the area of defence and security. Wouldyou agree that that argues for close co-operation withthe French on defence issues?Sir Howard Davies: Yes, I agree. Perhaps I waseliding a point in my answer to Sir John in the sensethat I think there are a lot of other countries in Europethat would not like European foreign and defencepolicy to be entirely driven by the French. A Franco-British approach, as the two countries with the abilityand the willingness to project military power, isregarded by others as being likely to produce a betteroutcome. But, yes, as far as we can agree with theFrench, I think we should do so.

Q15 Sir Menzies Campbell: That desirability ofAnglo-French co-operation on defence, which is

particularly felt by the Balkan countries—Estonia,Lithuania and Latvia—because of their—Sir Howard Davies: “Baltic,” you mean.Sir Menzies Campbell: “Baltic” is what I said.Sir Howard Davies: You said “Balkan.”Sir Menzies Campbell: I beg your pardon.Sir Howard Davies: These “Bal”s are difficult.

Q16 Sir Menzies Campbell: There is a world ofdifference because of their proximity to Russia andthe occasions when political pressure at least issometimes exerted against them.Sir Howard Davies: Yes, you are taking me a bit outof my comfort zone, Sir Ming. I would have thoughtthe Baltics attach very high importance to NATO andnot just to the European Union, although they see theirmembership of the European Union as anchoring themmore firmly in NATO than they otherwise would be.

Q17 Sir Menzies Campbell: Perhaps I could brieflytake you back to your comfort zone. You set out veryeloquently, if I may say so, what the UnitedKingdom’s objectives ought to be in relation to a moreintegrated eurozone. What do you think our chancesare of achieving that agreement which you referredto? What would be the consequences if we did notachieve it?Sir Howard Davies: I am a perennial optimist and Ithink that there are certainly people in the EuropeanCentral Bank, the single market directorates of theCommission and in the three European regulators whodo appreciate that the UK, with the presence of thefinancial markets in London and our understanding ofthese things, is a very important part of the debate.There have been areas where I know we have beenmaking constructive suggestions about how the futureregulation of the eurozone can be developed. As longas we adopt a constructive approach, there is areasonable chance that we can stay closely engaged. Ifwe get into a confrontational mode with the eurozone,where they perceive us as being obstructive of thingsthat they absolutely know they have to do in theirnational interests, then there is a risk that, in the singlemarket dimension, we find ourselves dealing with aeurozone bloc which has a guaranteed majority inapproving directives, improving relations andapproving the rule books below these directives whichthe three authorities are supposed to be producing. Wewould find ourselves in a position where we were notreally being debated with—because they discussed itall beforehand and voted in favour—and some ofthose rules could effectively be discriminatory. Wehave already seen the ECB suggesting that any eurotransactions with one leg in the eurozone must becleared by an entity in the eurozone. The UK is takingit to court, but it is one swallow that is anuncomfortable sign of summer. We could find a lotmore of that. If we did, the foreign-owned firms basedin London for their pan-European activity might welldecide to shift it. They might at least decide to shiftthe balance of their activity.Most of the American banks, and indeed the Swissand French banks, have the majority of their capitalmarkets activity based in London and they operatefrom here. If they thought that their trading based out




of their London offices was going to be discriminatedagainst because it had to be routed through a eurosubsidiary, etc, then at some point they might say:“We will have to reconsider where we put ourpeople”. There are firms already asking themselvesabout the viability of London. This question wasasked when the euro was constructed in the first placeand because of the single market dimension we wereroughly able to reassure people that it did not matter;they could do a lot of euro business and be based inLondon. If we get into a position where we are in aconfrontational mode and not influencing the future,then that balance of argument could shift. That wouldbe unfortunate, in my view.

Q18 Andrew Rosindell: Sir Howard, it is fascinatingto hear your reflections, especially when you spokeabout the dynamic for integration being much greaterthan people had expected. Do you therefore agree withme that Lady Thatcher’s warnings were right 20years ago?Sir Howard Davies: I am trying to recall all the thingsthat Lady Thatcher warned me about. Over a decadethere were many of them. It seems to me that in thiscountry we have never taken as seriously as we shouldthe phrase “ever-closer Union” in the original Treatyof Rome. Most people in other European countries doregard that as a general direction. They do not alwaysknow what they mean by it, but they regard it as asign that this is the way that Europe is going. Whenthe single currency was introduced, I remember beinginvolved in debates in the European MonetaryInstitute. At the time I was deputy governor of theBank of England, and I used to have to go to those,where we were constructing the single currency. Somepeople did say, “Surely we are going to need morefiscal co-ordination.” The answer typically given was,“Look, the way Europe proceeds is, we make a greatleap forward in one area and then we do all the thingsthat are necessary. We retrofit it with all the thingsthat you really should have done in the first place.”The single market was like that. It began as a kind ofaspiration for free trade, and that was followed by 142directives, which were not what people thought atthe time.What is now happening is that the European Union ishaving to retrofit the single currency with all the bitsthat arguably should have been put in place in the firstplace, but which create a new dynamic. That is theway Europe works. In this country, unfortunately, wetend not to see it that way. We tend to see it as a seriesof discrete transactions, where we look at each ofthem one by one and ask, “Does this make sense ornot?” In many places in Europe, people do not thinkin that way. I was at a conference in Poland the otherday. I talked about the eurozone, and I asked one ofthe Polish economic advisers what his view about itnow was. He said, “We still want to get on this boat,even if it is sinking.”

Q19 Andrew Rosindell: Based on that, as we havegot ourselves into such a muddle over membership ofthe EU, and as it has very little public support, isn’t ittime, as Lord Owen has suggested, that we change

our relationship with the EU to have a trade and co-operation grouping but without political union?Sir Howard Davies: I am afraid that I am a sort ofpractical fellow, and I always like to ask myself,“What do I actually mean by that? What is it that Iam going to end up with specifically?” My fear is thata dynamic that says, “Well, we’re off, unless we cando this, this and this”, might just result in a long, sadfarewell, where quite a lot of British economicinterests fall by the wayside.I am not very enthusiastic about these sorts of grandgestures. I certainly do not think that we are in aparticularly strong position, because at the moment,the preoccupation in the eurozone—you can see thisby the plethora of summits to which we are notinvited—is in solving that problem. If we come alongat that particular moment and say, “By the way,you’ve not got to solve just that problem, you’ve gotto solve our problem, because we want a completerenegotiation”, I think this is not going to be a goodplace to start.I do not disagree with the idea that it looks as if weare, to some degree, diverging, but I fear that thenotion that we have a good negotiating position at thispoint to renegotiate our relationship with the EU andend up in a place that is very happy for us is prettyrisky.

Q20 Rory Stewart: What do you think the timeframe will be for the moment at which we find theUK and Denmark being the only countries outside theeurozone? What is your best guess? Are we lookingat five years, 10 years or 20 years?Sir Howard Davies: My best guess would be areasonably long time frame. The inclination will be—certainly, the Central Bank will take this view—thatit will not be keen to admit any new members unlessthey meet absolutely, rigorously and strictly everypossible criterion. Whereas we know that in the past,the rules were bent to admit Italy, Belgium andGreece, that will not happen again. People willperceive the risks of that as being very severe. Thatwill mean that whatever new fiscal arrangementsemerge, people will have to meet those and show thatthey can meet them over a long period. Their currencyalignment will have to have been achieved for a longperiod and their banking systems will have to behunky-dory. My feeling is that it will be quite a longtime, so more in the 10-year or 20-year time framethan the five-year time frame.

Q21 Rory Stewart: Is Britain not facing almost atragic choice that, increasingly, as more countriesmove into the eurozone, the European Unionincreasingly looks like the eurozone? Being in the EUbut not in the eurozone will become an ever moreuncomfortable situation for us, for a whole series ofreasons. You have talked about banking reform, butsimply in terms of people’s attitudes in the eurozone,will they not increasingly begin to behave as thoughthe EU is the eurozone? What on earth do we do as acountry to make contingency plans for that situation?Sir Howard Davies: It is a reasonable hypothesis. Isuppose the counter-view that one might advance isthat, at the moment, there is quite a bit of variable




geometry in the European Union. There is Schengen,which some people are in and some are not. Some arein the eurozone, and some are not. There are free-movement things, some of which we are in whileother people are not, in relation to new members.There is defence co-operation, which is stronger insome areas. There is the notion of reinforced co-operation, which we are involved in, and some arenot.It is probably in our interests to try and argue that itis possible to construct a Europe of concentric circles,variable geometry or whatever, and that that is not justbecause we are terribly troublesome and would likean opt-out, but because it is a realistic way of runningEurope for a decent period to come. A lot of peoplewill not be able to get into these stricter criteria of theEuropean Union.If you say to me, “In 30 years’ time, can I see thisbeing stable?”, possibly I would agree with you, butfor quite a period, there will be, as a practical matter,a Europe of variable geometry. Therefore, rather thantaking a confrontational approach and saying, “We’regoing to take our bat and ball home unless you agreethis, this and this”, we should be saying, “Look, weare faced with this complicated picture. The eurozonehas not worked precisely as intended. One or twopeople may drop out”—my hunch is that the Greeksmay well leave the eurozone at some point, or may beforced to. Therefore, it is not just “us and them” onthis particular issue. We are going to be facing avariable geometry Europe, and we should all try toconstruct ways in which we can live as comfortablyas we can in this house, even if we are no longerallowed in the dining room.That would be a better way of looking at it, ratherthan seeing it as an opportunity to get some stuff back,which I do not think is going to be particularly good.

Q22 Rory Stewart: In terms of UK foreign policy,is it really responsible of us to press for closer fiscalunion? Presumably, there are two possibilities: eitherit works really well, in which case Britain ends upwith the potential risks and problems associated witha very coherent, powerful, unified economy and statestructure on its borders. Alternatively, it does not workwell—in other words, we push them into a situationin which, over the next five or 10 years, there areexactly the kind of tensions that Eurosceptics imagineare implicit in any kind of move towards more of asuper-state. Neither of those is very good for Britain.Neither a super-strong unified eurozone, nor a weak,fragmented, unstable eurozone is in the UK’snational interests.Sir Howard Davies: I think the worst possibleoutcome—it is always good to look at those—is thatthe eurozone collapses and we get blamed. That wouldbe the worst outcome and it is not completelyridiculous. You can hear a lot of French rhetoric, as Ifrequently do, saying, “The crisis really came fromLondon and New York. It is an Anglo-Saxon crisis,which we are having to deal with.” If we were thenperceived as having been obstructionist in terms of theeurozone doing what it needed to in order to try andstrengthen, that would be a really bad outcome. So,when the Chancellor says—he wrote a good article in

Le Figaro last week—“Look, we understand what youhave to do. You need to do all these things”, that is agood posture to take, because that is realistic, and itis what they have to do.Coming back to your previous question in a sense, Iagree with you that this could mean a coalescing inthe eurozone, which is a bit uncomfortable for us.However, of a lot of relatively unattractive outcomes,that one is better than the collapse of the eurozone,which would be economically disastrous for us andmight carry the additional risk that we were perceivedsomehow to be responsible for it. That would put usin a very poor position.

Q23 Mr Baron: May I, if you do not mind SirHoward, pursue that line of questioning? I think thatany reasonable assessment of the eurozone crisiswould lead to the conclusion that it was becausegovernments, particularly in the south, borrowed fartoo much, beyond their means and at artificially lowinterest rates, and went on a spending binge.Conspiratorial theories about New York and Londonwould, I think, be given short shrift.May I come back to your point about the generaldirection of the EU? You said, “ever-closer union”.There is this feeling that there is, certainly within theeurozone, a wish to get ever closer. You have talkedabout the Polish attitude of wanting to jump on a boateven if it is sinking, and so on. But may I be devil’sadvocate, and suggest to you that the number onepriority should be economic growth within theeurozone, but that that has singularly failed? We seegrowth rates continuing to fall behind other areas ofthe global economy. The only country within theeurozone, to my knowledge, that has gained a marketshare in the past 10 to 15 years has been Germany,but that has been on the back of a strongmanufacturing base and an artificially low currency—normally the two do not go hand in hand, in thenormal economic world.May I therefore suggest to you that if you look at the80-plus currency unions that have fractured since thesecond world war, in the vast majority of them—Istruggle to think of the exception—the countriesinvolved have benefited from the break-up of thatcurrency union? Even when you talk about bonddefault, if you take the Asian crisis in ’97, three yearslater GDP growth was higher than at the start of thecrisis, when it came to bond default. Do you think weare right to be pushing down the road of closer fiscalunion—saving the euro—when all the evidence is thatit is curtailing growth and, in some countries, causinga democratic deficit?Sir Howard Davies: There is a lot in that question.First, on the cause of the crisis, I think, as I have said,that it was not just government borrowing. In somecountries it was private sector borrowing, so I do notcompletely accept that diagnosis. I have written abook about the causes of the crisis, which identifies38 different causes, so perhaps we could spend two orthree minutes on each of them—is that okay?Mr Baron: To be fair, Sir Howard, I did not saygovernment borrowing, I said country borrowing.Sir Howard Davies: Okay, not just governments. Inthat case, I am with you.




As for whether it would be better just to call it quits,I guess that my conclusion on that would be that itwould not. I would take a slightly different view aboutGreece. I have to say that I cannot see a way out forGreece, and that might be true for Cyprus—I don’tknow. The indebtedness is too high, and I think thatit will have to default and then, whether it wouldrecover better within the eurozone or outside, is amoot point. I think it would probably be better thatit recovered outside the eurozone. I follow your lineof argument.There are two worrying things: first is the sheer scaleof recession that you might generate as a result of thegrinding of gears change in the currency zone wouldproduce. You might say that that is a transitionalphase, but I think that it could be a very painfultransition. Secondly—this is a political point, whichagain is beyond my normal area of expertise—I worrya lot about who the political inheritors of a collapseof the eurozone would be. In France, the keyopponents of the euro are the National Front, and wehave seen some exotic—let’s put it that way—politicalforces emerging in Greece, which are the ones that areopposed to it. We might find the politicalconsequences of a break-up of the eurozone in someof these countries to be ones that we would not likethe look of, and that is what frightens a lot of peoplein the eurozone.

Q24 Mr Baron: Do you not agree, though, that weare already seeing that? Take the Greek extremistparties. They are not necessarily against the euro; theyare against the austerity packages involved. There is,I think, a valid concern that there is a democraticdeficit out there, that the austerity packages, in manyrespects, are making matters worse because they arecreating this spiral of cuts and further missing oftargets when it comes to deficits and so forth. Thatis causing a real problem in the eurozone. What isdesperately required is what economic history wouldsuggest has happened. When countries leave such aunion, yes there is short-term pain, but growthultimately picks up much faster than would haveotherwise been the case. Economic history is litteredwith those examples. I put it back to you that theausterity packages on their own are simply makingmatters worse. History suggests that what we shouldbe doing is making strong contingency plans for thebreak-up. Yes, there will be short-term pain, but, ashistory shows us, once you have got through that pain,growth is much better and unemployment comesdown.Sir Howard Davies: These are imponderables really.I can understand your point, except that if you defaultand leave the eurozone, the austerity package that youhave now will be nothing compared with the austeritypackage that you will have to have then in order tore-enter international capital markets. Secondly, youneed to look country by country at what the problemreally is. In Ireland, it is not fundamentally a problemof competitiveness. It has quite a significant tradesurplus. It had a property bubble and a bust bankingsystem, which is a completely different diagnosisfrom the diagnosis in Greece, which has afundamental competitiveness problem. I am not sure

whether Spain has a fundamental competitivenessproblem. It was engaging in some sort of catch-up.Spain has quite a sizeable export sector. Again, thereis a property bubble, and massive deleveraging isgoing on. You need to look country by country at whatthe problem is and what the best outcome would be.As I say, I am not totally opposing your way ofthinking about this. Indeed, I think, if I looked atGreece, I would get to your position. I would say,“Actually, that is probably the better outcome forthem.” I do not think that I would get to that positionif I looked at Ireland or Spain.

Q25 Mr Baron: Can I move us on briefly toregulation. We come back to the supply side storyagain. In my constituency, I have a disproportionatenumber of SMEs. Their main gripe is not banklending but the weight of regulation that they are hitwith, which can disproportionately affect smallbusinesses. Some 90% of regulation emanates fromBrussels. I am interested to know whether you feelthat the business case for membership of the EU isstill valid, particularly when it comes to smallbusinesses. We look at other areas of the world thatare growing at much faster rates that are not burdenedby so much regulation, yet it feels as though Brusselsand the eurozone still do not have the key messagethat in the longer term, if you want to bring downunemployment, you have to allow your businesses tobreathe and thrive. They are finding it increasinglydifficult to do that under this weight of regulation thatemanates from Brussels.Sir Howard Davies: I think that I look at the worldslightly differently. We are part of it. Political choiceshave been made by governments in this country andin the rest of Europe to produce this. I also lookaround at other countries such as Australia andCanada and I do not find a highly deregulatedeconomy. I think that they are regulated as heavily aswe are. Then you have to say, “What would you do ifyou left?” Then your question would be, “Do youwish to stay with complete access to the rest of theEuropean market?” If you do, you have to meet mostof the standards—environmental, quality control andeverything—anyway, which is what the Norwegiansand the Swiss have to do. It is not clear to me eitherthat it is Brussels doing it—it is us—or that it is muchmore regulated than other parts of the world. If welook at Australia, there is no way we are moreregulated than Australia. You could not find a moreregulated country. Whether we would escape anywayseems to me to be a moot point.

Q26 Mr Baron: But do you not accept that roughly90% of regulation—a very high proportion anyway—emanates from Brussels? Do you have a tendency thento—I will not say gold plate because it is a bit of acliché—enact those regulations? The gripe from smallbusinesses is regulation.Sir Howard Davies: I am sure that it is right that 90%emerges from Brussels, but that is because we—Imean we collectively and I include our Government—have agreed to expand Community competences in awhole number of areas. There is much less UKregulation than there was because we have agreed




Community competences in a lot of areas. That initself does not seem to be a significant point.

Q27 Mr Baron: I have a final question. Do you thinkthat there is a case for Britain to look closely at a freetrade agreement, or a relationship similar to that ofSwitzerland or other countries that have access tomarkets—okay, they may have less say in how thosemarkets are formulated, but they have access tothem—but do not have to sign up to this general, ever-closer political union that can also have an impact oneconomic regulation? I ask that question becausethose countries seem to thrive.Sir Howard Davies: I would, on the whole, say thatthat would be a risky thing to do, and I think that it’sa different position when you have never been in thanwhen you are in, because your economic structure hasdeveloped in a different way. If you look at the Swiss,for example, the big parts of the Swiss banks—I amsorry to use the financial sector as an example, butthat is what I know about—are based in London fortheir access to the EU, as a matter of fact.So I think that we would run some risks in attemptingto disengage to that degree. And also I would attachquite high importance to things like co-operation onforeign policy and defence policy, which I think aregood things from the UK point of view, but admittedlythat is a matter of taste. And yet if you then say that,in order to off-set the economic disadvantages, wewould want an agreement that allows us completeaccess, then you go back to the regulation that youstarted with, because they will not allow you to havethat access if you do not follow regulation that isequal.So, personally I do not think that there is an easy kindof Swiss option. I would also point out to you thatactually Switzerland is not a deregulated country inany way and in the financial area there is somethingcalled the Swiss finish, which is actually over andabove our capital requirements; the Swiss have highercapital requirements than we have.

Q28 Mark Hendrick: Coming back to some of thethings that you said earlier, Sir Howard, youmentioned this idea of an even closer union and yousaid that we must not underestimate the degree towhich European countries want to integrate and staytogether. But then you conceded that you saw apossibility that Greece may come out of the eurozone,given what is happening at the moment. Do youforesee the possibility at all—you have mentionedlooking country by country—of a core of countriesproviding a very, very strong eurozone area andperhaps other countries that, after the Greeks go, maybe driven out, because of the size of their debts andthe problems they face, effectively making a two-tierEurope and one that has a fairly strict group ofcountries inside the eurozone and others thatincrementally have fallen off along the way?Sir Howard Davies: This is partly a tactical issue andpartly a strategic issue. I think the tactical issue is thatif the Greeks cannot make it, because they cannotmeet the austerity programmes or whatever and theygo towards the exit, what would have to happen toprevent real mayhem in financial markets would be

that the rest of Europe would have to wrap their armsaround the rest. What I do not think you couldpossibly do is say, “Well, goodbye to Greece today,now let’s see what happens”, because if you did thatyou would have a highly disorderly break-up, whichwould be catastrophic.So, to my mind—this is just my way of thinking aboutit—Greece stays in or not, and if Greece goes thathas to be the moment when effectively there is somemutually guaranteed borrowing and the rest areprotected, with a firewall erected around the rest,because otherwise it would be too disorderly.As for the impact of Greece going on futuremembership, I think that it will cause people to thinktwice, but I think that most of them still want to join.However, what Greece going will do, as I said earlierbriefly, is to cause the European Commission and theCentral Bank to erect the barriers to new entrantssomewhat higher than they have been in the past, sothat you will absolutely have to meet the criteria andhave met them for some time before you get in.As to whether it is helpful to think of that as two-tier,personally I prefer to think of it as variable geometry.You will have some countries that are in things andsome countries that are not, and some countries thatare on a flight path to join and some countries that arefurther down that flight path. Therefore, rather thansaying, “All countries are equal, but some are moreequal than others”, we would say that there is anevolution here, which is taking different forms atdifferent speeds in different places. Looking forwardas far as I can reasonably see—about 10 or 20 years,which will be long enough for me—that is the way Isee Europe. I don’t think everybody will be in theeurozone.

Q29 Mark Hendrick: Do you see it as animpossibility that Britain could acquire the status thatMr Baron talked about, of almost being like a memberof the EEA or EFTA?Sir Howard Davies: I think it is not impossible. Ifwe approach this as “Take it or leave it; we want arenegotiation—otherwise we’re going to take our batand ball home,” I think we could find people saying,“Well, okay, do so, and let’s renegotiate,” but I donot personally think that would be the best way ofapproaching what is a very difficult situation—andnot, by any means, of our making, most of it. I don’tthink that would be a good way of doing it. I thinkwe will get a better outcome for the UK if we adopt amore co-operative and collaborative approach to this.

Q30 Chair: Sir Howard, thank you very much. Thatexhausts our questions. Have we asked you the rightquestions? Is there any point you would like to make,that perhaps we have not touched on?Sir Howard Davies: If I could just be slightly specificon the financial thing, because that’s what ishappening now. I think, if I may say so, that yourinquiry is quite timely, because the first example ofwhat we’ve been talking about, of coalescing in theeurozone, leaving us on the outside, is going to be theidea of a banking union. I think what will be proposedwill be a linking together of the deposit guarantee




scheme, with some kind of mutual guaranteesbetween them.There will be a new, pan-European supervisor, in thereal sense of a supervisor that actually does thesupervision from day to day, not just the EuropeanBanking Authority, which writes some rule books.There will be a resolution authority as well, probablythe European stability mechanism; i.e. something thatcan provide capital to a failing bank on a pan-European basis, with a pan-European guarantee. Ithink something like that will now emerge. I think thesupervisor will probably be the European CentralBank, because I think it is easier to do that than to dothe European Banking Authority, which, after all, isbased in London—so that would be slightly odd—but,also, is really a large committee; or that was its origin.Therefore, we will have to decide how we deal withthat. I think what we should then do is to ask for somethings which are related to the Prime Minister’s redlines in December but are somewhat different, andexpress them in a more constructive way. We shouldtry to ensure that the European Banking Authorityremains the entity that writes the rules in the singlemarket area for banking, which we are a full member

of, and that what goes on in the eurozone is tuckedunderneath that, so that we don’t find ourselves inpurely an ante-room of the single financial market.That negotiation is going on more or less as we speak,and I think that is how we should approach thatparticular problem. It will be an interesting example,if we can negotiate it, of how we might approachsome of the other difficult issues that will come downthe track.

Q31 Chair: So are you saying that it is important thatwe are a part of the banking union?Sir Howard Davies: No. I don’t think we can be partof the banking union in the sense of the eurozone,because that involves mutual guarantees and theEuropean Central Bank, which we are not a fullmember of; but I think what we should ensure is thatwe retain market access for banks based here, even ifwe are not in the banking union.Chair: That may be easier said than done.Thank you very much indeed, Sir Howard. Yourevidence is much appreciated.

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Tuesday 10 July 2012

Members present:


Mr John BaronSir Menzies CampbellAnn ClwydMike Gapes

________________


Witness: Charles Grant, Director, Centre for European Reform, gave evidence.

Q32 Chair: I welcome members of the public to thissecond evidence session of the Committee’s inquiryinto the future of the EU and UK Government policy.It allows us to question directors of two of the UK’smost influential EU-focused think-tanks and, from theNetherlands, the author of one of several proposalscurrently being floated for fundamentalrearrangements of the EU. Our first witness is CharlesGrant, the Director of the Centre for EuropeanReform. Mr Grant, welcome, and thank you verymuch for coming. Would you like to make anyopening remarks?Charles Grant: I would like to make a couple ofopening comments. One is to try to dispel what I thinkis becoming received wisdom on one issue; the otheris to question what is also becoming received wisdomin many British political circles. The first one is theassumption that if the eurozone integratessignificantly, that, by definition, fundamentallychanges Britain’s own relationship with the EuropeanUnion. People from all political parties seem to acceptthat as a given, but I would question it. I would arguethat if France and Germany choose to integrate theireconomic policies, and if Spain is banned fromborrowing more than 1% budget deficit every year,that does not necessarily change Britain’s relationship,in terms of the single market. I agree that it might, ifthe integrated eurozone caucus had a unified positionon many issues, such as financial regulation. Thatwould affect Britain, but in my view, that danger ismost likely if Britain blocks future attempts to amendthe EU treaties that would facilitate eurozoneintegration, and perhaps we can talk about that later.It seems that that would spur eurozone countries to gooutside of the EU’s structures, and it would lead tothem caucusing, making it much harder for the Britishto influence what they do in the eurozone. It couldlead to quite a profound change in the relationship,namely through a loss of British influence.My second point is more fundamental. TheGovernment certainly seem to be moving towards aview—I have heard some people in the Labour partysay similar things, and Mr Persson, who you are goingto see later, says this as well—that what Britain shoulddo is get a better deal. It should go to its partners andtry to get a deal that effectively opts out of what somepeople regard as the sillier things that the EU does,perhaps then putting it to the people in a referendum,or not. However, my contention is that it is notfeasible, as far as I can see, to assume that the Britishcan negotiate special treatment, in terms of opt-outs

Andrew RosindellMr Frank RoySir John StanleyRory Stewart

from the bits of EU policy that they do not like—whether it is fish, agriculture, social, or whatever—because our leverage is very low, and if we wantedsuch opt-outs, others would too. It would not be in theBritish interest to allow other countries to opt out ofbits of the single market. I have talked to othergovernments about that, and I think that the Britishare under an illusion if they believe that a special setof arrangements is available to us. I think we are in aweaker position than we imagine in asking for sucharrangements. Those are the two opening points Iwished to make.

Q33 Chair: Can I start by asking about the UK’sinfluence, and then about its relationship? Youdescribed the December 2011 Council as a disaster.Can you give any concrete examples of where youthink we have lost influence since then?Charles Grant: I did describe it as a disaster, and itmay well turn out to be. I agree that in the shortterm—the six months since then—it has not proved tobe particularly harmful, as far as I can see. It createda lot of ill will towards us, which undermines us incertain ways. However, it has not been as bad as Ithought it would be, because in the subsequentnegotiation of the fiscal compact, although the Britishare not part of it, other EU countries, notablyGermany, fought hard against French wishes to ensurethat the Commission would play a very big role in thenew arrangements of the fiscal compact. Although itis outside the EU, it is intimately linked to the EUsystems, which is good for the single market and goodfor British interests. I do not think the way that thefiscal compact has so far turned out—of course, it hasnot even been ratified yet—is particularly harmful toBritish interests. So, what happened in Decemberupset and annoyed people, and we may need theirgoodwill at various points in the future, but I cannotgive you a precise example of British interests beingdamaged yet because of it.

Q34 Chair: You have downgraded the assessmentof disaster.Charles Grant: Yes.

Q35 Chair: Do you feel that we need to be at thetable for every discussion that is going on in the EU?Charles Grant: I think we probably need to be at thetable in most discussions when they are abouteconomics. Whatever the eurozone does in future in

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10 July 2012 Charles Grant

terms of financial regulation and economic policy co-ordination, although we will not be part of these newbinding arrangements, particularly those limitingfiscal policy, we should have a voice and be in theroom, perhaps without a vote, just to express ourviews, because our economy is big and important inthe overall EU economy. As we are the host toEurope’s largest set of financial markets, we’ve gotto have a voice. The British Government’s objectivesshould be to be present in the room with the right tospeak, certainly when financial issues are discussed,but I would say whenever economic issues arediscussed.

Q36 Chair: You said that if Europe went to an innercore it would make the EU “less congenial”—that wasthe phrase you used. In that case do you think that weare right to be encouraging the development of suchan inner core?Charles Grant: Yes, because my starting point is thatthe break-up of the euro would be very damaging tothe European economy and pretty damaging to theBritish economy, indeed the world economy. I hopethe euro’s break-up can be avoided. None of us knowsif it can be. The best way to avoid its break-up isfor the eurozone countries to integrate more in theireconomic policies and probably that means somemore political integration as well. As I think I havesaid, it is true that it makes the EU less congenial tothe British because they have tended to see theeconomics of the EU as the main reason for being init. However, my line would be that as long as theintegrating eurozone does not inflict its centralisationof economic policy-making on countries outside theeuro, such as Britain, it need not harm our interests atall. As I said before, we need to have a voice in theroom, but also—and we shall probably come on tothis—we need to find ways of influencing the outcomeof the eurozone discussions to make sure thatwhatever decisions they take are relatively congenialfor the British. Perhaps we can talk about how Britainshould influence the discussions.

Q37 Chair: Do you think we have more in commonwith Germany than we hitherto expected? One of thesurprises to me has been that we often seem to havecommon ground in groping our way forward withGermany. That rather surprised me. Does thatsurprise you?Charles Grant: No, because we have always hadcommon ground with the Germans in certain respects.They have always been relatively free trade oriented;they have always believed in a rules-based system ofEU governance; and they have always wanted arelatively outward-looking EU. They have been a bitless protectionist in their instincts than the French, butwhat so many countries say to me, especially thesmaller ones when I talked to them recently is: “Whyis Britain either leaving the EU or at least being lessinfluential in the EU?” We are forcing the Germans towork much more closely with the French, faute demieux, and there is a risk that the Germans willbecome less free trade oriented, because of thediminished British voice in the European Union. Onyour point about having a similar view, while the

background is that the Germans have often had asimilar view to us, things have got worse in the lastsix months. This is partly in answer to your firstquestion about December. I spend time in Berlintalking to quite senior advisers in the Germangovernment and they are very fed up with us. Theyare annoyed that we are a distraction. When they aretrying to sort out the serious business of the eurozonecrisis, we sometimes lecture them in a patronisingtone from the sidelines.We criticise them—in my personal view a lot of thatcriticism of the way they handled the eurozone crisisis correct—but when we criticise them from thesidelines we are not, as they perceive it, being veryconstructive. Then we come along and say that wewant to redefine Britain’s relationship with the EU,possibly opting out of certain things. This does notcreate a lot of good will. I have noticed in the last sixmonths, since December, a greater degree offrustration with the British. Just one example: therehas been a sort of gentleman’s agreement that theBritish will never be outvoted on financial serviceslegislation. It is majority voting and we could be, butwe have never been outvoted on a key issue, just likethe Germans have never been outvoted, I think, ontheir car industry and the French on farming. I havenow heard it said in Berlin: “We are so fed up withthe British, why should we do them these favours andgive them special dispensations? Maybe it is time thatwe outvoted them.” That gives you a flavour of theincreasing frustration with the British that I perceivein Berlin.

Q38 Sir Menzies Campbell: Might I take you backto your opening statement to see if I understandcompletely one of the points you made? Excuse me ifI put it in more pejorative terms than those you chose.Would I be right to infer that it is your opinion thatthe more obstructive generally the United Kingdommight be in the European Union, the more likely it isthat it will encourage integration on various levelsamong other members of the European Union, whicheither excludes the United Kingdom, or is againstUnited Kingdom interests?Charles Grant: Yes. My view is that the British beingdifficult cannot stop them integrating if they wish tointegrate, but it pushes them down a path that is lessgood for our interests. That path is being outside theEU, setting up new intergovernmental structures, asthey did with the fiscal compact. Although as I saidpreviously, the Commission does play a rather largerole in the fiscal compact, that was not how the Frenchintended it to be. The French initial view of that fiscalcompact was of a very intergovernmental bodydominated by the big member states, because theFrench have quite a negative view of the Commission.What I picked up in Germany recently is a fear thatwhen there are new treaty changes on the agenda, asthere may well be for the banking union, for example,Germans fear that the British will come along, as theydid in December, and say, “No, you can’t have thisdone through the EU.” The Germans will reluctantlygo outside the EU as they did before. They point outthat if you go outside the EU with a banking unionyou risk fragmenting the single financial market, and

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that could be quite harmful for British interests. It willcertainly cause great annoyance.

Q39 Sir Menzies Campbell: Mention of the fiscalcompact takes me neatly to my next question. Haveyou conducted any analysis as to why it was that allof the non-eurozone countries, with the exception ofthe UK, were willing to sign up to the fiscal compact?Charles Grant: Ultimately, just the Czechs stood byus, though in December they appeared to be on theother side. A lot of British officials were quitesurprised that most of the countries outside the eurodid not want to be associated with the UK in resistingthe fiscal compact treaty. Perhaps that is a measureof how, even before the December summit, Britain’sstanding and reputation had fallen. We think in thiscountry that the central Europeans are our friendsbecause we helped to get them into the EU, we let intheir labourers and so on. Actually, in recent years,our standing has really declined in central Europe,because we are perceived as so peculiar, so on theedge, that those countries, sometimes reluctantly, havedecided that Germany in particular, and France andGermany more generally, are where they need to be.One of your other witnesses, Howard Davies, quoteda Polish official saying, “We can see the eurozone shipis sinking, but we want to jump on to it anyway.” Ihave heard Polish officials say the same thing. That isthe view: most of the countries outside the euro wantto join it in the long run. They think that Germany isthe power that matters in Europe. They don’t want toannoy Germany too much; they think they need tobe in Germany’s camp; and the British are seen asincreasingly marginal.

Q40 Sir Menzies Campbell: One way to deal withthe perception that you have observed is diplomaticeffort. What is your view of the quality of Britishdiplomatic effort in the EU in recent years? I don’tjust mean the quality of the permanent representativein Brussels. I mean generally, within the EU and, ifyou like, intergovernmentally with countries that aremembers of the EU.Charles Grant: Obviously, our diplomats aregenerally very good at their job. My criticism wouldbe this: if you want to influence outcomes in the EUyou need friends and allies, and we haven’t alwaysbeen very good at making those friends and allies.Successive Governments, Labour and Conservative,have to their credit understood the importance ofFrance and Germany. Gordon Brown’s and DavidCameron’s Governments have paid attention to Franceand Germany, as they should, but we haven’t paidenough attention to some of the smaller countries,particularly the central Europeans.We have natural allies in the Netherlands and theNordic countries and, arguably, central Europe wherewe haven’t cultivated. Not enough junior Ministers goand visit those countries to get to know their oppositenumbers. Not enough senior officials go to them,while the French and the Germans send theirMinisters and officials all the time to those countries.We haven’t invested to a sufficient degree in the long-term relationships that we should have. Obviously,right now the current Government have pretty good

relations with Sweden, which is good, but I don’tthink we have done this with enough countries.

Q41 Sir Menzies Campbell: My last question couldalmost be one for a PhD thesis, but perhaps you willbe as economical as you can with the answer. Whyshould the United Kingdom remain a member of theEuropean Union?Charles Grant: The short answer to that question isthat if we left the EU we would not have full accessto the single market. We would face tariffs and non-tariff barriers. If we went for the Norwegian option,we would not be able to shape the rules of the singlemarkets. Being a full rule-making member of thesingle market is profoundly in Britain’s interests. Thatis the main thing.Secondly, global trade, global economic issues, freetrade agreements and climate change talks. If we arepart of the EU and influencing the EU’s position, weare one of the big boys, or big people, and we canreally influence the result. Thirdly, foreign policy. Weare, for all our problems, one of the most influentialplayers in foreign policy on Iran, Syria, Russia andChina. We can and sometimes do help to set theagenda. As part of a big bloc, we have more influence.If we want to open up Chinese markets, it is muchbetter to be part of the EU in doing so.Finally, enlargement, which is perhaps the EU’sgreatest success, spreading democracy, stability,security and prosperity across much of the continent.If we stay in the EU, we can continue to push forenlargement. Obviously, we would not have thatability if we left the EU.

Q42 Mr Baron: I completely agree with what youhave said. We have not put enough diplomaticresource into the EU. There is an attempt by theGovernment to catch up, but there is a long way togo. However, I accept what you say.May I come back to the question asked earlier aboutwhere our long-term interests lie? One could paint theopposite picture to what you have described. We havehad 40 years of ever-closer union in the EU. Thetreaty of Rome embodied the principle of that ever-closer union. We have had Governments and PrimeMinisters talk about clawing back powers before, butit has never transpired. What we have in front of usnow is a eurozone crisis. I think most would agreethat if the euro is going to succeed, at its core therewill be some sort of fiscal union and compact. Evennow, although that is not due to come into effect untilthe spring, most of the core countries—Germany,France and Holland—are already in contravention ofthat fiscal compact if one looks at the figures.In your view, would it be impossible for Britain toadopt a relationship similar to that of, say, Norwayand Switzerland, with a relationship based on traderather than on ever-closer political union? After all,these countries seem to be growing faster than the EU.Their currencies are certainly stronger. Their financesare in better shape. Despite their position, they areembracing more trade outside the EU at a faster ratethan Britain in faster-growing parts of the world. Doyou see that as an impossibility?




Charles Grant: I do not see either model working forBritain. The recent research published by OpenEurope, which is generally regarded as a Euroscepticthink-tank, points out that neither the Norwegian northe Swiss option would be very good for us. The worstwould be the Norwegian option, whereby you have toaccept the rules of the single market without having avote in setting them, which would surely beinconceivable for the City of London. Also, Norwayhas to pay into the EU budget, although it is not inthe EU.Switzerland, I suppose, is perhaps a less bad option,because you can negotiate a bilateral deal that suitsSwitzerland, but of course the Swiss do not take partin much of the services that the EU does, so financialservices is not included. If we went for a Swiss model,London would not remain the centre of Europe’sfinancial services markets. We would lose that, or partof that. I do not see either as being a particularlyappropriate model for Britain.The other point I would make is that neitherSwitzerland nor Norway is a middle-sized power withglobal interests, which wants to try and influence theworld around it. The fact that they are not part of EUforeign policy making is not a big problem for them.If Britain gave up being a member of the EU, as I saidbefore, we would lose the ability to shape and set theglobal agenda with like-minded countries that sharemany of our interests and most of our values.

Q43 Mr Baron: Let us put Norway and Switzerlandto one side. You have touched on the possibility—remote though you thought it would be of ussucceeding—of repatriating powers to the UK. Canyou just go into a little more detail as to why—this,after all, is what the British Government have statedis their intent—you think that would be such a hardpounding? Why do you think we could not achievethis, given particularly—I would put one point in ourfavour—the balance of trade with the EU, which isstrongly in their favour? It is in their interests to makesure that they do try to accommodate the British atthe end of the day, because it is a very largemarketplace for them and the balance of trade is verymuch in their favour.Charles Grant: I disagree on that last point. The EUis a much more significant market for the UK than theUK is for the EU. About half our exports go to theEU. I do not have the exact figure for non-British EUexports to the UK, but it is much lower than that. Ifthere was a sort of stand-off on trade and peoplestarted putting up tariffs, we would lose much morethan they would. I do not regard it as harmful that wehave a trade deficit with the European Union. Tradedeficits are only harmful if they are unsustainable. Ifyou have a capital account surplus and foreigninvestment and so on it makes up for that trade deficit.In terms of economics, it is not a bad idea at all tohave a trade deficit.

Q44 Mr Baron: We can perhaps disagree about thebalance of trade, but what about on that central pointof why you think it would be so difficult to reclaimpowers back from the EU? That is important becauseit is the Government’s stated position.

Charles Grant: No, I agree that it is hugely important,which is why I mentioned it in my opening remarks.In order to change the treaties you, of course, needunanimity. In my conversations with governments—and reports of other people’s conversations with theEU governments—I have heard of one governmentpossibly considering that it might agree to grantBritain some sort of opt-out. I have heard that oneDutch politician has said that.One is not enough for unanimity. You would need27—or 28 with Croatia joining—to say this. It wouldnot be in their interests to grant it. The French aregreat believers in social Europe—for better or forworse. They would say that if Britain was allowed toopt out of the 48-hour working week, information andconsultation and the rather small number of measuresthat had been passed under what used to be called thesocial chapter, that would lead to what they call socialdumping. Companies would relocate from France toBritain attracted by the relatively weak sociallegislation. So the French have no incentive to allowus to opt out of social policy. Many other countries—at least half or two thirds—would agree with theFrench on that.The leverage we do have, I guess, is that we pay netinto the EU budget roughly £9 billion1 a year. Thatis significant, but not overwhelming given the size ofthe EU budget overall. They would lose that if we leftthe EU, although, of course, if we went for aNorwegian status, we would still pay something netinto the budget.2 When I talk to governments, theybasically say, “Why should we give Britain a specialdeal?” If we allow the British to opt out of the thingsthat they do not like, such as social policy, the Frenchwill try to opt out of the EU rules that prevent youkeeping out Chinese shoe exports and the Germanswill try to opt out of the rules that ban them fromsubsidising their coal industry. Everybody hasbugbears and things about the EU that they do notlike. It is essentially a package deal and you have toaccept the rough with the smooth, except for the euroand Schengen, which are slightly different and wehave been allowed to opt out of.I do not wish to imply that nothing should be reformedin the EU, that everything is fine and the difficulties Ihave described mean you should not try to reform it.My think-tank is called the Centre for EuropeanReform because we believe that a lot of things needchanging. My argument would be to try to changethem from the inside. On agricultural policy, sure, let’sbuild up alliances and make that a priority in thecoming budget talks and try to get it changed in waysthat suit Britain. It has, of course, been reformeddramatically over the years—not enough—but it hasnot been a British Government priority to reform it,which I regret.

Q45 Mike Gapes: May I take you back to yourearlier remarks about the fiscal compact? That is anintergovernmental agreement. You hinted at thefrustrations that that mechanism has caused, but Iwould like you to be more explicit. Does this indicate1 Witness correction: £7 billion2 Witness clarification: the UK would still pay about half as

much into the budget as it does today.




that it is now politically impossible to get unanimousEuropean Union treaty change and that this will bethe model for the future?Charles Grant: I do not think so, although in a waythat is a question for British politicians to answerbecause unanimous treaty change requires a Britishsignature and passage through the House ofCommons. You are professional politicians, and I amnot. You can judge whether the House of Commonsis likely to pass a new EU treaty, but I think there willbe new EU treaties. As I said, there will probably beseveral treaties for banking union and other changesthat emerge in the coming years. Most countries willsign these treaties. I do not think it is impossible toget unanimity. The Germans, as I said before, areworried about the British. The British are the onlycountry likely not to sign such a treaty at the moment.Things may change after the next Italian elections, orwhatever, but at the moment that seems to be the case.Britain is the country that others are worrying about,and it is we, rather than anybody else, who will drivethe other EU countries to push ahead withintergovernmental mechanisms outside the EU.

Q46 Mike Gapes: The Prime Minister has saidexplicitly in recent articles, including his SundayTelegraph remarks, that he desires to repatriatepowers. Is there a possible quid pro quo if that comesto a head at the same time as some possible treatychange? Is it possible to sequence that? Given youranswer just now to Mr Baron, are you aware of anysupport for that view within member states of theEuropean Union that might be prepared to give us alittle bit, almost as a face-saver to the Prime Minister,while getting their big treaty change?Charles Grant: That is a very good question. As Isaid before, I do not see our partners being willing tooffer significant opt-outs from EU policies. However,they might be able to offer us something that could becalled a deal to allow Mr Cameron to say that he hasa piece of paper and that it is a good piece of paper.For example, as you know, in 2014 the BritishGovernment has to take the JHA decision on whetherto accept ECJ purview over the acquis communautairein justice and home affairs. Under the Lisbon treaty,Britain can choose to opt out of all that acquiscommunautaire and JHA, including the arrest warrant,Europol, Eurojust, and so on. Whether that is a goodidea, we can discuss, but that could be one element ofit. There could be an agreement on the working timedirective, which is not about treaty change but abouta particular piece of law. A few other bits and piecescould be dressed up in a package deal that MrCameron could come back and present as anachievement. I think some of my Eurosceptic friendsmay not be satisfied with that as it would notsignificantly change Britain’s relationship with theEU, except perhaps on the JHA point. I think ourpartners, for peace of mind and for allowing them tofocus on what they think is important, would give usa few crumbs like that, but not the significant opt-outs from EU policies that, as I understand it, manyConservatives, although perhaps not all of them, wishon farming, fish, social policy, and so on.

Q47 Mike Gapes: Are the Government, as far as youare aware, doing anything to facilitate that? Behindthe scenes, are they trying to nod and wink that,actually, a deal is possible on a limited—what yourefer to as “crumbs”—basis?Charles Grant: I have not picked up any informationthat the Government are nodding and winking alongthose lines. My guess is that the Government have notyet decided what they would ask for, but I am not amember of the Government, so I am not the bestperson to ask?

Q48 Ann Clwyd: You mentioned your regret thatreform of agricultural policy has not been givengreater priority. Of course, such reform has been givenconsiderable priority by previous Governments, albeitin the face of great opposition from the French andthe Germans. Is there any indication that theiropposition to reforming the CAP is weakening in anyway, or does their opposition still remain as resolute?Would a British Government not just be hitting theirhead against a brick wall?Charles Grant: The EU is fairly evenly divided onthis. There are perhaps more countries that are infavour of reform, but the French, the Spanish, the Irishand the Poles are among those who are stronglyagainst.I disagree slightly with your analysis of previousBritish Governments. If I was being very cynical, Iwould say that for 20 or 30 years British Governmentsof left and right have pretended to want radical reformof the CAP and the French have pretended to want toget rid of the British rebate. The reality, however, isthat the British have preferred to hang on to the rebate,because the Treasury calculates that it is better for theBritish taxpayer to keep the rebate and not worry toomuch about CAP reform, and the French have wantedto protect the CAP. So I do not think that it actuallyhas been a really big priority, and I think that we couldhave made it a bigger priority, but the Treasury hasvery strong views that what matters most is the Britishnet contribution to the EU. Of course, if you didachieve radical CAP reform, the rebate becomes lessnecessary, because one of the reasons that you needthe rebate is because the CAP is unfair to Britain.

Q49 Rory Stewart: I think your theory is veryconvincing, but the problem is that it seems from theoutside as though, broadly speaking, British peoplehave been dissatisfied for 30 years. It is not just thatsomehow British politicians are being irresponsible. Itis reflecting a genuine disquiet. It is therefore verydifficult to imagine in the long term the Britishpopulation really accepting the kind of model that youare presenting, which is that we are in a straitjacket,that we do not really have any choice, that our bestoption is to remain in, that we do not have muchmovement and that we might get a few crumbs off thetable. If that is the case, will there not eventually be apoint at which we regretfully have to recognise thatsomehow this is a relationship that does not quitework? Even if in an ideal world it should work,something about British national identity or Britishpublic opinion is not going to be comfortable over the




next 20 or 30 years with the sort of philosophy thatyou are advocating.Charles Grant: That is an interesting point. Yes, Iwould not be at all surprised if Britain leaves the EU,say, before the end of the next Parliament. I wouldregret that, but there seems to be a bit of momentumin that direction. However, public opinion can surelybe shaped and led by intelligent people, whetherbusiness leaders or politicians. Are you going to goback to your constituents in the north-west and give aspeech in the marketplace on the economic benefits ofEU membership? How many business leaders haveyet woken up to the fact that Britain could leave theEU? I happen to know personally that a number ofthem are just waking up to this fact and they are veryconcerned. You may see some of them explaining thatBritain should stay in the EU because of what theyand I perceive as the economic benefits, but it has nothappened yet.I think that public opinion is going in the directionthat you suggest towards accepting some sort ofwithdrawal, but when people think about the stakesinvolved, I hope that they change their minds. It is upto responsible politicians, business leaders and,indeed, journalists to explain the facts. The case forstaying in the EU is quite complicated and not veryeasy to explain in 20 seconds in the pub. The case forgetting out of the EU is rather simpler and easy toexplain in 20 seconds at the pub.

Q50 Sir Menzies Campbell: Following on from thatquestion and answer, have you given anyconsideration to the process of withdrawal, how longit might take and how difficult or easy it might beto negotiate?Charles Grant: I have not given a lot of considerationto that, but obviously one of the virtues of the Lisbontreaty is that it contains a clause setting out aprocedure for withdrawal. It would obviously be abilateral negotiation whereby Britain and our partners


Witness: Mats Persson, Director, Open Europe, gave evidence.

Q51 Chair: Our second witness is Mats Persson, thedirector of Open Europe. Would you say that you areon the other side of the coin from Mr Grant, to whomyou have been listening for the last few minutes?Mats Persson: There are a lot of sides to that cointhese days. That is one of the interesting things withthe eurozone crisis; it has shaken things up a bit. I donot think that you can any longer define the debateas being in two camps—anti or pro—particularly inBritain. I think that debate has been concluded.On the other side of the coin, I would say that I takea different approach to some of these issues, but I stillthink that the UK has a future in Europe. Like Charlesand a lot of others in this debate, we are very keen tofind a model that works for Britain and for Europe.

Q52 Mr Roy: Can you explain the relationshipbetween the All-Party Parliamentary Group for

would decide which bits of the single market we wereallowed access to in return for accepting all theregulations applying to that bit of the single market.While that was happening, the impact on the Britisheconomy would be quite dire. I would imagine that alot of people would be moving their headquarters outof Britain, particularly in financial services. A lot ofthe car industry may also choose to relocate. Therewould be economic problems while that washappening. The quicker it would be, the better, but Ihave not thought greatly about that.May I make a last comment? Going back to one ofthe earlier questions, Britain needs to think carefully.Whether it is a full member of the EU, a half member,a quarter member or a three-quarters member, it needsto think about how it influences the outcome ofdecision making in the EU. It has not paid enoughattention to that. We briefly touched on the need forfriends and allies, which is important and is up toMinisters and officials to pursue. Two other thingsmatter in order to increase our influence in the EU:the first of these is the tone of our comments and thelanguage we use. If it is seen to be constructive ratherthan snide that makes a huge difference as to whetherwe are seen to be a trusted and desirable partner or apain in the neck. The final thing is policies. If wecome up with good, constructive policies forreforming the EU so that it works better—whether itis on agriculture, the regional funds, energy marketsor liberalising services market, which, in my view,should be the number one priority for the EU rightnow—and try to corral others to help us push them,we will be seen to be constructive and we will havegood will. In that way, when we have problems thatneed to be sorted out, people will help us sort themout and look after our interests.Chair: On that glass-half-full note, we will end.Thank you very much, Mr Grant. Your contribution ismuch appreciated.

European Reform, the Fresh Start group and OpenEurope?Mats Persson: In the last year or so, we haveproduced a series of reports going through individualpolicy areas, and proposed various reforms that shouldbe taking place in those areas—in some cases, reformswithin the areas and in other cases, reforms involvinga redistribution of powers between Brussels and theUK. The reports have been discussed in various APPGmeetings. It has been an extremely useful forum fordiscussions. A lot of good ideas have been coming outof that process and that does help the debate.

Q53 Mr Roy: Tell me about the actual relationshipbetween them. Open Europe is obviously thesecretariat for one of them.Mats Persson: For the APPG, yes. We are involvedin setting up and providing the content for themeetings. We give a presentation of the recent report,



10 July 2012 Mats Persson

alongside other experts in that particular policy area,ranging from across society and the think-tankcommunity, and MPs and peers attend those meetings.

Q54 Mr Roy: What involvement has there beenbetween the Government, the FCO, the all-partyparliamentary group and the Tory MP group?Mats Persson: It has been a very constructivedialogue. Obviously, we have been workingindependently, and all our material has been producedin a strictly independent capacity. Naturally, as youwould expect in these kinds of questions, there hasbeen a lot of dialogue and good interaction. I wouldnot say that all of what we have done has the supportof the Government, but there is a general interest fromthe Government in what we have done.

Q55 Mr Roy: What influence does Open Europehave on the Government?Mats Persson: Hopefully, the right influence.Mr Roy: That is a hope or an expectation. I am askingabout the reality.Mats Persson: Quite. If I may beat my own drum fora bit, I think we have managed to take the debateforward, in the sense that we have tried to stake out away between the status quo and full withdrawal. Whatwe produced over the last year has illustrated whysuch a third way, if you will, is fully possible.

Q56 Mr Roy: So has the relationship changed in thelast three years between Government and yourselvesand these organisations?Mats Persson: I do not quite understand the question.We have become more influential, which is a goodthing for us and for Britain and Europe.Mr Roy: That remains to be seen. Thank you verymuch.

Q57 Chair: On the point just raised a second ago byMr Roy, the Fresh Start group is publishing a greenpaper later today.Mats Persson: That is correct.

Q58 Chair: William Hague is attending. Have youbeen involved in preparing that green paper?Mats Persson: It draws quite heavily from ideas thatwe have produced and our proposals and reports overthe past year.Chair: That is a yes.Mats Persson: If you read the actual paper, you willsee a lot of references to Open Europe. That is just afact. It has been a good two-way process.

Q59 Chair: There is no reason why you should nothave been involved.Mats Persson: No. It has been, and it has been quiteextraordinary in the sense that it has whetted theappetite among MPs to look into these questions aswell. It has worked out really well.Chair: All dialogue is welcome. Rory.

Q60 Rory Stewart: You listened to Mr Grant’spresentation. I believe that you have suggested thatthere is a colonisation of the EU by eurozone interests.

Could you substantiate that? What evidence is there?That was not quite the evidence we heard earlier.Mats Persson: No, I said I think there is a risk andthe risk is unknown. It is quite difficult to substantiateat the moment There are few examples of it that wecan point to, going back in time. It is quite interestingbecause that also raised the question people askedalmost all the time about loss of British influence.They have a perpetual worry about Britain losinginfluence in Europe. It is time for those people also topoint to concrete examples of where influence is beinglost. It is quite interesting and it is the right question,for example following the December veto.While we would argue that the veto was not ideal inmany ways, the kind of reaction that we sawfollowing the veto was in some cases almosthysterical—that Britain was now definitely on its wayout of the European Union. That reaction was verymuch overstated and exaggerated.I would say that the risk of colonisation of Europeaninstitutions for the purpose of pursuing the eurozoneagenda, to which British interests are secondary, isunknown, but it is a real risk. That is all I can say. Ifyou look at the creation of a banking union inparticular, that is where you have that risk coming tothe fore.

Q61 Rory Stewart: We have tried before, obviouslyin December, to try to get concessions in exchange forsupporting treaty change and we failed. What makesyou think that we are likely to be able to achieveconcessions in the future when we come to treatychange?Mats Persson: There are a number of factors. At themost fundamental level, I disagree with Charles andothers who say that negotiation is a kind of pathtowards Britain leaving altogether. I would reversethat and say that the status quo is the biggest threat toUK withdrawal, because, as you pointed out earlier,British public opinion is becoming increasinglysceptical to the current arrangements, having startedfrom an already sceptical base. So without somechanges in substance to the basic membership terms,Britain is on its way out of the European Union.I would say that you need to revise the UK’s EUmembership in order to save it, so I disagreefundamentally with that point. That is where itbecomes interesting because, sure enough, if you goto national capitals and say: “Britain wants x, y andz”, of course people in that national capital will say:“No, we won’t give it to you.” That is for yournegotiations. I do not know of any government whowould say: “Yes, of course. Reduce your budgetcontributions. Increase the effect of your rebate.” Thisis subject to negotiations.A similar thing is the idea that you will want to reducethe costs and maximise the benefits of EUmembership. I do not know of a single governmentwho go to their electorate and say, “Look, we want tomaximise the cost and minimise the benefits of EUmembership.” Of course you want to maximise thebenefits and reduce the costs—that goes with theterritory; it is what you are elected for. Anygovernment will say, “From our point of view, wewant to keep the costs to a minimum and maximise




benefits.” Britain must do the same. If Britain goes tothe negotiating table and says, “This is what we needto stay in the European Union over a longer period oftime”, I think they will get concessions.The second point I want to make quickly is that it isinteresting to note Germany’s position in this and theposition of some non-eurozone countries, such asSweden and Denmark. I think that while a lot of thesecountries will not like Britain renegotiating, what theyfear more is Britain leaving the EU altogether. If welearned anything from the last EU summit, it was thatAngela Merkel is now somewhat vulnerable to aMediterranean bloc. She is much more alone in theeurozone 17 than in the EU 27, and she needs Britainthere to counter-balance a potentially quiteprotectionist Mediterranean bloc. She will wantBritain inside and will therefore be willing to giveconcessions.

Q62 Rory Stewart: Just to pin this down morespecifically, Charles was essentially saying that allyou could ever get were breadcrumbs. You might getsome concessions on the working time directive, orJHA, on which we have an opt-out under Lisbon, butany idea that you might get something substantial ismisleading. Presumably, you disagree with that.Mats Persson: Yes, I disagree.

Q63 Rory Stewart: Can you give some concreteexamples of what we might get?Mats Persson: Structural funds: if you pitch thatcorrectly, there is no reason why you would not beable to do something with structural funds. Out of 27member states, 23 would benefit from havingstructural funds limited to richer member states only.It is a win-win situation. For the other four, whichhappen to be the poorest Mediterranean countries, youcan have an alternative arrangement that makes thestructural funds much more targeted than they are atthe moment.Roughly 30% of structural funds in Spain still gotowards infrastructure. Spain needs a lot of things, butmore roads and railways are not one of them. Thereis a win-win on structural funds, for example. We alsomentioned the 2014 JHA choice: Britain can do thatunilaterally without changing common treaties, andthen it can opt back into individual pieces ofregulation or law on a case-by-case basis.Those are two, and I think a third that you couldpotentially get is a single market safeguard, workingwith non-eurozone countries. A range of differentpragmatic solutions can be explored because here,Britain is not alone; there are a lot of non-eurozonecountries. We all talk to European governments andwe know what they say—“Britain should not begetting concessions. However, we are very keen forthe single market not to be undermined.”If you have a single market safeguard that works forall non-eurozone countries, Britain can get that aswell, and that would be very meaningful. Let’s saythat you would be able to refer a proposal to theEuropean Council where unanimity applies if non-eurozone countries see it as undermining the singlemarket, as involving eurozone caucusing or as beingdiscriminatory against non-eurozone countries.

There is a range of different pragmatic solutions.Those are three examples that you could getreasonably soon.

Q64 Rory Stewart: Finally, you understand this stuffmuch better than I, but apparently the enhanced co-operation procedure can only be used to reinforce theintegration process. Will you explain how it could beused by some member states to repatriate powers?Mats Persson: That would require a treaty change, aninstitutional change, but you could also use theprinciple of that mechanism to allow powers to flow inthe other direction. That would simply involve treatychange, where you say, “A limited number of memberstates could pursue powers back over this section ofthe treaties.” I think that would be institutionallypossible. Of course, it would require a treaty change,but I think that those are the kinds of ideas that wehave to work with.

Q65 Chair: Just to pick up on an issue raised by MrStewart, you mentioned structural funds as somethingthat you may get. Would that require treaty change?Mats Persson: No.

Q66 Chair: Would the single market safeguardsrequire treaty change?Mats Persson: Possibly.

Q67 Chair: Would you get unanimity on that?Mats Persson: I think you could—if it is presentedand communicated in the right way, unlike theDecember demands leading up to the December veto,and if it is prepared and the right lines are built aroundit, you could achieve that and get unanimity. Again, ifthe options are between the UK starting to fall outaltogether or some concessions with Britain remaininginside, I think the Germans, Swedes, Danes and otherswill play ball.

Q68 Mr Baron: Mr Persson, I have one question tofollow on from what Mr Stewart asked you about therepatriation of powers. I share your greater optimismthan Mr Grant’s that it is achievable—after all, that isthe Government’s stated position—but I believe thatone day, we will have to have a referendum in thiscountry. I believe we could legislate now for areferendum in the next Parliament, and I am not alonein my party in believing that. Would a referendum onthe statute book now increase the bargaining power ofa Prime Minister trying to repatriate powers or not?Mats Persson: I am somewhat agnostic on thatquestion. To me, it is very difficult to tell whether itwould help or not. In theory, if you come tonegotiations with a strict negotiation mandate fromhome, that helps, but it could also create variousproblems, of course. The question is what exactlyyour mandate involves. I must say that I am going toride the fence slightly on that one. I think thereferendum will probably have to happen sooner orlater, because there is so much political momentumbehind it, but at what point you call it is a difficultone.




Q69 Mr Baron: Surely you call it after you havetried to claw back powers.Mats Persson: Yes, you would probably have to havea validating referendum. Otherwise, it would be a bitlike holding a referendum on who we want to winWimbledon, which is a bit difficult.Sir Menzies Campbell: Not at all.Mats Persson: In terms of the sequencing of areferendum, there are two ways to do it. Either youhave a validating referendum with some sort ofmandate preceding it, perhaps in an electionmanifesto, or you can do a two-stage type of thing,where you have a three-way first, and the two firstones come up against each other in a secondreferendum, perhaps following negotiations.That could be another interesting option to explore. Itwould be unconventional for this country, but it couldbe a potential way of doing it. So I think there are acouple ways of doing that, which have to be lookedat and explored in detail, but in terms of legislatingfor it now, I am not sure. Obviously, I like the driveand enthusiasm for reform.

Q70 Mike Gapes: To follow up on what RoryStewart asked you, you seemed to imply that therewas support in other European countries for theBritish Government agenda. Can you specify whichcountries?Mats Persson: I am not saying there is support for theBritish Government agenda; I am saying it is subjectto negotiations.

Q71 Mike Gapes: So you accept that at present,there is no support in other European Union countriesfor the position that the British Government aretaking?Mats Persson: I accept that if you go to Paris, theywill of course tell you that—

Q72 Mike Gapes: I am not talking about Paris. I amtalking about other European countries—let’s saycentral Europe, southern Europe and the Baltic states.Is there any support there for the British Governmentposition?Mats Persson: Define “the British Governmentposition”.

Q73 Mike Gapes: As expressed by David Cameronat this moment.Mats Persson: To repatriate powers?Mike Gapes: Exactly.Mats Persson: He has not done anything yet.

Q74 Mike Gapes: As expressed, for example, inrecent articles in The Daily Telegraph, or the well-known position of the British Government. Is thereany support in other European Union states, atpresent, for that position?Mats Persson: If they can avoid negotiations, theywill do it.

Q75 Mike Gapes: So the answer is no?Mats Persson: The answer is that if the option isbetween Britain withdrawing and Britainrenegotiating, I think there will be support.

Q76 Mike Gapes: But you’re not giving me anycountries that do support it.Mats Persson: Do you want to get down to policyareas? This is what needs to happen. We need to gofrom this abstract concept—

Q77 Mike Gapes: I am asking you to answer thequestion I have asked. Is there any other EuropeanUnion country, at present, that is supporting theposition that the British Government are puttingforward?Mats Persson: On the single market safeguards, as Isaid, I think there is support from non-eurozonecountries, in principle.

Q78 Mike Gapes: But you are not naming any.Mats Persson: Sweden and Denmark.

Q79 Mike Gapes: They explicitly support the BritishGovernment position?Mats Persson: They will support measures to preventthe single market from being undermined, yes. Ofcourse they will. They are as worried as anyone elsethat the single market might be undermined. Actually,the Germans, if you put it to them correctly, mightsupport the undermining of the single market, for fearof being pushed into the arms of the Mediterraneanbloc.Structural funds are a tricky one, because Hollandehas changed the rules of the game a bit, but I think,in principle, go and talk to Swedish Ministers. Theywould love to repatriate the structural funds.The Czechs have sided with the UK Government onthe fiscal treaty. You can look at some other things. Ifyou look at the EU patent, for example, whichinvolves more of Europe and is a very important step,the British Government received a lot of support forthat. How many countries have signed up to thebudget freeze that they have called for—10 or 11?Hollande may have withdrawn his signature; we arenot sure.I can go down the list. It depends on how you framethe issue. If you say, “The British Government wantthis, this, this and this—just accept it,” they will say,“No, of course we don’t accept it.” You need to frameit in the right way and start to negotiate. That is howthe EU works—by compromise and negotiation.

Q80 Sir Menzies Campbell: What is the differencebetween you and the previous witness, then?Mats Persson: I am Swedish.Sir Menzies Campbell: That is obvious, but—Chair: Order. I call Ann Clwyd.Mats Persson: I am sure Charles has a lot of thingsto say about it, but the difference is that, again, I seethe status quo as the threat in relation to UKwithdrawal. I want to revise the UK’s EU membershipterms in order to save them. I think that is verystraightforward. We are willing to take concrete stepsto achieve that. We think sometimes you have to gointo negotiations in quite a tough way. You have to doit in a shrewd and smart way. You have to negotiateand be willing to play hardball sometimes to getsomething back.Sir Menzies Campbell: And—




Chair: Order. I call Ann Clwyd.

Q81 Ann Clwyd: You seem very confident abouttalking about British public opinion. I do not knowhow you gauge that. Is it through opinion polls? Howcan you speak for British public opinion?Mats Persson: I would not dare to say that I can speakfor British public opinion. Are you saying that Britishpublic opinion is less or more sceptical than what I—

Q82 Ann Clwyd: You were suggesting they weremore sceptical.Mats Persson: Most public opinion polls would putBritish public opinion in the strongly sceptical camp.

Q83 Ann Clwyd: But wouldn’t you say that theBritish public know even less about the EuropeanUnion now than they did when we had the first directelections to the EU, in 1979? I was a Euro MP at thattime, and the British public knew very little about theway the EU worked. I suggest to you that they knoweven less now—first, because of the system of electionto the European Parliament. MEPs have less contactwith their electorates than they did initially, in 1979,because of the system of election.Mats Persson: So you are saying that there is acorrelation between ignorance and Euroscepticism.

Q84 Ann Clwyd: I’m asking you.Mats Persson: I don’t think there is. I think there canbe, but one does not flow automatically from the other.That reminds me a bit of what I heard an MEP say inthe EU ACTA debate. She was saying, “Yes, there isa lot of campaigning against this EU ACTA treaty, butas MEPs, our role is not only to legislate for citizens.Because they’re busy with other things, we also haveto think for them.”

Q85 Ann Clwyd: Yes, but I am saying that you haveless contact with them now because of the system ofelection. It was only comparatively recently—I thinkit was at the last election—that in Britain we went tothe list system. Now, people have bigger electoratesand are therefore more remote from their electoratesthan they were previously. I do not know whether thatis your experience.Mats Persson: Possibly. I think that could be a factor.I do not necessarily see how it would have a majorimpact on the British public’s Euroscepticism, though,because that goes deeper than just the electoralarrangement of the day. I think that runs very deep.You are looking at quite strong historical and culturalforces that make Britain as Eurosceptic as it is. Thepoint you raise may have something to do with it, butat the end of the day, Britain is a Eurosceptic nation,whether we like it or not, and it will remain so for avery long time.

Q86 Ann Clwyd: I am trying to suggest to you thatthere is considerable ignorance about the EU.Everybody now knows about the eurozone—I wouldsay that comparatively few people understand it—but,in general, people do not hear enough about what goeson in the European Parliament and what subjects arediscussed, because of lack of coverage in the British

press compared with other countries. Stories from theEuropean Parliament fill the front pages of Frenchnewspapers and German newspapers; they very rarelyappear on the front pages of British newspapers.Mats Persson: You know what? I will actually takeissue with that. We go through the European pressevery morning, in 12 or 13 different languages and itis quite interesting that the UK media has had a lot ofcoverage of Europe over the past two and a half yearscompared with a lot of other European countries. Goto my native country, Sweden, and there is much lesscoverage—at least, there used to be before theeurozone crisis—of Europe than here in Britain. TheGerman media are very interesting, because naturallythey will have a lot of coverage of the EFSF, the ESM,TARGET2, SMP and so forth and so on.If you talk about the public not understanding theeurozone crisis, with respect, politicians have not donea particularly good job of getting on top of that either,so I would be a bit cautious about that. I hear whatyou are saying, but I think that in the British media,in terms of the cumulative coverage, there has actuallybeen quite a bit. However, I agree that they should domore to cover the European institutions.At the end of the day, I still think that, even if theBritish public was absolutely 100% on top ofcomitology, for example—if they knew exactly whatthat involved—that would not change one bit of theirEuroscepticism; it would probably make them moreEurosceptic, because comitology is a whollyundemocratic process, but that is for a different day. Iagree that there are, of course, areas of EUmembership that are beneficial, and perhaps the UKmedia could do a better job of covering them, but Iwould still not count on the British public becomingless Eurosceptic.

Q87 Ann Clwyd: Finally, can I ask you about twopossible risks that might arise through the repatriationof certain powers: first, that other member stateswould raise their own demands and the EU wouldeffectively unravel; and secondly, that the UK mightdamage its reputation for adhering to internationaltreaty obligations? How would you assess thoseissues?Mats Persson: Both of those are valid points, and theyhave to be acknowledged. I would say that, on thefirst one, it is true that a sort of tit for tat game maybe triggered. The big risk there is, of course—this iswhere I agree with the risk, at least—that the Frenchwill start to talk about watering down state-aid rules,which would not be good for Britain. Against that,you have to consider what the options are.If you do not actually do something to revise UKmembership terms and change the basic EU structure,then it may unravel anyway. Is there anyone whothinks that the one-size-fits-all principle is still a solidoverarching principle for European co-operation? Wehave seen, with the eurozone crisis, that you probablyneed a more flexible model if this is going to work. Iactually think that that flexibility may prevent the EUfrom unravelling, and if you negotiate in the rightway, you may not have that tit for tat that a lot ofpeople are warning against.




On the second one, I do not think that that willdamage the UK’s credibility, because if it negotiatesproperly, then it would not break treaty obligations; itwould just renegotiate a treaty, which happens fromtime to time. There is nothing unusual aboutrenegotiating a treaty. At the end of the day, the EUcannot be the end of history. We cannot possibly havediscovered the end of history with the EuropeanUnion moving only in one direction perpetually. Wecannot have that philosophical discovery right at ourdoorstep. Just like a lot of other internationalarrangements throughout history, the European Unionneeds to be subject to change and institutional change,including with a two-way street when it comes topowers.

Q88 Ann Clwyd: And perhaps with the EuropeanParliament meeting in one place of work.


Witness: Michiel van Hulten, independent consultant, Brussels, and former MEP, gave evidence.

Q90 Chair: Our third witness this morning is Michielvan Hulten. Mr van Hulten, you have been listening tothe last two witnesses. Would you say that you bring athird dimension to the debate? You have over theyears floated a number of different ideas forrestructuring of Europe. Do you consider yourself analternative to the two points of view we havelistened to?Michiel van Hulten: First of all, thank you very muchfor inviting me. I am Dutch, but I was largely UKeducated, and my wife is British, so I feel a great dealof affinity with this country, and the discussion youare having. I would consider my ideas a little far-fetched compared with the two previous speakers, soI hope you will allow me to make some briefintroductory comments to set them in context.Chair: Of course.Michiel van Hulten: The first thing I want to say isthat throughout my career I have worked closely withBritish colleagues—first in the European Parliamentand then later in two think tanks, Policy Network andthe European Council on Foreign Relations. Whatstruck me as a student when I was at the LSE, andwhat I still find striking today, is that Britishindividuals and ideas play such a central role in thedebate about the future of Europe. It is one of thegreat ironies of European history that the memberstate which I think has been consistently the mostcritical of the European project, and where some ofthe most outlandish and outrageous myths aboutBrussels are sometimes peddled, is also the one whichcontributes some of the most thoughtful, constructiveand frankly necessary ideas about how the EuropeanUnion should evolve. I think your inquiry attests tothat.The intriguing question to me, when I was thinkingabout this testimony, was why these ideas find so littlesupport among countries and people on the continent.I think the simple answer is because the UK has nevertruly, fully become a member of the European club. Ithas always been at best half-hearted about the project

Mats Persson: That would be a very good start.Unfortunately, it would require a treaty change, but itwould still be a very good place to start.Chair: And we would have a common electric plugthroughout Europe. Ming, did you want to makeanother point?Sir Menzies Campbell: No; the moment has gone.

Q89 Chair: Thank you very much, indeed, forcoming. We appreciate your views and we lookforward to keeping in touch with you.Mats Persson: Thank you so much. Thanks forhaving me.

to which it signed up almost forty years ago. That iswhy at the European Council in December last year itproved remarkably easy for the rest of the EuropeanUnion to move ahead without the UK. This was notjust a major policy disagreement. I think it was theculmination of years of frustration about a memberstate which professes to want to be at the heart ofEurope but in reality does not subscribe to some of thecore objectives pursued by the other member states.If this was the only challenge facing the EU, thesolution would be easy. The UK and the EU couldeach go their separate ways, and everybody would behappy. The reality, however, I think, is that severalother forces are threatening to pull the EU as a wholeapart. The most obvious one is the current euro-crisis,which pits members against non-members—but, evenmore significantly, northern members against southernmembers. All across Europe people are losing faith inthe European project, because it imposes too muchausterity, because it costs them too much money,because it is undemocratic and because it isbureaucratic, as they see it.I think the EU project is deadlocked and in danger ofcollapse. Seen from the continent, the UK now lookslikely to leave at some point in the next decade, butmembers of the eurozone themselves cannot agree ona viable way forward either. The debate between themis getting increasingly acrimonious. The accession ofTurkey has been put on hold because of our internaldifficulties within the EU. Popular support for the EUand its policies is at an all-time low, not just in theUK but across Europe. If nothing is done, the mostlikely outcome, I think, is that member states willleave the EU one by one, some voluntarily, someagainst their will, all as a result of the political andinstitutional gridlock that we are facing today withinthe existing treaty framework.I think that to allow the European project to fail atthis juncture in history would be madness, and aEurope without the UK would be unthinkable. Thereare clearly important issues on which Europeans



10 July 2012 Michiel van Hulten

fundamentally disagree, but there are also many—many more, I would say—objectives which we share:the commitment to the continued stability and securityof our continent; increased prosperity by reducingbarriers to trade and promoting free competition;strengthening Europe’s ability to make its voice heardin the world; and addressing cross-border globalproblems effectively.I am convinced that a durable solution to the currentcrisis is possible, and it will require at least twothings: first, a fundamental redesign of the architectureof European co-operation to remove the destructivetension currently tearing it apart. Rather than creatinga two-speed Europe—as Joschka Fischer, the formerGerman Foreign Minister, has called it, a vanguardand a rearguard—or gradually forcing countries outof the existing EU framework, we should replace theexisting EU with a wider Europe organisation focusedon regional security and global trade, and a secondbody with a separate decision-making structure tobring together those countries whose economies areso aligned and intertwined that it no longer makessense to have independent fiscal and economicpolicies. I call that a two-layered Europe, and I haveset out, in an article for the ECFR, what the broadoutlines of that would be.The second thing that I think is required is a popularmandate. Solving the euro crisis and building a newarchitecture will need thorough public debate andapproval in national referendums. We need to learnthe lessons of the last 20 years, in particular—I saythis as a Dutchman—the lessons of the 2005constitutional debacle, as well as the current eurocrisis. Only by giving people in every country a realsay can we build a new framework that can withstandthe test of time. This process should proceed on anopt-in basis, which is that member states can opt orrefuse to join, but they cannot block other countriesfrom moving ahead.Finally, Europe needs to find a new way of dealingwith the tensions that are causing it to break up, notby creating various types of second-rate membershipor by forcing countries out, but by recasting the entireEuropean edifice in such a way that all currentmembers can stay and new ones can join.

Q91 Mr Baron: Mr van Hulten, for many of us whodisagreed with the concept of the euro from the start,one sensed that in order to make monetary unionwork, you needed a fiscal union, and fiscal union is avery short step towards political union. I have a lot ofsympathy with regards to the two-tier suggestion thatyou have proposed—two-tier rather than two-speed.Two-speed implies that you are all aiming off at thesame destination and you are just going to takedifferent times to get there. A two-tier recognises theinherent contradiction at the heart of the euro. Couldyou set out your proposal for the two-tier structure ina little more detail? How would it be funded? Wouldthe outer core be a genuine free trade area? Whowould have responsibility for external trade?Michiel van Hulten: In my article I called the outerarea the European area of freedom, security andprosperity. This area should be based on the principleof unanimity, in recognition of the fact that one of the

reasons why countries are members of this particulararea is that there is no support in those countries fora system based on qualified majority decision-making.I also think that in this particular area, democraticcontrol should be exercised by national Parliamentsrather than by an overarching European Parliament,because again, I do not think that there is the supportand legitimacy for it. This body would operate as theglobal trade negotiator for the body as a whole. Ofcourse it would have to reach decisions internally.In my view, the countries that operate in the second,more integrated layer would effectively operate as onecountry, so a little bit like the United States withinNAFTA. Effectively, you would have maybe four, fiveor six voting entities within this larger area, one ofwhich is a European economic and political unionconsisting of those countries that decided to pool theirsovereignty and go for a fully fledged federal systemwith a federal Parliament and Government, whichdecides by qualified majority on its internal policies.

Q92 Mr Baron: Can I suggest to you a scenario?The eurozone crisis has yet to fully play out. There isa question mark as to whether the euro can survive.Some would suggest that no amount of moving thishuge amount of debt around the system from bank togovernment and back again can conceal or erode itsscale. Okay, a little bit of financial repression andausterity will help, but you still have this enormousdebt that needs dealing with. One day, there has to bea day of reckoning, and we are seeing Spanish bondyields above 7%. It may come about of its owninclination, mightn’t it? If you do see an implosionand the eurozone breaks up and perhaps eventhreatens the very existence of the euro even amongthe hard core, how does your two-tier approach fit intothat sort of scenario, a scenario which the markets areincreasingly suggesting is likely to happen?Michiel van Hulten: When I first wrote my articleabout this around half a year ago, I thought that theintegrated core could consist of the 17 eurozonecountries. That is very unrealistic right now. At thetime my main question mark was over Greece. Nowit is clear that Spain and Italy are also in serioustrouble. The main thing that I want to get away fromwith the approach that I am suggesting, which Idescribed earlier as farfetched because it is obviouslyan incredible undertaking to rewrite the entireinstitutional framework of Europe, is the situation weare in now where countries are classified as eithergood or bad, based on their attitude to Europeanintegration or their economic situation. If we don’tdeal with those huge tensions we face a much biggercrisis than if we address them now. For some countriesthat may mean that they will have to start at a positionthat is back to where they were several years ago, i.e.prior to joining the euro. It will be easier to securesupport in countries like my own, the Netherlands,and Germany for a frame-work where we start outwith a smaller eurozone core that can later beexpanded rather than trying to sustain the presentsystem, which I think is unsustainable.

Q93 Mr Baron: Your suggestion has traction in thesense that it addresses the fundamental contradiction




that exists at the heart of the EU, not just the eurozoneat the moment. But what support are you seeing forthis idea? Have you had any suggestion of supportfrom other EU countries and politicians? Is thisgaining traction generally? How likely is it totranspire?Michiel van Hulten: I think that the kind of idea Iam discussing is being discussed in various forms. Imentioned Joschka Fischer. He talked about the ideaof a two-tier Europe. Jean-Claude Piris, the formerhead of the Council’s legal service whose writtenevidence you have taken, suggested somethingsimilar. Charles Grant told me on the way in thatDavid Owen has written a book in which he suggestssomething similar as well. The idea of creating a newtype of framework is gaining traction. What I do notthink is gaining traction—at least I have not heard itfrom anyone else—is the idea that we need to replacethe whole EU. The reason I say this is that the EUright now has so much baggage in terms of itsreputation and institutions. Ms Clwyd mentioned theseat of the European Parliament, which is a goodexample. I think that restarting the process and dealingwith some of the concerns that people have today andputting those into a new framework is the right wayforward rather than trying to tinker with an existingtreaty. We are going to open up a whole Pandora’sbox. We were discussing before the question ofrepatriation of powers and what the UK can achieve.It is very clear that almost every member state has itsown gripes and wish list in relation to the EuropeanUnion. Trying to achieve that by changing the existingtreaties, which require unanimity, is almostimpossible. If you move to a new treaty negotiationbased on opt-in, as was the case for the fiscal treaty,without giving member states veto power, it becomesmuch easier.

Q94 Sir John Stanley: The UK is in a nearly uniqueposition in Europe. Along with France she is one ofthe five members of the Security Council of the UNand in terms of involvement in international defenceand military operations, apart from France, she isunmatched in terms of capability and reach comparedwith other EU countries. Against that nearly uniqueposition of the United Kingdom, what is yourresponse to the view that if the UK formed part of anouter layer—or second division, however you wouldlike to term it—she would suffer the worst of allpossible worlds by having significantly reducedpolitical influence in the EU while at the same timehaving much greater vulnerability to the inner core, interms of her financial, economic and commercialposition?Michiel van Hulten: It is obviously not an idealscenario. The idea of having a two-layer Europe is, ina way, second best from an ideal perspective. Ideally,we would have 27 member states that all shared thesame outlook, were all happy to welcome Turkey intothe European Union, and could all agree on thepolicies. We are starting from a second-best position.But this is one of the reasons why I am also sayingthat we cannot afford to lose the UK, because of theUK’s enormous importance in foreign policy anddefence. We have seen that with the Libya crisis

recently, and we are seeing it now with the positiverole played in the Syria crisis, so that is why it isincredibly important to make sure that the UK remainsa core partner in Europe in the field of foreign policy,as well as in other areas.The fact that economic policy will then to a largeextent be divorced from foreign policy is, I think, ahandicap. There are no two ways about that. But whatI am hopeful of is that by removing the constanttensions and the ill will that exist at the moment fromthe discussions on core economic integration, it willbe easier for countries to move forward on issues suchas foreign policy, where those tensions do not exist inthe same way.

Q95 Mike Gapes: May I take you back to the actualmechanics of how your idea would work? What youare proposing would be fine if we were in 1947 andwere trying to create European architecture, but thefact is that European architecture already exists andyou cannot bring down the whole edifice. Whatpossible interest is there for major European Unioncountries—let’s say Italy or Spain—to destroy astructure in which they can see considerable benefitsin the hope of creating some alternative structures inwhich they might be less influential or might well beeconomically worse off? I just cannot see how that isgoing to happen. Are you suggesting that youestablish one structure while the other still exists, andyou run the two in parallel? I cannot see how thatwould be particularly useful, in terms of costs andefficiency, and ministerial or civil service time.Michiel van Hulten: Of course, you are right. It is ablue-skies blueprint, but 10 years ago who would havethought that today we would have a fiscal treaty notinvolving the UK? No one would have predicted thecrisis we are facing today, and we are findinginventive solutions to the problems that we are facing.The main point of my proposal—my idea—is to get apoint across, and the point is that we should stopplaying a blame game in which we say that theproblems of the European Union are due to certaincountries behaving in a certain way. That is the dangerat the moment. We are descending into acrimony andfinger-pointing, and we have to acknowledge the factthat there are certain inherent truths such as that thereis and always has been a huge debate about Europe inthe United Kingdom, and that there are hugeeconomic problems in southern Europe, and growingproblems in other member states. If we play a blamegame, those problems are going to get worse.We need to think about the objectives, about what weare trying to pursue, what things we agree on, whatthe major European and international goals are, andhow we can best make an architecture to fit that. It isabsolutely right that it is going to be a challenge but,given what we have done since December, I think itis possible.

Q96 Andrew Rosindell: Thank you for comingtoday, and thank you for your reports, which containsome very interesting information. What I would liketo focus on is how you feel the UK is viewed by therest of the EU.




We have been told by successive governments—Foreign Secretaries and Ministers for Europe—thatBritain punches above its weight, that we have greaterinfluence than we really should have because we areBritain. Is that really true, or is it just a smokescreento tie us in to the ongoing integration within Europe?If we were not there, how would that affect Europe orthe development of the EU?Michiel van Hulten: I think it is true to say from mylimited experience—I started following this up closewhen I came to Brussels as a Council Secretariatofficial—that Britain does punch above its weight, orat least did until the December meeting of theEuropean Council. That is partly to do with thecountry’s size and global importance, but it is also todo with the fact that the UK has always had the bestcivil servants and has always been the best preparedat meetings. It has had some of the best debatesabout Europe.The fact that there is such a debate about Europe inthis country, between those who favour furtherintegration and those who favour the opposite, has theadded benefit of ensuring that whatever policy theGovernment come up with has been thoroughly tested.Other governments do not have that advantage whengoing to Brussels.Things have changed in the past few months andCharles Grant was right to say in his testimony thatthere has not been a measurable impact in terms oflost votes or lost decisions since that has happened,but there is a feeling that patience has run out andpeople are no longer willing to listen to the UK in thesame way as before.Under the Labour Government, there was a feelingthat things were improving, the rhetoric was changingand the UK was speaking more like the otherEuropean countries, but if you look at the votingbehaviour and the developments since then, the realityis that in substance not that much has changed.

Q97 Andrew Rosindell: If patience is running outand people are no longer necessarily prepared to listento Britain in the way that they might have done underthe previous Labour Government—and, probably, theprevious Conservative Government—do you think ourEU colleagues would therefore acknowledge that adifferent type of relationship may be the solution forBritain? Would that be acceptable to them, or wouldthey try to make it difficult for that to happen, to keepus tied in?Michiel van Hulten: A lot of people are prepared toacknowledge that we need a different type ofrelationship, but I do not think that they would seethat as facilitating a number of the demands that theUK Government are making about the repatriation ofpowers. I do not think that people are prepared to givethe UK the membership rights of the EU on lesser oreasier terms than the rest of the European Union.If the UK wants to discuss its withdrawal from theEU, member states will have to discuss that, but it isnot realistic to think that, in certain key areas wherecompetition is effective and progress has been hardfought, such as the working time directive or othersocial measures, you will find support among the

governments or populations of other member states ingiving the UK a competitive advantage.

Q98 Chair: Is it fair to describe what you are puttingforward as a slightly academic approach? David Owenput forward the idea of—“two tiers” is the wrongphrase—an inner and outer core. If you are havingtrouble getting the repatriation of a power orsomething like that, how on earth are you going toget unanimity on the complete rejigging of the wholeEuropean Union?Michiel van Hulten: I agree that it is a slightlyacademic approach, although I think that it is gettingless academic by the day. The bigger the problems aregetting in the EU as a whole, the more there is a needfor a fundamental discussion. I do not think that theUK will get very far with demands for repatriation.Where I think that the UK could play a constructiverole is by arguing that the current architecture is nolonger working and that we all need to think aboutreplacing or reforming it to take out the tensions andthe problems that we are facing. There are not manyallies for repatriation. There are a lot of allies in manymember states, including the Netherlands, in the senseof people who think that the EU at the moment isbroken and needs to be fixed. If the UK can becomea leader of those countries, of those people, I thinkthat a lot can be achieved.

Q99 Chair: Can you think of any EU member whois attracted to the idea of a two-tier or outer layerof Europe?Michiel van Hulten: I think it is attractive to thecountries that are moving ahead now, the strongeurozone countries, because it will make life easierfor them to design their own policy. I have no ideawhether—

Q100 Chair: They are the inner layer.Michiel van Hulten: That is right. I imagine it couldalso be interesting—I do not know this—for the EFTAcountries, because they are now in a situation in whichthey, as has been said before, have simply toimplement the rules that are decided in Brussels. Ifwe can create a new architecture where they also aregiven a decision-making role within the system theyare a part of, that would be attractive to them.

Q101 Mr Baron: I was going to question you furtheron your thoughts about repatriation, but you havemade it clear that you think we stand very little chanceof repatriating powers. That leads me to ask whetheryou think we should play a slightly hardball game totry and achieve our objective of repatriating powers,which would certainly ease the Government’sposition. It certainly chimes with what the Britishpublic want.Allied to that, to what extent do you think that areferendum, perhaps some years away in the nextParliament, could help the Government to achievethat, if at all? There is a significant body of opinion,certainly within the Conservative party, that believeswe should legislate now, in this Parliament, and havethe referendum in the next Parliament, which wouldgive us time to play out the eurozone crisis and give




time for the Government to try to claw back somepowers. Whether it is successful or not, only time willtell. We could have an informed debate as to what theexact question should be—whether it is in or out, orsomething else.Michiel van Hulten: Playing softball on repatriationis certainly not going to get anywhere. Hardball is theonly way, but of course the consequence of that maybe that the answer in the end is no, at which point theUK would have no option but to leave the EuropeanUnion.

Q102 Mr Baron: Can I question that? That wouldnot necessarily be the case. You could have hardballand fail. The decision would not be to leave. Thedecision would surely be to have a referendum to givechoice to the British people, having tried your levelbest to repatriate powers.Let us agree with your and Mr Grant’s scenario thatit will be almost impossible to repatriate powers,despite the best of intentions. If we get to the pointwhere we have tried and failed, or we have had a fewcrumbs but nothing significant, is that not the point atwhich to have a referendum? Would legislating in thisParliament help to arm the Government in theirnegotiations in trying to claw back those powers?Michiel van Hulten: I do not think European partnerswill be impressed by the threat, if you like, of areferendum. The debate has been going on too longfor that. It is obviously not for me to say whether theUK should hold a referendum, but I have said ingeneral terms that I think that we are at a point inEuropean integration where we need a new popularmandate—not just in the UK, but in every EUcountry—because we have made some major changes.The EU effectively started out as an internationalorganisation like the UN. It is now, I would say, aquasi-federal government, and yet the peoples ofEurope have never been asked and have neverproperly debated whether that is what they want. Ithink that, certainly in a lot of countries, if there is aproper debate, that is what they will choose to do, soI am confident in advocating that. But I am alsoconfident that if we do not have a popular mandate,the EU is simply not going to function. I do not thinkit is optional. I think it is something we have to do ifwe are going to—

Q103 Mr Baron: Very finally, a referendum inperhaps a few years’ time, once the eurozone crisishas played out, is the right thing to do, if only torenew the popular mandate.Michiel van Hulten: Speaking for Europe as a whole,I think we need to weather and solve the current crisis.We need to agree on new terms of engagement and anew structure, and that new structure then needs to beput to the people for a vote to get their approval.

Q104 Mr Roy: Just a couple of points. Has the UKlost any power to influence since December last year?Has a perceived hardball attitude actually worked toour benefit?Michiel van Hulten: I can only talk aboutatmospherics. In the atmospherics, the UK has lostinfluence. The December decision was perceived as

saying, “You guys move ahead. We’re not going to bepart of this.” Inevitably, that changes the nature of thegame and the relations.Even from a personal point of view, we see that. Whenleaders walk into the European Council chamber atthe beginning of meetings, you see the way thatpeople greet each other and who has the tête à tête.You can see that there is a different dynamic goingon, so, of course, it has had an impact. The UK stillhas voting weight in the Council of Ministers; thatdoes not change. The UK still has allies in key policyareas. It still has disagreements in key policy areas. Inthe practicalities of the day-to-day work of theCouncil of Ministers, the difference, at least so far, isvery small.

Q105 Chair: Mr van Hulten, can you let us have acopy of your report, VoteWatch Europe? It makes forrather interesting reading. Where there are leaguetables, the UK is either at the very top or the verybottom, depending which way the question is framed.Do you think that that tells us anything about the UK’srelationship with the rest of Europe?Michiel van Hulten: Yes. As I have said, I amspeaking in a personal capacity, but, on this issue, thesecretariat has asked me to say something on behalfof VoteWatch, and I am authorised to do so. You havethe data tables that go with this report, and I havebrought sufficient copies. VoteWatch is anorganisation that monitors decision making in the EUinstitutions. Until now, we have only covered theEuropean Parliament—that was since 2009. As ofyesterday, we also cover voting in the Council ofMinisters. Basically, we show how member stateshave voted, how often they are in a minority and howoften they are on the winning side.One difference between the Council of Ministers andthe Parliament is that the Council only ever votes infavour. The reason for that is that if the presidencyestablishes that there is not sufficient support for aproposal, the proposal is not put to the vote. So it is aslightly odd situation when you compare this with theEuropean Parliament.I make that caveat, because as you will see in thefigures that you have in front of you, the UK, in thelast three years, has backed 90% of EU legislation.That may come as a surprise to some people, but youneed to factor in the fact that proposals that the UKand other countries oppose and for which there was ablocking minority are not covered by our data,because that information is not made public by theCouncil.What the data show is that you can look at it fromtwo different perspectives. From the UK perspective,the UK votes in favour of 90% of European legislationthat comes before it in the Council, so it is a goodEuropean; 90% is very close to 100%. If you look atthe votes that were contested—all votes where at leastone country voted against—you see that the UK is ina minority 29% of the time. What that shows is thatthe UK, broadly speaking, is supportive of mostproposals, but stands out when compared with othermember states as the country that votes against mostoften and by quite a big margin.




Q106 Mike Gapes: On that point, could you also saythat although other countries might have been inclinedto express their reservations, there is a cultural thinghere in that when we have a reservation, the Britishattitude is that we are more prepared to register thatfact? Even though other countries know what theoutcome will be, they are more willing to go alongwith it, even though they have reservations.Michiel van Hulten: Yes. One of the chief authors ofthe report is Sara Hagemann from the LSE, who isvice-chair of VoteWatch. That is exactly the point shemade to me before this meeting. She said that somecountries, and the UK in particular, strategically voteno to make the point that they are opposed, whereasother countries may vote in favour despite the fact thatthey are opposed because they want to show that theyare good Europeans. That is absolutely true.

When I was analysing the data ahead of this meeting,I was particularly interested to know whether therehad been a change in the last three years. Obviously,you had a change of Government in 2010, so the firstyear of our data covers the Labour Government. Thesecond two years cover the current Government.Interestingly, and somewhat to my surprise, there isnot that much of a change. If you look at the first yearunder the Labour Government, the UK voted against,or abstained, on 10.7% of votes. Under the currentGovernment, it is 8.1%. If anything, the currentGovernment are slightly more pro-European from thepoint of view of these statistics than the previous one.Chair: On that cheerful note, we will end. Mr vanHulten, thank you very much indeed. That was reallyhelpful and an interesting contrast with our previousspeakers.



Tuesday 11 September 2012

Members present:


Mr Bob AinsworthMr John BaronSir Menzies CampbellAnn Clwyd

________________


Witness: Professor Patrick Minford CBE, Professor of Applied Economics, Cardiff Business School, gaveevidence.

Q107 Chair: I welcome members of the public tothis third evidence session for the Committee’s inquiryinto the Future of the European Union: UKGovernment policy. It will allow the Committee toquestion one of the most prominent economistsadvocating British withdrawal from the EU. ProfessorMinford, welcome. I hope that that does not pre-emptanything that you were going to say. Your position onthis is well known and long standing, and you haveargued it many times, so to ask you the question“What should happen?” will perhaps not take us muchfurther, but what do you think will happen? How doyou see this playing out over the next months andyears?Professor Minford: The first point I would make isthat a lot of people commenting from here on what isgoing on in Europe have a different viewpoint fromthe people in Europe who are participating in thewhole process. We here tend to overestimate thechances of the euro breaking up. The countries thatare most likely to leave in the first instance—say,Greece or Portugal—are absolutely determined to stayin for political reasons. They see a leaving of the euroas effectively putting them at risk of leaving Europe,so they are determined not to leave. At the same time,the other members of the eurozone are extremely keento keep the euro together because of the unpredictablenature of the effects of a country leaving, in terms ofthe general chaos of the break-up and thecontamination that could result from one countryleaving, in terms of risks of other countries leavingand the effects on government bond markets.So I think that the first point I would like to make isthat the eurozone is very likely, barring a completeshift in German opinion—essentially, whetherGermans decide that enough is enough and they leave,which I think is quite unlikely—to continue, and thecrisis will continue with it in an ongoing way as thenew institutions that they will need to make theeurozone work better in future are put into place. Thatcould take five years or it could take 10 years tohappen. Meanwhile, the European Central Bank hasmade it clear that they are going to buy bondswhenever crisis threatens, and I think that will happen.I think that is the basic background to the situation;this is not going to go away as an issue for us, interms of going back to some status quo ante wherethere was not a euro or where there was a muchsmaller eurozone. This is going to be a continuing

Mr Frank RoySir John StanleyRory Stewart

process in the eurozone, and that is the background toour policy actions.

Q108 Chair: Do you think anyone has got a plan? Isthere anyone out there at the moment with vision whocan see the way through, or are we stumbling throughfrom meeting to meeting?Professor Minford: I think the vision is to haveinstitutions in place that will make the eurozonefunction better. As everybody knows, to make acurrency union work, you really need to be part of afiscal union where there are sufficient shock absorbersin place to keep the currency working in the face ofquite sharp shocks. So they have to construct a fiscalunion, effectively, in order to make the currency unionwork. That will require a lot of institutions in place tomake it work as if it were a nation state run by a fiscalunion. That will take time.

Q109 Mr Ainsworth: When the Prime Minister casthis veto in December, were you cheering? What doyou think it achieved?Professor Minford: I don’t think it achieved anythingin objective concrete terms, but it gave a signal thatwe had a position and were not necessarily going togo along with things that would be against ourinterests. It achieved something in that sense. Itcommunicated something, but I don’t think that itachieved anything in concrete terms of institutionalchange. It gave out a signal and it started a process ofdebate, particularly here, and it perhaps also created alittle awareness on the continent that we do haveinterests at stake here.

Q110 Mr Ainsworth: I think you are right. It hasexposed a position. We were pursuing a position ofpreventing the deepening of the institutions of theEuropean Union, because we were uncomfortablewith many of the consequences of that. We nowappear to have acquiesced to other people, because ofthe financial crisis, deepening those institutionstowards fiscal union with us on the outside. Therefore,people like you who believe that we should leave theEuropean Union surely ought to be very happy withthe fact that we effectively marginalised ourselves.Are you not?Professor Minford: Yes, I was happy with DavidCameron’s statement, because it registered the factthat we are unhappy about changes that mightundermine our concept of Europe and our



11 September 2012 Professor Patrick Minford CBE

participation in Europe, which has always been on thebasis that there would be competition and a singlemarket, that it would be an outward-looking Europeand that it would not be a Europe that was highlycentralised and regulated.Of course, the sort of fiscal union institution buildingthat is going to happen is going to be threatening tothose concepts. It is going to be quite interventionistin a variety of ways that are very hard to predict.There is obviously going to be a lot of work targetingfinancial institutions that might be quiteuncomfortable for us as a major financial centre, andthere could be a lot of protectionism, because of theneed to make the peripheral countries that arestruggling with the recession recover. That will leadtowards more protectionist action. That is all veryuncomfortable for us and it was important for us togive a signal that we have considerable discomfortwith a lot of these things if we cannot be involved inthem. In fact, if they do spill over into affecting thesingle market in those ways, it is obviously going tobe a big problem for us.

Q111 Mr Ainsworth: Yes, and we surely cannotremain the pre-eminent financial centre of Europewithin a more fiscally integrated eurozone with whichwe want nothing to do.Professor Minford: We are not really a financialcentre of Europe; we are a financial centre globally.We are the pre-eminent global financial centre, andour main competitor is, of course, New York. I do notknow how much business is actually dependent on ourbeing in the European Union—probably not a greatdeal, but it is very hard to quantify. The mostimportant thing for us to be successful as a financialcentre is to be well regulated as such. Clearly, if weare inside an increasingly interfering EuropeanUnion—it is difficult to make a distinction betweenwhat the eurozone does and what will happen inEurope, because under the single market there isqualified majority voting. So if things are brought infor the majority of members in the eurozone and it isthen argued that they are not applying to us inside thewider European Union, there will be a strongargument for the single market to bring through thoseeurozone regulations, so that we are not out of linewith the rest of the European market. It is very hardto keep what will happen in the eurozone apart fromwhat is going to happen in the European Union,because the single market—largely because of MrsThatcher’s prosecution of that case—was brought inwith qualified majority voting, which puts us in a veryweak position if we are in a minority.

Q112 Mr Ainsworth: So we are on the way out?Professor Minford: I think this is really the logic ofwhat I have been trying to say; I think we are in avery difficult position. First of all, the way in whichthe European Union has developed economically hasnot been according to the concept that we had in mindwhen we pressed the single market on everybody. Infact, the organisation of Europe has become ratherprotectionist and not very competitive. It is muchmore a zone in which regulation was put in place thatwas in the interests of the dominant countries. It has

not been what you would call a very free marketenvironment at all.That has led to some quite considerable costs for us,anyway, being inside the European Union, which wasthe subject of my research some years back for thebook on the trade arrangements, the regulatoryarrangements and other issues of organisation inEurope. From my calculations, there was a very largecost-benefit deficit from being in the European Union,even before the recent developments. So yes, I thinkI agree with you that if these developments lead toeven more protectionism, more interference and moreregulation of areas that are inimical to our interests,we are in fact logically on the way out.

Q113 Mr Ainsworth: I don’t agree with you; I wasjust asking the question.Professor Minford: No, I don’t suppose you do agree,but I am perfectly happy to answer your question.Lots of people don’t agree with me.Chair: To one who might—John Baron.

Q114 Mr Baron: I happen to be one of those whowould certainly sympathise with your view. Can Idevelop your thinking with regard to the operation ofthe single market? I forget how many conferences andsummits we have had to try to save the euro, but wemust be heading towards 20 now. I think there isgrowing consensus that you do not solve a debt crisisby piling on more debt, and all that seems to behappening is that the eurozone leaders seem to beshifting the debt around the system—between thebank and government and back again.We all know that growth is the best way of reducingdeficits. We are told by our own Government—whenwe point this out to our own Front Bench andGovernment we are told that they are encouraged bywhat they see—that there is a lot of deregulationcoming through, the penny has dropped and there isgoing to be greater competitiveness. I sense from whatyou are saying that you obviously disagree with that.If anything, you are saying that there is a danger ofeven greater regulation, which completely contradictswhat the Government is telling us in the House ofCommons. What would you say to that?Professor Minford: I think one has to make adistinction between what the Government is nowsaying it would like to do in terms of national policyand the regulation coming from Europe. That is aclear distinction. My fear is that we are going to seea lot more regulation coming from Europe,particularly in financial affairs. One of the things thatI think is really needed domestically is to create onceagain a competitive banking system that is not over-regulated and prevented from lending. One thing thatis holding back our recovery is the lack of lending, aseveryone can see. The lack of response to quantitativeeasing in the form of extra money being created bybanks—that is the big thing that is missing. That iscoming, I think, from a big overreaction to the crisisin the form of massive re-regulation of the bankingsystem. I think that the penny is beginning to drophere that we need to get banking going. We need toease up on the regulative thrust of the banks in theinterests of getting banks into the credit business




vigorously again. The new proposal to have thelending programme, with the cutting of the costs oflending by the bank and the Government, is the firsteffort to roll back the freezing up of credit in thiscountry. The big worry is that one of the things thatwill come out of the European move will be a lot ofvery heavy regulation of the financial system.

Q115 Mr Baron: Can I suggest to you that althoughthe penny may be dropping here and that is verywelcome, the Government also seem to be saying thatthey are encouraged by what they see on thecontinent—that they do believe that the penny hasdropped with the eurozone leaders themselves, thatthey realise that greater competitiveness, and thereforegrowth, and being able better to compete with regionsoutside the EU, is very much on the agenda? Whatyou’re saying is that that is completely wrong, and ifanything, it’s going the other way. Are theGovernment seeing something you’re not, or viceversa?Professor Minford: What I was talking aboutspecifically just now was the financial—Mr Baron: Can we pull it down to regulation?Professor Minford: Talking about the other areas ofregulation, I think you’re right: there is a desire to doreforms, as they’re called on the continent, of thelabour market and to try to get more flexibility intothe economies and so forth. But as we see, it’s a verypainful, long and drawn-out process, and it is notmaking very rapid progress. There was quite a lot ofreform in Germany—the so-called Hartz reforms ofthe labour market—which did lead to greater labourmarket flexibility in Germany. But in these othercountries there is not much sign of these reforms,although Germany is backing them, actuallyhappening on the ground. Mr Monti is having a lot oftrouble in Italy, there are a lot of difficulties in Spainwith temporary contracts, and there is massunemployment. All these things have for a long timein Europe been given lip service—the idea that youare going to make labour markets more flexible; thatyou are going to deregulate them and have morecompetition. But they never seem to happen in theend, because there are strong vested interests in allthese countries opposing them; not least the unionmovement, but also business. A lot of businesses havevery strong vested interests in the status quo, and theyoppose these moves because they undermine theirown position. So one shouldn’t think that becausethere is a lot of talk of this sort, suddenly, Europe isgoing to change. It isn’t.

Q116 Mr Baron: You mentioned in your openinganswers that you thought we’re in a very difficultsituation; that, in your view, it reinforces the case thatwe are heading towards the door, in many respects,from the EU. Many would be concerned, if a questionwas put as to whether we should remain within theEU, about the cost to jobs and all the rest of it, andthat we would suffer economically. Why do you thinkthat’s not the case?Professor Minford: I think it is the opposite of thecase. We are suffering economically from being insidethe EU because it is a protectionist organisation. A

lot of people do not understand this: they think thatsomehow when you join the single market, this is apro-free trade action. In fact, what happens is that weare joining a customs union. A customs union raisesprices inside the tariff wall of the European Union andraises the prices of certain traded goods that it wishesessentially to protect, and it keeps out competitionfrom the rest of the world. Of course, if you are adominant producer of the things that are protected,you do get a gain, because your fellow membersinside the European tariff wall have to buy from youat inflated prices. Now unfortunately, we don’t get anygain from that because we are not a dominantproducer of these goods. So there is a general loss toeverybody from the fact that prices are out of linewith world prices. Consumers are paying too much;producers are producing the wrong things that areprotected. You can, if you are a dominant producerinside this tariff wall, make a bit of a killing at theexpense of your partners, but we are not in thatposition. We also lose out from that because we arenot dominant producers.All round, not only do European citizens lose fromthis protectionism generally, but we lose in particularquite substantially. I spent a lot of time in my bookon the whole issue trying to quantify that. Of course,it is true that if you leave your protectionistorganisation, the prices of the protected things fall.Consumers gain and certain producers lose. Of course,other producers gain, because they then get betterprofits at the expense of the sitting producers, who areprotected. Jobs are not lost; jobs are created overall,because you become a more competitive economy,producing the things that you are better at. Yourconsumers are better off, so there are generally goodincentives to work and so forth as a result of this movetowards free prices. The jobs that are lost in theprotected sectors are offset by jobs that are created inother sectors. There are more of them, in fact, becauseyou are a more competitive economy. The point aboutbeing inside the European Union is exactly theopposite of what its defenders say. We lose from beingin a protectionist organisation that distorts prices awayfrom world prices.

Q117 Mr Baron: If we were eventually to come tothe decision to leave the EU, by whatever means thatdecision was taken, do you think there is scope toestablish a free trade arrangement with the EU? Oneobviously wants good neighbourly relations. What isthere scope to do? You have obviously examined theSwiss and Norwegian models. We are about toundertake visits to both countries as part of ourinquiry and report. What would you advise us to lookfor in this regard?Professor Minford: One has to distinguish a situationwhere you become an independent country in theworld trading environment and operate under worldprices, in which case you sell anywhere at worldprices, including the EU. Of course, what you lose isprotective prices for particular products—in the carindustry for example. If we left the EU, we wouldimmediately join the world market in cars. One cansee that you need some transitional arrangements forthe car industry, because there would be quite a big




transition from the protected status to the unprotectedstatus where you were competing with cars from allover the world and the prices would drop. I think, forpractical reasons, transitional arrangements have to beconsidered. I imagine that there would be a particulararrangement for cars and other particularly protectedindustries that would suffer a big transitional loss. Itis standard when you do reforms that have long-runconsequences that are good that you have to havetransitional arrangements. That would be the sort ofthing to look at—particular interests that would sufferfrom loss of protection.A lot of people say that the Norwegian and Swissoptions are terrible, because you do not have anyinfluence over the regulations of the countries of theEuropean Union, but I always think that is a very oddargument, because for any country you export to youhave no influence over their regulations or theparticular things that they want you to embody in yourproduct if you sell it to them. That would be true ofany market we sold to. If we left the European Union,we would have to sell to them on their terms, but itwould be something that we routinely do.

Q118 Rory Stewart: Maybe this is a slightly unfairquestion, but what is your sense of why liberalisationin services in particular has not gone further in thesingle market system? Why has the UK not been ableto achieve its objectives?Professor Minford: When you do liberalisation—forexample when the UK liberalised its economy in the’80s—you need a lot of ability to buy off losers. Agood example is the housing market in 1988 when thehousing reform Act effectively abolished the rentActs, but sitting tenants were given the ability to carryon as sitting tenants with their privileges until theyleft or died. That was an example of how to makesome compensation to losers; you can get sometransitional arrangement where people who lose arewilling to buy into the reforms. Similarly withprivatisation, British Telecom workers were givenshare issues. You need to be able to compensatelosers.One of the big problems in the EU is that you cannotcompensate losers, because the budget is so rigidlyallocated to different areas that there is no flexibilityin the budget. For example, if China suddenlyproduces a new product that undermines the Italiantextile industry—the making of suits—there is no wayof compensating the suit-makers of Italy.What happens is that they come to the Council andsay there has to be an anti-dumping measure takenagainst the Chinese producers of suits. The moresensible outcome would be to have some transitionalassistance to the Italian suit industry. The EU is veryunable to do the sorts of things you need to beliberalising.

Q119 Rory Stewart: Could you also speculate on oranalyse the UK’s ability to control the EU budget?How much influence has it had in Britain? What isgoing to happen going forward?Professor Minford: I don’t think we have muchcontrol over it. We are one member among many. Aswe have seen recently, we tried to stop it but we

haven’t had an awful lot of allies. There has been verylittle effectiveness in stopping it expanding.

Q120 Rory Stewart: What relationship would youlike the UK to have with the European Union? Whatsort of model are you looking at? What seemsplausible and what would be in the UnitedKingdom’s interests?Professor Minford: I think it was a mistake to join,and I think we should just leave. It is verystraightforward. I am perfectly sympathetic to the ideaof renegotiation. One could make a great laundry listof things you would like to change in yourrelationship, but you go to your partners and say, “I’vegot this laundry list of renegotiation demands,” andthey say, “Sorry, we are not going to co-operate. Whyshould we? Why would it be in our interests to co-operate in a set of renegotiation demands?”People say we could threaten to stop the institutionalchanges that are going on as a result of the eurozonecrisis. Of course, we can’t, because they could alwaysdo it inside the eurozone as a separate arrangement.Then we cannot do anything about it, but we alsocannot do anything about any consequential effectsthrough qualified majority voting in the single market.I think we are powerless to use any leverage. We donot have any leverage over this that would give us thescope to renegotiate. I don’t think the renegotiationagenda is logical; it has no force. You cannot inpractice get a renegotiation. I think you have to say,“We’re leaving.” At which point, if you leave, yousimply repeal that treaty—the 1973 treaty; it is a one-line repeal, and you start again. You renegotiateeffectively, or negotiate, a completely fresh set ofrelationships that are suitable.That seems to me the logical way forward. We leave,we get a clean sheet of paper and we do things thatare in our mutual interests, which we are free to doanyway as an independent nation and should havedone all along.

Q121 Sir John Stanley: I am not clear why youbelieve it is such a hopeless task for the UKGovernment to freeze or possibly even cut the EUbudget. There are quite a significant number of netcontributor countries, including big countries such asGermany, all of whom are facing very seriousbudgetary restraints. Is it not a lack of determination,and will in part, by the British Government that it hasnot been able to mobilise sufficient power in Brusselswith potential allies in this area to get the EU budgetdown?Professor Minford: I agree with what you said, thatin principle it might seem so. Unfortunately, they arefacing a eurozone crisis. If you are in a crisis, the lastthing you want to do is cut back all the people whoare coping with the crisis. The European Commissionis heavily involved in trying to get this crisis resolved.It is quite a small outfit, actually. People often talkabout how enormous the European Commission is; itis really very small, considering its hugeresponsibilities. Of course it delegates as much as itcan, but when you are in a crisis and you areinstitution building, they are going to say, “How canwe resolve your crisis? You really have to pay for civil




servants.” It is a pretty difficult argument to answer.The other countries involved, particularly as they arethe ones that are in a crisis, are going to say, “Okay,we need another Sir Humphrey and we need peopleto work for him, because otherwise we are not goingto be able to resolve the crisis.”

Q122 Sir John Stanley: But expenditure in the EUis not largely on the Commission. It is largely on allthe other items—the common agricultural policy andso on. That is where the great majority of the budgetexpenditure goes. Why is it not possible for the BritishGovernment to mobilise those who are the netcontributors and produce a situation where we get amuch more sensible budgetary outcome?Professor Minford: The budgetary actions are allsubject to unanimity; it is not a single market thing.If you think about it, the French would veto anyattempt to change the common agricultural policy;Portugal and Spain would veto any attempt to changethe regional policy, and so you go down the list.Everybody has red lines that would lead to a veto, soyou get to an impossibility situation with these things.Obviously, everyone would like to make economies,but everyone has their red line—their own particularvested interest that is untouchable—and unanimity hasto prevail. I do not think you have a process there thatcan easily yield to the sorts of things that you aretalking about.

Q123 Sir Menzies Campbell: We have identifiedBritish manufactured cars and Italian manufacturedsuits as requiring transitional assistance. Is there anyway of estimating what the transitional costs wouldbe if the United Kingdom were to follow yourapproach and withdraw from Europe?Professor Minford: The point is that whenever youdo reforms that have long-run benefits, which are whatI have most focused on calculating, and which aresubstantial in the case of leaving a protectionistorganisation, something of the order of 3% of GDP isthe sort of gain from moving to free trade. But ofcourse you are right; there are transitionaldislocations. Those are not exactly costs; they aresimply transfers that have to be made. When anindustry contracts and another industry expands, thereis a gain overall. There is a gain to the consumer.

Q124 Sir Menzies Campbell: But that doesn’thappen overnight, as I think you will acknowledge.Professor Minford: It doesn’t happen overnight, butthe fact that it does not happen overnight just meansthat you don’t get the gain overnight. But there aremore gainers than losers. The point about transitioncosts is that they are essentially compensation costs.They are not costs to the economy. You have tocompensate the losers in order to not create socialdislocation.

Q125 Sir Menzies Campbell: That comes from theGovernment. That is public expenditure.Professor Minford: It can come by simply havingtransitional arrangements so that these things takeplace over a period of time. That would be how youwould manage it.

Q126 Sir Menzies Campbell: Which takes melogically—at least I hope logically—to my nextquestion. How long would that transitional period takein the event that the United Kingdom were to followyour approach and withdraw?Professor Minford: For most transitionalarrangements you need a decade. Something like adecade is the sort of way in which you could handlethis sort of change. I would not put it any less thanthat. It could be even more. But the point is that it ismoving our economy in the direction that it gainsfrom. Obviously, you cannot do it too rapidly, becausethere is too much dislocation.

Q127 Sir Menzies Campbell: I have one more rathermore specific example. You mentioned the supportprovided by the common agricultural policy. How fardo questions of food security enter into calculationsas to whether it would be better for agriculture tocease to enjoy the kind of support that it receives inthis country and elsewhere in the EU?Professor Minford: Obviously, people have raisedfood security from time to time. If there genuinely is asecurity worry about supplies coming from unreliableplaces and so forth, you can put in ad hoc controls,quotas, or thresholds that protect you in those securitydimensions. Those are much less expensive than thewhole common agricultural policy. That would be thepoint I would make. If you have security issues, it isalways better to pinpoint them and deal with them adhoc—item by item. The food security issue isprobably quite a narrow one. I do not know how bigit is at all, but I am sure that you could identify thethings where you thought there was a food securityissue and take much less expensive action to dealwith it.

Q128 Mr Roy: Because of its EU membership, doesthe UK have less access to markets outside the EUthan it would have by negotiating alone? If so, couldyou give examples?Professor Minford: I am not sure that I am followingyou exactly.Mr Roy: If we left the EU and wanted to negotiatealone in relation to trade—Professor Minford: With the EU?Mr Roy: No. Outwith the EU. What markets wouldbe available to us?Professor Minford: Oh, I see. Well, the world market.Those markets are already available to us. The pointabout the EU is that it creates trade diversion to theEU relatively, because obviously if the prices ofcertain products rise as a result of protection withinthe EU, you divert output to the customs union. Astandard effect of customs unions is, of course, tradediversion. So if we left the EU, there would obviouslybe no trade diversion incentive to the EU and ourproducts would move to other markets, because theywould be relatively more attractive than the EUmarket. Of course, the point is that our trade is alreadymoving towards other markets, because they are fastergrowing. Trade with the EU has dropped substantiallyover the last four or five years since the crisis, andtrade with the rest of the world has expanded




substantially as a result of relative growth indifferent markets.

Q129 Mr Roy: Would there be cases whereby if wenegotiated as a single entity, we would get a betterprice, for example, than we would as a member ofthe EU?Professor Minford: We don’t negotiate; we simplysell into markets. Markets are fundamentally—

Q130 Mr Roy: Surely you negotiate. Surely that iswhat selling is. It is a negotiation between buyer andseller.Professor Minford: No, you don’t negotiate; yousimply have most favoured nation treatment under theWorld Trade Organisation. One thing that hashappened in the last 20 or 30 years is the growth ofinternational institutions policing world trade. You donot go around negotiating; you simply go into amarket and sell, as we already do all around the world.We do not sell only in the EU. We already havearrangements—

Q131 Mr Roy: But with respect, you don’t go into anew market and say, “Take it or leave it.” You donegotiate. Surely, you negotiate. The United Kingdomwould not go into another country and say, “There itis. Take it or leave it.” Surely you are not saying that.Professor Minford: These are all voluntary contracts.Are you saying that if we left the EU, there wouldsomehow be a change in the commercial treatment ofthe UK compared with—Mr Roy: That’s what I am asking.Professor Minford: No, there wouldn’t be. Of coursenot. Why would there be? We are treated the sameway as any other country in world trade would be ifwe left the EU. It would be against WTO regulationsto do anything else. If a country levies tariffs againstyou unilaterally, that is illegal under WTOarrangements. That is one of the good things that haveemerged out of the last 30-odd years of the buildingof the World Trade Organisation environment.

Q132 Mr Roy: Could I take you to the mirror imageof that, which is the United Kingdom outside theEuropean Union and the European economic areawishing to negotiate with the European Union? Howdo you think Britain would stand?Professor Minford: As I say, I think there would beparticular areas such as the car industry where therewould be a transitional agreement, because it is sucha hugely integrated industry inside Europe as a resultof the way in which it has developed inside thecustoms union. I think there would be an agreementwithin the car industry that would be sanctioned bygovernments in effect to allow that to continue insome way for a length of time. That sort of industrywould require a special arrangement.

Q133 Mr Frank Roy: Made by whom?Professor Minford: Made, I think, as a result of thenegotiations that follow withdrawal, becauseeverybody has quite a large interest in that industry.

Q134 Ann Clwyd: Do you really think it is feasibleeconomically or politically to try to unpick the singlemarket in the way you are suggesting? I wasparticularly interested in some of the things you wantto unpick, such as social legislation. Some of us thinkthat social legislation is a good thing. I was an MEPwhen we had the big losses in the steel industry, forexample. We were criticised for not having a socialnet to assist people who were going to lose their jobsby the thousands because of the demise of the steeland coal industries. Why do you particularly want tounpick social legislation?Professor Minford: I think we gave a lot of help tothe coal and steel industries that, as a matter of fact,had not got much to do with Europe—mainly throughspecial grants to alleviate industrial problems. InWales, for example, huge grants were made throughthe regional mechanisms.I think, therefore, that our social safety net was quitea good one. We had a system of benefits. Theunemployment benefit system was a little bit toounconditional at that time; it had to be tightened up,with Restart and so forth. Now we have the newunemployment benefit system, which is quite tightlymonitored. We had systems of benefits to help peopleback to work, now called tax credits. In effect thesystem was quite a good one. It encouraged people toget back to work.There are problems about some of the sociallegislation that has come out of Europe as a result ofus joining the social chapter. In 1997, when Labourcame in they decided to join the social chapter. I thinkthat was a big mistake because it has brought in awhole raft of very intrusive intervention in the labourmarket, which has not particularly helped steelworkersor coal miners or anybody else displaced to get backinto work.

Q135 Ann Clwyd: There aren’t any more of those.Professor Minford: No, fortunately, because that allcame later, but looking at the analogue after 1997, ifwe had had those sorts of problems, it would havemade it much more difficult to adjust in our labourmarket. If you look at the sort of problems that areoccurring in places such as Spain and Portugal, withvery high levels of unemployment particularly amongthe youth, it is not a good advertisement for sociallegislation in the EU.

Q136 Ann Clwyd: And the working time directive?Professor Minford: I think the working time directiveis extremely intrusive and we spend all our timeavoiding it by one means or another. We have aninterest in people working; people want to work. Theidea that this is something that, on health and safetygrounds, you can impose on people seems not a veryserious idea. People have the chance to work. If theywant to work, they can choose the hours they workand presumably can judge their own health and safetyaccordingly, subject to normal health and safetyregulations.

Q137 Ann Clwyd: What sort of bargaining chip doyou think we have, if we want to pick and mix in




this way? We do not have very much influence in theEuropean Union.Professor Minford: I completely agree with you. I donot think that we have any influence. The so-calledrenegotiation agenda seems totally hollow because wehave no bargaining power. That is why we shouldsimply leave and start again.

Q138 Mr Ainsworth: The renegotiation agenda isuseless because we have no bargaining power.Therefore, we should leave. Having left, we would beable to negotiate for the car industry, for example, 10-year transitional arrangements. How on earth will webe able to do that? Why would the German-dominatedEuropean Union agree to give us 10-year transitionalarrangements for the car industry? You acknowledgedthat we could not do it quicker. The shock would betoo great. What negotiating leverage would we havefor such transitional arrangements?Professor Minford: The car industry is highlyintegrated, so it would be in the interests of thoseGerman dominant manufacturers to negotiate anarrangement, since they have a lot of plants here.There is a huge cross-ownership within the industrybecause it has been built up inside a protective wallwithin the EU. Of course, if there were not a willto do that, we would obviously have to give somecompensating payments ourselves to our end of thecar industry. We could do that, because we would begaining from the change in the structure of theeconomy.If, for some reason, there were no willingness by theother countries’ car owners and governments to co-operate in this and there were a faster run-down of ourcar industry as a result of that lack of co-operation, wewould have to compensate them in a way rather likethe steel and coal industry. Those were not economicindustries. That is a quite good parallel. If you havean industry that is not economic, it is your interests torun it down. Obviously, it would be nice if otherswould co-operate in parallel in the run-down so thatit puts less of a cost on you but if, in the end, youhave to do it yourself, you are still better off.

Q139 Mr Ainsworth: And we sell our goods in therest of the world, because the rest of the world is afree market. Would we be able to sell agriculturalproducts or defence equipment to the United States inthe free market that exists in the rest of the world?Professor Minford: I do not know the particularproducts you are talking about, but we generallyspecialise in services. There seems to be no lack of amarket for our services. Indeed, the goods you aretalking about are goods that we do not reallyspecialise in producing. The ones that we do specialisein producing, we seem to have no trouble selling. Infact, as I said, our exports to the rest of the world havebeen very dynamic in the last few years in the contextof the crisis. I do not recognise this great fear thatsomehow we cannot sell to the rest of the world. I donot recognise it in terms of the industries in thiscountry, which seem to sell very successfully to therest of the world.

Q140 Rory Stewart: I am still trying to understandthe political implications of this talk of transitionalarrangements. Is it not conceivable that what you arereally talking about is the collapse of the entire UKcar industry and that when we leave the Europeancustoms union and go directly into competition withAsian car manufacturers, this transitional arrangementis just a polite way of describing the wiping out of themanufacturing industry? How will that be explainedto a public and a political class that are increasinglyproud of our development in this kind ofmanufacturing industry in Britain?Professor Minford: It is perfectly true that if youremove protection of the sort that has been givenparticularly to the car industry and othermanufacturing industries inside the protective wall,you will have a change in the situation facing thatindustry, and you are going to have to run it down. Itwill be in your interests to do it, just as in the sameway we ran down the coal and steel industries.These things happen as evolution takes place in youreconomy. In the long run they are in your interest,but of course you have to deal with the compensationproblems along the route. It won’t be a process thatcan be entertained without some form ofcompensation. As I said, reform always requirescompensation. You can’t do anything that involveschanging relative prices long term that doesn’t involvesome form of compensation for political reasons.

Q141 Mr Baron: I suggest to you, and perhaps youwould agree, that there is a real risk that the EU willcontinue to fall behind the rest of the world when itcomes to market share, economic growth and so forth.I would suggest this is an EU overburdened withregulation and so forth. We talked about the socialchapter and the 48 hours. Do you see, in countrieswhere there is high unemployment particularly amongthe youth—the Mediterranean countries—anypolitical will there to try to get to grips with the deadweight of regulation, in order to free up markets andmake themselves more competitive? I come back tomy original question. Our own Government are sayingthat there is plenty of evidence that the penny isdropping. I question that; what do you see?Professor Minford: I question it, too. I’ve livedthrough the Lisbon agenda and umpteen agendas fromBrussels. I’ve lost count of them all and all theirnames. I remember the Lisbon agenda way back, andI’m sure Ann Clwyd remembers, too. We were toldthere was going to be all this reform; there wasn’t.There is enormous obstructionism and it is allunfortunately buttressed by the social legislation inEurope. Europe is a great engine for creatingentitlement, essentially, and strengthening vestedinterests, unfortunately.I am very sceptical that there will be much. Germanyis trying to enforce it through its austerity programme.It is basically saying, reform; austerity will continueand tighten if you do not reform. There is a sort ofprocess going on institutionally inside the eurozoneled by Germany to try to force the southern cone ofthe eurozone to reform in the way you talk about.Something will come out of that I should think, but Iam not holding my breath.




These are very difficult markets to deal with becauseof the strength of vested interests and the way inwhich these have been strengthened by the joining ofEurope. One of the ways in which these countrieshave benefited from joining Europe is in thestrengthening of the support mechanisms that theyhave had at hand to prevent these sorts of reforms. Idon’t see them changing any time soon.Of course, the latest remarks by Mr Draghi, sayingthat he will save the euro anyway by buying all theirbonds, whatever they do, as has been noted by peoplein Germany, are reducing the stick that is being wavedat them by Germany to get them to reform. I wouldbe very sceptical that there would be anything verydramatic coming out of it. Something will happen inthe end. There has to be something, but I think it willbe very slow and there won’t be very much of it. Itwill certainly take a long time.

Q142 Chair: Talking of sticks, you have argued thismorning that we have no leverage when it comes torenegotiation. The fiscal compact expressly says thatit hopes to be inserted into the EU treaties within fiveyears. That is the request. Is there not a political trade-off there? Could we not say, “Look, you can have thefiscal compact incorporated into the EU treaty, buthere is our shopping list of repatriated powers”?Professor Minford: I’ve thought about that quite a bitand have heard that argument quite a lot. It is not veryconvincing. They can always turn around and say, “Ifyou won’t co-operate we will do it in a separatetreaty.” There are obviously certain inconveniences indoing it in a separate treaty within the eurozone.However, as I understand it you can make use withinthe eurozone of the EU civil service and so forth and

it would be possible to have a separate treaty. If wewere to play that card, what are we saying: “We putyou to the inconvenience of having a separate treaty,so please give us a whole shopping list of demands”?

Q143 Chair: It is quite an inconvenience to have twoseparate treaties running in parallel but separate.Professor Minford: Yes. Well, there is an element ofleverage there. How big it is I don’t know, because itdepends how much is the inconvenience of aseparate treaty.

Q144 Chair: This would be politics, wouldn’t it?Professor Minford: This would be politics. I wouldn’twant to overplay it. For example, I don’t think itwould make it easy for us to leave the social chapter.I don’t think it would make it possible for us to changethe arrangements under the single market in which weget over-regulated. I don’t see where this renegotiationis going to go on really substantive things that arecentral to the structure of the EU. That is the problemI have. Once you mention the big areas that the EU isconstructed on, I don’t see us getting out of them.Effectively, those are the ones where we areexperiencing the massive costs: regulation, trade,social matters and so forth.Chair: Professor Minford, I am sure these argumentswill run and run and that we will be talking aboutthis for several years to come. I thank you for yourcontribution this morning and for the robust andarticulate way in which you have expressed yourviews.Professor Minford: Thank you.



Wednesday 6 February 2013

Members present:


Mr Bob AinsworthMr John BaronSir Menzies CampbellMike Gapes

________________

Examination of Witnesses

Witnesses: Rt Hon William Hague MP, First Secretary of State and Secretary of State for Foreign andCommonwealth Affairs, Sir Jon Cunliffe CB, UK Permanent Representative to the EU and Simon ManleyCMG, Director, Europe, FCO.

Q145 Chair: I welcome members of the public tothis sitting of the Foreign Affairs Committee. This isthe fourth, and is expected to be the final, evidencesession of the Committee’s inquiry, “The future of theEU: UK Government policy”.The Committee has been taking evidence since lastsummer, and visited several European capitals duringthe autumn, but sensibly decided that it could notconclude its inquiry until after the Prime Minister’smajor speech on the EU, which he finally deliveredon 23 January. Today is the first date since the PrimeMinister’s speech when it has been possible for boththe Foreign Secretary and the Committee to meet.Foreign Secretary, welcome.Mr Hague: Thank you.

Q146 Chair: I also welcome Simon Manley, thedirector of the Europe desk in the Foreign Office, andSir Jon Cunliffe. Thank you very much for comingover from Brussels, Sir Jon—it is much appreciated.Foreign Secretary, I understand you would like to startwith an opening statement.Mr Hague: I wanted to say a few sentences verybriefly, Chair—I spoke at length in the House on thislast week—just to welcome your inquiry.As you know, the Prime Minister believes, as I do,that Europe faces greater changes now than at anytime since the fall of the Berlin Wall. We aredetermined to seize the opportunities that thosechanges offer—that is what the Prime Minister’sspeech was about. They are opportunities to reformthe European Union and our relationship with it in away that is good for the EU and good for the UnitedKingdom as well.We are not in the business of ignoring the challengesahead, but in the business of confronting them, andwe are going to play an active and influential role inshaping Europe to make it a driver for prosperityagain. The focus is on competitiveness, flexibility anddemocratic accountability. I hope that that is anagenda that we will be able to take forward with theCommittee.

Q147 Chair: Thank you. Can I start with theBloomberg speech? How much input did the ForeignOffice have in that speech?Mr Hague: It depends on which part of the speech.The speech was in part a reflection of the Coalition’spriorities and beliefs about the European Union, as

Mark HendrickAndrew RosindellSir John StanleyRory Stewart

well as my speech in Berlin in October, which hadmany of the same themes. But the part of the speechthat was about what we will do after 2015 was thePrime Minister speaking as leader of the ConservativeParty. As you can imagine, on that part, the input fromthe Foreign Office came from the Foreign Secretary,as I am the foreign affairs spokesman of theConservative Party, as well as the Foreign Secretaryof the United Kingdom. Officials were not involvedin any of that part of the speech, but they were ofcourse able to give advice on those parts relevant toand representing Government policy in thisGovernment.

Q148 Chair: Did you warn him that the original dateof the speech was the same day as the Elysée Treatymeeting?Mr Hague: There was a range of dates for this speech.Since the Elysée Treaty meeting was taking place, inthe end we chose one of the other dates: Friday 18January. Of course, as the Committee knows, theAlgerian hostage crisis intervened, so we moved it tothe Wednesday instead.

Q149 Chair: It is proposed that there will be an in/out referendum. It will be drafted before the GeneralElection and would take place after it, if there is aConservative Government. To what extent do youthink the Foreign Office will be involved in thedrafting of the legislation over the next two years?Mr Hague: That is to be determined. The draftlegislation would be quite simple. I don’t think thatthat involves a huge amount of official work. But wewill involve the Foreign Office to the extent that isappropriate in pre-election arrangements. Of course,they will be required to work on arrangements in theevent of any party winning the General Election. Iimagine that that will fit within that, but we will dothat in an appropriate way.

Q150 Chair: What are you asking your officials towork on, both in UKRep’s office and here? To whatextent has the speech changed things? What is newthat you are asking your officials now to look at thatthey would not be doing if the speech had not takenplace?Mr Hague: The officials are working on all theaspects of Government policy reflected in this speechand all our other utterances and policies. As you



6 February 2013 Rt Hon William Hague MP, Sir Jon Cunliffe CB and Simon Manley CMG

know, the European Council is taking place thisweekend. There will be negotiations on theMultiannual Financial Framework and discussions atthe same Council on trade and, to some extent, onforeign policy. We are heavily engaged—lastThursday, I was at the Foreign Affairs Council in theEU—on the full range of global issues that arediscussed within the EU. We are very much engagedin driving forward the single market. The keyprinciples of the Prime Minister’s speech concerningcompetitiveness and flexibility are absolutely onesthat officials are working on all the time. That is partof the Coalition Government’s approach.The implementation of the referendum commitmentthe Prime Minister gave is for the Conservative Party,a future Parliament and officials at that time, subjectto whoever are the Government in that time.

Q151 Chair: So really, it hasn’t made muchdifference. This is work you would have been doinganyway.Mr Hague: The key difference in the Prime Minister’sspeech was a statement about how we will approachthe future and shaping the debate for the future. Itdoes not change the work of our officials on the singlemarket, the Multiannual Financial Framework and thefisheries policy, which the European Parliament hasvoted on earlier today, in a direction that we canapprove of—for a change. It does not change theirwork on these things.

Q152 Chair: You mentioned the Coalition. TheLiberal Democrats do not really support this proposal.Has that caused problems in preparing the policy?Mr Hague: It is, of course, a hybrid speech, to use aparliamentary term, although that is not unusual—itwould be normal in a single-party Government—closer to a general election. Of course, it is more likelyto arise in a coalition. In a mature democracy we allunderstand that. It has not caused a difficultypreparing it; it does mean that discussions about whatthe Prime Minister is proposing to do after the 2015General Election are, of course, discussions amongmembers of the Conservative Party. That would notbe unusual. It would not be unusual if theConservative Party was in government on its own forus to do that about what we will do in the nextParliament.

Q153 Sir Menzies Campbell: I was pleased to hearyou begin by saying the Prime Minister’s commitmentwas to reform, because I think that is a commitmentthat is pretty well shared on all sides of the Houseof Commons.May I ask you this question? Does the corporatememory of the Foreign Office recall the circumstancesin which Harold Wilson in the early 1970s, along withJim Callaghan, went round the capitals of Europeseeking renegotiation, came back and then, a bit likethe emperor’s clothes, had a very threadbare offeringto make. As a consequence, many people believed thatthe opportunity that had been taken was more of adevice to deal with the internal difficulties of his ownparty, than it was something in the public interest.

Mr Hague: I am sure that the corporate memory doesgo back that far, but in addition, my own personalmemory just goes back that far, and I think we wouldall have to agree that the circumstances of today arevery different. Europe faces the triple challenge—thetriple crisis, if you like—that the Prime Minister wasdescribing: of the effect of the eurozone crisis on theEU as a whole; of maintaining its competitiveness ina global race that was not taking place in the sameway in the 1970s; and of a growing gap between theEU’s institutions and the citizens of the EU memberstates. These are all factors that are present today thatwere not present in the 1970s. The Europe Union, orthe EEC as it then was, was relatively new. Now it isa mature institution facing these multiple crises, andwith other people advocating treaty change. That isin the so-called report of the four Presidents, it is inCommission President Barroso’s blueprint for thefuture—all of these call for treaty change for otherreasons. The environment, the scale of the crisis andthe requirements of other nations to bring aboutchange in the EU are all much more intense than inthe 1970s when it was simply a matter of a bilateralrenegotiation.

Q154 Sir Menzies Campbell: But I do not think thatany of these other countries that you mention haveembarked upon a process which would lead to an in/out referendum. I do not hear that in France, forexample, or Germany, or among the Baltic states, oranywhere else for that matter.Mr Hague: They have had referendums of course.There have been referendums in many other countrieson recent treaties over the last decade, when theBritish people have been, in my view, wrongly denieda referendum. People in other countries have had theopportunity to give their judgement.

Q155 Sir Menzies Campbell: But not on an in/outbasis.Mr Hague: No, not on an in/out basis, but as you willknow, Sir Menzies, from campaigning for an in/outreferendum at the last General Election for the LiberalDemocrat Party, there is a large body of opinion infavour of that in the United Kingdom.

Q156 Sir Menzies Campbell: A comparison ofmanifestos would not take us very far. Can I ask aboutthe approach here, and which of these two approachesis the one that you think is correct? Is it right to saywhile the eurozone is in difficulty, “We would like tohelp, and by the way, when that process is takingplace, there are a number of other things we want toraise”? Or, is the position, “The eurozone is in trouble,and we are not going to help unless you examine theseother issues which we think are important”? Thereception that the British Government will getdepends on which of these it is. Which is the approachthat you think you are going to address?Mr Hague: I would characterise it much more as theformer of those two. To look at an example of that inpractice, look at the recent negotiations concluded inDecember last year on the rules of the EuropeanBanking Authority. This is a change that is part ofthe so-called banking union proposals in the EU. Our




approach to that is that we are not going to block thechanges that eurozone members want, but we do wantour own interests to be safeguarded, in this case in anew way. So we asked for something that initiallyquite a few Member States were not very enthusiasticabout. Sir Jon might wish to add to that, as he wasinstrumental and part of the negotiations on this andsupported the Treasury team in doing so.We asked for a new procedure, “You can have aEuropean Banking Authority that sets rules by thenormal qualified majority but we want, as well, asimple majority vote among the ins and the outs ofthe eurozone, so that those out of the eurozone havetheir interests safeguarded.” That has been agreed inthe negotiations of December. Sir Jon, would you liketo elaborate on that?Sir Jon Cunliffe: Once one set out the principle thatif a number of countries were coming together in asingle institution and that institution would be roundthe table voting with all the votes of its members witha near automatic qualified majority, the point inprinciple was that you had to reflect that somehow bychanging the voting arrangements. There was a newreality being created by that particular proposal and anumber of changes were needed. Once the principlewas agreed, then it was about the details.

Q157 Sir Menzies Campbell: That is an illustrationof co-operation.Mr Hague: Yes, and hard negotiation. The two cango together.

Q158 Sir Menzies Campbell: But ultimately co-operation.Mr Hague: Yes.

Q159 Sir Menzies Campbell: Do you think that thatis embraced in the notion that if we don’t get what wewant, we would leave?Mr Hague: That part of it is just democracy. ThePrime Minister argued, correctly, in his speech thatdemocratic consent has become wafer thin for the EUin this country. I very much believe that to be true. Idon’t think we can deny people for ever. I am not sureanybody any more in the House of Commons isarguing that people can be denied for ever a say intheir future in the European Union. Therefore, it isbetter to lead that debate, confront that, shape thatand settle that. That is why the referendum pledge isimportant. It is not a threat; it is part of a vibrant,robust democracy that we have in this country.

Q160 Sir Menzies Campbell: Is that theinterpretation that the Governments of France orGermany have put on this policy?Mr Hague: Governments around Europe have ofcourse reacted in a wide range of ways, as they dideven to the proposal we made about banking rules.Chancellor Merkel said clearly that we must alwaysdiscuss the interests of individual countries; we are ofcourse ready to discuss British wishes and eventuallywe must find a fair compromise. She reacted in apragmatic way and that is true of many otherEuropean capitals.

Q161 Andrew Rosindell: Foreign Secretary, yousaid that the credibility of our legitimacy within theEU is wafer thin. Do you agree that it has been waferthin ever since we signed the Maastricht treatywithout a referendum?Mr Hague: There are many different types of waferson sale of different thinness. I do not know how wedefine when wafer thinness arrives. It has diminishedover all of that time. We have seen a series oftreaties—Amsterdam, Nice and, most importantly,Lisbon—where there were widespread demands for areferendum and it was not held. In the case ofMaastricht, of course, it was in the proposals of theparty that won the general election, that it would ratifythat treaty. In the case of the Lisbon treaty, there wasneither a general election nor a referendum for peopleto be able to give their views. That was veryundermining of the democratic legitimacy of the EUin the United Kingdom.

Q162 Andrew Rosindell: We are all delighted thatthere is going to be a referendum in four or five years’time, Foreign Secretary. For it to be a meaningfulreferendum is it right that the Government todayshould be looking at alternatives, to be motoring tolook at other alliances with perhaps theCommonwealth or other parts of the world we cantrade and co-operate with? Are the Government goingto make use of the next four years, so that when thereis a referendum there is a clear alternative, and it isnot just a question of being in or completely out ofeverything?Mr Hague: Be clear that the Government’s objective,as the Prime Minister has expressed it, is to succeedin arriving at a new settlement and to be able tocampaign for Britain to stay in the European Union.On the question of other relationships in the world, asthe Committee knows, a major part of our approachto foreign policy is that we are building up relationsall around the world, some of them, in my view, longneglected. Indeed, last year for the first time in a longtime a bigger share of Britain’s exports went tooutside the European Union than inside. Insideremains hugely important to us, but the balance hasstarted to shift in that direction as the pattern of worldeconomic growth has changed.We are shifting hundreds of diplomats into the AsiaPacific and the Latin American regions, opening 20new embassies and consulates elsewhere in the world.We are giving greater importance to theCommonwealth but I would not want the Committeeto think that the Commonwealth is an alternative tothe European Union. It has many great strengths andopportunities and more should be made of them but itis not and cannot become a single market, a tradingbloc, a similarly united force on a variety of foreignpolicy issues as the European Union has become. Wehave to be realistic about that.

Q163 Andrew Rosindell: I turn briefly to the PrimeMinister’s speech. Did he consider the implications ofhis proposals on not just England but the rest of theUnited Kingdom, particularly Scotland, which has itsown issues, Northern Ireland and Wales, but alsoGibraltar, which is a part of the European Union as




well, and whether the policy could have a knock-oneffect on the other British territories anddependencies?Mr Hague: He delivered the speech as Prime Ministerof the UK and as leader of the Conservative Party ofthe United Kingdom and therefore was speaking forthe whole of the United Kingdom. The UK’srelationship with the EU has complex effects onoverseas territories. Those effects would flow fromwhatever decision we made here in the UnitedKingdom about our future in the European Union.Certainly the Scottish dimension is very important. Iknow this is something the Committee is looking atseparately. Of course, there is to be a referendum inScotland in any case on the question of independence.I suppose, therefore, you could argue that the peopleof Scotland will have, in effect, two referendums ontheir membership of the EU because voting to leavethe United Kingdom would almost certainly have theeffect of leaving the European Union as well.

Q164 Andrew Rosindell: Will the people ofGibraltar have the right to vote in the Europeanreferendum as well?Mr Hague: The normal rules of referendums apply asthings stand. They, of course, vote in Europeanelections but not in a general election. There wouldbe the opportunity to amend those rules relating to areferendum before we arrive at the referendum.

Q165 Andrew Rosindell: You intend to do that,Foreign Secretary?Mr Hague: I am happy, Mr Chairman, to look atsuggestions which, I am sure, Mr Rosindell will bemaking.Chair: He has never been slow at that.

Q166 Sir Menzies Campbell: Referendums are a bitlike London buses: you can’t get one for a momentand then suddenly two come along at the same time.I want to go back to the point raised by AndrewRosindell about other relationships. In Munich at theweekend there was a lot of speculation both insideand outside the conference about a free trade arearelationship between the EU and North America. Isthat something which the British Government isanxious to pursue at the moment?Mr Hague: Yes, and we expect shortly the report ofthe high-level panel convened between the EU and theUnited States on this subject. It is something Idiscussed on my visit to Washington last week. It isfirmly on our agenda for initial talks with SecretaryKerry, as it has been between the Prime Minister andPresident Obama. This is part of our enthusiasm andthe very hard work of our officials in post around theworld of implementing more free trade agreementsaround the world. Two years ago we concluded theone with South Korea. We have now reached politicalagreement on a free trade agreement with Singapore.We are close to concluding an agreement withCanada. It is estimated that an EU-United States freetrade agreement could add 2% to 3% to GDP on bothsides of the Atlantic. Tariff barriers are not high, butnon-tariff barriers are substantial, and removing thosewould have a very positive economic effect. This is

actually a large part of our work and emphasis at themoment.

Q167 Sir Menzies Campbell: Is that discussionbetween the EU and the United States rather thanbetween the British Government and the UnitedStates?Mr Hague: The negotiation of such an agreement isbetween the EU and the United States. Trade, in thisrespect, is a competence of the European Union. Thepolitical impetus to get it going, to generateenthusiasm for it, to explain the case for it and topersuade the United States that it would be good forthem as well—national governments have to play abig role in that, and we are doing so in the UK.Sir Jon Cunliffe: It will be on the agenda for theEuropean Council on Friday morning, and the aimwill be to push it even further and faster.

Q168 Mark Hendrick: Foreign Secretary, if thePrime Minister had secured his requested safeguardsat the December 2011 European Council and the fiscalcompact had been enacted in amendments to the EUtreaties, would that have triggered a referendum underthe European Union Act 2011?Mr Hague: Since the fiscal compact relates toresponsibilities in the eurozone countries, it should nothave implied any transfer of power or competence tothe rest of the European Union. However, that is notjust for Governments to define. It is open to judicialreview and it is up to Parliament to agree or not. Thatwould be my assessment.

Q169 Mark Hendrick: In an EU treaty approvalreferendum held under the terms of the 2011 Act,what would a no vote mean?Mr Hague: There are a variety of issues under the2011 Act on which a referendum can be held. It couldbe a new treaty that transfers some new power orcompetence to the EU. There is also the use of certainprovisions incorporated into the treaties by the Lisbontreaty—some of the passerelle clauses—which couldbe used without a new treaty under the provisions ofLisbon to transfer further powers to the EU, whichcan trigger a referendum under the 2011 Act.In any of those things, a no vote would mean that theUnited Kingdom did not agree—it either did not ratifya treaty in the first instance or would not cast its votein favour of the use of a passerelle in the second case.

Q170 Mark Hendrick: Does that not mean, possibly,that the UK would be out of the EU?Mr Hague: No. People might argue—it depends onthe political debate at the time, of course—that a novote in a referendum on any individual issue raisesthat question, but it would not mean that in itself.

Q171 Mark Hendrick: So you are saying that thestatus quo would be an option, even though all theother countries had ratified that treaty?Mr Hague: Yes, of course. Treaties require unanimityand cannot come into force without the agreement ofall the Member States. As the Committee knows, therehave been ‘no’ votes in other countries in referendumson treaty changes. There was a no vote in France and




the Netherlands on the so-called Europeanconstitution.

Q172 Mark Hendrick: The question was askedagain and they said yes.Mr Hague: In France they decided not to ask thequestion again on something very similar called theLisbon Treaty, and in Ireland they asked the questionagain and got a different answer. I would not volunteerto be the Minister who asked the British people thesame question again.

Q173 Mark Hendrick: The legislation that youtalked about for a post-2015 ConservativeGovernment would introduce the in/out concept.Would it amend or repeal the 2011 Act, or neither?Mr Hague: It would add to the 2011 Act, which I ampleased to say now has cross-party support and I hope,therefore, has entered into the unwritten constitutionof the United Kingdom. I hope that the 2011 Act willremain in force for the long term before, and indeedafter, an in/out referendum, provided that the result ofthat referendum was to stay in the European Union. Itis our assumption in the Conservative party—and thisis a Conservative party proposal—that the 2011 Actwould remain after such a referendum.

Q174 Mark Hendrick: Given that the 2011 Act isfairly recent, and we are just at the beginning of 2013,why has the Prime Minister seen fit to introduce areferendum on a treaty that may or may not come afterthe next general election and may involve transfers ofpowers to the UK, rather than from the UK?Mr Hague: It is a time of fairly momentous changein the European Union—almost in any month, letalone any year. There is a major crisis, as I describedearlier, and as the Prime Minister described in hisspeech, in terms of the eurozone, and Europe’scompetitiveness and democratic legitimacy. That hasto be addressed.We cannot say that the issue was addressed in itsentirety by the 2011 Act because the 2011 Act dealtwith a different thing. It dealt specifically with theconcern that Mr Rosindell just raised—that a wholeseries of treaties have been passed without the Britishpeople ever having their say. This proposal deals withwhat happens in the future, and how we will shapeand lead the debate in Europe and succeed in winningdemocratic consent for that.

Q175 Sir Menzies Campbell: The terms of the 2011Act are to the effect that if there is any transfer ofpower from Westminster to Brussels, that wouldtrigger a referendum. Is there any risk that thatstatutory provision might have to be invoked at thesame time as the proposal about an in/out referendum?Assuming a negotiation, the view was taken by theConservative Government that in return for whatmight be described as concessions there are somepowers they are willing to transfer. Would that triggerthe statutory obligation in the 2011 Act or could thewhole thing be put into one package? Or might we, inthe worst-case scenario, find ourselves with tworeferendums?

Mr Hague: That would be for our successors in thenext Parliament to determine. The common sensebasis would be to consider a new settlement betweenthe EU and the UK in the round, in a singlereferendum with a single vote. Of course, that isentirely for the next Parliament to determine.

Q176 Sir John Stanley: Foreign Secretary, beforeyou and your fellow Ministers made the policydecision to have an in/out referendum in five years’time, did you carry out an assessment of theinescapable business investment blight that such anannouncement would create?Mr Hague: As I said before, it is a Conservative partycommitment, not a coalition commitment or aGovernment responsibility. Our view, based on talkingto many international businesses, is that it does notcreate a blight. In fact, we argue that, if anything,there will be less uncertainty with this approach,compared with the approach of never ruling out areferendum, but not having one in the meantime.This is a way of confronting the situation and settlingthe debate. Certainly, when I was talking to somemajor investors in this country and in the UnitedStates last week, I did not detect any change in theirplans or any blighting from what we have proposed,which is, in any case, dependent on a range of factors:the business environment, the labour market andcorporate taxation. It depends on quite a lot of things.

Q177 Sir John Stanley: Foreign Secretary, what youjust said to the Committee is in direct contradictionwith the reported comments of one of the mostsuccessful and experienced British businessmen, SirMartin Sorrell. The day after the announcement wasmade, he said this: “[Our] clients are worried. It’s thisuncertainty. It’s very simple—let’s say you build afactory in the UK. The gestation period is two or threeyears. You’ve got your factory up and running andsuddenly the UK pulls out. You’ve got tariffs, you’vegot trade barriers. Suddenly you’re outside Europe.That will either suspend decisions or will move themelsewhere.”That is a very significant statement. I would suggestthat that is mirrored by many other people in seniorpositions with decision-making capability about futureinvestment in the UK. If that is the risk, how can thispolicy possibly be squared with the Government’ssupposed priority of achieving economic growth?Mr Hague: There are many different quotes frombusiness leaders. There are ones from businessorganisations representing thousands of businessesrather than one business, including, for instance, thedirector general of the Institute of Directors, who says:“The British public, and many of our members, aresceptical about many of the institutions and practicesof the EU. We need to put their doubts to rest.” TheCBI director general said: “The Prime Minister rightlyrecognises the benefits of retaining membership ofwhat must be a reformed EU and the CBI will workclosely with government to get the best deal forBritain.” The head of the British Chambers ofCommerce said that “the Prime Minister’sdetermination to negotiate a new settlement for Britainis the right course of action.” I do not think individual




voices have the same weight as these huge businessorganisations.

Q178 Sir John Stanley: Yes, Foreign Secretary, butyou are bringing together two completely separateissues. One is the issue of renegotiating for betterterms, which is unanimously agreed with andsupported in the business community; the other is thequite separate issue of having stated that there is goingto be an in-or-out referendum in five years’ time. Thatis a quite separate issue and raises quite differentissues for the business community.Mr Hague: Those issues go together, of course,because any new settlement requires democraticconsent. That is our view. In this country, given thefailure to hold a referendum on a whole series ofprevious treaties, I do not think that we couldcountenance, in our democracy, having a newsettlement with the European Union withoutdemocratic consent—or, indeed, not having a newsettlement without democratic consent. This has tobe faced.One can argue, of course, on any basis, that anydemocratic uncertainty is something that disturbsbusinesses. You could argue that about a generalelection, but that does not stop us having them.Equally, we need to hold a referendum on theEuropean Union, and many of the businessorganisations that I have quoted are supportive of that.We receive, and there is every sign that we arecontinuing to receive—it has not changed in the pastfew weeks—a huge proportion of the foreign directinvestment that comes into the European Union.

Q179 Sir John Stanley: Foreign Secretary, do youaccept that there is a fundamental difference betweenasking the British people whether or not they arehappy with a new deal with Europe and asking themwhether they want to stay in Europe or to come out?Are they not fundamentally different, and is it not thecase that what is being promised by the Conservativeleadership is an in-or-out referendum?Mr Hague: It would be an in-or-out referendum, buton the basis of an improved settlement with theEuropean Union. In our view, that is the time to askthat question. Some people would argue that weshould ask that question now—Mr Baron has probablyjust been arguing that we should ask that questionnow.Mr Baron: Legislation in.Mr Hague: Our argument for asking it in the futureis that the changes taking place in Europe now are sofundamental—as a result of the eurozone crisis, therelationship between eurozone countries and othercountries is changing in important ways—and that theopportunity to improve the UK’s relationship with theEuropean Union is there, for all the reasons that I havedescribed, but we should ask the in-or-out question ata later stage, when we have a better idea of both thosethings. That is why those things are linked.

Q180 Mark Hendrick: The FCO has been trying toencourage more British nationals to pursue careers inEU institutions. Why should a young British persongo to the considerable effort of learning languages and

getting an EU-qualifying exam if there is a risk to hisor her eligibility for a job in the institutionsaltogether? For that matter, why should anybody nowbother trying to become an MEP?Mr Hague: There are many parts to that question. TheEuropean Parliament has considerable power. I justmentioned how, a few hours ago, they voted on thefisheries policy, sharing competence with theEuropean Council for the first time on fisheries. Theirpowers have been extended—at the same time as theirreputation and standing have fallen, on most surveysof opinion, but there is an important job to be done inthe European Parliament. There is an important job tobe done in the European institutions.The Prime Minister set out the case, in his speech,to improve the UK’s relationship with the EU and toimprove the whole position of the EU in the world—remember, he was including the whole EuropeanUnion in the reforms that he was advocating, so thatthe EU can succeed and Britain can succeed within itand so that he can argue in the future, in such areferendum, for Britain to stay in the European Union.So I don’t think it should mean that people do notcontemplate a career in the European Union.Otherwise, one can make the same argument aboutany general election, as to why people should everpursue careers in any organisations that might changeas Governments change.

Q181 Mark Hendrick: Civil servants will still bethere in the next British Government, whether it is aLabour or Conservative Government. In the EUthough, is it not the case that Britain’s withdrawingwould have huge implications for staffing from theUK?Mr Hague: Yes, it would, but our intention is that weare going to improve our settlement in the EuropeanUnion and campaign to keep Britain in the EuropeanUnion. I am pleased to say we are achieving anincrease in the number of people going into theEuropean institutions, including at the junior levels,as well as important positions within the EuropeanExternal Action Service. I don’t expect that to changeas a result of the Prime Minister’s speech.Mark Hendrick: Sir Jon, have you detected anyuncertainty, or people being a bit unnerved by thePrime Minister’s speech in UKREP?Sir Jon Cunliffe: On the question of young Britishpeople looking at careers in the European institutions,the numbers who have become interested and appliedhave been going up in recent years because we havebeen making a very substantial effort for that tohappen, and we have seen no sign of that changing.

Q182 Mark Hendrick: Finally, the possibility of anin/out referendum in 2015 could affect theGovernment’s ability to help secure a favourableportfolio for a UK Commissioner. Is that not aconcern as well?Mr Hague: Our ability to negotiate and succeed inthe European Union depends on many factors. One isour ability to make alliances on particular subjects;the Committee will have observed in the course of itsinquiry how we have done that on the multi-annualfinancial framework. Of course, we did that on the




change in the rules to the European Banking Authoritythat I have just described. We do it on a daily basison a vast range of subjects. As I mentioned, I attendedthe Foreign Affairs Council of the EU last Thursdayin Brussels. There we are dealing with huge questions,such as policy towards Syria, the Iranian nuclearprogramme, and the EU military training mission toMali. I did not detect any change in our ability to getour way, or difficulties on other subjects, as a resultof our declaration about a referendum in the future.We are a major player in the European Union and wemake our alliances on a vast range of subjects. I donot believe our ability to do that will be diminished.

Q183 Mark Hendrick: You are saying, then, that thePrime Minister’s speech has not got other Europeanleaders or our partners in Europe worried at all.Mr Hague: I am saying that they want to work withthe United Kingdom. That is what so many of themsaid. The French Government, which clearly has verydifferent views about the future development ofEurope, has said very clearly that they want to keepthe United Kingdom in the European Union. Now thatis very much the thrust of the comments of theGerman Government. I will not go through all the listsof Ministers and political parties and mediaorganisations around Europe, but they are all here,who have expressed either some understanding orsome sympathy with the Prime Minister’s speech, orcertainly expressed the hope that these sorts ofreforms and changes will take place for the benefit ofthe whole EU. The idea that there is a wall of hostilityto the ideas that we have put forward, I think wouldbe mistaken.Mark Hendrick: We’ll see.

Q184 Mike Gapes: Foreign Secretary, you concededthat the Bloomberg speech was a hybrid, as you putit—some might say a curate’s egg—part governmentaland part party political. Was it postponed from 2012to 2013 for governmental or party political reasons?Mr Hague: By the way, I wasn’t conceding a hybridspeech; that was an inaccurate parliamentary remarkabout it, I think. Equally, I am not going to concedeany postponement, because we did not fix any date in2012 for the speech and then postpone it.

Q185 Mike Gapes: It was talked about in the mediafor months that it was going to be before the end ofthe year.Mr Hague: I am not responsible for everything themedia say—or, thankfully, for very much of it. As theCommittee will understand, we have quite a lot ofthings going on, and therefore the Prime Minister gavethis speech when there was a suitable gap betweenother events.

Q186 Mike Gapes: Did you expect to benefit from apoll surge and winning back support from UKIP as aresult of that speech?Mr Hague: This is a speech about the whole futureof Europe and the future of the UK. It doesn’t bearany necessary relation to daily or weekly movements

in opinion polls in the UK. In the Conservative party,we will be very proud and clear about making thiscase at the next general election, and I think it will bean important part of our case, but polls go up anddown. Personally, I never show that much interest inthem.

Q187 Mike Gapes: Okay, we’ll see. Why did thePrime Minister set the deadline of November 2017 fornegotiating the new settlement and holding this in/out referendum?Mr Hague: Clearly, there has to be some time scalefor this. Not everybody who says they might supporta referendum has a time scale, but then there are majorproblems with endless uncertainty about it. November’17 is halfway through the next Parliament. It isimportant, as people consider in a general electionwhat Government they want, for people to have areasonable idea of the time scale on which thesethings will take place. The European Commissiontalked about floating ideas about changes in theEuropean Union around the time of the Europeanelections next year. I referred earlier to theCommission blueprint and the Four Presidents report,which called for major treaty change in the comingyears, meaning in the next few years. If you thinkabout it, there is a window between those elections in2014 and the French and German national elections in2017, which is really the window in which such treatychange would be logically discussed.

Q188 Mike Gapes: Clearly, if there is to be anegotiation, it is going to take time. Isn’t there a case,and would the Government support the idea, that youstart talking about this treaty amendment processbefore the 2015 General Election, perhaps after theappointment of the new European Commission, whichI understand is in October 2014? You would get ayear’s more negotiation, so you could make sure yougot your 2017 deadline.Mr Hague: If you look at the time scales for treatychanges on the Nice, Amsterdam and Lisbon treaties,they always measured within—I am speaking off thecuff here—less than a year and a half or so, frombeginning to completion. Some of them were less thana year. That is the normal time scale for treaty change.We welcome the idea that ideas about treaty changecan be discussed from now on. We are putting ourideas. We are in favour of treaty change. We are at thestage, where the Prime Minister is setting out theseprinciples, of launching the discussion—launching thedebate—in Europe. The time to turn that into specificitems for negotiation is clearly to be judged dependingon when that debate reaches the right point. It is alsoa commitment for the Conservative party for after thenext general election.

Q189 Mike Gapes: So it is not anything to do withthe fact that you would not be able to get coalitionagreement to start that negotiation before the generalelection.Mr Hague: On any treaty change that begins beforethe general election, we will seek to proceed withcoalition agreement.




Q190 Mike Gapes: That is not what I asked.Mr Hague: It is part of what you asked. The otherpart of what you asked, on the time scale for thesethings, is that the likely fulcrum of debate about treatychange is in the 2015 to 2017 period, which happensto coincide with the British people being able to sayin a general election what approach they would like.

Q191 Mike Gapes: The UK is going to take over therotating presidency of the Council of Ministers on 1July 2017. Can we assume that the Prime Ministerwould wish to hold any in/out referendum before wetake over that rotating presidency, rather than duringit?Mr Hague: The timing of the referendum will depend,of course, on when negotiations are completed.Therefore, the Prime Minister has made acommitment about the first half of the Parliament,which does not exclude the referendum being earlierthan the second half of 2017.

Q192 Mike Gapes: So it could be easier to have thereferendum before we take over the presidency so thatthe Prime Minister can triumphantly say, “We havehad the referendum, we have won and now we havea lovely presidency,” rather than having a presidencythat is overshadowed by, “Is he going to stay in orleave? What are the British people going to vote?”Mr Hague: That could happen, but I do not want tosay that we are jumping at that particular scenario.

Q193 Mike Gapes: Have you thought about it?Mr Hague: It will depend on the timing of thenegotiations. Therefore, yes, a referendum could beheld before the British presidency in the second halfof 2017, but I would not exclude a referendum beingheld during the presidency. That would make for aparticularly memorable presidency, of course.

Q194 Mike Gapes: It would indeed. Can I take youback to the matter that was referred to earlier: walkingaway from the Council in December 2011? It has beenput to us that, actually, the best chance of negotiatingan EU treaty amendment in Britain’s interest was atthat point, when other countries wanted somethingfrom a new treaty. Tactically, by walking away, theopportunity has now gone because a structure hasbeen established outside the treaties. How do yourespond to that?Mr Hague: There are two points I would make inresponse. One is that we did not walk away. Wevetoed it as a European treaty, so it is not part of theEU treaties, but we certainly did not walk away fromthe meeting, which the Prime Minister attendedthroughout and, indeed, as I remember it, he and Iwere in the building well after many others had left.The United Kingdom did not walk away, but weensured that the fiscal compact treaty is not part of theEU treaties as it stands today.On the question of whether there was an opportunityfor a bigger negotiation, the Committee will recall thatwe did put forward in those negotiations certainrequests for safeguarding the single market,particularly in financial services, and other countrieswere not prepared to agree to those requests as part of

the negotiation on the fiscal compact treaty, which iswhy it went ahead with a British veto. From that, itseems highly unlikely that they would have agreed tosomething more ambitious than those requirements.

Q195 Mike Gapes: We went to Germany, France andelsewhere to have meetings with other people in thepast few months. It is quite clear that the enthusiasmin some European Union countries for major treatychange was stronger a year and a half or two yearsago than it is now. And it is clear that we may wellbe in a position where, as Mr Van Rompuy saidrecently, the European Union is not going to have asignificant treaty change in the foreseeable future.Wouldn’t it have been better to come forward with thechanges that you want at a time when there was moreenthusiasm, rather than having a situation where youmay find that other countries say, “We are notinterested in this,” and you won’t get what you wantanyway?Mr Hague: Again, there are two points on that. First,I reiterate my last point in the previous answer. Sincethose countries at that time—in relation to the fiscalcompact treaty—were not prepared to agree to whatwe regarded as a quite modest request, it is unlikelythat they would have agreed to changes encompassingall the principles that the Prime Minister set out atthat moment. More importantly, enthusiasm for treatychanges in the EU is not on a straight-line trajectory.It will vary from one month to another. Often itchanges in proportion to the extent of perceived crisisin the eurozone.In addition to that consideration, there are ideas setout in the Four Presidents report and the Commissionblueprint that involve treaty change. Added to that, wehave to have regard to how frequently treaty changehas been contemplated in the EU over recent years.All of those point to the opportunity for treaty change,but the opportunity to bring about the sorts of changesthat the Prime Minister was talking about was notthere in December 2011.

Q196 Mike Gapes: A final question. Is the EU Actthat we have adopted in this country one of the factorsthat makes other leading member states wary of goinginto an amendment to the EU treaties, on the basisthat there is a risk that there would then be areferendum that would reject it and stop the process?Mr Hague: It is a democratic constraint on treatychange, but we are not the only country.

Q197 Mike Gapes: You accept that it is a possibility.Mr Hague: It makes treaty change in this country, andseveral other countries, which already haverequirements for referendums on treaty changes,subject to democratic consent. We are alldemocratically elected politicians. We do not runaway from democratic verdicts.

Q198 Mike Gapes: Democratic consent can alsocome through parliamentary democracy.Mr Hague: It can, but in the case of the EuropeanUnion, that parliamentary democracy has beenunusually unresponsive to public concern.Mike Gapes: We will have to differ on that.




Q199 Sir Menzies Campbell: I think we are rightthat until now in the history of the EC, and indeed theEU, no country has created an in/out referendum. Thatbeing so, we have no precedent in relation to what Iunderstand to be Conservative Party policy. What isyour assessment of the influence that the UnitedKingdom has now that the decision has beenannounced? Will it serve to weaken British influencein Brussels or will it serve to enhance it?Mr Hague: I want to make the case—I believe thisto be true, looking at some of the comments aroundEurope—that it can enhance our influence. It wouldbe too early to dispassionately make a judgment aboutthat. I argued a moment ago in terms of foreign affairsdeliberations that it certainly does not reduce ourinfluence. If you look at some of the comments fromaround Europe, in Die Welt, for instance, on the day ofthe Prime Minister’s speech, they were writing: “OurContinent needs a rethink...In view of the excessivebureaucracy, unscrupulous debt-making, lack oftransparency and democracy...What is needed today isa German-British axis.” The scope is there for Britainto lead with ideas. There are many such quotations.I do not want to go through them all. We have theopportunity, which the Prime Minister is taking, tolead and shape this debate.

Q200 Sir Menzies Campbell: But that is all aboutreform and about Britain remaining in. In thesecomments, including the one from Angela Merkel thatyou referred to a moment or two ago, the assumptionwas that Britain would stay in rather than walk out.Mr Hague: What is also reflected in those commentsis that so many European leaders say that they wantBritain to stay in the European Union.

Q201 Sir Menzies Campbell: I do not think there isany doubt about that.Mr Hague: It is very clear. It is always there. It isthere in Chancellor Merkel’s remark—not only in herpublic comments, but in her private comments. Thisis very much her position and passionate belief. Wedo not sacrifice our influence by raising legitimatequestions and by saying that the people of Britain willbe allowed to decide. People then want to work withus to make a success of the European Union andBritain’s role within it. We should not be afraid ofthat.

Q202 Sir Menzies Campbell: There is universalacceptance not just in Europe, but elsewhere; forexample, President Obama. Joe Biden was making aspeech at the weekend. It is perfectly clear that theUnited States sees its interest as best reflected byBritain being within the European Union andexercising influence within the European Union. Is notthe risk, if you pose an alternative, that the influencewe have both in Brussels and, indeed, in Washingtonwill be diminished if people think there is a genuineprospect that we will come out?Mr Hague: There are two parts in the answer to thatquestion. First, for all the reasons I have set out,leading the debate and advocating the necessarychanges can enhance influence rather than reduce it.In any case, I do not think we can argue that allowing

democracy to happen is an unacceptable risk.Otherwise, there are all kinds of things that we wouldnever ask people or Parliament about. We havereached the point in the United Kingdom whendemocratic consent has been greatly weakened for theEuropean Union. We have to recognise that, and dealwith it. We have to do that, whatever theconsequences. It is right to hold a referendum, but Idon’t think in any case that it diminishes our influencein the EU or with the United States. Again, I have notdetected any sign of that in all the discussions I havehad with the US Administration in recent days.

Q203 Sir Menzies Campbell: What work have youdone on the consequences of Britain coming out?Mr Hague: That will be the debate of the referendum,subject to holding the referendum in 2017, orwhenever it can be held. That will be what the debatewill be about.

Q204 Sir Menzies Campbell: Surely someconsideration has been given in the Foreign Office asto what the consequences would be for Great Britainwere there to be a vote in favour of coming out.Mr Hague: The job of the Foreign Office is to workon those priorities I was talking about earlier: theagreed programme of the Coalition Government. It isa full programme of work on Europe, as mycolleagues and officials will testify. Perhaps I shouldlet them testify on some of these questions.Sir Menzies Campbell: I don’t think that any of usdoubt it.Mr Hague: It is very full, but that is their job. Thejudgment about the consequences of leaving theEuropean Union is for political debate in the future atthe time of our referendum. Of course, the PrimeMinister addressed this in part in his speech when hegave a brief analysis of the Norwegian relationshipand the Swiss relationship with the European Union.

Q205 Sir Menzies Campbell: He dismissed them.Mr Hague: He pointed out the disadvantages of thoserelationships. He made clear in his speech why hewould like to be able to argue for Britain staying inthe European Union on the basis of a new settlement.Of course, in all the references that he made to thesingle market and the advantages of being part of thesingle market, he is also pointing to the disadvantagesof any separation from that. Such considerations runthrough the Prime Minister’s speech, but an analysisof the merits of being in or out of the European Unionon an improved basis is for the political debate, forthe political parties and for all concerned to present tothe people in a referendum.

Q206 Sir Menzies Campbell: Not the responsibilityof the present Government.Mr Hague: The present Government are proceedingwith the present Government’s policies. Thecommitment to a referendum is for a futureGovernment.

Q207 Sir Menzies Campbell: But that does notinclude any examination of the economic or political




consequences of an “out” answer in any futurereferendum.Mr Hague: The very hard-working and dutifulofficials of the Government will analyse what we askthem to analyse, but I very much ask them to continueon this work of free trade set in the Multi-annualFinancial Framework, making Europe morecompetitive. That’s their job.

Q208 Sir Menzies Campbell: We are all in favourof that, but is the answer to my question, “Yes”? Nosuch work considering the implications of Britain’swithdrawal from the European Union is being carriedout at the moment.Mr Hague: We are not doing a preparatory exerciseat this moment for withdrawing from the EuropeanUnion. The Government are engaged on a lot ofthings. The Conservative party is presenting itsproposals for the next election.Sir Menzies Campbell: Thank you.

Q209 Mr Ainsworth: So is it the job of the civilservice to analyse what you want them to analyse, andonly what you want them to analyse, and you do notwant our vetoing, preventing, or discouraging anyanalysis of the consequences of our withdrawal fromthe European Union?Mr Hague: One thing to add on this question and SirMing’s questions—I should have mentioned this—isthat we are also currently engaged in a huge analysis,the balance of competences review, which is in thefirst of four semesters and is analysing in enormousdetail the role and effect of EU competence acrossevery area of our national life. That will come to aconclusion in 2014 and will help to inform the debate.That is the right analysis to be conducting.

Q210 Mr Ainsworth: That is not the question that Ior Sir Menzies Campbell were asking. Effectively,you are preventing, discouraging or refusing ananalysis being done of the consequences of ourwithdrawal.Mr Hague: It is open to anybody to conduct suchanalysis—a Committee, a think-tank—

Q211 Mr Ainsworth: But not the civil service.Mr Hague: The job of the civil service is to work onthe agreed priorities of the Government, and that iswhat they are doing.

Q212 Mr Ainsworth: Let’s talk about the eurozone.The inevitability of some of the measures that aregoing to be taken by the eurozone will lead to aconvergence of interests, and potentially to itsmembers seeing themselves as a bloc. There willtherefore be two different views on the most importantaspects of the European Union. Those who are in theeurozone will see the currency union as the mostimportant thing, and the countries outside it as beingan unfortunate occurrence. Those who are outside itwill see the single market as the most important thingand the fact that some countries have chosen to gofurther as an addition. Are you beginning to see theconsequences of the development of the eurozone bloc

now, and how do you expect that development toaffect the way you negotiate in Europe?Mr Hague: In a moment, I will ask Sir Jon to add tothis, because he has so much daily experience of thosenegotiations, but there are several things to say beforethat. First, there is a vigorous debate within theeurozone about what these changes mean for therelationship of the eurozone countries to each other,before we even get to their relationship with thosewho are not in the eurozone. There are many differentviews about that. Of course, the choices are for themto make. In my view, there are painful choices to bemade between democratic accountability andsovereignty in their own countries and being able todeal together with some of the challenges of theeurozone. Only they can make those decisions.That has not made them, in general, caucus on a widerange of other issues in a way that changes theirrelationship on, say, foreign policy. Again, this is aneasier thing for me to refer to because this is the partof the European Council that I always attend—ifsomeone arrived to observe the meetings of theForeign Affairs Council without prior knowledge, itwould not be possible to determine who was in theeurozone and who was not, in terms of what ourpolicies are on Syria, Iran, the Middle East peaceprocess or any other global issue.So it is primarily in the financial area that theeurozone’s relationship with the rest of the EuropeanUnion has changed to some extent and would changemost quickly. That is why we have particularlyemphasised the negotiation of safeguards for thesingle market in that area, such as the ones Imentioned on the European Banking Authority. I thinkthere is a statistic—officials may know the precisepercentage better than me—about the number of votesin the European Council on which the UK has faceda eurozone bloc, but it is a figure below 20%, in theorder of 15%. Jon or Simon, do you want to add tothis?Sir Jon Cunliffe: As the Foreign Secretary said, wecan see the dimensions or axes on which the eurozonemight integrate—fiscal, economic, financial andperhaps political. But if you look at the outcome ofthe European Councils, it is very uncertain how farand how fast they will go and in what order; there isstill a lot of agreement to be worked out between theeuro countries themselves. It is not as if there is a jointpicture, plan or road map at the moment. Those detailsare being worked out, which is what makes the futureso uncertain.In most areas, the alliances that countries make acrossdifferent dossiers do not reflect the eurozone. Acrossthe single market, some of the alliances can be verystrange, but in agriculture, fisheries, single market,foreign policy and justice the alliances are verydifferent. They are very dossier-specific. But thecountries that normally group around what I call thenorthern economic liberal alliance look to the UK,Sweden, Denmark—all of them non-eurozonecountries—to be part of those alliances when theycome to single-market issues such as trade. There isno evidence of caucusing around that. Indeed, fromthe start of the euro, the evidence has been that thosecountries very much want non-euro countries of




similar mind in the discussions, because it addsweight—particularly the UK, because we are a largeand influential member state.In specific areas, though—banking union is one—theeuro countries were coming together to create a newinstitution within the ECB to do something that wasbeing done individually. Of course, there the issues ofblock voting or caucusing arose by virtue of the natureof the proposal, and that could happen again.However, generally speaking one is not seeing that atthe moment. One has to wait to see how theirintegration develops to know how much we will seeit in future.

Q213 Mr Ainsworth: So the changes that theGovernment are seeking are brought about not by thethreat of the inevitable integration of the EuropeanUnion, but rather by the opportunity that that presentsto get what you wanted in terms of your vision inany case.Mr Hague: There is a threat. So far it has surfacedonly in the way that we have described, but of coursethere could be much more far-reaching changes in theeurozone, when they have resolved their own debates,that present, for instance, a greater threat of caucusingwithin the EU on a wider range of issues.Of course there is an opportunity, but there is also athreat. The thing I want to emphasise is that thechanges in the eurozone—the crisis in the eurozone—are only one of the reasons why we need the approachthat the Prime Minister has set out. In or out of theeurozone, there is a fundamental issue ofcompetitiveness, which means we really have to drivethe single market and conclude more free tradeagreements.There is also the issue of democratic legitimacy andaccountability, which means that we have to enhancethe role of national Parliaments and make sure thatpowers can go back to nation states. So the crisis inthe eurozone is one of the factors driving the approachthat the Prime Minister has set out, but only one ofthem.

Q214 Mr Ainsworth: On the banking union set-upand the arrangement that you got this December, didyou learn the lessons from the year before? You wereable to come back this time and say that we hadsomething that potentially protects us, albeit that thething might change. Whereas the year before youfound yourself pretty isolated and exercised a veto,but nobody really knows what you vetoed.Mr Hague: We know what we vetoed—the fiscalcompact treaty. But there is an important difference,which was the lead-up to the proposals. Theseproposals were clearer for a longer time—what wewere dealing with in the proposed changes to theEuropean Banking Authority.The proposals that became a fiscal compact treatywere produced only in the hours before that particularEuropean Council began in December 2011. Clearly,it was easier in the circumstances in December 2012,on banking union, to form alliances and make the casefor amendments to proposals that others were flaggingup well in advance. We certainly did make thosealliances, very effectively, with countries inside and

outside the eurozone—with Germany, theNetherlands, Ireland, Austria, Sweden, Poland,Bulgaria, the Czech Republic—so, straddling theeurozone.

Q215 Mr Ainsworth: This double simple majorityarrangement—do you think it will stand the test oftime? You’ve just said that although it’s not clear andthere’s no agreement as to what the developments willbe within the eurozone, there are bound to bedevelopments that potentially provide a threat. Ifeurozone members repeatedly want one thing and arethen being prevented by the periphery—to use thatterm—from doing it, there’s going to be an enormousgrowing tension, isn’t there?Mr Hague: There could be, yes, and it’s important torecognise, as Sir Jon has just been underlining, theuncertainty about the future in this regard. That meanswe have to build in as many safeguards as possible.In addition to the voting system safeguard, we havesought and secured other safeguards: for instance, theEuropean Central Bank will be subject to anobligation to ensure that no action, proposal or policythat it pursues shall “directly or indirectly,discriminate against any Member State…as a venuefor the provision of banking or financial services inany currency.” That is in article 1 of the ECBregulation.Could there be pressure to change some of thesethings in future? Yes. The voting arrangements, forinstance, are meant to be reviewed by the Commissionand the Council if there are four or fewer non-participating member states. Of course, their concernis that once you go to a very small number and asimple majority is required of those who are outside,you have created a new veto for the United Kingdom.Again, that means we may have to renew the debateat that time. But I think the arrangement we’ve arrivedat so far is exactly what we want in thesecircumstances, and we have set, through thissuccessful negotiation, a very good precedent for thefuture—that when the European Union has to make anarrangement dealing with the issues of the eurozone, itis right for it to include in its own institutionalarrangements the rights and interests of those not inthe eurozone. That is a very important precedent.

Q216 Rory Stewart: Foreign Secretary, how manyof your ambassadors warned you that the EuropeanUnion is unlikely to allow any significant concessionsto the United Kingdom?Mr Hague: I don’t think any individual ambassadorwould in any case be in a position to assess that. Ourambassadors are very good, I have to say, at workingon winning the kind of arrangement I have just beentalking about and getting the concessions we need onone subject after another. It’s a very “can do” attitudeand I admire them for it. On all the issues we’ve beendebating, I cannot recall any occasion when they’vecome back and said, “No, no—we just can’t do thisat all.”

Q217 Rory Stewart: Help me to understand thehypothetical case. There is a possibility that theEuropean Union will be reluctant to return quite as




many powers to Britain as Britain wants. Some of myconstituents, for example, would like to be able to say,“Okay, maybe we’re not going to get much back, butcan we at least have a position of, ‘This far and nofurther. We’re going to draw a line in the sand’?” Is itcredible within the European Union to have that sortof position, or is it a dynamic thing with its ownmomentum that for ever integrates? Is Britain everable to halt it?Mr Hague: It is important for us to be able to haltintegration when we believe it is not in our politicalor economic interests, or to be able to stand aside fromit, because that’s what we’ve done in not joining theeurozone, for instance. As regards treaty change, aswe were discussing earlier, it is something to whichthe Act of 2011 now makes an enormous difference.Such change, in so far as it transfers any additionalpowers or competences, is subject to democraticcontrols through Parliament and a referendum. Ofcourse, there are other ways in which the EuropeanUnion’s institutions sometimes extend their powersand reach, by changes in procedure and the judicialcreep that can come from the European Court ofJustice. So it may well be that these are importantthings to address in making sure that Europe isflexible, competitive and has democraticaccountability as part of that new settlement. But weare not at the stage of being able to go beyond theprinciples that the Prime Minister has set out. That isfor a later stage.

Q218 Rory Stewart: Just to push that a little more,would it be even hypothetically plausible for you toissue instructions to officials essentially to stick theirheels in the ground and say, “This far and no further.We may not be able to get anything back, but we don’twant to get any deeper into this thing”? Is that aremotely plausible view?Mr Hague: We do that in many ways. We areconstantly, in posts around the world, never mind inthe European Union, very much alert for competencecreep, as it is called. The European Union is seriousabout its treaties and so are we. The powers conferredon the European Union are set out in the treaties anddo not go beyond the treaties. So we vigorously—andgenerally successfully—contest efforts, for instance inmultilateral organisations and sometimes by theEuropean Commission, to take over any of theresponsibilities of Member States. That is an example,but it is true of our policies as a whole. We alwayshave regard in all negotiations to ensuring that thereis no change of competence without a new treatydiscussion or without the approval of Parliament.

Q219 Rory Stewart: To turn it around, as you thinkabout what a negotiation might look like, do you haveany sense of what the real red lines of the otherMember States might be? What would be the point atwhich a Member State might reasonably turn roundand say: “Forget it. We’d love to have Britain in theEuropean Union, but that is too much. That is toofar”?Mr Hague: They vary enormously. That is what Iwould say. First of all, those red lines are not currentlydefined, because the whole process of further treaty

change has yet to begin. Secondly, red lines oftenmove, even though they are meant to be red, includingin European negotiations. As I pointed out earlier,there is a lot of support for the kind of rethinking andnew thinking that the Prime Minister is presenting tothe European Union. I do not think that any countrytakes the position that they have such a red line thatthey want Britain to leave the European Union.

Q220 Rory Stewart: One of the challenges seems tobe around the whole idea of the single market. We talkabout the single market and some people in Britain seeit as a WTO free trade area or think about it in termsof tariff barriers. Perhaps there are people in theFrench political establishment who see a single marketin terms of harmonisation of currency and tax. Whatdo you mean when you talk about the single market?Does it include the free movement of people or socialemployment legislation?Mr Hague: The provision of free movement is veryimportant in the success of the European Union. Itmeans free movement of capital and labour as well asof goods and services.The way I see it, there is much more to be done inseveral areas, particularly in services and the so-calleddigital single market. One of our main priorities in thecoming years, agreed across the coalition—and, Ihope, agreed across the whole of British politics—isthat we want more consistent implementation of theservices directive and further liberalisation of servicesand trade across EU borders. We want the completionof the single market for boosting cross-border e-commerce and to make sure that EU rules do not limitgrowth by placing unnecessary burdens on businesses.One of the things we have secured in recentnegotiations is the exemption of very small businessesfrom new regulations.Those are the sorts of priorities at the moment, so itis not just about tariffs, but about making it easier todo business in many different ways.

Q221 Rory Stewart: Just to pin you down on freemovement of people and social employmentlegislation, do you see the single market as includingRomanians or Turks if they come to Britain? Do youthink having uniform social employment legislation isimportant for the market to stop, for example, socialdumping?Mr Hague: The free movement of workers is veryimportant, but of course in my view and that of ourparty, that does not require anything like theharmonisation or uniformity of social andemployment laws that some people wish for, or indeedthe uniformity that comes from some provisions, suchas the working time directive, being brought in by theback door. We do not believe that a single marketrequires such things to be imposed in a uniform way.In my opinion, there are ways in which the EU hasgone too far.

Q222 Rory Stewart: What is the positive vision theGovernment have for the European Union? We hear alot of quite negative arguments, which seem to beslightly pessimistic and to say that the problem withleaving the European Union is that we are going to




end up poorer—our trade and our investment will beaffected. It is a bit as though we are somebody in abad marriage, who is not really in love but feels thatif they left they might lose the house. Where is thepositive vision? Where is the real love for the projectthat we are trying to express?Mr Hague: The positive vision is there in the PrimeMinister’s speech, and I warmly refer the Committeeto my own speech of 23 October in Berlin.Chair: We were there at the time.Mr Hague: You were in Berlin, but I do not thinkyou were in the actual premises where I delivered thespeech, and you might therefore still need to read it.It goes beyond free trade. The opportunity foremployment and prosperity that the single marketbrings is very important to us, but it is more than that.After all, we make an impact on world affairs whenwe impose the same sanctions as each other on Iran,or in stopping purchases of Syrian crude oil, or infavouring a peace process in the Middle East.We can help countries across North Africa by havinga coherent policy together on how we are going towork with them economically and politically. We canmake sure, as the Prime Minister referred to in hisspeech, that we are nation states co-operating,supporting European values and European civilisationin the world.So in our view, there is much more to it than a freetrade area, but nevertheless it has to work in a waythat is consistent with the prosperity of the people ofthose countries. It concerns their being able to keepup in the global economic race, with democraticaccountability and decisions being made at the rightlevel.Those are all things we have to get right, despite allthe many merits of nation states co-operating. ThePrime Minister set out that view of co-operatingnation states in that framework as an alternative to theever closer union that has for so long been an articleof faith in the European Union. I think that is the rightway to think about it.Mr Baron: Foreign Secretary, just to put you gentlyright, I was not advocating a referendum now.Mr Hague: I understand that very well.Mr Baron: I was suggesting we move legislationforward to take it beyond the realm of party politics.Mr Hague: Yes.

Q223 Mr Baron: I want to bring us back to thebusiness about the chances of the Prime Ministersucceeding in—how can I put it—his struggle with theGordian knot of federalism that exists. On our visits tothe European capitals, the direction of travel was allone way. The solution to the crisis was more Europe,with closer economic and political integration. So wewish the Prime Minister well in his negotiations.We also met officials in Brussels who said that,whatever the short-term successes and whatever theshort-term political manoeuvres, in the longer termthere would be a eurozone core heading more towardsfiscal union to make monetary union work and forpolitical and economic integration. There would thenbe a very small outer core within the EU—in otherwords, us and perhaps one or two more in a veryexclusive club, and that would not be feasible in the

longer term. That is what has been described to us.What are your comments on that? How would yourefute that argument?Mr Hague: The argument begs many questions; thatis the first thing to say. First of all, there is theassumption that those outside the eurozone will onlybe very small in number. There are 10 of them at themoment. Although there are not many countries thathave the opt-out legally from the obligation to join theeurozone, there are many others that are either not inany position to do so or not willing to in the near orforeseeable future. So I think the assumption thatthose outside the eurozone are just reduced to a verysmall number may now be a rather out-of-dateassumption, proceeding along the tramlines of thethinking of 10 years ago rather than now, in light ofthe financial and eurozone crises.Secondly, as the world has changed over the lastdecade, the kind of arguments that the Prime Ministerhas been advancing—for Europe to take urgent actionto be more competitive and flexible—are gainingground all the time. They have had a good receptionacross many countries.I entirely understand that the Committee will haveheard many things in European capitals that say thateverything goes in one direction, and it is towardsgreater integration. But there are some very supportivecomments, as the general secretary of the GermanCSU said: “Whoever condemns wholesale Cameron’sidea for a national referendum on Europe fans distrusttowards Europe, as if Europe must hide away frompeople”.On the need for reform, the leader of the Dutchgoverning liberal party, VVD, said that Cameron hadhit a nerve and named many things that the VVD isfor: strengthening the single market, no ever closerunion and no super-state. “Great!” he said, and addedthat you can characterise Cameron’s speech as anextended version of the Europe passage in the Dutchcoalition agreement.It does depend on which capitals, which people andwhich parties you speak to. Both those quotations arefrom governing parties inside eurozone countries.Mr Baron: Can I come back, Foreign Secretary? Wehave heard lots of quotes on both sides.Mr Hague: Of course.

Q224 Mr Baron: Can I just bring us back to theGovernment’s actual negotiating position? Whatapproaches are taken to forge alliances? We have notalways been good as a country at doing that in thepast. Blame it on under-representation in the EUinstitutions or whatever, but we need to be better at it.To offer a glimmer of optimism, you did see, withregards to the banking union at the end of last year,our success there, which suggests that there may bemore support there than we originally envisaged. Canyou flesh that out a little bit? How are we going to goabout constructing the alliances needed to achieve thegoals that we want?Mr Hague: This is a very important point. We haveintensified our efforts to build what really has to bea network of overlapping alliances. Of course, thosealliances are different on each subject. As Sir Jon hasmentioned, you can think of a kind of northern,




liberal—“liberal” in the economic sense—group ofnations, but even they will differ among themselveson various questions.On the banking union, I listed earlier some of thecountries with whom we forged an alliance on thevoting arrangements to conclude that negotiationsuccessfully. The Committee can see that on themultiannual financial framework negotiations in theNovember Council, we worked closely with Germany,the Netherlands, Sweden and Denmark.There are other issues, for instance pursuing Europe’scommon foreign and security policy on things such aswhat is happening now in Mali, with the EU militarytraining mission, where France is our closestpartner—or we are their closest partner in what theyare doing there.We gave, I would say, over the last couple of years,much increased attention to the smaller states of theEU, not only through the activities of our very goodembassies, but through Ministers. The Minister forEurope, David Lidington, is the first Europe Ministerever to have been to all the states—to every capital inthe European Union; in fact, he is now well on hisway on a second lap. Nobody has done that beforesince the European Union was enlarged.We spend a great deal of time with the ForeignMinisters of smaller European states when they cometo the UK. We are very conscious of the need to buildalliances on each subject, and we will be on theapproach to future treaty negotiations.

Q225 Mr Baron: The Prime Minister—rightly orwrongly, intentionally or not—has created theimpression that at the end of the renegotiation,whatever that may involve, he will be, if he is PrimeMinister, supporting the “in” campaign. I put it to you,Foreign Secretary, that we need greater clarity as towhere our red lines are as a Government. What wouldturn the Prime Minister away from that position whenit came to renegotiation? Where is that red line withregards to success or failure from the Government’spoint of view?Mr Hague: It is too early to speak of red lines. Wehave launched a debate, a discussion, on the basis ofthe principles that the Prime Minister has set out. Weare not at the stage of a detailed negotiation, which ismore the time for red lines.

Q226 Mr Baron: We must have an idea of what wewant to renegotiate and what we want to claw back—I hope that we have some idea. You would not go intoa negotiation without an idea.Mr Hague: We are not, as of today, going into thatnegotiation. As of today, we are going into themultiannual financial framework negotiations. Ofcourse, in social negotiations, we have our red lines. Itis important to note, however, that in most successfulnegotiations, such as the ones that I have been talkingabout, we do not publish our red lines. That does notnecessarily help bring about a successful negotiation.I am not sure at what stage we will be able to answerthat question in detail. The first part of your questionwas about what would turn the Prime Minister away.We will all have to use our judgment at the time. Wehave said—he has said and I have said—that our plan

is to improve the relationship with the EuropeanUnion and be able to campaign in a referendum forBritain to stay within it. Of course we will use ourjudgment at the time.

Q227 Mr Baron: What happens if negotiations hit abrick wall?Mr Hague: Well, then we will certainly have to useour judgment at the time. We can only state, as in somany areas of policy, what our intended policy is.That is true for all political parties when setting outan approach to Government in the next Parliament.

Q228 Mr Baron: Finally, Foreign Secretary, in anyrenegotiation of the UK’s position, will we be seekingcertain safeguards involving movement of some singlemarket items from QMV to unanimous decision-making? There is a general feeling that the singlemarket, which was a laudable aim, has still not beenachieved in many areas, and that would help.Mr Hague: Our main aim, as I was describing it inrelation to the digital market and the servicesdirective, is to deepen the single market and to driveit further in many areas. In many areas, that would ofcourse conflict with going away from these particularprovisions from QMV to unanimity. I am not settingout now, as I said in an earlier answer, a detailedapproach to negotiations. That can only come at alater stage, so I do not want to exclude anything atthis stage.

Q229 Sir John Stanley: Foreign Secretary, are yousatisfied legally—I stress “legally”—that it is open tothe British Government to go to our fellow EUMember States and say that we want to carry out afundamental renegotiation of the terms of ourmembership of the EU, our “new deal” with the EUas the Government term it, without first having givennotice, under article 50 of the treaty, that we wish toleave the EU?Mr Hague: Whatever we have to do legally, we willdo. Clearly, most of the discussion we have beenhaving today is in the context of treaty change indifferent ways in the European Union. Some treatychanges are needed by other members of the EuropeanUnion. We are not the only people looking for treatychange. Whatever we need to do legally in order tocarry out the political programme that we have putforward for the Conservative Party or then to carryforward any governmental responsibilities, we will do.

Q230 Sir John Stanley: Foreign Secretary, I haveasked you about a key legal point. You have not beenable to answer that question precisely. I can quiteunderstand that. Could we please have the answer tomy question in writing subsequently?Mr Hague: I am happy to elaborate in an answer inwriting, but this is a question for the future. Givingany notice about anything does not arise at themoment, but we will implement any legalresponsibilities, of course, in order to carry out ourmanifesto commitment if we are elected at the nextelection. I am happy to elaborate on that.




Q231 Sir John Stanley: Thank you. I am asking youformally if you could give the answer to theCommittee as to whether, under the terms of theexisting treaty, if the UK wishes to carry out asubstantive negotiation of the terms of its treatymembership it first has to give notice that it intends toleave the EU under article 50. Thank you.Mr Hague: We will send you some formal advice.

Q232 Sir John Stanley: Thank you. The secondquestion I want to put to you is this. As you know, wehave travelled to most of the major capitals in Europe.I would say that the broad view that we have had isthat, happily as far as I am concerned, our fellow EUmember states would like us to remain a memberstate; but, I would say unanimously, it has been saidto us that although they will try to be accommodatingto a limited degree to the UK’s demands, there isabsolutely no prospect of the UK being able to cherry-pick the acquis, to have the EU treaty à la carte. Doyou agree that is the case? If so, why are theGovernment holding out expectations that asubstantial renegotiation of the terms of ourmembership—having the EU à la carte—is a viablepolicy option?Mr Hague: On the à la carte question, the EuropeanUnion is already a restaurant where people eat theirdishes in many different combinations, as we know,with some countries in the eurozone and some out,some in the Schengen arrangements and some out. Wehave the major advance recently of agreeing the patentcourt, but that was by 25 countries not 27. The justiceand home affairs arrangements apply in a differentway to Denmark, Ireland and the UK. It is alreadyquite a complex mixture. It depends how peopledefine à la carte, but clearly dishes are eaten in manydifferent combinations, if we want to think of it as amenu. That is already the case.It is also the case that treaty changes have happenedin recent years that were not contemplated only a fewyears ago. That is how rapidly the European scene ischanging. Many of the factors that I was describingearlier will only intensify the pressures on Europeancompetitiveness. Pressures will only intensify. Oncurrent trends the problem of democratic legitimacyin the EU will only intensify over the coming years.Therefore I don’t think we should be held back fromputting the case for what is fundamentally andessentially in the interests of this country and thewhole of the EU, just because some people, but noteveryone across the EU, say that they won’tnecessarily want to go along with it.

Q233 Sir John Stanley: Foreign Secretary, youwould agree that it is not going to come down to someor other. You will agree, surely, that the only way inwhich the treaty changes that the Government wantand most of us here would want to see carried out thatwould improve the relationship of the EU and the UKcan only be achieved by the unanimous agreement ofall EU member states.Mr Hague: Treaty changes only come throughunanimous agreement; that is right. There are, ofcourse, treaty changes sought by other countries thatrequire our participation in an unanimous agreement.

There are many things that have already happened.We can look most usefully at recent examples, as wehave done during this Committee session, such asnegotiations on the banking union arrangements: thoserequired unanimous agreement, but they have beensuccessfully concluded to safeguard the interests ofthe UK, in a totally new way that nobody would havecontemplated just a few years ago.

Q234 Chair: Foreign Secretary, you will be awarethat the Fresh Start group produced a manifesto forchange and set out what it called “a new vision forthe UK in Europe”. You wrote the foreword for it anddescribed it as a “well-researched and well-considereddocument full of powerful ideas for Britain’s future inEurope”. You then went on to say that “many of theproposals are already Government policy, some couldwell become future Government or ConservativeParty policy and some may require further thought”which phrase could be described as covering all thebases.Mr Hague: Correct.

Q235 Chair: But on the last phrase—“some mayrequire further thought”—could you give us a steertowards a document you had in mind when you wrotethat phrase?Mr Hague: The covering of all bases is so effectivethat it is also not specifically attached to any specificproposal.Mike Gapes: Just as well.Mr Hague: Having just been accused of cherry-picking, I am not going to pick the individual ones.Clearly there are suggestions in there about deepeningand furthering the single market which are very muchin line with what I have just been describing of thethrust of Government policy, but there are others thatfall into more of the category that Mr Baron has beenasking about—specific items that would need to benegotiated in the future in treaty changes, and thosewe have not yet committed ourselves to as aGovernment; they fall into the category of furtherthought or possibly future policy, but I do not want togive you a checklist against each item in that verygood and thoughtful report.

Q236 Chair: But you did write the foreword for it,so I presume that you have had a good look at someof these.Mr Hague: I absolutely have had a good look, andthose general categorisations are absolutely true.

Q237 Chair: So I can’t tempt you on the views ofthe group on the common agricultural policy, forexample?Mr Hague: I am happy to give my views on thecommon agricultural policy, but I am really not goingto go through every proposal and say which of thosethree categories it falls into.Chair: I wasn’t going to ask you to do that, I was justgoing to pick out one or two.

Q238 Mr Baron: Foreign Secretary, you havecorrectly said that by planning to hold thisreferendum, you would be strengthening your




negotiating hand when it came to looking at powersto repatriate. Would not the hand be strengthened evenmore if the legislation for the referendum was broughtin to this Parliament? What is the downside of doingthat? If we are serious about renegotiating Britain’sposition in the EU, we all know any Prime Ministercoming in would find it very difficult—notimpossible—to repeal a popular piece of legislation,so why not bring that legislation into this Parliament?I grant you that that is not in the coalition agreement,but then neither was same-sex marriage.Mr Hague: It is not in the coalition agreement, andthe coalition agreement does have a section dealingwith Europe and our European policy. Of course, it isdifferent from any conscience or free vote issue inthat, of course, to pass it through the House ofCommons—to pass it rather than just vote on it; forthe Government to put it forward and for it to bepassed through Parliament—would require coalitionsupport. That part of the Prime Minister’s speech, thecommitment to a referendum, is a Conservative partyproposal not a coalition proposal. It is open to ourcolleagues in the coalition to favour the same policyif they wish to, or to the Opposition to favour thesame policy if they wish. I think the flaw as thingsstand in the argument that Mr Baron puts is that thereis no majority committed to pass it through thecurrent Parliament.

Q239 Mr Baron: I take your point about thecoalition Liberal Democrats perhaps not supporting it,but there are many on both sides of the House whodo support this, so the support may be there—thenumbers may be there to actually pass it. Now, if youcannot put it through, then there is no downside inmany respects, so I still have not heard a good reasonnot to bring that legislation forward.Mr Hague: This is a political debate. I saw Mr Gapesshaking his head when Mr Baron was asserting thatit could be passed through Parliament, and that onlyillustrates the point. I cannot see that that majorityexists at this moment.

Q240 Rory Stewart: If I could first pick up on theidea of the new settlement that you might be offeringto the British people. Is it always going to be a newsettlement within the framework of the currentEuropean Union, or is there a hypothetical possibilitythat you would offer to the British people somethingslightly different from the current arrangements—bringing in Norway and Turkey, or reconfigured insome way to take in a new US-EU free tradeagreement?Mr Hague: The conclusion of free trade agreementsis something that we want the European Union to doand for us to participate in.

Q241 Rory Stewart: Sorry, I confused you. I meantin the referendum in 2017—the thing that you offerthe people. Could it be something distinct from thecurrent framework of the EU? Could it be someimaginative thing that brought in other players andrepositioned Britain in some sort of new relationshipto the European Union?

Mr Hague: Again, what we have set out at themoment are principles. It is very much part of ourargument that the European Union is changing inimportant ways, and indeed that the flexibility forsome countries to participate in some arrangementswhile others do not participate in them is likely to getgreater, and that is a positively desirable thing, on thewhole. Given what would otherwise be the immensestrains on the European Union of a one-size-fits-allpolicy across the board, that is a desirabledevelopment.The European Union will keep evolving. It shouldalso be a European Union with many more membersin future. We think it is vital to Europe’s future forthe countries of the western Balkans to be able to jointhe EU, and we in this country are strong championsof Turkey joining the EU. I do not think that thosethings change the EU’s fundamental nature, but theywill require its continuing reform. The EuropeanUnion in 2025 may look very different in its structuresof power and in its geographic expanse, and hopefullyit will look quite different in its ability to compete andits democratic accountability from how it does today.

Q242 Rory Stewart: Specifically on 2017, are youruling out the possibility that you might, for example,present Britain as part of a single market tier withNorway and Switzerland? Is that completely ruledout?Mr Hague: We have not ruled anything out. As I wasdiscussing with Sir Menzies, the Prime Minister’sspeech set out the disadvantages of those things. Thereis no single market tier in existence. The arrangementsthat apply for Norway and Switzerland would havecertain additional disadvantages in respect of theUnited Kingdom. You were asking me earlier to setout the other attributes of the European Union that webelieve could be successful. They go beyond thesingle market. There isn’t a totally different structureor a totally different basis to the European Union thatwe are setting out here; we are setting out principlesof reform to the European Union that would allowus to recommend to the British people that we staywithin it.

Q243 Rory Stewart: Do you feel that you are raisingthe right expectations among British voters? How willyou explain to British voters what they are likely toget out of this? Is there a danger that British votersare expecting that they are going to get back a hugeamount more than we are ever plausibly going to beable to offer? How are you doing to deal with that?How are you going to discuss it so that we do not endup with a situation where when the referendum comes,they think, “Gosh, is that all?”Mr Hague: What they think at the time will be up tothem, but I do not think we are raising the wrongexpectations. We are setting out why Europe needsreform and what principles that reform should bebased on. We are not able, nor would it be wise at thismoment, to set out a negotiating shopping list, so weare not raising any expectation that anything thatcould appear on that shopping list will be agreed ornot agreed, at this moment. We are not at that stage;we are at the stage of launching the debate. I think




people welcome that debate and they welcome, on thewhole, the knowledge that they will be able to cast avote in the future. I do not think we have set anyunrealistic expectations going in what we have saidso far.

Q244 Rory Stewart: When you have got your newproposal together, what sort of evidence would youuse to determine in your own mind whether this islikely to win the support of the British voter? Youhave worked out a deal and you have looked at it, andbefore you present it to a referendum in 2017, whatsort of evidence, what sort of criteria, would youaddress to work out whether it is the kind of thing thatis likely to be acceptable?Mr Hague: I think it will be whether we can say thatthe European Union of the future will be moredemocratically accountable; that power will be able toflow to nation states in some instances, not justtowards the centre; that it is being operated fairly toall concerned, including those outside certainstructures such as the eurozone; and that we have wonthe ability to do what we need to do to allow us tocompete in the most intensively competitive globaleconomic environment; and that there is the flexibilityfor the EU to be able to evolve properly in the future.If we can say those things, then we will be in a goodposition with the British people and will have done agreat service to this country.

Q245 Mr Ainsworth: Let me take you back to justafter the Prime Minister’s speech, when he walkedinto Prime Minister’s Questions last Wednesday andwas cheered widely by his own side. I talked to oneor two Conservative Back Benchers just after that, andthe general view was summed up by one of them, whosaid that you would now get a 10-point jump in theopinion polls and the Labour Party would have tochange its position. None of those politicalconsiderations were in your mind, though, or in thePrime Minister’s mind when he made the speech; itwas just about protecting Britain’s interests in Europe.Mr Hague: It is hard to have totally out of one’s mindthe Labour Party changing its position as this happenson such a regular basis on this issue—that is a matterfor Mr Ainsworth and his colleagues rather than forme—but I believe very strongly that the policy we setout, the changes we set out, are in the interests of theEU and the United Kingdom. I am no great aficionadoof opinion polls—Mr Ainsworth: Did you get a 10-point jump?Mr Hague: I couldn’t honestly tell you. These thingsjump around all the time. These need not be theconsiderations of the Foreign Office, and I am surewould not be the considerations of the Committee inwriting their report, Mr Chairman.

Chair: Of course not.

Q246 Mr Baron: If the EU did not exist would youcreate it?Mr Hague: You can tell at this point, Mr Chairman,that we have had two hours of questions. I would notcreate it exactly as it is today. I would want it to lookmore like the answer I just gave to Mr Stewart in itsattributes, but I would not be opposed to the creationof something that allowed European countries to worktogether in all the ways I have described they shouldbe able to work together.

Q247 Chair: A couple of serious questions from meto close, Foreign Secretary. Do you see a role fornational Parliaments in a restructured Europe?Mr Hague: Yes—a much stronger role. Obviouslyparliamentary views on this are particularly relevantand important. I think strengthening democraticaccountability through national Parliaments is veryimportant.

Q248 Chair: What have you got in mind?Mr Hague: This is for us all to develop but, forinstance, we have the yellow card system, the orangecard system, and these are not much used inParliaments around the EU. I think many Parliamentswould welcome a strengthening of that system. It isimportant to look at ways in which nationalparliamentarians can be more readily involved inEuropean affairs. As the European Parliament hastaken on more power, ironically, people aroundEurope have felt more distant from Europeaninstitutions. The prime focus of democraticaccountability remains the national Parliament—ofevery country, actually, not just of the UnitedKingdom—so we need to find a stronger role fornational parliamentarians in the affairs of the EU.Those are the directions that we should go in.

Q249 Chair: If by 2015, no treaty negotiations havebeen initiated, would you initiate treaty negotiationsafter 2015 if you form the Government?Mr Hague: The Prime Minister said in his speech thatwhile there is a widespread expectation and advocacyof treaty change, if no other treaty change arose inthe coming years, then we would embark on our ownbilateral negotiation.Chair: Thank you. That is very helpful indeed. Thankyou very much, Foreign Secretary, and thank you, SirJon, Mr Manley. We much appreciate you taking thetime to come to see us.Mr Hague: Thank you.

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Written evidence

Written evidence from Dr Jóhanna Jónsdóttir, Policy Officer, European Free Trade AssociationSecretariat

Author Background

I am currently a policy officer at the European Free Trade Association (EFTA) Secretariat in Brussels, whichis responsible for the management of the European Economic Area (EEA) Agreement.

In 2010 I was awarded a PhD in European Studies from the University of Cambridge. My dissertationfocused on Iceland’s relations with the EU through the EEA Agreement.

My PhD dissertation was awarded the Sir Walter Bagehot Prize by the Political Studies Association for bestdissertation in the field of government and public administration.

A revised and updated version of my dissertation is due to be published this year by Routledge.

Foreword

I understand the Committee is starting from the assumption that the UK should and will remain a memberof the EU. Nonetheless, as the Committee has expressed a particular interest in submissions from non-memberstates and in light of increasingly frequent suggestions that the UK should withdraw from the EU, I will reflecton the suitability of an EEA type solution for the UK. This is related mainly to the first two questions posedby the Committee:

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

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

Please note that my submission does not in any way represent the official views of EFTA or its memberstates, but is based on my research and personal observations, which I hope may be of use to the Committeein its inquiry.

Summary of Key Points

— The EEA Agreement allows Iceland, Liechtenstein and Norway to participate in the EU’s internalmarket while excluding potentially less attractive areas such as the common fisheries policy.

— The EFTA states adopt all EU legislation in relevant areas without participating in the EU’s decision-making institutions.

— Although the EEA contains various clauses to formally protect the EFTA states against loss ofsovereignty, there are indications that it functions as a supranational agreement in practice.

— It is unlikely that the UK would find the EEA model in its current form to be a suitable alternativeto EU membership.

— The EEA could perhaps provide some lessons for the potential development of a “multi-tier Europe”.

Introduction

1. The members of EFTA have a long history of EU rule adoption and close institutional contact with theEU. The current members of EFTA are Iceland, Liechtenstein, Norway and Switzerland. With the exception ofSwitzerland, the EFTA states are parties to the EEA Agreement and thus participants in the EU’s internalmarket. Indeed, it could be argued that the EEA Agreement entails a form of “quasi-membership” of the EU.Having been in force since 1994, the EEA Agreement has proved considerably more resilient than was expectedat the time of its inception. Furthermore, it appears to have functioned relatively well over the years and inmany respects it has benefited its signatory states. Although it is not without its challenges, it is an institutionalframework which deserves attention, particularly in light of increasingly louder calls for a multi-tier Europe.

2. In recent years, proposals have been made to expand EEA membership, for example to Western Europeanmicro-states such as Andorra, San Marino and Monaco and Eastern giants like the Ukraine. In particular,following the UK’s decision in December 2011 to veto the new “fiscal compact” Treaty, suggestions have alsobeen made as to whether the UK might better belong in the EFTA family rather than the EU. In order toevaluate the viability of this course of action, it is necessary to examine how the EEA Agreement works inpractice, including its main challenges. In this submission I will explain the content and functioning of theEEA Agreement, before moving on to the recommendations section where I evaluate whether it potentiallyprovides a realistic or suitable alternative to EU membership for the UK or whether it provides any lessons forthe development of a multi-tier Europe.

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What is the EEA Agreement and how does it work?

3. The history of the EEA Agreement goes hand in hand with the EU’s plans to develop an internal market,which gained momentum in the 1980s. At the time, Western Europe was split into two blocks: the EEC andEFTA. The UK was the original driving force behind the establishment of EFTA as a non-supranationalcounterbalance to the European Economic Community (EEC), as it was called at the time. However, by thetime the EEA was being negotiated, the UK had long since left EFTA for the EEC. Nonetheless, EFTA’smembership still included some of the Community’s most important trading partiers, ie Austria, Finland,Sweden, Switzerland, Iceland, Norway and Liechtenstein.1 The aim of the EEA was to allow them toparticipate in the internal market.

4. The EEA Agreement was signed in May 1992 and came into effect on 1 January 1994. However,Switzerland rejected membership of the EEA in a referendum on 6 December 1992. On the other hand, Austria,Finland and Sweden decided to join the EU, becoming full members in 1995, thereby leading to speculationthat the EEA Agreement’s primary role would be to ease the EFTA states’ transition to EU membership.Currently, Iceland, Norway and Liechtenstein are thus the three remaining EFTA parties to the Agreement andthere is potential for further dwindling on the EFTA side as Iceland has applied for EU membership.

5. In return for access to the internal market, the EEA Agreement requires a high degree of integration ofEU acquis into the national legal systems of the participating states. The EFTA states must adopt nearly allprovisions relevant to the free movement of goods, services, capital and persons. In addition, the Agreementprovides for the adoption of EU legislation in a variety of horizontal areas such as labour law, consumerprotection, environmental policy, statistics and company law. As the EU’s legal framework is in a state ofcontinuous development, this includes not only legislation that was in place at the time the EEA Agreementcame into effect but also all new legal acts that are passed in the relevant areas, which constitutes a large bulkof EU legislation. A number of substantial areas do fall outside the scope of the EEA Agreement (although theEFTA states participate to a certain extent in some of these policy areas through other agreements) including:

(1) Common Agricultural and Fisheries Policies,

(2) Economic and Monetary Union,

(3) Customs Union,

(4) Common Trade Policy,

(5) Taxation,

(6) Common Foreign and Security Policy and

(7) Freedom, Security and Justice.

6. The exact proportion of the EU legal framework which is covered by the EEA Agreement is difficult tomeasure. In 2010, the Norwegian Government commissioned a comprehensive review of Norway’s agreementswith the EU, the EEA Agreement being by far the most extensive. The results of this review, totalling 900pages, were published in January 2012.2 The report estimates that through its agreements with the EU,Norway has incorporated approximately three-quarters of all EU legislative acts into Norwegian legislation.Iceland’s membership talks with the EU are also sometimes cited as an indicator of the scope of the EEAAgreement. The Commission stated that, prior to commencing negotiations, Iceland had already fullyimplemented 10 and partially implemented a further 11 chapters out of a total of 33 policy chapters throughthe EEA Agreement. Figures from the EFTA Secretariat show that at the end of 2010 approximately 8,300legal acts had been incorporated into the EEA Agreement.

7. Despite the exclusion of certain fields, it is clear that the EEA Agreement is quite extensive. It has enabledIceland, Norway and Liechtenstein to participate in the internal market while remaining outside of somepotentially less attractive areas. However, there is a price to pay for “à la carte” relations with the EU, as theEEA Agreement grants the EFTA states very limited access to EU decision-making institutions, while requiringthem to adopt all EU legislation in the relevant areas. The EEA Agreement does allow some access to theCommission’s expert groups and comitology committees (Articles 99 and 100 of the Agreement) but no formalaccess to either the Parliament or the Council. As the EFTA states adopt the majority of EU legislation, theyhave a clear incentive to make their voices heard and research suggests that they are increasingly making useof more informal lobbying tactics to do so. These may in some cases yield results, though this is difficult tomeasure. Nonetheless, the fact remains that the EFTA states do not have a seat at the table and their impact isundoubtedly limited. This inherent “democratic deficit” is indeed one of the main criticisms of the EEA.

8. Unlike the EU member states, the EFTA states have not formally ceded sovereignty to supranationalinstitutions. In order to counter their lack of access to EU decision-making institutions, the EEA Agreementcontains various clauses to formally protect them against loss of sovereignty. In the first place, EU acts do notautomatically become part of the EFTA states’ legal orders. Rather, an agreement has to be reached between1 Liechtenstein became a full member of EFTA in 1991 having previously been linked to EFTA through a special protocol.2 See link to the English translation of the introductory chapter of the review:

http://www.regjeringen.no/pages/36798821/PDFS/NOU201220120002000EN_PDFS.pdf

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the European External Action Service and the EFTA states in the EEA Joint Committee3 as to theirincorporation into the EEA Agreement. All decisions of the Joint Committee are taken by unanimity and, ifapproved, the acts are listed in the relevant Annexes to the EEA Agreement.

9. If the EFTA states find a piece of EEA relevant legislation unacceptable they have the right to refuse itsincorporation into the Agreement. This was considered extremely important when the EEA Agreement wasbeing negotiated. However, it could be argued that in practice it is a mere formality. In fact, it can be said thatthe EFTA states do not have any “real veto power” as they do not have the right to refuse without considerableconsequences, ie the provisional suspension of the relevant part of the EEA Agreement according to Article102 of the Agreement. As internal market issues are all interlinked, there is also fear that the entire EEAAgreement could be called into question if Article 102 were put into force. Therefore, due to their dependenceon access to the internal market, this clause makes it difficult, if not impossible, for the EFTA states to say“no”. Perhaps not surprisingly, they have never yet refused the incorporation of an act into the EEA Agreement,although the Norwegian government has recently indicated that it intends to veto the incorporation of the thirdPostal Services Directive, which would mark a historic development in the EEA.

10. In some cases, the EFTA states have been able to negotiate certain exemptions or adaptations prior toincorporating acts into the EEA Agreement. However, they must be able to demonstrate the necessity of suchadaptations for example because domestic conditions are entirely different from those in the EU member states.Granting exemptions or adaptations is at the discretion of the EU and they are generally not given becausesomething is “inconvenient”.

11. Another feature of the EEA Agreement which is aimed at retaining the sovereignty of the EFTA statesis that they have not formally transferred binding legislative powers to the EEA Joint Committee. In this way,although an act has been incorporated into the EEA Agreement, one or more EFTA state may have so-calledconstitutional requirements which means that their respective national parliaments must ratify the act before itcan take effect. Thus, unlike in the EU, regulations are not directly applicable and directives do not have directeffect. However, the national parliaments of the EFTA states have never yet rejected an act which has beenincorporated into the EEA Agreement. This is perhaps not surprising as refusing to transpose EEA relevantlegislation at the national level would have the same effect as refusing to incorporate the act into the EEAAgreement, ie the suspension of the relevant part of the Agreement.

12. Once acts have entered into force in the EFTA states, they are not subject to monitoring and surveillanceby EU institutions but have their own Surveillance Authority and Court which monitor compliance with EEAlaw. EFTA infringement procedures are fairly similar to the mechanisms for monitoring compliance in EUmember states. The EFTA Court does not, however, have the same authority as the CJEU as it does not havethe power to issue binding decisions, only recommendations and advisory opinions. This, coupled with the factthat the EFTA states monitor themselves, means that these mechanisms may appear rather weak at first glance.Nonetheless, research suggests that they function fairly well. This can partly be explained by the fact thathaving their own institutions increases the legitimacy of the EEA Agreement. Furthermore, each EFTA stateis subject to control from its partners, not just its own officials. Finally, the EFTA bodies are in close contactwith the EU throughout the monitoring process and so the EFTA states are aware of the potential danger inallowing the EU to perceive that the EEA Agreement is not functioning well. Therefore, in practice, the EFTAstates appear to feel strong pressure to adapt to EU requirements.

13. If domestic opposition is very fervent significant delays may be experienced throughout the process ofincorporating acts into the EEA Agreement and putting them into practice at the national level. Nonetheless,on the whole the EEA framework appears to be fairly conducive to domestic adaptation to EU requirementsdue in large part to the asymmetrical nature of the relationship between the EFTA states and the EU and theirdependence on participation in the internal market. Taking into consideration lack of access to EU decision-making bodies, it could therefore perhaps be argued that in practice the EEA Agreement involves a greaterloss of autonomy than EU membership and there are indications that the EEA Agreement functions as asupranational agreement in practice.

14. In this context it is important to note that the EFTA states have generally found participation in the EEAAgreement to be beneficial. In most cases, EU legislation corresponds relatively well with pre-existing domesticarrangements in the EFTA states and does not require much change to the national legal framework. State actorsmay also often feel that EU policy poses an effective solution to domestic needs and challenges. Therefore, theEFTA states willingly adopt the majority of the EU legislation which they are required to take on board throughthe EEA Agreement. Yet, as in all states adopting EU rules, situations do arise where EU requirementseffectively clash with domestic policies or preferences. In these cases, the EFTA states have not had theopportunity to express themselves within EU decision-making institutions and they are not generally able toprevent their incorporation into the EEA Agreement or their implementation at national level.

15. Given that the EFTA states incorporate a large bulk of EU legislation into the Agreement without accessto the EU’s decision-making institutions, they have been likened to colonies of the EU. This situation has alsobeen described as a “fax democracy”, although perhaps a more apt description today would be an “email3 The EEA Joint Committee provides the forum in which views are exchanged and decisions are taken to incorporate EU legislation

into the EEA Agreement. The Joint Committee generally meets about eight times per year and is made up of ambassadors ofthe EEA EFTA states and representatives from the European External Action Service. Prior to the Lisbon Treaty, the Commission(DG RELEX) was the EFTA states’ counterpart in the Joint Committee.



democracy”. The democratic deficit has been a well-known aspect of the EEA Agreement from the start. It isthe price which the EFTA states agreed to pay for enjoying many of the benefits of European integrationwithout being full members of the club and without being bound to participate in some of the areas theyconsidered less attractive.

16. In this context it should be noted that the EEA has been slowly extending into new areas. The EU’smethods of legislating have evolved over time with more comprehensive acts being adopted which can spanover different policy areas. In many cases some elements of an act may be EEA relevant while others are not.As a result, the question of EEA relevance has become increasingly ambiguous. Cases where EEA relevanceis controversial can potentially lead to an expansion of the scope of the EEA Agreement into new areas whichwere not foreseen when it first came into effect, at least when the EU attaches importance to their adoption bythe EFTA states. Furthermore, the Parliament and the Council have gained more say in the EU legislativeprocess over the past two decades at the expense of the Commission. Therefore, it could perhaps be arguedthat the democratic deficit in the EEA has been increasing over time.

Recommendations

17. Having considered the functioning of the EEA Agreement, a question arises as to whether it is, in fact,a viable long-term alternative to EU membership. To date, this has not been a model that has been replicatedelsewhere; the closest exception might be Puerto Rico’s relations with the United States. As noted by theauthors of the Norwegian review, the EEA Agreement has often been considered a second best solution bothby those who favour EU membership and those who would prefer looser ties with the EU. By and large otherstates have not found this to be an attractive model and no other state has so far seriously made an effortto join EFTA and the EEA. Yet the possibility of developments in the membership of EFTA have oftenbeen suggested.

18. As a founding member of EFTA, the UK has been frequently named as an EU outsider. Indeed, aspreviously noted, the UK was instrumental in setting up EFTA as a counterbalance to the supranational EEC.Although the UK later decided that membership of the Economic Community better served its interests, it hasnever been a very enthusiastic member of the European project preferring to remain outside of areas ofcooperation such as Schengen and the Eurozone. Indeed, some would argue that Euroscepticism and a generaldistrust of the EU are inherently British.

19. David Cameron’s veto of the EU fiscal treaty in December 2011 reopened the debate on the UK’srelationship with the EU, with a return to EFTA frequently being named as a potential alternative to EUmembership. In the British media a number of reports suggested that the UK might have something to learnfrom Norway and Switzerland.4 One article argued that “switching from the costly and undemocraticEuropean Union and joining the European Free Trade Association would bring many benefits and job creationis one of them”. Slightly ironically, the article further explained that such a move would mean regaining controlover democratic law-making processes and being able to choose the best policies in a host of important areas.5

Another report stated that if Britain were to withdraw from the Union, but remain in the EEA “it would neitherparticipate in the much maligned Common Agricultural Policy—nor the equally criticized Common FisheriesPolicy. It would also fall outside of the common foreign and defense policies so detested by someEurosceptics”.6

20. Many would, however, argue that a return to EFTA would not work for the UK. Not least because theEFTA states are bound by EU rules but lack access to its decision making processes. As noted in one article,in comparison to the EFTA states “semi-detached status for a larger and more assertive country might well beharder to achieve. And being in with the outs while trading freely in Europe comes at a price. It means payingto administer and police the single market while the in-crowd makes the important decisions about how itworks. For a noisy nation accustomed to a place at the table and having its voice heard, that could feel like avery un-splendid isolation”.7

21. It is true that the EFTA states have so far been willing to pay the price of non-participation in EUdecision-making institutions. However, this would arguably be a much larger price to pay for the UK,particularly due to its size and general international standing. If Iceland and Liechtenstein joined the EU theywould be the smallest members of the Union in terms of population. Therefore, even if they did join the Union,they would not receive a large portion of the vote in the Council or a large number of seats in the Parliament.It is also likely that lack of resources would pose a problem for them in terms of active participation. Indeed,questions have even been raised as to whether membership of the EU is possible for a state as small asLiechtenstein. Norway is by far the largest of the EFTA states and therefore membership of the EU mightmake the biggest difference with respect to increasing influence within the institutions. However, althoughNorway is large in the EFTA context, it would still be a relatively small member state within a growing EU.

22. The UK on the other hand is one of the EU’s largest member states. It generally has the resources toparticipate actively in all policy areas and it is an important actor when it comes to coalition building and4 For example http://www.economist.com/node/215418635 http://www.publicserviceeurope.com/article/1139/time-to-leave-the-eu-and-stop-exporting-british-jobs-abroad6 http://www.publicserviceeurope.com/article/1090/what-exactly-would-the-uk-gain-from-leaving-the-eu7 http://www.economist.com/node/21541863



Qualified Majority Voting. Losing access to the decision-making institutions would therefore be a substantialblow. Furthermore, the incorporation of EU acquis into the EEA Agreement is an inherently asymmetricalprocess whereby the EFTA states adopt legislation which has been decided without their participation. In theview of the author, taking such a subordinate role would not sit well with the UK’s self image. True, the UKsaccession to EFTA would potentially make the relationship between the EU and EFTA pillars slightly lessasymmetrical. Nonetheless, the EEA in its current form, is very much a one-way street whereby the EFTAstates follow the EU’s lead. Therefore, a return to EFTA for the UK might not be such a plausible scenario.

23. Although the EEA Agreement in its current form is not a viable option for the UK, a future scenario ofa two or multi-tier Europe in which structure, content and membership of the EEA was substantially revisedcould potentially be explored further. Forecasts predicting a widening gap between an outer core and an innercore within Europe abound. In his book, The Future of Europe: Towards a Two-Speed EU?, Jean-Claude Pirisreaches the conclusion that the solution to the current economic and political climate is to permit “two-speed”development: allowing an inner core to move towards closer economic and political Union. Michael vanHulten, a former Dutch MEP, has detailed what a two-layer Europe might look like. “The outer layer wouldbe an overarching, less intrusive and more inclusive framework for European cooperation: a European Area ofFreedom, Security and Prosperity (EFSP). This would comprise all EU and EFTA member states, as well asall existing EU candidate countries including Turkey. It could be expanded eastward to all European countries,including Russia, if and when the Copenhagen accession criteria (or similar) were met”.8

24. Any such plans could potentially in some ways build on the experience of the EEA, albeit with substantialrevisions. For example, changes in the EU’s policy making process and recent Treaty revisions should be takeninto account. Furthermore, according to the EEA Agreement, Iceland, Norway and Liechtenstein are meant toharmonize their positions internally and then speak with one voice towards the EU. A greater number ofdiverse states would make this system of unanimity quite difficult and cumbersome. Changes might thereforeimply a more supranational structure. However, in return, the members of the outer tier should be allowedfurther participation in decision-making processes.

25. The economic climate within the EU has perhaps served to decrease the attractiveness of EU membership.The future of the EEA is of course largely dependent on developments within the EU. Whether the EEAAgreement’s content, structure and membership are revised or whether it ceases to exist at all are questionswhich will only be answered in the fullness of time. In general, the EEA in its current form, probably does notprovide a viable solution for countries such as the UK. However, this does not mean that the EEA can provideno lessons for the future of Europe. Rather, given that it has generally been found to function well, anydeliberations on a multi-tier Europe should take the experience of the EEA into account.

25 April 2012

Written evidence from Mrs Anne Palmer, JP (retired)

I do not belong to, and have never been in any Political Organisation or Political Party. My Faithful and TrueAllegiance is, as always, to the wearer of the British Crown. Responding to The Foreign Affairs CommitteeInquiry into “The Future of the European Union: UK Government Policy”.

1. Question: To what extent should the December 2011 European Council and its outcome be seen as awatershed in the UK’s EU Policy and place in the Union?

At first glance it looks as if we should and will stand by and watch while a continental system is built. Astatement by the Eurogroup made 30 March 2012, states, “The stability and integrity of the Economic andMonetary Union have required swift and vigorous measures that had been implemented recently, together withfurther qualitative moves towards a genuine Fiscal Stability Union” etc. To me it is and should be a “wake-upcall” for those that want to be further integrated into the European Union rather than be proud to be electedPoliticians of what many believe is/was the best free Country and Nation in the World.

2. Noted that one Gentleman, Mr Ottaway was starting from the assumption that the UK should and willremain an EU Member. Should the EU progress towards the one State of European Union will that decisionstill stand? The people have recently watched this present Government divide the Nation and Country ofEngland into nine EU Regions through the Localism Bill/Act which is shown quite clearly on the Council ofEurope’s Website where “ticks” are recorded when action is taken. Is he and the Government concerned at theextra money for and extra layer of Governance this Country has never had before? These REGIONS withelected Mayors, full Cabinets and all the regalia that goes with them? Note also, “The Regional Dimension ofDevelopment and the UN System”. Is this also wanted?

3. Noted that Mr Hague made quite clear on 8 March 2012 that, the protocol was not agreed, and as a resultthe agreement among the 25 nations is not part of the Treaties of the European Union, and does not have theforce of EU law and that we will have to continue to seek to protect the single market, financial services andour national interests in other ways in the absence of having secured a protocol to changes to the Treaties ofthe European Union. I would have thought even changing a Protocol to an already ratified Treaty requires areferendum in ALL EU Nation States.8 http://www.spectator.co.uk/coffeehouse/7421503/what-kind-of-europe.thtml



4. However, on 31 May Ireland is to hold a referendum on the “Fiscal Compact” which is in fact the “Treatyon Stability, Coordination and Governance in the Economic and Monetary Union” an extra Treaty on top ofthe Treaty of Lisbon, and whether it disturbs or intrudes on the previous Treaty remains to be seen for theoriginal paragraphs relating to the Eurozone Members are in the body of the Lisbon Treaty.

5. I pray that the original intention to alter just the “Protocol” rather than alter the body of the Treaty, whichI believe was/is required for such an important matter, was not the intention of being used to prevent or cheatthe people of any country out-side the Euro-Zone.

6. “Should the UK Government support the incorporation of the “fiscal compact” into the EU Treaties?”Without doubt, if the alleged “Fiscal Compact” is included into the Treaty of Lisbon and therefore an alterationto the original Treaty of Lisbon, this Country should-without doubt, have the promised referendum. With afurther additional Treaty, which may touch or intrude on the previous Treaty, I leave it to the experts.

7. I do have concerns regarding the recent extra funding to the IMF by the UK Government, which is notin the Euro-zone, yet this extra funding has knowingly been used to “help out” the Euro area through the IMF.This does raise concerns.

8. Further to Paragraph 2 re Mr Ottaway’s remarks regarding remaining in the European Union. That thisCountry will remain an EU Member. I have noted on more than one occasion that the EU wants to “use its‘one voice’ in all matters and especially in the United Nation Security Council.” In the General Assembly 30July at the 88th Meeting “General Assembly, in recorded vote, adopts resolution granting European Union,Right of Reply Ability to Present Oral Amendments”.

9. In fact I read Hungary’s representative, submitted the draft resolution on behalf of the European Unionand reading a number of oral revisions, said it was the product of extensive consultations among a broadspectrum of Member Sates, held following the Assembly’s vote on 14 September 2010 to defer considerationof the original text outlining the bloc’s expanding rights”, Do you know what those expanding Rights were?Did the people of this Country know? Were they told? See here GA/10983.

10. UN General Assembly 3 May 2011. Mr Körösi (Hungary) “It is an honour for me to appear before thegeneral Assembly, on behalf of the members of the European Union (EU), the draft resolution on theparticipation of the European Union in the work of the United Nations, contained in document A/65/L.64/Rev.1I would like in particular to thank the High Representative of the European Union for Foreign Affairs andSecurity Policy for being here today at a moment of great significance for the European Union” etc.

11. What a great pity the people of this Country did not have the opportunity to celebrate this good newswith them-FOR THE PEOPLE OF THIS COUNTRY WERE NOT TOLD. Will the EU soon have “one Voice”in the UNSC? Will this Country still need a British Government or a House of Commons or House of Lords,especially as the EU Regions have been set up here in the once United Kingdom of Great Britain and NorthernIreland at all, because no one will hear their voices, not even in the United Nation’s Security Council if theEuropean Union are going to speak with their one VOICE in all matters and on our behalf.

12. Your questions, “The Future of the European Union: UK Government Policy”.

The future of the European Union as it is at the moment is rather doubtful. Whether we as a country couldremain in the EU knowing without doubt that it is to become one European State/Country, not even as oncethought a United States of Europe rather like the USA, which should, under the circumstances when recentGovernments have let the people down, I would have thought should be decided by a Government of GreatBritain that is faithful and true to their solemn Oaths of Allegiance to the British Crown, that the Oaths theymake before they take their seats in that wonderful and once proud Houses of Parliament, would lift the peopleinto perhaps bringing a little faith and hope of a Government they could be proud of once more. For the onlyway for this Country and nation to survive, is out of the European Union completely. We truly should neverhave joined. (See Hansard from the 1960s)

13. If that is rejected, the people of course should be given a referendum on an “in or out” of the EuropeanUnion, and surely knowing exactly what the European Union is in reality to become, far better for ourGovernment to tell the people exactly why they are proposing to allow such a referendum and for the peopleto make a decision. A federal European Union or a Sovereign United Kingdom of Great Britain and NorthernIreland once more? That way, a British Government may win back some credibility and respect which it lacksat present and a chance to really govern this Country according to its long Standing Common Law Constitution.Failing that, in all honesty, if the EU continues as is proposed and encouraged by British Governments to fillthe role of a Single State of Europe, I have absolutely no idea what the ending will be, except that there willbe in all probability a terrible and tragic ending for all, with no going back.

11 May 2012



Written evidence from Dr Martyn Bond, Visiting Professor, Royal Holloway University of London

Please find below my evidence submitted to the Foreign Affairs Committee of the House of Commonsconcerning the future of the European Union.

The Argument of my Submission can be Summarised as Follows

The UK has lost its way in adapting to the challenges of globalisation. It is heading for an increasinglyisolated position, out of sympathy with its regional partners in Europe. It needs to develop a leading role withinits regional bloc, co-ordinating its priorities with other leading players there. UK foreign policy should prioritisethe EU and project UK power increasingly through this regional organisation.

A Note on my Background

I am Visiting Professor of European Politics and Policy at Royal Holloway University of London, aDistinguished Visiting Fellow at the European Business School as well as a Senior Fellow of the SalzburgGlobal Seminar.

My main career was as a European civil servant, serving eight years from 1974 as press spokesman inBrussels for the Council of Ministers of the EU (then the EEC), a further seven years, first as a senioradministrator during the negotiation of the fourth Lomé Convention with the countries of Africa, the Caribbeanand the Pacific, and then with responsibility for relations between the Council and the European Parliament.From 1989 until 1999 I worked in London as Director of the UK Office of the European Parliament.

My initial professional training, however, was in the BBC, which I joined on my return from Hamburg in1966, working there until 1970. I later took leave of absence from my civil service post in Brussels from 1981to 1983 to work as BBC correspondent in Berlin, broadcasting in German and English about politics, economyand society in West Berlin and East Germany. In 2005 I was invited to become the London Press Correspondentfor the Council of Europe, advising on media strategy and promoting the image of the Council in the UK.

I gained a BA in modern languages and literature from Cambridge, followed by further study at Hamburgand Sussex Universities (D.Phil 1971). Between 1970 and 1973 I was lecturer in West European Studies at theNew University of Ulster. After retiring from the European civil service I was Director of the Federal Trustfor Education and Research from 2000 to 2003, and from 2005 I have been Visiting Professor at RoyalHolloway. In 2006 I was invited to become a patron of the University Association for ContemporaryEuropean Studies.

I have written and edited several books, including Eminent Europeans (Greycoat Press, 1996), The Treatyof Nice Explained (Federal Trust, 2001), Europe’s Wider Loyalties: Global Responsibilities for the New Europe(Kogan Page, 2002), The European Convention on Human Rights and the Council of Europe (Council ofEurope, 2010), and The Council of Europe: structure, history and issues in European politics (Routledge, 2011).I also write for Public Service Europe (web only) and for Parliament Magazine, a Dods publication in Brussels,and I lecture on European issues both in the UK and abroad. I have contributed to numerous training coursesfor UK civil servants, in particular in the context of Dod’s programmes Westminster Explained and BrusselsExplained.

The Future of the European Union: Implications for UK Government Policy

Global framework—Regional priority

1. The power of individual states such as the UK to shape an effective response to global shocks hasconsiderably diminished over the past 50 years. Poor economic performance in relation to other Europeaneconomies has increased the need for the UK in particular to work with other members of the EU in seekingcommon solutions for the region. The UK is not as impecunious as Greece, but it is also not as wealthyas Germany.

2. In addition to the shock of the current financial crisis, the member states of the EU now face cultural,social and economic adjustments to an exceptionally strong migratory influx as a result of globalisation.Doubtless other external shocks—possibly ecological or energy-related—will also soon call for a Europeanresponse.

3. As Chou-en-Lai predicted long ago, at the global level the move to dialogue among several strong regionalpowers appears unstoppable. The EU represents one such power. The UK individually—despite retaining someelements of power acquired in earlier years (nuclear deterrent, Security Council seat, special relationship,Commonwealth)—does not. Sooner or later it will be the EU and not an individual nation which will answerKissinger’s phone call and speak for Europe. The route to optimising the UK’s influence globally lies thereforein strengthening its position inside the EU.



Government influence or Party politics?

4. Many policy initiatives derive from party political discussions at European level. Across the continent,political forces are organised in three main groups, the European Peoples Party, the Socialists and Democrats,and the Alliance of Democrats and Liberals in Europe.

5. The absence of the Conservative Party from the EPP represents a serious weakness for the UK in itsefforts to exert influence in the EU at a political level. Without a close alliance with the EPP, the Conservativeelement of the Coalition government is absent from the dominant circle of those deciding the direction of EUpolicies in most other states. This is a party political issue that is harming the national interest. It should beremedied as soon as possible.

6. The December fiasco last year was the most recent high-level example of the UK’s misjudgement ofcontinental responses because of Conservative political isolation. Absent from the meeting of the EPP inMarseilles just before the Brussels Summit, the Conservative leadership was unable to grasp the importance ofother states’ political capital invested in the Eurozone.

7. Ideological assumptions increasingly shape member states’ political positions at continental level. Theyinfluence the European argument well before the Commission puts practical proposals on the table for formaldiscussion in Brussels. For the UK, the underlying issue is as much a matter of political contacts and ideologicalaffinities as of institutional structures.

8. In this analysis, the fiasco of last December was not a watershed, but one of a series of accidents as thesebroad political affinities surface from time and time. Until the Conservative Party changes its continentalpolitical alignment, the UK under its present leadership will be isolated again and again. In the 2014 EuropeanParliament elections, for instance, the main political groups are all likely to nominate their candidates for thepost of President of the Commission well in advance. Conservative absence from the EPP will again isolatethe UK Prime Minister when the European Council is subsequently called on to endorse the next President ofthe Commission.

9. The grand narrative of European unification has little attraction in the UK at the popular level. However,it clearly still has—as it has had since 1945—considerable strength among European political elites. Theassumption of “strength through unity” drives the policy choices of major political parties across the continent.If the alternative is impotent isolation, it also makes more and more sense for the UK.

Maximising UK influence inside the EU

10. It is only within a grand strategy of close co-operation with other like-minded political forces in the EUthat the UK government—whichever Party is in power—will achieve its specific foreign policy goals: securityof supply for food and raw materials, open markets in third countries, and respect for our values in regard todemocracy, human rights and the rule of law. All these objectives are shared with other members of the EU.Only by playing an engaged and proactive role in advancing further integration within the EU will the UKhave a powerful voice in deciding how these objectives are to be secured at a global level.

11. Successful opposition to manifestly unfair proposals or specifically detrimental policies at EU levelincreasingly requires enough allies to form a blocking minority, and preferably a positive majority to press forimprovements. This is not achieved from a position of isolation, opposed to the main thrust of integration.Opposition by the UK can be productive—as witness stalling proposals for a financial transaction tax andadvancing reforms in agriculture and fisheries—but it is considerably more successful when exercised fromwithin the tent.

12. The UK government should move from a default position of opposition in principle to further Europeanintegration to a position that allows it to respond positively to new proposals. The UK administration is stillrespected for the clarity and consistency of the positions it takes in Council, and a shift of stance in no waydetracts from its right to raise objections and call for amendments to proposals as discussions proceed. But togain a more sympathetic hearing, the UK government needs to signal that Brussels is appreciated more as thesolution and criticised less as the problem.

13. In particular the UK government needs to show that it wants to stay as closely associated as possible toinitiatives undertaken by groups of other states under “enhanced cooperation”. The UK should avoidformalising divisions within the EU, maintaining above all the option to join such initiatives later. It shouldmaintain this option for itself and argue for it as a principle for other states.

14. With specific regard to the “fiscal compact”, the UK should rapidly seek allies within the Eurozoneprepared to argue its case to keep open the option for the UK a) not to be excluded from the decision-makingfora set up for Eurozone countries, and b) to be able to opt in without onerous conditions if it later decides to.Hence the fiscal compact treaty should be agreed—like other EU treaties—by all member states.



15. Exclusion from the treaty would cause political, moral and economic damage to the UK. It stands tolose its traditional status as a leading member state of the EU if it is forced to position itself outside themainstream of European integration. This is reflected in exclusion from political decision-making (the top tableargument), the absence of British officials in important posts (the engine room reality), and reduced formal andinformal influence in Brussels (the everyday experience). The UK stands to lose morally if it is not presentalongside its traditional allies in debate, notably states of Scandinavia and central and eastern Europe. Ineconomic terms it stands to lose by being absent from decisions that directly affect the UK’s trading interests,notably regarding currency issues and matters relating to the Single Market.

Re-positioning among larger and smaller allies

16. As the EU develops further it will need more than just Franco-German leadership, and the UK shouldhave enough awareness of its own interests to seek a role alongside them in deciding the future of Europe.France and Germany need the UK as a balancing partner in their bi-lateral relationship, if this traditional coreof the peace settlement in Western Europe is to develop into a regional force in the world.

17. The reformed voting arrangements of the Lisbon Treaty give the larger states a greater say in thedevelopment of EU legislation and policy. The UK should therefore prioritise its efforts, identifying anddeveloping common interests in particular with the big players. The UK’s main allies in the EU should bethose countries which have the capacity—material and moral—to lead it.

18. At the same time, the UK should not neglect its relations with smaller states in the EU. Many of these—Scandinavia, Ireland, Portugal, Benelux, Malta, Cyprus and the Baltic States—have traditionally had closerelations with the UK. As it has done in the past, the UK needs to maintain good relations with the mediumand small member states, building up clusters of friends, but in doing so it should not lose sight of the need toidentify common interests with the larger leading countries.

Wider responsibilities and the longer view

19. As the UK is increasingly linked with its European neighbours—tourism and residence abroad, tradeand aid, finance, military alliance and foreign policy co-ordination, higher education, intermarriage, historicalexperience and cultural roots—it should strive to maximise its interests in playing a leading role in the newstructures of Europe. That cannot be done effectively from the sidelines.

20. The UK government should take measures to stop the drift towards isolation from the continent whichhas recently marked the country’s relations with the EU. A role for the UK comparable to Norway without itsoil or Switzerland without its reserves is profoundly unattractive. If the country were reduced to this, the UKwould be dominated by an integrated power on the continent and relegated to a subordinate role in bothregional and global affairs—an outcome which would realise the worst fears of British foreign policy.

21. As an alternative, the UK should develop its own vision of an EU under conditions acceptable both tothis country and to our European allies. It should position itself in the mainstream of economic and politicalintegration, from which position it would be better able to steer it in the direction and at the speed whichoptimises British interests.

22. Division among EU states plays into the hands of other powers which are not slow to take advantage ofit. Examples include Russia on energy supply, the US on air transport, China on a range of trade issues, andmany multinationals (backed by their governments) on conditions for FDI. Temporary advantages won by theUK in competition with other EU states are more than balanced out by benefits won by other members andlost to the UK. Overcoming this zero sum game would benefit all and permit the development of a morecoherent foreign policy as a regional bloc.

23. That geopolitical option will involve a considerable revision of recent UK foreign policy aims andmeans, which have assumed that the UK will continue as a priority to relate bilaterally to the rest of the world.The future will require a perspective looking from London through Brussels out to the wider world. The worldby 2020 will be looking first towards the EU and only secondarily towards the individual member states.

24. A view of the UK independent of this perspective is doomed to increasing irrelevance. If the UK doesnot want to be marginalised in international affairs by positioning itself outside any regional power bloc, itmust quickly concert its efforts with other European states to optimise its interests both within and throughthe EU.

15 May 2012



Written evidence from Sir Colin Budd KCMG

Summary— The December European Council not necessarily a watershed for UK/Europe, but an important wake

up call.

— For the UK voluntarily to accept demotion from the top European tier would be a huge strategicerror. On the contrary, we should wherever possible ensure that we are part of its leadership.

— To maximize our leverage in EU policy making, the whole of UK plc must apply itself to that task,with energy, imagination and unceasing effort.

— If we fail to wake up, we will increasingly find that we are living in Britzerland.

— We can and should do better.

Introduction

The writer was a member of HM Diplomatic Service from 1967–2005, serving in Warsaw, The Hague, Bonnand Brussels. He was Assistant Private Secretary to Geoffrey Howe, then Foreign and CommonwealthSecretary, from 1984–87; Chef de Cabinet to Leon Brittan, then Vice President of the European Commission,from 1993–95; Director General for Europe in the Foreign and Commonwealth Office from 1997–2001; andAmbassador to the Netherlands from 2001–05.

Background

1. Sir Percy Cradock, who from 1983–90 was Margaret Thatcher’s foreign policy adviser, once observedthat the story of British European policy since 1945 had to an alarming extent been one of “mistakenassessments and missed opportunities, a depressing chronicle of delayed awakening to reality, of belated arrivalin institutions fashioned by others, of repinings, second and third thoughts, divided counsels and qualifiedenthusiasms, and a general confusion of policy designed to achieve maximum pain and minimum influence”.

2. To ask about the impact of the December 2011 European Council on the UK’s policy towards and placein the European Union (EU) is to beg the question: what should that policy and place ideally be? If as a nationwe want to avoid simply continuing the lamentable story so pithily summed up by Cradock, we need to thinkclearly about this.

3. The policy of the present UK government, as laid down in the Coalition Agreement, is that this countryshould play a leading role in the EU—in order (inter alia) to ensure that “all the nations of Europe are equippedto face the challenges of the 21st century”.

4. What that, quite rightly, implies is that European countries can meet those challenges more effectively ifthey stand together than they could on their own. But there is more to the story than that.

5. The underlying logic of EU membership for the UK, for those who support it, has always in essencerested on two perceptions:

(i) the assumption that UK interests are best served by our being inside the EU; and

(ii) the view that we are best placed to protect and promote those interests the more influence wecan bring to bear on the directions in which the EU is heading.

6. Why is EU membership to our advantage? Partly for economic, and partly for wider reasons.

7. The economic case in favour is very well trodden ground. It rests on full access to the Single Market,with its many implications for profitability and employment; on the magnetism of the EU for foreign directinvestment; and on the huge clout the EU has in world trade talks. The UK badly needs Europe to beeconomically strong, open to free trade, and prosperous. The best way to maximize the chances of that is forthe UK to be influential inside the EU.

8. There are also numerous wider benefits—including the ability to travel, live and work anywhere in theEU, the scope the EU affords for action to improve the environment, and the forum it provides for moreeffective cooperation over crime and justice matters.

9. Above all, there is the wider strategic imperative: the whole question of how in the 21st century tomaximize the UK’s global influence and authority, in a world in which so many of the key problems crossnational borders. As a member state in the EU the UK exercises far greater influence internationally than itcould on its own. The more we fall out of the key EU decision-making circle, the more that will undermineour political relationship with the United States and reduce our influence in many international fora.

10. If we want to maximize our prosperity, trade and employment rate, if we want our own continent andthe world to be safer and greener, if we want to be as influential as possible in world affairs, there is simplyno option but for the UK to be an active and leading member of the EU.

11. It follows that unless there is a compelling case, given the national interest, for standing aside from anyparticular policy proposal, we should in all circumstances aim to exert as much influence as possible on thedecision-making process inside the EU.



12. It was with that analysis in mind that the outcome of the December 2011 European Council left manyUK observers with a considerable unease. Far from strengthening the UK’s position in Europe, there isaccumulating evidence that this has reduced our capacity to influence future EU legislation in the areas itcovered—which by common consent are of very great importance for this country. Though there is much leftto play for, there must be a strong probability that by the time future policy proposals in the areas in questioncome to ECOFIN, where the UK will still be present, the outcome of ECOFIN discussion will in effect havebeen predetermined—by decisions in the prior caucusing of the member states committed to the fiscal compact.

13. The key dilemma for the UK, when it comes to questions of EU institutional architecture, is that themore we choose to stand aside from the evolving process, the more it will tend to evolve in directions andways which do not suit our interests, while continuing to impact very directly on those interests. Euroscepticsmay want us to roam the globe, untethered by Europe. But whatever their dreams, we will still be 22 milesfrom the European mainland, and profoundly affected by the way the EU is organized.

Response to the FAC’s Questions

14. The FAC asks what institutional architecture the UK should seek for the EU, and whether the UK shouldembrace the idea of an EU made up of two or more tiers. That directly raises the question of what on any suchanalysis would be the right tier for the UK to be in. The answer plainly depends on how far we want in futureto be counted among the leaders of Europe, rather than the followers.

15. Germany and France will continue to lead, and will tend always to look to each other first—bound asthey are by the 1963 Elysée Treaty to arrive, “on all important policy questions, insofar as possible, at a similarposition”. Along with the leaders of the key EU institutions, they will tend to dominate any European top tier,however much they may disagree on many of the substantive issues.

16. If the UK wishes to maximize its influence in Europe, it has much scope for exercising as much influenceas and sometimes more than Germany and France. So long as we remain in the top tier, then in the future asin the past, when either Germany or France disagree with the other, they will often seek support from the UK,thus giving us real scope for influencing the outcome in question. In addition to which, if we cultivate as weshould our natural allies on each issue among the other member states, we can in any case often build up astrong bargaining position. But to the extent that we fall, voluntarily or otherwise, outside the top European tierin any given field, there will be an inevitable reduction in UK leverage and influence, often to our disadvantage.

17. We need in this connection to beware of the incremental effect of the widespread and increasingassumption in the rest of the EU that the UK perspective, when it comes to considering the future of Europe,is of less and less importance.

18. The potential danger to which the UK needs to be alert, in assessing the impact of the new “fiscalcompact” treaty, is that in other areas too the notion will take hold that in the construction of the key deal theUK does not have to be involved from the start, but can instead be presented later—as now happens routinelyto Switzerland—with a series of faits accomplis. Our rights under the Treaty, where unanimity is required, ofcourse still provide us with real protection, but there is nonetheless a clear and significant difference betweenbeing one of the prime movers in the power dynamics of the EU, from the beginning of any discussion, andsimply being presented with an already constructed package, which by that stage has become much moredifficult to amend.

19. There is little solace to be had, even when we are right, from any situation in which we end up, as mostrecently in the context of the EU’s implementation of the Basel III rules on banking regulation, isolated 26–1.If we find ourselves in that position, the strong likelihood is that we have in one way or another misplayed ourhand—especially if it is clear that a number of the 26 in fact share our analysis.

20. Thus at the time of last December’s European Council, it was plain that a number of other memberstates had real sympathy for aspects of our position—but we tabled our proposals and started to look for alliesso late in the day that it proved impossible to build the alliance in our favour which would have greatlystrengthened our position. The way the UK played its hand, in response to all attempts to agree the fiscalcompact unanimously, and within the existing treaties, was in some respects understandable but on any analysisweakened our overall position in the European Union. The outcome of the December European Council, it isincreasingly clear, in the eyes of many observers in the rest of Europe as well as in the UK strengthened theperception of a binary division between the UK and the rest, and opened up speculation about the more formalestablishment of an explicitly two tier system.

21. It would certainly be better if the fiscal compact could still be incorporated in the treaties—provided theUK position were adequately safeguarded—because the UK would then be able, in an area of such cardinalimportance for its interests, to play a full role in all relevant EU discussion. As far as possible, all futureframework policy statements should be agreed by all 27 member states.

22. There will always be instances in which the strength of the UK interest in a particular policy line is suchthat we may prefer isolation to dilution of our own proposals—but there is a strong case for reducing theirnumber to the absolute minimum, to avoid as far as possible our being forced de facto to live with policyoutcomes affecting our interests which have been shaped and decided by others. How can we best seek toachieve that?



23. To keep the UK in the forefront of European decision-making will require, in addition to the necessarypolitical commitment, first class planning and a clear and sustained determination to use to the full thenetworking and other assets we have. What are those assets?

24. We start with the benefit of the growing strength in Europe of the English language. It would be bizarreindeed to accept demotion from the top European tier just when our language is increasingly the lingua francaof our continent.

25. We have, and need to use to the full:

— bilateral links to the 26 other member states of the EU, which need to be nurtured constantlyby all Ministers with EU-relevant business;

— and a policy coordination system the envy of our European partners (Jacques Delors, whenPresident of the European Commission, went on record as saying he considered the UK’ssystem to be the best in the EU). If used sufficiently far in advance, that system will tend tomaximize our chances of securing, in any given case, at least a significant proportion of ourobjectives. If we continually reinvest in keeping it well oiled, and in first class working order—which requires (i) optimal coordination between the Cabinet Office, FCO and UKREP Brussels;(ii) effective EU coordination sections in other Whitehall Departments, and (iii) fullinvolvement and use of our Embassies in other EU member states.

26. We also have, but have so far only fitfully chosen to play, a potentially significant role in the developingEuropean polity which is, like it or not, part of the way today’s European policy-making game is played.

27. Both Government Departments in London and our political parties need to understand the significanceof the evolving pattern of party politics on a European scale. Important in part, clearly, because of the EuropeanParliament’s position in the EU, but also because of the prior caucusing of the party leaders before manyEuropean Council meetings which has now become a routine part of political life in the EU.

28. Our Government Departments need to make a much greater effort to engage with the MEPs, from allcountries, who are active in their policy areas. All our political parties need in the national interest to ensurethat they are playing an active role in intra-European dialogue, and in particular that their weight is felt inintra-party debate at the European level in the run up to key meetings of the European Council. In this respect,for instance, the Conservative Party’s decision to leave the European People’s Party has in effect meant that inrecent meetings of the EPP leaders from the EU member states—such as that at Marseilles just before lastDecember’s European Council—the UK voice has gone unheard, sometimes at tactically very importantmoments.

29. Another weakness in our position is the alarming decline in recent years in the number of UK nationalssecuring posts in the EU institutions: in the most recent EU-wide competition, fewer than 3% of the successfulcandidates were from the UK (which has some 12% of the EU’s population). This needs urgent attention,otherwise 15–30 years from now it will come to haunt us. In the real world, all EU member states relysignificantly on the nationals they have in the EU institutions as part of their collective networking strength,and it makes no sense for the UK not to push hard to ensure that the playing field is made level. There is astrong case, which the FAC may wish to consider, for a substantial remedial package—including more training,especially in foreign languages, and agreement across Whitehall that the UK needs to send to Brussels someof its best and brightest civil servants.

30. One obvious test case in the offing for the UK’s ability to remain constructively engaged in the EU innercore discussions is the subject of growth, and the issue of a potential growth compact to match the fiscalcompact. Here the UK will plainly want an outcome to EU debate which takes the fullest possible account ofthe UK interest. Equally obviously, some other participants in the discussion may tend to emphasise questionson which they are not at one with HMG—but there will certainly be some member states in broad agreementwith the UK. The question of growth and how best to stimulate it should very clearly not be left solely to theeuro area. It is much to be welcomed that the UK has been to the fore in the so-called “Like-Minded” groupof member states, which since well before the French Presidential election has been stressing the strength ofthe case for action to help boost economic growth in the EU.

31. Another test case will be the forthcoming discussion of the EU budget. There we can either establish apurely defensive position, and just sit tight, determined to be inflexible, leaving the shape of the final packageto be created by others—or apply ourselves proactively, while still of course pulling no punches about theimportance of the UK interest, to the task of working hard at the core of the EU’s debate on the subject, usingall the arguments we can, to help forge an outcome which can be seen as acceptable to all.

Conclusions

32. Last December’s European Council does risk becoming a watershed for the UK’s place in the EU, butthat is by no means inevitable.

33. To conclude that the UK should now favour a much looser arrangement for the future institutionalarchitecture of the EU, whereby we would take up a position somewhere outside a new core Europe, wouldbe a fundamental misreading of the UK national interest.



34. Certainly the UK must continue to fight its corner in relation to the fiscal compact, but our strategicapproach should continue to be to do all we can to shape the evolution of future European policy.

35. In pursuing that strategy we need always to remember that in the modern European Union outcomes areincreasingly shaped and predetermined away from the formal negotiating table. The race tends to go to theproactive, well organized alliance-builders, who maintain effective networks and plan their approach to eachissue well in advance. Last minute initiatives of the kind the UK tried immediately before last December’sEuropean Council are unlikely to prosper. The UK has in ample measure the skills needed to build effectivealliances in Europe, but we need to ensure that we both maintain them and use them, early enough in the gameto have a chance of achieving our objectives.

16 May 2012

Written evidence from Jean-Claude Piris, former Legal Counsel, European Council and EU Council,and Director General, EU Council Legal Service (1988–2010)

Summary

— The implementation of the Treaty on Stability, Coordination and Governance in the Economic andMonetary Union (“Fiscal Compact”) which was signed on 2 March 2012 by 25 Member States ofthe European Union (EU) will not, in itself, go against the UK’s interests.

— The conclusion of other intergovernmental agreements or arrangements of a similar kind, bindingEU Member States other than the UK, and in particular the members of the eurozone, are not to beexcluded in the future.

— If this were going to happen, the UK’s policy should be to obtain legal guarantees for the protectionof its rights and interests.

— An intergovernmental agreement or arrangement might be signed, in the period to come, by themembers of the eurozone, given the need to increase the convergence of their budgetary andeconomic policies in order to solve durably the current financial and economic crisis.

— Solving this crisis and relaunching economic growth in Europe is a priority aim and an essentialinterest not only for the eurozone but also for the UK.

— It is argued that, if the way of a further integration was chosen by the eurozone to attain this aim,the UK would have no interest, and in any case would have no legal or political means, in trying tooppose or delay this evolution. The UK’s aims could be that the provisions of any newintergovernmental arrangement should be fully compatible with the EU Treaties and guaranteeopenness and transparency. It should as well confirm the legal obligation of the Contracting Parties,under the judicial control of the EU Court of Justice, to comply with the letter and spirit of the EUTreaties, including the rules on the internal market.

Brief Answers to the Specific Questions of the Committee on the “Fiscal Compact”

(1) The December 2011 European Council and its outcome, including the signature on 2 March 2012 of theFiscal Compact by 25 EU countries, are a logical consequence both:

— of the need felt by the eurozone members to go forward in the integration of their policies inorder to try and solve the current crisis, and

— of the policy decided by the UK’s Government and Parliament, in particular by the 19 July2011 EU Act.9

(2) One cannot expect the other EU Member States to remain inactive, if and when they think that they haveimportant interests at stake, in cases when the UK exercises its right of veto within the framework of the EU.

(3) If such a case happens, it is argued that the UK’s policy should aim at ensuring that any action by theeurozone members shall respect their legal obligations under the EU Treaties. If this condition were fullyrespected, in letter and in spirit, the place of the UK in the EU and the possibility for the British Governmentto defend its rights and interests could be safeguarded.

(4) The Fiscal Compact will not be legally part of the EU’s acquis. Its entry into force will not have anyimpact on the EU budget, on enlargement, or on the Common Foreign and Security Policy.

(5) The rights and interests of the UK might be easier to defend through an incorporation of the Fiscalcompact in the EU Treaties. It appears that the Contracting Parties to the Fiscal Compact would not have anyobligation or interest to make concessions as a price to pay to the UK for that incorporation. However, the UKcould ask that some rules should be formally confirmed (this would in any case follow from the incorporation9 See the Written Evidence that I submitted on the EU Bill to the House of Commons (European Scrutiny Committee) on 24

November 2010: “...this might lead to the UK to be sidelined on certain issues. This is because it could trigger a tendencyamong other Member States to circumvent this situation, either by engaging in enhanced cooperation among themselves withoutthe participation of the UK, or by concluding intergovernmental agreements outside the framework of the EU”.



in the Treaties), such as the possibility to go to Court in case the UK’s interests would be put in jeopardy byany decision taken by the Contracting Parties to the Fiscal Compact.

On the Possible Future Evolution of the EU and on the Policy of the UK

(6) To solve durably the crisis of the eurozone, its members will probably have to increase the convergenceof their budgetary and economic policies.

(7) Most economists argue that it will not be possible to exit the financial (now also economic) crisis withoutincreasing significantly the convergence of the budgetary and economic policies of the members of theeurozone. This has also been acknowledged by British political authorities.

(8) This is now becoming more pressing. The high rate of interest which some of the eurozone countrieshave to pay to borrow money in the markets makes it difficult to encourage investment. Given the present stateof affairs, trying to re-launch their economic growth could trigger a further increase in their interest rate. Atthe same time, it is becoming unsustainable to continue on the road of more austerity. This increases desperationon the part of their population suffering unemployment and fall in revenues and translates into a heavy priceto be paid to populist political parties.

(9) To be able to use adequate instruments to re-launch economic growth, a protection from possible reactionsof the financial markets would be needed. The opportunity to earn money by speculating against individualmembers of the eurozone should disappear. To reach this aim, the eurozone should move closer to becominga full economic and monetary union, as this is the only realistic way for the markets to be convinced.

(10) This would demand visible and credible—albeit politically hugely difficult—actions, committing thegovernments, parliaments and populations of the eurozone countries. This evolution might be accelerated bythe current situation in Greece.

(11) It is obvious that this would raise huge political problems in the countries concerned, and that it is byno means certain to happen. Would taking such a road be sustainable politically, especially when coupled withbudgetary austerity and slow or negative economic growth during a few years? This is a big question mark.However, the economic and political risks of an explosion of the crisis are such that one can bet that the roadtowards more share of powers within the eurozone has a reasonable chance to be accepted.

(12) Making the eurozone a full economic and monetary union would involve accepting a substantial sharingof powers.

(13) In such a hypothesis, the members of the eurozone would accept not to be the only masters of theirbudgetary and economic policies.

(14) In legal terms, this would translate into a legally binding convergence, ie to go much further than thelanguage used in 2 March 2012 “Fiscal Compact”, where the Contracting Parties “undertake to work jointlytowards...”, “stand ready to make active use, whenever appropriate and necessary...” and “ensure that all majoreconomic policy reforms that they plan to undertake will be discussed ex-ante and, where appropriate,coordinated among themselves...”.

(15) The members of the eurozone would be linked together by a joint responsibility and solidarity.

(16) According to the author of this Evidence, “joint responsibility” would mean that each country involvedshould not finally adopt its national budget before having obtained a green light from “the centre”. The choicenot to respect a red light would entail the exclusion of financial help from Eurozone Funds. Economic policiesmight be subject to a convergence mechanism, which would be tighter in cases where a country is receivingfinancial help. A Eurozone Debt Agency could be created, as well as a Eurozone Banking SupervisionAuthority, going in the direction of a kind of Banking Union. This might also be accompanied by a minimalharmonisation of national laws concerning taxation (eg a common basis for the assessment of corporate taxes,to be followed eventually by minimal harmonisation) and social policy (such as linking the age and conditionsof retirement to current demographic trends, establishing a common minimum guaranteed salary, takingmeasures to liberalise the labour market and to encourage labour mobility). It is also recalled that Article 138TFEU might be used to ensure unified representation of the members of the eurozone in the Bretton Woodsinstitutions in Washington, both the International Monetary Fund and the World Bank. These policies andactions would not be detrimental to the rights and interests of the UK or of the other EU States not having theeuro as their currency.

(17) If such a framework were to be adopted, the other side of the coin, ie “joint solidarity”, might triggera joint answer to a move from the financial markets directed against an individual country in the eurozone.

(18) Such an evolution would take the form of an intergovernmental treaty or arrangement to be concludedby the eurozone countries.

(19) A revision of the EU Treaties is politically excluded, especially due to the opposition of the UK and ofother EU Member States. The only way forward for the eurozone members would therefore be to negotiate anintergovernmental agreement or arrangement among them. Taking into account its content, the conclusion of a



legally binding instrument might involve a referendum, and possibly a change of Constitution, for somecountries.

(20) It is argued that the UK would not be able, and in any case would have no interest, in trying to opposesuch an “Intergovernmental Arrangement” among the countries of the eurozone. However, the UK could andshould obviously demand that this arrangement be compatible with the EU Treaties.

(21) Besides, the members of the eurozone might, for reasons of coherence and also of political visibility,decide that the Additional Treaty could have other ambitions than in EMU matters stricto sensu, for example:

— in the policy of immigration, as linked to the labour market;

— in giving new political rights to the citizens of the countries involved, after a few years ofresidence;

— in encouraging swift progress in judicial cooperation in civil matters, especially the law ofcontracts and family law with cross-borders implications, in order to try and make life easierfor families of different nationalities; and

— in armament industry cooperation, aiming at a common public procurement; moreover, asregards defense policy, it is not excluded that some of the Contracting Parties consider that thetime has come for the implementation among them of the “Permanent Structured Cooperation”foreseen in the Lisbon Treaty. If these last issues were to be considered as raising a difficultyfor the UK, the British Government might think about launching other ideas in that domain, ifthat would better suit the UK’s interests. This might be welcome by the other EU States, as itis difficult to conceive a group of European countries going ahead on defence matters withoutthe active participation of the UK.

(22) One of the issues concerning the UK would be to know if a new intergovernmental arrangement wouldentail a new institutional framework, distinct from the EU’s institutions.

(23) It would be in the interest of all to avoid the establishment of new organs, in order not to make thepicture of Europe more complex than it is already today.

(24) In principle, this should not be problematic for some institutions: the EU Court of Justice, the Court ofAuditors and the European Central Bank could work, in their present composition and without any change totheir status, in the implementation of an “Intergovernmental Arrangement”, subject to the acquiescence of allEU Member States. One could hardly see what would be the interest of the UK in opposing this. Actually,British nationals are members of all these institutions. It would look better for the UK (and the other EUMember States non members of the eurozone) to accept that these institutions work for the eurozone as wellas for the EU, rather than pushing the Contracting Parties to create new organs, which would appear to belegally feasible, even if politically unadvisable.

(25) As for the European Council and the Council, the current situation would not be changed. Meetings ofthe 17 are already taking place back-to-back with them, both at the level of Heads of State or Government andat the level of ministers responsible for economic and financial affairs.

(26) The issue of the possible role to be conferred on both the European Parliament and the Commissionwould be more difficult.

(27) It is quite obvious that, given its content, the implementation of an Additional Treaty would make it anabsolute requirement to have strong, effective and legitimate democratic control. For legal reasons (text of theEU Treaties), it would look a priori impossible to use only the MEPs from the eurozone countries.10 Forpolitical reasons, it would be difficult to use the entire European Parliament which, moreover, would not bringsufficient political legitimacy, especially in these matters, which are in the remit of National Parliaments, whichhave the power to decide on taxes. It would also be difficult to ask the National Parliaments of the Statesconcerned to accept an important transfer of their powers in such essential domains, without giving them anysay when corresponding decisions will be made at the European level. The logical solution would therefore beto establish a Delegation composed of Representatives of the National Parliaments concerned and to conferupon it a real power of co-decision and control.

(28) As to the Commission, it would be difficult to imagine the EU Commission, composed of one memberfor each of the 27 (soon to be 28) EU Member States, taking (at least theoretically) all its decisions by a simplemajority, being in charge of monitoring and imposing its decisions in essential matters to a group of them.However, it would be even more difficult to envisage the creation of a new organ with a whole range of similarfunctions, as well as with the necessary human resources which that would require. A solution might be foundthrough the establishment of a small political organ, exercising limited tasks by itself, and out-sourcing theirpreparation, as well as other tasks, to other bodies, including to the EU Commission, if this was accepted byall EU Member States.10 This might be seen as going against the letter and the spirit of the provisions of the EU Treaties on the European Parliament.

Article 10(2) of the Treaty on European Union provides that “citizens are directly represented at Union level in the EuropeanParliament”. The mandate of MEPs is a European and not a national one. Actually, there are numerous acts voted in the EP thatdo not apply to all 27 EU Member States, for example legal acts concerning fisheries, mountain areas, or specific kinds ofindustry.



(29) This would look easier if the EU Commission were re-organised, in order to be more efficient, assertiveand independent, both from the Member States and from the European Parliament, in particular at a time whenmore powers are conferred upon it for the governance of the euro. The UK might be interested in such a wayout, especially if it helps re-organising the EU Commission, which has been regrettably weakened over the lasttwo decades or so.

(30) The imperative for the UK would be to request and obtain respect and protection of its rights andinterests.

(31) The UK will certainly demand that the eurozone should not establish itself as the first class of apermanent two-class or two-tier EU. Any action of what should remain a temporary group should be excludedin areas pertaining to the exclusive competence of the EU, including the areas of shared competence where theEU has already exercised its competences. The group should be forbidden to deal with issues directly linked,inter alia, to the internal market, external trade or foreign policy.

(32) It should respect the normal functioning of the EU and of its institutions. Priority should always begiven to proposals of the Commission to act or to legislate in the framework of the EU. The cohesion of theEU should be preserved, both in the internal market and in foreign policy.

(33) An Intergovernmental Arrangement, legally binding or not, should always remain open to accession forthe other EU Member States, and foresee means to help those of “the others” willing and able to join. Actually,“the others” include States whose stated policy is to have the euro as their currency as soon as possible. Oncethese States will have ratified the “Fiscal Compact” and confirmed their policy, they might be offered an “activeobserver status” in the organs of the eurozone group.

(34) As for the others, including the UK, they should insist that their concerns be taken into account andallayed. Provisions ensuring the legal protection of their rights and interests should be included in any newIntergovernmental Agreement. Firstly, openness and transparency should be ensured. Secondly, legal rules,whose respect should be under the judicial control of the Court of Justice of the EU, should guarantee thegroup’s strict compliance with the letter and spirit of the EU Treaties, in particular of the rules on the internalmarket.

(35) Solving the current crisis of the eurozone would obviously be good for all EU Members, including theUK. It would be in the interest of the UK that the members of the eurozone organise themselves in order tosolve durably the crisis, on the condition that the rights and interests of the UK be strictly and legally protected.

15 May 2012

Written evidence from Sir Michael Franklin KCB, CMG

Deputy Director General, European Commission, 1973–77; Head of the European Secretariat, Cabinet Office,1977–81; subsequently Permanent Secretary, Board of Trade and Ministry of Agriculture, Fisheries and Food

Summary— The December 2011 European Council did not disrupt business and was not a watershed.

— The EU can accommodate different national needs without the dangers of a “two-tier” Europe.

— Political changes in France and elsewhere open a new debate on how to restore growth in Europe;the UK must play a full part.

— n other important areas of EU activity, the UK has an important contribution to make.

— HMG should see its role in the EU in constructive not defensive terms, and present it in this way toParliament and the British public.

1. The December 2011 European Council was not, and should not be seen as a watershed. Whatever thearguments for and against the position taken by HMG at the meeting, its effect was not to block progress. Withcharacteristic ingenuity, the EU institutions found a way of dealing with the UK’s unwillingness to sign up tothe draft fiscal declaration. It is encouraging that, since the meeting, HMG has shown every sign of wishing toproceed with “business as usual”. The eurozone crisis is too serious to worry too much about legal niceties.

2. Over the years, the EU has shown itself adept at accommodating different requirements of the memberstates. It abounds in derogations, opt-outs, partial membership, special treatment and other departures from amonolithic structure. I see no need and many dangers in trying to formalise this practice into some kind oftwo-tier EU.

3. It is now clear, notably with the arrival of a new French President, that a new debate on how to deal withthe economic crisis is beginning. It may not reopen the Fiscal Treaty as such but it will certainly lead to avigorous challenge to its adequacy as a means of solving the many problems of recession, unemployment andbanking failures. In one form or another, there will be more emphasis on parallel policies to stimulate growth.This will be an EU-wide debate and it is therefore important that the UK should play its full part in it. It couldalso provide a convenient opportunity for the Fiscal Treaty to be incorporated into the EU Treaties. Since its



contents accord so closely with current UK policy, there seems no reason why HMG should not give itsconsent, perhaps as part of a package of measures acceptable to the UK resulting from the current debate.

4. I note with satisfaction that the Committee’s enquiry is “starting from the assumption that the UK shouldand will remain an EU Member”. This must surely be right. But at present the UK is not getting full valuefrom its membership. The Committee could play a very valuable role in asking, more generally than theparticular questions on which the Committee has sought evidence, how the UK Government should play itsrole as an EU member. All too often in the past, under governments of different persuasions, the UK has putitself on the defensive in Europe. Hence it is often seen by others as a reluctant member, not willing to engageconstructively and all too often seeking special treatment for the UK.

5. When we were fighting for a fair UK budgetary contribution such an attitude was inevitable and thelegacy is still with us. But that touches only one aspect of EU policy. There are others where the UK can andshould have a positive contribution. That has always been true of trade policy where the generally liberal tradepolicies have owed much to British influence. Even in agriculture, the CAP, albeit still absorbing too large ashare of the budget, has changed significantly for the better in ways much closer to UK thinking. In those areaswhere the EU has still not achieved a single market, there is much for the UK to play for.

6. The EU’s Common Foreign and Security Policy is a hugely important and growing part of the EU’sactivities. Here, surely, with its basis in co-operation rather than majority voting, is a place where the UK byvirtue of its history and diplomatic skills can and should play a leading role.

7. If, in these and other areas, the UK Government can be seen actively to serve British and Europeaninterests well, it would offer public opinion good news to counterbalance the negative and often misleadingaccounts currently offered by the media. Its actions and decisions need to be explained to Parliament and tothe British public not in confrontational terms but as being the result of honest negotiation and in terms whichshow where the outcome has been beneficial for Britain and of the EU as a whole. As I wrote in 1990,11 “byall means let Britain act in the future more as though what is good for Britain is good for the Community, butwe need also to believe that what is good for the Community may be good for Britain”.

18 May 2012

Written evidence from The Church of England, The Archbishops’ Council

Summary of Main Points

— The Church of England is a Church established by law in the UK but it is also by virtue of its historya European Church. It recognizes that to have any influence in Brussels it needs to work inpartnership with others. To this end it has invested time, energy and resources in building appropriatebilateral and multilateral relations with key strategic partners across Europe.

— At the December 2011 European Council, the United Kingdom found itself not only without allies,but without credibility as a negotiating partner as it opposed measures which were intended toachieve broad policy goals which are fully in line with UK national interest. This exposed thedomestic constraints on the British government and left its partners with the impression that it wasan unreliable partner. An opportunity to show solidarity with partners was missed. The UK mustwork to rebuild trust with its EU partners.

— Successive British governments have failed to articulate a policy towards the United Kingdom’sclosest partners that sustains public opinion while enabling it to take a constructive line acrossthe board. Unless future governments develop more constructive and positive conceptions of andcommitments to the EU and are able to sell them to an increasingly skeptical domestic audiencethen Britain could find itself slowly drifting towards the exit. Rather than looking to formalize atwo-tier structure the Government should use existing Treaty provisions on enhanced cooperation topress for a more flexible multi-speed Europe with variable membership across different policyspheres.

— By agreeing a legally binding intergovernmental agreement outside the scope of the EU Treaties,signatories to the fiscal compact have marginalised the EU institutions and in so doing weakenedtheir ability to defend the single market. These new arrangements could also have significantimplications for the EU’s common judicial space and common foreign and security policy. There isa very real worry therefore that the fiscal compact while saving the Euro might over time contributeto the EU’s demise.

— It is in the fundamental interests of the UK that the problems of the Eurozone are resolved and it isin the UK’s interests that this fiscal compact is folded back into existing EU Treaties as soon aspossible. Those wishing to press ahead with a stability union should be able to do so using existingTreaty provisions that allow for enhanced cooperation. The development of a two-tier or even amulti-speed Europe is not without its risks but it is preferable that such a development builds onexisting Treaties rather than departing from them.

11 “Britain’s Future in Europe”. Michael Franklin with Marc Wilke, Chatham House Papers, RIIA, 1990



Introduction

About the Mission and Public Affairs Council

1. The Mission and Public Affairs Council is the body responsible for overseeing research and comment onsocial and political issues on behalf of the Church. The Council comprises a representative group of bishops,clergy and lay people with interest and expertise in the relevant areas, and reports to the General Synod throughthe Archbishops’ Council.

A European Church

2. The Church of England, established by law in England, is a European Church active in all the memberstates of the European Union. It counts among its members nationals of all the member states and many others.

3. The Church of England maintains very close links with the Anglican churches of the rest of the UnitedKingdom, Ireland, Spain and Portugal. It works in partnership with the Old Catholic churches in Netherlands,Germany, Austria and Switzerland, the Lutheran churches of Iceland, Norway, Denmark, Sweden, Finland,Estonia and Lithuania. Special agreements also exist with the Evangelical Church in Germany and the RomanCatholic Church in France. It maintains 25 companion links with churches in Europe and is active in theConference of European Churches.

4. It is from this broad base that the Church of England engages with the European Union. The Archbishopof Canterbury has a permanent representative to the EU institutions in Brussels and members of its EuropeBishop’s Panel are frequent visitors to Brussels and Strasbourg.

5. The Church of England’s policy on Europe has been framed by a succession of papers which have beenendorsed by the General Synod, its representative assembly. The Church of England engages with the EuropeanUnion to ensure a values based approach to Europe’s development. It does so in order to build a humane,socially conscious and sustainable Europe at peace with itself and its neighbours.

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

6. The 2011 December European Council was less a watershed in Britain’s relationship with the EU as itwas the natural and inevitable consequence of decisions taken by successive British governments over the lasttwo decades.

7. The decision not to join the Euro until the economic conditions are right, and only then if approved byreferenda, has meant that Britain has always been detached from conversations regarding the governance ofthe Eurozone. One of the stated reasons why past governments have opposed membership of the Eurozone isthat along with monetary union must come closer fiscal integration. There is therefore a “remorseless logic”of closer integration in-built into the Euro project that Britain has rightly or wrongly decided to excludeitself from.

8. Moving beyond Eurozone specifics, the 2011 European Union Act acts as an emergency brake on Britain’srelationship with the EU by requiring any proposed EU Treaty or Treaty change to be subject to a referendum.As a number of Lords Spiritual pointed out at the Second Reading, the Bill ties the government’s hands infuture Treaty negotiations by delegating authority to the people acting through a referendum. The relativelynegative state of public opinion towards the EU (in 2011 opinion polls indicated for the first time a majorityin favour of leaving the EU) opens up the prospect of referendum defeat for any future government.

9. The December 2011 European Council showed, however, that the 2011 European Union Act does notserve as an emergency brake on the integrationist tendencies of others. That other countries, even non-Eurozonestates, are now willing to openly press ahead without Britain, even if that means working outside the formalstructures of the EU, is symptomatic of Britain’s waning influence in Europe and its declining ability tocultivate allies in Europe.

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

10. Institutional architecture and membership should be the servants of the issues and priorities that can beanticipated, not goals in themselves. Economic austerity and its consequences are likely to dominate policy,not just in the United Kingdom, but across Europe, well beyond 2020. In these circumstances it will be morethan ever necessary for government policy to project hope and to demonstrate solidarity, not just domestically,but with our partners.

11. Against this uncertain background future British governments need to develop constructive and positiveconceptions and commitments to the EU, sell these ideas to an increasingly sceptical domestic audience, andfind friends in Europe. Unless it does so the UK could find itself slowly drifting towards the exit. That wouldbe a travesty given the positive contribution that Britain has made to the EU since it joined in 1973.



12. Any notion that the UK could somehow turn to “like-minded” member states to define an alternative toa core of more “integrationist” member states was shown by events in December to be unrealistic. The problemof the December European Council was not that of two camps, but of a single camp with one major playeroutside it, despite its vital interest being at stake.

13. The events of December have shown that, despite differences of approach between member states, almostall wish to travel together based on a recognition of continuing shared interests and a desire for solidarity inthe face of the most significant policy challenge for the EU since its inception. A two-tier Europe is simplynot on the agenda. We suspect Europe’s future will be more messy and complex with Europe developing amulti-speed approach with variable membership across more closely coordinated policy spheres.

14. Existing European Treaties provide for enhanced cooperation between member states. Britain shouldlook to use this Treaty provision to develop permanent areas of structured cooperation with like-mindedmember states on issues of strategic concern across the other two pillars of the EU. An obvious area whichwould benefit from enhanced cooperation is the field of defence and security and it is an area where Britaincan play a leadership role. Such an approach might ensure that Britain is seen as a full and committed EUmember, even if it absents itself from the Eurozone and its governance structures.

15. Under this arrangement member states are likely to find themselves operating in different contexts witha different mix of partners and travelling at differing speeds rather than travelling together in convoy at thespeed of the slowest. The Europe of tomorrow might therefore more closely mirror the Europe de Partiesenvisaged by Charles de Gaulle than the supranationalism pursued by Jean Monnet.

16. We anticipate that the break with the one-speed model to a multi-speed Europe, could help unpack someof the obstacles that currently impede the future enlargement of the European Union. Enlargement has run intothe ground within the current EU. But a messier and more variable multi-speed Europe might prove a vehiclethrough which to integrate Turkey, Ukraine and others.

17. We accept that there are as yet un-assessed risks with this model of European cooperation. Is enhancedcooperation fragmentation by any other name? Will an a-la-carte approach to Europe generate a strong-enoughsense of common purpose for Europe to survive? At what point in the process does Europe’s policy makingbecome incoherent and ineffective? How might the move to various sub-groups possibly with their owninstitutions and procedures impact on the EU’s institutions and other policy areas? Will smaller member statesfeel marginalised such that the trust that binds all member states together is eroded?

18. Whatever the answer to these questions, ideas regarding the future of Europe must seek to close the gapbetween Europe and its citizens. Popular disenchantment with the EU, might be most marked in the UK, butthe EU’s crisis of legitimacy is a Europe-wide rather than a uniquely UK problem. As suggested by the LordBishop of Guildford in the House of Lords debate on the EU on 16 February 2012, Europe needs a revival ofthe vision of Europe which fired the EU’s founders and which is deeply rooted in Europe’s many cultures and,now, its many communities of faith.

19. From a UK perspective the Government needs to move beyond the defensive measures provided by the2011 European Union Act to articulate new channels by which voters can be engaged in the political choicesfacing the EU. These measures need to be complemented with steps to tackle at both a national and Europeanlevel some of the issues that fuel populist debates about Europe, some of which are based onmiscommunication.

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

20. As the Lord Bishop of Guildford made clear in the EU debate of 16 February it is to be welcomed thatBritain has taken a more pragmatic line when it comes to the use of EU institutions in the workings of thefiscal compact.

21. We remain concerned, however, that the fiscal compact weakens these institutions and makes it harderfor them to perform their role of defending the single market and ensuring that all member states are treatedfairly. At the very least these institutions will have to try and reconcile two sets of rules and procedures whichcan only absorb time and resources so making it harder for them to protect and extend the single market. Wesuspect that over time the relationship between the EU institutions and the fiscal compact will be determinedby the European Court of Justice.

22. It was possible that over time the “Euro core” even without the complication of the fiscal compact wouldincreasingly speak with one voice within the EU as well as outside it. The fiscal compact threatens to acceleratethis process. Although history suggests that countries tend not to act as a cohesive caucus there is clearly arisk of signatories to the fiscal compact agreeing a single position and only then negotiating with others. It isimportant that assurances are in place beyond those set out in the fiscal compact that key policy areas such asthe single market, common trade policy and the common budget will be negotiated at the level of all 27member states rather than being decided by a subset of the EU.



23. Externally, there is a danger that these new arrangements will impair the EU’s ability to present acoherent and unified position to others and in international forums with the result that the benefits of a commonforeign and security policy remain unrealized. The EU has built a reputation for being fiercely committed to aglobal order based on strong, multilateral rules and institutions. It supports free trade, the United Nations andglobal solutions to challenges such as climate change, economic marginalization, poverty and organized crime.

24. As suggested by the Lord Bishop of Exeter in a supplementary question in the House of Lords on 8December 2011 the EU’s international reputation has already been dented by its handling of the Eurozonecrisis, but its soft power could be further eroded if others find the way it organises itself less attractive. Wesuspect it will be hard for the EU to meet future challenges if an important geopolitical country such as Britainis excluded from its core.

25. We note here the ongoing discussions between France, Germany and Italy as to the possibility ofunilaterally establishing their own joint representation at the IMF which might in time provide a core multi-country seat around which all euro area members might be included. We worry that in seeking a solution tothe Euro crisis member states might have weakened Europe’s ability to play a role in a world which is seeinga significant transition of power from West to East. That is not only regrettable but shortsighted.

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

26. The EU and the Eurozone had various options available to them to resolve the institutional crisis thatlies behind the euro crisis. They could have continued with the policy of incremental shifts without treatychange, changed the European treaties to create a stability union or broken free from existing treaties andsigned a legally binding agreement amongst themselves.

27. None of these options provide(d) a cast iron solution to the problems affecting the Eurozone, but weconsider the third option the most risky and least attractive. It potentially threatens the future of the EU itselfby creating over time a tightly integrated core that undermines the single market and prevents Europe fromexercising its collective power on the world stage.

28. It is in Britain’s interests that this fiscal compact and/or its provisions are folded back into existing EUTreaties as soon as possible. Those wishing to press ahead with a stability union should be allowed to do sousing existing Treaty provisions that allow for enhanced cooperation. The development of a two-speed or evena multi-speed Europe is not without its risks, but it is preferable that such a development builds upon theexisting Treaties rather than departing from them.

29. In terms of safeguards, the Government should press for a deepening of the single market in order tostrengthen the ties that bind all member states together regardless of which lane they are in. This step mightbe productively linked to pressing for enhanced cooperation in other areas where Britain has a competitiveadvantage and strategic interest such as foreign and defence policy.

30. Taken together these measures might go some way to dispelling the impression given in December 2011that Britain was being awkward for the sake of it. We recognise that this strategy is unlikely to find immediatefavour with a euro-sceptic electorate, but over time it might help to refute the assertion that the EU worksagainst British interests.

21 May 2012

Written evidence from Professor Clive H. Church, Dr Paolo Dardanelli and Sean Mueller, Centre forSwiss Politics, University of Kent

THE “SWISS MODEL” OF RELATIONS WITH THE EU AND ITS RELEVANCE FOR THE UK

Executive Summary1. The idea that it would be advantageous for the UK to adopt the “Swiss model” of relations with the

EU instead of membership is neither new nor politically neutral.

2. The suggestion is based on a poor understanding of the features of such a “model” and of theconditions within which it operates.

3. Actual Swiss relations with the EU have disadvantages as well as advantages.

4. A careful examination of the Swiss experience suggests that the Swiss “model” is inferior to thestatus quo of UK-EU relations.

5. The UK should try to preserve a unified institutional structure for the EU in the face of pressuresfor a formalised two-tier architecture.

Submitters

Clive H. Church is Emeritus Professor of European Studies, Paolo Dardanelli Lecturer in European andComparative Politics, and Sean Mueller a doctoral researcher in Comparative Politics, all at the University of



Kent’s Centre for Swiss Politics. Prof. Church has been working on Switzerland since the 1970s and publishedthree books, notably the edited volume Switzerland and the European Union (Routledge 2007). Dr Dardanelliis the author of a series of articles and book chapters on Swiss politics while Mr Mueller, a Swiss national, iscompleting a PhD on inter-governmental relations in Switzerland.

1. Purpose

It is sometimes claimed that Switzerland’s relations with the EU might provide a better model for the UKthan membership. The claim is generally based on a limited understanding of the Switzerland-EU “model” andespecially of the conditions within which it operates. The purpose of the present evidence is to outline keyfeatures of Switzerland’s actual relations with the EU and explore the extent to which these could profitablybe adopted by the UK.

I. Swiss Relations with the EU

2. The Idea of a Swiss “model”

Those who suggest the UK adopts the “Swiss model” proceed from admiration for Switzerland’s economicand political performance. However, the reasons for this are rarely spelled out. They have to be teased out ofa series of broad statements about free trade and bilateral cooperation. Critics of UK membership tend tobelieve the main pillars of the Swiss model to be a popular refusal to join the EU; government intransigencetowards “Brussels”; one-to-one free trade deals with the EU; co-operation in other areas of use to Switzerland;a separate currency; a limited/part time parliament; and referenda. However, whether all this amounts to a“model”, either in the sense of a single, deliberate Swiss creation or a template accepted by all those who urgethe UK to follow the Swiss example, is far from certain.

3. Background

Membership of any supranational organisation was long considered incompatible with the country’straditional policy of neutrality. Switzerland did not get involved in the early phases of European integrationand stayed outside both the European Coal and Steel Community and the European Economic Community. Itjoined, however, the European Free Trade Association (EFTA) in 1960 and the Council of Europe in 1963 asthese organisations were by then perceived not to encroach on neutrality and sovereignty. In 1972, along withthe other EFTA states, it signed a treaty with the EU on free trade of manufactured goods.

4. EEA negotiations and EU application

The emergence after 1989 of a narrower conception of neutrality, and the changing international context ledSwitzerland to take part in the negotiations to create the European Economic Area (EEA) and to apply for EUmembership in May 1992. Ratification of the EEA treaty, however, narrowly failed in a referendum inDecember 1992. The campaign exposed deep divisions within Swiss society and led to a record high turnout.Subsequent events have confirmed the caution of the Swiss electorate about further integration, althoughpragmatism has often won out over Europhobia.

5. The bilateral approach

After the EEA vote, the country embarked on a bilateral approach, aiming to sign separate treaties coveringa range of policy areas so as to fill the gaps left by being outside the EEA. The first main package of bilateraltreaties proved difficult to negotiate and only came into effect, after endorsement in a referendum, in 2002. Itcontained seven separate agreements on free movement of persons; technical barriers to trade; publicprocurements; agriculture; research; and overland transport. A second package was signed in October 2004. Itsnine separate agreements entered into force at different times, according to different ratification requirements:processed agricultural goods, pensions, and taxation of savings (all three in force since 2005); environmentand media/film industry (both 2006; renewed film agreement signed in 2007 and in force since 2010); statistics(2007); Schengen/Dublin (2008; airports 2009); education (2010), and fight against fraud (not yet ratified byall EU states; applied by Switzerland since 2009 with those that have). In these areas, EU law directly appliesto Switzerland. At least 120 other technical agreements are also in place, some dating back to the post waryears. Switzerland also contributes financially to EU cohesion and research policies.

6. Informal Integration

The EU’s impact on Switzerland goes beyond the effect of formal treaties. In order to make its economy asEU-compatible as possible, the country has adopted a policy of “voluntary adaptation” whereby Swiss law isaligned with the EU’s acquis communautaire. A prominent example is the incorporation of the Cassis de Dijonprinciple into domestic law in 2010. Recent research shows that around 55% of the laws passed by the Swissparliament concern transposition of international, including EU, law. The bilateral treaties and the country’svoluntary adaptation have led to Switzerland being much more deeply integrated with the EU than suggestedby its formal status as a non-member. Indeed, in certain respects such integration is deeper than that of EUmembers such as the UK, as the case of Schengen shows.



7. Advantages

7.1 The resulting relationship clearly has many attractions for Switzerland. If initially it was a fallback optionin the face of a lack of popular support for membership, it has come to be seen by both the elite and theelectorate as the best way of managing the country’s relations with the EU.

7.2 The bilateral way essentially enables Switzerland to benefit from access to the single market whileretaining a degree of political autonomy in other spheres. Compared to EU membership, such autonomy isparticularly significant in monetary, fiscal, trade, and agricultural policy. It also exempts the country frommaking a contribution to the EU budget commensurate with the size of its economy.

7.3 Symbolically, the bilateral way preserves the formal trappings of state sovereignty and allows theunencumbered exercise of direct democracy. The bilateral way has so far served the country rather well. Aftera difficult period in the early 1990s, the economy has been highly successful over the last 15 years. At leastsome of this success can plausibly be attributed to its pragmatic partial integration with the EU.

8. Disadvantages

8.1 The most fundamental disadvantage is that Switzerland finds itself directly or indirectly compelled toadopt much of EU law without having any say in the process of making such law. The EU has made it clearthat access to decision-making can only come with membership, so this is unlikely to change. The paradox isthus that an arrangement meant to protect Switzerland’s autonomy is actually eroding it. Indeed, some saySwitzerland is a vassal or satellite of the EU.

8.2 The legal framework of the bilateral approach is cumbersome, fragmented and static. The linked natureof most of the treaties makes individual agreements potentially hostage to others. This complicates theiradaptation to the evolving acquis communautaire. A subsequent negative vote in a referendum might endangerthe whole initial package. Moreover, while the Swiss government has contemplated negotiating a third set oftreaties, the EU has made it plain that it believes the bilateral road has come to an end and that in the futurethe relationship would have to be based on quasi-automatic acceptance of EU law. The government has airedproposals on the basis of which Switzerland would “provisionally” adopt the evolving acquis under thesupervision of a Swiss monitoring agency and subject to direct democracy challenges. But the EU has alreadysignalled its opposition to such an arrangement.

8.3 Some of the advantages also have a negative side to them. Freedom of movement has led to a substantialinflux of labour and exacerbated tensions around the high percentage of non-nationals in the country (22%).In April 2012, the Swiss government decided to cap immigration from the post-2004 EU states under asafeguard provision, attracting vocal EU criticism. The rapid appreciation of the Swiss franc in the context ofthe Eurozone crisis has also created problems. The Swiss National Bank tried to cap the currency’s rise bycommitting itself to maintaining a lower bound of Sfr 1.20 to the euro, a stance now being tested by the markets.

9. Conclusions

9.1 The Swiss “model” of relations with the EU is one of considerable integration without membership. Itwould be erroneous to interpret it as “market access without the burden of regulation” as the impact of EUlaw on Switzerland is very extensive. Equally, the idealized view of an intransigent and wholly aloof stance isnot borne out in practice. Moreover, while bilateralism has served the country well so far, there are seriousdoubts as to whether it can continue to do so. Switzerland thus finds itself in an impasse, with the bilateralroom for manoeuvre increasingly narrow, on the one hand, and severe domestic obstacles in the way of a morecomprehensive agreement—or membership—on the other.

9.2 Switzerland has not ruled out membership altogether. Although joining is no longer active governmentpolicy, the application submitted in 1992 has not been formally withdrawn despite much pressure for this. Afundamental obstacle is presented by negative public opinion and high constitutional hurdles. Under thecountry’s federal system, membership would have to be approved in a referendum by a double majority ofcitizens and cantons. As some of the latter are very small and strongly anti-EU, observers estimate that closeto a 60% popular majority would be needed to clear the cantonal majority requirement. The present state ofpublic opinion is very far from that: only around 20% favour EU entry, although attempts to insert a 10-yearmoratorium on entry into the Constitution have recently failed.

9.3 Switzerland thus faces a fundamental trade-off, pitting the autonomy derived in some areas from stayingoutside the EU against the costs of not having access to EU decision-making. The viability of the bilateralmodel rests on the former being greater than the latter. While this might have been true in the past, as thecountry’s de facto integration continues—hence its autonomy shrinks—there are increasing concerns that costsmight soon outweigh benefits.

II. The Model’s Relevance for the UK

10. Origins of the idea

The idea that the UK should adopt the Swiss model of relations with the EU is neither new nor politicallyneutral. It has its roots in calls for the UK to rejoin EFTA and was advocated in the late 1980s by the Bruges



Group. More recently, it has been advanced by Daniel Hannan MEP, Sir Rocco Forte and others. Thus DavidCampbell Bannerman MEP told the EP that the UK should replace membership by “a free trade agreement,an arrangement very successfully adopted by Switzerland, saving it CHF 3.4 billion”. In other words, the ideahas come mainly from critics of the EU. Some have also called for the adoption of features of the Swiss systemin the UK, notably direct democracy and decentralisation.

11. Applicability to the UK

However, the model has significant limitations even for Switzerland. Any discussion over its applicability tothe UK must also take into account the major differences between the two countries. While some of themwould work in favour of the UK, others would make the model even less attractive for the country than it isfor Switzerland.

12. Levels of interdependence

A first important aspect is the different level of interdependence with the EU. Because of its size, economicstructure, and geographical location, the UK is less dependent on (the rest of) the EU than Switzerland is—theEU buys 60% of Swiss exports. A hypothetical UK-EU bilateral relationship would thus be less asymmetricalthan the Switzerland-EU relationship at present. This could mean that the UK would find itself in a strongerbargaining position vis-à-vis the EU and be better able to secure advantageous terms.

13. “Withdrawal” versus “rapprochement”

A fundamental difference, however, is that Switzerland has come to the present model through progressiverapprochement to the EU. The UK would have to adopt it after having left the EU. The two dynamics areobviously very different and might produce different attitudes on the part of the EU. While the EU has beenmore accommodating in its approach to Switzerland than might have been expected, this is now changing, andcould rub off on attitudes to the UK after renegotiation or withdrawal.

14. No such thing as “free trade without regulation”

As outlined, the Swiss model is essentially one of considerable integration without membership, not ofrejection of integration. Crucially, it includes acceptance of EU economic regulation without a say in shapingsuch regulation. If support for the Swiss model in the UK is motivated by a desire to escape EU regulation,then the former certainly is not the way to pursue that objective. If the UK left the EU, it could only retainaccess to the single market by also accepting regulation, and would have no influence over the making of suchrules—or certainly less than at present.

15. Savings versus influence trade-off

The UK already enjoys a tailor-made, semi-detached form of EU membership—which leaves it outside twoof the key areas of integration, monetary union and Schengen, but with the option of joining them any time—while Switzerland has joined Schengen. Hence, the Swiss situation’s chief attraction for the UK essentiallyrests on the savings the country would make if it did not have to pay member-level contributions to the EUbudget. While such savings would be substantial, they should be set against the loss of influence the UK wouldsuffer from withdrawing from the EU. In broad, as opposed to narrow accounting, terms, the costs of the latterwould almost certainly be greater than the benefits of the former.

16. The impact of possible EU restructuring

It is possible that the EU will restructure in the direction of a two-tier, core and periphery, architecture as aresponse to the Eurozone crisis. If so, the key question for the UK would be what level of access to institutionsand decision-making the “outer” members would have. Should restructuring go as far as effectivelymarginalising the non-core countries, membership of such “periphery” would come to resemble membershipof the EEA. This would raise questions in the UK as to whether the terms of the trade-off outlined abovewould still be in the country’s interests. In such a scenario, the Swiss model might become more attractive forthe UK. It would be premature, though, to assume a restructuring along these lines. While the “remorselesslogic” of integration, as the Chancellor put it, is certainly at play in the Eurozone, there are powerful obstaclesin the way of fundamentally changing EU membership into separate “classes”.

17. Conclusions

Many of the advocates of the Swiss model in the UK have an imperfect understanding of the features ofactual Swiss practice and the challenges it is currently facing. In particular, they fail to appreciate that themodel does not deliver free trade without regulation and that it carries high costs in terms of influence. The“selective” form of membership the UK currently enjoys appears clearly superior to the Swiss model, evenfrom a narrow cost-benefit analysis, let alone from wider considerations such as the UK’s place in the worldetc. Unless the “constitutional” architecture of the EU changes dramatically in the wake of the Eurozone crisis,this situation is unlikely to change for the foreseeable future.



III. Recommendations to the Committee

18. Swiss model unsuited to the UK

Our central recommendation is that the Committee should consider the Swiss “model” of bilateral treatiesas unsuited to the UK. It would be an inferior form of pursuing the country’s interests in its relations with therest of Europe compared to the status quo, because it would mean giving up political leverage over fundamentalEU decisions.

19. December 2011 European Council and the “fiscal compact”

We would not over-emphasise the significance of the December 2011 European Council. While the “fiscalcompact” is important, it has not so far greatly impinged on thinking about the Swiss “model” or on actualSwiss relations with the EU. The latter continue to focus on banking secrecy, tax policy and the question offinding a mutually acceptable form of institutional and policy cooperation. However, in line with much Swissopinion which sees the history and structure of Swiss nation building as something which the Union shouldadopt, one think tank has seen it as another potential case where the EU might use Switzerland as a model.This points to the fact that the fiscal compact, assuming it comes into effect in its present form, and especiallyif it is incorporated into the treaty base, could well introduce a new element of EU-directed control of nationaleconomic and financial policies.

20. UK Position on a “two-tier” EU

The UK is already in a de facto special form of membership but has full access to the institutions and formaldecision-making. A more formalised division into two tiers that would limit institutional access and influenceon decision-making would be unlikely to be in the country’s interests. The UK should thus try to retain aunified institutional structure for the EU.

21 May 2012

Written evidence from Civitatis International

About Civitatis International

Civitatis International is an independent and supranational think-tank on global governance. CivitatisInternational is composed of a global network of leading international relations professors and practitionersaround the world who research according to the editorial mandate of Civitatis International: Constructivesolutions to the common global challenges and crucial issues facing mankind’s civilization now and in thefuture.

Civitatis International works with stakeholders around the world as a supranational research instituteindependent of any state interest so as to effectively analyse and propose solutions to the interlinked globalchallenges. Civitatis International publishes its high-level research on global issues to former and serving headsof state and government and global stakeholders.

Policy Seminar: The Future of Europe

Civitatis International convened a policy seminar on “The Future of Europe: Towards the European Dream?”at the Office of the European Parliament in London on 19 April 2012.

Sir Peter Marshall KCMG CVO, Former Deputy Secretary General of the Commonwealth and distinguishedBritish diplomat, chaired the seminar. The discussants included: Mr Edward Mortimer CMG, Former ChiefProgramme Officer of the Salzburg Global Seminar and former speechwriter to UN Secretary General KofiAnnan; Mr Daniel Ottolenghi, Head of the London Office of the European Investment Bank; Mr MauriceFraser, Senior Fellow in European Politics at the European Institute, London School of Economics andAssociate Fellow at Chatham House and Professor Christopher Coker, Lecturer in International Relations atthe London School of Economics and former member of the Council of the Royal United Services Institute.

Taking part in the Civitatis International policy seminar were: Ambassadors to the Court of St James’s; FirstPolitical Officers and Embassy representatives from key nations; former British Ambassadors and diplomats;representatives from the United Kingdom Foreign and Commonwealth Office; Former Members of the BritishParliament; the Atlantic Council and CEOs of City of London companies. Also in attendance were selectedyoung leaders from the British political parties and London’s leading universities.

The basis of the seminar was to explore the greater vision for the future of the EU in a broader context andnot necessarily for the specific interests of each member state. Therefore our recommendations to the UKForeign Affairs Committee drawn below are specifically to questions 1 and 2 as submission of evidence.



The below submission of evidence does not necessarily represent the views of the seminar’s participants.

Summary to Recommendations

Some of the solutions derived from the seminar included: Retelling the European story in a way that engagesand makes sense to all Europeans; emphasizing not what divides us but focusing on what brings us togetheras Europeans; reaffirming the values on which Europe was built and not allowing politicians to override thosevalues; building a new European economic growth based on an increased European competitiveness in theglobal market; accepting the new realities of the changing world order towards a more communitarian worldand that the European cosmopolitan model may not become universal.

1. Observations and Factual Information Derived from the Civitatis Seminar

1.1 The current pockets of optimism for Europe appear to be, on the surface, more economic, as opposed topolitical, and in terms of any separation between the two, a “two-tier” Europe appears to exist. However thisis not just simply political versus economic, since there are aspects of economic union which are very importantto countries such as Britain, the single market particularly, and equally there are aspects of the political whichnot all Eurozone members are willing to fully sign up for. “Variable Geometry” or “Multi-speed” Europe isthe best description of Europe’s current state. Phrases like “two-tier” imply some sort of automatic division.The situation is infinitely complicated and unless there is full political union it is bound to exist. Sovereignstates will always want to do different things. How far will it be possible to organise some sort of fiscal unionwithout it drawing in its train everything else? The language of “two-tiers” is unhelpful. There must be moreflexibility than terms of “two-tiers” or “two-speed”, and so “Variable Geometry” is a better phrase for the UKgovernment to use.

1.2 It is imperative that Europe overcomes the Eurozone crisis, because apart from the economic damage, itdecreases talk of integration and increases the language of break-up; of the Eurozone or perhaps even of theEuropean Union. Average unemployment in Europe was at 10.9% in March 2012, according to the FinancialTimes, and there are nine countries in the European Union with double-digit unemployment rates. In creditorcountries there is growing appeal of Eurosceptic populist parties. In debtor countries austerity is perceived asimposed by Brussels or hostile Northern European countries, and Europe-wide there is anti-EU sentimentfeeding on the impact of recession. The UK government should look into alternatives to austerity.

1.3 To see growth which might facilitate its aims Europe must achieve an increase in competitiveness. Thiswill require both in-depth structural reforms at the national level and gains in competitiveness that can beachieved by European action, through completing the single market in areas so far untouched, such as manyservice sectors, and potentially developing common infrastructure in transport and energy. Some countries,such as Germany, have already progressed greatly, but many others still have much to do to improvecompetitiveness. Here too, there is evidence, including that of Germany, suggesting it will take a long time.Mario Monti, the Italian Prime Minister, has even said that Italy will need eight years of structural reforms.Improving competitiveness will mean reform of labour markets, of pension and welfare systems, investmentsin physical infrastructure, education, Research & Development, and at the European level, completing thesingle market. There will be powerful resistance to reform from those who benefit from the existing system.Current opposition in Greece, or Italy, to structural reforms is because they touch the interests of people whoare benefiting from the existing system.

1.4 While Europe needs to increase competitiveness, it does not have a problem of a finance gap in aggregate.Looking at the EU-27 as a whole, the European Union’s balance of payments is essentially in equilibrium. Theproblem of gaps in foreign finance for Europe as a whole would arise if Europe had a balance of paymentsdeficit, and in order to finance that deficit it would need recourse to finance from countries such as China,Japan, and Brazil. Europe, as a whole, also does not have a balance of payments deficit. However there aresurplus countries and deficit countries, so the problem is of a flow of funds within Europe. There is a reluctancealready within Europe by European investors to invest in countries which currently do not appear to havefavourable prospects. Why would Japanese investors, for example, want to invest in projects in countries wherethere is little confidence of a sufficient return? This reinforces the argument for improving competitiveness inEurope. The moment competitiveness begins to increase private capital will start flowing again. A reform thatimproves the productivity of a rail transport system, for example, would very much interest private investorsglobally.

1.5 It may be time to start thinking of a wider Europe, and a looser confederation of countries, perhaps instark contrast to any protectionist measures, including countries like Turkey. This does not exclude theEuropean project or the European Union continuing to go on its way as a free-market, but it does rule out theidea of a political state in the near term, because a political state would exclude those other European countriesthat have to be part of the European project. Indeed through a broader lens the EU should welcome the fastgrowth of new emerging powers as they could power a major engine of growth for Europe through trade, andtherefore there needs to be an increasingly open trading system both within the EU and with the rest ofthe world.



1.6 The emerging economic powers must be factored into European decision-making. Many non-Westernpeople see the European Project as a form of regulatory imperialism, translating Europe’s minimal politicalpower into maximal political power by changing the rules of the game. There are also an increasing numberof non-Western social advocacy groups and NGOs that do not share the liberal agenda of the 75,000 NGOsEurope is familiar with, in areas such as social planning. Much of the world does not share Europe’s vision.For example in Africa the Cotonou agreement has existed since 2008, a tripartite dialogue between theEuropean Union, China and Africa around terms of trade. Europe has tried to use this to influence China awayfrom corrupting local officials or using bribery, and to adhere to International Labour Organization standardsregarding labour practices. However those in Africa share the Chinese view not the European view. So perhapsthere is a failure by the European Union, despite its commitment in its first security paper of 2003, to underwritesoft power with a military dimension which Solana said was essential for civilian power to mean anything ina 21st Century world.

1.7 There is an emerging common European voice on the world level. It is a voice based on European valuesthat speaks on global issues: on climate change, on human rights, on democracy, on the breakdown of non-proliferation, and on the activities of transnational companies around the world. In terms of trade and climatechange, it is evident that there is such a thing as collective preferences based on a particular culture andoriginating in a particular set of values. If Europe intends to be serious about multilateralism then it is goingto have to develop a new emboldened type of multilateralism and back up its values with a crediblepeacemaking capability.

2. Civitatis International Recommendations from the Seminar

2.1 Europe must increase its competitiveness. This is imperative if Europe seeks to see growth and is thestrongest plan to bring Europe out of the Eurozone crisis. This will allow the flow of private capital torecommence within Europe, both internally and through external investment.

2.2 The European story must be retold in a way that engages and makes sense to all Europeans. The threatof far-right and -left parties in Europe is very real and many people feel disassociated with the EuropeanProject. It is important to connect with those living in Europe to make them feel like Europeans and becomeengaged with the European story.

2.3 Europe should adopt an increased liberal attitude, rejecting insular protectionist measures. The future ofEurope is not as predictable as it once was and as it is rewritten, Europe must ensure that this is not at the costof the project. Europe needs to start rethinking what it should be ultimately by emphasizing not what dividesbut what unites us.

2.4 Europe should consider a common military policy. Although it looks unlikely at present, if the EU isgoing to punch at least not under its weight in the future, there will need to be some form of common militaryand foreign policy with teeth. This could take the form of an integrated EU Army, Navy, and Air Force.Furthermore, Europe should create its own European Security Council, composed solely of EU member states,enabling Europe to speak and act with one voice on security issues.

2.5 There is a need for a real European identity. Having created Europe there is now a need to createEuropeans. It may be time to start thinking of a looser confederation of countries as the way forward forEurope and through this establish what a European identity actually means. This is also true for ideas of theWest, which must reconsider its own common values and integration, and seek a new model which facilitatesthese.

2.6 The EU needs one voice on the global stage, and to enable this each EU country should be representedby one voice on the boards of global economic institutions such as the IMF and World Bank. A debate shouldbegin on the merits of a directly elected, through universal suffrage, executive President of the European Union.

2.7 The EU should welcome the growth of the new emerging powers, as they could prove an engine forgrowth within the EU through trade. To enable this Europe must promote an increasingly open trading systembetween itself and the rest of the world.

2.8 Erecting protectionist barriers, both within Europe and at its borders, would be a grave mistake as itwould deprive Europe of at least half its potential for growth and job creation. Seeking compromise solutionswould do a great deal to avoid the break-up of the EU, and encourage further integration, as many past criseshave done.

2.9 Europe must achieve gains in competitiveness by completing the single market in areas so far untouchedsuch as many service sectors and developing common infrastructure in areas such as transport and energy.Europe must also recognise and invest sufficiently into key areas where opportunities for future growth lie,such as Research and Development.

2.10 The UK should seek to emulate states such as Denmark, Sweden and Germany in building models ofaffordable welfare states within stabilised economies. These countries show this existence is not beyond thecapabilities of European states such as the UK and on a wider scale suggest that competitiveness can berestored without eliminating the social protection to which Europe has become accustomed.



2.11 If European heads of government do not pull themselves together in matters of solidarity with Greece,consolidating the common European values of human rights, social justice and delivering real democracy, theyrisk the break up of the EU and the values that it and the broader West stand for. To consolidate the peace ofEurope, heads of government must build a common defence and energy security framework for the E-27 andaccession states or the European Dream of a cosmopolitan legal and rights based world order risks beingeclipsed by one of “Hybrid free-market communism”. The United Kingdom, more so than others, has a keyinterest in and therefore responsibility to secure the peace, values and prosperity of the European Union. TheBritish Government, MPs and MEPs should be mindful of this in their statements which are noted asrepresenting our resolve on the world stage.

22 May 2012

Written evidence from Graham Avery CMG

1. This submission addresses the following questions posed by the Committee:

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

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

2. In summary, I argue that:

(a) The UK’s “veto” at the European Council, as seen by its partners, illustrated significant aspectsof Britain’s relationship with the EU.

(b) The EU already has the characteristics of a multi-tier system; the UK will face grave risks if itremains in the outer circle.

(c) The UK has a strong interest in participating in the main political and economic decisions ofthe EU, including the shaping of its foreign policy.

3. I am a Senior Member of St. Antony’s College, Oxford, Senior Adviser at the European Policy Centre,Brussels, and Honorary Director-General of the European Commission. My evidence is based on personalexperience of 40 years as a senior adviser and administrator in Whitehall and Brussels (see biographical noteat end).

Implications of the December 2011 European Council

4. The British “veto” at the summit was not, according to commentators, the result of strategic planning onthe part of the UK, but a response to the unexpected failure of negotiations in which the UK requestedguarantees for Britain’s financial sector in return for ratifying amendments to the Treaty. According to sourcesin diplomatic circles and the EU institutions in Brussels, this incident illustrated a number of aspects of Britain’srelationship with the EU:

(a) The partners were unwilling to compensate the UK for ratifying a deal that imposed no newobligations on it. As one diplomat remarked “we would have liked you to join with us inchanging the Treaty, but we didn’t see why we should pay you for it”.

(b) Although the UK’s position was presented as a “veto”, it did not stop 25 other partners fromcontinuing with the process of ratifying the changes in another way. As another diplomatremarked “we prefer you to join with us in doing things together, but you are not going to stopus from doing things without you if we think it’s necessary”.

5. These remarks were made—more in sorrow than in anger—by persons friendly to the UK. Others aremore critical of British attitudes, for example “you continually preach at us, saying that the success of the eurois a priority, but you show little solidarity; as a result, Britain loses influence and credibility”. Others haveremarked that the preparation of the December summit on the UK side was below the professional standardsexpected of British negotiators.

6. The events of December may not represent a watershed in the UK’s relationship with the EU, but theydid demonstrate that when Britain stands outside important EU policies, it has little leverage with its partners.

Multi-tier Membership of the EU

7. The EU already has the characteristics of a multi-tier system: 22 of its 27 member states are in theSchengen zone, and 17 are in the euro-zone. This has not had much impact so far on the EU’s institutions,which still operate mainly in a unitary fashion, but the increasing importance of decisions concerning the euro-zone is beginning to create problems and tensions that will be aggravated by the recent compact involving 25member states.

8. The EU’s enlargement from 15 to 27 did not result, as some predicted, in more “variable geometry”.Although the 12 new members could not join Schengen or the euro on their entry to the EU, they have



progressively qualified for membership of the “inner circles” and continue to do so. The UK thus finds itselfin a diminishing minority in the “outer circle”.

9. The Coalition’s Programme for Government stated “We will ensure that the British Government is apositive participant in the European Union, playing a strong and positive role with our partners”. Thisdeclaration sits uncomfortably with the actual situation in which the UK is a commentator, rather than an actor,in current decisions on the euro-zone.

10. Britain’s EU policy encourages by default the development of a multi-tier system in which the UKremains in the outer circle. The members of the inner circles will continue to develop common actions andcommon policies, and take decisions without other members having a vote or being at the table. Whateverassurances may be given, they will naturally tend to ignore the interests of the outer circle.

11. If you are not at the table, your point of view is not likely to be taken into account. Decisions takenwithout you may not go in the direction that you prefer, and may go in directions that are against your interests.A non-British commentator has expressed it brutally in the following way: “if you are not at the table, youwill be on the menu”.

12. As a matter of national interest, the UK needs to be involved in all the important political and economicdecisions concerning Europe. This is a question of realism. If the development of common policies is left toGermany, France, Italy and others, this may lead to serious economic and political problems for us. The EUposes difficulties and problems for the UK (and for other members) but it remains the most effective systemthat has been devised of organising Europe in political and economic terms. It is an illusion to think that, ifBritain pulls back, the EU will disintegrate, or limit itself to a common market. Without an effective Britishpresence in the balance of power—in the inner circle—the EU may move in directions that are not in ourinterest.

13. Two practical conclusions:

(a) The British government should be more proactive in the development of European policies inareas where we have a decisive contribution to make and much to gain; this is especially trueof foreign policy, a field in which the UK has the experience and resources to shape policy inways that correspond to British interests.

(b) When the sovereign debt crisis is resolved, and the euro-zone is stable, a future Britishgovernment needs to address the question of joining the euro. In the long term we cannot evadethis question if we are to play a decisive role in Europe.

Britain’s Role in the Development of EU Foreign Policy

14. The most important feature of the Lisbon Treaty was the creation of new structures for foreign policy—the EU’s High Representative and the European External Action Service. This reform, which brings togetherthe economic and political instruments of foreign policy, offers the possibility for the EU and its member statesto act more effectively to deal with regional and global problems.

15. There are few areas of foreign policy where the UK can be more successful acting on its own than actingtogether with its European partners. In Beijing, Delhi and Moscow the Europeans exert more influence jointlythan individually. As for Washington, an American diplomat with experience in London and Brussels recentlytold me “in the State Department we naturally want to cooperate with the Europeans acting together; whenthey act separately—and particularly without the UK—it’s less useful for us”.

16. Although the European External Action Service—the EU’s embryonic diplomatic service—has had adifficult birth, it offers a chance to project the interests and values of the EU’s member states in a more efficientand cost-effective way. In this, British ideas and British personnel can have a decisive influence. If it’s truethat the common agricultural policy was fashioned by France, and corresponded largely to France’s interests,then surely the future common foreign policy should be shaped by Britain.

Biographical Note

Graham Avery is Senior Member of St. Antony’s College, Oxford University, Senior Adviser at the EuropeanPolicy Centre, Brussels, and Honorary Director-General of the European Commission. He has given evidenceon a number of occasions to Committees of the House of Commons and the House of Lords.

In the Ministry of Agriculture, Fisheries and Food in London (1965–72) he headed the unit responsible fornegotiations for accession to the EC, and later (1976) served as Private Secretary to two Ministers.

In the European Commission in Brussels (1973–2006) he worked in agricultural policy, foreign affairs,enlargement policy, and the cabinets of the President and other Commissioners. His last post was as Directorfor Strategy, Coordination and Analysis in the Directorate General for External Relations.

He has been Fellow at the Center for International Affairs, Harvard University; Fellow at the Robert SchumanCentre for Advanced Studies of the European University Institute, Florence.



Visiting Professor at the College of Europe, and Secretary General of the Trans European Policy StudiesAssociation.

In the Queen’s New Year Honours 2012 he was appointed Companion of the Order of St. Michael and St.George (CMG) for services to European affairs.

21 May 2012

Written evidence from the Foreign and Commonwealth Office

Letter from Rt Hon David Lidington MP, Minister for Europe

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

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

Memorandum


1. The December 2011 European Council and its outcome need to be set in context. First, they must be seenin the context of the original decision to set up a single currency within the European Union, which led to thecreation of the Eurozone. Greater fiscal cooperation within the Eurozone is a logical consequence of thatdecision and the December European Council is one moment in this process. As the Chancellor has said,Eurozone states need to accept the remorseless logic of monetary union that leads from a single currencytowards greater fiscal integration.12 However, the UK has been clear that as a Member State not committedto joining the euro, it will not be part of this integration. Second, if integration in the Eurozone deepens, theinterests of the UK and other non-Eurozone Member States must be protected. Third, since December, we havecontinued to engage actively in EU negotiations to shape the debate on a variety of EU issues and promoteour national interests.

The logic of greater fiscal cooperation in the Eurozone

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

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

4. As the Foreign Secretary outlined in his letter of 15 February 2012 to the Committee,13 as the Eurozonecrisis grew more acute through 2011, it became increasingly clear to us that for the euro to survive, theEurozone required greater fiscal and economic coordination as well as the implementation of the October 2011Agreement: a larger firewall, the recapitalisation of the most vulnerable Eurozone banks and a sustainablesolution to Greece’s debt crisis. Thus this Government has welcomed the greater fiscal and economic co-ordination in the Eurozone required to resolve the crisis, while maintaining the position that it should takeplace in a way that does not spill over into areas that are properly for the EU at 27, such as the Single Market.We also note that this greater co-ordination does pose questions for Eurozone countries on how it should relateto national democracy and accountability.

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

Protecting the interests of non-Eurozone Member States

6. The UK considers that under the EU Treaties there is a proper role for the EU Institutions in supportingthe Eurozone and strengthening its internal governance, in the way that the European Commission already12 Hansard: 6 September 2011, Column 156

(http://www.publications.parliament.uk/pa/cm201011/cmhansrd/cm110906/debtext/110906–0001.htm)13 http://www.parliament.uk/documents/commons-committees/foreign-affairs/120215-SoS-on-December-European-Council.pdf



suggests measures Member States, including Eurozone Member States, should take to correct an excessivedeficit. But the interests of non-Eurozone Member States must also be protected and the EU Institutions mustnot be used in a way that undermines the integrity of the Single Market.

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

UK influence in Europe

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

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

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

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

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

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

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

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

16. It follows that the Government does not believe that the December 2011 European Council represents awatershed in the UK’s EU policy and place in the European Union. The UK was prepared to support EU



Treaty change with all 27 Member States in return for safeguards to protect the integrity of the single market.However, without those protections, what was on offer was not in the UK’s interests. Therefore the DecemberEuropean Council demonstrated how strongly we are prepared to defend our national interests.


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

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

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

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

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

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

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

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

25. While I did not personally support the EAS’s creation, now it is established I believe that our goal shouldbe to ensure that it usefully complements and supplements our national foreign policy but does not in any wayreplace it. Therefore we believe the EAS can have the most effective impact on UK security and prosperity byfocussing on: stability in Europe’s neighbourhood—South, East and the Western Balkans; relations withemerging and major powers such as the US and BRIC countries; conflict prevention, development and peacebuilding—especially in Africa; and some key foreign policy challenges such as Iran and the MEPP. We areworking at home to promote the EAS as a stepping stone in the career of talented UK officials, so we can



ensure that the UK participates fully both in Brussels and in the work of delegations abroad. We remain veryclear that the division of competences must be respected, in line with the Treaties; and any changes inrepresentation must be agreed by Member States by consensus. The EAS will only represent the UK where weor the Treaties mandate them to do so—for example, on agreed positions in the CFSP.

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

27. Fourth, we want an EU which faces the challenge of legitimacy. Those within the EU saying that theyhad a positive image of the EU dropped from 52% in autumn 2007 to 31% in autumn 2011.14 This is not anisolated trend. The appeal of mainstream politics has weakened in most western democracies in the last thirtyyears. However, without the roots that sustain national democracies, it is particularly important that the EUaddresses demand for greater accountability, transparency, efficiency and probity.

28. This issue of accountability is something we have also sought to address at home. We recognise thatmany people in Britain feel disconnected from how the EU has developed and the decisions that have beentaken in their name on EU matters. To counter this, the Government is committed to ensuring that there is nofurther transfer of competence or power from the UK to the EU over the course of this Parliament.

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

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

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

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


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

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

35. The Fiscal Compact deals primarily and in some detail with fiscal discipline for the Eurozone States,and also touches on growth where its provisions are much less specific. The Fiscal Compact does not touch onthe EU budget, enlargement, or the Common Foreign and Security Policy. These and all other EU policies willcontinue to be negotiated under the terms of the EU Treaties.14 Standard Eurobarometer 76 (http://ec.europa.eu/public_opinion/archives/eb/eb76/eb76_first_en.pdf)




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

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

38. In his letter to the Treasury Select Committee on 27 February 2012 the Chancellor outlined the substanceof the safeguards proposed at the December 2011 European Council when changes to the EU Treaties werediscussed.15 These safeguards were not UK opt-outs, exemptions or any other kind of special treatment forthe UK. What we proposed were safeguards for the whole EU that would have supported open competition forfinancial services companies across the Single Market, and upheld the existing commitment to ensure theability of all Member States to supervise their domestic financial sectors, which is particularly important giventhe scale of the fiscal risks involved.

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

22 May 2012

Supplementary written evidence from the Foreign and Commonwealth Office

Letter from Rt Hon William Hague MP, Secretary of State for Foreign and CommonwealthAffairs

Thank you for your letter of 14 February. You asked five questions about the evidence I gave to yourCommittee’s inquiry The future of the EU: UK Government Policy. The answers to your questions are below.

1. Would any future Government seeking to renegotiate the terms of their membership of the EU need to givenotice to the European Council under Article 50 of the Treaty on European Union?

The Conservative Party starts from the premise that we will negotiate changes to reform the European Unionand then seek the consent of the British people on that new settlement. As the Prime Minister said in hisspeech, “I want the European Union to be a success. And I want a relationship between Britain and the EUthat keeps us in it.”

Article 50 of the Treaty on European Union provides a mechanism for states to withdraw from the EU. It isnot intended to provide a mechanism for Member States to force a renegotiation of the terms of their existingmembership of the EU whilst remaining within the EU. The withdrawal process that Article 50 sets out doesinclude a period of negotiation. However, Article 50(2) makes clear that this negotiation follows a decision bya Member States to leave and states that the purpose of this negotiation is to set out the arrangements for aMember State’s withdrawal, taking account of the framework for its future relationship with the EuropeanUnion. In addition, Article 50(4) deprives the withdrawing State not only of a vote on the terms of thewithdrawal agreement but also of the right to take part in discussions about that agreement in either theEuropean Council or the Council. The Prime Minister, by contrast, envisages a British Government playing anactive and positive role in securing reforms of the EU as a whole, including through changes to the Treaties.

Amendments to the Treaties may be adopted in accordance with either the ordinary or simplified revisionprocedure both of which are provided for under Article 48 TEU. Article 48(2) sets out that proposals can“serve either to increase or to reduce the competences conferred on the Union in the Treaties”. Therefore, I donot consider that any future Government seeking to renegotiate the terms of their existing membership of theEU would need to give notice under Article 50.15 http://www.parliament.uk/documents/commons-committees/treasury/120228%20-%20LetterfromChxtoChair.pdf



2. Is it the Prime Minister’s policy to negotiate what would be the terms of the UK’s trade with the EU as anon-Member State before any in/out referendum takes place?

No. As the Prime Minister said in his speech, “Britain’s national interest is best served in a flexible, adaptableand open European Union and [the] European Union is best with Britain in it”. Achieving such a settlement inthe European Union is the goal of his policy and negotiations to that end. In the event of the majority of Britishvoters deciding that the United Kingdom should leave the EU in a referendum the terms of the UK’s tradewith the EU would be resolved under the process set out in Article 50 of the Treaty of the European Union.

3. The number of votes in the Council of Ministers on which the UK has faced a Eurozone bloc

In the period 2009–12, the Council of Ministers (in all its configurations) voted 373 times. The number oftimes each Member State’s vote matched that of the UK is shown in the Annex and ranged from 317 to 335occasions, with little difference between the record of ins and outs. We do not have data that shows on howmany occasions the Eurozone as a whole lined up against the UK. But our concern remains for the future whena greater degree of political and economic integration in the Eurozone could lead them to vote more often asa block.

4. Safeguards requested at the December 2011 European Council:(a) Identify the Treaty or other legislative provisions that these proposals sought to amend or—otherwise, andwhere relevant—specify by what legal instrument the Prime Minister sought to realise these proposals

At the December 2011 European Council we sought agreement to the principle that safeguards were neededto protect the single market as greater integration took place.

We were as flexible as possible in our approach and we did not specify the precise amendments for achievingthe protections that we sought. There are a number of ways these could have been incorporated into the existingUnion framework, such as a protocol to the Treaty. Establishing the precise method for doing this would havebeen subject to negotiations that would have taken place if this principle had been accepted.

(b) Tell the Committee whether any of these proposals have by now been realised, for example through theagreement on the European Banking Authority reached at the end of 2012

The need for protections to maintain the unity and integrity of the single market was subsequently acceptedat the June 2012 European Council. It remains important that any proposals for further integration are fullycompatible with the single market, and we sought protections on this basis.

For example, it was agreed that the Commission would bring forward proposals to transfer prudentialsupervision of credit institutions in the euro area (along with non euro area members that chose to participate)to a new Single Supervisory Mechanism led by the European Central Bank. These proposals were broughtforward under Article 127(6) of the Treaty on the Functioning of the European Union, which requiresunanimity.

As part of the Council’s approach to the Commission proposals, we agreed an explicit duty for the ECB tohave regard to the unity and integrity of the internal market in performing its supervisory tasks. Furthermore,none of its actions, proposals or policies should directly or indirectly discriminate against any Member Statesor group of Member States as a venue for the provision of banking or financial services in any currency.

The Council’s agreement on the European Banking Authority in December 2012 secured additionalprotections to balance the influence of those in banking union and those remaining outside. EBA powers anddecisions will apply equally to the ECB and other supervisors, and voting on key issues will be on the basisof a “double majority” of participating and non-participating Member States.

(c) Tell the Committee if the Government is still pursuing, or would pursue, these proposals, and if so underwhat circumstances

Our overall objective in negotiations on financial services legislation is to preserve and strengthen acompetitive and open single market. We will continue to strive for targeted protections based on the specificproposals that are under negotiation. For example, as part of agreeing a Council approach on banking union,we sought and obtained protections that addressed in the EBA the changing nature of the ECB and how itwould interact with other EU institutions and agencies.

5. Does the Government consider there are some elements of the TSCG that could be incorporated into thelegal framework of the EU only through treaty change?

The Contracting parties to the TSCG have made clear it is their intention to incorporate the Treaty into thelegal framework of the EU within five years of it entering into force. Some aspects of the TSCG have alreadybeen proposed in Secondary Legislation under the EU Treaties, namely the “two pack” of economic governanceproposals that apply only to the euro area. The Government believes that if other elements were to beincorporated in the Treaties, they would need to be brought in through EU Treaty change. Specifically: Article3, including measures constituting the Fiscal Compact; Article 7, which amounts to an agreement of the



participating Member States to accept Commission proposals for decisions under the excessive deficit procedureunless there is a QMV majority against the proposal (so-called “reverse QMV”); and Article 8, which confersjurisdiction on the ECJ on compliance with Article 3 (2).

24 February 2013

Annex

A B C D E FUK matching with: Total votes Matching votes % Non matching %

Austria 373 319 86 54 14Belgium 373 335 90 38 10Bulgaria 373 328 88 45 12Cyprus 373 335 90 38 10Czech Republic 373 331 89 42 11Denmark 362 320 88 42 12Estonia 373 329 88 44 12Finland 373 331 89 42 11France 373 335 90 38 10Germany 373 317 85 56 15Greece 373 335 90 38 10Hungary 373 335 90 38 10Ireland 370 327 88 43 12Italy 373 327 88 46 12Latvia 373 333 89 40 11Lithuania 373 335 90 38 10Luxembourg 373 330 88 43 12Malta 373 335 90 38 10Netherlands 373 332 89 41 11Poland 373 325 87 48 13Portugal 373 327 88 46 12Romania 373 329 88 44 12Slovakia 373 332 89 41 11Slovenia 373 335 90 38 10Spain 373 330 88 43 12Sweden 373 335 90 38 10

Column B shows the total number of times the Council voted from 2009 to December 2012.

The figures in columns C & D show the number of times the UK cast a vote in Council that matched witheach of the countries listed in column A.

The figures shown in columns E & F show the number of times the UK cast a vote in Council that did notmatch with each of the countries listed in column A.

Source: VoteWatch Europe: www.votewatch.eu

Further supplementary written evidence from the Foreign and Commonwealth Office

Letter from Tim Hemmings, Head, Future of Europe Department, Europe Directorate

Thank you for letter with some additional questions following the Foreign Secretary’s oral evidence to theCommittee’s future of Europe inquiry. Please find enclosed our responses to those questions. If there is anythingfurther we can help with, please do get in touch.

UK Derogations and Opt-outs

1. For the sake of completeness, it would be helpful if you could a) supply a list of opt-outs, derogations, etcthat the UK enjoys under the EU Treaties, indicating the relevant Treaty provisions; and b) indicate the caseswhere these affect UK participation in EU decision-making, and how

The UK’s derogations are principally in the areas of Justice and Home Affairs (JHA) and in MonetaryUnion policy.



CURRENT OPT-OUTS/INS

Treaty Reference Nature of derogation, Opt-out or Opt-in

Protocol 15. on certain provisions Single currency opt-out: recognises that the UK is under no EC Treatyrelating to the United Kingdom of obligation to adopt the single currency and that a separate decision to doGreat Britain and Northern so would be required by the UK government and parliament. EstablishesIreland[1] procedures to enable the UK to opt-in to the single currency—it is for

the UK government alone to initiate procedure for moving to 3rd stageof EMU

Protocol 19. on the Schengen Art 2 provides for UK (and Irish) opt-out of Schengenacquis integrated into the Arts 4&5 provide for UK (and Irish) opt-in to some or all of the existingframework of the European Schengen acquis (by unanimity) or to measures building on it on a caseUnion[2] by case basisProtocol 20. On the application of Art. 1: authorises the UK to maintain border controls on persons seekingcertain aspects of Article 26 of the to enter the UK from other Member States (thus opting-out ofTreaty on the Functioning of the prohibition of internal border controls)European Union to the United Art. 2: provides for UK and Ireland to maintain their Common TravelKingdom and to Ireland[3] Area

Art.3: provides for other MS to exercise equivalent controls on personsentering their territories from the UK and Ireland

Protocol 21. On the position of Referred to as the UK’s JHA Opt-In Protocol.the United Kingdom and Ireland Arts 1&2: provide for the non-application to the UK (and Ireland ) ofin respect of the Area of Freedom, measures concerning border controls, visas, asylum and temporarySecurity and Justice.[4] protection, immigration policy, judicial co-operation in civil matters and

family law having cross-border implications based on Title V of theTFEUArts 3&4: provide for UK (and Irish) opt-in to any of the abovemeasures at the stage of negotiation or after adoption

Amendment to Protocol 21[5] Amends Amsterdam Protocol on the Position of the UK and Ireland (theUK Opt-In) to extend its scope of application to all JHA measures in thefield of freedom, security and justice, including police and criminaljudicial co-operation. A new Article 4a in the Protocol makes explicitthat the Opt-In applies to amending measures.Amends Amsterdam Protocol Integrating the Schengen Acquis into theFramework of the EU to make clear that the UK is not bound to takepart in any measures building on parts of the Schengen acquis in whichthe UK already participates. The effect is to ensure that the UK’s JHAOpt-In applies to all Schengen-building measures.

Protocol 36, Article 10[6] The Protocol provides that, 5 years after the Lisbon Treaty enters intoforce, any remaining Third Pillar police and criminal judicial co-operation measures that have not been repealed, replaced or amendedwill be subject to ECJ jurisdiction and Commission powers of infraction.A special provision enables the UK to notify the Council that it does notaccept ECJ jurisdiction and Commission powers of infraction in respectof such measures. In the event of such notification, the remaining ThirdPillar measures will cease to apply to the UK. The UK may subsequentlyapply to opt back in on a case-by-case basis.

Table Notes:

Adopted in the Maastricht Treaty as Protocol 11 annexed to the EC Treaty

Adopted in the Amsterdam Treaty as Protocol Integrating the Schengen Acquis into the Framework of the EU,annexed to the EC Treaty and TEU

Adopted in the Amsterdam Treaty as Protocol on the Application of Certain Aspects of Article 7a TEC to theUK and Ireland (the “Borders Protocol”), annexed to the EC Treaty and TEU.

Adopted in the Amsterdam Treaty as the Protocol on the Position of the UK and Ireland, annexed to the ECTreaty and TEU (the “Title IV opt-in”).

Adopted in the Lisbon Treaty as Protocol No 1 amending the Protocols annexed to the TEU and TEC.

Adopted in the Lisbon Treaty as part of the Protocol on Transitional Provisions.

Derogations in Relation to JHA

Protocol 19 integrates the Schengen acquis into the EU framework. The UK is not bound by measures thatare a part of, or build on, this acquis, unless the UK requests to take part in a measure and the Council agreesthis unanimously or the measure builds on a section of the acquis which the UK has already opted into (Council



Decision 2000/365/EC). Although the UK is permitted to opt out of these “deemed opt-ins”, it has neverdone so.

The UK is present at and able to contribute to discussion of Schengen measures. It is not able to vote onmeasures in which it is not participating. However, it retains an active interest in Schengen measures, and UKcontributions are welcomed by other Member States. A good example can be found in the negotiations on theSchengen Information System II. Initially, the legal base meant that the measure did not apply to the UK, andtherefore the UK would have been unable to vote on its adoption. However, the UK was able to take part inthe meetings and push for a change of legal base, which was achieved.

Protocol 20 entitles the UK (and Ireland) to continue to operate border controls, notwithstanding theprovisions of the treaty prohibiting barriers to free movement of persons. The protocol also allows the UK andIreland to maintain the Common Travel Area. It does not limit the UK’s participation in EU decision-making.

Protocol 21 establishes the UK’s position in relation to the Area of Freedom Security and Justice. TheProtocol provides that Title V TFEU, and no measure adopted pursuant to it, applies to the UK unless the UKdecides to opt-in within three months of its presentation.

When the UK has exercised the opt-in in relation to a draft Title V measure, it plays a full part in Councildecision-making in the normal way. The opt-in does not determine the UK’s voting position—we retain thefreedom to vote against the adoption of a measure that we have already opted in to. However, if after a“reasonable period of time” the measure cannot be adopted with the UK taking part, the Council may proceedto adopt the measure without the UK’s participation. In these circumstances, the measure would not apply tothe UK as if it had not opted-in.

There is nothing in Protocol 21 which prevents the UK from attending and speaking in negotiations on aproposal that the UK has not opted in to. Indeed, the UK contributes to negotiations on measures that it doesnot wish to opt in to, and is thus able to influence decision-making. Even where it has not opted-in, the UKalso remains entitled to challenge the legality of the adoption of a measure in the Court of Justice of theEuropean Union if it considers there are grounds to do so.

Protocol 36 contains various transitional provisions relating to entry into force of the Lisbon Treaty and TitleVII of this Protocol (articles 9 and 10) contain transitional provisions relating to JHA measures adopted on thebasis of the Treaty on European Union prior to the entry into force of Lisbon.

Article 10(4) entitles the UK to notify the Council at least six months before the expiry of the transitionalperiod (1 December 2014) that it wishes to opt-out of police and criminal judicial cooperation measures adoptedprior to the entry into force of Lisbon. The decision on whether or not to opt out of these measures is knownas the “2014 Decision”. If such an opt-out is made, those measures will cease to apply to the UK from theexpiry of the transitional period, although the UK has a right to notify, pursuant to the procedures in Protocols19 or 21 as applicable, its wish to participate again in those measures. Should the UK exercise the opt-out,Article 10(5) calls on the Union institutions and the UK to seek to re-establish the widest possible measure ofparticipation in the acquis of the Union in JHA, without impairing the operability and coherence of the acquis.

This Protocol has no impact on the UK’s participation in decision making around current measures.

Derogations in Relation to EMU

Protocol 15 expressly recognises the UK’s opt-out from the Euro and lays down detailed provisions for theapplication of Treaty provisions on economic and monetary policy to the UK. These include in certain cases,the suspension of the UK’s voting rights in relation to Council decisions adopted under the treaty articlesspecified in the Protocol.

The effect of not being a member of the Euro on decision making in the EU is that the UK does not sit inthe Eurogroup (or its preparatory bodies), the Governing Council of the ECB and the Board of the ESM.

Experience shows we can be outside the Euro and still be influential in making financial and economicdecisions within the EU that are good for the UK. In the last two years, for example we have ended Britain’sobligation to bail-out Eurozone members and secured specific protections on Banking Union that the UK andother non-Eurogroup members needed. Proposed legislation for a single supervisory mechanism and reformsto the European Banking Authority included fair and legal protection for the non-euro States because ofarguments made by the UK. The legislation established a new system of double majority voting to ensure thatthose outside the Eurozone cannot be outvoted by those inside.

Bilateral Relations

2. At Q 224 in his evidence session on 6 February, Mr Hague said that Mr Lidington was the first EuropeMinister to have visited all the EU Member States. He also said that no Europe Minister had done this sincethe EU was enlarged (my emphasis). I would be grateful if you could confirm that Mr Lidington is the firstEurope Minister since the EU’s major enlargement of 2004 to have visited all the EU Member States

Mr Lidington is the first Europe Minister to have visited all EU Member States since the 2004 enlargement.



3. When the Committee visited Berlin in October 2012, it heard that the UK and Germany had established ajoint bilateral EU Affairs Sub-Committee. The Committee head that the Sub-Committee had met twice andwas due to meet again in early 2013. I would be grateful if you could confirm that this third meeting tookplace; when the fourth meeting is expected (assuming it is); and whether the UK has similar arrangementswith any other EU Member State(s)

The UK’s EU Affairs sub-committee has established a regular pattern of meetings with German StateSecretaries. The EASC visited Berlin on 14 January for the third meeting in that series. Seven British Ministersled by David Lidington took part in the 14 January meeting, which was judged a great success by both sides.The next meeting is due in the summer. But Ministers on both sides have concluded that a meeting at theirlevel will be impracticable just before the German federal elections in September. EU Directors will thereforemeet, probably in June, to maintain the dialogue in the expectation of a further Ministerial meeting around theturn of the year. The UK has no arrangement for joint EASC meetings with any other EU Member State.

UK Embassies

4. When he gave evidence on 24 January to the House of Lords EU Committee, Sub-Committee C, for itsinquiry into the European External Action Service (EEAS), at Q 274 David Lidington said that the “numberof staff at pretty much every embassy in Europe [has been] reduced over the last few years”. What has beenthe reduction in headcount for policy staff in UK Embassies in EU Member States since 2007 and 2010?

We cannot provide an exact figure for changes in headcount for policy staff in UK Embassies in EU MemberStates. Policy staff can be UK based or locally engaged; while data on UK based staff numbers is held centrally,data for locally engaged staff is managed by individual missions and can change from year to year as localcircumstances dictate, eg posts might reinforce their political teams by recruiting a locally engaged policyofficer to support an EU Presidency for a specific period of time.

Over the period of Spending Review 20010, overall headcount within Europe Directorate (including postsin non-EU member states) fell by 76. The vast majority of this was the result of reductions in corporateservices or consular teams as posts adopted more efficient working practices, including some consolidation andregionalisation of work. During this period a number of UK based policy positions were also localised andmay subsequently have been rationalised as Posts developed more innovative and collaborative ways ofdelivering policy work.

To date under Spending Review 2010–14, we have seen some reorganisation of policy slots in posts in EUMember States. While the overall headcount in posts in EU member states continues to fall, this again ispredominantly staff in corporate functions. We have to date protected policy positions, including retaining orlocalising rather than eliminating “Band B” (also known as “Executive Officer”) policy positions within theEurope network. We have also used the FCO reprioritisation exercise to create small scale but additionalregional economic and policy capacity within some European posts until the end of 2015. Our headcount forpolicy work has remained consistent over this period.

UK Nationals on the Staff of the EU Institutions

Undergraduate survey

5. In 2010, the FCO commissioned a survey among UK undergraduates about their awareness of EU careers(“Students unaware of EU career opportunities”, FCO press release, 21 January 2011). Has this beenpublished, or, if not, might the Committee see it (in confidence if necessary)?

We have attached the report, for the Committee’s attention. There is nothing explicitly sensitive aboutthe survey results (which are anonymous) and we therefore do not judge is necessary for it to be sharedin confidence.16

“Concours”

6. At Q 181 in the evidence session on 6 February, Sir Jon Cunliffe said that the numbers of UK nationalsapplying for EU careers had been rising. In answer to a PQ on 8 January 2013, Baroness Warsi said thatthere had been a “30% increase in British applicants to the main EU graduate recruitment”. I understand(from the FCO’s written briefing for the Committee’s 2012 visit to Brussels) that Baroness Warsi’s 30% figureis for an increase between 2010 and 2012. It would be helpful if you could supply the number of UKnationals who a) entered and b) were successful in the EU concours for generalist administrators, and thetotal numbers of a) entrants and b) successful entrants, for 2008, 2009, 2010, 2011 and 2012. (I am definingbeing successful as making it onto the reserve list.)

There were no general concours in 2008 and 2009. We can, however, provide figures for 2010, 2011, and2012. These figures illustrate the success to date in increasing the number of British people applying for EUjobs, but work remains to be done to help translate this into more successful candidates. Whilst there is nogeneral concours in 2013, we are contacting those British applicants retaking the 2010 concours17 and16 See Ev 9417 Retakes were permitted because of a technical fault with the exams in 2010.



providing training to help those candidates succeed. All British laureates in 2012 received training from UKRep.

GENERAL CONCOURS

Year 2008 2009 2010 2011 2012

Total entered N/A N/A 747 996 1,066Total successful N/A N/A 7 7 6

7. I understand that the FCO recently funded a secondee into EPSO. I would be grateful if you could confirmthe dates of the secondment, and whether there are any plans to repeat the exercise

The dates of the EPSO secondment were October 2009 to February 2012. The exercise was a success, andwe have recently placed another UK secondee in EPSO, co-funded by FCO and BIS. Since returning toLondon, the EPSO secondee now works in the Foreign and Commonwealth Office managing the team whichdeals with EU Staffing.

Fast Stream

8. How many entrants were there to the Civil Service European Fast Stream in 2011 and 2012? (I have afigure of 21 for 2010, from a PQ to Francis Maude answered on 15 June 2010, col 416). Since it is a two-year programme, and I understand that there is no generalist administrator concours in 2013, I assume thatonly those who entered the European Fast Stream in 2010 have so far entered the concours. How many ofthe 2010 intake of 21 have a) entered and b) passed the concours so far, and how many have secured jobs inthe EU institutions?

14 graduates joined the European Fast Stream programme in 2011 and 15 in 2012. 15 of the 2010 intaketook the AD5 concours computer-based tests in 2011, with three achieving the pass mark and proceeding tothe Assessment Centre. Of these three, one passed the Assessment Centre and secured a place on the EU“reserve” list, but did not take up a place in the EU institutions. Additionally, one European Fast Streamerreached the required standard in a specialist AD5 Communications concours but failed on a technicality. 25European Fast Streamers took the computer-based tests in the 2012 concours but none achieved the pass mark.Recognising that it is the computer-based tests which cause most difficulty, Civil Service Resourcing, whichhas overall responsibility for the European Fast Stream, is putting in place a more rigorous and targetedprogramme of training and preparation for this element of the assessment process.

9. Is the European Fast Stream only for entrants to the Civil Service, as opposed to the Diplomatic Service/FCO? If so, does the FCO offer any support for junior members of its staff who wish to sit the concours andmake a career as a permanent EU official?

The majority of European Fast Streamers enter the Home Civil Service but the FCO have specific DiplomaticService European Fast Stream posts set aside which form part of the European Fast Stream intake. The FCOwill also provide support for members of staff not on the European Fast Steam, should they wish to apply forthe concours.

10. I understand that BIS has provided bursaries for UK Fast Stream Civil Servants to undertakepostgraduate study at the College of Europe. Is this scheme still functioning? If so, I would be grateful if youcould clarify if it is for European Fast Streamers or “ordinary” Fast Streamers? If the scheme is no longerfunctioning, does the Government now provide any funding for UK nationals to study at the College ofEurope? How many students, if any, were funded by the UK Government in the 2009–10, 2010–11, 2011–12and 2012–13 academic years?

The BIS College of Europe scheme is still in operation. BIS retains a budget to fund postgraduate study atthe College of Europe, managed on behalf of Whitehall. The scheme is open to all Fast Streamers, whethergeneralist or on the EFS programme.

In academic year 2011–12 BIS funded four scholarships to the College for established Fast Stream civilservants with the intension of pursuing a career with the European Institutions. BIS is also funding four studentsin 2012–13 and intend to fund a further four 2013–14 subject to successful applicants being chosen throughthe College’s own admission process.

In addition, the FCO is planning to fund one member of staff per year at the College of Europe. This is newfunding, and there is not currently a member of staff on secondment.



Job entrants

11. At Q 181 in the evidence session on 6 February 2013, Mr Hague said that there was an increase in thenumber of UK nationals joining the EU institutions, including at junior levels. It would be helpful to haveany figures that are available to support this claim, including any information on UK nationals joining mid-career, as well as those joining at junior grades. In each year since 2008, how many UK nationals havejoined the European Commission as permanent career staff at administrator entry grades?

As Sir Jon Cunliffe said in the evidence session, following the Foreign Secretary’s comments, the numberof UK nationals applying for posts in the EU Institutions has been increasing. We do not have figures for thetotal number of UK nationals joining the EU Institutions that include those joining outside of the concoursrecruitment process.

However, whilst the number of successful applicants is broadly stable, more UK nationals are retiring thanare arriving, resulting in a fall in the overall number of UK nationals in the Institutions. We continue to workto address this shortfall, and will be building on existing programmes which have proved so successful inincreasing the number of Brits applying for EU jobs.

12. In the written briefing that it provided to the Committee for its visit to Brussels in 2012, the FCO saidthat there was a 100% success rate in 2011 as regards UK nationals who passed the concours then securingan EU job. If possible, it would be helpful to have this success rate “on the record” for 2011 and otherrecent years

Of the 2011 laureates, four have secured jobs. The remaining three, two are in the process of securing a postand one has decided to pursue an alternative career path. UK laureates are usually among the first to secureposts once on the reserve list, which illustrates the value placed on UK civil servants in Brussels. Under thenew recruitment system, the issues experienced in the past, where many laureates were left on the reserve list,is now much less common.

For 2010, all of the seven UK laureates have secured positions within the EU Institutions. It is too early tocomment on the six laureates from 2012, but early indications suggest that the appetite for UK laureatesremains healthy.

Commission staff

13. The Committee would like to see some data over time for the numbers of UK nationals on the staff of theCommission, so that it can see how matters are developing

The total number of UK nationals working in the European Commission has been declining steadily as moreBritish officials are retiring than are being recruited. The figures for total numbers of UK nationals in theEuropean Commission can fluctuate within a one year period.

2005 2006 2007 2008 2009 2010 2011 2012

Total number of UK 1,449 1,452 1,417 1,362 1,340 1,296 1,175 1,094nationals in theEuropean Commission

14. In his speech “British foreign policy in a networked world” on 1 July 2010, Mr Hague said that thenumber of UK officials at Director level in the European Commission had fallen by a third since 2007. Iwould be grateful if you could confirm which grades Mr Hague’s statement applied to, and supply any datayou have on the numbers of UK Commission officials at these grades since 2010

The Foreign Secretary said that “since 2007, the number of British officials at Director level in the EuropeanCommission has fallen by a third and we have 205 fewer British officials in the Commission overall”. The UKis better represented at higher grades than at lower grades, but as staff who joined the European Commissionafter accession in the 1970s start to retire, our numbers will continue to decline.

Director level positions within the EU Institutions, as defined by the Staff Regulations, are staff holdingpositions at AD14 to AD16. The UK currently holds 56 of these 698 posts, or 8% of the total staff at thosegrades. In 2011, the UK held 63 of these posts; in 2010, the UK held 76; in 2009 the UK held 71; in 2008 theUK held 85; and in 2007, the UK held 94.



External Action Service (EEAS)

15. I understand from evidence provided by the EEAS to the House of Lords Committee in December thatthere are 20 UK diplomats or civil servants on the staff of the EEAS (seconded national diplomats employedas temporary agents). I would be grateful if you could provide the breakdown of these officials by UKdepartment. Does the December 2012 figure of 20 include the two EU Special Representatives who are UKnationals (Gary Quince, African Union, and Rosalind Marsden, Sudan)?

As of April 2013, there are 22 UK diplomats or civil servants working as Temporary Agents in the EEAS.These include 18 staff from the Foreign and Commonwealth Office, one from the Department for InternationalDevelopment, one from the Ministry of Defence, one from the Department for Transport and one from thePolice Service of Northern Ireland. This figure does not include the two British EU Special Representativeswho are UK nationals.

16. In a parliamentary answer on 16 July 2012, col. 564, Mr Lidington said that, in addition to UKdiplomats and civil servants employed by the EEAS as temporary agents, the UK had 17 seconded nationalexperts (SNEs) in the EEAS—two from the FCO, 11 from the MOD and four from DFID. I would be gratefulif you could update these figures for UK SNEs in the EEAS

As of 1 January 2013, the UK has 24 seconded national experts (SNEs) in the EEAS: seven from the Foreignand Commonwealth Office, three from the Department for International Development, and fourteen from theMinistry of Defence.

17. In a parliamentary answer on 16 July 2012, col. 562–4, Mr Lidington provided figures on the numbers ofUK civil servants seconded to EU institutions and agencies in recent years, including from the FCO. I wouldbe grateful if you could confirm that these figures did not include either the 17 UK SNEs in the EEAS orseconded UK diplomats or civil servants employed as temporary agents by the EEAS

The figures provided to the House of Commons on 16 July 2012 by Mr Lidington did not include any ofthe SNEs or Temporary Agents currently working in the EEAS.

18. I understand from the EEAS evidence to the Lords Committee that, of EEAS Heads of Delegation, 11 areUK nationals. It would be very helpful if you could supply a list of them, and indicate the breakdown amongthem between seconded national diplomats and permanent EU officials. Does the figure of 11 include MrQuince, who I understand is double-hatted as EUSR and Head of Delegation to the AU?

There are currently 11 Heads of Delegation with British nationality. Three are seconded to the EEAS fromthe Foreign and Commonwealth Office as Heads of Delegation to Switzerland, Morocco and Bolivia. Eight arepermanent EU officials, who are Heads of Delegation to Egypt, Fiji, Indonesia, Israel, Nigeria, Sri Lanka andThailand. This latter figure also includes Gary Quince, who is double-hatted as EUSR to the Africa Union andHead of Delegation. This does not include current outstanding applications for Heads of Delegation, where wehope to gain further positions.

19. In what percentage of cases has a UK diplomat or civil servant who has applied for an EEAS job (as aseconded national diplomat to be employed as a temporary agent) been successful?

In the 2012 EEAS main jobs Rotation (the latest for which full statistics are available) the UK put forward83 applications and secured six jobs, giving an overall success rate of 7%. In addition, the UK also put forwardin 2012 42 applications for 34 EEAS jobs which were advertised on an ad hoc basis outside the main Rotation.We have secured three of these so far, which again represents a success rate of 7%, but hope to gain furtherpositions as the recruitment process is completed.

20. When the previous FAC considered the EEAS in the last Parliament, as the Service was still beingestablished, it was told by then-PUS Sir Peter Rickets that the FCO might second around 25 officials into theService. Does the FCO expect the current figure of 20 UK seconded national diplomats to rise further?

As of April 2013, there are 22 UK diplomats or civil servants working as Temporary Agents in the EEAS.We continue to field UK candidates for EEAS jobs, and to promote them in the FCO and Whitehall departmentsas a good career option for talented staff. We anticipate that this figure will therefore continue to rise.

21. I understand that national diplomats seconded into the EEAS are employed as temporary agents on EUterms and conditions. In the FCO’s experience so far, how do these terms and conditions compare to thosewhich apply within the FCO to the FCO officials applying for EEAS positions? Does the FCO guarantee toits officials that, after a secondment to the EEAS, they can return to the FCO on terms and conditions atleast as good as those applying to them beforehand?

Staff joining the EEAS and taking up EU terms and conditions have found that they compare favourably tothose of the FCO. The EEAS requires EU Member State governments to guarantee that they will take backTemporary Agents at the end of their secondment. Candidates return to their home department after thesecondment ends on the home department’s terms and conditions.



22. How would the FCO expect a successful secondment into the EEAS by one of its officials to be reflected,after his/her return to the FCO, in his/her performance against the FCO’s core competencies? For whatkinds of senior FCO positions would the FCO see an applicant’s prior successful secondment to the EEAS asdesirable or necessary?

Secondments to the EEAS provide staff from the FCO and other Whitehall departments with an excellentopportunity for individual career development, as well as the chance to build and deepen EU expertise. Ingeneral, roles in EU delegations will provide a similar range of opportunities to develop core competences,core diplomatic skills, and country-specific or regional expertise as in equivalent FCO posts. In addition, someroles in EU delegations may provide opportunities for FCO staff to manage significantly larger budgets (forinstance on development programming) than they would in a UK mission, to manage larger and more diverseteams of staff, or to use a wider range of language skills.

The EEAS is still a new organisation, but we expect it to continue to bed in and establish itself in the future.Successful EEAS secondments are likely to be an asset to applicants for FCO roles on the EU. Given that theEEAS has a large number of Delegations (though not as extensive as the FCO network), the experience of asuccessful secondment could be useful and relevant experience for staff working in very many areas of theFCO in future.

23. In the EU’s Delegations in third countries, how many UK nationals participated in the Junior Experts inDelegation (JED) scheme in each of the last five years? What have the UK participants in the scheme goneon to do? How many UK participants are being deployed to EU Delegations from March 2013 in the newHigh Level Traineeship Programme? What is the FCO doing, if anything, to encourage the participation ofUK nationals in the programme; and how much funding for participation by UK nationals is the Governmentproviding, if any, through a voluntary Member State sponsorship agreement? I understand that two EU-funded places are available for UK participants

Following the creation of the EEAS, the Junior Experts in Delegation scheme has been renamed the JuniorProfessionals in EU Delegations scheme (JPD). Like the JED, the JPD offers the chance for EU nationals toapply for a short-term traineeship once every two years. DFID is the lead UK department on this scheme. Theyreceived 80 applications to the JED scheme in 2008 for postings in 2009–10, and 100 applications in 2010 forpostings in 2011–12.

The JPD was launched in 2012 for candidates to take up traineeships in EU Delegations from March-October2013. DFID received about 80 applications for the 2012 JPD scheme. Two candidates successfully securedEU-funded places: one is now in the EU Delegation to Peru under the EEAS JPD, and the other is in the EUDelegation to Algeria under the European Commission JPD. The FCO is not funding any additional candidatesbut helps publicise the scheme and works alongside DFID to sift applications.

UK Civil Service

24. Answering a PQ on 16 September 2010, col. 1185, Mr Lidington said that “work [was] underway todevelop a more strategic approach to the use of secondments of UK civil servants to [...] the EUinstitutions”. What progress has been made on this issue? How, if at all, are secondments to the EUinstitutions to be encouraged and recognised under the Civil Service Reform Plan and the forthcoming CivilService Capabilities Plan?

Seconded National Experts (SNEs) are a key means of ensuring UK representation at the EU Institutions.SNEs are currently funded from departmental budgets. The UK currently places 60 fewer SNEs than eitherFrance or Germany. To redress this imbalance, a new “EU Staffing Unit” has been created in the Foreign &Commonwealth Office. The remit of this new Unit, which will commence work in May 2013, is to place 20additional SNEs in EU Institutions each year for the next three years, with a specific focus on strategic postswithin the Institutions. The Unit is funded from cross-Whitehall contributions, and will also act as a crossWhitehall focal point to develop best practice for SNEs.

25. What coverage is given to EU business in the new Civil Service Learning core curriculum? Are EUmatters covered in any of the training that is compulsory for UK civil servants?

Civil Service Learning’s curriculum for Policy Professionals includes a 1.5 day course entitled “EUTraining”. This course is aimed at policy advisers whose role is focused on, or includes elements of, work withEU. The course combines face-to-face workshops with workplace learning and is designed to explain how theEU works and how EU policies might be influenced. Policy curriculum courses are not mandatory. In addition,some Government departments provide specific and tailored training on the EU. For example, the FCO offersa one week course entitled “Understanding, working with and influencing the EU”.



Cabinet Office

26. I understand that Angus Lapsley has been seconded from the FCO to the Cabinet Office to work on theBalance of Competences Review. He is routinely described in public as Director of the European and GlobalIssues Secretariat, but I can find no public announcement of any change in the position of Ivan Rogers, whoI understood held that position. For the record, I would be grateful if you could confirm Mr Rogers’ and MrLapsley’s current positions and when they took effect

Ivan Rogers is the Prime Minister’s Advisor on European and Global Issues and Head of the European andGlobal Issues Secretariat. He took over this position on 12 December 2011.

Angus Lapsley has been a Director in the Europe and Global Issues Secretariat since April 2012.

11 April 2013



Working for the European Civil Service

1. Have you heard of the EU Recruitment competition or assessment process?

Response

PercentResponse

Count

No 81.0% 1,787

Yes 19.0% 420

answered question 2,207

skipped question 0

2. If No, have you ever considered working for the European Union?

Response

PercentResponse

Count

Yes 56.2% 994

No 43.8% 776


skipped question 437

3. If Yes, have you applied for, or considered taking part in the EU Competition or assessment process?

Response

PercentResponse

Count

Yes 24.8% 350

No 75.2% 1,059



4. If you have heard of the EU Recruitment competition or assessment process, where did you hear about it?

ResponsePercent

ResponseCount

EU website (EUROPA) 37.4% 114

UKREP website 2.3% 7

Career adviser 29.2% 89

Newspaper 7.9% 24

Friend 24.9% 76

Can't remember 14.1% 43

Other 14.1% 43

Other (please specify) 51

answered question 305

skipped question 1,902



5. If you have not applied, or considered working for, the EU please tick up to three reasons why not.

Response

PercentResponse

Count

Never heard of it 38.0% 681

Don't know about the recruitment process and what's

required74.2% 1,329

Can't find any information about it 18.2% 326

I'm not interested in what the EU does

6.8% 121

It's too boring 3.4% 60

The application is too time consuming

5.1% 91

Its too competitive 13.9% 248

My language skills are not good enough

35.4% 634

I don't want to work abroad 9.3% 167

I don't believe in the EU 4.9% 87

Other (please specify)

157



6. What are your career ambitions when you leave university? Please tick your top two choices

Response

PercentResponse

Count

Work in the public sector / civil service

42.2% 859

Work for an international organisation

51.2% 1,042

Work in the City or finance 15.1% 308

Further study 31.1% 633

Graduate training scheme 19.4% 396

Don't know 13.0% 265


165





7. What do you look for in a career? Please tick your top two choices.

Response

PercentResponse

Count

Good salary 49.4% 1,006

An interesting/challenging job 80.4% 1,637

Travel 28.6% 583

Promotion opportunities 19.3% 393

Job security 18.3% 373

Working in a multicultural organisation

15.6% 318

Flexibility/work-life balance 32.8% 668

Other 1.4% 28


38



9. Do you listen to the radio? (if so please tick up to 2 favorites.)

Response

PercentResponse

Count

Radio 1 42.5% 858

Radio 2 12.1% 245

Radio 3 2.3% 47

Radio 4 21.6% 435

Another radio station 37.5% 756

You don't listen to the radio 26.2% 528



8. Where do you get your information? Please tick your top two favourite newspapers.

Response

PercentResponse

Count

The Daily Telegraph 16.8% 340

The Guardian 46.9% 946

The Times 43.8% 883

The Daily Mail 10.5% 211

The Mirror 2.9% 58

The Sun 5.5% 110

The Financial Times 7.8% 157

You don't read any newspapers 21.6% 435


360





10. Please tick the social network membership site you most use.

Response

PercentResponse

Count

Facebook 96.4% 1,945

MySpace 1.9% 39

Bebo 0.6% 13

Twitter 7.3% 148

Other site (please specify)

68



11. Do you regularly read specialist or consumer magazines such as the Economist, Wired, Vogue, Vanity Fair, OK or other? If so please state which ones below.

Response

Count

1,158



12. Do you regularly read or view the website or newspaper of any foreign media (ie Le Monde, Die Zeit etc)? If so, please state which ones below.

Response

Count

1,047



13. Where would you look online for jobs or careers information? Please tell us which two sites you are most familiar with - or of any others you use.

Response

PercentResponse

Count

Monster 24.2% 481

Prospects 21.1% 419

Totaljobs 13.2% 262

Jobsite 18.4% 365

Reed 10.7% 212

GRB (Graduate Recruitment Bureau)

11.7% 233

Gradjobs 13.3% 265

MilkroundGraduate-jobs 24.8% 492

Don't know of any 28.4% 564


221





14. Have you ever approached your careers office about information on working for the EU?

Response

PercentResponse

Count

No 92.2% 1,813

Yes 7.8% 154



15. Please tick the EU related websites below that you have visited most regularly.

Response

PercentResponse

Count

Europa 14.5% 287

EU Careers 8.2% 162

EPSO 2.5% 50

European Fast Stream 5.5% 108

FCO 8.8% 175

UK Representation to the UK 3.6% 72

None of the above 69.8% 1,380



16. Please tell us the name of your course and university

Response

PercentResponse

Count

At what university are you studying?

99.9% 1,946

What subject are you studying?

99.7% 1,941



17. Gender

Response

PercentResponse

Count

Male 41.3% 805

Female 58.7% 1,142





18. What year of study are you in?

Response

PercentResponse

Count

Year 1 35.0% 682

Year 2 26.7% 520

Year 3 19.4% 378

Year 4 14.1% 275

Year 5 4.7% 92



19. Please provide us with your email address if you would like to be entered for the draw to win £50 of Amazon Vouchers.

Response

Count

1,898



20. Will you be interested in receiving further information about EU careers via this email address?

Response

PercentResponse

Count

Yes 61.7% 1,193

No 38.4% 742


21



Written evidence from Nigel Farage MEP on behalf of the UK Independence Party (UKIP)

Summary

What is the relationship between the new “fiscal compact” Treaty and the EU’s acquis?

The Fiscal Union Treaty stands outside the Treaties and in the absence of agreement by the UK cannot formpart of the acquis or permit use of EU institutions under it.

Should the UK Government support the incorporation of the “fiscal compact” Treaty into the EU Treaties?

No, because the means by which this is to be done sets a dangerous precedent inconsistent with futureUK interests.

If it should, what demands and safeguards, if any, should it make its condition for doing so?

We doubt that any safeguards and conditions would be honoured, given our prior experience of such.

Should the UK embrace a formalised two (or more)-tier EU and start to develop ideas for multiple forms ofEU membership?

No. We believe that this would still involve an unacceptable loss of sovereignty and would be far toocomplex to establish and administer.

Between now and 2020, what institutional architecture and membership should the UK seek for the EU?

If the UK remains a member, then the relationship should be confined to trade and access to the singlemarket with a concomitant architecture. UKIP’s policy is clear, however: only withdrawal is the means ofsecuring the exclusive national interests of the UK.



What impact might the conclusion of the “fiscal compact” Treaty have on other aspects of the EU and itspolicies, such as the EU budget, enlargement, or the Common Foreign and Security Policy?

We believe that this will be a signal for the EU to increase its budget, raise more of its own resources andto enforce harmonised tax rates across the Union. Enlargement is on hold. The clamour for an EU foreignpolicy and defence force will grow.


With the deft sidestep by the Commission of the “veto”, this was no watershed.

In the first instance we feel that a more helpful order for the questions posed in the Committee’s rubric is tofollow the order we have used below.

What is the relationship between the new “fiscal compact” Treaty and the EU’s acquis?

As a matter of international law, the Treaty on Stability, Co-ordination and Governance in the Economic andMonetary Union (“The Fiscal Union Treaty” or “FUT”) is a Treaty within the meaning of the ViennaConvention on the Law of Treaties and therefore has all the attributes of a Treaty in international law.

It is signed by 25 sovereign nations who are, coincidentally, also members of the European Union. It is not,however, a European Union Treaty. The Treaties—now consolidated as The Treaty on European Union (TEU)and The Treaty on the Functioning of the European Union (TFEU)—are those to which 27 sovereign nationshave acceded.

Two sovereign nations which are EU members, The UK and the Czech Republic, having declined to signthis Treaty, the Fiscal Union Treaty has no legal nexus to TEU/TFEU.

Since the EU is not a signatory to the FUT and two of its members have not assented to be bound by it, theEU is not itself bound by the FUT. Nor does the Fiscal Union Treaty have any lawful impact on any Treaty orother agreement which is itself linked to TEU/TFEU.

One should be mindful of Article 5 TEU by which “the limits of Union competences are governed by theprinciple of conferral”. The full 27 member states have not granted to the EU any of the competences whichare set out in the FUT.

This has significant consequences. For example, Article 818 of the FUT makes provision for use of the ECJin certain circumstances. Given that the FUT Group legally lies wholly outwith the structures of the EU, it isdifficult to see how Article 8 might legally be deployed, given the jurisdiction of the ECJ as set out in Article19 TEU.

The jurisdiction of the ECJ is the “interpretation and application of the Treaties” [ie TEU and TFEU] and,“in accordance with The Treaties”, ruling on actions brought by “a member State” or “an institution” (ie aninstitution of the EU as defined by the Treaties) or a natural or legal person; giving preliminary rulings onthe interpretation of Union law; ruling on other cases provided for “in the treaties”. The FUT falls outsidethat jurisdiction.

We submit that neither the FUT, nor any organization set up thereunder and nor any contracting party hasany locus standi to bring actions before the ECJ. The contracting parties may say whatever they wish in theirown Treaty: the Treaties make it clear that the jurisdiction of the ECJ is limited.

Article 8.3 of the FUT pretends to the notion that referring matters to the ECJ under the FUT is a “specialagreement” for the purposes of Article 273 TFEU. Yet Article 273 only grants jurisdiction to the ECJ in anydispute between Member States which relates to the subject matter of the Treaties. The FUT is not part of thesubject matter of the Treaties.

Nor can this be claimed as an act of enhanced co-operation under Article 20 TEU (which applies to non-exclusive competences) since the subject matter is the Euro, an exclusive competence of the EU.

Notably, The United Kingdom has in no way consented whatsoever to any institution—such as the EuropeanCourt of Justice (ECJ)—or mechanism of the EU being used by the FUT group or UK Taxpayer’s moneybeing thus deployed. UKIP MEP Stuart Agnew, substitute member on the European Parliament’s ConstitutionalAffairs Committee, has repeatedly asked what the legal basis for any such use might be: no satisfactory andcompelling answer has been proffered.

Her Majesty’s Government has itself no power to permit use of the ECJ by outside organisations or otherwiseacquiesce in such use. No such power was granted by The European Communities Act 1972 nor any subsequentAct which makes such permission or acquiescence lawful under UK law. We therefore contend that anyexpenditure of British Taxpayer’s money on such use of the ECJ would quite simply be illegal.18 Given the need for brevity we have not set out in extenso the text of individual articles on the assumption that this Honourable

Committee is fully conversant with them.



Whilst the 25 may have agreed that as far as this arrangement is concerned, “this Treaty shall be appliedand interpreted by the Contracting Parties in conformity with the Treaties on which the European Union isfounded”, that is entirely a matter for them. Such does not bind the UK.19

We also feel it imperative that this Committee considers in this regard two other matters:

— The intimate relationship between the FUT and the Treaty Establishing the European StabilityMechanism (ESM). Implicitly, at the very least, each of the treaties is intimately linked the onewith the other. There is an on-going case before the Irish Courts initiated by Independent MEPThomas Pringle which has this relationship at its heart, challenging the lawfulness under EUlaw of the ESM and calling for a Referendum on the ESM.

— Continuing developments in Europe. We respectfully suggest that the Committee cannotproperly come to any settled conclusion until the issue of further amendments to the FUT isresolved. France’s new President Hollande has called for major changes. Greece faces anuncertain future which may have major implications for the FUT. The Netherlands soon has ageneral election which may produce a call for yet further amendments or even a refusal toratify. Six months from now the architecture of the EU may look very different.

Should the UK Government support the incorporation of the “fiscal compact” Treaty into the EU Treaties?

For the reasons set out here, we believe that to do so would be wrong and would set a potentially verydamaging precedent.

It will be recalled that very soon after the Prime Minister had indicated Her Majesty’s Government’sunwillingness to sign this Treaty, the Deputy Prime Minister (DPM) spoke, on 9 January 2012, of the FUTbeing “folded into” the existing Treaties:

U.K. Deputy Prime Minister Nick Clegg called for changes to the way euro-area countriesmonitor each other’s spending to be “folded into” existing treaties to prevent multiple rulebooksgoverning members of the 27-nation European Union.

“We believe that it should, over time, be folded into existing treaties so that you don’t getpermanent two parallel treaties working separately from each other,” Clegg told reporters inLondon today following talks with leaders from European liberal parties, which included EUEconomic and Monetary Affairs Commission Olli Rehn and Dutch Prime Minister Mark Rutte.“We all see this as a temporary arrangement.”20

As an aside, one is bound to wonder who the DPM meant by “we” here.

It is a matter of note that the DPM was speaking of the FUT being “folded into” existing Treaties. Onewonders if he had been talking to his erstwhile colleagues at The Commission and had been privately alertedas to how the Commission saw the FUT becoming EU law.

We would point to the observations of a Mr. Romero, a legal expert from the Commission, who spoke to ajoint meeting of the Constitutional Affairs Committee and Economic Affairs Committee of the EuropeanParliament on 12 January 2012 at Strasbourg.

A video of his contribution can be found here: http://youtu.be/WfSvvgCmvbo.

In summary, Mr. Romero was making it plain that making the FUT part of EU Law did not, as far as theywere concerned, require a Treaty change of any kind. It would all be done by means of what Mr. Romero calls“secondary legislation” which we take to mean by way of the whole gamut of Directives, Regulations,Delegated acts and implementing acts.

Within about a month of the Prime Minister claiming having to have vetoed the FUT, the Commission hadfound a way round that little local difficulty and thus rendered the so-called veto nugatory.

One might properly infer that The DPM knew all of this when he spoke. For whom, then, was he speaking?Her Majesty’s Government or the Commission?

We strongly submit that this means of eliding external agreements into EU should be fiercely resisted byHMG and that there should be no question of the UK supporting the stealthy insertion of such via the backpassage of directives, regulations and the like. Once this exercise has been done once, it will be repeated.British MEPs might in such instances vote against it but the UK stands to be over-ruled at every turn. What isproposed thus represents a serious threat to the UK’s interests and must be resisted, involving as it does aconsiderable further loss of sovereignty, power and influence within the EU.

That is quite apart from our grave concerns that this particular enterprise is both the template for andharbinger of a further strong drive towards Federalism. It contains within it a powerful impulsion towardsoverall control by the EU of harmonising a wide range of taxes and control over national budgets into whichwe fear the United Kingdom will be sucked. The degree to which the power of Sovereign States to draw up19 FUT Article 2.120 Eg Bloomberg online: http://tinyurl.com/bmofpcp



budgets and set their own tax rates independently is gravely threatened by this Treaty and Her Majesty’sGovernment should have nothing to do with such an anti-democratic step.

This is a major step towards “ever closer union”. Whilst the UK remains outside much of this closerintegration—for the moment—the United Kingdom remains bound to EU Treaties which call for an ever-closerunion whose currency is the Euro. The grave danger is that we shall be pulled headlong into such union bythe maelstrom of the collapse of the Euro and its consequences.

We believe that the People of the United Kingdom desire—and demand—that we travel in an entirelyopposite direction.

In addition the emergence of a nascent proto-government for the Eurozone is bad for the members of theEurozone in terms of democracy. This Treaty is profoundly undemocratic, placing as it does so large a degreeof control over national budgets in the hands of the EU. Given the ineptitude displayed during the Eurocrisis by its leaders at all levels, it is not unreasonable to be pessimistic about Europe’s prospects for growthand competitiveness.

That would be deeply damaging to the UK’s interests. Having as a major trading partner a sclerotic groupof countries becoming ever less competitive by the day—thus inhibiting growth—is hardly likely to enhancethe UK’s trade. With so many of our eggs in this basket, that can only be against our vital interest.

If it should, what demands and safeguards, if any, should it make its condition for doing so?

We have set out above our view that it should not be supported under any circumstances. If that means webecome fully-declared opponents of the great European Project, so be it. We doubt that any safeguards andconditions would be honoured, given our prior experience of such.

Should the UK embrace a formalised two (or more)-tier EU and start to develop ideas for multiple forms ofEU membership?

The problem we foresee with the suggestion of a two- or multi-tier EU is that it will inevitably involveconcession of an unacceptable degree of Sovereignty. More than that it is very difficult to see how such acomplex arrangement could be made to work.

We now have 40 years’ experience of how a single-tier EU is administered and its anti-democratic tendencies,of which the overthrowing of the results of National Referendums and the insertion of EU-approvedTechnocrats as national leaders are but part. We have also had ample evidence of the poor performance of theunelected and unaccountable officials of the EU who are immune to the norms of democratic life.

Why should a two- or multi-tier EU be any different?

We consider that the notion of a two—speed or multi-speed EU is simply a non-starter. The notion of anysignificant powers being repatriated—after the EU has spent 55 years in the careful and assiduous accretionthereof—is risible. A genuine two-tier relationship is very unlikely to be on offer on any terms that are actuallyadvantageous. The attitude of the new French President to the UK ought to make that abundantly plain.


Whilst the UK remains part of the EU, it should seek the loosest possible architecture for the EU and to bebound by the least political commitments possible. We should take this opportunity to disengage ourselves,above all, from all the non-trading elements (especially the political ones) of the EU and look to concentrateonly on our access as a trading nation to the Single Market and our trading relationship with Europe which,we say, is all the People of the UK have ever assented to by way of the 1975 Referendum.

What impact might the conclusion of the “fiscal compact” Treaty have on other aspects of the EU and itspolicies, such as the EU budget, enlargement, or the Common Foreign and Security Policy (CFSP)?

As far as enlargement is concerned, we believe that this process will be placed in abeyance for the timebeing. A new entrant is required to adopt the Euro. The next countries in line, in no particular order, are thelikes of Serbia, Albania, Macedonia, Bosnia-Herzegovina and Montenegro. It will be some time before we canassess the impact of Croatia’s accession. Given the state of the economies of the prospects, further enlargementis unthinkable for the time being. Greece may yet leave or be ejected from the EU. We could not, with theproblems that now face us, contemplate trying to digest Turkey or any of the Balkan states. Enlargement is atbest on hold.

The new agreement is highly unlikely, we believe, to promote growth and prosperity for its members.

What it will do is provide the impetus to the EU to introduce new ways of raising EU taxes (“own resources”)and harmonising tax rates across the EU. The EU’s appetite for spending other people’s money will neverdiminish but will continue to rise. We already know how many of the EU states greatly resent Ireland’s lowcorporation taxes. France calls stridently for a Financial Transaction Tax.



As far as the CFSP is concerned, the diminishing ability of member states to afford proper defence spendingwill lead to greater efforts to impose the creation of a European defence force, thus further diminishing theUK’s independence and ability to protect its own interests.

We believe that this agreement will be a disaster for UK vital interests.


It is not the case that the supposed “veto” of the Prime Minister represents a watershed. As we have seenabove, the EU plans to sidestep it almost without moving a muscle and the use of secondary legislation to“fold” the FUT into EU law will happen, in a stark demonstration of the impotence and marginality of theUK’s MEPs.

In reality it was not a veto at all but simply a spur to the EU to find a way of thwarting UK policy andgetting on with the business of integration as fast as possible. Having thus revealed the utter contempt of ourso-called partners for the UK’s position and interests, it may be thought a watershed in that the UK must nowadmit to and contemplate the fact of our impotence and lack of influence at the heart of Europe. Those whowould claim otherwise must stand adjudged of mere hollow bluster.

If we have no influence, then what is the point of our membership?21

22 May 2012

Written evidence from the Scotch Whisky Association (SWA)

The Scotch Whisky Association (SWA) is the trade organisation whose main aim is to promote and protectthe interests of the Scotch Whisky industry. A key element within that broad remit is to try to ensure that thetrade regimes in which our members operate are non-discriminatory and permit fair competition. The EU isthe industry’s single largest export market and is therefore of vital importance to our sector.

Our member companies, which range from small and medium-sized enterprises to multi-national companies,sold over 500 million bottles of Scotch Whisky in the EU in 2011: over 40% of all Scotch Whisky sales takeplace in the 27 Member States. Much of this success has been built on the harmonised trade rules in theinternal market and the EU’s regular phases of enlargement.

We frequently campaign to ensure the internal market’s rules are appropriate to our sector and we greatlyappreciate the dialogue with, and the support we receive from, UK officials. The EU legislation of greatestinterest to our sector often bears the hallmark of UK participation. We only are able to secure rules meetingthe needs of our sector through the UK’s EU membership and full involvement in its decision making processes.

The SWA therefore welcomes the Foreign Affairs Committee inquiry into the future of the European Unionand UK Government policy. The attached submission seeks to highlight the benefits the UK’s EU membershiphas brought our sector within and beyond the EU’s borders. We have provided information regarding theinternal market, EU enlargement and international trade relations. As a trade association, however, theCommittee’s questions in relation to eg the “fiscal compact” lie outwith our remit.

Naturally we would be ready to provide further written information if that would be helpful.

1. Executive Summary

1.1 The Scotch Whisky Association welcomes the Foreign Affairs Committee’s inquiry into the future ofthe European Union and UK Government policy. Our sector liaises regularly with UK government departmentsand greatly appreciates their guidance and support in the effort to improve trading conditions for Scotch Whiskyin the EU and in third countries.

1.2 The EU is the industry’s single largest export market and is vital to the Scotch Whisky industry. Globalexports in 2011 were worth £4.23 billion, of which sales to the 26 other EU Member States accounted for£1.45 billion. Total sales within the EU, ie including the UK, amounted to over half a billion bottles, or 42%of the industry’s total volumes.

1.3 Scotch Whisky is sold in every EU Member State; our sector benefits greatly from harmonised tradingrules in the single market, ie as opposed to the 27 sets of national rules that would otherwise apply. Theseadvantages have been extended by EU enlargement. Although the internal market provides a (relatively) barrier-free trading environment, more is required for it to reach its full potential.

1.4 The UK plays a key role in the EU’s decision-making processes through the European Council andEuropean Parliament. The Association is extremely grateful for the readiness of UK officials, MPs, MSPs,MEPs and Ministers to raise our sector’s concerns and pursue our interests in all relevant fora.21 UKIP does not, of course, thereby concede that if we had influence membership has a point.



1.5 The UK’s EU membership has delivered benefits to Scotch Whisky which would not otherwise havebeen possible. We very much hope that, whatever decisions are taken regarding the EU’s future institutionalarchitecture, and the UK’s role therein, these will not jeopardise the benefits of the internal market and theUK’s ability to influence and shape EU policies.

2. Introduction

2.1 Scotch Whisky is the world’s foremost internationally traded spirit drink. The Scotch Whisky Association(SWA) is the trade organisation which represents the interests of the Scotch Whisky industry. Its main objectiveis to protect and promote Scotch Whisky at home and in its overseas markets. More than 90% of sales takeplace outside the UK.

2.2 Despite the current economic difficulties, rising demand in both emerging and mature markets hasresulted in export values increasing by an average of 10% a year over the last five years. The governmentregularly exhorts business to find new opportunities overseas. The Scotch Whisky industry provides anexcellent example of the benefits of such trade. Much of the export success could not have been achievedwithout the UK’s EU membership.

2.3 Exports of Scotch Whisky to over 200 countries in 2011 were worth £4.23 billion. This equated to nearly1.2 billion bottles; or 3.2 million bottles every day. Scotch Whisky alone represents 80% of Scotland’s foodand drink exports, 23% of the UK’s and 7% of the EU’s (2010 data, as 2011 figures are not yet available forthe whole EU). Scotch Whisky contributes £134 per second to the UK balance of trade.

2.4 The industry employs over 10,000 directly and a further 35,000 jobs across the UK are supported by theindustry. Our sector spends £1 billion each year with UK suppliers of goods and services. Prospects for furtherexport-led growth have resulted in the industry investing £1 billion in additional distillation, maturation andbottling capacity over the last five years.

2.5 The ability to export is vital to the health of the industry. Our members have been exporting for over ahundred years and are fully familiar with intra-EU and international trade and a wide variety of national tradingenvironments, not all of which are benign. The SWA is an active campaigner against trade barriers and seeksto ensure fair and non-discriminatory trading conditions in all markets.

2.6 Our submission includes an overview of Scotch Whisky in the EU, and highlights some of the benefitsit has brought as well as the work that remains to be done. It also looks at international trade aspects, andexplains why the UK’s EU membership brings benefits within and beyond the EU’s borders. We have notsought to address questions in relation to, eg the “fiscal compact” since these lie beyond the Association’s remit.

3. Scotch Whisky in the European Union

3.1 Exports to the 26 other Member States were worth £1.45 billion in 2011. Total sales within the EU, iealso including the UK, amounted to over half a billion bottles. Scotch Whisky is sold in every Member Stateand our sector enjoys the advantages of the EU’s harmonised trading rules, ie as opposed to 27 sets of nationalrules. Our success in the EU is in large part a consequence of the internal market’s (relatively) barrier-freetrade environment.

3.2 Our sector has long been involved with UK/EU officials and MEPs to try to ensure that EU legislativeproposals are appropriate for our sector and enhance trade rules in the internal market. Our involvement isboth direct and through our membership of the European Spirits Organisation—CEPS, which represents spiritsproducers at EU level. In the same way as CEPS relies on its members to determine the best policies for theindustry, so too do the EU decision making processes rely on the active engagement of national governmentsand MEPs to pursue the interests of their constituents.

3.3 Thanks to the readiness of EU and UK officials to engage with our sector, much useful legislation forthe Scotch Whisky industry has been passed. Policy areas where the Association has been actively involved atevery stage include VAT and excise taxation, bottle sizes, spirit definitions, holding and movement of excisableproducts, strip stamps, environment, food labelling and protection schemes for geographical indications.

3.4 The policy work in which SWA and CEPS are engaged requires a constant dialogue with UK and EUofficials in national capitals and Brussels, and with MEPs once those dossiers come before the EuropeanParliament. The breadth of issues, and the level of engagement needed, are such that we could not securetrading conditions appropriate to the sector without UK support. Some of the dossiers on which we are engagedaffect Scotch Whisky far more than any other spirit drink and the UK’s voice is critical in ensuring the enactedmeasures meet industry needs.

3.5 Among the advantages brought to our sector from the UK’s EU membership since 1973 are the following:

— removal of excise tax and VAT discrimination against Scotch Whisky in France, Greece, Italyand Denmark;

— adoption of EU rules to define and protect whisky, and to provide specific protection forgeographical indications, such as Scotch Whisky;



— introduction of common rules on labelling requirements and the bottle sizes in which spiritsmust be sold; and

— removal of tariffs, quotas, tax discrimination, national labelling requirements and many othertrade barriers in EU accession countries.

4. Single Market—Work Still in Progress

4.1 While we strongly support the principles of the Single Market, as is regularly observed it is far fromcomplete. In our sector difficulties persist, notably on tax issues and inappropriate national rules which preventfree movement or protect domestic interests. Resolving such concerns does not happen overnight; the UK’svoice is needed over the long term to try to improve the operation of the single market.

4.2 A key area of concern is the EU’s excise tax directives which require Member States to apply minimumrates of tax according to category of alcoholic beverage. On spirits the minimum rate is €1,000 per hectolitreof pure alcohol (hlpa); for beer, it is €127 per hlpa; and on wine, the minimum rate is zero, a level applied by16 Member States. All alcoholic beverages compete with one another and we believe the tax structure shouldreflect this situation. Instead the current crisis is being used by some countries to further widen discriminationagainst spirits; in many cases Scotch Whisky is the main imported spirit.

4.3 In addition, EU structures permit some national derogations from the broad principle that, within eachcategory of alcoholic beverage, everything should be taxed in an identical manner. Thus, for example, thereare lower rates of tax in France on rum from its overseas departments and on ouzo in Greece. There are otherexamples, too numerous to mention, of particular categories of spirit receiving preferential tax treatmentsanctioned by the EU.

4.4 These have created the conditions in which some Member States, unilaterally and illegally, haveintroduced protection for domestic products: Hungary and Romania are the current worst offenders but Greecetoo has illegally extended its derogation for ouzo to include other local spirits. While there are means of redressin place, infractions proceedings, designed to enforce compliance with the acquis, are often slow and can takeover four years before being resolved. In the meantime the discrimination continues.

4.5 Although it is usually the Commission that leads in removing such barriers, the UK’s involvement, atEU level, and bilaterally with the offending Member State, are extremely helpful in trying to resolve suchconcerns. We are constantly grateful for the UK’s support in this respect.

5. EU Enlargement

5.1 The internal market’s benefits have regularly been extended by EU enlargement. In acceding countriesthis has brought, among other things, the removal of many trade barriers including high tariffs, quotas,preferential tax rates, import permits, inappropriate laws defining whisky and national labelling rules.

5.2 The SWA has been closely involved in each phase of enlargement. Our main aim has been to ensure theEU acquis is implemented and enforced in the new Member States at the earliest opportunity, and that anyderogations and/or transition periods in our sector are kept to a minimum. We have been helped greatly by theUK administration in this process. Through, eg the Enlargement Working Group, and bilaterally with theaccession country, the UK has been extremely effective and persuasive in ensuring new EU members accedeunder the right conditions. Among other things, the UK was influential in securing:

— the introduction of two benchmarks in Turkey’s accession negotiations which were instrumentalin resolving two major trade barriers for the Scotch Whisky sector;

— the agreement by Romania that, in advance of its EU accession, the tariff preferences it hadnegotiated for US whisky should also be extended to EU whiskies;

— the introduction of a review period for certain tax derogations granted to some of the 2004intake of accession countries; and

— the refusal to permit any continuation of the preferential treatment (via excise tax and/or tariffs)of local vodka after Poland joined the EU.

5.3 More recently, we very much appreciate that the UK and others did not accept Croatia’s request for aseven year transition period to allow the sale of inappropriately labelled national spirits (“domaci rum” and“domaci brandy”), against which Scotch Whisky competes. Croatia’s accession in 2013 will therefore providefar greater potential for improving Scotch Whisky exports than if the current protection had been maintained.

5.4 EU enlargement has, over the long term, proved to be of massive importance to Scotch Whisky exporters.Some countries that have joined the EU over the last 25 years have been among the industry’s most importantexport destinations:

— Before its 1986 accession, exports to Spain were typically £20–30 million a year. 10 years laterthey averaged over £200 million; between 2003 and 2010 they exceeded £300 million onfour occasions.



— Exports to Greece were worth £10–15 million a year between 1980 and 1985. When barrierswere removed upon its 1986 accession, exports rose to £71 million after five years. Theyexceeded £100 million four times between 2003 and 2010. Prior to the recent economicdifficulties, Greece was often cited as the country with the highest per capita consumption ofScotch Whisky in the world.

5.5 Among more recent accession countries, exports to Poland have increased from £5 million in 2003 toover £42 million in 2011.

6. EU and International Trade

6.1 Europe is the world’s largest trading bloc, accounting for one fifth of global trade. EU trade policypromotes the principles of free and fair trade around the world. While the Commission negotiates on behalf ofthe EU, the active involvement of Member States is critical in ensuring vital national interests are pursued inthe negotiations. For example Free Trade Agreements (FTA) between the EU and third countries removemarket access barriers, including excessive tariffs, and are an important tool in helping exporters gain betteraccess to markets. In an export dominated industry such as Scotch Whisky, we are very grateful to UK officialsand Ministers who regularly seek to ensure our interests are pursued in FTA negotiations.

6.2 The highest priority market for the Scotch Whisky industry is India. There is significant demand forScotch Whisky in the market, but also major barriers, the most important of which is the excessive 150% tariff;effectively this prices our products out of the range of most consumers. The negotiations on the proposed EU-India FTA offer the only realistic chance of significantly reducing this tariff in the medium to long term. TheAssociation is very grateful to UK officials in Delhi, Brussels and London who put in a considerable amountof time and effort to ensure the interests of the Scotch Whisky sector are taken into account during thesecomplicated negotiations.

6.3 In the case of South Korea, where Scotch Whisky is both the UK’s largest export to the country and byfar the biggest imported spirit, the entry into force of last year’s FTA provided substantial benefits. Not onlywill the 20% import tariff on spirits be eliminated, but the Agreement provides a mechanism to introduce legalprotection for Scotch Whisky as a Geographical Indication. As in India, UK officials in London, Seoul andBrussels played a major part in delivering the successful outcome.

6.4 WTO trade rules have also been very useful in improving trading conditions for Scotch Whisky. Foracceding countries, we have been helped enormously by the UK and EU’s readiness to ensure, in some cases,that longstanding barriers are resolved as a condition of accession. Elsewhere, WTO rules provide a mechanismfor the EU, pressed by the UK, to take action against illegal protectionism in world markets. Our sector hasbeen successful in removing tax discrimination in Japan, Chile, Korea and the Philippines.

6.5 More generally, the EU’s trade dialogue with third countries also helps it to promote and “export” theapplication of EU rules as best practice, and thereby shape trading conditions around the world. As mentionedearlier, the UK is active in seeking to ensure EU rules are appropriate for the Scotch Whisky sector; such rulescan have a positive impact well beyond the EU’s borders.

7. Conclusions

7.1 The SWA firmly believes the UK’s membership of the European Union has provided significant benefitsin improving trading conditions for Scotch Whisky in Europe and beyond. We could not have secured theseadvantages from outside the EU. And there remains much to be done, in particular to ensure that the proposedFTA with India delivers the tariff reductions that would help unlock this potentially huge export market.

7.2 The UK government has a vital role to play in promoting a level playing field for business in the EU.The EU Single Market and free movement of goods has already delivered huge benefits to Scotch Whiskyproducers. However, improving the Single Market and removing the remaining barriers to trade should remaina priority UK objective.

7.3 It is therefore critical that the British voice is, and continues to be, heard in Brussels and is successfulin shaping EU policies. The UK would lose its current influence if, like EEA members Iceland or Norway, itwas not part of the EU decision making process. Moreover, the UK would still be required to implement EUlegislation which it had not helped shape.

7.4 We hope any decision regarding the institutional architecture and the UK’s EU membership will notjeopardise the advantages membership has brought, or weaken the influence and impact membership brings inthe decision-making processes.

We hope the above comments will be helpful. If any further written information or clarification on anyaspect would be useful, please do not hesitate to get in touch.

22 May 2012



Written evidence from the Liberal Democrat European Parliamentary Party

Summary

Unless structural problems are tackled, the long-term future of the EU is at risk. UK European policy lacksstrategic clarity on this and other matters. Economic recovery is not possible without a stronger Union, wherefiscal solidarity supplements fiscal discipline. The fiscal compact treaty is a necessary expedient. Itsincorporation in the EU framework will trigger a full-scale revision of the Treaty of Lisbon. The UK will haveto decide whether to support further integration of the EU—and, if so, whether to participate. A Britishreferendum on the EU is likely to be necessary.

1. We welcome your important enquiry, and hope it can produce some clear-sighted commentary on andoptions for the guidance of the United Kingdom’s future relationship with the European Union.

2. As Liberal Democrat Members of the European Parliament we are committed to making a success ofBritish membership of the EU and, in particular, to advancing the role, efficiency and legitimacy of theEuropean Parliament in the governance of the Union and in British politics. We sit within the group of theAlliance of Liberals and Democrats for Europe (ALDE).

3. To set a context for our responses to your particular questions, we have some general points to make.First, we firmly believe that Britain’s membership of the European Union has been of substantial benefit to theUK and remains fundamentally in the national interest. The UK is clearly more prosperous, more secure andmore powerful as a result of being a member of the European Union.

4. Second, no group has produced even a remotely compelling or attractive alternative to full EUmembership. The obvious alternative available to the UK is to move to a Norwegian model as a member ofthe European Economic Area (EEA). But as the recent and thorough report from the Norwegian EEA ReviewCommittee shows,22 there are serious negative consequences from such a model, not least to nationalsovereignty since Norway is obliged to implement the vast majority of EU rules without having any votingpowers over what those rules actually are. We find this “fax democracy” option deeply inappropriate for the UK.

5. Third, the protracted liquidity and sovereign debt crises have made the EU more not less necessary.Economic recovery is not possible without deeper European integration, and the Europe 2020 programme setsthe appropriate agenda. Recognising the need for a return to fiscal discipline at the national level, it is theobvious role of the EU to provide the platform and instruments for a revival of investment in sustainablegrowth. Appropriate action at the EU level, both directly through programmes financed by the EU budget, andvia the EIB and through the launching of new project bonds, can produce massive cost efficiencies andeconomies of scale, not least by cutting wasteful duplication and adding value in science and technology(including defence capabilities), as well as by modernising Europe’s infrastructure. The transfer of somesignificant items of public expenditure from national budgets to the EU budget, re-shaped to be more flexibleand drive competitiveness, makes every sense. New streams of genuinely autonomous EU revenue will reducethe burden on national treasuries. We broadly support the Commission’s range of proposals on reform of theown resources system.

6. Fourth, we believe that European integration has come almost as far as it can under present constitutionalconditions; and that while, after the Treaty of Lisbon, the EU lacks little in terms of statutory authority it isdeficient in terms of capacity of government and resources. Unless these structural problems are tackledurgently, the legitimacy and durability of the Union will be at risk.

7. And fifth, we are gravely concerned about the state of British European policy which we find too oftento be driven by short-termism and partisan and populist pressures, managed by a declining diplomatic force,and guided by no sense of strategic direction. This may in part be the consequence of having a coalitiongovernment composed of contradictory pro-European and eurosceptic tendencies. Yet previous Labour andConservative governments also signally failed to deepen Britain’s engagement with the EU or to enlightenBritish public opinion about the true nature of the country’s deep interdependence with its EU partners and thescale and scope of integration.

The December European Council

8. So, to turn to your questions, we believe that the crisis at the December European Council marks a radicalshift both in the UK’s policy towards the EU and, more importantly, in its partners’ attitude towards the UK.No other prime minister since Anthony Eden has turned his—or her—back on the Brussels negotiating table.We find Mr Cameron’s demands of his colleagues in the European Council to be matters of secondary notprimary law, largely misguided in content and intemperate in tone. The evidence is that the coalition partnershipdid not work that day.

9. It is impossible, however, to be surprised by what happened. The European Union Act of July 2011installed UK referendums on all future important constitutional change in the EU. Although denied by ministersat the time, this unilateral British constitutional innovation was not received elsewhere with equanimity: theEU Act is seen to have side-lined the Westminster parliament, weakened British political parties, and given the22 http://www.europautredningen.no/english/



populist press a nationalist field day. The result is that the hapless British people have an entrenched vetoagainst the constitutional evolution of the European Union.

10. Treaty change is a normal if complex phenomenon because the European Union is founded on a systemof common law. Regular treaty amendment is needed to codify settled jurisprudence of the Court of Justice, toadapt to enlargement, or to adjust the Union’s competences and the powers of its institutions to deal with newchallenges. Remove the possibility of treaty change, and the Union is paralysed. The fact is that the EU isonce again facing a further round of substantial reform with, one way or another, major political consequencesfor the UK. Therefore the government cannot indefinitely resist a European referendum in Britain.

11. The December European Council was well aware of the threat of a looming British referendum. Themain story of that meeting was not so much the attempt by a British prime minister to stymie the efforts tosalvage the euro but, rather, the willingness of the other heads of government, under the leadership of PresidentVan Rompuy, to call his bluff. Subsequent events confirm that the rejection of the British was not just a onenight stand. There is no attempt made either to reverse the split or even disguise it. Indeed, we detect a palpablesense of relief in some quarters in the EU institutions that the perennially neuralgic British problem might beabout to go away. While the Coalition Government has shown engagement and indeed leadership in someareas—for example by former DECC Secretary of State Chris Huhne on moving to an immediate EU 30%reduction in GHG emissions and at the UNFCCC COP in Durban—the more common perception hasunfortunately been that the UK remains uncooperative, notwithstanding the Coalition Agreement commitmentto being a positive partner in Europe. The UK maintains a negative attitude across a number of areas of EUpolicy—including the EU’s accession to the ECHR, the negotiation of opt-outs in the field of justice and homeaffairs, the first shots fired in the battles over the budget rebate and the reform of the own resources system,the continuing debate over the regulation of the financial markets, and a general British refusal to back thedevelopment of common foreign, security and defence policies. Good and energetic initiatives from the UKside need to utilise the usual European channels to reach their full potential. For example, the Like MindedGrowth Group has successfully brought together 16 member states to focus on deepening the single market,smarter regulation and growth generation, but so far only in a parallel process not cross-referenced to thedetails of initiatives already underway at a European level.

12. It is extremely difficult to identify any benefit to the UK from the outcome of the December EuropeanCouncil, a view echoed in private by many in the British financial services industry which the Prime Minister’sactions were apparently seeking to protect. Meanwhile the costs to British reputation and relationships havebeen significant, with potential knock-on consequences for our negotiating clout, including, ironically, onfinancial services dossiers. Moreover, the potential for caucusing among Eurozone or Eurozone Plus countrieson EU matters, including the single market, is now more real than before December.

13. We note with deep regret the tendency in London to proceed to debate EU affairs as if “Europe” were afar off country of which nothing much needs to be known. The narrow nationalistic tone of the domestic debatedoes great harm to the image of the UK in the rest of Europe. The argument over the future of Britain’s treatycommitment to the ECHR and the Charter of Fundamental Rights is being closely scrutinised, as will be anyofficial discussion of “repatriation” of EU competences. The behaviour of British right-wing MEPs who workmerely to undermine the institution to which they are elected to serve is universally ridiculed, but the relativeinfluence of all British MEPs is affected adversely by the belligerence of the few. In short, we deplore the factthat conclusions are now being drawn in Brussels, across Europe and in the wider world about Britain’s fitnessand trustworthiness as an EU partner.

The Fiscal Compact Treaty

14. The new treaty is unprecedented.23 It works by explicit analogy with the EU treaties, respects thecompetences conferred under the EU treaties, seeks to deploy the institutions which are empowered by the EUtreaties, commits to its own eventual incorporation within the EU treaties, but is not itself of them. It is anarchetypal confederal treaty, committing the governments of signatory states to a course of action which if inthe event they choose not to pursue there is no enforceable legal sanction against them. The EuropeanCommission may help to implement the fiscal compact treaty, but it is unable to use the fullness of its powersvested under the EU treaties to do so. The European Court of Justice is enjoined to act at the behest of onemember state against another according to Article 273 of the Treaty on the Functioning of the EU in a dispute“which relates to the subject matter of the [EU] Treaties”. Here the vessel of the fiscal compact sails intouncharted seas: Article 273 has never been used in litigation, not least because of what its use would implyfor the elevation of the ECJ into a federal supreme court. At the very least, as the UK government has alreadymade clear, the EU institutions will only be able to act in the context of the fiscal compact treaty under thethreat of court action from another EU institution or a member state if a provision of the EU treaties is breachedor the integrity of EU law abused.24 The principle of sincere cooperation among member states and betweenthe institutions is here a very relevant and important general principle of EU law.25 It is difficult not toconclude that the relationship between the fiscal compact treaty and the formal EU treaties is highly ambiguous.23 The Schengen Agreement, by contrast, concerned an area of policy (passport controls) which the EU itself had not at that stage

(1985) embraced and was crafted with the consent of all EU member states even though only some were to be bound by it.24 See the letter from the UK Permanent Representative to the Secretary-General of the Council, 22 February 2012.25 Article 4(3) Treaty on European Union.



15. Despite its portentous title, the Treaty on Stability, Coordination and Governance in the Economic andMonetary Union does not go all the way to remedy the flawed structure of EMU as handed down by the Treatyof Maastricht. Nor does it comprise more than one element in establishing the reign of austerity: indeed, mostof its provisions are already enshrined (with the full support of the ALDE Group in the European Parliament)in the “Six Pack” of EU laws which re-tightened the nuts and bolts of the Stability and Growth Pact andhas made it more difficult for states, even large ones, to evade their mutualised responsibilities to observefiscal rectitude.

16. An important innovation of the fiscal compact treaty is that the signatory states commit to passingcardinal laws at home in order to install a debt brake on national budgets where structural deficits rise above0.5% of GDP. The confederal nature of the treaty means, of course, that there is no mechanism for enforcingthe implementation of such rules. The contracting parties also agree to use reverse qualified majority in theCouncil of Ministers when it acts in the excessive deficit procedure—a principled code of conduct whosepractical operation will be under close observation. The effect of the corrective provisions of the new treatywill only be felt in a number of years once the outcome of the present austerity regime is known. The immediateimpact of the treaty falls on those eurozone states which will be unable to access bail-out funding from theEuropean Stability Mechanism unless and until they agree to ratify both the fiscal compact and ESM treaties.For that reason alone, the substantive importance of the fiscal compact should not be underestimated. Itssymbolic importance lies in its exclusion of the British.

17. Two other features are notable. First, the treaty commits its signatories to using the enhanced cooperationprovisions of the Treaty of Lisbon to go further and faster in matters of social and economic integration. And,second, like all good confederal pacts, the treaty will come into force before all signatory states have completedtheir ratification process—indeed, when only 12 of the 17 eurozone states have done so. One would hope thatsuch flexibility will influence the debate which the Union is bound to have at its next Convention on how tomodify the entry into force provisions of its own treaties.

18. In any case, the fiscal compact treaty, if not an entirely good thing, is a necessary expedient, and addsto the pressure of market discipline and continual peer assessment to which all member states are now subjectedto a greater or lesser extent. What is needed now, however, is faster economic growth to make palatable to asceptical democracy the inevitably painful process of structural reform.

Incorporation of the Fiscal Compact Treaty

19. Article 16 of the new treaty foresees its substantive incorporation within the EU legal framework “withinfive years at most” following entry into force. It also predicates a situation five years hence in which the UnitedKingdom (and the Czech Republic) have changed their mind about the business and are prepared to concedewhat in 2012 they blocked. We support such incorporation. The UK’s interests are not served well in thecurrent set up. We must ensure that a rigid two-tier Europe, with the UK as a second rank junior partner, doesnot develop.

20. We would draw the Committee’s attention to the likely significance of the institutional innovation oftwice yearly summit meetings of the eurozone. Under Article 12(3) of the fiscal compact treaty these summitswill discuss Europe’s competitiveness, the modification of the global architecture of the euro and itsfundamental rules—that is, the convergence criteria and the Stability and Growth Pact. Unless and until theUK agrees to the incorporation of the substance of the fiscal compact treaty into the EU framework its primeminister will be excluded from such important negotiations. British self-exclusion from such a forum wouldnot serve the national interest.

Fiscal Union and Beyond

21. The integration of the fiscal compact treaty into the EU framework will not be the only item ofconstitutional business which the Union will need to address over the next few years. For a start, in additionto the new treaty, the rigid fiscal discipline enshrined in the current austerity programmes, the strongerregulatory framework for the financial sector, the creation of the EFSF and ESM and the revision of Article136 TFEU, the Euro Plus Pact proposals on the supply side, the Six Pack (and other) EU legislation—all neednow to be followed through by a decisive move towards fiscal solidarity. The debate about stability eurobondstakes the Union in that direction, as does the election of President Hollande in France. We believe that it is ineverybody’s interests that the euro is consolidated through the building of a fiscal union in which joint andseveral liability for sovereign debt is admitted. Such a fiscal union will need effective economic governance tomake common economic policy.26 The shape and size of this government have yet to be determined, but itspowers and instruments are becoming increasingly well defined—including, for example, the creation of aproper treasury facility at the EU level. We have discussed above the need for a rebalanced EU budget withits own sources of revenue.

22. The creation of a fiscal union requires a radical overhaul of the Economic and Monetary Union chaptersof Maastricht, including the granting of new powers to the Commission and Court, adjustment to the statute26 We note that Mr Cameron appears to agree with this. He told the Daily Mail on 8 May 2012: “We think that single currencies

really require single governments if they are going to work properly”. Mr Osborne speaks of the “remorseless logic” of fiscalunion.



of the European Central Bank, changes to the decision-making procedures in the Council of Ministers, andmodification of the “no bail out” rules. Moreover, in addition to fiscal union, the next opportunity to revise theEU treaties will surely be minded to rectify some of the less good features of the Lisbon treaty. There will alsobe moves to reform the electoral procedure of the European Parliament and, possibly, to address the issue ofits seat. In any case, it is already some ten years after the start of the last constitutional Convention whosework culminated in the Treaty of Lisbon: another general revision of the treaties cannot reasonably be longavoided—with its inevitable climax in a British referendum.

23. For the United Kingdom, therefore, and for other member states frustrated by the British problem, therewill be one unavoidable topic at the next Convention. This is nothing less than the continuing status of the UKas a member state. Will the UK wish to stay a member of a more federal union or not? If not, will the UKhave either the moral authority or the political will to block its partners from proceeding where they deem itnecessary and desirable to go? Alternatives to EU membership should be properly assessed. Would a form ofassociate membership be more convenient for the UK? If so, what shape could that association take? Wouldother countries, either currently full member states of the Union or actual or probable candidate states, preferto be more or less closely associated with the federal core but not to be a full part of it? These questions willbe divisive. Their answers will be complex. Any outcome of a re-ordering of membership of the EuropeanUnion will be controversial both for those who stay and for those who go. But the future of Europe will notbe secure unless the European Union reaches a higher stage of integration than it has at present or one it canhope to reach under the treaties currently in force.

22 May 2012

Written evidence from Professor Michael Dougan, Chair in European Law, and Dr Michael Gordon,Lecturer in Public Law, Liverpool Law School, University of Liverpool

1. The main points substantiated in this evidence may be summarised as follows:

— The December European Council veto will only be treated as a watershed if the UK opts toview it as such.

— The TSCG27 is separate from and subordinate to the EU Treaties. One should be wary ofdressing political reservations about the TSCG in the language of illegality.

— There are several different scenarios in which UK policy towards the TSCG will be conditionedby the legal and political environment created by the European Union Act 2011 (EUA).

— Flexible membership of the EU already exists. The benefits of further reform must be balancedagainst the corresponding costs of greater flexibility.


2. There is no necessary reason that the “veto” exercised by the Prime Minister at the December 2011Brussels summit should be treated as a watershed moment in UK Government policy towards the EU. Theexercise and consequences of the veto were significant, yet we believe its implications can be construed in twoways. We suggest that the veto will only be treated as a watershed if the UK opts to view it as such.

3. First, the 2011 veto could be understood “narrowly”, as an exercise in the protection of specific UKnational interests which has had a minimal impact on its broader position in the EU. Indeed, this would seemto reflect the view of the Prime Minister, who in a statement to the House of Commons on 12 December 2011maintained that the veto was necessary in the absence of “relatively modest” safeguards “on the single marketand on financial services”. Disagreement about the fiscal compact might thus be seen as effectively severablefrom other EU policy issues, and not necessarily inhibiting constructive engagement by the UK with fellowMember States.

4. Further, the UK, as a non-Contracting Party to the TSCG, actually remains in substantially the sameposition with respect to the provisions of the fiscal compact as non-eurozone Contracting Parties. The newobligations set out in the fiscal compact, and in particular the balanced budget rule, will only be applicable tosuch non-eurozone Contracting Parties if they declare an intention to be bound by these provisions. Further,the UK may decide at any point to accede to the TSCG, thereby placing itself in an identical position to anyother non-eurozone Contracting Party. The UK may not then in practice be isolated on the margins of the EUsimply because it has declined to participate in a compact designed principally to regulate fiscal policy amongEuro-members.

5. Secondly, however, the Brussels veto might in contrast be viewed more “broadly”, as expressive of amore fundamental shift in UK Government policy towards the EU. The UK Government’s attempts to obtainconcessions in exchange for consenting to an amendment of the existing EU Treaties demonstrates a lack ofsolidarity with fellow Member States during the ongoing financial crisis, especially since the most controversialprovisions contained in the fiscal compact would not have been automatically applicable to the UK. Nor wasthe Prime Minister’s veto necessary to avoid a national referendum in accordance with the EUA, because the27 TSCG—The Treaty on Stability, Coordination and Governance



“referendum locks” contained in that Act would not have been triggered by the provisions of the fiscal compact.Indeed, it is difficult to see the Brussels veto as necessary or effective in any real sense, given the PrimeMinister’s negotiating strategy failed to secure any of the safeguards sought, while the provisions of the fiscalcompact objected to by the UK Government were still enacted by alternative means.

6. Perhaps the UK veto might then be emblematic of a shift in Government policy towards the EU, ratherthan a statement of dissatisfaction with the notion and/or terms of the fiscal compact itself. If this is the case,the 2011 veto may ultimately come to be seen as a watershed moment: the diplomatic manifestation of theUK’s retrenchment from Europe. Yet the fact that such an understanding of the veto may be adopted does notmean that it ought to be adopted. Whether viewed narrowly or broadly, the Brussels veto will have implicationsfor the UK’s future within the EU. The two contrasting understandings discerned here will, however, afforddifferent priority to the questions raised in this inquiry. If the impact of the veto is to be understood narrowly,attention should be directed to the Committee’s questions concerning the relationship between the fiscalcompact and the existing EU architecture. If the impact of the veto is to be understood broadly, then one shouldconcentrate rather upon the Committee’s questions concerning the UK’s vision for future EU membership.

Narrow Focus

What is the relationship between the TSCG and the EU acquis?

7. The formal relationship between the TSCG and the EU Treaties is very straightforward. The TSCG is aninternational agreement entirely separate from and constituting no part of the EU legal order. Moreover, theTSCG must be interpreted and applied in conformity with EU law, the latter taking precedence in the event ofany conflict between the two regimes.

8. Despite that formal separation, there is a significant overlap between the subject matter of the TSCG andEU law. The TSCG contains certain obligations for Contracting Parties which go beyond those already laiddown under EU law: eg the “balanced budget” rule in Arts.3 and 4 TSCG commits the Contracting Parties toa higher standard of fiscal discipline than that imposed under existing EU law (while Art.8 establishes a specificenforcement mechanism in respect of limited aspects of that commitment); the “reversed qualified majorityvoting” rule in Art.7 TSCG commits the Contracting Parties to a particular course of conduct within theCouncil (though there is no effective way to enforce that commitment, should a Member State behave otherwisein accordance with EU law).

9. Otherwise, however, the TSCG does little which can be considered genuinely novel. Various provisionsmerely anticipate obligations which are possible and indeed imminent under the EU Treaties, eg Art.5budgetary and economic partnership programmes; Art.6 public debt issuance plans; Art.11 major economicpolicy reform plans. Similarly, several provisions do no more than express aspirations about the future use ofpowers/procedures already provided for under the EU Treaties, eg Art.10 enhanced cooperation; Art.13parliamentary cooperation. Meanwhile, other provisions refer to informal programmes/activities alreadyestablished before the TSCG, eg Art.9 enhanced convergence and competitiveness; Art.12 Eurosummitmeetings.

10. We do not share the analysis expressed by certain commentators, and partially endorsed by the recentreport of the European Scrutiny Committee, concerning three important issues of compatibility between theTSCG and EU law.

11. First, there is the idea that recourse to an international treaty is somehow improper, as a matter ofprinciple, whenever a Member State(s) tries and fails to persuade its partners to amend the EU Treatiesthemselves. That is quite a remarkable proposition—amounting to a virtual denial of state sovereignty. It cannotbe seriously argued that the failed or indeed hypothetical possibility for the EU to have assumed responsibilityover a given matter thereby precludes the Member States from pursuing the same or similar objectives underordinary international law.

12. Secondly, there is the argument that Art.273 TFEU28 is an improper legal basis for the jurisdictionconferred upon the ECJ pursuant to Art.8 TSCG. There is little direct judicial authority exploring the detailedconditions governing resort to Art.273 TFEU, though there is much historical precedent to support the viewthat the Member States enjoy a wide margin of appreciation when it comes to voluntarily submitting disputesto the ECJ. To reject the lawfulness of Art.8 TSCG implies adopting a systematically restrictive interpretationof Art.273 TFEU without any real legal authority and despite the evidence of past practice.

13. Thirdly, there is the argument that it is impermissible for Member States to entrust limited tasks to theUnion institutions outside the framework of the EU Treaties. There is direct authority from the ECJ to supportthe lawfulness of such delegated functions as a matter of constitutional principle. However, the conditionsgoverning such delegated functions in practice remain unclear—especially whether delegation requires theexpress consent of all Member States. There are solid legal arguments on both sides of that debate—whichshould caution against adopting a strong critical stance based on the alleged unlawfulness of the TSCG, asopposed to holding an opinion about its political desirability.28 TFEU—The Treaty on the Functioning of the European Union



Should the UK Government support the incorporation of the TSCG into the EU Treaties?

14. Adopting a narrow understanding of the implications of the UK veto, and accepting that the TSCGcontains little which can be considered genuinely novel, the possibility of the fiscal compact’s futureincorporation into the existing EU Treaties will need to be considered. We focus here on the legal issues arisingin relation to the UK Government supporting incorporation of the fiscal compact into EU law, as envisaged byArt.16 TSCG.

15. There is no compelling political reason that the Government should not support incorporation, especiallysince the provisions of the fiscal compact do not bind the UK. There is also no domestic legal impediment tothe Government supporting incorporation, for, as noted above, the referendum locks contained in the EUAwould not be triggered by such a development. Although an amendment of the existing EU Treaties to includethe balanced budget rule set out in Art.3 TSCG would appear to be caught by s.4(1)(f)(i) EUA, which providesthat an extension of EU competence in relation to economic policy will attract a referendum, the exemption ins.4(4)(b) would serve to obviate this requirement. By this exemption, while the provisions of the fiscal compactremain inapplicable to the UK, it would not be necessary for a national referendum to be held before anamending Treaty could be lawfully ratified by the Government.

16. This basic position should be qualified by noting three potential legal problems in relation to futureincorporation attempts. First, if an amending Treaty went beyond the simple incorporation of the fiscal compactprovisions into EU law, and purported to make other changes which extended the competence of the EU inany of the ways specified in s.4 EUA, unless those changes were exempt under s.4(4), a referendum would benecessary. If the UK were to make its acceptance of an amendment of the existing EU Treaties conditionalupon certain demands being satisfied, and other Member States were to counter with competing demands, it isconceivable that the exercise could expand beyond the mere incorporation of the fiscal compact into EU law,with the consequence that a broader amending Treaty might engage the EUA’s referendum locks.

17. The remaining problems expose inconsistencies in the EUA itself. The second problem is a gap in thescheme of referendum locks. If the UK were to support the incorporation of the fiscal compact into EU law,and subsequently opted to be bound by these provisions, the competence of the EU with respect to UKeconomic policy would have been extended, and yet a referendum would not have been required lawfully toratify this extension of competence. A referendum lock would only be engaged if the rules contained in thefiscal compact were to be applicable to the UK from the time of their incorporation. Otherwise, a nationalreferendum could be readily avoided, and while this may appear politically convenient, given the controversialcontent of the fiscal compact, it might also be difficult to justify.

18. The third problem is, in contrast, one of overprovision. If the UK were to accede to the TSCG inaccordance with Art.15, and declare an intention to be bound by the fiscal compact prior to supporting itsincorporation into EU law, a referendum would be required at the moment of incorporation notwithstandingthe fact that the UK would already have put in place a domestic mechanism to implement the balanced budgetrule. In such circumstances, the formal extension of EU competence would trigger a referendum essentially toapprove what had already been done, with the corollary that a failure to obtain the requisite popular approvalwould produce significant legal and political uncertainty.

19. In essence, the EUA adds a further layer of legal and political complexity to any UK Governmentdecision to support the incorporation of the fiscal compact into the existing EU Treaties. In so far as it hastransformed the domestic procedure for approving an amendment of the EU Treaties, and dramaticallyreconfigured prior assumptions about the role played by national referendums in this process, we contend that,if a watershed moment in UK Government policy towards the EU is sought, it should be found not in theBrussels veto, but in the enactment of the European Union Act 2011.

Broader Focus


20. It is worth recalling that, despite its controversial evolution, the final Lisbon Treaty was widely seenacross Europe as a triumph for the UK’s vision of European integration. Lisbon clearly affirms that the EU ismerely the creation of its Member States, the latter remaining sovereign states under international law, and thatthe EU lacks any claim to statehood of its own. Lisbon reinforces fundamental characteristics such as theprinciple of attributed EU powers and a system of differentiated EU competences. It redraws the EU’sinstitutional balance by strengthening the influence of national governments. It also includes specific provisionsfor the UK, such as extending the opt-out across all of justice and home affairs. Against that background, weshould ask: if the British vision for Europe triumphed at Lisbon, what is it that remains “wrong” with the UK-EU relationship?

21. For some, the problem is a relatively narrow one: it relates to the fact that one government objects tobeing bound by particular EU reforms or policies (in fields such as employment rights) that were agreed to byor under a previous administration. If that diagnosis is correct, there seems little that can be done to remedyit: there is no unilateral capacity to undo EU treaty reforms; the right to repudiate existing EU secondaryobligations is very rare. Perhaps the major political parties need to reconcile themselves to a system in which



certain policy choices are indeed a collective responsibility of the Member States and as such difficult toreverse unilaterally even after a change of domestic government.

22. For others, however, the real difficulties are significantly more far-reaching. Perhaps the British visionfor Europe has changed since Lisbon, even among those actors who are not opposed as such to UKmembership: there is certainly a strong political constituency which argues that the extent of our participationin European integration now needs positively to be rolled back. Or perhaps the fallout from the ongoingEurozone crisis will see other Member States pushing for a renegotiation of the Lisbon settlement, so as tostrengthen considerably the foundations of European economic and political integration—a project in whichthe present or a future Government decides the UK should not fully participate. In either case, the FAC’s termsof enquiry suggest that one potential solution lies in developing multiple forms of EU membership.

23. In that regard, it is worth recalling that “flexible integration” already exists under the current Treaties.The range of policy opt-outs provided for directly under the Treaties themselves, together with the system forengaging in enhanced cooperation within the EU framework, mean that there are myriad constellations of(actual and potential) national participation in various fields of EU activity. Moreover, such flexibility alreadycarries clear institutional (as well as substantive) consequences, eg as when the Council acts in restrictedformations, taking into account only the votes of participating Member States.

24. Against that background, one should ask: how much further might the UK want such flexibility to go?Eg would it be sufficient to encourage more frequent/extensive resort to enhanced cooperation within theframework of the existing Treaties? If so, that would permit the UK to opt into or stay outside given EUmeasures or policy sectors as the national interest required—but would require building consensus within theEU that enhanced cooperation should be exploited to its full potential (and possibly also a Treaty amendmentto remove the requirement that enhanced cooperation may only be used as a “last resort”). Or would the UKwish to negotiate amendments to the Treaties themselves, extending its existing opt-out rights beyond the singlecurrency or justice and home affairs, to cover additional policy fields? If so, that would require the UK topersuade its European partners of the need for potentially far-reaching revisions to its EU membership,potentially including making the difficult case for special treatment within the single market, or a second-ratestatus for UK workers/consumers.

25. In any event, it is worth recalling that flexibility has costs as well as benefits. Flexibility can involve atangible loss of policy leadership and influence—especially if it involves institutional arrangements whichexclude a Member State even from being present around the negotiating table. Depending on the relative sizesof the core/periphery, and the importance of the subject matter, flexibility might risk non-participating statesbeing de facto obliged to follow, or work around, the policy agenda agreed by others. Flexibility can alsoexacerbate concerns about the complexity, transparency and legitimacy of EU decision-making—though suchconcerns pale when compared to the limitations of more traditional intergovernmental bargaining conductedoutside the EU framework. Seeking to negotiate “country specific” Treaty amendments obviously still requiresunanimity among the Member States, and opens the door for other countries to bring their own demands tothe table, some of which may not serve the UK national interest.

22 May 2012

Supplementary written evidence from Professor Michael Dougan and Dr Michael Gordon, LiverpoolLaw School, University of Liverpool

1. All of the most important issues we identified in our original submission remain essentially the sametoday; indeed, we suspect that the terms of debate will come into greater focus only in the light of the PrimeMinister’s forthcoming speech on EU-UK relations. In particular, while we make no attempt to prejudge thesubstance of the Prime Minister’s imminent intervention into the debate, if a referendum to obtain fresh consentfor a renegotiated relationship between the UK and EU were to be proposed, it would seem necessary toreassess existing assumptions as to the use of national referendums in the UK for the purpose of validating EUreform. Such work would, however, need to be undertaken once the detail of the Prime Minister’s position hasbeen disclosed to be most meaningful.

2. However, we wondered whether the Committee has already taken into account the implications of theEuropean Court of Justice’s recent ruling in the Pringle dispute (Case C-370/12, Judgment of 27 November2012)? Although this case concerned the compatibility of the European Stability Mechanism Treaty with EUlaw, the ruling addresses several important points of broader constitutional principle, which seem equallyrelevant for the UK’s approach towards the controversial Treaty on Stability, Coordination and Governance—including various issues which concerned the Government after the European Council meeting in December2011, as well as being dealt with in detail by the European Scrutiny Committee in its 2012 enquiry and reportinto the new Treaty.

3. In particular, when it comes to certain Member States requesting an EU institution (such as theCommission) to exercise various non-EU functions on their behalf, the Pringle ruling offers a clear affirmationof that possibility under EU law. According to the Court, “the Member States are entitled, in areas which donot fall under the exclusive competence of the Union, to entrust tasks to the institutions, outside the frameworkof the Union... provided that those tasks do not alter the essential character of the powers conferred on those



institutions by the EU and FEU Treaties”. In addition, when it comes to certain Member States conferringjurisdiction upon the European Court of Justice over disputes arising under an international agreement to whichthose Member States are party, the Court in Pringle adopted a broad interpretation of its own special jurisdictionunder Article 273 TFEU, eg as regards the possibility of consenting to ECJ jurisdiction over a pre-definedcategory of potential future disputes; eg as regards how one should understand the concept of internationalagreements “related to” the subject matter of the EU Treaties themselves.

4. Altogether, the Pringle ruling thus suggests that many of the legal objections originally raised against theTreaty on Stability, Coordination and Governance were not well-founded.

11 January 2013

Written evidence from Open Europe

Open Europe is an independent think tank, with offices in London and Brussels, set up to contribute positivenew thinking to the debate about the future direction of the European Union and Britain’s role within it.

THE UK MUST REVISE ITS EU MEMBERSHIP TO SAVE IT

Summary— The institutional and political status quo in Europe is not an option for the UK. The UK public and

political class are growing more sceptical of the European Union at exactly the same point as theEurozone is set for more integration: the final destination points for the UK and the Eurozone areinevitably different.

— Without a revision of the UK’s EU membership terms and if the EU is left to become simply anextension of the euro, Britain may be forced to leave altogether.

— Based on these changed circumstances, the UK should set out a new, firm and positive vision for itsplace in the EU, based on the following principles:

— Powers can flow back from the EU—it should not be a one-way street;

— Countries must be free to integrate with each other to different degrees;

— No EU interference in areas that can be better—or equally well—handled locally or nationally;

— A far greater role for national parliaments.

— This agenda should be pursued with a concerted and thought-through drive by the UK governmentaimed at:

— Formalising an EU structure based on different—but equally legitimate—circles of membership;

— Seeking safeguards to counterbalance the risk that a more tightly knit Eurozone could dictateterms to non-euro members;

— Starting a process of devolving powers back from the EU when the political and economiccircumstances present themselves.

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

1.1 The December veto was a reflection of the multi-tier Europe inherent in the creation of the euro, not thecause of it. It was a watershed moment in as much as it could signal the start of a new political settlement inEurope in the wake of the Eurozone crisis, a process which could last for a number of years—perhaps morethan a decade. Furthermore, no matter what we think of the diplomatic efforts and the preparatory work thatpreceded the veto,29 so far there is no evidence that the UK has lost influence in Europe as a result of it—assome warned, in very stark language, following the December Council.30 On the crucial Capital RequirementsDirective, for example, the UK managed to largely achieve its objectives, despite being in a minority positionat the outset.

1.2 What is clear is that the status quo is not an option. The euro crisis will inevitably force EU memberstates to develop a more variable approach to European cooperation. Though not of the UK’s making, the rulesof EU cooperation are changing—Britain’s role in Europe must change with it. This presents opportunities aswell as challenges.

Challenges

1.3 If the EU becomes a political extension of the Eurozone, then the UK may well be forced to leave theEU: The December veto did remind us that the end points for the Eurozone and the UK are now, inevitably,29 For a broader discussion, see Open Europe, “Cameron’s EU veto: Ten lessons that need to be learnt”, December 2011,

http://www.openeurope.org.uk/Content/Documents/PDFs/10lessons.pdf30 See, for instance, Charles Grant, “Britain on the edge of Europe”, 9 December 2011,

http://www.opendemocracy.net/ourkingdom/charles-grant/britain-on-edge-of-europe; Charles Grant is Director of the Centre forEuropean Reform (CER)



different if the UK remains outside the euro. The British public and political class is becoming increasinglysceptical of the EU at exactly the same point that the Eurozone is set for further integration. Therefore, if theEurozone continues to insist on more political integration, including those EU member states that are not euromembers—such as was the case with the fiscal treaty—then the UK will become increasingly uncomfortablewithin the EU and could well slowly move towards the exit. The question is whether this is what the UK andthe rest of the EU really wants and if it is inevitable (see “Opportunities” below)?

1.4 Eurozone caucusing: A well-documented risk is that Eurozone states start to act and vote as a “caucus”—not only in areas of direct concern to the running of the Eurozone but also, for example, in single marketlegislation, social policy or financial services regulation.31 It is hard to envision how “Eurobonds” or otherforms of shared eurozone government borrowing could work without some sort of banking resolution fund atthe eurozone level to underpin the financial system or potentially even a shared finance minister, as proposedby former ECB President Jean-Claude Trichet.32 This would clearly have major implications for the UK’sfinancial services industry.

1.5 So far, there has been limited evidence that Eurozone caucusing is taking place, but it remains a clearrisk—this is particularly true if the EU grows more protectionist in services (including financial), on which theUK is heavily dependent.33

1.6 Future changes to qualified majority voting weight in the Council of Ministers (under the Lisbon Treaty)could potentially exacerbate this risk. In 2014 or 2017 (if a country requests it), Eurozone countries, if theyvote as a bloc, will for the first time have a qualified majority in the Council of Ministers, meaning that theycan outvote non-euro members on issues decided by QMV.

31 We discussed the issue thoroughly in Open Europe, “Continental shift: Safeguarding the UK’s financial trade in a changingEurope”, December 2011, http://www.openeurope.org.uk/Content/Documents/PDFs/continentalshift.pdf

32 See the FT, “Trichet seeks single EU finance ministry”, 2 June 2011,http://www.ft.com/cms/s/0/e0bd4e7a-8d15–11e0–815d-00144feab49a.html#axzz1vUPlj1IT

33 An early example of the potential for eurozone dominance was the decision leading to the creation of the EU’s EuropeanFinancial Stabilisation Mechanism (EFSM) bailout fund, used to aid Ireland and Portugal. Unlike the European Financial StabilityFacility, which is guaranteed solely by eurozone states (EFSF), the EFSM is jointly guaranteed by all 27 EU member states viathe EU budget. The decision, in May 2010, to create this fund was hugely controversial because it used Article 122 of the EUTreaties, previously reserved for providing financial assistance only in times of natural disaster, to overrule the Treaties’ “nobailout clause”. Although the decision was formally approved under QMV at a meeting of the EU-27 finance ministers on 9May 2010, eurozone leaders had already outlined the creation of the EFSM at their own meeting two days earlier. The statementof the heads of state or Government of the euro area (from 7 May 2010) is available here,http://in.mobile.reuters.com/article/businessNews/idINIndia-48328620100507



CHANGES TO QUALIFIED MAJORITY VOTING UNDER THE LISBON TREATY

345

300

250

200

150

100

50

0Current rules: TheEurozone needs

255 out of 345 EUCouncil votes

New rules: TheEurozone will needto get 65% of thevote - it has 66%

United Kingdom (29)

Denmark (7)Latvia (2)

Sweden (10)

Poland (27)

Czech Republic (12)Lithuania (7)Hungary (12)Bulgaria (10)

Romania (14)

Eurozone (213)

100

90

80

60

50

30

10

0

United Kingdom (29)

Denmark (7)Latvia (2)Sweden (10)Poland (27)

Czech Republic (12)Lithuania (7)Hungary (12)Bulgaria (10)Romania (14)

Eurozone (213)

Under the crrent pre-Lisbonsystem (number of votes)

After 2014/17(% of EU population)

70

40

20

1.7 The colonisation of the EU institutions: Linked to the above is the risk of the European institutions beingused to pursue policies that are designed for the specific needs and concerns of the Eurozone as opposed tothe EU as a whole. There is some, albeit limited, evidence that the EU institutions are already starting to actas facilitator of a Eurozone agenda. As has been widely noted, without the specific approval of the UK, anddespite it not being incorporated in the EU treaties, the fiscal treaty makes some use of the EU institutions toenforce Eurozone budget rules (the ECJ is meant to police whether the new rule on “balanced budgets” isimplemented into national law, but cannot impose penalties if a signatory country breaks the rule).34 Likewise,the European Commission has tabled a proposal for a financial transaction tax, following pressure from withinthe Eurozone (the proposal is protected by a veto so will not be adopted at the EU-level as long as theUK objects).35

1.8 These risks are linked to the possible “fragmentation” of the single market, ie the single market getsdivided between those inside the euro and those outside, which would represent a step backwards for intra-EUtrade. However, the UK could have allies in seeking to prevent this. The European Commission and smallermember states want to avoid it, as it would tip the balance of power further towards the Franco-German axis.

Opportunities

1.9 A new vision and model for European integration: The Eurozone crisis marks a clear setback to theoriginal founding principle of “ever closer union”. First, the principle has led directly to financial and politicalturmoil; Greece should clearly not have joined the euro, but there was so much political momentum for closerunion that it signed up, which is now threatening to cause major political and economic fallout in Europe.

1.10 Second, as noted, it cannot accommodate for the different end points for the UK and euro countries. Itfollows that the UK now has a unique opportunity to take the initiative, stating clearly and firmly an alternative34 See Open Europe’s blog, “Fifth time lucky?”, 30 January 2012,

http://openeuropeblog.blogspot.co.uk/2012/01/fifth-time-lucky.html35 See Open Europe’s blog, “Taxing unicorns”, 23 March 2012,

http://www.openeuropeblog.blogspot.co.uk/2012/03/ftt-rears-its-ugly-head-once-again.html



principle of European cooperation, which allows for different circles of membership of the EU, and whichwould be based on the following principles:

— Powers can flow back from the EU—it should not be a one-way street;

— Countries must be free to integrate with each other to different degrees;

— No EU interference in areas better—or equally well—handled locally or nationally (the currentconcept of “subsidiarity” is so vague that it can mean anything, elsewhere we have insteadproposed a “European localism” agenda, ie taking the principle of localism endorsed at thenational level and applying it to the European level);36

— A far greater role for national parliaments.

1.11 The UK government has consistently suffered from a poverty of vision for its role in Europe, whichhas left it without an overall strategy.37 The euro crisis, and its potential aftermath, means this must change.The alternative vision it now has the opportunity to set out needs to be positive, stressing a new, economicallyflexible model, growth opportunities across the globe and the need to reconcile EU membership with nationaldemocracy. David Cameron came close to spelling out such a vision last year when he said that the EU shouldtake on “the flexibility of a network, not the rigidity of a bloc—whose institutions help by connecting andstrengthening its members to thrive in a vibrant world, rather than holding them back.”38 Having a clear visionof where the UK should be in Europe—and setting out an alternative vision for European cooperation—willalso help to focus diplomatic efforts and make it easier for EU partners to know what, exactly, the UK wantsto achieve (and therefore easier for them to lend support or at least reach a position of compromise based onmutual interests).

1.12 Pushing for redistribution of powers: As the Eurozone will continue to need the UK’s approval topursue further integration via the EU institutions, and as Germany and other member states have a strongincentive to keep the UK inside the EU, the UK should accompany its drive for an alternative model forEuropean integration which includes bringing specific powers back to the UK (see below).

1.13 Reorientation of the UK economy away from the eurozone: The EU will remain an important destinationfor UK trade but the short and long-term economic challenges Europe faces warrant a rethinking of the UK’seconomic interests. Currently, only 1.4% of UK exports go to India forecasted to grow on average by 8.1% ayear up to 2050 and only 2.35% to China forecast to grow at 5.9%.39 Although trade negotiation remains anexclusive EU competence, the UK retains the power to promote UK business and exports to non-EU countries,something which the current Government has correctly made a priority. This is an important exercise for tworeasons. Firstly, boosting UK trade with emerging and fast-growing economies is clearly beneficial in its ownright but, secondly, the less the UK depends on the EU/eurozone for trade, the stronger Britain’s negotiatingposition when it comes to arguing for reform.

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

2.1 Talk of a “multi-speed Europe”—implying that all EU member states are religiously heading in the samedirection—must stop. Instead, the UK should fully embrace a formalised EU structure based on different modesof membership, based on the principles set out above and the understanding that Britain will not join the euro.

2.2 The notion that such a multi-facetted EU structure would leave the UK on the side-lines is misplaced:the UK is one of EU’s “big three” economies; it is a large export market; remains a genuine global player; abig net contributor to the EU budget; is home to Europe’s financial centre and a nuclear power. The rest of theEU will listen to the UK if it comes up with a constructive agenda. In the EU debate, “influence” is a term toooften used—particularly by those who favour the status quo—in a rather lazy and undefined way. Those whoworry about loss of influence must give concrete examples of where this is happening and, crucially, what theUK should be influencing.

2.3 In terms of an EU institutional framework, the UK has three basic options:

— Status quo;

— Changing the institutional framework from within, ie seeking new membership terms;

— Seeking a new institutional arrangement with Europe altogether, which most likely wouldinvolve withdrawal.

36 See Open Europe, “The case for European localism”, September 2011,http://www.openeurope.org.uk/Content/Documents/PDFs/EUlocalism.pdf

37 See, for instance, Open Europe Senior Analyst Christopher Howarth’s article on Conservative Home, “If he wants Britain tohave a vision for Europe, David Cameron should appoint a European Secretary”, 17 April 2012,http://conservativehome.blogs.com/platform/2012/04/christopher-howarth-if-he-wants-britain-to-have-a-vision-for-europe-david-cameron-should-appoint-a-e.html

38 From David Cameron’s speech at the Lord Mayor’s Banquet, 14 November 2011,http://www.number10.gov.uk/news/lord-mayors-banquet/

39 ONS, “Pink Book” and Open Europe, “Continental shift: Safeguarding the UK’s financial trade in a changing Europe”, p25



2.4 We believe the status quo is not an option, while withdrawing from the EU altogether would raise morequestions than it would answer (the alternative trading arrangements with Europe, ie the European EconomicArea or a free trade agreement, would also require the “approval” of EU partners and therefore raise many ofthe same issues as renegotiation from within). Therefore, creating a new institutional arrangement from withinis the UK’s best option. Concretely, the new institutional architecture that the UK should push for could include:

2.5 The devolution of powers from EU—at least for the UK: David Cameron has labelled the current crisis“An opportunity, in Britain’s case, for powers to ebb back instead of flow away and for the European Unionto focus on what really matters.”40 This is the right thinking. Substantially reforming the institutional divisionof labour between the UK and the EU may be necessary to reconcile public opinion to EU membership.The pursuit of returning powers to the UK and further Eurozone integration is not mutually exclusive—onthe contrary.

2.6 The priorities should be areas that have an everyday impact, for example:

— Devolving EU regional spending to richer member states, including the UK, which would saveBritain billions and allow it to run a far more effective regional policy (no treaty change);41

— The UK should exercise its “block opt-out” from around 130 EU laws in justice and homeaffairs, which it could do unilaterally under the Lisbon Treaty (by 2014—no treaty change);42

— As noted below, there needs to be a better balance between European market access and controlover vital national economic interests, for example via a veto over disproportionate financialservices law (treaty change);43

— At least part of the CAP should be re-nationalised (no treaty change);44

— A UK long-term objective should be to devolve social and employment law (treaty change). Ashort-term, intermediate objective should be to minimise the impact of the working timedirective (no treaty change);45

— EU environmental legislation should be far less prescriptive. A compromise may involve overalltargets set at the EU-level but member states free to meet them in whatever way they deem themost cost-effective (no treaty change).

2.7 Far stronger roles for national parliaments: This should include far greater scrutiny powers for MPs(for example a mandate-based system based around the Danish model, which could be achieved unilaterally)and pushing for parliaments to be given a “red card” option which would enable them to veto Commissionlegislation if there was a significant majority opposed (requiring Treaty change).46

2.8 European cooperation must be a two-way street: As noted above, it simply has to be possible under theTreaties for powers to flow back to member states. There are a number of ways in which this could beformalised. For example, the Lisbon Treaty already allows for so-called “enhanced cooperation”, whereby agroup of member states are free to pursue a policy separately if not all 27 are able to agree. This has alreadyhappened in areas such as family law and an EU patent. However, there is no reason why this cannot alsowork in reverse, with a group of countries deciding to repatriate powers or EU laws, even though it may notbe politically possible for all 27 countries to do so.

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

3.1 Yes, subject to safeguards or powers back. These safeguards need to be better thought-through, preparedand communicated than the UK’s demands ahead of the December summit. The safeguards could include:

(1) Formal safeguards for the non-euro group. For example, “double QMV” to give the non-eurogroup a veto or a non-euro red card allowing non-euro members to block a Eurozone “caucus”in the Council.

(2) A new “single market protocol”, which could commit the EU to a pro-growth, outward lookingand proportionate regulatory regime while safeguarding the UK from decisions taken solely bythe eurozone for all 27 member states.47

(3) UK-specific, legally watertight safeguards that will ensure that the UK is not overruled on avital financial measure and cement London’s ability to do business and compete in globalmarkets. Though it will be resisted by EU partners, this could include a “double lock”,

40 From David Cameron’s speech at the Lord Mayor’s Banquet, 14 November 201141 See Open Europe, “Off target: The case for bringing regional policy back home”, January 2012, http://www.openeurope.org.uk/

Content/Documents/PDFs/2012EUstructuralfunds.pdf42 See Open Europe, “An unavoidable choice: More or less EU control over UK policing and crime law”, January 2012,

http://www.openeurope.org.uk/Content/Documents/PDFs/JHA2014choice.pdf43 See Open Europe, “Continental shift: Safeguarding the UK’s financial trade in a changing Europe”.44 See Open Europe, “More for less: Making the EU’s farm policy work for growth and the environment”, February 2012,

http://www.openeurope.org.uk/Content/Documents/Pdfs/CAP_2012.pdf45 See Open Europe, “Repatriating EU social policy: The best choice for jobs and growth?“, November 2011,

http://www.openeurope.org.uk/Content/Documents/PDFs/2011EUsocialpolicy.pdf46 Open Europe, “The case for European localism”.47 For a broader discussion, see Open Europe, “Continental shift: Safeguarding the UK’s financial trade in a changing Europe”.



acknowledging the UK’s prominence in this sector and giving the Government the right to referany disproportionate or discriminatory laws to the European Council, where it has an effectiveveto over regulatory proposals.48

3.2 We have recommended that the UK focus first and foremost on financial services as it is a policy areawhere we can already see the potential friction that can occur between Eurozone integration and UK interests(as a fiscal union could well spill over to financial supervision and regulation)—therefore options two and/orthree are our preferred ones.

22 May 2012

Annex

POTENTIAL WORDING OF THE PROTOCOLS

WORDING OF A POTENTIAL SINGLE MARKET PROTOCOL

PROTOCOL ON THE SINGLE MARKET

THE HIGH CONTRACTING PARTIES,

RECOGNISING the importance of maintaining the single market for the prosperity of the Union;

DESIRING to reduce barriers to trade in areas such as the digital economy, services, telecoms and energyby 20XX;

DESIRING to allow for a competitive flexible and responsive labour market;

HAVE AGREED upon the following provision, which shall be annexed to the Treaty on European Unionand to the Treaty on the Functioning of the European Union:

Article 1

So as to ensure that competition in the internal market is not distorted, all decisions relating to the internalmarket are to be decided by the Council of Ministers by the ordinary legislative procedure and that all decisionsrelating to the operation of the euro-area are compatible with the internal market of all member states.

Article 2

No provision will be introduced unless it has been subject to a rigorous impact assessment, is matched bythe cancellation of a current measure, is proportional, consistent with the principle of subsidiarity and isdemonstrably related to a known risk.

Article 3

No provision relating financial services will be introduced unless it is proportional, related to and seeks toremedy a known and demonstrated risk, and does not impose maximum standards on the sector, if a memberstate demonstrates the need to safeguard its own industry.

Article 4

That a Code on Better Regulation will be considered before any proposal is brought forward and anassessment made as to whether measures will improve growth and competitiveness of the Union economy.

WORDING OF A POTENTIAL UK PROTOCOL

PROTOCOL ON THE FINANCIAL SERVICES INDUSTRY IN THE UNITED KINGDOM

THE HIGH CONTRACTING PARTIES,

RECOGNISING the importance of the financial services industry to the United Kingdom;

DESIRING to allow the United Kingdom to maintain control over the regulation of its financial servicesindustry;

WHILST wishing to allow the United Kingdom to retain the ability to participate in regulations andmeasures;

ACKNOWLEDGING the United Kingdom’s responsibility to act responsibly and preserve the SingleMarket;

HAVE AGREED upon the following provision, which shall be annexed to the Treaty on European Unionand to the Treaty on the Functioning of the European Union:48 Ibid.



Article 1

Notwithstanding the provisions of the Treaties, where the United Kingdom indicates to the Council that itbelieves that a proposed regulation or directive or an amendment to an existing regulation or directive is orwould in its judgement adversely and disproportionately affect its financial services industry it may requestthat the proposal is referred back to the European Commission, that additional assessments are made of theproposal and that suggested amendments are considered.

Article 2

Notwithstanding the provisions of the Treaties, where the United Kingdom indicates to the Council that itbelieves that an existing directive or regulation, a proposed regulation or directive or an amendment to anexisting regulation or directive is or would in its judgement adversely affect its financial services industry itmay request that the proposal is suspended and referred back to the Council. In that case, the ordinary legislativeprocedure shall be suspended and the validity of such a request shall not be called into question whether bythe ECJ or in any other way.

Written evidence from Ruth Lea, Economic Adviser, Arbuthnot Banking Group

Summary

— The December 2011 European Council and the subsequent signing of the “Fiscal Compact Treaty”by 25 EU Member States (excluding the UK and the Czech Republic) would at face value seem tohave little impact on the UK’s EU policy and place in the Union. After all the British Governmentremains firmly committed to EU membership, which is not, in my judgement, in the country’sbest interests.

— But perhaps the December Summit will be seen by future historians of the EU as a watershed eventfor the UK and the EU, when the UK’s isolation was obvious, at last, for all to see. Moreover,despite the PM’s veto, the European Council has simply pushed ahead with the Treaty, which willprobably be incorporated into the EU Treaties sooner rather than later. One can only conclude thatBritain’s influence on EU events, as crisis engulfs the Eurozone, is minimal.

— Given the lack of UK influence in the EU, we are in the weakest possible position to drive forwardinstitutional or policy developments in the EU. Whilst we remain a member, the best we can do isrespond to decisions made by the Franco-German axis and EU institutions and attempt to obtain thebest deal for us. This may seem like a counsel of despair, but it is a realistic one.

— In any case, any major near-term to medium-term developments in the EU will almost certainlyconcern the Eurozone as EU institutions and the EU17 Member States struggle with the existentialthreat to the currency. Britain, thankfully outside the euro, is inevitably at the periphery of events,a bystander.

— Moreover, any notion that the British Government could use the Eurozone crisis to negotiate anyrepatriation of powers, and develop a different form of membership, is a chimera. There is absolutelyno evidence that our EU partners would accept such a move.

— It is not clear that the Treaty will have any direct impact on other aspects of the EU and its policies.But the indirect impacts of its implementation must not be underestimated. The Treaty is part of theon-going centralisation of EU policy-making. Under these circumstances, I would expect the EU’sinstitutions to push ahead with the further centralisation of policy-making, some of which is intended,at least putatively, to “save the euro”.

— Having vetoed the incorporation of the Fiscal Compact Treaty into the EU Treaties in December2011, the UK Government should continue to reject any such move for the sake of consistency, atthe very least. If the Government is prepared to agree to the incorporation they should at the leastget guarantees that the EU-wide Financial Transactions Tax will remain subject to veto in order tosupport the City. They can, after all, do little to protect the City from the flood of EU Single Marketfinancial regulations which are subject to QMV.

Submitter of Evidence

Ruth Lea has worked in the Civil Service (the Treasury, the Civil Service College, the CSO and DTI(1970–88), with a short break lecturing in economics); the City (Mitsubishi Bank (1988–93), Lehman Brothers(1993–94), Arbuthnot Banking Group (since 2007); ITN (1994–95) and the Institute of Directors (1995–2003).She was Director of the Centre for Policy Studies (2003–07) and Director of Global Vision (2007–10).

I would be happy to give oral evidence to the Committee.



Submission


1. A brief analysis of the background to the “Treaty on Stability, Coordination and Governance of theEconomic and Monetary Union”, otherwise known as the “Fiscal Compact Treaty”,49 is required in order toassess the significance of the December 2011 European Council meeting for Britain.

2. The Treaty is intended to strengthen the Eurozone’s Stability and Growth Pact (SGP), whereby generalgovernment deficits should not exceed 3% of GDP and general government debt should not exceed (or is“sufficiently declining towards”) 60% of GDP, by introducing a new range of medium-term objectives,including a “balanced budget rule” and an automatic mechanism to take corrective action. The former statesthat budgets must be balanced, with “a lower limit of a structural deficit of 0.5% of GDP”, or in surplus.Concerning the corrective action, if the European Court of Justice judges that a member has failed to complywith the “balanced budget rule”, it can impose a fine, a sum “that shall not exceed 0.1% of GDP”. It shouldbe noted that there is some flexibility in the “balanced budget rule” in that “exceptional circumstances” areallowed for. In addition, the target is expressed in terms of the “structural” (ie the cyclically-adjusted) balance,not the actual recorded balance, which can allow for large deficits if the economy in question is performingwell below potential. Note also that, because the Treaty is exclusively about the Eurozone, it does not directlyaffect the UK.

3. Putting aside the feebleness of the SGP to impose fiscal discipline on the Eurozone’s members in the firstdecade of the euro’s existence, there are significant doubts about the Treaty’s potential success, given thehorrendous and deep-seated structural problems faced by the Eurozone in its current dysfunctionalconfiguration. The Treaty is, significantly, only concerned with fiscal discipline in the Eurozone and should beseen in the general context of the EU’s endeavours to tighten economic governance procedures.50 It is not, assometimes reported, concerned with the development of an EU fiscal union, broadly defined as comprising acommon Ministry of Finance, common sovereign debt (the mutualisation of debt) and substantial financialtransfers from the rich, highly competitive northern economies (principally Germany) to the less competitiveperipheral economies. Such a fiscal union is arguably necessary to save the currency area in its currentconfiguration. There are moreover few signs that the Eurozone is moving towards such a union. It should alsobe noted that the Treaty does nothing to address the fundamental structural fissure at the heart of the Eurozonecrisis, namely the competiveness mismatch between the northern and the peripheral economies, which is tearingthe currency union apart. It can be argued that the Treaty, by focussing on fiscal discipline, has simply side-stepped or chosen to ignore the causes of crisis engulfing the euro.

4. Twenty-five out of the 27 Member States signed the Treaty in March 2012, with the UK and the CzechRepublic the only two dissenting members. The Czech Republic may yet sign, leaving the UK completelyisolated. December’s Summit was, of course, noted for the British Prime Minister’s veto of the EU’s plans toincorporate the proposed Fiscal Compact Treaty into the current EU Treaties when his stipulations for relativelymodest safeguards for the City of London were refused. His veto forced the separate Treaty but the EU clearlyintends to push ahead and incorporate the Treaty into the EU Treaties “as soon as possible”.51 The likelihoodis that this will happen sooner rather than later.

5. So to what extent should the December 2011 European Council and its outcome be seen as a watershedin the UK’s EU policy and place in the Union, given this background? The short answer appears to be “verylittle” at face value. After all the UK’s EU policy remains committed to membership of the EU, which is not,in my judgement, in the country’s best interests.52

6. But developments since the PM’s veto have merely served to underline our lack of influence in EU affairs,implying our place in the Union is firmly at the periphery. The Fiscal Compact Treaty has gone aheadessentially as planned by the European Council, even if it remains outside the main EU Treaties. Because theUK is (rightly) outside the Eurozone, which is understandably focussing on trying to hold the currency uniontogether, the UK is inevitably increasingly peripheral. Our influence diminishes as crisis engulfs the Continent,even though the future of the Eurozone has major implications for the country. If the Eurozone pushes aheadtowards full fiscal union the UK’s influence in EU affairs will diminish even further. Perhaps the DecemberSummit will be seen by future historians of the EU as a watershed event—an event when the UK’s isolationwas obvious, at last, for all to see.49 European Council, “Treaty on Stability, Coordination and Governance in the Economic and Monetary Union”, signed on 2

March 2012. Subject to ratification by at least 12 Eurozone members, the Treaty enters into force on 1 January 2013. Availableon www.european-council.europa.eu.

50 Council of the European Union, “Council confirms agreement on economic governance”, press release, 4 October 2011. Thispress release for example outlines the “Six Pack”, the six legislative proposals on economic governance in the EU (though morespecifically in the EU17), agreed by the Council of the European Union (the Council) in October 2011. The proposals relatedto a reformed SGP, reducing macro-economic imbalances and promoting competition. The press release is available onwww.consilium.europa.eu.

51 The precise words in the Treaty are “…bearing in mind that the objective of the Heads of State and Government of the euroarea Member States and of the other Member States of the European Union is to incorporate the provisions of this Treaty assoon as possible into the Treaties on which the European Union is founded.”

52 See Ruth Lea and Brian Binley MP, Britain and the EU: a new relationship, Global Vision, May 2012, for wide-rangingdiscussion of the options open to the UK.




7. Given my earlier comments on the lack of UK influence in the EU, I believe we are in the weakestpossible position to drive forward developments in the EU. Whilst we remain a member, the best we can do isrespond to decisions made by the Franco-German axis and the institutions of the EU and attempt to obtain thebest deal for us. This may seem like a counsel of despair, but it is a realistic one.

8. More specifically, any debate on the future of the EU and its institutional architecture is inevitablydominated by the possible resolution of the existential Eurozone crisis. It is worth speculating as to how theUK should respond, given possible Eurozone resolution scenarios. Very broadly three such scenarios can beidentified. The first scenario is that the EU17 members push ahead with full fiscal union and the Eurozone blocsurvives broadly as currently configured. The EU is already a two-tier organisation comprising the EU17 (andarguably the pre-in aspirants) and the “outs” the UK, Denmark and possibly Sweden.53 With fiscal union, orpolitical union, a two-tier structure would be formalised and the UK’s peripheral position would be reinforced.The second scenario is a possible major reconfiguration of the currency union with either the weaker countriesreturning to their own currencies or, more fundamentally, a split into a northern Eurozone and a southernEurozone to reflect the competitiveness gap between these two blocs. The power would indubitably be withthe northern Eurozone bloc. Britain should, of course, stay clear of both blocs, but with the Eurozone splitBritain would look less isolated from mainstream affairs than with full fiscal union. The third scenario is acomplete collapse of the bloc which would shake the EU to its very foundations and could possibly presentthe UK with an opportunity to remodel, or reform, the EU as a looser trading relationship. But I regard thisscenario as highly unlikely with the chances that the UK could drive forward a major reform of the EU asvanishingly small. There is simply no stomach for such a “reformed” EU in the other EU Member States.

9. There are, of course, non-currency “multi-tier” aspects to the EU already (Schengen springs to mind) butthese are of minor significance compared with the currency and will almost certainly remain so. On a slightlyrelated issue, there is much speculation that the UK Government could negotiate the repatriation of certainpowers thus creating a different class, or form, of EU membership. But there is absolutely no evidence thatour EU partners would accept such a move and plenty of evidence to show they would block it totally. Forexample, German Minister of Finance Wolfgang Schäuble said last October that Britain should forget anyattempts to use the Eurozone crisis to repatriate EU social and employment laws.54 The repatriation of powersis a chimera.


10. I assume for all practical purposes that the Treaty is already part of the acquis and if/when it becomespart of the EU Treaties then it will formally become part of the acquis.

11. It is not clear that the Treaty will have any direct impact on other aspects of the EU and its policies. Butthe indirect impacts of its implementation must not be underestimated. The Treaty is part of the on-goingcentralisation of EU policy-making. The history of the EU tells us that its proponents only have forward gearsand the EU’s institutions cumulatively accrue competencies and influence. They do not divest power. Underthese circumstances, I would expect the institutions to push ahead with further control over policies, possiblyincluding budgetary issues or matters relating to the CFSP. Where there is a possible link between an EUpolicy (say budgetary control or promoting an EU-wide Financial Transactions Tax) and “saving the euro”, Iwould expect “saving the euro” to be invoked frequently in support of increased EU activism. Concerning theimplications for enlargement, I would speculate that successful countries on the EU’s periphery, Turkey springsto mind, would have even less interest in joining the EU if it means an EU-grip on its economic policies.

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

12. Having vetoed the incorporation of the Fiscal Compact Treaty into the EU Treaties in December 2011,the UK Government should reject any such move for the sake of consistency, if nothing else. But, as alreadycommented, the Treaty states clearly that the European Council wishes to proceed with its incorporation “assoon as possible” and I expect the UK Government to agree to this.

13. The Government should revisit the Prime Minister’s demands for some relatively modest safeguards forthe City of London and insist they are enshrined in the Treaty. Specifically, any proposals for an EU-wideFinancial Transactions Tax should strictly remain subject to veto. But there is little that the UK can do aboutthe EU’s heavy programme of financial regulations because they are part of the Single Market and subject toQMV where we have just 8.5% of the vote in the Council of the European Union. As such the UK has littleinfluence over the legislation relating to one of its major businesses, arguably one of its most successful53 Only Britain and Denmark have formal opt-outs whilst Sweden has decided to stay out of the euro for the time being. The other

seven, however, are legally bound to join and wish to do so except, perhaps, the Czech Republic.54 “David Cameron told by Berlin: drop demands for repatriation of powers”, Guardian, 19 October.



businesses, some of which has been described as “harmful”.55 Membership of the Single Market is increasinglydisadvantageous for this country. But this is a different issue.

22 May 2012

Written evidence from TheCityUK

1. Preliminary

1.1 This Note sets out views on behalf of TheCityUK in response to the Select Committee’s Inquiry into thefuture of the European Union and UK government policy. TheCityUK is a membership body representing UK-based financial and related professional services businesses competing in global markets, both developed andemerging. It coordinates its work through its Advisory Council, its Board, and various Groups and Committeeson which its member-businesses are represented.

1.2 In this evidence, TheCityUK will take all four principal Inquiry Questions together, and seek to give acombined response. Given TheCityUK’s remit, the evidence will focus on financial and related professionalservices and will be cross-sectoral in its approach.

2. Short Summary of Main Points of Submission

2.1 Service businesses including financial and related professional services play a key role in the UKeconomy, the UK’s international competitive advantage and in meeting the saving, protection and investmentneeds of its citizens. Financial services account for 8.9% of UK GDP—higher than all other major economiesincluding the US (8.4%), Japan (5.8%), Germany (5.3%) and France (5.1%). A significant portion of this ismade up from the contribution of financial services exports (2.9%). To safeguard this key economic interest,the UK must be fully engaged in EU financial services policymaking.

2.2 UK businesses and non-UK firms established in the UK rely on the Single Market. They take its “fourfreedoms” (free movement of goods, persons, services and capital) as the basis for conducting business inEurope. UK exports of financial services to the EU totalled £17.8 billion in 2010, 80% up on the £9.8 billionin 2005, although down from a peak of £21.8 billion in 2008. Main destination centres in the EU for UKexports of financial services in 2010 were the Netherlands £3.4 billion, Germany £3.4 billion, France £2.9billion, Ireland £1.7 billion, Luxembourg £1.2 billion and Spain £829 million. The existence of the SingleMarket also partly explains the UK’s success in attracting foreign firms. A total of 1,442 financial companieswere authorised by the FSA as foreign owned at end-2011 including 634 US companies and 78 Swisscompanies.

2.3 The new UK regulatory authorities succeeding the FSA will need to remain engaged with the EUInstitutions and European Supervisory Authorities (ESAs). Indeed we would argue that even greater focus andresources are needed today than before. First, UK participation in the staff of the EU Institutions and ESAsneeds to be enhanced. Rulemaking powers will reside with the EU authorities. The new UK regulatory bodieswill have a secondary supervision and enforcement role. This change in the balance of decision-makingnecessitates the establishment of a UK secondment/placement scheme for filling senior roles. Senior vacanciesin EU Institutions and ESAs need to be mapped out, followed by an identification of suitable candidates whosecandidacy can then be promoted. TheCityUK is keen to support this effort. Secondly, the UK authorities willneed to co-ordinate their activities to ensure that UK interests continue to be seamlessly promoted in discussionswith the EU Institutions and ESAs.

2.4 Financial services regulation and trade liberalisation both have key implications for EU economic growth.An over-emphasis on regulation is likely to act as a brake on jobs and growth-oriented policies. Regulatorypolicy should prize stability but not at the expense of economic growth, while trade policy should be a spur tobusiness expansion and lasting job creation.

3. Breadth of TheCityUK’s Interest in EU Issues

3.1 TheCityUK’s member-businesses exist to service their customers’ needs in the UK and globally; andTheCityUK has an interest in those EU policies that impact on their ability to do so. The areas of EUpolicymaking with which TheCityUK is particularly concerned include EU regulation of financial servicesand related professional services, EU proposals for taxing financial services, the EU’s strategy for regulatoryconvergence with other global markets, and the EU’s trade and investment policy for market opening; as wellas an interest in such other areas of EU policy as encouraging Small and Medium Enterprises (SMEs); financefor business including promoting alternative sources of finance; trade finance; corporate governance,competitiveness and innovation.

3.2 Services including financial and related professional services are integral to the UK economy. UK private-sector businesses in the services sector contribute around 60% of UK GDP and employment. The UK is thelargest exporter and importer of services in the EU, with a third of total EU trade in services. More than 60%of all outward foreign direct investment (FDI) by UK business and around 70% of FDI coming into the UK is55 The Economist, “Save the City”, 7 January 2012.



invested into the service sectors. Financial services account for 8.9% of UK GDP higher than all other majoreconomies including the US (8.4%), Japan (5.8%), Germany (5.3%) and France (5.1%). A significant portionof this is made up from the contribution of financial services exports (2.9%). Consequently, UK engagementin EU policymaking lies at the heart of safeguarding these UK interests.

4. Promoting an Active EU Engagement Strategy

4.1 The UK benefits from being within the EU Single Market in goods (the stock-in-trade of many ofTheCityUK’s members’ clients) and services (the business of TheCityUK’s members); UK businesses and non-UK firms established in the UK rely on the UK presence within the Single Market and the “four freedoms”inherent in the Single Market (free movement of goods, persons, services and capital) as the basis forconducting business in Europe. The UK also derives benefit from participating in the formulation of such EUpolicies as the Common Commercial Policy—the basis for the EU’s trade relations with third countries. UKexports of financial services to the EU totalled £17.8 billion in 2010, 80% up on £9.8 billion in 2005, althoughdown from a peak of £21.8 billion in 2008. Main destination centres in the EU for UK exports of financialservices in 2010 were the Netherlands £3.4 billion, Germany £3.4 billion, France £2.9 billion, Ireland £1.7billion, Luxembourg £1.2 billion and Spain £829 million. The existence of the Single Market also underliesthe UK’s success in attracting foreign firms. A total of 1,442 financial companies were authorised by the FSAas foreign owned at end-2011 including 634 US companies and 78 Swiss companies.

4.2 The UK seeks to shape EU policies in line with the principles of open and competitive markets. Forfinancial and related professional services, this needs to be backed by a reinforced system of financial regulationwhich promotes financial stability and high levels of consumer protection and unlocks capital which is vital toeconomic growth.

4.3 It is also clear that many other EU Member States wish to work alongside the UK for policies that willpromote the EU’s growth and global competitiveness. UK policymakers should use the UK’s resources acrossgovernment, regulatory bodies and in financial and professional services firms themselves to champion theUK’s interests with other Member States.

5. Enhancing UK Engagement on EU Financial Regulation and EU Trade Policy

5.1 This part of TheCityUK’s response will not attempt a comprehensive itemisation of the details of everypolicy area in which the UK has an interest in full participation in EU policymaking. Instead two policy areasare highlighted as examples, namely financial regulation and trade policy.

Financial regulation

5.2 Changes to financial regulation are clearly required to address failures highlighted by the financial crisis.Protecting consumers, businesses and taxpayers from the costs of failures in financial firms is rightly thepriority. A significant programme of change is already underway including via the Financial Services Bill, andTheCityUK’s members are willing partners to complete this programme of reform.

5.3 In EU terminology, financial regulation is not an EU “common policy” established under the Treaties (ieit differs from the EU’s Common Commercial Policy, Common Agricultural Policy or Competition Policy). Itcomprises a developing body of legislation and institutions. These have evolved to a point where the EU’scommon legal framework for much of financial services is now a “given” in the international business of theUK as a global financial centre: indeed the provision of financial services in the UK by non-UK firms hasbecome to a large degree dependent on the maintenance of that common EU legal framework and the UK’spart in devising it and operating within it. The evolutionary character of this common legal framework meansthat the UK must be engaged at all levels of policy development.

5.4 Nor is the process of widening and deepening EU engagement only a matter for Government. Financialinstitutions also have a role to play. TheCityUK and its membership in conjunction with the City of LondonCorporation have decided to promote a dialogue with other Member States. It is envisaged that this dialoguewill encompass policymakers and regulatory authorities as well as business and trade associations, think-tanksand civil society. We believe this effort can complement UK diplomatic engagement with other Member States.

5.5 Nonetheless the main burden of maintaining constructive engagement with the European Institutions andinternational bodies will inevitably fall on the FSA and its successor bodies and other UK regulatory authorities.Further, we would argue that greater resources and attention are now required given the changing political andregulatory environment. The developing role of the ESAs mean that greater focus is required from the UK.This was highlighted by FSA CEO Hector Sants in February 2012 when he said “it needs to be recognisedthat currently in respect of prudential regulation, and increasingly in the future in respect of conduct, the ruleswill be made by the European Supervisory Authorities and the role of PRA and FCA will primarily be one ofsupervision and enforcement.” The example of the European Securities and Markets Authority (ESMA)emphasises the scale of the challenge for UK representation. The UK market accounts for between 60 to 80%of all EU securities trading, yet the UK has only 8% of the vote.



5.6 TheCityUK welcomes the Government’s commitment to establish an international co-ordinationcommittee for the Treasury, the Bank of England, the FCA and the PRA (“the UK authorities”): its mandateshould be to lead and co-ordinate UK engagement on European financial services policy issues and to:

— establish clear ownership and responsibility for each European policy dossier: overlap or worse“underlap” is undesirable in the UK’s international representation;

— enable strategic objectives and the full extent of “the UK position” to be agreed in advance ofEU negotiations and during their progress;

— harness the expertise and contacts of UK Government officials in Member States so thatengagement on European dossiers is not seen through a narrow Brussels prism but takes intoaccount the realities that views promoted in Brussels are determined in Member State capitals;the efforts of FCO officials in Member States to complement Brussels engagement are to bewelcomed; and

— harness the views, knowledge and skills of financial industry practitioners in the UK.

5.7 Two specific issues should be highlighted. Firstly, UK staffing of European Institutions, EuropeanSupervisory Authorities (ESAs) and international authorities: the UK needs to play a full role in the governanceof the ESAs and other bodies, whose importance is forecast to grow. There is high level UK staff participationin ESMA, EIOPA56 and ESRB.57 Whilst these developments are helpful, greater depth of resource is needed.This necessitates the putting in place of a dedicated UK secondment/placement scheme for filling senior rolesboth in the European Institutions and the ESAs. TheCityUK is willing to support HMG in the establishmentand promotion of this scheme.

5.8 Secondly, interaction of the new UK regulatory regime with EU Institutions and European SupervisoryAuthorities: the transition to a new UK financial regulatory regime will change responsibilities for representingthe UK in European and international bodies. It is already clear that there will not be a perfect match betweenthe responsibilities of the new UK bodies and those of the European Supervisory Authorities (ESMA, EIOPAand the EBA58 which are set up along sectoral lines). The Financial Services Bill should therefore make fullprovision for coordination between different UK bodies to ensure that the UK’s interests continue to beseamlessly represented. The Bill requires the preparation of a Memorandum of Understanding between theTreasury, the Bank of England, the FCA and the PRA (“the UK authorities”) and the establishment of acommittee for the purposes of co-ordination. The Government should make it clear that the UK authoritieshave an equal voice and parity of status in agreeing the UK position. The Financial Services Bill, as currentlydrafted, lacks any requirement for UK financial regulators to have regard to the impact of their actions in aninternational context: TheCityUK considers that this requirement (which previously existed) should bereinstated.

5.9 TheCityUK believes that taking a holistic approach to engagement with the EU agencies and with otherMember States should yield dividends over the medium term making it more likely that the UK achievesunderstanding and support for its views and positions when policy issues reach Heads of State and Governmentin bodies such as the European Council. We commend the work of UK Ministers in seeking to explain anddevelop support for the UK’s positions in the Council.

Trade regulation

5.10 Trade policy is different in character from EU financial regulation. It is a “common policy” whoseambit is set under the Treaties. The demands placed upon trade policy are now changing. Until recently, thepolicy focused on long-term, multilateral trade liberalisation. This has now changed. First, under the LisbonTreaty, the EU trade policy now includes investment and investment protection (previously the province ofMember States). Secondly, the focus is now on shorter-term bilateral approaches, reflecting both the globaltrend towards preferential trade and investment agreements between a limited number of parties and the EU’sown policy enshrined in the Commission’s “Global Europe” initiative (2006). This provides opportunities forthe EU to engage with emerging economies.

5.11 This change in policy has had several important effects. First, EU trade policy, by focusing morebilaterally, involves prioritisation of markets to a greater extent than before. Secondly, the types of tradeagreement being entered into (bilateral Free Trade Agreements (FTAs) for instance), are narrower and deeperagreements than before, embracing such matters as regulation and consultation mechanisms for resolvingregulatory conflicts. Third, there are more linkages between trade policy and regulatory policy. Fourth, theimportance of the EU’s trade policy for services in general, and highly regulated services in particular, isheightened as services liberalisation requires regulatory barriers to be tackled.

5.12 For all these reasons, the interplay of different Member States’ choices and priorities in policy-formationis even more marked than before. The UK has a well-respected position in the EU Trade Policy Committee,supported by the government’s wider commercial diplomacy initiative (which TheCityUK welcomes). It willbe important for the UK to continue to have an influential voice. Trade policy is changing its nature, and the56 EIOPA—European Insurance and Occupational Pensions Authority.57 ESRB—European Systemic Risk Board.58 EBA—European Banking Authority.



UK will need to see that its interests continue to be recognised and that the EU retains an outward-lookingperspective drawing in emerging economies.

6. Financial Regulation, Trade Policy, and Growth

6.1 In developing its views on both regulation and trade policy, a particular feature of TheCityUK’s approachhas been to emphasise the potential implications of both for EU economic growth. In the case of EU financialregulation, TheCityUK has consistently stressed that regulatory reform cannot be viewed in isolation fromwider economic policies. True, sound regulation of financial services is important in itself. But financial servicesfacilitate the functioning of the economy as a whole by channelling savings towards productive investments.

6.2 An over-emphasis on regulation is likely to act as a brake on growth-orientated policies. The EU’scurrent Proposals on CRD59 IV and Solvency II need to be carefully calibrated to ensure that they do notrestrict lending to the real economy and investment in corporate bonds and infrastructure. Other Proposals suchas MiFID60 II need to ensure the EU remains open to business with third countries. TheCityUK welcomesthe Government’s efforts to reorient EU policy towards growth, modernisation and competitiveness exemplifiedin the Prime Minister’s recent letter (with eleven other EU Prime Ministers) to President Barroso calling forfresh initiatives in the interests of trade and growth.

7. The EU’s Institutional Architecture

7.1 Even a cursory review of some of the EU’s economic, commercial and regulatory policies suggests thatthe UK ought to be wary of any new institutional architecture in which the UK’s influence is reduced, whetherthis be through new formal or informal structures. Fiscal integration within the Eurozone is likely to lead tofurther changes in architecture and an EU policymaker presumption that the needs of the Eurozone and of theSingle Market are the same. UK policy will need to be alive to these trends and assumptions, working withthe grain of other Member States’ perceptions while countering or rebutting them as necessary. To be effective,UK policy will need to operate within an institutional framework that accords the UK a full voice inrepresenting UK, and full equality of treatment in securing them.

8. Conclusion

8.1 TheCityUK’s evidence does not seek to cover the entire policy field. However, by taking two key policyareas bearing on its members’ business, and by bringing out how both relate to growth, TheCityUK seeks toillustrate two essential points: first, that the EU policies in question are themselves evolving and, secondly, thatthe UK needs to be a continuing force in contributing to their evolution in ways consistent with UK interests.The European Union has reached a sudden and unanticipated phase in its development. These changes aretaking place against a global backdrop of great changes in traditional patterns of economic comparative andcompetitive advantage between trading blocs. For TheCityUK and its members it is vital that the UK retainsand enhances its influence over the development of EU policy and practice at a moment of change.

22 May 2012

Written evidence from Professor Richard G. Whitman, University of Kent and Associate Fellow,Chatham House, and Thomas Raines, Chatham House

The submitters of evidence are the authors of a recent Chatham House report evaluating the performance ofEU foreign policy and the EU European External Action Service. Thomas Raines is Programme Coordinatorfor Europe and North America at Chatham House. Professor Whitman is an academic and commentatorworking on the EU’s foreign, security and defence policy and has previously presented written and oral evidenceto the Foreign Affairs Committee on EU matters.

Summary of Evidence

The evidence submission argues that Stability and Governance Treaty (SCG) sets a precedent that could beexported to other EU policy domains. This is illustrated by reference to the EU’s foreign, security and defencepolicies. The evidence outlines areas where an approach drawing on the SCG might be devised by other EUmember states may be seeking to develop policy beyond consensus at 27 and to the detriment of the UK.

Evidence

1. The Stability Coordination and Governance Treaty (SCG) raises important questions about the UK’s futureplace in the EU. This is primarily because the Treaty represents an approach towards setting near-termobjectives for the European Union without any formal UK participation.

2. A key concern for the UK must be the precedent that it sets as an arrangement for future collaborationand agenda setting between Member States based on an agreement to which the United Kingdom is not a party.59 CRD—Capital Requirements Directive.60 MiFID—Markets in Financial Instruments Directive



Of crucial significance for the UK is the principle that is established to use the EU institutions outside of theprovisions of the EU Treaties. These policies could be styled “sub-EU 27” policies as they do not contain theparticipation of all the member states but will carry the imprimatur of the EU.

3. The UK’s future European policy could be affected by the precedent that has been set to operate on thisbasis. Consequently a broader discussion of the possible implications of the SCG for other policy areas isimportant. This submission will deal principally with the potential knock-on effects of the SCG on the EU’sforeign relations and the UK’s capacity to play a lead role in collective European foreign and defence policy.

4. The Foreign Secretary (in his letter to the Committee of February 2012 final paragraph) was sanguineabout the implications of the SCG for other policy domains and specifically referred to the leading role thatthe UK continues to play in foreign, security and defence policy. However, foreign, security and defencepolicies are areas in which the SCG model [of cooperation] might well be replicated.

5. A sub-27 member state arrangement already operates in the area of EU defence policy with the governmentof Denmark not participating. The remaining 26 member states fully utilise the EU foreign, security anddefence policy institutions for defence matters.

6. In addition, the innovations introduced by the Lisbon Treaty can be viewed as facilitating an approachsimilar to the SCG. The Lisbon Treaty represented a departure from the EU’s previous foreign and securitypolicy arrangements, with the intention to bring greater coherence and impact to the EU’s internationalrelations. Implicit in the design of foreign, security and defence policy post-Lisbon is an innate capacity forthe creation of “sub-27 EU” policies.

7. The Lisbon Treaty has diminished the international profile of the EU’s 27 member states in its eliminationof the rotating six-monthly Presidency of the Foreign Affairs Council (formerly the General Affairs andExternal Relations Council). This was intended to ensure a greater degree of continuity in EU policy-makingand in the representation of EU foreign policy to third countries. However, the opprobrium attached to BaronessAshton from some member states for her reluctance to proactively lead a more ambitious European foreignpolicy (rather than just be a servant of the EU’s Foreign Ministers) may encourage her successor to seek amore independent line on foreign policy issues. Such an approach to the role of High Representative mightencourage a “sub-27-EU” tendency within the foreign policy domain amongst member states that are receptiveto a more developed approach [supported by the majority] which overrides the objections of some memberstates. Some member states may even wish to collectively grant the High Representative representation fortheir national foreign policy to third parties and in international fora.

8. In establishing the European External Action Service (EEAS) as an institution separate from the maininstitutions of the EU there has already been institutional innovation in the foreign and security policy domain.As we have noted in a recent report written for Chatham House (Chatham House, 2012) the EEAS will needto establish a reputation for independent action if it is to carve out a distinctive role for itself. In order to makethe most of its role and its capabilities, the EEAS needs to cultivate the virtues of entrepreneurship: seeking tobe ahead of the market by emphasizing intellectual leadership and innovative policy development; utilizingresources most effectively through a clear strategy; seeking new opportunities to advance the EU’s commonagenda and be prepared to take calculated risks for that purpose; and building the confidence of its“shareholders”—the EU’s 27 member governments and the EU institutions—through creative diplomacy thattakes advantage of the leverage that comes with the EU’s unity while exploring the opportunities that lie inits diversity.

9. If considered as “shareholders” in the EEAS it is possible to envisage a majority group of member statesseeking to steer the service in directions that may not represent the unanimous view of all 27. Further, theEEAS is already actively operating on a foreign policy issue (Kosovo) where there are cleavages between the27 on the issue of recognition and so is pursuing a policy which, in effect, represents a “sub-27 EU” position.It is difficult to envisage how the UK might resist moves to further task the High Representative and the EEASwith a collective policy agreed by a “sub-27 EU” group of states if this was presented as offering a boost forEU foreign policy.

10. Another area in which “sub-27 EU” practices can be considered is a decision by a group of memberstates to “sub-contract” their consular work or political representation in third countries to Union delegations.Under such an arrangement the member state(s) concerned would sign an agreement that allows for theirconsular activities or diplomatic representation to be conducted on their behalf by the Union delegation. Thisarrangement is likely to appeal to states that face resource constraints in running an extensive embassy networkin third countries and/or take the view that they do not have foreign policy interests that extend beyond thosealready pursued collectively through Union foreign policy and which may be more effectively conveyedthrough collective negotiation. Agreement by a “sub-27 EU” group of countries to sub-contract representationmay be difficult to resist in principle by other EU member states if it is presented as a more efficient use ofnational foreign policy budgets.

11. The Common Security and Defence Policy (CSDP) is an area in which “sub-27 EU” policies could becontemplated. This is also an area in which the UK currently finds itself in opposition to majority memberstate support for increasing the European Defence Agency (EDA) budget and setting up an EU operational



headquarters. An SCG-type arrangement in defence may become an attractive option to other member states ifthe UK is considered to be the primary obstacle to greater EU defence integration.

12. The Lisbon Treaty created the Permanent Structured Cooperation arrangements of the CSDP that allowfor “cooperation between member states whose military capabilities fulfil higher criteria and which have mademore binding commitments to one another in this area”. The participating member states are expected to “bringtheir defence apparatus into line with each other as far as possible, particularly by harmonising the identificationof their military needs, by pooling and, where appropriate, specialising their defence means and capabilities,and by encouraging cooperation in the fields of training and logistics” (Art. 2(b), Protocol 10). Although it isnot envisaged as a procedure for the deployment of EU missions, this mechanism should facilitate capabilitydevelopment and the pooling of assets, in turn increasing CSDP operational capabilities. The Treaty definesmembership as voluntary: there is no obligation for the member states to join a Permanent StructuredCooperation. Further, the decision for the establishment of a Permanent Structured Cooperation is to be adoptedby the Council on the basis of qualified majority voting. The existing un-utilised voting provisions of the CFSPsuggest that recourse to voting in the face of member states opposing a policy innovation in this area in unlikelyand the SCG provides an alternative model to provide for such an arrangement.

13. The Treaty also foresees the possibility of entrusting CSDP operations to a group of member states“which are willing and have the necessary capability for such a task”. The procedure to establish a “coalitionof the willing and able” is much less convoluted than in the case of Permanent Structured Cooperation. TheCouncil authorizes the decision and, thus, the mission is launched in the name of the EU, but run by the“coalition of the willing”. The coalition will agree on the details of the implementation of the task, inassociation with the High Representative. The rest of the member states have the right to be kept regularlyinformed of its progress. Again the SCG-type agreement provides an alternative governing arrangement forsuch an undertaking.

14. The precedent setting consequences of the Intergovernmental Treaty on Stability Coordination andGovernance in the Economic and Monetary Union should be considered. A broader discussion of the possibleimplications of the SCG for other policy areas is important. As indicated, EU foreign, security and defencepolicies are policy domains which could see the evolution of comparative arrangements of collective action bysmaller constellations of states within the 27. This could place the UK in a position of future disadvantage,reducing UK leadership in these fields and limiting HMG’s influence and capacity to set the EU’s agenda.

22 May 2012

References

Staffan Hamra, Thomas Raines & Richard G Whitman “A Diplomatic Entrepreneur: Making the most ofthe European External Action Service”, Chatham House, (January 2012). (http://www.chathamhouse.org/sites/default/files/public/Research/Europe/r1211_eeas.pdf)

Written evidence from Professor René Schwok and Cenni Najy, University of Geneva

UK RETURNING TO EFTA:DIVORCE AT 40 AND GOING BACK TO MOM AND DAD?

Summary

Our objective is to assess the proposal that the United Kingdom (UK) leave the European Union and returnto the European Free Trade Association (EFTA) in order to get deals such as the European Economic Area(EEA) or even simple bilateral agreements such as Switzerland enjoys for a couple of years.

In the first part, we analyse the relationship between EFTA states and the EU through the EEA. Thismechanism is based on a certain number of complex features that offer a high level of integration to threeEFTA countries.

Second, we address the Swiss case, an active member in EFTA, who maintains close relations with the EUdespite its rejection of EEA membership. Prima facie, the example of Switzerland supports many Britisheurosceptics because it provides an example of flexible arrangement.

Third, we assess the likelihood of the UK joining either the EEA/EFTA or instead adopting the EFTA/Switzerland approach as a sustainable and realistic choice.

Biography

René Schwok is professor of political science at the University of Geneva, specializing in Europeanintegration.

He is the holder of the Jean Monnet Chair, and Director of the Master programme in international andEuropean security studies.



He has published 20 books and authored many journal articles and book chapters. They are available athttp://unige.academia.edu/RenéSCHWOK/

René Schwok was born in Geneva and is Swiss. He has been a consultant for various Swiss and Europeanagencies and governments, comments frequently on European issues for the media and speaks regularly atconferences.

Cenni Najy is a Master student at College of Bruges and holder of a Master from the European Institute ofthe University of Geneva.

Introduction

1. There has been increased domestic pressure demanding that the United Kingdom (UK) leave theEuropean Union.

2. Some of them also propose to return to the European Free Trade Association (EFTA) and to get a “moreadvantageous integration” through deals such as the European Economic Area (EEA) or even simple bilateralagreements such as Switzerland enjoys for a couple of years.61

3. Advocates of this EFTA option expect major positive effects following a UK withdrawal from the EU.

4. Economically, they foresee greater prosperity and growth due to the removal of the British contributionto the EU budget, the phasing out of the common agricultural and fishery policy, a lowering of VAT, a reductionof European workers from Eastern Europe, a decrease of bureaucratic norms that constitute barriers to tradeand the possibility of concluding independently free trade agreements with other countries in the rest ofthe world.

5. They also argue that EFTA states (especially Norway and Switzerland which are the two biggest members)are more prospering economically than the EU countries and, consequently, that their levels of unemploymentand debts are much lower.62 Note also that the combined GDP of Norway and Switzerland is nearly half ofthe UK!63

6. They also anticipate political benefits including greater independence and increased democracy. Inaddition, it is argued that by abandoning the EU’s foreign, security and defence policy, the UK will benefitfrom a rapprochement to United States’ external policies.

7. On the other hand, advocates of maintaining UK membership to the EU do not take into seriousconsideration the EFTA option, which they consider as a regressive proposal, comparing this to divorcing at40 and “going back to mom and dad”.

8. Overall, the objective of this paper is to consider the essence of EFTA and to try to analyse it as objectivelyas possible.

9. In the first part, we analyse the relation between EFTA states and the EU through the EEA. Thismechanism is based on a certain number of complex features that offer a high level of integration to threeEFTA countries.

10. Second, we address the Swiss case, an active member in EFTA, who maintains close relations with theEU despite its rejection of EEA membership. Prima facie, the example of Switzerland supports many Britisheurosceptics because it provides us with an example of flexible arrangement.

11. Third, we will assess the likelihood of the UK of joining either the EEA/EFTA or instead adopting theEFTA/Switzerland approach as a sustainable and realistic choice.

A–The EFTA/EEA Model

12. The European Economic Area was established on 1 January 1994 following an agreement between theEuropean Union and the member States of the European Free Trade Association.

13. By July 2013, its total membership could reach 31 states included in two pillars: the 28 EU memberstates (including Croatia) as well as three EFTA countries (Norway, Iceland, Liechtenstein).

61 Van Randwyck, H (2011). “EFTA or The EU?”, The Bruges Group, 21 March. Available at: <http://www.brugesgroup.com/EFTAorTheEU.pdf>. Ould, R (2011). “Time To Leave The EU And Stop Exporting British Jobs Abroad”, Public Service Europe,17 November. Available at: <http://www.publicserviceeurope.com/article/1139/time-to-leave-the-eu-and-stop-exporting-british-jobs-abroad>; Pickles, A (2011). “Britain Isolated, Like the Swiss. If only”, The Commentator, 12 December. Available at:<http://www.thecommentator.com/article/725/_britain_ isolated_like_the_Swiss_if_only>.

62 See for instance Van Randwyck, H (2011)., op. cit., pp. 5.63 GDP of Norway = billions 480 $, GDP of Switzerland = billions 666 $. Total = billions 1,146 $.

GDP of the UK= billions 2,481 $. Source: IMF. GDP at current prices in USD (2011). Available at: <http://www.imf.org/external/pubs/ft/weo/2011/02/>.



14. Materially, the EEA is an association based on primary EU law and treaties, in addition to secondarylaw such as regulations and directives commonly referred to as the acquis communautaire. It mainly containsthe so-called EU “four freedoms”: free-circulation of persons, goods, services and capital.

15. The EEA agreement also include issues pertaining to several horizontal provisions relevant to the fourfreedoms, such as competition law (ie the abuse of dominant position, cartels, merger control, state aid andstate monopolies), minimum social standards as well as consumer and environmental protection.

16. The EEA does not eliminate however border controls for rules of origins and indirect taxation. Indeed,the free movement of goods is only established in respect of products originating from the contracting parties.Otherwise put, this agreement does not establish a customs union as it is the case in the EU.

17. Consequently, EEA/EFTA countries retain their full sovereignty over their trade policies in addition tothe capacity of establishing their own different level of value added tax (VAT).

18. Similarly, the EEA is not related to the Economic and Monetary Union (EMU), the Common AgriculturePolicy (CAP), the Common Foreign and Security Policy (CFSP) as well as the Justice and Home Affairspolicies.

19. Finally, the EEA agreement provides a cooperation framework between EU and EEA/EFTA states inmatters concerning research, development, tourism and civil protection.

EEA institutions

20. In exchange for internal market access, the European Commission imposed from the beginning a rigidinstitutional arrangement with the concept of the European Economic Area based on two pillars: EC and EFTA.

21. As a result, the Oporto agreement established four different institutions: the EEA Council, the EEA JointCommittee, the EFTA surveillance authority and the EFTA court. Let us briefly introduce them hereafter.

22. The EEA Council is composed of members of the Council of the EU, members of the EU Commissionand of one of the government members of the participating EFTA states. According to Article 89 of the treaty,it “is responsible for giving the political impetus in the implementation” of the agreement. Furthermore, it maydecide to amend the agreement.

23. Daily tasks are left over to the EEA Joint Committee. This body ensures that, “the implementation andoperation” of the agreement is carried out on a monthly basis. In practice, it is responsible for adopting thedecisions extending the evolution of the acquis to the EEA/EFTA members.

24. Taking a step back the Committee’s composition and functioning appear to be quite interesting as well.Since the EU is represented by the Commission and faces EEA/EFTA states representatives, it can be arguedthat this committee is an interesting example of both a supranational/intergovernmental mixed institution.

25. The EFTA surveillance authority, which is a technical and supranational institution by nature, ensuresthat the EEA/EFTA member states respect their legal obligations. Hence, as the EU Commission, it mayinitiate proceedings against one of these states (for instance in case of development of unlawful burdens oncommercial activity).



26. Parliamentary cooperation is also provided through the EEA Joint Parliamentary Committee.Interestingly enough, this institution has a special composition, as it includes members of the EU Parliamentand of the EFTA states. However, it does not carry out important political tasks.

27. Finally, a Court of Justice, also referred to as the “EFTA Court”, has been created in order to ensure asingle interpretation of the treaty. Generally, this Court aims at ensuring a strict homogeneity of interpretationwith the Court of Justice of the EU (CJEU). That being said, it has no legal monopoly as rulings of the CJEUfalling within the EEA scope are also bound to produce effects for EEA/EFTA participants.

The EEA as an asymmetric market-association

28. Despite this seemingly balanced institutional architecture, the EEA agreement prevents significantpolitical participation of EEA/EFTA member states in the EU decision-making process.

29. As we have seen, these States must comply with the obligations imposed by most of the acquis, inaddition to the adoption of Community law and the interpretations made by the ECJ existing prior to theirEEA accession.

30. Although, they have been granted a right of consultation and association during the early stage of thelegislative procedure, the so-called “decision shaping”, no possibilities of participation to the voting procedurein the EU Council or the European Parliament are provided.

31. Admittedly, an opting-out instrument exists but it is politically unusable and has never been used untilnow. Like in the case of the decision shaping clause, this opt-out instrument has to be agreed upon by theentirety of the EEA/EFTA pillar members.

32. In principle, any of these three countries may refuse to take on new EU legislation. However, this woulddrag into the same opt-out position the other EEA/EFTA countries, regardless of their particular position onthe matter. Indeed, the EEA agreement clearly stipulates that EFTA participants are not entitled to take thedecision to adopt EU legislation on an individual basis (see art. 93).

33. An additional deterrent is also the understanding that failure to adopt an act after the end of the time-limit, may lead to the partial or even total suspension of the EEA agreement (see art. 102). Consequently, theseconditions make any rejection less likely to occur.

B–The EFTA/Switzerland’s Model

34. Following the rejection of the EEA agreement in a popular referendum on 6 December 1992, the SwissFederal Council engaged in long negotiations which led to the conclusion of a first package of bilateralagreements, hereafter “Bilateral Agreements I”. Signed on 21 June 1999 in Luxembourg, these agreementswere adopted by the Swiss electorate on 21 May 2000 and entered into force on 1 June 2002.64

35. Five of the agreements posed no difficulty and concerned relatively secondary matters. The mostimportant two—free movement of persons and overland transport—on the contrary, were the object ofintense debate.

36. The EU and Switzerland also signed a second series of Bilateral Agreements (BA II) on 26 October2004. These agreements cover nine dossiers each of which took effect on different dates. The most importantconcern the participation of Switzerland into the Schengen area and a withholding tax on taxation of savingsin place of the lifting of bank secrecy originally demanded by the European Union.

37. From a legal perspective, these agreements are not interlinked, unlike the Bilateral Agreements I, andthus do not include a “guillotine clause”. Switzerland could have rejected any one of them without the othersbeing called into question.

38. Seven of these agreements posed no problems and concerned secondary issues. Once again, the twomost important ones, Schengen/Dublin and the taxation of savings, were the subject of a heated internal debate.As a result, the Agreement on Schengen/Dublin was subject to a referendum in June 2005 but was acceptedby about 54.5%.

64 More details on the Bilateral Agreement I and II in Schwok, R (2009). Switzerland-European Union. An ImpossibleMembership?, Brussels, PIE Peter Lang, pp. 37–78.



201320122011201020092008200720062005200420032002200120001999199819971996199519941993

Implementation

Probing Phase

Signing

Pre-negotiations/Negotiations

BilateralAgreements 1

(whole package)

Schengen/dublin

Taxation ofsavings (B.A.II)

Electricity(B.A. III?)

Figure 2: The Swiss-EU Bilateral Agreements or a time-consuming process

Differences between the Bilateral Agreements and the EEA

39. In comparison with the EEA, the Bilateral Agreements enable a third-party country (in this caseSwitzerland) to negotiate on an individual basis.

40. This freedom of action is in part limited by the multilateral structure of the EEA, which obliges EFTAcountries to speak with a single voice. Here, Switzerland has never been obliged to harmonise its position withits EFTA partners before or during its dealings with the European Union.

Differences in terms of structures

41. The structure of the Bilateral Agreements I and II is light and does not create any new institutions. Thisdistinguishes it from the EEA which was more unwieldy and based on a two-pillar system relying on a galaxyof institutions.

42. In principle, the Bilateral Agreements I and II do not function through a literal and all-inclusiveapplication of Community law as is the case in the EEA: they are not governed by a Community or para-Community justice mechanism akin to the European Communities Court of Justice or the EEA/EFTA Court,but rather by a political mechanism (the Joint Committees).

43. The Bilateral Agreements I and II, therefore, radically differ from the EEA agreement, under which theEFTA-pillar states were obliged to adopt the relevant Community law together with its interpretations by theEuropean Communities’ Court of Justice pre-existent to the date of the signature of the agreement.

No automatic acceptance of new relevant Community legislations

44. The Bilateral Agreements I and II do not include an automatic adoption of new relevant Communitylegislations but instead, allow for the renegotiation on a case-by-case basis. There are, however, exceptionsconcerning Schengen legislation and air transport competition.

45. Thus, these Bilateral Agreements I and II differ from the EEA, where the EEA/EFTA countries arealmost obliged to integrate developments of the relevant acquis.

46. Nonetheless, the Bilateral Agreements should not be over idealized. Switzerland is not immune to outsidedevelopments and the processes of “EU-isation”. Since 1988, with every new federal legislation considered, itis mandatory for the Swiss parliament to include a paragraph summarising the EU position on the relevantmatter. As a result, this has led to indirect adaptation in that Switzerland adopts numerous legislation of theEuropean Union without conducting formal agreements.

Differences in terms of content

47. The EEA includes important sectors not covered by the Bilateral Agreements I and II, mainly concerningthe free movement of services (ie financial, telecommunications and postal services), the free movement ofcapital, company law and intellectual property.



48. Additionally, the EU rules of competition for the four types of free movement were transposed into theEEA treaty. Regarding the monitoring of competition rule compliance is carried out, on the one hand, by theEuropean Commission and, on the other hand, by the EFTA Surveillance Authority.

49. Conversely, the Bilateral Agreements I and II do not make provision for rules of competition. The onlyexception is in the domain of air transport where the European Commission and the European CommunityCourt of Justice obtained exclusive jurisdiction over compliance with competition rules provided for in theagreement.

Differences in terms of horizontal and flanking policies

50. In comparison with the bilateral path, the EEA also added horizontal and flanking policies. This includedconcepts such as equal treatment between men and women, labour rights, participation in enterprises, consumeror environmental protection, and some social policy, education and youth, tourism, civil protection togetherwith European economic and social cohesion.

51. The financial solidarity towards less affluent countries and regions of the EU that would have been askedfrom Switzerland as a member of the EEA would be greater than that required under the Bilateral AgreementsI and II.

Figure 3: Overview of the scope and depth of the EAA/EFTA and Swiss options

See Schwok, R (2009) and Lavenex, S (2011).

The bilateral approach is largely deadlocked since 2007

52. Since 2007, no more significant agreements were signed. This can be attributed to the EU dissatisfactionregarding the continuous Swiss’ strategy aiming at concluding rigid “tailor-made agreements”.

53. Recently, the European Union demanded that Switzerland adopt the evolution of the relevant EU acquisand called for a uniform interpretation in its application.

54. For its part, the Swiss Confederation does not want to lose its autonomy of decision and to accept therulings of foreign judges. In fact, Bern would prefer as a model for future agreements the 2009 Switzerland-EU bilateral agreement on “the simplification of inspections and formalities in respect of the carriage of goodsand on customs security measures” (also known as the “24 hours” agreement).

55. This technical agreement offers interesting institutional components.

56. First, it provides a participation in the early stage of the legislative process.

57. Second, Switzerland does not adopt automatically the evolution of the relevant EU acquis. Although itdeclares itself in principle ready to adopt the new EU legislation, the internal approval processes are respected.



58. Third, if Switzerland were not able to adapt to the evolution of the relevant EU acquis, the wholeagreement would not become automatically terminated (there could be however proportionate “rebalancingmeasures” decided by the EU).

59. Fourth, the settlement of dispute about the interpretation or application of the agreement is also verycreative because it is not let to the EU Court of Justice but to the Joint Committee or to an ad hoc arbitration.

60. This contrasts sharply with the EEA agreement since there are no such possibilities of independentarbitration on the proportionality of the EU rebalancing measures.

61. That being said, the European Union has constantly repeated that the 24 hours agreement will not serveas a framework model for the future of the Swiss-EU relations.

C–Advantages and Disadvantages of the Two Options

62. Within the following analysis, our goal is not to argue for or against the UK leaving the EU. This is apolitical decision to be taken by the British themselves.

63. Besides, we are also aware that the circumstances of a return of the UK into EFTA are not comparableto the situation of EEA/EFTA countries as well as Switzerland.

64. Finally, although not addressed within this text, we acknowledge that a withdrawal of the UK from theEU itself would likely result in an avalanche of consequences that are difficult to assess.

Advantages of joining EFTA

65. First, EFTA membership would imply a far lower British financial contribution. Costly EU policies arenot included, especially the ones related to the onerous CAP.

66. Nevertheless, one should also keep in mind that EEA/EFTA membership is not free of costs. These threecountries have to pay for policies in which they are included. Their most important financial contribution isrelated to their participation in EU structural funds (1.8 billion Euros allocated to 13 EU member states for the2009–13 period). Similarly, Switzerland, which is not even part of the EEA, had to disburse significant amountsto secure its relationship with the EU. Indeed, through its bilateral agreements, Bern is also obliged tocontribute, though far less than EEA/EFTA states, to the “reduction of socio-economic disparities” in the Union.

67. Thus, it is plausible that a country with a larger GDP such as the UK would have to disburse much morethan the above-mentioned amount if it was to join the EEA/EFTA pillar or even to adopt a Swiss approachthrough the use of bilateral relations.

68. In terms of the total financial cost, it is possible, by extrapolation, to provide the following figures forboth potential EEA/EFTA pillar membership and the Swiss-type bilateral approach (all-included): EUR 2.54billions and EUR 1.62 billions per annum, respectively. However, it is also important to note that the UKwould have to negotiate the exact amount of its contribution in both cases. Hence, these figures are onlyintended to be indicative as they assume that the UK would get the same treatment as EEA/EFTA statesor Switzerland.

69. In addition to the above mentioned elements, the UK government would also be free to set its VAT level.That being said current British VAT level is 20% for most of their products, which is much higher than the15% required by EU legislation. Therefore, it is unlikely that a withdrawal from the EU would changeimmediately anything in this regard.

70. Another advantage of EFTA membership is that States within this organisation have demonstrated theircapacity to ratify free-trade agreements faster and with more partners than the EU.65 As of 2012, EFTAmember states have implemented 24 free trade agreements (covering as much as 33 countries).

71. It should be noted that the EFTA countries negotiated agreements with all States, which have concludeda Free Trade Agreement with the EU.

72. Additionally, it is interesting to observe that the EFTA States preceded the EU in their free-tradeagreements with Canada, Columbia, the Gulf Cooperation Council, Ukraine and South Korea. Moreover, theyare also well advanced in their negotiations with India, Indonesia, Thailand, Russia, Belarus and Kazakhstan.

73. It can be argued that Switzerland and Norway have been more efficient in terms of developing their freetrade network than the EU. Indeed, the Union is often mired with internal disagreements as well as itsinstitutional constraints in matters of trade policies (mainly related to the existence of divergent interests andviews regarding agriculture and conditionality).

74. Finally, it is also important to underline that EFTA member states are free to enter into trade agreementsindependently. Thus, if the UK would join the EFTA, it would certainly benefit from a greater freedom ofmanoeuvre to sign free trade agreements with other countries in the world.65 Schwok, R (2010). “Specificities of Switzerland's Relations with EFTA”, in Bryn, K & Einarsson G. (eds.). EFTA 1960–2010,

Elements of 50 Years of European History, Reykjavik, University of Iceland Press, pp. 117.



75. Concerning dimensions of foreign policy, security and defence, bilateral agreements between the UKand the EU, based on the Norwegian model, would undeniably better protect British sovereignty. It wouldcome however at the expense of a loss of influence, particularly on CSDP. This would also mean that it wouldbe more difficult for the UK to control or even to slow down the development of a more integrated EU defence“from the inside”.

76. While it can be argued that a withdrawal from the EU would imply a decrease of adaptation to newnorms the Norwegian and even the Swiss cases show that these two “outsider” countries have still adopteddirectly or indirectly a certain number of EU laws.

Challenges of EFTA and EEA membership

77. In order to accede to EFTA or to the EEA/EFTA pillar, the UK would have to follow a potentiallydifficult path.

78. First, the UK would have to submit an application to EFTA. Unlike the EU, this organization does notpursue an active enlargement policy and, according to a well-informed source: “Feasibility and desirability ofa possible EFTA enlargement would have to be assessed on a case-by-case basis for each possible applicant”.

79. As a matter of fact, there is no guarantee that EFTA States would welcome any new member or simplynot veto its application (as the EFTA convention specifies that unanimity is needed in case of enlargement).Indeed, this organization represents a quite homogenous bloc in terms of countries’ size, economic developmentand trade preferences. Hence, the accession of big countries such as the UK would certainly shake theestablished bases of the whole organization. Besides, it is also questionable if the British would accept to dealon a one to one basis with small countries such as Liechtenstein.

80. Furthermore, even if London secured an EFTA membership, it is not guaranteed that the three EEA/EFTA States would welcome the UK in “their” pillar. As we have seen, these countries would have to adopt acommon position during the joint decision making procedure. While this has not proven to be a problem untilnow, it could very well change with the arrival of a new member. These three countries would be laying at themercy of any kind of British opt-out, leading potentially to a partial or even the total suspension of theEEA agreement.

Swiss or EEA option?

81. Arguably, the Swiss option can be seen as relatively favourable when compared to the EEA option as away to formally maintain its sovereignty. That being said, the EU is clearly against the perpetuation of this suigeneris bilateral relation mechanism, which is a case resulting from the several economic and politicalparticularities of Switzerland.

82. In contrast, the EEA option could result in the support of the European Commission and of its memberStates. There is also the advantage of providing full access to the EU internal market. Given EEA’s evolutionarynature, this allows for easy and rapid adaptation to the developments of EU legislation, while also offeringstrong legal certainty, and therefore predictability.

83. The main challenge of the EEA option is related to the undermining of UK sovereignty. If the UKwithdraws from the EU, it may very well end up becoming a sort of “satellite” of the European Union if itjoins the EEA/EFTA pillar. Indeed, its government would be obliged to automatically adopt certain legislationwithin important policy areas, while being unable to take part in the making of decisions.

84. In 2012, Norwegian experts mandated by the government went as far as relating these sovereigntyproblems to a more general question of democratic deficit. In their view, the Norwegian government cannot beheld accountable for most of its European policy.66 Thus, one has to seriously question the argument that theEEA would be a better deal for the UK because it would restore important parts of the British nationalsovereignty.

6 June 2012

Written evidence from the Liberal Democrat Parliamentary Party Committee on International Affairs

Executive Summary— British membership of a European Union of peaceful, free democracies has brought us a huge range

of benefits including jobs and prosperity both through free access to the EU’s internal market andthrough the EU’s collective weight in international trade negotiations. It has brought robust consumerrights and protections, justice and home affairs measures which help our police and security servicesto keep British people safer and more secure and greater environmental protection and it hasgenerally magnified UK influence in the world. But EU institutions are not perfect and should besubjected to challenge and review.

66 EEA Review Committee (2012). “Outside and Inside: Norway’s Agreement With The European Union”, Official NorwegianReports (NOU 2012:2), Oslo, 17 January, pp. 7.



— The obsessive focus by some on the worst aspects of the EU gives the British public a grotesquelydistorted view of Europe. But British parliamentary scrutiny of EU affairs is itself inadequate andneeds to be mainstreamed across departmental select committees. Ministers need to be questionedahead of sectoral council meetings. More also needs to be done to increase British representationwithin the commission and across the EU institutions.

— No compelling case has been made for any alternative to full EU membership. Norway andSwitzerland, by their own admission, have to comply with EU rules but are unable to shape thoserules. This would be a bizarre way to try to defend British sovereignty.

— Rather than the exercise of a British veto, the December council was a decision by the rest of theEU to walk away from the UK and carry on with their negotiation in a different room. The keydanger now is that the questionmark over Britain’s future place in Europe becomes a self-fulfillingprophecy as other member states start to overlook UK interests. But the government has rightlyworked hard to rebuild key relationships and this must continue.

— A formalised two-tier model could relegate the UK to permanent second class citizen status in theEU with all the consequences this implies for British influence over the shape and fortunes of ourcontinent and the seriousness with which we would be taken as a global player. We should retaintop table status within the EU.

— The fiscal compact treaty should be incorporated eventually into the EU treaties along withsafeguards and access guarantees for non-Eurozone countries like the UK but without those countrieshaving to sign up to any aspect of the treaty itself.

Introduction

1. The Liberal Democrat parliamentary party committee on international affairs is a sub-committee of theLiberal Democrat parliamentary party. The committee is chaired by Martin Horwood MP with co-chairsBaroness Kishwer Falkner, Lord David Chidgey and Lord John Lee.

2. The Liberal Democrats believe that the UK belongs firmly at the heart of Europe. This political stance isbuilt on our long tradition of internationalism and our clear belief that UK membership of a European Unionof peaceful, free democracies is in the British national interest. Our membership of the EU has brought hugebenefits in terms of jobs and prosperity through free access to the EU’s internal market and a uniform regulatoryenvironment for EU-wide business, and through the EU’s collective weight in international trade negotiations,whether via the WTO or EU free trade agreement negotiations.

3. Membership of the European Union allows us extraordinary freedom to live, work, study and retireanywhere in the Union. It makes life cheaper and easier by, for example, driving down flight costs throughcompetition, cutting phone and data charges, providing free access to EU-wide health insurance and putting inplace robust consumer rights and protections. EU justice and home affairs instruments and minimum standardshelp our police and security services to keep British people safer and more secure from security threats andserious organised criminal gangs operating across borders, whilst also raising the standards of justice, and theprotection of civil liberties and rights for our citizens wherever they are across the Union.

4. Collective European action enables the UK to pursue credible policies on cross-border matters of vitalimportance, whether it is energy security, combating climate change, boosting environmental protection ordeveloping joined-up infrastructure networks. Collective EU action in foreign, development and defencematters can be an extraordinary magnifier of British influence in the world. We have included in the Annex toour submission a range of facts, figures and examples to illustrate some of these points.

5. The UK has driven forward an open, outward looking and liberalising agenda to improve the Union andincrease the benefits it delivers for the British people and all Europeans. In an increasingly interconnectedglobal economic and political system with shifting patterns of power and influence, EU membership has helpedsuccessive British governments to shape our own future direction and fortunes by actively helping to shape thefuture direction and fortunes of the continent of which we are a major part. In the process, the UK has beenable to retain global player status, taken seriously in Washington, Beijing, Moscow, Delhi and Brasilia, in largepart because we hold influence in Brussels, Paris and Berlin, the world’s largest single market and biggesttrading bloc.

6. The EU is not perfect. Liberal Democrats believe as passionately in reform of the European Union as wedo in reform of the UK’s political system. We want the EU to work and to work better. And as with any setof political institutions, the EU structures, systems and processes are in need of constant attention, regularchallenge and review. We are convinced that there is considerable scope for cutting waste, achieving greatercost efficiencies and refocusing EU level spending on areas where it will add greater value to spending at anational level.

Public Perception and Scrutiny of European Affairs

7. We want a more efficient, effective, transparent and accountable European Union helping to deliver aprosperous, progressive, liberal and outward looking Europe. But there is a tendency, sometimes an obsession,in many parts of British political and public life to focus on the worst of the EU. Too often, a picture is painted



that is grotesquely distorted, riddled with myths and peppered with untruths. If our picture of British publiclife was equally distorted—if all the British public knew about the UK government, parliament and Britishpolitics was MPs’ expenses, party funding scandals, media scandals, and failed big budget projects—it wouldhardly be surprising if people questioned the value and purpose of the whole British political system.

8. We do want to see a more responsive, transparent and accountable Union, and we believe that some ofthe reforms necessary to achieve this need to occur at home. For instance, it is painfully clear to us that theCommons European scrutiny system needs urgent reform. In a post-Lisbon world, it is simply unacceptablefor the Commons to rely on a single Scrutiny Committee and a system of ad hoc Standing Committees toscrutinise EU affairs. Such a setup is symptomatic of the widely held and misplaced view that Europe is aniche foreign policy issue and only of general interest when framed in terms of in/out or the future of UK-EUrelations. While we welcome the Foreign Affairs Committee’s inquiry, it is in danger of falling into thistrap as well, unless it is accompanied by a mainstreaming of EU foreign policy matters within the work ofthe committee.

9. The vast majority of MPs have little or no engagement with substantive EU matters at all. The level ofunderstanding of how the EU operates and Britain’s role within it is staggeringly low and the awareness of EUpolicy developments practically non-existent. The European Commission’s 2011 Work Programme—theEuropean equivalent of the Queen’s Speech—was given less than an hour’s debating time in an ad hoc standingcommittee some six months after it was published and when the bulk of the planned measures had alreadybeen introduced. If MPs handled the Queen’s Speech in this way, there would be outrage. EU matters need tobe mainstreamed across the departmental select committees so that they can consider them early enough toinfluence government and commission thinking, question ministers representing Britain’s interests ahead ofsectoral councils and focus on policy direction and how it relates to domestic policy and British interests, notjust constitutional questions.

10. Equally, we are extremely concerned at the UK civil service’s capacity on EU matters and the long-termdecline of British personnel in the EU institutions and the numbers successfully passing through theCommission concours. We understand that EU units across Departments have been among the first to see cut-backs, that the UK has never before been so under-represented amongst commission personnel and that onlyeight British nationals successfully passed through the concours in 2011. The lack of focus on this crucial areaby successive governments needs to be urgently addressed. The British civil service and UK representation(UKRep) have some incredibly good people working on EU matters, and many talented British nationals workin the EU institutions. But we need to drastically increase Whitehall capacity and British representation acrossthe EU institutions.

There is no Realistic Alternative

11. In the absence of any clear and compelling alternative vision to Britain’s full membership of the EuropeanUnion, the only option for Britain is to remain at the heart of the European Union. Within the EU, we willretain the economic benefits, individual freedoms and advantages for British citizens, the enhanced ability tomanage major cross-border issues and the geo-strategic advantages of increased global influence in anincreasingly interconnected and competitive world.

12. There is no compelling case for an alternative relationship between the UK and the EU. The only realisticalternative to full EU membership is membership of the European Economic Area (EEA) along the lines ofNorway or Switzerland. But this would clearly be detrimental to UK national interests.

13. In order to gain access to the single market as a member of the EEA, the Norwegian government has toimplement the vast majority of the EU’s rules but has no say in deciding those rules. This “fax democracy”represents a huge democratic deficit for the people of Norway. As a Norwegian Committee set up to considerthe impact of EEA membership recently reported,67 Norway is as “Europeanised” as the UK despite not beinga member of the EU yet there is an enormous democratic cost to not having votes in the Council, MEPs in theEuropean Parliament or a commissioner in the commission as the UK and all other member states do.

14. In our view, this would not enhance British sovereignty. It would leave the UK sitting on the sidelinesas others went ahead and shaped the future of the continent without us. Without a British voice pushing foropen markets, green governance and an outward-facing Europe, the EU could turn in ways that would damageall our collective interests. As the Prime Minister put it: “Leaving the EU is not in our national interest.Outside, we would end up like Norway, subject to every rule for the single market made in Brussels but unableto shape those rules. And believe me: if we weren’t in there helping write the rules they would be writtenwithout us—the biggest supporter of open markets and free trade—and we wouldn’t like the outcome.”68

15. The case of Switzerland is very similar. Though the Swiss have tried to resist the rigid application ofEU rules under the EEA and other agreements with the Union, the trend is very clear as the country hasincreasingly accepted that it is in its interests to apply EU rules given the importance of the Union for its owntrade. Bern, by its own admission, has increasingly deferred to Brussels in the key areas of banking and trade.New hedge fund rules proposed in Switzerland are explicitly based on EU rules with additional Swiss rules—67 http://www.europautredningen.no/english/68 PM’s Lord Mayor’s Banquet Speech, 2011



a Swiss form of gold-plating. And negotiations between the Swiss and the EU aimed at encouraging the Swissto conform to “all the criteria” of the EU Code for Business Taxation are due to start imminently.

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

16. Prior to the December European Council, the major concern in Britain was that a caucus of Eurozonecountries might stray into EU-27 matters, most importantly over the single market. This is a legitimate concern.But the outcome of the December council increased the risk of such caucusing rather than reduced it.

17. The UK was not asked to pool any additional sovereignty or power within the EU architecture. Whatwe were being asked was to allow the Eurozone countries to enhance the debt rules that apply to them byamending the EU Treaties accordingly. Worryingly, and for the first time in our membership of the Union, allthe other member states decided that they could not work with the UK in this regard. They had to find analternative arrangement outside the EU Treaties and without the UK. Rather than being a British veto, thiswas a decision by the rest of the EU to walk away from the UK and carry on with their negotiation in adifferent room.

18. This broke the number one rule that has guided British policy on Europe for decades: that we shouldalways seek to exert maximum British influence on decision-making inside the Union. And, far from protectingthe City of London, it actually put the City’s interests, and broader British interests, more at risk not less. Theoutcome of the Council was a plan for a Fiscal Compact signed by 25 out of 27 member states (and we expectthe Czech Republic to sign before long). Provisions for discussions and initiatives among the signatories aredangerously close to single market matters under Title IV of the Treaty and regular meetings among Eurozoneand Eurozone Plus members will take place around European Council meetings. Unless the Treaty is embeddedinto the institutional architecture of the EU, the UK cannot fully rely on the protections and rights afforded tomember states under the Treaties. The potential for caucusing among Eurozone or Eurozone Plus countries,and without the UK, on single market matters, especially financial services, remains clearer than ever withvehicles and legal scope for this to occur.

19. This risk is reinforced by the political impact of the December council, with British relations with ourpartners strained at a time of extreme anxiety for the Eurozone and broader EU. The UK’s reputation as a fullycommitted, reliable and trustworthy member of the EU has been questioned. It is far from rare to hear peopleopenly speculate about Britain’s future in the EU, or about whether EEA membership may be a better modelfor us. The key danger in the short/medium-term is that the questionmark over Britain’s future place in Europebecomes a self-fulfilling prophecy as other member states start to overlook UK arguments and interests(regardless of their merits), and make other alliances over matters of core interest to the UK. The recentnegotiations over the CRDIV Directive, a piece of legislation of crucial importance to us, saw the UKdangerously close to a position of one against 26, despite the merits of our argument. A by-product, perhaps,of the December council. And there are plenty more difficult negotiations to come.

20. All is not lost—far from it. The use of our observer status in the negotiations following the Decembercouncil was wise, as was our decision to allow the use of the EU institutions which themselves are bound toprotect the EU Treaties in full and thereby British rights and responsibilities. The UK is a highly valuedmember of the Union in many ways, not least for our free trade and liberalising instincts which chime withmany other member states and the natural disposition of the European Commission. But also for our leadershipin foreign and security policy matters, our excellent reputation on police and judicial co-operation, our strongclimate change credentials and our rigorous scrutiny of EU proposals at a technical level to ensure theyare workable.

21. The UK has rightly fought hard to rebuild key relationships and alliances on matters such as the Europeangrowth agenda, climate change and EU foreign policy matters. We need to redouble our efforts, maintain aflexible approach, generate new initiatives and ideas, deepen existing alliances and build new ones—especiallywith Euro “ins”—and maximise our influence while taking opportunities for good deals and trade-offs forthe UK.

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

22. A multi-speed Europe already exists. The UK is not a member of the Euro or of Schengen (though weparticipate in police and judicial cooperation aspects in the latter) and we have an opt-in on all justice andhome affairs matters. The treaties also offer considerable safeguards for the UK and other member states onsensitive matters such as the emergency brake clauses, safeguards on the single market and new powers fornational parliaments over subsidiarity matters. This flexibility has worked well for Britain and many othercountries within the overall framework of the EU, while they retain the option of altering these arrangementsaccording to their own interests. Denmark, for example, is considering moving from an opt-out on JHA matterstowards a UK opt-in model, and many non-Eurozone states are committed to joining the Euro in the future.



23. The treaties’ enhanced co-operation mechanisms (the first use of which the UK pushed for in relation tothe EU patent and patent court) was one amongst other innovations in the treaties. These offer a vehicle topreserve the rights and responsibilities of non-participants in specific areas of deepened integration.

24. However, a formalised two-tier model is not in the British national interest. It could relegate the UK topermanent second class citizen status in the EU with all the consequences this implies for British influenceover the shape and fortunes of our continent and ability to project power and influence internationally. Thenon-Euro block is likely to decline in size so the idea of forming a non-Euro group to balance a Euro-groupingis fanciful. If the UK wishes to maximise its influence in the EU and retain global player status in worldaffairs, it is fundamentally in the national interest to ensure we retain top table status within the EU. We seegrave risks of the “self-fulfilling prophecy” if the UK openly starts to explore different forms of membershipwith the EU. The reality is that, in such circumstances, others might take that decision for us.

What is the relationship between the new “fiscal compact” Treaty and the EU’s acquis? What impact mightthe conclusion of the Fiscal Compact Treaty have on other aspects of the EU and its policies such as thebudget, enlargement, or CFSP?

25. The fiscal compact Treaty lies outside of the EU treaties, but is linked via the EU institutions and setsout political commitments among the signatories over the use of EU Treaty tools, such as enhanced co-operation, and positions such as on the enforcement of the new “six pack” rules. Our primary concern overthis structure is the potential for caucusing over EU-27 matters, most notably on the single market. Within theFiscal Compact Treaty, this could occur through actions taken under Title IV of the Treaty. More broadly, thenew opportunities for Eurozone and Eurozone Plus groupings of member states to meet to discuss mattersunder the Fiscal Compact Treaty could directly or indirectly impact the interests of the EU-27 or the singlemarket. The prospect of this materialising depends to a large extent on the 27’s ability to find solutions toproblems with the EU’s main architecture, and thereby on the attitude and approach of the UK and othermember states.


26. The “fiscal compact” Treaty envisages its own incorporation into the main EU Treaties within five years.This would be far more satisfactory than the current situation and clearly in line with British national interests.It would not mean that the UK itself would need to sign up to the debt rules included in the Treaty or to anyother aspects of the Treaty itself. Rather it would, as was the original intention, enable Eurozone countries totighten and apply greater discipline to their own debt rules by amending them within the EU Treaties. The UKand other non-Eurozone countries would be well within their rights to ask for a generic safeguard on singlemarket matters (that is that they remain the exclusive preserve of the EU-27 and that the Compact will honourand not undermine existing single market rules), as well as access to future Eurozone and/or Eurozone Plusmeetings.

22 May 2012

Annex

1. Creating British Jobs and Prosperity through the Single Market

— The UK economy benefits from the single market alone (not including EU external free trade deals)to the tune of up to £90 billion annually, or £3,300 per household every year (27 million householdsin UK).69

— The EU’s single market gives British companies free trade access to the world’s biggest singlemarket worth nearly £12 trillion in GDP and over 500 million consumers.70

— 3.5 million British jobs are reliant on the EU’s single market. That’s one in every 10 British jobs.71

— 50% of British trade, worth £450 billion a year, is with other EU member states.72

— Over 100,000 British firms export to other EU countries, 94,000 of which are SMEs. 80% of all UKbusinesses think the Single Market delivers concrete benefits to them.73 Over 200,000 UKcompanies trade with the EU every year.74

— The growth in free trade within the EU has generated up to £3,300 in extra income per Britishhousehold per year over the last 30 years.75

69 http://www.theyworkforyou.com/wrans/?id=2011–09–06c.67079.h&s=section%3Awrans+speaker%3A11494#g67079.q070 http://www.bis.gov.uk/policies/europe/eu-single-market-introduction71 http://www.theyworkforyou.com/wrans/?id=2011–09–06c.66959.h&s=section%3Awrans+speaker%3A11494#g66959.q072 http://www.bis.gov.uk/policies/europe/eu-single-market-introduction and http://www.theyworkforyou.com/wrans/?id=

2012–03–27a.101662.h&s=section%3Awrans+speaker%3A11823#g101662.q073 2006 MORI Poll74 http://www.theyworkforyou.com/wrans/?id=2012–03–27a.101662.h&s=section%3Awrans+speaker%3A11823#g101662.q075 http://www.theyworkforyou.com/wrans/?id=2011–09–06c.67079.h&s=section%3Awrans+speaker%3A11494#g67079.q0



— Over 50% of foreign direct investment to the UK comes from other EU member states, and is worth£351 billion a year.76

— Over 50% of companies investing in the UK cite the UK’s membership of the Single Market as acore reason for investing in the UK.77

— Full access to the EU’s single market makes the UK a magnet for foreign companies locating in theUK: Between 1998 and 2011, 603 major foreign companies chose to locate their EuropeanHeadquarters in the UK.78

— An OECD and Bank of England study suggest that UK withdrawal from the EU would cut FDI intothe UK by over a third and damage household incomes.79

— The UK is pushing to liberalise trade within the EU in new growth areas such as energy, digital,services and green tech. sectors. This could add over £650 billion to the EU economy, making theaverage UK household almost £3,500 better off each year.80

— EU enlargement is hugely economically beneficial for the UK by expanding the EU’s single market.The enlargement of 10 central and eastern European countries has seen UK exports to those countriestreble over the last ten years to almost £12 billion.

— The City of London and Edinburgh are the leading financial centres in Europe. Ensuring the UKretains its influence over financial services regulation is vital.

— The level of trade liberalisation in the EU is unparalleled anywhere in the world.

2. New Opportunities, Making Life Cheaper and Easier for British Citizens

— Our membership provides UK nationals freedom of movement across the entire EU.

— Today, around 2.2 million British nationals are living in another EU member state—either working,studying, or in retirement. Around 50% live in Spain.81

— EU free movement rules allow British families to travel freely on holiday throughout the EU at anytime in the year—some 25 million Brits go on holiday to other EU countries every year.82

— EU rules allow for Brits to live and work anywhere else in the EU too. Some 260,000 Brits work inanother EU country, an increase of more than 40,000 since 2005.83

— Under current and emerging EU rules, British nationals will be guaranteed to have their rights andprotections respected in all other EU member states.

— Eg the European Protection Order will ensure that British victims of violence who have a UKprotection order will receive the same protections anywhere in the EU.

— Eg the EU is in the process of passing a package of measures that will ensure that any Britishcitizen arrested on the continent will have their basic rights guaranteed including the right tobe fully informed at all stages of the process, access to a lawyer and translation rights.

— The European Health Insurance Card (EHIC) enables UK travellers to receive free or reduced costhealthcare when on a temporary visit to another member state. There are around 30.5 million UK-issued EHICs in circulation.

— EU competition and consumer rights laws have driven down prices, opened up markets for smallerbusinesses and boosted consumer protections.

— The average British UK consumer saves around £480 per person per year as a result of EU singlemarket competition driving down price of goods and services.84 For example, British families andbusinesses now enjoy vastly reduced mobile phone roaming charges, cheaper flights and propercompensation when flights are delayed or cancelled.

3. Opening up Markets for British Businesses Around the World

— The EU is vital to opening up new trading opportunities for the UK around the world.

— By negotiating as part of the world’s biggest single market bloc, the UK is able to get much betterterms and access than it would if it were negotiating by itself.

76 http://www.theyworkforyou.com/wrans/?id=2011–09–05a.66958.h&s=section%3Awrans+speaker%3A11494#g66958.q077 UKTI, OMB Research, (2010) UKTI Performance and Impact Monitoring Survey (PIMS) Inward Investment.78 Calculated taking 2010–11 figure from: http://www.theyworkforyou.com/wrans/?id=2012–03–27a.101660.h&s=

section%3Awrans+speaker%3A11823#g101660.q0 and 1998–2009 figure from http://www.ukti.gov.uk/uktihome/item/113922.html

79 Pain and Young, (2004) Macroeconomic Impact of the UK Withdrawal from the EU.80 http://www.bis.gov.uk/news/topstories/2011/Mar/eugrowth81 http://www.theyworkforyou.com/wrans/?id=2011–09–06c.68474.h&s=section%3Awrans+speaker%3A24928#g68474.q082 http://www.theyworkforyou.com/wrans/?id=2011–11–24b.82499.h&s=section%3Awrans+speaker%3A11494#g82499.q083 http://www.theyworkforyou.com/wrans/?id=2011–11–24b.82500.h&s=section%3Awrans+speaker%3A11494#g82500.q084 http://www.theyworkforyou.com/wrans/?id=2012–04–16b.102035.h&s=section%3Awrans+speaker%3A11823#g102035.q0



— For example, a recently signed EU Free Trade Agreement (FTA) with South Korea (a bigger marketthan Turkey or Indonesia) has virtually eradicated all tariffs barriers for EU exporters. It will bring£500 million a year of benefits to British businesses.85

— The EU is in the process of negotiating a series of new FTAs including with India, Canada, Ukraineand South America which will deliver enormous economic benefits to British households andbusinesses. Completing all ongoing EU FTA negotiations would generate over £50 billion for theeconomy.86 There are many others in the pipeline, including with Japan and the US which couldbring enormous economic benefits to the UK and broader European economy.

— Below is a snapshot of some of the benefits from some of individual FTAs under negotiation:87

— EU-Canada: The benefits of this agreement to the UK could be approximately £423 million perannum in the short term;

— EU-India FTA: This agreement could produce benefits to the UK of approximately £2 billionover ten years;

— EU-Mercosur FTA: The Commission has conducted some research but there is not yet apublished SIA;

— The EU-Malaysia FTA and EU-Singapore FTA are important building blocks towards an EU-ASEAN FTA, which could bring benefits of up to £3 billion per annum to the UK in thelong term.

4. Helping the UK Combat Climate Change, Deliver Energy Security and Generate a LowCarbon Economy

— The EU is vital to delivering British objectives on climate change, energy security and generating alow carbon economy.

— The EU is a world leader in combating climate change. Collective EU action was crucial forestablishing the Kyoto protocol. Strong leadership by the UK and the European Commission helpedto keep a strong and united “Team EU” position at the UNFCCC CoP in Durban in 2011 and secureda remarkable global commitment including all major emitters.

— The EU’s collective position to deliver a 20% reduction in emissions by 2020 is essential for securinga global deal on climate change. The UK is pushing for a 30% EU climate change target.

— The EU’s Emissions Trading Scheme is the biggest of its kind in the world and vital for combatingclimate change and generating low carbon growth.

— The EU’s new Energy Strategy is essential in delivering UK energy security by diversifying energygeneration and supplies, driving through reductions in consumption, creating a fully functioninginternal energy market and investing in an efficient European Supergrid.

— EU targets and actions stimulate investment in UK renewables and low carbon technologies, andgenerate British low carbon export markets across the EU.

— For example, a European Supergrid could generate tens of thousands of new British jobs in theoffshore renewable industry, turn the UK into a net exporter of energy again and reduce the costs ofinvesting in new offshore wind and marine energy by 25%.88

5. Helping to Combat Criminal and Security Threats Facing the UK and Protecting Rights

EU-wide action is essential to tackle cross-border security threats to Britain like terrorism, human trafficking,drug smuggling, illegal immigration and money laundering. Some examples:

— A three-year Europol investigation, Operation Rescue, broke the world’s largest online childpornography network making 184 arrests (121 in Britain) and rescuing 230 children (60 in theUK) 2011.89

— Operation Golf, a joint operation between Europol, the Met and Romanian Police, broke up anorganised criminal operating a child trafficking network in the UK and across the EU. In 2010,this saw seven individuals arrested in the UK and the release of 28 children. In total, some 121individuals were arrested under the Operation.90

— Through the European Arrest Warrant (EAW), in 2010 the UK extradited over 145 individualsfrom other EU member states to the UK to face criminal prosecutions for crimes they hadcommitted here.91

85 http://www.bis.gov.uk/news/topstories/2010/Oct/davey-free-trade-agreement86 http://www.number10.gov.uk/wp-content/uploads/EU_growth.pdf87 http://www.theyworkforyou.com/wrans/?id=2012–04–16b.102034.h&s=section%3Awrans+speaker%3A11823#g102034.q088 http://www.parliament.uk/business/committees/committees-a-z/commons-select/energy-and-climate-change-committee/news/

esg-publication/89 http://www.guardian.co.uk/society/2011/mar/16/global-paedophile-ring-smashed and http://www.build.co.uk/national_

news.asp?newsid=12434690 https://www.europol.europa.eu/content/page/operational-successes-12791 SOCA Annual Report 2010–11 page 93



— Over the last two years, the UK has used the EAW to extradite at least 71 non-UK nationalssuspected of committing serious crimes in the UK. This includes four thefts, four robberies,five murders, five rapes, six child sexual offences, nine cases of GBH and 14 cases of fraud.92

— This, of course, excludes British national extradited back to the UK for crimes committed inthe UK. We note, for example, the extraordinary success of the Crimestoppers’ OperationCaptura which has successfully seen the arrest and return under the EAW of 49 out 65 mostwanted British nationals on the run in Spain.93

— Through EU action to enable transfers of data on convictions, the UK is now aware (previouslyunaware) of 276 British nationals who have committed offences against children across the EU.

— The Eurodac System helps the UK cross reference thousands of asylum claims in the UK withthose in other member states.94 Since 2003, the EU’s “Dublin System” has enabled the UKto remove over 12,000 asylum applicants to member states that are responsible for decidingtheir claims.95

— EU action via “Frontex” at Europe’s external borders helps to combat illegal migrant flows intothe Union, many of whom intend to travel to the UK.

— The EU’s Joint Investigation Team (JIT) has become a key vehicle for the British Police tooperate smoothly with other national forces in pursuing lengthy and complex cross-borderinvestigations. Since 2009, British Police have been involved in at least 15 JITs.96

— The recently operational EU Council Framework Decision 2005/214/JHA should enable theUK to ensure that hundreds of thousands of pounds worth of financial penalties issued foroffences committed in the UK can be claimed back from individuals in other EU memberstates.97

— The EU’s Prisoner Transfer Framework decision, which recently came into force, should allowthe UK to both improve rehabilitation outcomes and reduce the size of the British prisonpopulation by returning foreign national prisoners to the home EU member state. The transferof the first batch of prisoners is currently in the pipeline.98

— The ongoing package of legislation to put in place minimum standards for victims rights,heavily inspired by UK best practice, will help to ensure that British victims of crime in othermember states have their rights properly protected. The parallel package on procedural rightsin criminal justice, also heavily inspired by UK best practice, are crucial for ensuring that themore than 3,000 British nationals arrested and tried in other member states every year aresubject to high standards of criminal justice.99

6. Helping Deliver British Foreign Policy: Global Security, Stability and Combating Poverty

Acting as part of a 27 nation bloc, representing the largest single market in the world, is a huge magnifierof Britain’s voice and influence in the world. Some examples:

— The EU’s biggest foreign policy success is spreading European values, peace, security andprosperity across the continent, most recently through enlargement in 2005 to include 10 newEU member states. The UK remains a leading proponent of further enlargement to the WesternBalkans, Iceland and Turkey.

— The EU’s Neighbourhood Policy is essential to delivering UK objectives of stability andprosperity to countries on the Eastern-edge of the EU, and in supporting the transitionsunderway across much of North Africa and the Middle East.

— EU sanctions have a much greater impact than UK-only sanctions. The EU, urged on by theUK and others, recently agreed sanctions on all oil exports from Syria to help put pressure onthe regime there. Syrian oil exports to the EU are 95% of their total oil exports and reportssuggest that the impact of the sanctions is already being felt by the regime and the rulingelite.100 The EU has also enacted a robust sanctions package on Iran and Zimbabwe.

— Equally, removing EU sanctions, opening up normal diplomatic channels and relaunching aidflows are a huge incentive to positive reforms. Indeed, we saw this and the benefits it brings toUK influence overseas very neatly in Burma with the PM’s initiative to urge the suspension ofsanction on Burma, this position being approved by EU Foreign Ministers, the EAS openingup a new office in Burma and the reopening of EU aid flows to the country.

92 http://www.theyworkforyou.com/wrans/?id=2011–11–28c.81230.h&s=section%3Awrans+speaker%3A11494#g81230.q093 http://www.crimestoppers-uk.org/most-wanted/catching-criminals-in-spain/arrests-to-date-operation-captura94 http://www.theyworkforyou.com/wrans/?id=2011–11–15c.81155.h&s=section%3Awrans+speaker%3A11494#g81155.q095 Ibid96 http://www.theyworkforyou.com/wrans/?id=2012–04–16b.103060.h&s=section%3Awrans+speaker%3A11494#g103060.q097 http://www.theyworkforyou.com/wrans/?id=2012–05–01b.106071.h&s=section%3Awrans+speaker%3A11494#g106071.q098 http://www.theyworkforyou.com/wrans/?id=2012–03–07a.98443.h&s=section%3Awrans+speaker%3A11494#g98443.q099 http://www.theyworkforyou.com/wrans/?id=2011–11–15c.81154.h&s=section%3Awrans+speaker%3A11494#g81154.q0100 http://www.bbc.co.uk/news/world-middle-east-14759416



— The EU remains the world’s biggest aid donor and will be crucial for delivering on the UK’sobjectives of combating global poverty.101

— The EU’s trading power is vital for supporting poorer countries growth and stability. The EU,under a UK initiative, agreed an ambitious emergency trade relief package for Pakistan in thewake of the devastating floods in the country last year.

— The EU’s Common Security and Defence Policy (CSDP) is delivering in a variety of importantareas to the UK and broader EU such as:

— The large-scale rule of law mission in Kosovo to combat organised crime, corruption anddeliver stability in the country;102

— Operation ATALANTA, a UK-led (commanded from Northwood) EU naval mission tocounter-piracy off the coast of Somalia which has reduced the number of successful pirateattacks and protected over 500,000 tonnes of food aid.103

Written evidence from Professor Richard Rose, FBA, University of Strathclyde and EuropeanUniversity Institute

DISTINCTIVE UK PRIORITIES FOR THE EU’S FUTURE

1.1 The December 2011 European Council is a challenge, not a watershed, because it is unclear how eurozonemembers of the EU will react to future events. The German Chancellor is calling for changes in EU rules thatcould trigger a British referendum under terms of the 2011 European Union Act. To avoid misunderstandingsand possible isolation, HMG should start preparing for such developments.

1.2 The European Union notionally endorses diversity as well as Union, but the predominant position favoursall member states advancing in unison toward an ever closer union. Thus, the UK’s repeated challenges tofurther European integration are widely perceived as negative. This submission recommends that, consistentwith HMG’s distinctive position, it should promote institutional diversity as a positive means of managingdifferences within an EU that has 27 or more member states.

— 1.2a Pragmatic experimentation. EU procedures for enhanced cooperation enable willingcountries to adopt policies and countries with doubts to observe the experiment before decidingwhether to join in. This has been Britain’s stance on the euro and the Stability Treaty can gointo effect after ratification by 12 countries.

— 1.2b Give European citizens a say on major increases in EU powers. HMG should promote its2011 EU Referendum Act as a positive step to address the EU’s democratic deficit by testingthe commitment of Europe’s citizens to further expansions of the EU’s powers.

— 1.2c Link enhanced cooperation and referendum endorsement. A coalition of the willing impliesthat the unwilling should satisfy themselves by opting out. Therefore, future agreements on theexpansion of EU powers should have complementary and contingent provisions for enhancedcooperation by countries that favour further integration and opt out clauses for countries thatmay not do so, eg Britain after a national referendum.

1.3 The above recommendations are based on an ESRC-funded study to be published by Oxford U. Pressnext spring, Representing Europeans: a Pragmatic Approach, and related publications. Both projects reflectmy long-term interest in how growing cross-national interdependence can be managed by governmentsaccountable to a national parliament and electorate. See for example, The Prime Minister in a Shrinking Worldand The Post-Modern Presidency.

2.1 Experimenting through enhanced cooperation occurs when some EU member states adopt a policy andothers do not. This has been happening for decades in different policy sectors and institutional forms. Forexample, the Schengen agreement promoting easy movement across national boundaries started in 1985 andBritain and Ireland continue to opt out. Pragmatic experimentation enables governments that consider a policyin their national interest to cooperate with other member states and promptly learn how it works.Simultaneously, it allows governments that think a measure not in their interest to avoid being forced to joinand, even worse, being forced to pay the costs of doing so if the experiment is unsuccessful.

2.2 Title IV of the Treaty on European Union and the Treaty on the Future of the European Union ArticleVI. Title III contain detailed rules for the use of enhanced co-operation to maintain momentum toward an evercloser Union when unanimity is lacking about what the EU should do. Hence, the practice is sometimesdescribed by the term “differentiated integration”. The eurozone crisis pushes EU countries into unchartedwaters. In conditions of high uncertainty, trial-and-error policies are being adopted in an experimental searchfor measures that will work. Since eurozone countries fall into three different groups—members; non-memberswith a commitment to join at some unspecified future date; and countries not expected to join—it is possiblethat different policies may be suited to each group. By allowing for differentiation, enhanced cooperationincreases the number of countries satisfied with their EU obligations.101 http://development.donoratlas.eu/home.html102 http://www.eulex-kosovo.eu/en/front/103 http://www.eunavfor.eu/ and http://www.publications.parliament.uk/pa/ld200910/ldselect/ldeucom/103/10302.htm



2.3 Enhanced cooperation can avoid the extremes of Britain vetoing an EU measure favoured by a substantialmajority or Britain being compelled to adopt a policy unacceptable to the UK Parliament and citizens. In a 27-country European Union it is unlikely that Britain would be alone in hesitating about being in the vanguard ofmoves toward closer integration. However, in the absence of leadership from a major country, small states lackthe political will and clout to secure major changes in what a predominant majority agrees.

2.4 The convention of the acquis communautaire prevents “retro-fitting” enhanced co-operation toestablished measures. Hence, it is rhetorical overkill to suggest that it would cause the EU to disintegrate.Where uniformity is required, for example, the admission of new member states or basic principles of thesingle Europe market, enhanced cooperation is not feasible. However, existing EU policies show that the casefor uniformity tends to be exaggerated. Key measures affecting the three pillars of the EU are not uniformlyapplicable across EU member states, eg, border controls (Schengen); monetary policy (the euro); and defence(NAT0).

2.5 HMG should promote enhanced cooperation as desirable in principle and invoke it when issues emergewhere there are pressures to act but no agreement about what is to be done. Ideally, these issues would includepolicies where Britain can lead in cooperation, as it did in air support for Libya, as well as those where itsdistinctive priorities recommend opting out.

2.6 Pragmatic experimentation through enhanced cooperation is not a commitment to a two-speed Europe.The dynamic consequence depends on its success. If an initiative is successful, laggards (that is, those who donot initially join) can catch up with leaders subsequently. This is the process by which the UK entered theEuropean Union two decades after refusing to be a founder member. It also provides a firm institutionalfoundation for flexible integration, in which the member states that join together can differ from one policy toanother. This is the basis on which Britain participates in the chief institution for European defence, NATO,while remaining outside the chief institution for European monetary policy, the ECB.

3.1 Giving European citizens a say through referendums. While the European Parliament has gained inpowers vis a vis other EU institutions, its claim to represent EU citizens has fallen as turnout has settled belowhalf the electorate. Moreover, key decisions in the EP are made by multi-national party groups, which researchshows are much more in favour of an ever closer Union than are Europe’s citizens. Moreover, irreversibledecisions on treaties expanding the EU’s powers can be agreed in the European Council by nationalgovernments representing less than half their country’s voters and binding future national governments. Thisis less than the super-majority normally required to endorse changes in national constitutions; ten memberstates require referendums on major changes in their national constitution.

3.2 Consistent with the EU principle of subsidiarity, it is open to the government of any EU country to calla referendum on an EU issue. At different times over the years 22 countries have called a national referendumon an EU issue on grounds of political principle, political prudence or for domestic political reasons. Theconduct of a referendum campaign focuses attention on whether citizens want to be committed to furtherintegration. Turnout at EU referendums is normally significantly higher than national participation in aEuropean Parliament election. In three-quarters of the cases, the result of a referendum is popular endorsementof an EU measure. Public opinion in every EU member state favours a referendum vote on any new EU treaty(Annex 1).

3.3 The current practice of referendums on expanding EU powers has major flaws. National referendumshave excluded between 72 and 99 percent of EU citizens from voting (Annex 2) and a single EU country canveto the adoption of an important measure supported by a preponderant majority of countries. Because a freeand fair referendum vote risks the rejection of an EU agreement, current EU policy is to expand its powers byadopting “treaty-like” agreements through novel procedures. The new Treaty on Stability, Coordination andGovernance in the Economic and Monetary Union is a prime example. It confers new powers on the EuropeanCommission and European Court of Justice and national governments are expected to get their parliaments toadopt fiscal measures prescribed therein without further reference to their national electorate.

3.4 The UK is now one of three member states with a legal requirement to hold a national referendum ontreaties transferring powers to the EU. The Irish court has ruled that the Stability agreement is a Treaty subjectto a national ballot. Danish lawyers have been able to finesse referendum requirements. National elections inmember states, occurring at the rate of seven a year, present further challenges, as Greece most vividlydemonstrates. In addition, the German Federal Court is now prepared to examine cases challenging whetherEU measures are consistent with the democratic principles of the German Constitution.

3.5 HMG should call for European citizens to be given a bigger voice on major EU decisions throughsimultaneously held national referendums. This is a practical means of reducing the EU’s democratic deficitand increasing popular commitment to EU measures that national majorities endorse. Moreover, it does notrequire a new Treaty to be enacted. National governments that decide to hold a referendum need only co-ordinate the date and wording of a ballot. National governments hesitant about doing so would be underpressure to follow where others lead.

3.6 The prospect of a referendum on the transfer of powers to the EU should have a significant influence ondiscussions in Brussels about whether and how integration should be increased. It should encourage the pro-integration majorities in the Commission and Parliament to pay more attention to securing the commitment of



their citizens. It would also remind national governments meeting in the European Council that British concernswith ambitious transfers of power are not a peculiarly insular fixation but one that a significant number of theirown citizens may share.

4.1 Linking enhanced cooperation with popular support through referendums. Any treaty approved by allnational governments in the European Council is likely to be endorsed by a majority of national referendums.But since all referendums raise the possibility of defeat, a treaty proposal should include clauses for optingout by countries rejecting a treaty and also clauses allowing countries to join subsequently if a new policyis successful.

4.2 HMG should have a two-pronged strategy for proposals to expand EU powers. It can seek support tomodify proposals to make them acceptable in Britain. If this is not practical, it should emphasis includingenhanced cooperation clauses that allow member states to co-operate and allow Britain to opt out. Such astrategy can be justified as consistent with the EU principle of diversity, authorized by the Treaty on EuropeanUnion. It will also avoid conflict between the UK’s 2011 EU Act and commitments that majorities endorse.

22 May 2012



Annex 1

NATIONAL DEMAND FOR REFERENDUMS ON EU TREATIES

41%45%

51%52%

55%55%

58%58%59%59%59%60%62%62%62%62%63%64%65%65%65%66%

71%74%

79%81%82%

88%

0% 50% 100%

SloveniaSwedenBelgium

NetherlandsLuxembourg

SlovakiaAustria

ItalyRomania

FinlandEstonia

GermlanyLithuania

LatviaCzech Republic

HungaryAll EUFrance

PortugalDenmark

PolandMaltaSpain

BulgariaCyprus

UKGreeceIreland

Pro-referendum

Q. Do you agree or disagree that EU treatychanges should be decided by refendum?

Source: European Election Study, 2009. A survey of 27,069 respondents across all EU Member States. Fordetails see www.piredeu.eu



Annex 2

EXCLUSION OF EUROPE’S CITIZENS BY NATIONAL REFERENDUMS

(Percent of citizens in Member States not holding referendum)

% excluded from voting

Stabilty Treaty

Lisbon

European Constitution

Amsterdam

Nice

Maastricht

Single European Act

0% 50% 100%

99%

99%

73%

97%

99%

80%

97%

Notes: Stability Treaty and Lisbon: Ireland voted; 26 countries did not. European Constitution: France, Spain,Luxembourg and Netherlands voted, 21 countries did not. Amsterdam: Ireland and Denmark voted, 13 countriesdid not. Nice: Ireland voted, 14 countries did not. Maastricht: France, Ireland and Denmark voted, 9 countriesdid not. Single European Act: Denmark and Ireland voted, 10 countries did not.

Written evidence from Professor David Phinnemore, Queen’s University Belfast

THE FUTURE OF THE EUROPEAN UNION: FORMS OF MEMBERSHIP

Executive Summary— A UK referendum on the EU is now highly likely and will, irrespective of the wording, most likely

be treated as a vote on whether to stay in the EU or not.

— Any renegotiation of the terms of UK membership will need to address the individual and collectiveinterests and preferences of all member states and not just those of the United Kingdom.

— Any renegotiation could result in a demand from “full” members that the United Kingdom’sinstitutional representation and role in decision-making be reduced.

— Any renegotiation would set precedents for and challenge the EU’s approach to enlargement.

— The United Kingdom already benefits from a specially tailored form of membership that othermember states may be willing to see refined in the context of a further round of wider treaty reformbut this refinement may not be sufficient to meet popular and political demands for a renegotiation.

— For a range of reasons relating primarily to maintaining the existing balance of rights and obligationsof member states and to enlargement the EU is unlikely to agree formalized tiers of membership.

Prof. Phinnemore is an expert on the politics of the European Union and specifically its treaties andenlargement. He is Visiting Professor at the College of Europe where he teaches on EU enlargement. He haspublished widely on successive rounds of EU treaty reform as well as on enlargement and forms of associationwith the EU. During 2010–11 he was seconded as a Senior Research Analyst to the Foreign and CommonwealthOffice during the passage through parliament of the EU Act 2011. He is currently completing a book on thenegotiation of the Treaty of Lisbon.

1. Whether or not the December 2011 European Council and its outcome can or should be seen as awatershed in the United Kingdom’s EU policy and place in the Union is open to question. Current debates onhow the United Kingdom should respond to calls for further integration, particularly within the Eurozone, onwhether the UK government should seek to alter the terms of its membership, and on whether there should bea referendum on remaining in the EU all predate the eurozone crisis. Rather they are the symptoms of theUnited Kingdom’s uneasy and unenthusiastic participation in a process of European integration which is poorly



understood and which successive governments and oppostions have shown a tendency to portray as alienand threatening.

Towards a Renegotiation of the United Kingdom’s EU Membership

2. Although support for the United Kingdom’s continued membership is regularly re-affirmed bygovernments and most political parties, there can be no question that the current inquiry is taking place at apoint when the desirability of this membership is being most openly and forcefully questioned among voters,campaigners and politicians. The political saliency of the issue has not been so great since the early 1980s.With public opinion remaining for the most part unenthusiastic about European integration—whether the statusquo or further integration—and increasingly inclined to express a view on the United Kingdom’s positionwithin the EU, debate on alternatives appears set to remain a feature of UK politics until such time as areferendum is held and its outcome addressed.

3. The likelihood of a referendum is high and not simply because of the political saliency of the continuedmembership issues. The EU Act (2011), irrespective of whether it requires or not a referendum for a treatychange, has heightened expectations of a referendum being held. In the current political climate, it is extremelydifficult to envisage a future government being able to resist popular and parliamentary calls for a referendumeven if it can provide a completely water-tight legal case for ratification of a treaty change being exemptedfrom referendum requirement under the EU Act (2011). Irrespective of the formal focus of the referendum, thevote would be treated by many campaigners and voters as a question of whether the United Kingdom shouldremain in or alter its relationship with the EU.

4. Many opponents of the United Kingdom’s continued membership of the EU advocate withdrawal and theestablishment of an alternative relationship, often along the lines of the European Economic Area or thecomplex, multi-agreement bilateral relationship that Switzerland has with the EU. These are dynamic forms ofrelations in which the non-member state takes on a substantial proportion of the obligations of EU membershipwithout a formal role in their adoption, an important point often overlooked by supporters of such relations forthe United Kingdom.

5. A key feature of the emerging debate is, however, the preference to consider “renegotiation ofmembership” as some form of middle way between the status quo and withdrawal.

6. Assuming such a focus is maintained, it raises the question of what alternative forms of EU membershipare possible and which would suit UK interests best. However, and importantly, consideration of options cannotbe undertaken simply from a UK perspective of what would be desirable. EU membership, it cannot beforgotten, is regulated by unanimous agreement among the member states as contracting parties to the EU’sconstitutive treaties—the Treaty on European Union and the Treaty on the Functioning of the EuropeanUnion—and so renegotiation would have to take place with their active consent and potentially be ratifiedby them.

7. It is not the case that the United Kingdom could dictate the terms of any renegotiated form of membership.The interests of the other member states both individually and collectively would have to be addressed. It isto be expected that the EU’s institutions will also seek to influence the substance of any renegotiations withthe European Parliament likely to demand a role in the formal approval of any change. As regards the collectiveinterest, any renegotiated form of membership would set precedents for other actual and would-be members aswell as the terms of accession governing enlargement. Renegotiation would have implications well beyond thenarrow terms of the UK’s continued membership.

One Membership, but Degrees of Membership

8. Formally, there is only one form of EU membership: membership. Other forms of membership have beenproposed (eg affiliate membership) but no treaty provision has ever been drafted to enable them. If a statewishes to become a member of the EU, it has one option: membership. Established practice is that it assumesall existing treaties as well as all other primary and secondary legislation—the acquis. Opt-outs are exceedinglyrare and highly specific. Moreover, acceding states are obliged to subscribe to the acquis politique of the EU,ie its often loosely worded political ambitions, including “ever closer Union”.104

9. In practice, certain forms of contractual relationships have been presented as a form of (eg “associate”)membership. Legally speaking, however, these are not a form of membership of the EU, but a form ofrelationship with the EU. This is irrespective of the fact that the intensity of the contractual commitments insome relationships is so great (eg the European Economic Area) that the non-member state assumes many ofthe obligations and receives many of the benefits of membership and in some cases, notably where Schengenparticipation is concerned, is actually more of a member than certain member states (eg the United Kingdom).However, one important and highly sought benefit of membership that has never been granted to a non-memberstate has been representation in the EU’s institutions and therefore participation in EU decision-making.104 It can and should be expected therefore that states acceding to the EU in the future will be expected to commit in principle at

least to acceding to the extra-EU Fiscal Compact Treaty even if becoming a signatory is not a pre-requisite for membership. Inany case, with the “six-pack” legislation on economic governance part of the acquis, acceding states would be committed tomost of the requirements of Fiscal Compact Treaty albeit with the obvious exception of the debt brake.



10. Although legally there is only one form of EU membership, in practice various degrees of membershipexist. On the one hand, not all member states are members of the eurozone. Member states can be divided intothree categories: eurozone members—“ins”; member states that have not yet met the criteria to become part ofthe eurozone—“pre-ins”; member states—“outs”—that have either previously signed up to economic andmonetary union and subsequently decided not to join the eurozone (Sweden, Denmark) or have always had anopt out (United Kingdom). On the other hand, not all member states participate fully in Schengen activities orthe area of freedom, security and justice: the United Kingdom, Ireland and Denmark have a partial membershipof these areas due to various opt-out/opt-in arrangements. Furthermore, the United Kingdom and Poland havea special status vis-à-vis the Charter of Fundamental Rights,105 and Denmark has a politial opt-out from defencecooperation. And then we have the recently established forms of enhanced cooperation (ie on cross-borderdivorce, an EU patent).

Formalizing Tiers of Membership

11. Each of these arrangements alters the degree of a state’s membership and has been developed followingnegotiation between the member states. Each—with the exception of the eurozone opt-outs—also remainsrather fuzzy, the boundaries shifting as the relevant acquis evolves and opt-ins are exercised. None has beenformalized through the creation of a particular form of named membership that is made available—explicitlyor implicitly—to others, whether current or would-be members. Only at the time that the relevant treaty changewas agreed (eg Maastricht, Amsterdam, and Lisbon) was the variable degree of membership established.

12. The unscripted emergence of the variable degrees of membership and the fact that they have remainedad hoc arrangements reflects a widespread reluctance to formalize tiers of membership. At least five reasonscan be advanced:

— securing agreement on what constitutes a second or third etc. tier of membership would beexceptionally difficult given the integrated nature of the acquis and the fact that unanimousagreement among the member states would be required;

— member states have studiously avoided any situation where they might be classified as a second-class member as with all certainty would be the case if tiers of membership were established;

— formalizing tiers of membership would necessitate a debate on the balance of rights andobligations associated with each tier leading potentially to differentiated levels of institutionalrepresentation and decision-making involvement;

— the existence of formalized tiers of membership could, and potentially would, necessitate afundamental re-working of how the EU enlarges (eg regarding which tier should be the basisfor negotiation) and oblige the EU to admit applicant states to some form of membership earlierthan would normally be the case; and

— if certain rights of membership (eg relating to institutional representation or decision-making)were clearly associated with only specific obligations being undertaken, a non-member statemeeting such obligations under a contractual arrangement with the EU could legitimately claimsuch rights.

13. While the possibility of EU member states formalizing tiers of membership—whether via politicalagreement or formal treaty change—cannot be ruled out, precedent suggests there would be little appetite todo so. The default option of the EU and its member states has always been for any deviations from “full”membership to be negotiated on an ad hoc basis and only when absolutely necessary to secure agreement ona wider set of treaty reforms. The preference for flexibility is also reflected in the decision not to specify theminimum content of any agreement governing relations with a member state that decides to leave the EUthrough the withdrawal clause in Article 50 TEU introduced by the Treaty of Lisbon.

14. Moreover, the question should be asked as to whether other member states actually support the idea offormalized tiers of membership. Past proposals for differentiated forms of integration and of establishing an“avant garde” of member states have generally attracted little support beyond the most integrationist memberstates. Most member states have feared relegation to a second or potentially lower tier. Among those memberstates has been the United Kingdom. There is currently little, if any evidence, to suggest that member stateswould be receptive to any formalization of tiers. Reaching unanimous agreement among the current 27 memberstates would be a major challenge.

Obstacles to Renegotiation

15. The history of the European integration has been long been characterised by flexibility with ad hocsolutions often being generated to address the particular concerns of individual member states. This helpsexplain the unique nature of the United Kingdom’s formal participation as a member in the EU. Whether thereis scope to secure a renogotiation or further refinement of that relationship is unclear. Precedent would suggestthat the latter—refinement—may be possible, although media and academic accounts of successive rounds oftreaty reforms reveal a persistent frustration with UK demands for exceptions, exemptions and other specialtreatment. It may be that the United Kingdom has at last exhausted the patience of other member states.105 This is due to be extended to the Czech Republic.



16. If a further refinement of the United Kingdom’s EU membership were possible, the question still remainswhether the result would satisfy domestic demand for a more substantial renegotiation such that a UKgovernment could win a referendum which in all likelihood would be perceived by many as a vote on whetherthe United Kingdom should remain in the EU or not.

17. How member states would respond to a UK demand for a more substantial renegotiation is unclear. It islikely that they would baulk at the prospect, not least because membership has always been—at least formember states—a carefully negotiated balance between rights and obligations in which all member states havehad to compromise. If renegotiation were possible, it can be expected that it would only be possible in thecontext of a wider, possibly major, treaty reform process, during which the United Kingdom would be expectedto make concessions to the other member states allowing them to pursue further integration. If so, the UnitedKingdom’s renegotiated—and reduced—form of membership would be accompanied by further integrationamong the remaining member states thus increasing the gap between “UK” and “full” membership.

18. As the gap—which already exists—widens, attention will undoubtedly shift to whether with reducedcommitments and obligations the United Kingdom should retain the same level of membership benefits, notablyregarding institutional representation and decision-making. The EU would be faced with its own West Lothianquestion, most obviously within the Council and European Parliament, but also potentially within otherinstitutions (eg the Court of Justice) and the EU’s advisory bodies, the Economic and Social Committee andthe Committee of the Regions. Existing practice means that MEPs are not excluded from debates and decisionsrelating to areas of EU activity from which the United Kingdom has opted out. In the Council, however, theUnited Kingdom does not have a vote in such situations.

19. A consideration that will undoubtedly influence the willingness of the other member states to consider arenegotiation is the fact that the result would further expose the inconsistency between the requirement the EUmakes of acceding states to accept as a prerequisite of membership the acquis in full and the fact that a memberstate can negotiate down various, possible many of its, obligations while retaining the benefits of membership.The EU will undoubtedly want to avoid accusations of double-standards; it will also want to maintain at leasta semblance of consistency in its approach to enlargement and the terms of accession. A UK government willalso presumably wish to avoid accusations of double-standards. Could though a UK government, with its strongadvocacy of Turkish membership, insist that Turkey only be admitted if it meets the criteria for membershipin full when the United Kingdom is seeking to reduce its commitments and exempt itself from elements of theacquis which it finds incovenient and undesirable?

22 May 2012

Written evidence from Dr Robin Niblett, Director, Chatham House

Dr Robin Niblett is Director of Chatham House. He also contributes to the institute’s work on Europe and UKforeign policy. His recent publications include The Chatham House-YouGov Survey 2011: British AttitudesTowards the UK’s International Priorities (Chatham House, 2011) and Playing to its Strengths: Rethinking theUK’s Role in a Changing World (Chatham House, 2010).

Summary of Evidence

The December 2011 European Council meeting was a watershed for the UK’s relationship with the EuropeanUnion (EU). It exposed the growing divergence between the UK’s approach to its membership of the EU andthat of the overwhelming majority of other member states. Britain’s position outside the eurozone means thatit will have minimal influence over near-term changes to the EU’s institutional architecture, which are beingorganised around the need to stabilise the monetary union and may include building a fiscal union. The riskhas grown, therefore, that the UK will be pushed to the margins of European integration and that this willundercut its influence and interests within the EU overall.

The UK has three options. It can take the radical step of withdrawing from full EU membership. It can siton the sidelines of the EU while other member states focus their energies on saving the single currency. Or itcan make the most of its EU membership. Either of the first two options would demonstrate a seriousmisreading of the UK’s national interests at the start of the 21st century. These interests are best served throughactive UK participation in the EU.

Stepping back or sitting aside from the EU would also reveal a misreading of the process of Europeanintegration. Even a fiscally united eurozone will be divided between the more and less competitive, betweenthose who favour a more federal or a more intergovernmental Europe, and between the smaller and the biggerstates. Britain will continue to be an important player in this multi-tiered Europe.

Rather than holding the EU at arm’s length at this critical juncture, the government should be more proactivethan it has been in its approach towards the large realm of EU policy outside European Monetary Union(EMU). For example, it should lay the groundwork for a deepening of the Single Market in the services sector,drive the agenda on collective approaches to energy, trade and climate change, and build more coordinatedEuropean foreign policies towards the Middle East and the Asia-Pacific region.



Evidence

The logic of EMU

1. The December 2011 European Council was a watershed for the UK’s relationship with the EU. It exposedthe growing divergence between the UK’s approach to its membership of the EU and that of the overwhelmingmajority of other EU member states. Since December, the divergence has widened rather than narrowed.Eurozone members and those EU member states that hope to join the single currency area (and even countriessuch as Sweden and Denmark which currently do not) are working together to create new structures of financialand political integration that they hope will put the euro on a more stable footing for the future.

2. There are some in the UK and beyond who expect the current crisis to be the beginning of the end of thesingle currency. Others expect it to retreat into a core group of North European countries clustered around (andsharing some of the same competitive advantages as) Germany. These expectations ignore the political thinkingon continental Europe that launched the euro and the economic drivers that created a large rather than “core”eurozone in the first place.

3. The decision in 1992 to create the euro was not driven by economic logic. Principally it reflected thedetermination of the French government of President François Mitterrand to contain the economic power of aunified Germany. The creation of the euro also reflected Chancellor Kohl’s desire to bind a unified Germanyirreversibly into an integrated Europe with France and Germany at its core. This fundamental Franco-Germanpolitical pact at the heart of the eurozone remains intact.

4. With France and Germany locked into a single currency, there was economic logic (as well as politicalpressure) to launch the euro with a larger rather than smaller number of members. If Italy had remained outsidethe euro, German companies would have faced stiff competition in their domestic market and internationallyfrom companies based in Italy’s dynamic north pricing their goods in cheap lira. If Spain had remained outsidethe euro, German companies would have been tempted to shift more of their production to its relatively cheaperlabour market. In either case, prospects for German domestic growth and job creation would have been affected.This economic dynamic remains in place today; as such, Germany and other northern states have a powerfuleconomic incentive to keep the eurozone together.

5. Most eurozone members also see membership of the single currency as part of their defence against thegrowing might of China and other emerging economies, as well as a counterbalance to the economic power ofthe United States. Despite the current turmoil, being inside the euro offers EU members greater long-termstability in terms of interest rates, inflation and exchanges and some prospects for solidarity (in terms of therole of the European Central Bank and other mechanisms of intra-eurozone financial support). Carrying outpainful structural reforms to their welfare systems is likely to be easier inside the eurozone than if each countryhad to manage its own currency. This is a principal reason why other EU members are still queuing to jointhe euro.

6. Certainly, there is a growing risk that Greece will leave the euro. The contagion effects of such an eventcould force out vulnerable countries such as Portugal or even Spain. But the pressures and incentives to avoidthis outcome are enormous. Even if it happens, the impetus to sustain the euro in some form, covering as manyEU members as possible, would be powerful. If it did have to be re-fashioned, it would likely be with thepolitical dimensions of a fiscal union debated and approved from the outset.

The UK and the single currency—divided we stand

7. Given its geography and its history, the UK has never shared the same political commitment to Europeanintegration as other European countries. This means that not only the British public, but also the two majorpolitical parties have viewed the single currency with considerable scepticism. No UK government, either atthe time of its launch or since, has been a strong and consistent advocate of membership, doubting the economicbenefits and fearing the domestic political consequences.

8. The divide between British and continental European perspectives concerning the relative merits and risksof joining the single currency has not abated. Today, with the euro crisis in full flow and with British publicopinion as eurosceptic as ever, there are no prospects of the UK joining the euro at any point in the near- tomedium-term (indeed, remaining outside the eurozone is even written into the “Coalition Agreement”). Thereis also little prospect that the UK will join the fiscal compact any time soon, as other non-euro and “pre-in”governments have chosen to do.

9. For their part, eurozone members have drawn the opposite lesson from the crisis. They now recognise theinsufficiency of the political mechanisms in place to manage the single currency during periods of stress. Theyhave committed, therefore, to deepen their fiscal coordination and have embedded national commitments tofiscal discipline in a treaty that requires a dilution of legislative sovereignty and a commensurate increase inthe power of EU institutions.

10. The UK must recognize that, absent a sudden implosion of the entire single currency, building this fiscalunion and resolving the euro crisis in a sustainable manner will be the overriding objective of most EU memberstates for the next few years.



11. The UK will be on the margins of this process, and its absence could affect its political relations withother EU member states. The attitudes of the Netherlands and of Poland are a case in point. Both countrieshave traditionally been close bilateral allies of the UK within the EU: the former as one of the main advocatesof an open EU Single Market, like the UK; and the latter as a sovereignty-minded late-comer to EU integrationwith strong Atlanticist instincts, also like the UK. Today, however, the governments of both countries havethrown in their hand with the logic of deeper European integration. And their officials are deprecating in privateabout the UK’s stance.

12. It is true that deeper political integration within the eurozone should not imply material changes to theoverall EU acquis, whether in the management of the Single Market or negotiation of the budget, nor in moreintergovernmental areas such as EU enlargement or foreign policy. And, while the UK may end up as the onlyEU member state outside the fiscal compact (or one of a very few), it has been in this sort of position before(as the only EU member state not to adopt the “Social Chapter” initially) while remaining a full participant inother areas of EU competence.

13. On the other hand, close and regular cooperation between EU members on an issue as fundamental asfiscal policy will change the dynamics of EU integration and the UK’s place in Europe in ways that are hardto predict. There is a risk that “package deals” of demands and concessions among euro members over issuesthat begin in the fiscal realm will then spread into other aspects of EU policy-making. This was partly theconcern of the UK government in the lead-up to the December 2011 summit; the fear was that new regulationsgoverning EU financial services—a Single Market issue in which the UK has a full vote—might be driven byconcerns over the stability of the euro rather than by the need to sustain market openness and stability.

Options for the UK

14. Faced with a structural transformation of the EU in which it does not want to share, the UK has threeoptions. It can take the radical step of withdrawing from full membership of what looks likely to be an evencloser Union. It can sit on the sidelines while other EU member states focus their energies on saving the singlecurrency. Or it can make the most of its EU membership. I argue in this evidence for the third option.

15. The first option, reconsidering full EU membership, presupposes that UK leverage within the EU willinevitably decline as the euro crisis deepens. By this logic, the UK might as well get out before it is pushedinto a second tier of membership from which it is increasingly difficult to shape an EU that best fits UKinterests. Is this likely to be the case?

16. On the contrary, there is every possibility that an integrating eurozone will contain the same tensionsand inconsistencies that the EU as a whole has carried since its inception: between big and small states;between those that favour a more federal future and those that want to preserve as much national sovereigntyas possible; between those that are already competitive and those that are struggling to become so; and betweenthose who foresee the eurozone becoming a genuine transfer union and those, such as Germany, which currentlyremain committed more to the principle of “collective responsibility rather than solidarity”.106

17. These cleavages within the eurozone mean that the UK will continue to find receptive partners to promotea range of its EU priorities, whether in the Single Market, on the budget, on energy policy, or on priorities forEU foreign and security policy. In contrast, stepping out of the EU but remaining inside the European EconomicArea would turn the UK into a consumer rather than a co-designer of the Single Market and into an observerrather than a leader of its more intergovernmental policies.

18. The second option, sitting on the side lines, fails to recognise the enormous value that the UK gainsfrom its membership of the EU and the importance of the UK’s voice in shaping the future evolution of theUnion in ways that reflect the best of British ideas as well as national interests.

19. The UK’s membership of the EU already gives it (almost) barrier-free access to a single market of 500million of the world’s wealthiest consumers; estimates suggest that trade between EU countries is twice ashigh as it would be without the Single Market. It is a key reason that the UK continues to attract some of thelargest inflows of foreign direct investment (FDI) and sends the lion’s share of its own FDI into the EU.Government estimates suggest that 3.5 million jobs in the UK are linked to exports to the EU, and the incomegains for UK households from the Single Market are in the region of £1,100–£3,300 per year.107

20. Even if the UK adjusts its patterns of trade to take better advantage of emerging markets, Europe islikely to remain by far its dominant market. At the end of 2011, eight of the UK’s top ten trading partners106 Philip Whyte, “Governance reforms have left the euro's flawed structure intact”, Centre for European Reform, 18 April 2012,

http://centreforeuropeanreform.blogspot.co.uk/2012/04/governance-reforms-have-left-euros.html.107 These figures are taken from the Department for Business, Innovation and Skills. For more information, see Department for

Business, Innovation and Skills, The UK and the Single Market, 2011, http://www.bis.gov.uk/assets/biscore/international-trade-investment-and-development/docs/u/11–719-uk-and-single-market, p. 3. According to BIS, in 2008, 49% of total inward FDIoriginated from EU member states.

108 Office for National Statistics, “Trade in goods—one month geographical analysis”, 9 February 2012, http://www.ons.gov.uk/ons/rel/uktrade/uk-trade/december-2011/stb-uk-trade-december-2011.html#tab-Trade-in-goods—one-month-geographical-analysis—seasonally-adjusted-.



were in the European Economic Area.109 And, if the UK were to double its exports to China, these would stillonly match the volume the UK currently exports to the Republic of Ireland.110

21. In addition, at a broader political and geopolitical level, the UK’s attachment to Europe is likely toincrease rather than decline in the coming years. As a medium-sized power in a world of increasingly largeplayers, and at a time when the United States is spending more of its time and energy in Asia, being part of aunified European market and of a coordinated diplomatic entity enhances rather than diminishes UKinternational influence. This applies as much to negotiations with third parties over UK trade interests, energysecurity and climate policy as it does over preventing nuclear proliferation or the spread of instability in theMiddle East.

22. The third option, making the most of its EU membership, represents the best choice for the UK, in lightof both the compelling economic case and the strategic realities inside and outside the EU.

23. Moreover, as a major player in a multi-tiered Europe, the UK government has every opportunity to buildalliances with other EU members and within EU institutions on EU policies that do not form part of eurozonecompetence, but that continue to be of direct interest to the UK. These include:

— Liberalising further the Single Market by opening up the EU market in services, a key elementof a European “growth strategy” that is supported both by northern EU governments such asthe Netherlands and Denmark and southern governments in Italy, Spain and Portugal. A 2005study examining the economic gains for the EU of integrating services into the Single Market,undertaken by the Dutch Planning Bureau, suggested this could yield growth benefits of0.6–1.5% of GDP;111

— Energy policy, where the European Commission’s emphasis on building a more inter-connectedand open energy market plays directly to UK strategic and economic interests;

— Re-designing the EU budget, where Germany shares many of the UK’s interests in re-balancingfunds towards new drivers of economic growth;

— International climate negotiations, where UK and EU leadership and leverage were instrumentalin the breakthroughs made at the Durban summit in November 2011;

— Trade policy, where the UK, EU Commission and a number of member states see thecompletion of new free trade agreements or economic partnership agreements as critical to themuch-needed European growth strategy;

— Designing and conducting more coherent EU foreign and security policies in targeted areaswhere the common interests of all EU member states are clear, such as the sanctions regimesagainst Damascus and Tehran or joint operations to combat piracy off the Horn of Africa.

Conclusion

24. The UK’s national interests are best served by active participation in the European Union. But, giveneurozone members’ rush to build a fiscal union, the government will need to be more proactive than it hasbeen in the past in its approach towards EU policy. It cannot afford to hold the EU at arm’s length.

25. In order to overcome the growing suspicions of their EU counterparts about UK objectives andmotivations, the Prime Minister and his senior ministers will also need to engage consistently, notspasmodically, in EU policy debates.

26. And they will need to work as collaboratively as possible with EU institutions such as the EuropeanCommission, the increasingly powerful European Parliament and the European External Action Service, ratherthan treating them instinctively as obstacles to progress or threats to national sovereignty.

27. The euro crisis will change the EU. The UK’s psychological detachment from the process of deepeningEuropean integration will be more apparent than before. But the contributions that it can offer and the benefitsthat it can obtain from active EU membership will continue to make the EU one of the cornerstones of Britain’splace in the world.

24 May 2012

109 Office for National Statistics, “Trade in goods—one month geographical analysis”, 9 February 2012, http://www.ons.gov.uk/ons/rel/uktrade/uk-trade/december-2011/stb-uk-trade-december-2011.html#tab-Trade-in-goods—one-month-geographical-analysis—seasonally-adjusted-.

110 The Guardian, “UK export and import in 2011: top products and trading partners”, 10 January 2012, http://www.guardian.co.uk/news/datablog/2010/feb/24/uk-trade-exports-imports#.

111 See European Commission, “Economic Benefits of the Services Directive”, 20 May 2009, http://ec.europa.eu/internal_market/services/docs/services-dir/explanatory/economic_benefits_en.pdf. The case for expanding the Single Market was made by PrimeMinister David Cameron and other EU leaders in two letters to Herman Van Rompuy and José Manuel Barroso in February andMarch 2012, http://www.number10.gov.uk/news/joint-letter-to-president-van-rompuy-and-president-barroso/;http://www.number10.gov.uk/news/letter-to-european-council-on-european-growth/.



Written evidence from Brendan Donnelly, Director, Federal Trust

1. This submission addresses all the four questions posed by the Committee in its call for evidence. Insummary, I argue that as a result of decisions by successive British governments the United Kingdom is likelyto be for the foreseeable future a spectator rather than a shaper of the most important developments in theEuropean Union. The events of the European Council in December 2011 were in my view a clear illustrationof this reality.

2. I am the Director of the Federal Trust, a research institute concerned with subnational and supranationalpolitical structures. From 1994 to 1999 I was a Conservative Member of the European Parliament. Mysubmission is offered in a personal capacity.


1. At one level, the European Council of December 2011 can be regarded as a simple failure of Britishnegotiating tactics. The British position was not that of refusing to join the proposed Fiscal Compact act as amatter of principle, but rather of being willing to do so if certain changes were made in the Union’s decision-making procedures in order to “renationalize” the regulation of financial services. The European Council’sconsideration of this proposal had not been well prepared, nor was it well conducted during the meeting of theCouncil by the British side. With better preparation and presentation, it might have been possible to secure amore sympathetic consideration or at least a less brusque rejection of this British proposal.

2. Beyond the immediate issue of questionable negotiating tactics, however, the events of December 2011mark the unsurprising culmination of a series of events and decisions by successive British governments whichhave weakened British influence and standing within the European Union. The continuing refusal to join theeuro; the continuing refusal to participate in passport-free travel in the Schengen area; the passage of the EUBill in 2011; the commitment of the Coalition government to stand aside from any further Europeansovereignty-pooling over the five years of its existence; and finally the perceived attempt of Prime MinisterDavid Cameron to unpick in December 2011 central elements of the European single market—all these stepshave cumulatively led Britain’s partners in the European Union to the conclusion that the political trajectoryof the United Kingdom within the European Union is likely over the coming years to be at best one of semi-detachment and at worst eventual total withdrawal. This has fundamentally changed the political “terms oftrade” between the United Kingdom and the rest of the Union. Britain’s partners in the Union emphatically donot think today that the British government believes “we are all in this together.”

3. It would have been surprising indeed if this growing perception on the part of Britain’s partners had notled eventually to a diminution of British negotiating capacity within the Union. The enormous fund of goodwill towards the United Kingdom from its European partners and clever diplomacy by British officials andministers have to some extent postponed this day of reckoning. But the increasing centrality of the Eurozoneand its structures to the future evolution of the European Union has inevitably hastened the process of Britishmarginalization. The Coalition agreement stipulates that during its five years of office the United Kingdomwill not join or make any preparations to join the euro. The larger party of government has as its establishedpolicy not to join the euro in any circumstances. Against this background, the British government cannotreasonably expect to play any significant role in the European Union’s current defining debates, those aboutthe future of the Eurozone and about the implications of that future for the wider structures of the Union. Therewill no doubt continue to be some areas of the European Union’s activities where the United Kingdom will beable to make a constructive contribution. But the crucial question of the euro is not one of them. That fact hasthe profoundest consequences for Britain’s position within the European Union.


4. Over recent months, the British government has found itself in the unexpected position of urging upon itspartners in the Eurozone a quicker and deeper process of integration than some of them might wish. Britain’sposition outside the Eurozone deprives these calls of political authority or significance. The fact that they arebeing made highlights however the uncomfortable alternatives with which a United Kingdom semi-detachedfrom the European Union finds itself confronted. The success or failure of the Eurozone is a matter of centraleconomic importance to the United Kingdom, not least in view of the British economy’s current fragility. Thereis a more than plausible case to be made for arguing that the success of the Eurozone can only be achieved bygreater political and economic integration among its members. Yet when the current British government callsupon its neighbours to pursue more vigorously such integration, it is spectacularly reversing centuries of Britishforeign and European policy, central to which was the avoidance of united European structures potentiallyhostile to the United Kingdom. While a more deeply integrated Eurozone will no doubt be a more positivefactor for the British economy than one which has disintegrated, its successful integration may well pose inthe medium term a new set of political and economic problems for the United Kingdom. There could be noguarantee, or even likelihood that the approach of this integrated Eurozone to such questions as macro-economic policy, financial regulation, trade and competition would always be congenial to the United Kingdom.



5. Ironically, its very semi-detachment within the European Union dispenses the present British governmentfrom needing to form any very precise view of the appropriate future structures for the Eurozone and of theEuropean Union in general. Unless the single European currency ceases to exist, or its membership is radicallyreduced, decisions on these matters will overwhelmingly be taken by others, and it will be up to Britain tomake what it sees as being the best of the situation with which it is confronted. In the chaos that would followthe collapse of the single currency, Britain’s voice might (but not necessarily) be a determining one in thereconstruction of European co-operative and integrative structures. Otherwise, its role will predominantly bethat of a spectator. Even on the question of how many other countries from within the Union will wish to shareBritain’s role as spectator, and to what extent, the British capacity to shape events should not be over-estimated.Before the European Council of last December, there were well-publicized calls in this country for the UnitedKingdom to play a role of leadership for the member states of the Union not in the Eurozone. The outcome ofthe European Council clearly suggests that these calls are unrealistic.


6. The “Fiscal Compact” is unlikely of itself to compromise the present acquis of the European Union. Onthe other hand, the Compact is unlikely to be the final building-block of the greater economic, fiscal andpolitical integration emerging from the present difficulties of the Eurozone. If this integration continues on itspresent path, the current acquis of the Union will inevitably come to form an ever smaller proportion of theUnion’s legal instruments and structures. The members of the integrated Eurozone will be well placed to shapethe new elements of the acquis and in some instances to revise the existing acquis, according to the Union’sestablished decision-making procedures. Fear of this latter prospect may well have weighed with Mr Cameronin his abortive attempt to change some of the Union’s decision-making procedures at the European Councillast December.

7. The Fiscal Compact is equally unlikely to affect directly the three mentioned policy areas of the Europeanbudget, enlargement and the Common Foreign and Security Policy. The Eurozone countries are clearlyunwilling to use the European budget as a major instrument of macro-economic or fiscal adjustment; if theyhad wished to do so, that would inevitably have created controversy with member states outside the Eurozone.The terms of the debate surrounding the continuation of the British rebate/abatement in the next FinancialPerspective for the European budget are long familiar to all involved. The Fiscal Compact will neitherexacerbate nor mitigate this probable confrontation. The debate about the further enlargement of the Union ingeneral and specific candidate countries in particular is already a complex one, and the Fiscal Compact willnot simplify it. The Common Foreign and Security Policy is a predominantly intergovernmental arrangementwith its own specific decision-making procedures, in which Britain plays and is likely to continue to play asignificant role. If the countries of the Eurozone were willing to adopt between themselves decision-makingprocedures for their contribution to the Common Foreign and Security Policy more akin to those of the Union’sother policy areas, then that would of itself be a radical innovation. No such change however seems inimmediate prospect.


8. Paragraph 6 above sketched out the possible implications of the increasing integration of the Eurozonefor the evolution of the Union’s acquis. These implications are not greatly affected by whether the FiscalCompact is incorporated into the EU Treaties or not. If a future British government were able to secure some“renationalization” of decision-making in return for accepting the Compact’s incorporation into the Treaties,then it might regard itself as having achieved some desirable measure of “protection” against futuredevelopments of the acquis driven primarily by the member states of the Eurozone. To judge from the eventsof December 2012, it seems unlikely that any such quid pro quo would be on offer. It would of course be opento a future British government to acquiesce in incorporation of the Pact into the European Treaties as a simplegesture of goodwill to its partners, which will avoid legal complications for them and make no objectivedifference to the United Kingdom. Whether it will wish or be politically able to make this gesture cannot bepredicted today.

Final Comment

9. The Committee’s Chairman, Mr Ottaway, remarked in connection with the proposed report that he was“starting from the assumption that the UK should and will remain an EU Member.” A recurrent theme of thissubmission is that Britain’s present capacity to influence the Union’s decision-making is small and likely tobecome smaller. When Britain joined the European Community in 1973, a central reason why it did so was inorder to influence European decisions that, for better or worse, would crucially affect British interests. Policiespursued by successive British governments which put that influence at risk cannot but undermine the politicalrationale for British membership of the European Union.

28 May 2012



Written evidence from the European Movement

Summary

1. This submission argues that the European Union represents the best way for European countries tocooperate on matters of mutual interest whilst respecting the political rights of their citizens. The increasingtrend towards opt-outs and integration at different levels is a reflection of the different state of public opinionin different parts of Europe, but nevertheless there are some core principles which must be observed by all EUmember states. The several opt-outs that apply to the UK will not necessarily deprive it of influence in Europe’sfuture direction, as long as the government acts positively towards the rest of the EU. This is not obviouslythe position of the government at present.

About the European Movement

2. The European Movement is a independent, not-for-profit and all party organisation that calls for closerintegration at the EU level, with more powers for the democratically elected institutions of the EU and morepopular involvement in its intergovernmental decision-making structures. It was founded in 1948 by SirWinston Churchill, and its president is Rt Hon Charles Kennedy MP.

Introduction

3. The case for the European Union is made stronger by the recent developments in the eurozone and aroundthe world. That individual countries are no longer able to safeguard their own interests acting independentlybecomes clearer and clearer every day. To enable European countries to take care of their own interests andthose of their citizens is the purpose of the European Union. This is true when considering the current economiccrisis, the developing social and environmental challenges, or the growing change in the global balance ofpower.

4. We recognise that, for the time being, public opinion in some countries means that not every country cantake part in every aspect of European integration. We regret the fact that public opinion feels this way, but thefact that the EU is a union of consent means that this must be respected.

5. It is therefore necessary to design the future European Union taking into account these variations in publicopinion in different member states. This is a process that started in fact in the Maastricht Treaty with the opt-outs for the UK and Denmark from the euro, and has acquired many new dimensions since then. The notionof a finalité politique that was perhaps in the minds of some of the founders of the EU has been replaced by amore varied picture. Public opinion can change, meaning that the opt-outs that were once necessary mightsomeday be relinquished, so the picture we paint here is not necessarily permanent. However, it may be saidto be more than strictly temporary.

Core Principles of the European Union

6. The design of the European Union under this approach, recognising opt-outs, must also specify thoseaspects of EU membership from which no opt-out may be permitted in order to ensure that the EU is nothollowed out into nothingness. There are some core principles to which all EU members must subscribe, andwe list them here:

6.1 The rule of law—decisions taken through the European institutions must have the force of law,which citizens can see enforced through the courts, and not be merely political declarations tobe made or dropped for political convenience. Both market credibility and public trust must beearned and cannot simply be taken for granted.

6.2 The supremacy of EU law over national law in those areas specified in the treaties—this is along-standing principle of the EU that ensures that its decisions have meaning and that themember states can rely on each other to keep to the commitments they have made.

6.3 The role of the European Parliament and the Council of Ministers as the two chambers of thelegislature—the directly elected European Parliament performs a vital role in representing theinterests of the citizens in the European decision-making process, and the Council representsthe interests of the member states. Both are important; neither should have supremacy overthe other.

6.4 The role of the European Commission as the executive of the EU—there must be a part of theinstitutional system that represents the common European interest rather than the interests ofany particular member state. Among other things, this is a protection for those member statesnot participating in any particular European initiative.

6.5 Transparency—the EU institutions may have been created as a diplomatic initiative but are nowbetter understood as an expression of democracy. The standards of openness and transparencyobserved by the institutions should reflect their democratic role rather than their origins indiplomacy and international relations.

6.6 Minimal use of the veto power—it is for the time being unrealistic to propose that the vetopower should be relinquished by the member states altogether, but its use should be absolutely



a last resort. The threat of the veto creates uncertainty and discontinuity in policy—onecountry’s “red line” is another country’s “unreasonable veto”—which qualified majority votingdoes not. The academic literature shows that QMV encourages member states to join successfulcoalitions rather than to hold out in lonely opposition.

6.7 Subsidiarity—the idea that there should be no more centralisation than necessary and as muchdecentralisation as possible is another foundation of the European idea. Changes in technologyand markets will lead to a reassessment from time to time of what is the appropriate level foreach policy, or for different aspects of the implementation of each policy. Debate between themember states and the European institutions over the appropriate level is an expression of thesuccess of this policy and not its failure.

6.8 Contributions to the EU budget—to be able to act effectively, the EU needs reliable andsufficient financial resources. The original vision that the EU should be financed wholly fromown resources has been lost in a complex web of political compromises between the memberstates, made up of rebates, exceptions and correction mechanisms. It is imperative we replacethis opaque system with something that resembles what the treaty originally intended, tofunction in a more transparent, simpler and above all fairer way. A more direct form of EUfunding would signal an end to the clientelistic relationship between the union and its memberstates and at the same time strengthen the direct connection with citizens, by making clearerhow much the EU costs and how it is being paid for.

Core Powers of the European Union

7. Those principles of decision-making must apply to a minimum core set of powers, including:

7.1 The single market, with its implications for issues such as environment, social policy andinternational trade.

7.2 The fight against international terrorism and cross-border crime.

7.3 Human rights.

7.4 Foreign policy, to the extent that EU member states have foreign policy interests in common.

8. Opt-outs currently exist inter alia from the euro (the UK, Denmark and Sweden), defence cooperation(Denmark), Schengen (the UK and Ireland), the European patent (Italy and Spain), the euro-plus pact (Hungary,Czech Republic, Sweden and the UK). These and future opt-outs have to be reconciled with the organisingprinciples of the EU (paragraph 6) and the essential powers of the EU (paragraph 7).

Britain and the EU

9. Britain belongs in the European Union. The principles outlined in paragraph 6 above are entirely consistentwith the view of EU and of democratic politics as understood in Britain over many years. They imply that theEU is effective in the policy areas granted to it by the treaties but not beyond those areas. They grant citizenslegal rights within the political process, in a way that no other international organisation can do.

10. That Britain is currently not a member of the euro nor of the Schengen area is a matter of regret. Norwas the UK an active participant in drafting the fiscal compact treaty. However, these exclusions do not haveto imply a termination of British participation in the European Union.

11. There is still plenty of opportunity for a positive attitude on the part of the British government to exerta positive influence on the European Union, even given the exclusions mentioned above. However, thatinfluence has got to be earned and cannot simply be assumed. The European Movement remains concernedthat the current government is not doing nearly enough to earn that influence in the EU, a trend which if takento its logical conclusion would render redundant the speculation by this and other parliamentary committeesabout the future of the European Union. It is necessary to act before it is too late.

28 May 2012

Written evidence from Maurice Fraser, Senior Fellow in European Politics, London School ofEconomics and Political Science (LSE) and Associate Fellow (Europe), Chatham House

Biographical Note

Maurice Fraser was Special Adviser to three UK Foreign Secretaries, 1989–95: Sir Geoffrey Howe, JohnMajor and Douglas Hurd. He is Director of the LSE-Sciences Po European Double Master’s Degree programmeand Director of the LSE European Public Lectures Series. He is a trustee and council member of severalEuropean think tanks and policy networks and is a regular commentator on European affairs in the internationalnews media. He has recently conducted master classes on French politics for Whitehall departments and theBBC. He was made Chevalier de la Legion d’ honneur in 2008.



Key Propositions

1. The EU needs an institutional framework which enables it to improve the quality of its outputs andgenuinely to add value.

2. The UK’s national interest remains in the promotion of a unitary model of European integration, with acomplementary rather than an alternative role for “variable geometry”.

3. The UK has an interest in a strong European Commission that upholds the interests of the Union asa whole.

4. Whilst the assumption continues to take hold that monetary union requires fiscal union if it is to besustainable, the appetite for far-reaching economic union in the eurozone is at present limited. The UK’s roleshould be to inject clarity and realism into such a discussion, in the interests of the EU as a whole.

5. Those who argue for political union to underpin economic union have yet to demonstrate how theirproposed solutions would command legitimacy.

6. Institutional reform and public consent need to be pursued in tandem and not left entirely to post factolegitimation in the form of parliamentary ratification or a referendum.

7. The momentum behind EU enlargement has faltered, potentially irreversibly. Real effort will be neededjust to keep the option on the table.

Argument

1. The EU needs an institutional framework which enables it to improve the quality of its outputs andgenuinely to add value

This should be obvious but urgently needs restating. For all the soaring rhetoric of European construction,the fact is that the founding rationale of the EEC/EU was a practical and unsentimental one: it was to be aninstrument for addressing collective action problems in those areas where solutions were beyond the reach ofnation states acting on their own—principally cross-border issues such as the movement of people, goods,services and capital, but also those areas where collective action can yield significant economies of scale. Onthe whole there were few arguments about such public goods: the customs union, the common commercialpolicy, the competition policy and, later, the single market were win-win projects. To be sure, they producednegative externalities which required regulation. But the only losers were inefficient producers who had grownused to national protection.

This mission for the European Union is one which successive UK governments have sought to promote,with the accent on “outputs” and “deliverables”—the goods which make a real difference to the lives ofEurope’s citizens. Far from being a minimalist “anglo-saxon” idea of Europe (mistakenly characterised as aglorified free trade area by some of Europe’s political and intellectual elites), this instrumental conception ofthe EU generates a rather long list of strategies requiring close cooperation, some best pursuedintergovernmentally, others lending themselves to the Community Method. The list includes not only thedismantling of trade barriers but concerted action for dealing with cross-border crime, terrorism, migrationflows, energy security, pollution and climate change.

This mission for the EU finds its legitimacy in the effectiveness of its outputs. But there are other lensesthrough which we look at the EU, and some of these are more problematic. One such lens is that of values,because the EU is a community not only of law but of values such as freedom (in the form of civil liberties)and democracy, originally enshrined not in the EEC/EU but in the Council of Europe—specifically in theEuropean Convention on European Rights, though such rights now form part of the acquis communautaire. Aswith the original economic goods, these too were not zero-sum games: everybody could enjoy them. They areat the heart of Europe’s identity and are a key element of its attractiveness to others—its “soft power”. But, asa rationale for the EU’s institutional architecture, the “values vision” is deeply problematic, because, in itsrelentless attempts to lever up standards to a level which (to the minds of some at least) adequately expresseswhat it means to be a European, it falls foul of the decentralising principle of subsidiarity.

This has been most apparent under the heading of “Social Europe” and the recent concept of socio-economicrights. The UK’s objection to the Working Hours Directive is an example, as are some recent controversialrulings of the European Court of Human Rights. At best the “values” rationale of the EU is a distraction (noEU member state sends its young boys up chimneys); at worst, it takes the EU into unnecessarily contentiousterritory, alienating public opinion in some member states.

This is why the UK should press the case for an institutional architecture for the EU which enables it torealise its instrumental mission, concentrating on those (mostly cross-border) challenges of the 21st centurywhich are evidently beyond the reach of nation states acting alone.



2. The UK’s national interest remains in the promotion of a unitary model of European integration, with acomplementary rather than an alternative role for “variable geometry”

Successive British arguments have put the case for both unitary and flexible models simultaneously (andsomewhat uneasily). While the flexible, decentralised and non-coercive character of variable geometry mostclosely reflects traditional UK concerns about sovereignty, concerns about marginalisation, loss of influence orpotential vulnerability to caucusing by other member states has often impelled British governments to cautionagainst fragmentation and the idea of a “hard core” Europe.

From a UK perspective, the most prudent course is to insist on the integrity of the acquis and the primacyof EU obligations over other political or legal instruments amongst Europeans, on the basis that the liberaleconomic character of the acquis, and the level playing-field it provides, serves the UK’s interests well. Thedemonstrable utility and moral capital which the EU has built over more than half a century should help ensurethat Britain will find many allies for this argument. What is more, the unitary model has proven its ability toaccommodate multiple forms of integration (Schengen, EMU, CFSP, aspects of JHA) outside its “core”competences and indeed has formalised arrangements for pioneer groups through the “enhanced cooperation”provisions of the Treaties. The UK needs to take care, however, to give convincing reasons when it calls forthe exclusion of new areas of integration (such as those defined in the Fiscal Compact) from the EU treaties,and to learn better how to use the communautaire language of solidarity in the service of its national interests.

3. The UK has an interest in a strong European Commission that upholds the interests of the Union as awhole

Even before the economic crisis, it had become apparent that the power and influence of the EuropeanCommission had been waning. From a UK perspective as well as a European one, this is regrettable.

First, the Commission has responsibility for ensuring that the writ of EU law runs through the EU. (It wasprecisely to bolster the rule of law that the UK successfully proposed at Maastricht the power for the ECJ toimpose fines.)

Second, the Commission has responsibility for safeguarding the interests of all the EU27. In any newinstitutional architecture for the EU, it will continue to perform this role, thereby helping to ensure that theUK’s keen interest in, for example, the single market and an effective competition policy, are safeguarded.

Third, the Commission has been a powerful force and ally for economic liberalism, structural reform andfree trade. This is not widely understood by the British public; in the printed media at least, memories of theDelors Commission’s activist approach to social legislation die hard. But that chapter is closed and is likely toremain so, barring a seismic shift to the left in the Commission’s complexion over the next few years, whichis improbable.

After a short-lived and unhappy flirtation in the early 2000s with a UK-France-Germany directoire—nolonger an option in an EU of 27—the UK is now in a better position to understand, following its self-exclusionfrom the Fiscal Compact and the fears about marginalisation which this has raised, the need for allies inupholding the interests of the 27 and the integrity of an acquis which is broadly liberal in complexion.

4. Whilst the assumption continues to take hold that monetary union requires fiscal union if it is to besustainable, the appetite for far-reaching economic union in the eurozone is at present limited. The UK’s roleshould be to inject clarity and realism into such a discussion, in the interests of the EU as a whole

Among many supporters of the “European project”, and indeed numerous “neutral” commentators, it hasbecome a commonplace that, beyond the present eurozone crisis, a new system of economic governance goingbeyond the Fiscal Compact requirement of balanced national budgets, tight surveillance and automatic sanctionsfor excessive deficits, will be required. At present, however, against the background of painful fiscalretrenchment across the EU member states, there is little support for more ambitious ideas such as fiscalfederalism in the form of a new dedicated budget for economic transfers, or for the mutualisation of existingdebt in the form of Eurobonds (though the limited use of such bonds for new debt may yet prove acceptableto Germany).

We are still in an EU of nation states and, for as long as this remains the case, it would seem unlikely thatthe member states would fail to draw from the eurozone crisis the obvious conclusion that countries should infuture avoid moral hazard and take full responsibility for their own economic management. As for the moreradical ideas for European economic governance intermittently advanced by France (such as harmonisation ofcompany taxes or of labour market regulations), these have attracted little support across eurozone members,given their potential to undermine the comparative advantage of many member states. Nor, crucially, are suchideas likely to be acceptable to Germany.

The UK’s role—from its position as a non-member of the eurozone but a significant economic and financialactor—should not only be to urge clarity in the Europe-wide debate about further economic integration butalso to caution against a rush to political union which is not, of itself, required by the degree of economicintegration which seems likely, in light of the limited provisions of the Fiscal Compact. (The legitimacy ofsuch a political union is discussed at paragraph 5, below.)



It would not be in the UK’s interest to absent itself from such a debate, given its degree of economicinterdependence with its eurozone and fiscal compact partners. But, to be effective, the UK’s contribution tothe debate (however intergovernmentalist or “eurosceptic”) should be presented in a way which does not callinto question its bona fides or its commitment to secure and build on the demonstrable achievements of theEU to date.

5. Those who argue for political union to underpin economic union have yet to demonstrate how theirproposed solutions would command legitimacy

After decades of a progressive pooling of sovereignty through the extension of community competences, ofthe co-decision procedure for EU legislation, and of qualified majority voting (QMV)—developments whichwere widely taken as presaging a fuller “political union”—it now seems clear that policy integration in the EUhas reached a plateau. Key areas of policymaking, such as health, education, welfare, pensions, law and orderand defence, along with most areas of taxation, will remain matters of national competence, and there is noserious suggestion, even from federalists, that these should be revisited. (N.B. Whilst the communitisation inrecent years of much EU activity under the heading of Justice and Home Affairs would appear to contradictthe “plateau” theory, in fact this is one of the areas where the particular logic of collective action applies,consistent with the founding rationale of the EEC/EU—see paragraph 1, above.)

The absence from the European public space of most of the “high-salience” policy areas which touch directlyon the lives of the citizen, with all the opportunities for political contestation and mobilisation which thesepresent, is of major significance: it constitutes a potentially insurmountable obstacle to the ambition of buildinga legitimate political union on the foundations of a European “demos”. And it is by no means clear that proudand ancient nation states (with the possible exception of Germany) are yet ready to endorse the establishmentof potentially competitive institutions with an equal claim to democratic legitimacy.

There are further reasons why a top-down or mechanistic pursuit of a European demos is likely to remaincounter-productive. Ideas such as the direct election of the president of the European Commission by Europeanvoters, or even of the president of the European Council, run straight into a number of difficulties.

First, their adoption would require treaty change—a fraught and uncertain process, as European leaders havelearned to their cost on many occasions over the last 20 years.

Second, the assumption that a democratically elected Commission or Council president would commandfunctional (as opposed to titular) legitimacy rests on the heroic assumption that levels of allegiance and consentare unaffected by the geographical remoteness or cultural “otherness” of those who wield authority, even wheredemocratically endorsed. It is asking a lot of people’s sense of European identity to suppose that a left-wingvoter at one end of the European continent would comfortably accept decisions taken by a right-wing leaderfrom the other end of the continent, and vice versa. There is a real risk here of jeopardising the cornerstoneprinciple of democracy, namely, the willingness of a minority to be bound by the decisions of the majority.

Third, the well-documented and much-analysed decline in voter turnout at European Parliament electionsreminds us of the inherent difficulty in building the legitimacy and credibility of a majoritarian institutionwhich handles predominantly low-salience issues (even when its powers have steadily increased undersuccessive treaties). It also illustrates the difficulties already experienced by the main actors and channels ofcontestation in any putative European demos: the pan-European party groups. Whilst the European People’sParty, the Party of European Socialists and the Alliance of Liberals and Democrats for Europe are able to agreebroad statements of principles and values, they find it much harder to achieve internal consensus aroundconcrete policies from which European voters can be invited to make a clear and decisive choice. Furthermore,party labels can be misleading: it could be more logical for a supporter of free trade to vote for a Scandinaviansocial democratic MP than for a French centre-right MEP.

So it is by no means clear that European political parties are yet in a position to upload to the Europeanlevel their national function of articulating clear policy options and aggregating voters’ choices. This is to saynothing of the lack of interest in politics shown by most citizens, most of the time, in well-ordered polities—let alone in European Parliament elections. And even if the political parties were more effective actors on theEuropean stage, we are drawn inexorably to the conclusion that whilst the continuation, de minimis, of thepresent “passive consensus” within a full-fledged economic union looks very precarious, most of theinnovations now being canvassed for addressing the even larger democratic deficit which would be opened upby full economic union risk disappointing expectations and alienating public opinion—thereby encouraging thecentrifugal forces which such innovations were designed to reverse.

6. Institutional reform and public consent need to be pursued in tandem and not left entirely to post factolegitimation in the form of parliamentary ratification or a referendum

It is unrealistic and ultimately futile to posit any set of institutional arrangements as being appropriate for theUK independently of the likelihood of these securing public endorsement. For any new set of EU institutionalarrangements to command public consent across the European Union and, more particularly, in the UK, withits particular concerns about sovereignty, the rationale of institutional reforms needs to be explained and setout in advance of the “end game” of treaty negotiations in an Inter-Governmental Conference (IGC). In theUK, this will require a degree of public information which successive governments have shirked, on the



grounds that such activity could be seen as “propaganda”. This has led to the curious and regrettable situationin which one of the two central planks of UK foreign policy—membership of the EU (alongside membershipof NATO)—has never been properly explained to British citizens—and this in spite of the fact that EUmembership not only provides benefits for UK consumers but also creates rights for UK citizens.

To succeed in its objective, any public information campaign about the EU should explain the centrality ofinstitutions and law in the European project, given the need to lock in the commitments of the member statesand to prevent free-riding and cheating. Such an explanation should be intelligible and persuasive for Britishpublic opinion. Until now, however, the impression has been given that the customs union and single marketprovided by the EU can be guaranteed through self-policing. This is evidentially not the case—as the regularuse of infringement procedures by the EU Commission and ECJ testifies. It needs to be explained.

7. The momentum behind EU enlargement has faltered, potentially irreversibly. Real effort will be needed justto keep the option on the table

A combination of enlargement fatigue, the distractions of the eurozone, concerns about uncontrolledmigration and the social integration of minorities, and more general fears about the sustainability of the wholeEuropean project has chipped away at the EU’s most compelling narrative since the Single Market programmeand risks undermining its international profile as an effective normative power. This presents a real obstacle tocontinued enlargement beyond Croatia and, possibly, Iceland.

For the Western Balkans, the accession process will be kept alive procedurally by the European Commission,which remains a committed but increasingly low-profile supporter of enlargement. If substantive progress is tobe made, there is no substitute for high-level support from the member states and the public articulation of thecase for a widening, outward-looking and inclusive EU, consistent with the principles of openness whichhistorically have underpinned its success. But the reality is that none of the EU’s leaders now see any benefitin such an investment of political capital; indeed, it is striking how even the most enthusiastic supporters ofEU enlargement, notably the UK, have largely dropped EU widening from their public discourse.

In order merely to retain a realistic medium-to-long term prospect of membership for aspirant countries, theUK government needs to explain why EU enlargement is a win-win scenario, not a zero-sum game; how theEU has built its success on an open and outward-looking mindset; how transitional arrangements can be put inplace to ease problems of absorption and adaptation (as in Germany and Austria after 2004); and how stabilityand prosperity in the western Balkans, on the EU’s doorstep, is of vital interest to the EU’s existing members.

The case of Turkey, historically part of Europe’s “Other”, was more problematic even before EU accessionnegotiations stalled over Cyprus, European concerns about civil liberties and the treatment of journalists inTurkey intensified, and Turkey’s commitment to a western orientation began to look equivocal. The questionof Turkey’s ultimate geopolitical choice (western, middle eastern, or eurasian/pan-turkic) is unlikely to beresolved definitively and is in any case simplistic: there is no reason why Turkey should not pursue severalstrategic vocations, whilst privileging its western one. But if Turkey’s EU accession is not to wither on thevine, the present stand-off will need to be overcome before its exclusion from the EU becomes a self-fulfilling prophecy.

The case for Turkey’s EU membership remains compelling: it is in the EU’s interest that as important aneconomic player and commercial partner should join the EU (for the same reason it joined the customs unionin 1995); that as influential and increasingly important a geopolitical player should join the EU (for the samereason it joined NATO in 1952); and that the EU should succeed in its mission of extending its norms andvalues beyond its present territorial confines.

29 May 2012

Written evidence from Nucleus

Summary of Submission— The events of the December 2011 European Council meeting were not so much a “watershed” as a

missed opportunity, emblematic of the long-term approach of the UK to EU-level policy.

— Whilst the UK has increasingly isolated itself from key EU decisions, there are plenty of reasons tobe optimistic that the UK can still play a vital, and leading role in shaping the outcome of theeurozone crisis.

— The UK’s current approach to EU-level policy-making has negative consequences for both the UKand the EU itself.

— It is the approach, not the policy detail, of the UK Government, that has done most to isolate it fromits European allies.

— An informal two-tier EU already exists. This flexibility is part of its strength.

— A formalised two-tier EU—with the eurozone 17 at the heart of decision making, with the 10 euro“outs” excluded—would dramatically alter the focus of the EU, and have disastrous consequencesfor the UK.



— The euro is a key priority of the EU, and it is extremely unlikely that it would be allowed to fail.

— Before the sovereign debt crisis in Greece and the burst of asset bubbles in Ireland and Spain theeuro had reportedly become the most widely held currency and the de facto second reserve currency.

— The US and China have continually shown their support for the euro, both verbally and practically.

— The UK Government’s outright rejection of the fiscal compact was unwise, given its effect on thoseoutside the common currency as well as within.

— The uncertainty over ratification of the fiscal compact by its signatories may present an opportunityfor the UK to re-involve itself in negotiations.

About the Submitter

Nucleus is a euro-realist campaign organisation that seeks to promote a positive and pragmatic approach bythe UK towards membership of the EU, other European institutions and diplomatic relations with key memberstates. Nucleus brings together various euro-realist voices, and provides a platform for figures from business,media, academia and politics. Nucleus is an independent, private not-for-profit organisation. We are notaffiliated with, nor do we receive any funding from, any Government, political party, or European institution.Our activities are funded entirely by donations from the private sector.

Our team includes senior figures from Westminster, think-tanks, media, and business.

Recommendations for action by the Government or others which the submitter would like the Committee toconsider for inclusion in its report to the House:

The Eurozone crisis has brought fresh focus on the entire EU project and reopened questions about the roleof national parliaments—indeed, the role of citizens—in European policy-making. These questions are,naturally, most urgent for countries like Italy and Greece. For Britain, however, the situation provides anopportunity to promote a new understanding of what the EU does, how Parliament can influence it and howBritain can enhance her role in the process.

The Conservative Party’s position is clear: we seek a changed relationship with a reformed EU, but at presentwe have an important and influential role inside the Union and wish to remain full-fledged members. However,such is the mistrust of “Brussels” and everything to do with the EU today, that there is little appetite amongstTory MPs to fully understand how the EU actually works—and how to use parliamentary power to change it.Indeed few MPs seem even to be aware of the power Parliament now yields, following enactment of the LisbonTreaty, in influencing or even blocking EU legislation particularly if it joins forces with just nine other EUcountries. If we are honest, UK MPs are generally not interested in EU details. Few visit Brussels, few speakEuropean languages well and few bother to exploit networking opportunities in other capital cities with like-minded politicians. Consequently we do our citizens a disservice by providing inadequate oversight andinfluence over what the EU does.

Consequently the party is not as good at changing EU policy upstream as it should be, but excels atcomplaining about the same policy when it becomes law. Such a “complain-but-don’t-change” policy is clearlynot in Britain’s interests considering that around 10% of all UK law determined along with 50% of all businesslegislation is decided in Brussels.

A new approach is now needed. If we are to fully master all the EU mechanisms at our disposal then a clearstrategy must be given, which allows Government Ministers, the civil service and Parliament to contributetowards shaping, tempering or indeed rejecting proposed EU legislation emanating from Brussels.

This means, firstly, improving the current (underpowered) system of EU scrutiny; and, secondly, a culturalshift towards engagement, which will assist in projecting Britain’s national interests in EU decision-makingand encouraging other member states to support us in the process.

Essentially we must understand the (EU) beast in order to better tame it and improve its “democratic deficit”.MPs must be encouraged and rewarded for developing a specialism and building influence in European capitals.We must get away from reducing every debate on EU legislation to the broken record of quibbling about ourfundamental relationship with the EU. This rhetoric undermines progress made by the Conservative-ledgovernment in enhancing our influence in Brussels through UKREP, the influence of British EU officials andad hoc alliance building with other member states. It also overshadows the critical role we play as one of thethree big players in the EU. Germany and France need us. In a whole variety of areas from security to climatechange we are the “lead” nation. The Lisbon Treaty also fully recognizes the case for so called “EuropeanLocalism”112 the antidote to centralization. But to date there has been no voice providing a constructive planto maximize British interests and influence with the Europe we have today, not the Europe some might wantto have in the future.

If we are in it—then we must be committed to deliver on our priorities and aims. If we are committed wecan lead. If we lead we project influence. This paper considers how that enhanced commitment might start.112 Open Europe: The Case for European Localism: Anthony Brown and Mats Persson



Questions


The “veto” of December last year, ought not to be considered a “watershed”, as the outcome of the EuropeanCouncil was emblematic of the UK’s approach to European-level politics under this Government. Rather, thisshould be seen as a missed opportunity for the UK to exert its influence in any meaningful sense, and adangerous step towards self-propelled isolation on the sidelines.

Prime Minister David Cameron issued a rallying cry for a “time for boldness”,113 then meekly retreated.Despite what the UK media overwhelmingly presented, the UK Government was not alone in its reservations;but what is striking is that when it could have indeed spoken for a large number of fellow member states, andprovided leadership in an obvious vacuum, the government failed to rise to the occasion.

It was this approach, especially the failure to seek out and win allies in advance and during the negotiationsand the last-minute nature of the UK’s demands, rather than the substance of the UK views, which cast Britaininto self-imposed exile from the negotiating table.

However, whilst the UK has increasingly isolated itself from key EU decisions, there are plenty of reasonsto be optimistic that the UK can still play a vital, and leading role in shaping the outcome of the eurozonecrisis. There has been (often justified) criticism among its partners that the UK government is carping andlecturing from the sidelines but these partners remain anxious for Britain to offer its wisdom and expertise—in financial services above all—in a co-operative spirit. This was true, particularly of Berlin and other capitals,in the run-up to and even during the December 2011 “summit”. Since then too, there was the single marketletter, signed by David Cameron and eleven fellow European Prime Ministers. However, so far, the UK’sapproach to EU-level policy-making has had and continues to have negative consequences for both the UKand the EU itself. “Annoyance” has become the oft-repeated way to describe the feelings of our EU partnerstowards the UK.


The FAC is correct to use the term “formalised”, as a two-tier—also referred to as a multi-speed—EUalready exists in many senses. The most obvious example of this is the division between the 17 members ofthe eurozone and the 10 non-members or “outs.” But there are others such as membership of NATO or theSchengen “passport-free” area.

Bence Nemeth, of the Defence Planning Department of the Hungarian Ministry of Defence, has argued thatthe Anglo-French military co-operation treaty has created a “two-tier Europe” insofar as foreign and securitypolicy is concerned.114 Tracing the development of a two-tier structure back further, Dr Michael J Geary,(lecturer in history of European integration at Maastricht University), and Kevin A Lees, (Associate, Lathamand Watkins LLP in Washington, D.C), have written:

By the 1990s, a two-tier EU was already emerging, which became an enshrined reality by the early2000s when it became clear that Britain had not only firmly opted out of not just the single currency,but also rejected the Schengen Agreement on the removal of border controls within the EU and hadscoffed at a Europe-wide foreign policy.115

This might also be applied to other countries such as Denmark, Sweden in the case of the euro—or Irelandregarding NATO.

It is our opinion, however, that a two-speed EU, based around those embracing closer fiscal union, and thosewho do not, would formalise a two-tier structure. This would undoubtedly have strongly negative consequencesfor the UK—we would likely see the 17 eurozone countries driving decision-making, while the 10 euro “outs”,of which we are one, are not even in the room, let alone at the table. This is already happening to a largeextent—much to the consternation of “outs” such as Poland, which are bound to join the EZ sooner or later.

The centre of gravity of the EU has—since the onset of the eurozone crisis—moved away from the leadersof the 27 member states in the European Council towards what are now known as the EZ-17. The agreementamongst those eurozone states over ten steps to formalise how the EZ should be run, and a decision that EZsummits will take place at least twice a year separately and not necessarily concurrently with European Councilmeetings, based on agendas encompassing key economic and financial policies, including on growth andcompetitiveness, has dramatically shifted the centre of power within the EU to an organ in which the UK hasno place and no voice.

For an image of what this would be like, we need only look to history, and the founding of the EuropeanFree Trade Area (EFTA) as an alternative to membership of the then EEC. The UK quickly realised that113 http://www.nucleus.uk.net/home/item/a-time-for-boldness114 http://www.nucleus.uk.net/diary/ideas-on-europe/item/pesco-and-british-french-military-co-operation115 http://www.nucleus.uk.net/diary/item/britain-and-the-european-union-continuity-or-rupture



influence and opportunity for growth were limited by being outside the core EU decision-making process, andbegan to pursue membership. Britain would be in danger of becoming “Greater Switzerland”: bound by therules of the EU and, indeed, the EZ but having no influence over the latter and, increasingly, over even thoseof the former.


The “fiscal compact’s” effect is to politicise the single market. Clearly, the fiscal compact draws upon andenhances previous EU policies and treaty provisions such as the Maastricht criteria, the Stability & GrowthPact and the recently adopted “Six Pack” (already in the process of being amplified). The “European Semester”hands extensive powers to Brussels to oversee and influence the budget process in member states. Thesepowers are even more extensive in the case of Greece and other Member States subject to the “bailout/rescue”programmes, including those of the EFSF and soon-to-be ESM.

Arguably, they prefigure a fully-fledged EU federal state. The EU—including many of the current “outs”,future members and actual or potential applicants who are all treaty-bound to join—is engaged in a process ofmonetary integration which might soon be coupled with fiscal and political union. No matter what theimmediate and short term problems of the eurozone (and its institutional architecture) are, the EZ and its singlecurrency are so systemically important for the EU (and global) economy that it is a matter of when rather thanwhether the zone will sort itself out and continue its path towards becoming a global reserve currency. (Morethan a quarter of reserves are already in euro-denominated assets.)

Before the sovereign debt crisis in Greece and the burst of asset bubbles in Ireland and Spain the euro hadreportedly become the most widely held currency and the de facto second reserve currency. It has maintainedthat status throughout the financial and debt crisis of 2008 and 2010 and it has also kept its value, while globalpowers like the US and China have verbally and practically shown their confidence in the euro.

As a result we will soon find ourselves in a world where the global economy will be dominated by two,maybe three, currencies: the US dollar, the euro and the Chinese renminbi/yuan. This would be a situation thatcould contribute to the re-balancing of the global economy, away from the current uni-polar and destabilisingsystem towards a more sustainable multi-polar system.

The question is what happens to relatively declining economies like Britain’s, with a freely floating currency,when they get caught up in the headwinds of those three global reserve currencies and the enormous economiesthat underpin them.116

Lord Hannay of Chiswick has written:

The global financial and economic crisis which engulfed the world in 2008 would have tested theEuropean Union severely whether or not the single currency had by that time been established. Soit makes no sense to blame the euro for everything that has happened. Nor can any of the EuropeanUnion’s 27 governments afford to neglect that it is in our collective interest that the Eurozone shouldsurvive and prosper and avoid a chaotic collapse which would damage all of us. The hard factnevertheless remains that, for the foreseeable future, the European Union is going to consist ofmember states within the Eurozone and member states outside it; and, since it is unlikely that theerrors of premature admission to the Eurozone will be repeated, that foreseeable future could be along time indeed, so we had better get used to that and learn to live with it to our mutual benefit,minimising the differences between the two groups. In that context the British coalition government’sdecision to reject the fiscal union treaty was unwise, given that the different obligations on the twogroups are clearly spelled out in it. And we do all share the view that fiscal austerity, which isproving every bit as painful in this country as elsewhere in Europe, must not be regarded as an endin itself but rather as part of a concerted growth strategy.117

There remains some uncertainty over the fiscal compact. Germany has sought a delay on a vote, and cannotnow say when it will ratify—possibly in June, maybe July. The new French President has clearly signalled hisintention to amend or, at least, amplify the treaty; the ratification process is incomplete. A compact will beagreed though, whether in its current form or otherwise. Any delay presents an opportunity for the UK toreturn to the negotiating table and, this time, help shape the outcome in a more constructive manner.

However, it is also clear that the closer union of those signed up to the fiscal compact will have a growinginfluence on the future direction of the EU’s organs and policy-making. The budget will largely be decidedwithin its framework, future enlargement will require new member states to meet stricter financial criteria fromthe very beginning, even long before entry, and, by its very nature, this “inner club” will begin to dominate allareas of EU policy and decision-making. The question then arises whether the UK should actively support andparticipate in this integration process or, as in the last 40 years, with exceptions such as the Single EuropeanAct, continue to “sit it out”.116 http://www.nucleus.uk.net/diary/item/the-european-view117 http://www.nucleus.uk.net/diary/item/britain-in-europe-a-tragedy-in-the-making-or-just-another-episode-in-a-long-running-soap-

opera




Nucleus firmly believes that the UK should play a positive but not uncritical role within the current—andfuture—EU. This requires a substantial shift from the position adopted at 8–9 December 2011 “summit”:Britain should now support the inclusion of the compact within the existing treaty framework. The compact’sprovisions will provide greater stability to the EZ and that, as the Prime Minister and Chancellor constantlyremind us, is in the UK’s vital interests.

However, certain safeguards—notably over parliamentary control over the budget process—must be retained.In the absence of a full fiscal and indeed political union the old adage of no taxation without representationapplies to no small degree. We do not share the view that—in a multipolar, highly complex globalised world—national sovereignty is an absolute. But the British legislature and executive must retain control over thenational budgetary process and influence monetary policy while we remain outside the EZ/euro. There can beno question of the European Commission holding a veto on that process. The same holds true, obviously, forthe decision to go to war or engage in peace-keeping operations with partners.

29 May 2012

Written evidence from Sir Peter Marshall KCMG, CVO

I hope you will permit me, as someone who has followed with great enthusiasm the work of the Committee,to express to you my delight at your decision to launch this inquiry into The future of the European Union:UK Government policy.

First, its timing: “by conducting an inquiry at this stage, we hope to contribute to public debate by airingsome of the options that might be available to UK policy-makers”. That is of particular relevance in the lightof the inquiry into the Lisbon Treaty undertaken by the previous Committee, and of their clear dissatisfactionat the lateness of the stage at which they were able to express an opinion. Anyone familiar with the work ofthe Select Committees readily understands their key importance, not only in the service which they renderdirectly to the House of Commons, but also more widely in enlightening and shaping public opinion in mattersof great weight and complexity. Timing is of the essence.

Secondly, the background. You call attention to “a widespread sense that the Eurozone crisis and theDecember 2011 European Council have raised fundamental questions about the future of the EU and the UK’splace in it”. The causes of the disquiet now so generally felt are manifold. They also go back a long way: 2013will mark the 40th anniversary of UK accession to the EEC, an appropriate juncture at which to make a generalassessment. More fundamentally, 2014 will be the poignant centenary of the outbreak of the Great War, withall its disastrous consequences. It cannot fail to sharpen memories of the upheavals and the suffering enduredby the peoples of Europe during so much of the twentieth century, and cast fresh inquiring light on therelevance to our own day of the pressures which ensued for European integration. It is a sombre thought thatdisaffection in a minor part of the Austro-Hungarian Empire led to much of Europe going up in flames. It is ano less sombre thought that Greece, a mere 2% of the Eurozone GDP, has the G8 by the ears.

Thirdly, while attention to the historical perspective does not reduce their urgency, it would nonethelesssuggest that the four questions on which in particular, the Announcement notes, evidence would be welcomerepresent in a very real sense the tip of the iceberg. That helps to explain the extraordinary way in which theEurozone crisis has developed, or has been allowed to develop. Such have been the scale and rapidity of thecrisis, any answer to the four questions must inevitably involve a measure of second-guessing of governmentsor even of electorates.

Fourthly, you speak, Mr Chairman, for the vast majority of our compatriots in stating that you were startingfrom the assumption that the UK should and will remain an EU Member. That is a broad judgement, not anarrow one. To approach the question of member ship of the EU as if it was only a matter of whether weshould, or should not, be part of the Brussels institutions, or of whether we should, or should not, acquiesce inany particular amendment of them, is to adopt an essentially two-dimensional approach to a three-dimensionalproblem. There is more to our stake in Europe than the EU. There is likewise far more to the EU thanl’acquis communautaire.

Fifthly, by virtue of their mandate, and of the skilled and imaginative way in which they are discharging it,the Committee under your leadership have acquired a unique understanding of the interplay between ends,ways and means in British diplomacy, and of the broad political and social context, both national andinternational, which modern world wide interdependence demands of the conduct of foreign policy. These arefactors which have in the past too often been ignored or underestimated in the conduct of our European policy.

These considerations prompt the submission to you of two lines of thought. First, while concentration onthe policy options that might be available to UK policy-makers has great practical value, are the Committeenot ideally placed at the same time to contribute to public debate on the wider issues involved in the future ofthe EU and Britain’s place in it?



Secondly, could that contribution with advantage extend not only to the substance of our relations with ourEuropean partners, but also to the management of them? It is clear that the over-polarised and divisive debateon the issues which has largely prevailed in this country has weakened the influence which we can exert inEurope. Why is it, we should ask ourselves, that we have so far failed to achieve in our dealings with ourEuropean partners the same type of broad ad hoc, ex post/ex ante, de facto/de jure consensus which we havemanaged in virtually every other major aspect of our international involvement?

These lines of thought in their turn point to a yet more basic consideration. We may have reached a stage inthe debate on our European involvement at which it is appropriate to seek the expert impartial assessment andadvice which only an authoritative high level body set up exclusively for that purpose, and with adequateresources and time at its disposal, is in a position to furnish?

A study of the appointment over the years of Royal Commissions in the UK and elsewhere in theCommonwealth suggests that the criteria for the utilisation of this eminent vehicle are less than clear cut. Theprincipal factor seems to be the perception that a particular situation requires the response that only a body ofthe consequence of a Royal Commission can provide, or help to provide. The present state of our relationswith our European Partners can be a case in point. The publication of the findings of a Royal Commissionduring the lifetime of this Parliament would be an enormous help in the next general election.

I am acutely aware that, for all the effort to make it both brief and self-contained, a submission of this kindto the Committee cannot but rest on a wide and detailed analysis of the relevant factors, which of necessitywould be of a length putting it beyond the normal compass. I have therefore offered to the most admirablestaff of the Committee a memorandum, prepared in the first instance for my fellow members of the FCOAssociation, that is to say, the Diplomatic Service alumni, addressing the issues in greater detail. A copy ofthis memorandum is enclosed with this letter.

21 May 2012

Annex

Memorandum for the FCO Association on the inquiry launched by the House of Commons ForeignAffairs Committee into the future of the European Union: UK Government policy

As our Chairman noted in his report to the AGM, the House of Commons Foreign Affairs Committee havelaunched an inquiry into the future of the European Union and UK government policy. The brief text of theSelect Committee Announcement, dated 28 March 2012, repays close attention. The timing is significant. TheCommittee’s hope is that by conducting an inquiry at this stage they may be able “to contribute to publicdebate by airing some of the options that might be available to UK policy-makers”.

The Committee have invited the submission of written evidence by 22 May. Although time is limited, thecase is a strong one for responses where possible from members of the Association. But that of course is byno means the end of the matter. The subject as a whole is on-going. It is as massive as it is complex. Boredomwill not be a problem in the foreseeable future. We are under the ancient Chinese curse “may you live ininteresting times”.

The background, as it would seem to affect the membership of the Association in particular, is explored inthis memorandum under three headings: Opportunity; Context; and the Image of the Diplomatic Service andits Alumni.

I. Opportunity

(a) One of the many respects in which we are fortunate indeed to have William Hague as Foreign Secretaryis that he is the first holder of that office to make a strong positive point about the value of the alumni. Thestrong historical sense which pervades his speeches is not only greatly reassuring in itself, but also gives addedweight to the practical steps, in pursuit of clearly articulated objectives and priorities, which he outlines inthem. He and his Ministerial colleagues are a team for which anyone who values the work of the DiplomaticService should be profoundly grateful. Never before has a chairman of the House of Commons Foreign AffairsCommittee subsequently become an FCO Minister, as is the case with David Howell.

(b) The present Foreign Affairs Committee is likewise unprecedented in its expert, detailed and supportivescrutiny of the work of the Diplomatic Service in the pursuit of UK international priorities, which are advisedlyextensive, despite the financial exigencies which are likely to beset us for years to come. The Committee’swork testifies to a precious ability to look simultaneously at the ends, ways and means of diplomacy in thebroad political and social context, both national and international, which world interdependence demands. Weshould be much encouraged that the Committee set store by the experience and the opinions of the alumni,and have promised to let the Association know about future inquiries.

(c) Past experience of discussion of the UK role in the EU suggest that it can easily generate more heat thanlight. However after years of polarisation and a dialogue virtually of the deaf, there is a great deal ofconstructive thinking and discussion. I make no apology for referring in particular to the recent seminar atEurope House, organised by Civitatis International, on the theme “The Future of Europe: towards the EuropeanDream?”, which I had the honour of chairing. The contributions of the four main speakers—Edward Mortimer,



Daniel Ottolenghi, Maurice Fraser and Christopher Coker—taken individually and collectively, wereoutstanding. Still less do I apologise for drawing attention to the “Eurogazing” missives circulated to membersof the Wyndham Place Charlemagne Trust by its indefatigable Secretary, Win Burton. All in all, one isconscious of a hint of consensus in the air. It should be inhaled deeply.

II. Context: (i) Political and Diplomatic

(a) In the announcement of the inquiry, the Chairman of the Foreign Affairs Committee, Richard Ottaway,observed that “there is a widespread sense that the Eurozone crisis and the December 2011 European Councilhave raised fundamental questions about the EU and the UK’s place in it”. That observation becomes morepertinent day by day.

(b) Next year we shall mark the fortieth anniversary of UK accession to the EEC. The anniversary willstimulate much further analysis. 2014 will be the centenary of the outbreak of the Great War, which willprompt even more profound questions about our European involvement. Have Sir Edward Grey’s lamps, whichwent out all over Europe in 1914, been lit again? What would Eyre Crowe have to say now for our guidance?It is a sobering thought that disaffection in a minor part of the Austro-Hungarian Empire led to much of Europegoing up in flames. Today Greece, which accounts for some 2% of Eurozone GDP, has the G8 by the ears.There must be better ways of running the railroad.

(c) In the meantime let us go back 50 years. On 5 December 1962, in a speech at West Point, Dean Achesonwaspishly remarked that “Britain had lost an Empire and not yet found a role”. His comment was ill-receivedin this country at the time, not least because it was uncomfortably near the truth. There seemed to be no let-up in our post-war adversities. The Plowden Committee to examine our future overseas representation had justbeen appointed. Our standing aside from the EEC and the creation of EFTA meant that Europe could be saidliterally to be at Sixes and Sevens. De Gaulle’s veto of our first application to join the EEC was only amonth away.

(d) Matters are somewhat better now. We have a perception, both realistic and responsible, of the scale andnature of our international involvement in a world of growing interdependence, or, to put it more picturesquely,in the Global Village. Our perception of course has its continuities with the past. But it is in the main verydifferent from our prevailing notions of a century ago.

(e) The best measure in the twenty-first century of this transformation is to be found in the ground-breakingWhite Paper on UK international priorities published by Jack Straw, one of our patrons, during his ForeignSecretaryship, in December 2003 (in which our present Permanent Under-Secretary had a noteworthy part) andits sequel in March 2006. Detailed study of both these wide-ranging texts continues to be rewarding. Thepolicy of the Coalition, comprehensively outlined in 2010, has a good deal in common with them. The sameoverall approach is convincingly endorsed in the lecture delivered at Ditchley last year by Sir John Major,another of our patrons. In all these documents our relations with our European partners are seen as integral toour international involvement as a whole, and not as some external, unwelcome, yet overriding, priority.

(f) The FAC Chairman speaks for the overwhelming majority of our compatriots in stating that he was“starting from the assumption that the UK should and will remain an EU member”. Exactly what this impliesmust be approached from a number of different standpoints. It certainly does not suggest that there can orshould be a single view on the major issues of the day The Committee’s announcement lists at the outsetfour burning questions on which in particular evidence would be welcome. The rapidity and invasiveness ofdevelopments even since 28 March are such that any reply to these questions could not but be highlyspeculative, and require a measure of second-guessing of governments, or even of electorates. No two membersof our association would be likely to come up with exactly the same answers. The idea of a collectiveAssociation view is fanciful.

(g) We need surely to give more attention to the shortcomings of discussion in this country of Europeanissues. Historians surveying our record on the fortieth anniversary of our accession to the EEC are unlikely toshower us with compliments on our handling of business. They would be bound to draw attention instead tothe divisiveness, the sterility even, of much of the debate, when the commonality of interest is so great and sopromising. Sir Edward Heath said at the outset that he would not wish to take Britain into the EEC withoutthe “full-hearted consent of the British parliament and people”. He soon changed his tune, averring that asingle vote was enough.

(h) The requirement has in reality always been to nurture an approach to the EU embodying the same adhoc, de facto/de jure, ex post/ex ante broad consensus we have achieved in almost every other major aspect ofour international involvement. Within such a compass, there will inevitably be considerable differences ofanalysis and a plethora of prescriptions. Once again, the idea of a single view on such a massive array ofinterrelated topics is fanciful. It is however the overall consensus which is crucial. Without it, our impact onEuropean counsels is much more limited. With it, we can be more confident that what we have to say willreceive greater attention. Failure so far to achieve such a consensus has cost us dear.



III. Context: (ii) Public and Social

(a) Reaching a consensus on how best to involve ourselves in the EU is not the elitist preserve of policy-makers. Public opinion and the public mood are becoming an increasingly important factor in virtually everyaspect of foreign policy-making. Yet failure to carry people with you, and indeed the deliberate ridingroughshod over the views of voters and what are firmly seen as their democratic rights, have in recent yearsbeen the besetting sins of the EU.

(b) In the 21st century we are hearing more than ever before about national solidarity, the maintenance ofwhich is indispensable for security as well as prosperity. There is increased willingness to examine our EUpolicy, not only in the context of Britain’s international involvement generally, but also in the light of thenecessity of fostering national values and the social cohesion essential to the discharge of our internationalresponsibilities. It is a far cry from classical diplomacy.

(c) In EU terminology this is a matter of l’esprit communautaire in dialogue with l’ acquis communautaire.We have heard little or nothing in recent years about the former: the latter, principally in the shape of a raft oftreaties and their ensuing regulatory moves—the Single European Act, followed by the Treaties of Maastricht,of Amsterdam, of Nice, of Lisbon and the current fiscal compact—has squeezed it out. That is the antithesisof the creation step-by-step of a de facto solidarity envisaged by Schuman in the 1950 Declaration.

(d) EU Heads of Government fully recognised the importance of securing public support or acquiescencefor this fuite en avant, inspired and engineered by Jacques Delors in his long tenure of the office of Presidentof the European Commission.

(e) The European Council Declarations of Nice (December 2000) and Laeken (January 2002), on the eve ofmajor enlargement to the East, followed up by the Declaration of Berlin on the occasion of the 50 anniversaryof the signature of the Treaty of Rome (March 2007), dwelt on the twin necessities of fulfilling our internationalresponsibilities abroad and of bringing the EU institutions nearer the people at home. The outcome isdistressingly different. Inward-looking institution-mongering, eventually enshrined in the Lisbon treaty, itselfstubbornly adhering to the precepts of the Constitutional Treaty spectacularly rejected by the voters of Franceand the Netherlands, has absorbed an inordinate amount of time and attention. The Eurozone is now, and islikely for some time to come to remain, the major headache of the international financial and businesscommunity. The EU institutions, very largely by their own fault, have never been further than they now arefrom the public in the member countries.

(f) Developing within the UK a broad ad hoc, de facto/de jure, ex post/ex ante national consensus on EUmatters will be a mighty multi-faceted task. But we have a no less mighty weapon available to help meet it inthe shape of the richness of our heritage, of our creativity, of our adaptability and of our diversity. We are ahappy breed. In recent years we have had limited success in expressing that noble truth in our Europeaninvolvement.

(g) Co-operation among the major faiths has an important part to play in this quest, especially as regardsthe role of Christianity, and historically, of Christendom. On 18 February the Archbishop of Canterbury broughttogether at Lambeth Palace representatives of the nine major faiths on the occasion of a visit by The Queenand the Duke of Edinburgh as part of the Diamond Jubilee celebrations. As Dr Rowan Williams observed,

it was an unprecedented gathering here within these walls, but it was one which certainly revealedthe degree to which our society has changed quite radically in terms of its religious composition,just within the last 60 years. It was an event which highlighted both the religious diversity of oursociety and the willingness to integrate, represented by the elements within that diversity.

The text of The Queen’s short address to the gathering is highly satisfying food for thought.

(h) In November, 2009, Notre Europe, a think-tank of which Jacques Delors is the Founding President,issued a Declaration which can be regarded as an authoritative orthodox formulation of the post-Lisbon missionof the EU in the 21st century. It asserts that “the condition for success is to rediscover … the Communitymethod, a virtuous and dynamic counterpoint between the three institutions responsible for the well-being ofthe Union and its people”, a triangle formed by the Council, the Parliament and the Commission, each body“newly strengthened … and led by men and women freshly summoned for the task”.

(j) Matters have not worked out that way. The thesis itself is seriously flawed in at least two respects. First,the Declaration makes no mention of the European Court of Justice. The Court’s powers, enhanced by thewide extra discretion conferred on it in the Treaty of Lisbon, constitute probably the greatest stumbling blockto the willing public acceptance of the Union’s institutions as a whole.

(k) Second, there is no hint of a popular dimension to the problem. We are concerned not with a virtuousand dynamic triangle, but with an irregular quadrilateral, the fourth side being composed of the people of theUnion in numerous configurations, Europe-wide, national, regional and local, and with interests andpreoccupations far removed from institutional fine-tuning in Brussels.

(l) In our own country the establishment of the Supreme Court in the old Middlesex Guildhall offers us alively example of the quadrilateral in what can be called the Allegory of Parliament Square. To the East is theLegislature; to the North, the Executive; to the West, the Judiciary; and to the South, Westminster Abbey. It



comprises, in what many people think of as the Parish Church of the Nation, a Royal Peculiar, the Seat ofMonarchy, the chief National Shrine, homage to excellence and sacrifice, and a beacon in modern society.

(m) In her message on Accession Day, The Queen expressed the hope that “this Jubilee year will be a timeto give thanks for the great advances that have been made since 1952 and to look forward to the future withclear head and warm heart as we join together in our celebrations”. That surely applies as much to ourinvolvement in the EU as to any other aspect of our national life.

IV. The Image of the Diplomatic Service and its Alumni: Three FAC Inquiries

Thirdly, a word about our own concerns as a Diplomatic Service. The Foreign Affairs Committee has, withina relatively short span, launched three related inquiries into policy matters which, though by no means the soleconcern to the FCO/Diplomatic Service, are very much in our bailiwick: the first was concerned with the roleof the FCO in UK government; the second is considering the role and future of the Commonwealth; the thirdis the present EU inquiry. They need of course to be looked at synoptically.

(a) Until recently the FCO was not so much getting a bad press on account of its shortcomings as being thesubject of concern on account of the difficulties created for it by No 10 and the Treasury. In evidence submittedto the Committee, I listed three in particular of what I described as the “present discontents”: sofa diplomacyin No 10, managerialism and what Douglas Hurd, yet another patron, called “the hollowing out of the FCO”.One of the last recommendations made by the FAC in the previous Parliament was that the new governmentshould “carry out a comprehensive foreign policy-led review of the structures, functions and priorities of theFCO, MOD and DFID”.

(b) I am not aware that the new government responded directly to this recommendation. But William Hagueand his ministerial colleagues at once grasped all the main nettles. The discontents were rapidly remedied. Anew atmosphere prevailed.

(c) The new Foreign Affairs Committee, for their part, sprang early into action. They immediately launchedan inquiry into the Role of the FCO in UK Government. The Committee’s report was published a year ago,actually on the day of our last AGM. The directness of the report is refreshing. Its main conclusions were thatthere was indeed a significant role for the FCO/Diplomatic Service and that we were significantly underfundedfor its adequate fulfilment.

(d) The moment however was hardly propitious for demanding an immediate large increase in the FCObudget. But the question remained whether the FCO/Diplomatic Service had been sufficiently robust in recentyears in defending our legitimate interests, or sufficiently comprehensive in the discharge of our responsibilities.

(e) In this context it is relevant to recall the point noted by the previous Foreign Affairs Committee that“among the 30 Member States of the OECD only one other—Germany—has a fully-fledged ministry ofinternational development, with all the others maintaining agencies or departments that in one way or anotherfall under the authority of the foreign ministry”.

(f) The reasons for this state of affairs may be numerous. But chief among them is undoubtedly the failureof the FCO adequately to understand either the emergence of what was aptly termed “the third worldcoalition”—the collective actions and the pressures of the countries newly acquiring their independence andeager to join others, similarly desirous of expressing their sovereignty and of securing a “level playing field”internationally—or the ever-widening concept of “development”. The chief consequence in practical terms ofthis failure is the grotesque discrepancy between the expanded funding lavished on the DFID on the one hand,and the penury visited on the Diplomatic Service on the other.

(g) The second of the three inquiries directly affecting us was launched by the FAC on 8 December. Itaddresses the role and future of the Commonwealth, and was prompted by what was widely thought of as thedisappointing outcome of the biennial Commonwealth Heads of Government Meeting in Perth (WesternAustralia) last October. The Committee will take its time about reporting, not least because of what mayemerge in this Diamond Jubilee Year.

(h) Although they will deservedly commend Ministers for their stance on the Commonwealth putting the“C” back into the FCO, the Committee are likely to be unenthusiastic about the performance as a whole of theFCO over the years. The Commonwealth has been seriously neglected. In one halcyon year—I name no names,nor date no dates—the word “Commonwealth” did not appear in the Annual Departmental Report except inthe term “Foreign and Commonwealth Office”.

(j) The third is the EU inquiry, launched on 28 March. The particular context is the outcome of the DecemberEU Council meeting and the consequences of the British “veto”. It must be said that the Committee can hardlyignore the general public perception in this country of the FCO as having been unduly influenced by, and readyto endorse, the actions and ambitions of Brussels. Former members of the Diplomatic Service, especially thosewho have served in UKREP, have been vociferous in their collective advocacy in particular of the euro andthe Lisbon Treaty.



Envoi

This brief survey of the issues involved in the Foreign Affairs Committee EU inquiry suggests a number ofareas in which we as alumni are well placed to make a contribution, individually if not collectively, to the on-going debate. And let us not feel inhibited about discussing these matters among ourselves. How about, forexample, a laid-back exchange of views on some low-key question such as “will future historians cast JacquesDelors in the role of Pied Piper of Brussels?”.

Finally, what of the Diplomatic Service itself? Perhaps Hollywood mogul Sam Goldwyn sums up ourposition: “the last thing I think about is money—pause—before I fall asleep”.

Further written evidence from Sir Peter Marshall KCMG, CVO

Three recent developments have, in combination, gone far to transform both the perception in this countryof the UK role in the EU, and, not less important, the perception of our EU partners of that perception. Thesituation, if imaginatively handled, could be one of abundant promise for the United Kingdom, and for the EUas whole.

These developments are:

(1) The Prime Minister’s speech on January 23

While reaction to the Prime Minister’s speech understandably concentrated at the outset on thereferendum undertaking, and the risks that may attach to it, there has been a growingunderstanding of the validity for the EU as a whole of the analysis it contains of the Union’scurrent woes. There has been neither any effective challenge to the analysis, nor any significantalternative to it. Overall, reaction on the Continent has seemed almost more favourable than inthis country.

(2) The Multiannual Financial Framework, 2014–20

The adoption by the European Council, at their meeting on 7/8 February, of the nextMultiannual Financial Framework covering the years 2014–20, represents a turning point in theUnion’s financial—and, indeed, general—history. Hitherto there had been a general acceptanceof a virtually automatic increase in the resources vouchsafed to the Union’s institutions bymember governments, irrespective of the pressures on their expenditure in other respects. MrCameron found allies in his insistence that this could not be the case when austerity andcutbacks were so prominent and painful a feature of life in the member countries.

(3) Review of the Balance of the Competences between the United Kingdom and the EuropeanUnion

The interdepartmental examination of the Balance of Competences announced in the WhitePaper presented to Parliament by the Foreign Secretary in July, 2012 (Cm 8415) has so farattracted little attention. It was regarded in some quarters as a tool in the repatriation of powersimplicit in the “negotiation”, or “renegotiation”, of the UK’s terms of membership of the EU.In reality, it has fundamental and far-reaching implications for the EU as a whole.

One of the extraordinary lacunae in the management by the EU of its affairs is that, althoughthe conferral of competences on the Unions institution is proclaimed to be the essence, and thejustification, of its activities, no collective assessment of them has ever been collectivelyundertaken. Nor it appears, has the need to conduct such an assessment,, still less the obligationto do so, even been perceived.

In the interests both of the efficient functioning of the Union, and of engaging the full supportof the governments and peoples of the member countries in the enterprise, however, a thorough-going audit is long overdue. The UK Review, as outlined with outstanding clarity andmethodology in the White Paper, even as a prospect, let alone when completed, will have asalutary effect on the Union’s institutions.

Ends, Means and Ways

These three developments, surveying ends, means and ways respectively, afford, when taken together, acomprehensive insight into the lines on which the Union should evolve in the twenty-first century. This insightis a distinctive contribution from the UK to the mighty task we face together in the EU. It is a tailor-maderesponse to the recognition in the closing paragraph of the Declaration of Berlin, issued in 2007 on the occasionof the 50th anniversary of the Treaty of Rome, that “we must always renew the political shape of Europe inkeeping with the times”. Six years is a long time in EU politics.

The Paradox of Our Partners’ Perception of what the UK can Contribute

I have long been struck by the paradox in our partners’ perceptions of us. On the one hand we are toldrepeatedly told that we probably have the greatest contribution of any member country to make to its futurehealth and prosperity. On the other they insist that this has to take the form of falling in with the views of the



majority. It is pointed out to us, for good measure, that we are at the bottom of the league of member countriesas regards the level of public support for the EU. The possibility that there might be some connection betweenthe two phenomena has not so far been the common coin of discussion.

The Contrast with the Situation in December 2011

The full significance of the situation can be grasped more easily by comparing what we see today with thepanic-stricken reaction to the Prime Minster’s “veto” of the fiscal compact at the December 2011, meeting ofthe European Council. Hands then were freely wrung, and denunciations were plentiful of our self-inflicted“isolation” and “marginalisation” The panic died down in the months that followed. There was a very differentson de cloche by the time the Prime Minister reported to the House on the December, 2012, meeting. It was aharbinger of a more balanced appreciation of our EU involvement.

The Decisiveness and the Incisiveness of the Changes

The decisiveness, and the incisiveness, of these favourable developments in our position in the EU promptthe question how it was that we laboured long under a dreary, defeatist Anglo-Brussels Orthodoxy , as it maybe called, of going along in general with the Union flow, however belatedly or reluctantly. It was an orthodoxywhich went so much against the national grain on the one hand, and which was so essentially anti-democratic,and so inadequate analytically, on the other. There is less purpose, however, in pursuing the question on itsown account than as a means of highlighting the opportunities which now are opening before us.

The Role of the Foreign Affairs Committee

I hope I do not lay myself open to the charge of sycophancy if I add to the three developments to which Ihave referred a fourth development-in-the-making: namely the Report which you, Mr Chairman, and yourcolleagues will shortly be publishing on the inquiry which you launched in March, 2012, into The Future ofthe European Union: UK Government Policy. The immediate reason for offering this comment is theCommittee’s day-to-day and practical concern, and indeed familiarity, with every major aspect of the UnitedKingdom’s international involvement. It gives the Committee an unrivalled standpoint from which to appraisethe position. One of the great difficulties in the past in the management of our relations with our EU partnerswas that it was regarded as basically a self-contained affair, either enjoying the right of eminent domain overother aspects of our international involvement, or somehow escaping the laws of political and administrativegravity. Thanks in large measure to the work of the Committee, that phase is now over.

I would add two further general considerations. First, it is now beyond doubt that the parliamentary elementin the Union’s arrangements is unsatisfactory. Fairly or unfairly, the European Parliament has come to bewidely regarded as part of the problem rather than part of the solution. There is well-justified pressure forgreater involvement of national parliaments. The Foreign Affairs Committee, or its equivalent country bycountry, cannot but be a significant part of this.

Secondly, some adjustment in the balance between parliamentary democracy on the one hand, and directdemocracy on the other, has been made possible, and perhaps inevitable, by the worldwide impact of theinformation technology revolution. Delicate as this development is in national societies, it is even more delicatein complex international entities such as the European Union.

Even so, the requirement identified by the Schuman Declaration of 1950 is the same: namely, themaintenance of an ad hoc solidarity as the essential companion of the step-by-step building of Europe: in EUterminology, that means the maintenance of l’esprit communautaire, in parallel with l’acquis communautaire.This essential linkage was broken by single-minded pursuit first of a Constitution, and then, after the failureof the latter, of a para-Constitution, in the form of the Lisbon Treaty. Once again, the Select Committee systemis undoubtedly a key factor in any adjustment of the balance.

It is not altogether fanciful to suggest that the situation has something of the exponential about it. The wholeis not the sum of its constituent parts, important as each of them is. It is their product. One does not add themtogether; one multiplies them one by another. The prospects are as exciting as they are unlimited. We mighteven repeat to ourselves, if not to others, and without prejudice to the outcome of the forthcoming Scottishreferendum, the observation of William Pitt the Younger in the wake of the Battle of Trafalgar: “England hassaved herself by her exertions, and, as I trust, will save Europe by her example”. If that seems over-ambitious,would we be justified in echoing the words of Winston Churchill after the Battle of El Alamein: “this is notthe end. It is not even the beginning of the end. But it is perhaps the end of the beginning”.

26 February 2013



Written evidence from Professor Pauline Schnapper, Sorbonne Nouvelle University, Paris

Pauline SCHNAPPER, Professor of British Studies at the Sorbonne Nouvelle University, Paris. I have beendoing research on the UK and the EU since I completed a PhD in International Relations at the Institut d’EtudesPolitiques (Sciences Po Paris) in 1997, having spent two years at St Antony’s College, Oxford. I publishedamong other books and articles: La Grande-Bretagne et l’Europe: le grand malentendu (Paris, Presses deSciences Po, 2000) and British Political Parties and National Identity: A Changing Discourse (Newcastle:Cambridge Scholars, 2011).

Summary— The decision of the present government to reject the fiscal stability pact signed by the other 26 EU

members in December 2011 was unprecedented.

— It has led to Britain being isolated in the EU, which cannot be in its long-term interest.

— The EU has actually evolved in a “British” direction in the last 15 years, a fact often overlooked inthe public debate.

— The UK government should not let itself be drawn, for party political reasons, into an even moreremote corner but play a full part in EU developments which are clearly in the national interest, suchas CFSP, the single market, the future EU budget, etc.

1. The refusal of the coalition government to sign the fiscal stability pact agreed by the other 26 EuropeanUnion member-states in the midst of a major economic crisis during the December 2011 European Councilmarks a turning point in the British engagement in Europe, with potentially long-lasting consequences. Theobvious risk is that Britain will find itself isolated and incapable of exercising influence in an organisationwhich weighs heavily on its economy and provides it with an opportunity to increase its clout on the worldscene.

2. It was the first time that a British government chose not to opt out from some aspects of a treaty butcompletely withdraw from a negotiation since it joined the EC in 1973. Neither Margaret Thatcher nor JohnMajor had in effect adopted such an empty chair policy in spite of their reservations, to say the least, towardsplans for further integration in the 1980s and early 1990s. They always chose, whatever the rhetoric, to try toinfluence negotiations from the inside, hoping thus to advance what were defined as British interests—thesingle market, deregulation, reform of the CAP, etc.

3. Arguably, David Cameron was in a different situation last December since the UK is not part of theeurozone and therefore not as directly affected by measures destined to help resolve the crisis as eurozonemembers. In theory it also pursues an independent monetary and budgetary policy, with no obligation to followrules that apply to others. The well-known truth is, as acknowledged by David Cameron and William Haguethemselves, that the British economy is totally interdependent with that of the eurozone countries and that it isdefinitely not in the British interest to see the eurozone collapse—whatever the gleeful predictions of someeurosceptics. It could therefore have been argued that the national interest made it imperative to sign the treaty.The other argument used, that the treaty failed to protect the interests of the City of London, “threatened” bynew regulations, was also debatable. On the one hand it is not obvious that the interests of the City totallyoverlap with the interests of the British economy as a whole, as underlined at the time by some British businessworried about British isolation in Europe. Secondly, it is not certain either that EU plans for financial regulationare contrary to British consumers’ interests. There should at least have been a debate on whether obsessionwith the protection of interests of the City can become counter-productive.

4. It is clear therefore that the decision to stay out of the treaty was taken not so much for economic reasonsas for party political ones, which raises once again the issue of British euroscepticism, in its different guises,and the constraints it imposes on governments. There is still a widely shared perception in the UK thatmembership of the EU is a pragmatic adaptation to international economic pressures but that it fundamentallyundermines the sovereignty of Westminster and the identity of Britain. In this view membership offers someadvantages, such as access to a wide and expanding market conducive to growth, but the scope of the EU, orat least of Britain’s involvement to it, should be curtailed. The EU is seen as an obstacle to the UK’s fullenjoyment of the benefits of globalisation and open markets. The Conservative party has entrenched this “soft”euroscepticism in its DNA since the late 1990s, while some in the party as well as its direct competitor in theelectoral field, UKIP, campaign for a complete withdrawal from the EU. I do not believe that it is a reasonablereflection of the situation Britain finds itself in as a member of the EU.

5. The reality of the EU is much more complex than this vision suggests. Eurosceptics ignore the fact thatthe EU has actually become much closer to the model that they favour than it was 20 years ago and that thefederal dream is to a large extent dead. The European Union is now much more intergovernmental, in spite ofor thanks to enlargement, than federalists hoped for. In institutional terms, this evolution can be traced back tothe Nice treaty (2000), when big EU countries, including Britain, secured a majority of votes in the EuropeanCouncil, thus preventing a coalition of small countries from potentially outvoting them in the future. Votersthroughout Europe have become much more wary of European integration, for both good and bad reasons, asillustrated in opinion polls, European Parliament elections and referendum results, which imposes heavyconstraints on what all governments are ready to accept in the EU. Britain is not alone in resisting movestowards more integration—France under Presidents Chirac and especially Sarkozy has reasserted the



importance of intergovernmentalism in the EU, contributing to a weakening of the Commission. Britain istherefore less “different” than its politicians think from a new mainstream Europe.

6. In the midst of the sovereign debt crisis, it is difficult to assess the future for Britain in the EU. Providedthe whole euro project does not collapse, more budgetary and tax integration is likely in the eurozone. Thisdeepening of integration among some member states should not push Britain even further to the margins thanit already dangerously is. In a European Union which would become de facto multi-tier, Britain should remaina central player in all the other crucial sectors dealt with at the EU level. This includes the Common Foreignand Security Policy, where the UK is a crucial player and has a vital interest in improving the efficiency of thecurrent system, if only for economic reasons. Bilateral cooperation with France, however positive, will not beenough to reduce costs and improve European defence within NATO. The CFSP offers an opportunity toencourage other EU members, notably Germany, to improve burden-sharing. It also includes cooperation inthe former “third pillar”, home and justice affairs, where Britain has enjoyed the “best of both worlds” (to useAndrew Geddes’ phrase) in being able to opt in or out of EU directives. British input into the EU will also benecessary in decision-making about the budget and single market issues in general if the government is to pushthe EU towards Britain-friendly policies.

7. The long-term economic and political interests of Britain and Europe in general require continuedengagement in the EU, not the dogmatic opposition to anything European, based on an outdated vision of anillusionary “superstate”, which is too often heard in the British media and on some Parliamentary benches. TheBritish government should acknowledge how much the EU has changed since the 1990s and the extent towhich the debate about sovereignty is out of step with a globalised world in which individual European nationsare not major players. The debate about organising a referendum on whether to stay in the EU is equallysurreal—leaving aside the debate about the merits of referenda in general in solving complex issues—whenconsidered within the global environment. This is marked by the relative decline of “the West”, the rise ofemerging countries and an economic crisis unprecedented since the 1930s. In this context Britain’s activeparticipation in the EU is more necessary than ever.

30 May 2012

Written evidence from Business for New Europe (BNE)

Business for New Europe (BNE) welcomes the opportunity to make a submission as part of the considerationby the Foreign Affairs Select Committee for their Inquiry into “The Future of the EU: UK Government Policy”.This evidence outlines what BNE views as the key priorities.

1. Executive Summary

The UK government should seek the following goals for the UK’s relationship with the European Union:

— Seek to retain the UK’s seat at the EU table and have a voice in all negotiations.

— Boost jobs and strengthen growth by pushing for reform at the EU-level.

— Recognise and advocate the benefits of UK’s full access to the single market more clearly.

— Push for greater liberalisation and completion of the single market.

— Prioritise digital and energy markets in the pursuit of a more liberal European market.

— Foster and encourage EU external trade policy.

— Push for Common Agricultural Policy reform.

— Support measures to solve eurozone crisis and protect the UK’s financial services sector.

— Continue to fight against a rise in the EU budget for 2014–20.

— Proactively address the diminishing UK numbers in the EU institutions at both UK and EUlevels.

2. Introductory Comments

2.1 BNE is an independent coalition of business leaders advocating a positive case for reform in Europe.We are an independent not-for-profit organisation funded by donations from the private sector with offices inLondon and Brussels.

2.2 Our Advisory Council consists of Chairmen and CEOs of FTSE 100 companies and our Executiveconsists of experts in foreign and economic policy.

2.3 We are involved in a wide range of advocacy activities to provide a platform for debate on Europeanissues to business leaders and policy makers. We publish research, hold seminars and conferences, andcontribute in the media. We seek to ensure that a reasoned, pro-European voice is heard in the UK.

2.4 The author of this evidence, Ariane Poulain, Head of Research at BNE, specialises in quantitative andqualitative analysis, EU and UK affairs, immigration, international development and economics. The editor ofthis evidence, Phillip Souta, Director of BNE, is an expert on the eurozone, international trade, Britain’s



relationship with the EU, European foreign affairs and comments on these issues regularly in the media. PhillipSouta would be happy to appear before the Select Committee and provide oral evidence on this submission.

2.5 BNE appreciates the opportunity to put forward evidence and will focus on advocating: (a) positive andengaged approach to the UK government’s relationship with the EU; (b) specific policy areas that the UKgovernment should prioritise as critical to the future of the EU: the Single Market, EU external trade policy,reform of the Common Agricultural Policy, the Multiannual Financial Framework 2014–20 and financialservices; and (c) British representation in the EU institutions.

3. Recommendations

3.1 The UK should pursue a realistic, pragmatic and positive approach to the EU. We advocate that the UKgovernment’s approach to its future relationship with the EU should be characterised, overall, by thefollowing two prerogatives

3.1.1 The importance of the UK having a seat at the negotiating table must not be underestimated.

— Britain must remain engaged across all relevant policy areas. The view that the UK would bein a better position if it left the EU and instead took part in an EEA-style agreement, similar tothat of Norway, is not in the UK’s best interests.

— A January 2012 report commissioned by the Norwegian government118 highlighted majordrawbacks of their agreement with the EU stemming from not having a seat at the table duringnegotiations. Norway is “bound to adopt EU policies and rules on a broad range of issueswithout being a member and without voting rights” and as a result, for example, has actuallyimplemented more EU regulations than the UK.

— Norway’s “association without membership” relationship with the EU provides access to thesingle market but at the cost of contributing to the EU budget and not having a voice at thenegotiating table. An EEA-style arrangement, if it were even available to Britain on equivalentterms to Norway, would in practice do little to enhance British sovereignty, and would mean thatthe UK would be obliged to implement EU legislation without having any say in its formation.

3.1.2 The pursuit of opt outs is a red herring and the UK government must shift the current debate towardsa more constructive agenda, primarily focused on achieving better growth.

— According to the Office for National Statistics, the UK’s real GDP has stagnated for nearly twoyears and is currently in a “double dip” recession with a second successive quarter of economiccontraction—real GDP declined by 0.3% in Q1 2012.

— At present, the EU has not implemented the necessary reforms sufficient to boost jobs andgrowth—this is damaging the EU and in the process, the UK.

— Thus, the UK’s future relationship with the EU must be based upon pushing for reform that isin the UK’s interests. With this in mind, the future of UK government policy on our membershipof the EU should not be about renegotiation, it should be about reform.

— As 3.2 notes in greater detail, the EU is the UK’s largest trading partner and the single marketadds over €600 billion to the UK economy annually. It is in the UK’s best interests that the EUovercomes the crisis and regains competitiveness in the global economy.

3.2 The European single market is vital to the UK economy and plays a major role in the importance of theUK’s relationship with the EU. We advocate that the UK government should build a stronger agenda on thefollowing

3.2.1 Seek to more clearly recognize and build upon the key benefits of the European single market. Thefollowing identifies why—despite the current financial crisis—the UK’s full access to the EU single marketremains highly attractive and lucrative in the global political economy.

3.2.1.1 The single market is the world’s largest trading area with almost 500 million consumers andworth €12.6 trillion, compared to €12 trillion and €3.5 trillion in the US and Japan respectively.

3.2.1.2 Over 50% of foreign direct investment to the UK comes from EU member states; the UKattracts global FDI primarily because of its full access to the EU single market. An example ofthis is the recent decision by the leading Japanese pharmaceuticals giant, Shionogi, which iscurrently rolling out a five-year global expansion plan. In July 2012, Shionogi announced thatthey would set up their European headquarters in London because of London’s stronginfrastructure, outstanding talent and “easy access to the rest of Europe”; this creates 50 newjobs and Shionogi are now also considering moving part of their manufacturing operations tothe UK.

3.2.1.3 The single market adds €600 billion a year to the UK economy, accounts for over 50% of allUK trade in goods and services, and three million jobs are directly or indirectly linked to it.

118 “Outside and Inside: Norway’s agreements with the European Union”, Report by the EEA Review Committee submitted tothe Ministry of Foreign Affairs on 17 January 2012, Official Norwegian Reports NOU 2012: 2, Chapter 1 [in English], athttp://www.europautredningen.no/wp-content/uploads/2011/12/NOU201220120002000EN_PDFS.pdf



3.2.2 Full completion would add a further €200 billion to the EU’s GDP. We advocate that the UKgovernment prioritise the following two policy areas in the push for greater liberalisation and completion ofthe European single market: the digital single market and the energy market.

3.2.2.1 The Digital Single Market

— The failure to complete a digital single market in the EU has the potential—under cautiousassumptions—to cost Europe at least 4.1% of GDP by 2020 due to the lack of coherenceand fragmentation across EU member states which present significant barriers to growthin a swiftly growing market.

— In the UK alone, it is estimated that the digital market will grow by 10% in 2012 and bythe end of 2015, the Minister for Media, Culture and Communication, Ed Vaizey, predictsthat it will represent 20% of the UK’s total GDP.

— We strongly encourage the UK government to fully support the goals of the “DigitalAgenda for Europe”,119 from improving cross-border online transactions to theimplementation of pan-European licensing for online content such as music, photographyand film.

3.2.2.2 The Energy Market

— Like the digital market, the EU’s member states are operating in a highly fragmentedEuropean energy market and at present, EU 2020 targets in the area of energy will not beachieved. For example, in energy efficiency alone, the EU is forecasted to improve itsenergy efficiency by 9% which is less than half of the EU 2020 target.

— In May 2012, European Commission president, Jose Manuel Barroso, stated that the EUenergy market was worth €620 billion in itself.120 This clearly underlines the importanceof the Commission’s communication “Energy 2020: A Strategy for Competitive,Sustainable and Secure Energy” goals which comprehensively set out the requirements fora stronger and more productive EU energy market, such as energy efficiency andinfrastructure.

— We strongly encourage the UK government to actively support and push forward the EU2020 goals in energy for the benefit of the wider EU economy as well as domestically.Furthermore, the UK does not have the capacity to independently meet national energydemands and is currently falling behind other EU countries in its ability to maintainimportant environmental priorities such as reducing greenhouse gas emissions andincreasing the amount of energy produced from renewables.

3.3 As a member of the EU, the UK trade sector is in a much stronger position and it is in the UK’s bestinterest to foster and encourage the EU’s external trade policy

3.3.1 The EU is a significant force multiplier for UK trade. There are three main reasons for this:

3.3.1.1 The UK trade sector has the support of the EU if external trade partners contravene WTO rules.

3.3.1.2 As part of the EU27, the UK is in a more influential and attractive position to secure Free TradeAgreements (FTAs). The following examples demonstrate a benefit already achieved and thepotential for future UK opportunities in EU external trade policy:

3.3.1.2.1 In July 2011, an FTA between the EU and South Korea came into force. The deal isestimated to eliminate over 99% of duties on EU goods and in the UK specifically, theDepartment for Business, Innovation and Skills estimates that the deal will bring £500million of annual benefits to the UK and create an additional £2 billion in exportopportunities for UK business.

3.3.1.2.2 We advocate that the UK should continue to encourage the EU’s external trade policybecause of the vast potential opportunities for the UK trade sector. According to theEuropean Commission’s comprehensive sustainability impact assessments for FTAs, thefollowing benefits to the UK of completed EU FTAs would be, for example:

— EU/Canada: Around £423 million per annum in the short term.

— EU/ASEAN: Up to £3 billion per annum in the long term.

— EU/India: Approximately £2 billion over 10 years.

3.3.1.3 The UK’s EU membership places the UK in the strongest position to push for a more liberaltrade agenda at the global level. This influence is two-fold. Firstly, the UK has a significantrole to play in shaping the EU trade policy agenda which—considering that the EU is theworld’s largest trading area—allows the UK to push forward its open market philosophy andencourage greater liberalisation in the single market. Secondly, as an individual voice on the

119 See http://ec.europa.eu/information_society/newsroom/cf/pillar.cfm?pillar_id=43&pillar=Digital%20Single%20Market120 “Deepening EU China co-operation on energy: Working together to meet global challenges”, speech by European Commission

President Barroso, EU-China High Level Meeting on Energy, Brussels, 3 May 2012, press release available via http://europa.eu/rapid



global level the UK is more powerful as part of the EU27; if the UK was outside of the EU,for example, it would have little ability to influence and shape the WTO agenda.

3.4 The UK government should call for reform of the Common Agricultural Policy (CAP) to ensure CAPspending is conducive to long-term growth and better aligned with the UK’s best interests alongsideproviding more effective support to the EU’s agricultural sectors

3.4.1 The main issues surrounding negative CAP spending are:

3.4.1.1 The allocation of direct payments are highly unequal: (a) over 50% of CAP goes to the top16% of farmers; (b) direct payments per hectare vary significantly across EU member states,from €462 to €190; this primarily disadvantages the Central and East European (CEE) memberstates and the CEEs are most in need of support to strengthen their agricultural sectors.

3.4.1.2 Subsidising the EU agricultural sector goes against the values of the single market: it is (a)highly protectionist, and (b) distorts regional and global markets.

3.4.1.3 CAP is currently allocated over 40% of total MFF spending and of this amount, only 25% goestowards rural development. Rural development spending is more sustainable and effective thandirect payments in the long-term.

3.4.2 We consider that the above issues should be addressed in the next MFF and as a result, an 8% reductionwould be made to overall CAP spending but alongside efficiency gains and an increase in positive spending.We advocate that the UK government should consider the following reforms to CAP:

3.4.2.1 Introduction of means testing for individual beneficiaries of CAP.

3.4.2.2 A 50% reduction in direct payments to the top 11 EU member states with a GDP above the EUaverage, with the aim to phase out post-2020.

3.4.2.3 Increase direct payments by 26% to the four EU member states with the lowest GDP below theEU average.

3.4.2.4 An increase in rural development spending by over €4 billion.

3.5 The euro area summit conclusions dated 29 June 2012 provide for the creation of a “single supervisorymechanism” by the end of 2012. This mechanism will be vested in the European Central Bank (ECB) andonce established will allow for the European Stability Mechanism (ESM) to recapitalise banks directly. It isin the UK’s interests that the eurozone crisis be resolved. It is reasonable to talk about common resolution,depositor protection at a eurozone or EU level. We submit that the UK government should strongly supportthe creation of such a “European Banking Union,” whilst bearing in mind the following

3.5.1 Financial services are of considerable importance to the UK economy, accounting for 9% of UK GDP,and £63 billion in UK tax revenues in 2010–11 accounting for 12% of total UK tax receipts. Financial servicesemploy two million people in the UK—7% of UK employment.

3.5.2 The UK accounts for 36% of the EU’s wholesale finance industry and 75% of European financialtransactions take place in London.

3.5.3 The European Council conclusions dated 29 July 2012 state that proposals to be prepared on a EuropeanBanking Union, “will include concrete proposals on preserving the unity and integrity of the Single Market infinancial services and which will take account of the Euro Area statement and, inter alia, of the intention ofthe Commission to bring forward proposals […]”.

3.5.4 It should be remembered that the proposals referred to in 3.5.3, above, will not change fundamentaltreaty freedoms. At this stage, it is also impossible to give a detailed analysis as there is no detail on theproposals.

3.5.5 In order for the Single Market in financial services to be properly maintained and protected, thegovernment should maintain that:

— Regulation of eurozone banks should remain fully within the scope of the EU’s existing EUtreaty structure, where both the European Commission and the European Court of Justice arebound to maintain a level playing field.

— The UK should remain fully engaged in the operation of the European Banking Authority,which works with the national regulators of all the EU’s 27 member states to prevent regulatoryarbitrage and help maintain a level playing field.

— The UK should seek to establish whether there is any risk of a European Banking Unioncreating barriers to eurozone banks which currently have operations in the UK.



3.6 Negotiations on the next long-term EU budget “The Multiannual Financial Framework 2014–2020(MFF)” are ongoing. We encourage the UK government to push for the EU to avoid raising the size of theMFF to reflect the impact of the current fiscal pressures on member states

— This submission recognizes that areas such as energy, the digital agenda, innovation and researchplay a significant role in the success of productivity, growth and unemployment levels in the EU andindividual member states alike.

— However, future EU spending must offset the current times of austerity and policies, such as CAP,that are not conducive to long-term prosperity should be reduced.

3.7 In order to pursue this realistic, pragmatic and positive approach to the UK’s membership in the EU,British influence towards and within the EU institutions is paramount. We strongly encourage theGovernment to proactively push for greater UK representation at the EU level alongside building a betterplatform to encourage the importance of this domestically

3.7.1 Whilst a European Commission official is of course required to act on behalf of the interest of the EUas a whole, rather than that of his/her member state, the official naturally reflects his/her national perspectiveand culture in his/her daily interactions. Without national perspectives represented in each institution, theinstitution would not act on behalf of the Union as a whole. Regrettably, the number of British officials withinthe institutions, namely the European Commission, is dwindling at an astonishing pace.

— The UK represents 12% of the population of the EU but holds only 5% of posts within theinstitutions.

— These figures are only deteriorating and UK representation in new EU institutions, namely theEuropean Financial Supervisory Authorities, is also a worry to the British business community.

3.7.2 The main issues behind this lack of overall representation include the following and all of these reasonsfall on a background of an overall national negative perception of the EU:

3.7.2.1 The 1972 intake of British citizens is close to retirement.

3.7.2.2 The Concours examination must be taken in French or German.

3.7.2.3 The awareness of career opportunities at universities is poor and secondments within the CivilService to Brussels are not encouraged.

3.7.3 BNE has worked with the UK Government, both in London and Brussels, on this issue for the pasttwo years. We will continue to push this agenda and encourage continued government support.

— We applaud the Foreign and Commonwealth Office and the UK Permanent Representation tothe EU in placing such a priority and resources to achieving the objective of greater UKrepresentation in the EU.

— Following representations made by our members, we welcome the introduction of mandatoryforeign language learning in the English Baccalaureate and we support the government’s driveto work with universities, including the College of Europe, to create awareness of the manyEU career possibilities open to UK graduates.

— We also welcome the support given in the establishment of the British Brussels Network. Thisnetwork seeks to provide a platform for debate on EU issues from a British perspective inBrussels and has been successful in doing so over the past year.

3.7.4 Whilst the Foreign and Commonwealth Office has made noticeable progress in highlighting the needto address this subject, BNE seeks to ensure that this priority is heard across Government. We stronglyrecommend that further action be taken as follows:

3.7.4.1 The Civil Service should explore the possibility of requiring civil servants to work on EU issuesat some point during his/her career development, whether it is through secondment or training.

3.7.4.2 The Government must seek to ensure that the new financial supervisory authorities are staffedappropriately. This is of upmost importance because without the continuation and strengtheningof this drive, British influence within Europe is bound to diminish.

10 July 2012

Written evidence from Lord Howell of Guildford

THE EU AND UK STRATEGY

This paper argues that rather than becoming bogged down in sterile, polarising and ultimately divisivearguments about renegotiating Britain’s relations and powers vis-a-vis the rest of the EU (a situation towardswhich we are currently fast slipping), the moment has come for the UK to take the initiative for once inreforming (ie changing the direction of) the EU as a whole -and doing so in a thoroughly pro-European andCoalition-friendly way. We have, in short, to mount and win the argument for a better sort of Europe—and doso in a manner which wins over, rather than antagonises, allies throughout the EU and the best and brightest



Europhiles in all parties here at home. We have to show that the integrationist doctrine has reached its limits(as everyone privately acknowledges) and that a better model, in tune with our times, is available.

There are always voices ready to assert—from both Eurosceptical and Europhile wings—that this is “noton” and that the rest of the EU “will never have it”. But these views are becoming rapidly out of date. Bigforces are building up not only at national and political level throughout Europe, but also at the levels ofintellectual argument and theory, which invalidate the old integrationist case and put in reach the alternative,but still highly pro-European, model of flexibility, diversity and decentralisation of powers.

The time is fast becoming ripe for Britain to lead in this new direction, not only in the interests of the EUitself, but also to head off major and imminent problems here at home.

As an undeniable old-timer, I suspect that I have been tangling with these matters longer than most inParliament, or indeed in Government (since 1962 when I wrote the D.Tel guide to the Common Market, afterinterviewing Monnet!). I don’t know whether that qualifies or disqualifies me from opining, but I do know thatthe need now is for a European policy—repeat, a European policy—not a policy for Britain in Europe but astrategic framework for the reform of the structure of the whole EU enterprise, in line with commonsense andcompletely up-to date needs and principles.

We are constantly told by advisers that this is “Not on”, that “no-one in Brussels will listen” etc. This is nolonger so. Lots of quality support for a radical overhaul of the EU—its powers and institutions—exists inFrance and Germany, the Netherlands, in Central Europe (where they long for a British lead) and even in ClubMed. countries.

There is also the view that no initiatives of this kind would be appropriate until the present Eurozoneproblems are resolved. But that could take ten years. Neither we nor the rest of the EU can afford to, or needto, wait that long. Anyway, the intellectual conversion required takes time (just as it took time to convert theworld to privatisation and market economics thirty years ago).

Ideas on a reform programme for the EU emanating from the UK must be strongly pro-European, pro-France, pro-Germany and pro-the smaller member states. We will get nowhere at all by sounding anti-Europeanor withdrawalist (or anti-French or anti-German). The question is not about us v. the EU, it is about what kindof EU we want to see develop and how we intend to use our full weight and intellectual capacities to promote it.

The watchwords must be decentralisation and flexibility. The balance of competences study is an excellentstart—but only a start—from which to build this approach. At all costs this exercise must not be allowed todegenerate into an argy-bargy about Britain in Europe, and about which powers we can take back or “repatriate”unilaterally. That way lies certain polarisation into a sterile argument about withdrawal, inner or outer coresand so on. We have been round this course before and it always ends in stalemate, bad feeling and politicaldivisiveness. It would also suck us into an in/out referendum which is not what most people want.

Instead, the emphasis should be on the contribution British thinking can make to overall EU reform as iteffects all member states (in different ways). The phrases in statements on the balance of competences exerciseabout contributing to the modernisation of Europe as a whole are therefore the key ones.

We come to the substance. What does reform really entail and how does it interrelate with the on-going Eurocrisis and its resolution? There is first a profound intellectual conundrum—or indeed series of conundrums—tobe resolved—which have been debated over many years in endless EC/EU conferences and informal circles.

What does integration in Europe really mean. Does it mean conformity or diversity? To get on the righttrack we first need to demonstrate that our EU vision is superior, in European terms, to the outdatedintegrationist one.

This approach has never been seriously attempted. Most of the campaigns for change on the EU front—including the current backbench Fresh Start one—begin from the narrower and shallower assumption thatintegration will prevail for the “core” majority of member states, that it will work and that this therefore forcesus in Britain to review our relationship with Brussels.

A much better starting point is that integrationism is not the best thing for modern Europe, that it probablywon’t work, that we have a better model and that our ideas can do more for the EU and its future health andinterface with the rest of the world, than the prevailing “more Europe” orthodoxy can ever deliver.

How do we do that? We have to open a new front of proposals and initiatives on EU reform. Of course thisdoes not resolve, or even engage immediately with, current headaches such as the upcoming Budget issue,fiscal union and any consequential Treaty changes, FTT or other challenges. But the gap to be filled here isone of vision, strategy and direction—without which every second order issue becomes another damaging anddefensive struggle.

The central intellectual contention, which we need to build on, and which to the world outside politics isbecoming a self-evident feature of the way society now works, is that networks triumph over hierarchies.

Hierarchies produce pyramid thinking, constant centralisation, laager mentalities and inclinations to wall-building and protectionist measures. The old EU is shot through with these tendencies. The current signs ofgrowing support for climate protectionism are an excellent example of this.



So our policy has to demonstrate (repeatedly) that decentralisation, diversity and flexibility (the “refashioningof the EU” the PM calls for), offer a superior model to political integration, more in line with 21st-centurypractices and technological possibilities and bringing Europe closer to the people, in line with the (largelyforgotten) principles of Laaken.

More specifically it is an approach which insists on real subsidiarity, not just tokenism. It demands thetransfer of a range of competences back to national and local level—e.g making social legislation moreintimately tailored to local needs and circumstances and bringing employment and health legislation closer tothe shop floor.

We have to be able to argue convincingly that our model—involving a more variable and less standardisedapproach to European co-operation—is a better dedication to the integrity of the single market than the currentEuro-orthodoxies. We have to establish that the mindsets of those who still hanker after tax harmonisation,fiscal union, FTT and other centralising trends lie outside the Treaties and outside the interests of the Union inmodern conditions.

This applies to the whole Eurozone itself, for which we should now seek legal separation from the evolvingUnion. Whether pure political integration is the answer to the Eurozone’s future—and whether it is actuallypracticable if attempted, however logical—is for others to try out and establish. Britain’s message should rideabove that. The force, in the end, is with decentralisation, variety and member states acting democratically—rather than with central power attempting to rule Europe. The essence of Europe is diversity, and always hasbeen. The web age of information and interactivity makes it ever more of a necessity.

To make all this more than a set of mere assertions (or dismissed as another perfidious British try-on) wehave to go still deeper into the analysis and show that modern economic thinking is swinging to our side. Wehave to call in aid the fact that revised economic theory and example are recasting economic activity as aprocess and increasingly rejecting conventional macro-economics as system-shaped and mechanical—leading,as it invariably does, to the apparent need for more and more central control, bloc planning and regulation. ForEurope, we have to demonstrate and establish propositionally this does not and will not work.

Beyond economists’ arguments one can also summon in aid many other professions and disciplines. Thespearhead principles of today in science, biology, engineering all point towards self-assembly, self-regulationand against central compression. Difficult stuff but reflected in EU localism. From these new perspectives andinsights flow the practical arguments for unravelling the existing accumulated acquis, for more competitionand bringing social and economic policy much nearer the shop floor and the local office.

A further “pro-European authentication” of this new direction can be secured by tying it up with the widelyaccepted principle of subsidiarity. Even the Lisbon Treaty, despite its heavy integrationist bias, acceptedsubsidiarity as a founding principle of the Union. On this growing consilience of modern theory and practice,together with the new social and technological imperatives of the information and cyber ages, and togetherwith the new economics, we can and should build our case for a different Europe.

The delivery politics of this new approach are challenging, but a good deal more promising (and enjoyable)than the prospect of constant defensiveness in face of new Continental initiatives and Treaty change proposals,and constant domestic pressures for EU withdrawal where our defences fail (as they inevitably do in places).

The first step towards getting on the front foot is to advance the arguments, with the real profundity andintellectual backing which is there to be mobilised from the sources enumerated above. The best brains in allparties have to be won over to the anti-integrationist case.

The second step is to join up in harness with the other EU member states, and the growing opinion blocswithin them, who take the same view—pro-European and also pro-reform. The conventional integrationistsand federalists have long been better organised than their critics. They have to be assured about new ways ofproceeding as their old ones fail, not just confronted. There has to be mutual give and take.

The third step is to promote and apply, with the support of organised allies, principles of decentralisation,local intimacy as against remote bureaucracy, and flexibility at all levels of decision-making within the Union.Specific focuses and strategies are required to beam in on all the official power centres and institutions of theEU, as well as the unofficial ones. The four official centres of directional drive are the Council, the Court ofJustice, the Commission and the Parliament. The key lessons of lifelong experience and studies of Union (andbefore that Community) progress are that decisions and trends are hatched in think-tanks and at informalgatherings, with which alliances of opinion must be sought and to which unrelenting intellectual pressure mustalso be applied.

Further reinforcement for this whole new approach comes from events and developments outside the Union.The EU is now dealing with, and competing in, markets that are no longer just developing but are in someareas fully matured and pulling ahead of the West in sophistication and general standards. Established Asiandynamism and market opportunities are now being reinforced rapidly by rising African and Latin Americanprosperity. For the EU to survive in these new conditions demands an agility, flexibility and openness whichthe conventional integrationist approach cannot deliver.

Behind these remarkable shifts in the global economic pattern lie, amongst other things, big developmentsin energy prospects, revolutionised by enhanced discovery and recovery technologies. Led by shale gas and



shale oil prospects (already realised in the USA) the African states, both East and West coast, are emerging asmajor world energy suppliers, while across the southern Atlantic the same pattern, as predicted by geologists,is emerging, with Brazil now taking its place as the sixth-largest energy- producing power in the world.

Alongside these resource developments, and in part because of them, the emerging powers are becoming theworld’s chief sources of wealth and investment capital. The flow of capital has been reversed. The EU, inmaking itself an attractive destination for funds, has no alternative but to become less of a standardised andregulated bloc, and more of a region of varied opportunities.

In Sum: In the PM’s words “the EU is an organization in peril”. Another attempt at unilateral Britishrecapture of EU competences is a dead end. It will strengthen the withdrawalists, antagonise ourEuropean friends and allies, divide our parties and undermine the Coalition. Instead the argument hasto be won, as it now can be, against the traditional EU integrationist model and in favour not just ofvariable geometry but of a more decentralised, modernised EU structure. This reform strategy has to bebuilt up and promoted (with allies) in a PRO-European manner, as an attractive model for all those whogenuinely want to see the EU survive and prosper in the transformed global landscape

29 September 2012

Written evidence from Frank Vibert, Senior Visiting Fellow, Department of Government, LondonSchool of Economics (LSE)

DIFFERENTIATION IN THE EU

Summary and Conclusions

In the context of the EU, “differentiation” refers in a broad sense to the possibilities open to member statesto pursue public policies along their own track in a particular policy field where the EU is active.

Differentiation, in one form or another, has long been possible within the EU and is now of criticalimportance. At one end of the spectrum, members of the Eurozone need to share powers in new areas such asfiscal policy and banking union. At the other end, the UK would like to repatriate certain powers. Potentially,an increase in differentiation offers a way to accommodate both ends of the spectrum.

Differentiation should not be seen simply, or even mainly, as a response to British “exceptionalism”. Itprovides a way for all member states to connect more closely with their own electorates and to help redressthe “democratic deficit” in the EU. Greater differentiation will consolidate the direction of institutional changein the EU in favour of a more coherent involvement of national parliaments and constitutional courts. Inaddition, rather than a “turning inwards” it also provides a way for member states to recognize the importanceof international rule making in forums that extend beyond the regional grouping offered by the EU.

This paper maps the scope for further policy differentiation and identifies the institutional implications ofthis more open architecture.

1.Background

Membership in the EU means that countries agree to share powers in order to pursue common policyobjectives or to “pool sovereignty”. The preferred norm is that the EU becomes the focus for policy-makingacross the main fields of public policy making and that member states share their powers and give up the rightof independent action in them.

The current scope for differentiation

In practice there are many exceptions, some of long standing and some recent, to the preferred norm of fullyshared powers. These exceptions define the scope for differentiation as currently recognized in the EU’s treatybase. The main varieties are as follows:

— First, there is differentiation that allows for different approaches to compliance with EUdirectives. (TFEU Art. 288) Differentiation in this case is about using different means to achievethe same effect.

— Secondly, there is differentiation that allows for derogations that permit different time paths toimplement common policies. For example in the case of enlargement both new and existingmembers have been provided with grace periods to allow time for policies to adapt. This formof differentiation assumes that grace periods will lapse and that policies will converge thereafter.

— Thirdly, there is differentiation in the form of limited exemptions to harmonisation measures inthe Internal Market. These are subject to a “Union control procedure” (TFEU Art.114 (4,5&10)).



— Fourthly, there is differentiation in the form of general exemptions or derogations that allowsmember states to carry out their own polices in certain areas of shared competence, for examplein the case of development cooperation (TFEU Title1 art.4 (3&4)) and in relation to theadmission of third country nationals under the area of Freedom Security and Justice (Art. 79(5)).There are other derogations that permit members to enact higher standards than the EU agreedlevel in certain areas of the treaty such as in heath and the environment (for example TFEUArt.193).

— Fifthly, there is differentiation that allows some member states to move ahead of others intonew areas of common policies (areas of enhanced cooperation) while outsiders wait and seewhat the outcomes are, or wait to qualify as members of the in-group. (TEU Title IV Art. 20).This form of differentiation assumes a goal of eventual convergence and opt ins over the longrun around the new areas of shared policy.

— Sixthly, there is differentiation that allows for member states to stay outside an area of powersharing with no assumption that convergence will necessarily take place over time. This formof differentiation is built around “opt out” provisions in the Treaty base. A leading example isin the Protocol on the UK in relation to the Euro. “Unless the UK notifies the Council that itintends to adopt the euro, it is under no obligation to do so” (Protocol para1). As a variant, optouts can also be framed in ways that allow for future opt ins to selected items or initiativesunder a common policy. The leading example is in the Protocol on the UK & Ireland in relationto the Area of Freedom, Security and Justice (Protocol Art3).

— Finally there is differentiation in the form of “structured cooperation” applying in the field ofsecurity and defence. This recognizes differentiation in two ways. First, it acknowledges theimportance of wider international groupings and obligations—specifically NATO. (TEU Art. 42(1) & (6) and Protocol). Secondly, it recognizes the importance of coalitions of the willing andable when it comes to implementation.

While differentiation in this wide variety of forms has been permitted under EU treaties it has also beenregarded as a largely undesirable exception to the preferred norm of a uniform approach to power sharingaround common policy objectives and the uniform application of the treaties. For example the use of theprovisions for enhanced cooperation is referred to as a “last resort” (TEU Title IV Art.20(2)). Most of the optouts are exercised by just four of the member states (UK, Ireland, Sweden and Denmark). The aspirationremains, even in cases where differentiation takes place, that convergence around common policies for allmembers should still be the ultimate goal.

Further differentiation challenges this treatment of differentiation as the exception. It would mean thatdifferentiation would become part of the normal workings of the EU.

2. Mapping the Scope for Differentiation

Discussion of differentiation is best organized around the concept of policy “clusters”. “Clusters” are afamiliar concept in spatial geography (for example the tendency of financial service providers to cluster arounda dominant centre such as London or New York). They are also a relevant concept in policy terms. Theymeasure how far policies are related or connected to each other. Those that are necessarily or very closelyconnected can be viewed as a “cluster”.

The second element in differentiation allows for variations in the degree to which members wish to associatethemselves with particular clusters.

The scope for differentiation can be mapped by bringing together these two dimensions.

Degrees of Linkage between policy clusters

In this paper the mapping of policy clusters distinguishes between four categories of linkage:

— The first is where there is a necessary connection between policies. For example it is acceptedthat monetary union must necessarily be accompanied by fiscal policy discipline for those thatare members of the currency union. They are part of the same cluster.

— The second is where there is a close connection. For example, policies that concern criticalinfrastructure in energy, water, telecommunications and transportation systems share a commonconcern about consumer satisfaction, the security of supply, the resilience of basic services aswell as about interconnection policies and are therefore clustered together.

— The third is where the connection is contingent. For example, the Common Agricultural Policyhas a contingent connection with the Single Market in goods because income support providedto those in rural areas might distort the supply and pricing of agricultural goods. However ithas a closer ideological connection with other policies related to achieving social cohesion andis therefore included with a cluster of other policies designed to increase social cohesion.

— The final distinction is where connections are remote. For example, a common policy providingfor the right of abode in member states has only a distant connection to the Common FisheriesPolicy. They can be treated therefore as belonging to different policy clusters.



The clusters are illustrated in Annex 1. They are not exhaustive of the current range of polices pursued inthe EU but are intended to be illustrative of the principle of clustering.

Degrees of association with policy clusters

In the same way that areas of public policy can be mapped by degrees of connectedness so too can differentdegrees of desired policy association be mapped for member states.

— First, powers can be pooled in order to achieve a common objective in ways that mean that themember state concerned gives up the possibility of taking independent action in the same area.

— Secondly, member states may wish to acknowledge that policies in a particular area are ofcommon concern, and of concern to themselves, while retaining discretion as to whether andwhen exactly they want to pool powers. For example environmental policies can be seen as ofcommon concern to all members because pollutants cross borders. Nevertheless some memberstates may still wish to conserve considerable policy discretion in their own hands (for examplein determining the energy mix or in deciding which greenhouse gases to target). Areas ofcommon concern lend themselves to an “opt in” approach.

— Thirdly, there are some areas of policy that member states may wish to pursue in a widerinternational setting rather than in a regional (EU) one. As policy making becomes more globalthe issue extends well beyond the recognition of the importance for some countries ofmembership in NATO. For example, in the area of financial services the UK might wish toframe its policies in the context of international bodies such as IASB, FSB & IOSCO ratherthan in the context of a regional grouping such as the EU. In such areas both “opt outs” and“opt ins” have a role in structuring cooperation.

— Finally, there are some areas of policy that member states may wish to keep as areas for theirown independent domestic policy action—for example in respect of criminal justice, asylumpolicy or family law. Here, opt outs are also the relevant instrument.

3. The Map

The different degree to which policies are connected in different clusters and the different degree of closenesswith which member states might wish to associate with the different policy clusters can be put together as atheoretical map that reflects the two sets of considerations.

Annex 2 shows a theoretical mapping. It charts four cases. They are summarized in the table below.

Table

A MAP OF DIFFERENTIATION

Degrees of associationPolicy clusters Pooled common concern wider domestic

Case a 13 0 0 1Case b 9 3 1 1Case c 5 5 2 2Case d 2 4 3 5

The mapping exercise reflected in the table above is a purely theoretical one. It is not intended to correspondto the actual preferences of any identifiable member state. The point is simply that, in theory, a much greaterdegree of policy differentiation in the EU is possible.

4. The Institutional Implications

The theory of “functionalism” that is often used to track or to “explain” the development of the EU as apolitical union asserts that if the EU performs an increasing number of functional tasks successfully thendemocratic forms of government at the EU level can be constructed following in their wake. The assumptionis that policy making at the EU level brings democracy at the EU level following in sequence. What this meansis that any concerns about the alleged “democratic deficit” in the EU should be put on hold. If more policiesare pooled successfully in more areas then democracy will follow. Differentiation is an obstacle to thissequencing and from this perspective an obstacle to the development of EU level democracy.

The experience of the recent past runs counter to this logic. As EU policies reach more deeply into matterstraditionally regarded as falling within the policy discretion of individual member states the democratic voiceis increasingly being expressed at the national level. It is not simply a matter that demonstrators choose toexpress their opposition to policies set at the EU level in front of their own parliaments. Nor is it simply thatnew parties are emerging at the national level because traditional parties no longer seem to aggregate opinionabout EU policies effectively among their own supporters. It is also shown in the way that the head of theECB finds it necessary to explain ECB policies to the German Parliament and it is the German constitutionalcourt and Parliament that sets limits on the bail out of Greece.



Greater differentiation has institutional implications that go with the grain of reattaching democraticsentiment about EU policy making to national democratic institutions, both for member states that want to poolmore powers and for member states that want to pool less. One key issue is how to articulate the role ofnational parliaments.

Joining up national parliaments—the “subject to approval” test

One of the most powerful reasons for developing the EP as the focal centre for representative democracy inthe EU is that it is difficult to see in practical terms how the voice of 27 or more national parliaments couldbe expressed in any collective form. Despite all its limitations as the voice of the people the EP seems to bethe only available platform for representation.

The simplest way in which the national parliaments can be brought into play as the voice of democracy onEU measures is through a new legislative procedure that stipulates that any agreement reached in the Councilof Ministers is subject to the approval of their parliaments under an agreed timetable for approval.

The procedure offers three main advantages:

— First, it makes decisions of governments in the Council more transparent in front of nationalelectorates.

— Secondly, it recognizes that, for a variety of reasons, what is termed “executive dominance”over national parliaments is much weaker than in the past in a number of member states andthat this new reality needs to be respected.

— Thirdly, the reassignment of legislative responsibilities provides a way of exploiting the valueof the EP as a platform for integrationist views (that cut across and often over-ride partydistinctions in the EP) while acknowledging the strengths of national parliaments in “socialisingdifferences” on a conventional left/right continuum. This ability of national parliaments to“socialise differences” needs to be harnessed in respect of the approval of European measures.

7. Conclusions

Greater differentiation represents a different model of how the EU might develop. It goes with the grain ofrecent developments in the EU where some member states want to pool more powers and others less. It alsogoes with the grain of the reassertion of democratic opinion through national institutions. It provides the meansto hold together in one union a greater diversity of expression.

14 January 2013

Annex 1

POLICY CLUSTERS. ILLUSTRATIVE GROUPINGS

IMG (Internal market—goods) prohibition on tariffs & quantitative restrictions on goods originating in memberstates (TFEU Arts. 28 & 34). Prohibition on tax discrimination (arts 110–112).

IM NFS (Internal market non financial services) Prohibition on restrictions to provide non financial serviceswithin EU. (TFEU Art 53). Including professions (Art. 57). Right of establishment (Art. 49).

IM FiS (Internal Market—financial services). Prohibition on right to provide financial services in EU (TFEUArt.53). Prohibition on restrictions of movement of capital (Art.63). Measures versus terrorism funding (Art.75) Measures versus money laundering (Art. 83).

IM INFRA (Internal Market Critical Infrastructure). Transportation (TFEU Arts 90–100) TransEuropeanNetworks (Arts 170–172) Energy (art 194) Telecommunications & postal services.

Rules on competition and against market abuse (COMP) (TFEU Arts 101–103). Rules on state aids (Arts107–108) Consumer Protection (art. 169).

Economic, Monetary & Fiscal Union (EMF) economic policy a matter of common concern (TFEU Art 121)exchange rate policy of common interest (Art.142) Excessive deficit procedure (art.126). monetary policy (Arts127–128) provisions specific to Eurozone(136–138).

Environment (ENV) (TFEU Arts 191–193) Fisheries (TFEU Arts 38–44).

Taxation policies (TAX) Re harmonization of indirect taxes (TFEU Art.113) Own resources policy (Art. 311).

Research & development (R&D) (TFEU Arts 179–190).

Freedom, Justice & Home Affairs (FJHA) Freedom of movement of workers (TFEU Art.45) measures in fieldof social security (Art.48) Absence of internal border controls (Art.77) Common policy on immigration&external border control & asylum (Art.67 & 78) Measures to promote police & judicial cooperation &approximation of criminal laws (Art.67) Judicial cooperation on criminal & civil matters (Arts 81 & 82)Measures in field of crime prevention & police cooperation (Arts 84–88).



Social & Cohesion policy (SOCCOH) CAP (TFEU Art 39) Employment (Arts 145–150) Social policy(151–160) Education, public health, territorial cohesion, (Arts 165, 167, 168, 174–178). Budget (Arts 313–319).

Foreign policy (EX FOR) (TEU chap.2. Sect. 1 Arts 23–41) inc development cooperation (TFEU Arts208–211), cooperation with third countries (Arts 212–214) International agreements (Arts 216–219) relationswith international organisations (Art. 220).

Security & Defence (DEF) (TEU chap.2. sect.2 Arts 42–46)

Trade policy (TRADE) Tariff policy towards third countries (TFEU Arts 28 & 31). Common commercialpolicy (TFEU Arts 206–207).

Annex 2

HYPOTHETICAL CHOICES BEHIND THE MAPPING OF DIFFERENTIATION

This annex illustrates some hypothetical choices of how far different member states might wish to associatethemselves with different areas of EU policies.

Case a case b case c case d.

IM G P P P PIM NFS D P P DIM FiS P P P WIM INFRA. P P CC CCCOMP P CC P PEMF P CC CC DENV P CC W CCTAX P D CC DR & D P P CC CCFJHA P P D DSOCCOH P P D DEX FOR P P CC CCDEF P W W WTRADE P P P W

Key: P member state agrees to pool powers

CC member state treats cluster as of common concern

W member chooses wider grouping for policy making

D member retains domestic policy making prerogatives

Written evidence from Dr Simon Usherwood, Senior Lecturer, School of Politics, University of Surrey

1. In 1997–9, I took the general concours for both the European Commission and the European Parliament.At the time, I was working at the College of Europe in Bruges as a Teaching Assistant, having done myMasters there in 1996–7. In both cases, I was successful in passing stages up to and including final interviews,but not by enough to make the final lists.

2. My decision to apply was a result of being at Bruges, where many students go on to work in Brussels,and a lack of certainty of my own career path. Certainly, I considered that a permanent position as afonctionnaire would have many attractions (interesting work and colleagues, high level of job security, personalinterest in the EU), but it was never my sole objective, especially as I got to know Brussels better and couldsee that such a position would be relatively rigid, as compared to work with private bodies or think-tanks.

3. The Commission concours in particular suffered a number of major delays which did little to enthuse meto the organisation. The level of effort that many people seemed to put into preparation for the first round(which was highly selective) was substantial and anyone considering applying would need to be aware of thedifficulty of passing that first threshold. I was fortunate that my Masters study (and subsequent work) washighly relevant, so both I and many others from the College were able to progress. This included several UKcitizens on the European Fast Stream programme.

4. The length of the concours process was a major factor in my final career choices. By the time I had gotto the end, I was actively considering academic options (I ultimately returned to the UK for my PhD) andmore time spent in Brussels (as a city) had not really made me feel it was a place I wanted to spend more timein. Thus my failure to make the lists was a disappointment, but one which allowed me to move on.

5. My impression—both from my own cohort and from many others that I know of—has been that theCollege remains a very valuable means of securing employment in Brussels, both within the Institutions andmore generally. The cutting of funding for scholars in recent years therefore strikes me as completely counter-productive to securing positions for UK nationals. The level of engagement that the College has had with the



EU was, and remains, invaluable in this regard: several of the people running the concours that I encounteredwere anciens of the College and it was a door-opener (this is equally true with other organisations too).

8 January 2013

Written evidence from Erna Hjaltested, Senior Legal Officer, EEA Co-ordination Division, EFTA

1. You are indeed correct that the EEA Agreement only provides for two ways for a state to be a contractingparty to the EEA Agreement, either by being a Member State of the EU or a member of EFTA. As theAgreement stands today, it is therefore not possible to become a party to the EEA Agreement without being amember of either EU or EFTA.

2. With regard to possible amendments of the EEA Agreement, Article 98 of the EEA Agreement stateswhich parts of the EEA Agreement can be amended by a decision of the EEA Joint Committee. Article 102EEA then lays down the procedure and the general principles for incorporation of new EU legislation. Forother amendments, the Agreement does not contain any specific provisions as you rightly state. Hence, anyother amendments, such as an amendment of the main agreement, is subject to new negotiations between theContracting Parties.

14 January 2013

Written evidence from Dr Richard Corbett,121 Member of the Cabinet of Herman Van Rompuy,President of the European Council

1. On Competences

The European Union is the framework that we and our neighbouring countries have built up, over a periodof decades, not just to help secure peace, but to manage our interdependence. Cautiously, we and the otherMember States have gradually enlarged the fields in which we work together at European level. It is worthremembering that EU competences concern subjects on which member states have by common agreement—duly ratified by each and every one of them—decided that it is in our collective best interests to work together,because of our interdependence or because of economies of scale or because of the leverage that it brings atworld level.

And when something is within the field of competence of the EU, the exercise of that competence normallyrequires the agreement of the Council—that is of national ministers, members of national governments,accountable to national parliaments. These are not people who by definition want to limit their national marginof manoeuvre unless there is a good case for doing so. That case must convince a qualified majority of them(currently over 70% of the votes), and on many issues, where unanimity is required, all of them. For goodmeasure, the approval of legislation by the directly elected European Parliament is also required, and mostnational parliaments are now taking advantage of the eight-week period, given to them for prior scrutiny beforeCouncil deliberates, to shape the position to be taken by their minister in the Council.

So, the idea that “Brussels” arrogates to itself powers and competences against the will of Member Statesmust be taken with a pinch of salt. On the contrary, the EU only deals with subjects that all Member Statesagreed it should, and even then can only act when an overwhelming majority want it to.

In these circumstances, any discussion on devolving powers back to Member States is about reversing avery large onus. It can be done, but requires a big shift in opinion to secure either a qualified majority (andusually support of the EP) to repeal or modify legislation, or else unanimity (and national parliamentaryratification) to amend the treaties. This is true both for a general devolution of powers, or for unilateral opt-outs or derogations.

It has been done in the past, to a degree. Competition decisions below a certain threshold were devolvedback to Member States’ competition authorities to deal with. Fishing policy reforms currently underway go inthe same direction. The EU budget has fallen as a proportion of EU GDP (even ahead of the February 2013agreement to reduce it in absolute terms) and now represents just 1% of GDP. There are other examples. Butthey are all collective devolutions, not specific to one country.

From time to time, Member States have embarked on new areas of cooperation in which not all wish toparticipate, most recently the common European Patent. But we have never seen a country retreat unilaterallyfrom existing areas of cooperation. After all, they were all voluntarily embarked upon for good reason, andworking together across different fields inevitably involves give and take, the sum of which is positive.

It is therefore understandable that there is reticence to the idea of countries leaving existing fields ofcooperation. There is a genuine concern that, if every Member State were able to cherry pick those parts of121 Dr Richard Corbett is an advisor to the President of the European Council, Herman Van Rompuy. This submission is made in

a strictly personal capacity. Dr. Corbett has written widely on European matters, including “The European Union: how does itwork?” (OUP 2012) and “The European Parliament” (JHP, 8th ed 2011). He was an MEP from 1996 to 2009 and was theParliament’s co-rapporteur on the Lisbon Treaty.



existing policies that they most like, and opt-out of those that they least like, the Union in general, and thesingle market in particular, would soon unravel.

Indeed, such concerns explain what is widely perceived to have been the dynamic in December 2011, whenthe UK’s refusal to allow an amendment to the treaties for matters affecting the eurozone (and not affectingthe UK) unless another change were agreed reintroducing unanimity for certain decisions in the financial sector,led to the eurozone countries signing a separate treaty among themselves (joined, in the end, by all others barthe UK and Czech Republic).

The perception that the UK wanted to retreat from the principle that single market rules (other than tax) aredecided by QMV—the norm since the Single European Act signed by Mrs Thatcher—was quite a surprise toother Member States. Until then, the UK had rarely been out-voted on any important financial sector legislation.Reintroducing unanimity would give Britain a veto it rarely needs, but would give everyone else a veto too,which could be used to block things the UK wants. And if the UK successfully reintroduced unanimity for thefinancial sector, would others (perhaps more protectionist minded than Britain) not seek to do likewise in fieldssensitive for them?

There is similar perplexity about the various suggestions currently being floated for UK opt-outs or“repatriations” of power. Why, it is asked, would the UK want to cease cooperation with its neighbours onpolice & justice matters (given the growing threat of international crime and cross-border evasion)? on fishing(given the unfortunate habit of fish to swim from one country’s waters to another, making the management ofstocks impossible to do alone)? on the environment (where common norms are both more effective and alsosimpler for industry than 27 divergent national norms)? or on the social chapter (regarded by most—notwithstanding a willingness to re-examine individual pieces of legislation—to be part and parcel of thecommon rules for the common market)?

By contrast, on Britain’s pleas for reducing the regulatory burden, there is much sympathy in many otherEU countries, and even in the European Commission. There is a focus on this that wasn’t there before.Importantly, it is a common interest, not a unilateral one. And the debate is tempered elsewhere by theappreciation that common rules for the common market, when we get it right, can be an exercise insimplification, cutting red tape. For businesses, replacing 27 sets of disparate and often conflicting nationalregulations with one common European-wide approach has usually been a huge exercise in cutting costs.

Of course, the EU, like any political system and every level of government, has its faults and makes mistakes.There are policies and legislation that need correcting, updating or adjustment. It is a common challenge tocorrect any mistakes, and ensure that they do not happen again in the future. But simple unilateral opt-outs (orrequests to reinstate unanimity where qualified majority voting currently applies) will certainly be resisted.

All Member States can, and do, have particular requests and needs that are taken into consideration, providedthat the interests of all are not unduly damaged. And every member country brings its own unique contributionto our Union of diversity. Britain’s contribution is greater than it sometimes seems to realise itself. It has beencrucial in building the EU’s centrepiece, the single European market, now the largest market in the world, andthe common rules for the common market that are necessary for it to function. British expertise in the fieldsof foreign policy, finance, and trade shape the EU’s policies in these fields. It has led the way on climatechange and development aid. It has offered the English language, now in practice the lingua franca of Europe.And Britain, as a trading nation, has a particular interest in the success of this enterprise.

Britain is unique—but so is each and every one of the Member States. None has come into the Union inorder to lose their character or their identity. The European Union is there to enable us to work together whilstpreserving identities—hence the motto “Unity with Diversity”.

2. On a two (or more) Tier Europe

Of course, Britain remains outside the euro, and does not therefore participate in the increasingly closecooperation among those who need to jointly manage their common currency. That cooperation may be takenfurther (see below), but will probably not involve as much integration (beyond what has been agreed already)as some hope and others fear. As President Van Rompuy pointed out last month in London, it is far fromcertain that it will require further treaty change.

But, in any case, the bulk of EU decision-taking is still at the level of all 27 Member States. That will notchange. Fields such as the single market, foreign policy, police & justice, development aid, research, theenvironment, student exchanges, transport links and others are for the whole EU.

Yes, there are some other exceptions. Denmark does not participate in defence cooperation; Ireland and theUK are not in all aspects of Schengen; Denmark, Ireland, and the UK have rights to opt-in, or not, to measuresin the field of security and justice; the UK and Poland have a protocol with restrictive interpretation of howaspects of the Charter of Rights interacts with their domestic law; Denmark has an exemption from the singlemarket regarding the acquisition of secondary residences on its territory; Sweden does not participate on crossborder divorce procedures; Italy and Spain are not joining in on European patents; the UK and the CzechRepublic did not sign the Stability Treaty (“Fiscal Compact”).



This list covers relatively few fields, and what is also striking is that, in each case, the number of non-participating States is small (and has a different configuration). Thus, every policy area involves theoverwhelming majority of Member States. The general unity of the Union remains the rule, non-participationthe exception. The reason goes back to what was said in the very first paragraph of this submission: EUcompetences concern subjects on which member states decided that it is in their collective best interests towork together, because of interdependence or because of economies of scale or because of the leverage that itbrings at world level. Such an assessment generally applies to all, not just some, Member States.

And when countries have chosen not to participate, it was from the outset of cooperation in the field inquestion, not opting-out of an already existing policy.

Some have expressed a fear that the eurozone will be a “vanguard” for further integration or a cohesiveblock within the EU in other fields. This is not plausible. On most subjects, the range of views and interestsamong the 17 are as wide as among the 27: just think of foreign policy, the environment, or police & justicematters. In the one area where such a fear seemed plausible, namely banking regulation, a double majority (ofins and outs) arrangement was found to reassure the outs.

Any further eurozone integration will therefore be only about euro-related matters, not a vanguard for adeeper integration in other policy fields. But what is potentially dangerous, is the emergence of new proceduresand bodies without every Member State (and not the UK) in the room.

Up until recently, a situation of not all Member States participating in a policy field did not entail anydivision in the institutional structures. For example, UK and Irish ministers sit in the Council and take part indiscussions on Schengen related matters, and on the Justice & Home affairs issues they have opted out of,even if they don’t have a vote. In the Parliament, their MEPs do have a vote, and in the Commission too, thereis no distinction made by nationality, nor in the Court. The only exception was the “Eurogroup” of financeministers, but even then, the treaty described this body as “informal”, unable to enact decisions alone.

That is now beginning to change. As mentioned above, the British government’s refusal in December 2011to allow an amendment to the treaties for matters affecting the eurozone (and not affecting the UK) led to theeurozone countries signing a separate treaty among themselves (joined, in the end, by all others bar the UKand Czech Republic). This Stability Treaty creates a partly separate structure, including formal “EurozoneSummits” at the level of Heads of State or government, without the UK in the room.122 It has also triggereddiscussion about whether non-euro MEPs should vote in the EP on euro related matters, or even whether aseparate parliamentary body should be established. It may have made it less likely that a Brit will be chosenas President of the European Council or of the Commission.

This situation is, of course, entirely of the volition of the UK government. It need not have happened,and could be rectified if and when the Stability Treaty is integrated into the EU treaties, as intended bythe signatories.

3. On Accountability of the Institutions and the Decision-taking System

Another important part of the discussion about the future of the EU relates to its democratic accountability—whatever its field of competence.

Of course, EU institutions will always be more distant from people than are national or local institutions.That is a good reason not to do things at European level unless there is a good reason to do so. But to theextent that we do—and we do—it must be done in as accountable as democratic way.

EU laws are not “diktats from Brussels”. The European Commission in Brussels only has the right to putforward proposals (and to implement what has been agreed). The actual adoption of legislation is done by theelected governments of European countries through their ministers meeting in the EU Council of Ministers.The Ministers are scrutinised by their national parliament. In addition, EU laws also require the approval ofthe directly elected MEPs in the European Parliament.

But does this double check—of needing both a qualified majority (or more) of national ministers in theCouncil and a majority of MEPs in the Parliament—have its weak links? Are national ministers genuinelyaccountable for their actions in Brussels to their national parliament? Are MEPs sufficiently representative?

On the first question, there is certainly a trend to strengthen ministerial accountability. The requirement foran eight week period to allow national scrutiny to take place before Council deliberates on EU legislation givesnational parliaments more time. Some have organised to take advantage of this and genuinely shape the positionto be taken by their minister before he or she goes to a Council meeting, rather than just hear about itafterwards. Several national parliaments have revised their procedures on this. There is no doubt scope forfurther improvement, but this is a matter for each national parliament. They do now compare notes, and manyfind that the parliaments of the Nordic countries are an example to be followed, with ministers appearingbefore the appropriate committee before they leave to Council meetings. Whether others should follow is adomestic decision—the EU cannot tell national parliaments how to organise themselves.122 It was not intended as such. One description (by Luuk van Middelaar) describes the Stability Treaty as a buttress, strengthening

the Union from the outside.



One aspect of this prior scrutiny by national parliaments is, however, a European matter: the “yellow card”and “orange card” procedures whereby a national parliament can object that a Commission proposal violatesthe principle of subsidiarity. Given that the first time that even a “yellow card” was shown (by over a third ofnational chambers), the Commission withdrew the proposal in question (even though it disagreed that theobjections were genuinely about subsidiarity), it can be argued that the yellow card (and certainly an orangecard, where over half object) is de facto a “red card”. All the more so, as a proposal is very unlikely to receivethe support of a qualified majority in the Council if there are so many national parliaments opposed to it. Sowhy not recognise this? It would not require treaty change: if the Commission were to make a solemndeclaration that it would, as a matter of course, withdraw any proposal that had triggered an “orange card”,and normally do so in response to a yellow card, then there would be a more visible and (for nationalparliaments) reassuring guarantee.

The second question, about the effectiveness of the European Parliament, is also frequently raised. But theexistence of a body of full time elected representatives, coming not only from governing parties (as in theCouncil) but also from opposition parties in each Member State, able to query, question and confirm or reject,is surely a guarantee of pluralism and additional scrutiny of everything the EU does.

The fact that it is elected on a lower turnout than we are used to in national elections does not detract fromthat, any more than does the similar turnout for US Congressional elections (or the even lower turnout in localelections) render those institutions invalid. Its turnout is lower than national elections because less is at stakethan in them. And most national parliamentary elections in Europe also have a visible impact on the choice ofthe government or head of government, whether it is closely linked as in the UK or only generally, as inBelgium or the Netherlands. It will be interesting to see if this begins to change with the treaty provision thatthe EP will henceforth “elect” the President of the Commission, and the stated intention of the main Europeanpolitical parties to have candidates for this post as part of their election campaigns. In any case, this is morerealistic and more appropriate than ideas to have a direct presidential election on the American model.

The strengthening of both parliamentary dimensions (national and European), which has been the trend forover twenty years, means that we now have an EU that is subject to more checks and balances, and far moreparliamentary scrutiny, than ever before and more than in any other international structure. It needs to behighlighted, not denigrated.

To sum up:

— The fields of EU competence are ones where Member States have, for good reasons, all chosento act jointly at European level. When they then do so, specific actions have to be agreed byan overwhelming majority of national governments.

— In a few cases, cooperation has been established in certain fields without one or more MemberStates, who chose at the outset not to join in. However, none have unilaterally retreated fromareas which they have chosen to join. Attempts to do so are unlikely to be treatedsympathetically, especially if they involve the common rules for the common market—the bulkof what the EU does. They would need genuinely good reasons, which are hard to discern.

— Multilateral devolution of competences (or loosening of existing requirements) is possible, andhas been done—though it requires winning an argument reversing the burden of proof from theoriginal decision to act jointly at European level.

— On the other hand, reform and updating of existing EU legislation, for instance to lessen theregulatory burden, is perfectly possible and is on-going.

— Further pooling of competences in the eurozone (which in any case may not be as far reachingas some think) does not detract from the fact that the bulk of EU competences and decision-taking will remain at the level of the whole EU. The UK should not encourage any duplicateinstitutional structure. Its policy should be to be in the room and in the discussions.

— Democratic accountability in the EU has been improved in recent years, by strengthening boththe European and national parliaments. Further progress can be made on enhancing nationalparliamentary scrutiny over the minister representing them in the Council and on recognisingthat “orange cards” and perhaps “yellow cards” are in practice a “red card”. It remains to beseen how the election of the Commission President by the EP will work in practice, withthe stated intention of the main European political parties to propose candidates ahead of theEP elections.

19 March 2013



Written evidence from HE Laetitia van den Assum, Ambassador of the Kingdom of the Netherlands

1. With reference to your letter of 31 January 2013 regarding your inquiry into The future of the EU: UKGovernment policy, I would like to inform you of the following.

2. In the Netherlands, like in other EU Member States, the exercise of competences at the EU level vis- à-vis other levels of government has increasingly gained attention. It is against this background that earlier thisyear, following up on a commitment laid down in the coalition agreement, the Dutch Government launched across-ministerial process to look into the issues of subsidiarity and proportionality. Participating ministries areexpected to make an internal assessment, as well as to consult with stakeholders, to identify aspects of EUpolicy that could possibly be addressed more effectively on the national or local level. We will not subject allEuropean legislation to a subsidiarity and proportionality test again. Together with experts and stakeholdersour ministries will be able to take stock of sufficient examples of regulations, directives and decisions thatcannot stand the test of subsidiarity and/or proportionality based on experiences, practical bottlenecks, orchanged circumstances since adoption. No other Member States or the EU institutions will be asked tocontribute to this exercise.

3. On the basis of the results of this stocktaking exercise we will prepare a report with recommendations,which we aim to conclude by late September 2013. Shortly after that we intend to submit the results to theEuropean Commission, in line with the mechanisms of the Smart Regulation Programme and the BetterRegulation Action Plan.

4. The process is being coordinated by a task force set up within the Ministry of Foreign Affairs, which willalso formulate the recommendations.

5. At this stage in the process, the Government has not yet identified any policies or areas that cannot standthe test of subsidiarity or proportionality (excluding draft EU legislation that is currently negotiated).

12 April 2013

Written evidence submitted by VoteWatch Europe

[Note: at the Committee’s request, VoteWatch Europe supplied the data below for July 2009-March 2013 toupdate the data presented in Figures 6, 7 and 8 of its report Agreeing to Disagree: The Voting Records of EUMember States in the Council since 2009, published in July 2012 and available at: www.votewatch.eu/blog/wp-content/uploads/2012/07/votewatch-annual-report-july-2012-final-7-july.pdf]

VOTING TRENDS IN THE COUNCIL OF THE EU

1. Overall Statistics, all Votes in Council, July 2009–22 March 2013

Total votescast in % in

non- No. of % in minority inTotal votes unanimous statements minority disputed % with

Member State cast situations drafted overall votes statements

United 391 117 30 10.49 35.04 7.67KingdomAustria 406 125 23 5.91 19.20 5.67Germany 406 125 29 5.42 17.60 7.14Netherlands 405 125 25 4.69 15.20 6.17Denmark 379 113 16 4.22 14.16 4.22Portugal 406 125 22 3.45 11.20 5.42Sweden 405 125 25 3.21 10.40 6.17Poland 405 125 21 2.96 9.60 5.19Ireland 390 116 21 2.56 8.62 5.38Italy 404 125 25 2.48 8.00 6.19Spain 404 125 20 2.23 7.20 4.95Czech 405 125 15 2.22 7.20 3.70RepublicBulgaria 406 125 16 1.97 6.40 3.94Slovenia 406 125 13 1.72 5.60 3.20Slovakia 405 125 8 1.48 4.80 1.98Finland 405 125 18 1.48 4.80 4.44Estonia 405 125 10 1.48 4.80 2.47Romania 406 125 10 1.48 4.80 2.46Belgium 406 125 11 1.48 4.80 2.71Hungary 406 125 9 1.23 4.00 2.22Malta 406 125 19 1.23 4.00 4.68



Total votescast in % in

non- No. of % in minority inTotal votes unanimous statements minority disputed % with

Member State cast situations drafted overall votes statements

Luxembourg 406 125 9 1.23 4.00 2.22Latvia 406 125 14 0.99 3.20 3.45Greece 405 125 14 0.49 1.60 3.46France 406 125 19 0.00 0.00 4.68Cyprus 405 125 8 0.00 0.00 1.98Lithuania 405 125 9 0.00 0.00 2.22

2. Percentage of Votes in which Member States were in a Minority, all Votes in Council, July2009–22 March 2013

Member State % in minority overall

United Kingdom 10.49Austria 5.91Germany 5.42Netherlands 4.69Denmark 4.22Portugal 3.45Sweden 3.21Poland 2.96Ireland 2.56Italy 2.48Spain 2.23Czech Republic 2.22Bulgaria 1.97Slovenia 1.72Slovakia 1.48Finland 1.48Estonia 1.48Romania 1.48Belgium 1.48Hungary 1.23Malta 1.23Luxembourg 1.23Latvia 0.99Greece 0.49France 0.00Cyprus 0.00Lithuania 0.00



3. Percentage of Votes in which Member States were in a Minority, Non-Unanimous Votes inCouncil only, July 2009–22 March 2013

% in minority inMember State disputed votes

United Kingdom 35.04Austria 19.20Germany 17.60Netherlands 15.20Denmark 14.16Portugal 11.20Sweden 10.40Poland 9.60Ireland 8.62Italy 8.00Spain 7.20Czech Republic 7.20Bulgaria 6.40Slovenia 5.60Slovakia 4.80Finland 4.80Estonia 4.80Romania 4.80Belgium 4.80Hungary 4.00Malta 4.00Luxembourg 4.00Latvia 3.20Greece 1.60France 0.00Cyprus 0.00Lithuania 0.00

4. Percentage of Votes Accompanied by Statements out of Total Votes Cast in Council, July2009–22 March 2013

Member State % with statements

United Kingdom 7.67Austria 7.14Germany 6.19Netherlands 6.17Denmark 6.17Portugal 5.67Sweden 5.42Poland 5.38Ireland 5.19Italy 4.95Spain 4.68



Member State % with statements

Czech Republic 4.68Bulgaria 4.44Slovenia 4.22Slovakia 3.94Finland 3.70Estonia 3.46Romania 3.45Belgium 3.20Hungary 2.71Malta 2.47Luxembourg 2.46Latvia 2.22Greece 2.22France 2.22Cyprus 1.98Lithuania 1.98

5. Combined Presentation

In minority inMember State In minority overall disputed votes % with statements

United Kingdom 10.49 35.04 7.67Austria 5.91 19.20 5.67Germany 5.42 17.60 7.14Netherlands 4.69 15.20 6.17Denmark 4.22 14.16 4.22Portugal 3.45 11.20 5.42Sweden 3.21 10.40 6.17Poland 2.96 9.60 5.19Ireland 2.56 8.62 5.38Italy 2.48 8.00 6.19Spain 2.23 7.20 4.95Czech Republic 2.22 7.20 3.70Bulgaria 1.97 6.40 3.94Slovenia 1.72 5.60 3.20Slovakia 1.48 4.80 1.98Finland 1.48 4.80 4.44Estonia 1.48 4.80 2.47Romania 1.48 4.80 2.46Belgium 1.48 4.80 2.71Hungary 1.23 4.00 2.22Malta 1.23 4.00 4.68Luxembourg 1.23 4.00 2.22Latvia 0.99 3.20 3.45



In minority inMember State In minority overall disputed votes % with statements

Greece 0.49 1.60 3.46France 0.00 0.00 4.68Cyprus 0.00 0.00 1.98Lithuania 0.00 0.00 2.22

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The future of the European Union: UK Government policy · 2013. 6. 10. · The future of the...

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