European and External Relations Committee

Meeting date: Tuesday, December 13, 2011

Official Report 545KB pdf

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“Brussels Bulletin”

Agenda item 3 is the “Brussels Bulletin”, which is regularly compiled by Dr Ian Duncan. I invite members to give me their comments on this meeting’s bulletin. Bill Kidd is first.

Is that because the light was shining off my head or something?

I will not answer that.

I had a quick word with Ian Duncan before we started. My question is about the euro zone crisis, which is discussed on page 2 of the bulletin, carries on to page 3 and could probably go on for another 30 pages with the way that things appear to be mounting up. Can Ian say anything about the circumstances of that crisis in terms of the numbers of euro zone members that are economically viable as opposed to those that are not contributing economically?

My word—that is an extremely difficult question. What became very clear last week was that the euro zone is driven by two member states—Germany and France, but mostly Germany—in particular. Of the remaining member states within the euro zone, it is very obvious that all are not equally solvent. At the moment, those that are most at risk—the well-known candidates—are Greece, Ireland, Spain and Portugal, and the make-or-break country is Italy.

The discussions last week were about a new architecture; they were not really about resolving the situation right now. That makes for an interesting period to come, because a lot of the discussion is now around that architecture. As far as I can work it out, the markets are not that bothered about it; they are bothered about what we are doing now. It is absolutely right that many countries within the euro zone cannot do much because they do not have the capacity to give funds. They need the money more than they can afford to give it.

On the same point, page 3 of the “Brussels Bulletin” refers to

“Automatic sanctions in case of non-compliance with deficit rules, i.e. a Member State budget deficit should not exceed 3% of GDP”

and says that

“These sanctions could only be overturned if a majority (85%) of member states agreed.”

That is a huge majority, is it not?

Yes. It is designed not to allow sanctions to be overturned, which is what makes the sanctions automatic. If a member state breaches the rules, there should almost be no saving them. So many member states would have to agree that the sanctions should not apply, which begs the question, “Why would they do that, given that they have already agreed that sanctions should be automatic?” One of the most difficult parts of the agreement is the automatic aspect. In the past, a number of agreements between member states, even at treaty level, have been breached by Germany, France and others within the growth and stability pact and nothing has happened to them. The European Court of Justice has not been able to sanction a member state. Moving to create an automatic sanction is a huge bound forward. Probably about 60 per cent of the member states within the euro zone would have been sanctioned by now.

What is the ultimate sanction? Is it to be thrown out?

No.

I do not understand this. If a member state is too poor to pay its contributions, does not do what it is meant to do or if it steps out of line with regard to its fiscal policies, what is the ultimate sanction?

A member state cannot be thrown out.

Surely a principle of the European Union is that no member would be so poor that it would be thrown out. Countries are taken in only if they meet certain criteria. The only reason they become poor is if they are mismanaged. The European Union is trying now to assist Greece in managing its funds. I do not think that the EU would be looking to expel member states.

No, but if one sanction does not work, there has to be another sanction following it.

Oddly enough, gentlemen, you are both correct. There has to be a sanction, which looks very much like what Hanzala Malik has just described: greater involvement from EU officials to guide the economy of the member state that had breached the limits, which would have its economy managed from beyond its own treasury. That would be a loss of sovereignty the likes of which a member state had never witnessed before. I cannot see why a member state would want that, but an automatic sanction means that it cannot be avoided, which is the tricky part.

A lot of things that were agreed last week still need to be hammered out and I am not sure that all member states’ Parliaments will be equally content to sign off some of them, because they will be quite detailed structures. One country that has not been mentioned is Finland, which has serious concerns about how this will work at parliamentary level; it wants to look at the matter in greater detail before giving it the okay. No one is even talking about the Finnish position on this, because it has been eclipsed by brighter twinkling stars around it.

15:45

I am not sure what would be a brighter twinkling star than Finland, but there we go.

Ian Duncan alluded to where I am going with my question. Obviously, at the time that Ian wrote this—[Interruption.] Is that my phone?

Sanctions!

I apologise, convener. I did not realise that my phone was on. That shows my knowledge of technology.

On Friday we saw dramatic developments that leave us in the position, at least in principle, in which 17 members of the euro zone and nine other EU member states that are not members of the euro zone will go ahead with an amended treaty which, it seems, it is intended will use the existing EU institutions for the 26 states, and the UK has walked out of that discussion.

That raises significant issues for the committee. The first thing I thought about was our poor fishermen. The fisheries negotiations are coming up this week, and our member state has walked out of other discussions. What negotiating position can our member state possibly have at this point in time? It is a worrying development for Scotland, but it is a development that the committee should seek to investigate further because it will have huge ramifications for Scotland and the rest of the UK. When I read the “Brussels Bulletin”, that was the issue that came up for me.

I am not surprised. The impact on Scotland—not just in farming and fishing, but in other areas—of the UK’s decision was on my wee list of issues to mention. We already have a backdrop of uncertainty. What does the UK’s decision mean for Scotland? There is room for the committee to have a broader discussion about the decision, and to invite UK and Scottish ministers to discuss whether it will have a detrimental impact—or even whether it will lead to opportunities. What does the committee think?

I absolutely agree. We certainly need to ask the UK Government what vital UK interests Mr Cameron believed were at stake in the proposals from the EU 26. If I can put it bluntly, the decision seems to have been an attempt to smash and grab power back in terms of financial services regulation. I think David Cameron was trying to change from qualified majority voting to unanimity the financial services regulation decisions, through a separate protocol that had nothing whatever to do with the treaty proposals that were on the table to try to solve the euro zone debt crisis. It was pure political opportunism that backfired spectacularly.

We have seen a complete reversal of the UK’s foreign policy overnight, and we should not underestimate how serious the implications of that are for the UK’s ability to represent Scotland’s legitimate strategic interests in the European arena, and particularly in the European Council. The UK’s, and therefore Scotland’s, voice at the top table has been significantly marginalised as a direct consequence of David Cameron’s actions. We will now not be part of the intergovernmental discussions. A number of key economic decisions will be taken by 26 member states, and we will not be at the races for any of them. That is a diabolical position in which to find ourselves.

Thanks, Aileen. You have expressed a strong opinion.

Aileen McLeod is right. That is a fair assessment of the situation.

A number of member states have said that they want to go back to their Parliaments to consider the proposals. There are still concerns within some member states, but less about the issues that concern Britain than about the implications of the proposals.

One of the broader issues relating to the financial aspect is that the process will take place in two stages, involving the current financial crisis and an architecture of restoration. I suppose that what happens in the short term will determine how the second stage happens. One of the curiosities of the proposed rules is the need to determine how Greece, were it to find itself in its present predicament times 10—that is, just tumbling out—would be accommodated within the new architecture. That remains to be seen.

I am not saying that the EU has buried its head in the sand. It has moved towards solving one problem, but there is something happening right now, and it has not dealt with it yet. That is the bit that is going to roll forward between now and Christmas, and between Christmas and January. That will be an interesting time for the EU, because a lot will happen in that period that will be troubling.

I agree with Ian Duncan’s point that we have yet to see what will happen. It is fair to say that we have yet to see whether the national Parliaments of the other nine non-euro zone members will maintain their position, or whether they will have to hold referendums. However, as Aileen McLeod said, it is clear that the UK will not be at the table in the forthcoming discussions. That is a serious development, particularly for our financial services industry here in Edinburgh and Glasgow.

The curious silver lining is that, had there been a treaty, the process would have been much slower, because of the need for ratification by each member state’s Parliament. An intergovernmental pact will, oddly enough, be quicker. The provisions could, therefore, be brought in much faster because there is no treaty. I hasten to add that that is an unintended consequence of what has just happened. The EU has avoided what is called the Irish problem, involving an automatic referendum on a treaty. Those events might have forestalled that necessity.

Yes, but the member states could have used the enhanced procedure—which they tried to use initially—as well as article 136 of the Treaty on the Functioning of the European Union.

They could have done that, but there were discussions about that—even Ireland and, oddly enough, Finland were concerned about it. I was in Brussels last week, inside the cordon. Talking to people there was a curious experience. There was a genuine sense that they were getting to the bottom of the problem and finally sorting it out. Alongside that, however, I sensed quite a lot of unspoken resentment among member states that felt that they had no choice, and that Germany and France were simply pushing the measures through. They felt that there was nothing that they could do, and that they had to follow that lead. They felt that their ability to be different from Germany and France was being removed. There was definitely a sense of unease about the fact that opportunities for discussion were being eroded.

We can throw into that mix the parliamentary aspect, with a number of member states saying, “We won’t even go back to our Parliaments; we are just going to do this.” There is definitely a recognition within the EU that the democratic underpinnings are uneasily founded. That is an issue for this Parliament, for the UK Parliament and for all Parliaments. A lot is now rolling forward without democratic approval.

Democracy is being damaged in Europe. We have seen changes of Government in Greece and Italy without elections. Those are clearly illegal movements, yet all of Europe has accepted them. That is frightening, because it takes away the democratic right of the people to choose their own Government. David Cameron’s stance is questionable, to say the least, and colleagues are right to say that we have damaged ourselves to a degree. However, it is important to ensure that we maintain some stability in terms of where we want to go. I therefore agree with the convener that we need to ask our ministers exactly what their philosophy will be, now that we find ourselves in this position. We cannot allow the Westminster Government to damage our opportunities and our ability to achieve what we are trying to achieve. We need to put in place a structure and a policy, working through our committees. I shall talk about committees later, under the next item, as I believe that there are certain issues relating to committee representations.

Events are moving far too rapidly in Europe and, if we are not careful, we could come away badly bruised. We need to ensure that that does not happen. We should not allow others to damage us. We might have our own shortcomings, but we cannot allow others to put us in a position in which we could lose out. Our strategy should be to take a belt-and-braces approach to what needs to be done to secure our interests. For example, there are a lot of questions around the fisheries issue. It is not only that our people may be denied their rightful fishing rights; I am concerned that Iceland will not be checked in the way that it should be. There is talk of taking measures against Iceland, including possible trade sanctions, but I do not think that that would work. People are not focusing on that issue, but we need to. It is right to say that we need to reconsider our strategy quickly to ensure that we can address the issues that will arise in the near future.

That is absolutely correct. The convener’s suggestion of bringing in Scottish and UK ministers to outline where things stand is definitely valuable, and the sooner we can do that, the better. Things are moving so fast now that it is almost impossible to know what is happening.

I wrote down six things that struck me when I was in Brussels that will happen quite soon in any case. One is that the credit ratings agencies will almost certainly downgrade a number of the member states in the euro zone. It might not happen this week, but it will happen. They will probably downgrade the European financial stability fund, so its ability to leverage will be reduced, which will have huge implications for its ability to function. At the same time, the sovereign debt of various member states is now so great that €150 billion of sovereign debt will be sold by Italy alone in February, March and April. Is that going to work? In addition, the bank crisis will roll forward and banks will possibly all experience write-downs and downgradings of their own credit ratings. It takes only one German bank or one big bank to experience a huge problem for the world to look very different, and that is almost certainly going to happen.

We can throw into that the situation of Greece, which has still not been solved. The issue there is not even close to resolution. It seems to have dropped off the radar, as if we accept that the position is now so bad that we cannot do anything about it and need to move on, while almost pretending that it is not there—that is the frightening aspect.

Against that background, in the next few months the euro zone plus the additional member states will seek to construct a new architecture. A lot of attention will be spent on the new architecture for the new world order but, against that backdrop, all the things that I have described will roll forward, any one of which could unseat the rider and change everything completely. We would definitely value the UK and Scottish Governments’ views on that because nobody knows just now. You could go from one end of the spectrum to the other in a breath because there is every view imaginable on what will happen, from the view that Britain will go on fire to the view that Britain will be the only one left standing as the European Union falls apart, and all views in between. We need to get an executive view at the UK and Scottish levels to get a sense of this, because it is so massive.

It is all the more urgent because, as you said, what is being proposed is not a treaty in the usual sense in Europe and there is a pace that we are not matching and through which we could lose opportunities.

I have had Bill Kidd on my wee list for a while, but he has not managed to get in yet to speak.

It has been extremely interesting and worth while to listen to what Ian Duncan said—thank you, Ian.

I echo what everybody has said on the issue. Earlier in the meeting, we talked about how we will do on European structural funds between 2014 and 2020, but they might not be there—although we hope that they will and that the figures will be much the same or even better than what we talked about. However, it certainly does not look as if the political will is there, even if the bureaucratic side of Europe seems to roll on regardless. It cannot continue to do that unless the political will is there to support it. We need to consider the political arguments, so we need to talk to Scottish Government ministers and hear their opinions on what influence we can exert—whether it is on a UK basis, a transnational basis or a regional basis—across Europe. We also need to find out from Westminster ministers, up front and in person, where they see things going now that these actions, which I think are precipitous, have been taken. If they are not precipitous and there is some direction behind them, I would like to know what it is, and the Scottish Parliament deserves to hear it.

16:00

If the committee is content, I will ask the clerks to produce a brief scoping paper on how we can take the issue forward and tie it into our work programme. Some of the things that we plan to discuss at our two meetings in January are flexible and we can play around with them. We will see whether we can get something set up for early in the new year. Is the committee happy for me to do that on its behalf?

Members indicated agreement.

May I add another point? It will allow swiftness of foot if the committee mandates the convener to begin to explore potential participants in the process, because time is tight and Christmas is in the way. If members are content with that, we will liaise with the convener and move towards securing appropriate participation.

Members indicated agreement.

On the scoping of the issues, things are very much up in the air. As a former European Community lawyer in the private sector, I note that there are implications in many areas of the single market, and particularly in financial services. To be frank, if the EU continues to have a nucleus of 26 member states, with the euro zone plus the additional member states, and they decide, as they will have to, to address the capital adequacy and solvency margins of their banks and other financial institutions, the bar may be raised, and the City of London and our financial services industry will be affected by that, but we will not be part of the discussions on it. From my experience of EU matters, I believe that what happened last week is the most devastating development. I simply cannot understand why it was done, except for the reason that has been suggested in the press, which is that it was an appeasement of Mr Cameron’s back benchers, who take a very Eurosceptic line. There might be some other reason, as Bill Kidd suggested, but if so, I cannot see what it is.

I wanted to raise that issue because it is not at all clear what measures will be introduced to deal with the solvency and capital adequacy of banks and financial institutions in the EU. That is a big issue for them, because it is a cost issue and it will affect what credit can be made available and so on. It is important to take that into account as well.

You are absolutely right. One of the outcomes of the Council meeting was that the euro zone plus will meet monthly, in effect forming a proto-European governance structure, but it is less clear when that will start. Will it be after broader ratification? Is it imminent or is it to be delayed? Nor is it clear what will happen in the grey period before that happens, which is between now and, say, the end of January. Even a casual reading of the newspapers shows that people smell blood in the water and things are going to happen. Will any of the structures be in place and in a position to address it should there be some sort of feeding frenzy? That is unclear.

Convener, I suggest that we are going in circles. We decided to seek representations from ministers, and I think that we can move forward on that. You have been given authorisation to pursue it for us quickly.

Can I move on to the water efficiency element? There is not a great deal in the “Brussels Bulletin” about that. Historically, Scottish Water has experienced difficulties with Europe in relation to the quality of water, repiping and ensuring proper supplies. Can we get an update for our next meeting on the position with the European Union, any challenges that Scottish Water is facing and how we can help to resolve them?

Yes. I have not come up against that, but it will not be difficult to do what you request. I would say that the current bulletin is not for that purpose. It is—

I appreciate that, but it has triggered a—

I am looking at your colleagues across the table, because the Rural Affairs, Climate Change and Environment Committee might already have begun to do some thinking on water quality and other water issues.

I am just trying to establish Scottish Water’s current position with regard to meeting European Union standards. Obviously, we do not want Scottish Water to be subject to penalties.

We can establish where Scottish Water is with regards to meeting the requirements of the water framework directive.

I have two issues to raise. First, I hope that the North West Rockall Bank is better than Northern Rock. That was a wee joke.

Struan Stevenson’s report mentions powers over fisheries and member states and suchlike. Hanzala Malik mentioned the possibility of sanctions being imposed by the EU on Iceland and possibly the Faroe Islands. I read something about that recently and was wondering whether those talks have advanced. What is the situation? Will sanctions have to be imposed, or has a decent level of co-operation on fishing and the eradication of overfishing been reached?

There are a couple of answers to that particular question. The discussions with Iceland and the Faroe Islands sit outwith the end-of-year fisheries quota discussions that begin tomorrow. The bilateral discussions are on-going and they have not resolved the mackerel question. It is hard to make any meaningful allocation in the absence of agreement on what might be a huge part of the stock. It is unclear when that will happen.

As we all heard last week when we met Commissioner Damanaki’s deputy chef de cabinet, the Commission is going to try trade sanctions. I was going to say that that is its starter for 10, but I think that it is its only option at the moment. It remains to be seen whether that will be successful or not. I do not know and I suspect that there is no answer to that yet.

One of Iceland and the Faroe Islands is a member of the coastal states agreement, under which there are automatic sanctions—I think that Iceland is a member and the Faroe Islands are not. There are two separate problems there and I wondered whether you could clarify the situation for me.

I can tell you more, but I do not know whether I can clarify things. You are right that Iceland is within the coastal states agreement, under which sanctions can be imposed. However, Iceland seems to be indifferent to the threat either from that agreement or from the EU. I would have thought that the threat of EU sanctions would have been far worse because they would limit Iceland’s access to the EU market, but Iceland seems to be unaffected by the threat and the imminence of action.

I understand that the parties have not reached agreement and that negotiations have been postponed until after the new year. I also understand that the measure that would allow sanctions to be pursued can work in parallel because it is an internal EC trade measure. It would be wise to use that as a negotiating tactic. Discussions have to resume in the new year to see whether agreement can be reached.

One difficulty is that fishing is one of the most peculiar aspects of European policy. All the management of the seas is decided in a very short space of time—often, overnight one day in December. That is a peculiar reality and, apart from the recent Council meeting, it is the only example of an all-night meeting that always happens.

Annabelle Ewing is right: there is a series of bilateral discussions with Norway, the Faroe Islands and Iceland that precede the negotiations. Those discussions are on the joint stocks that straddle the boundary of the EU’s territorial waters; they roll forward and are usually tied up by now to allow for the end-of-year negotiations to allocate the unilateral stocks. For the second year in a row, it has been impossible to reach an agreement on the joint stocks, with no great resolution in sight short of the sanction and no prospect as yet of that working.

I remember the use of the Royal Navy against Iceland. We must be serious about protecting our stocks. At the end of the day, we must remember that the stocks have been built up not because Iceland made a contribution but because our fishermen stopped fishing to allow the stocks to increase to the current levels. We have made the sacrifice in the first instance, and we are now expected to make the second sacrifice to let other fishermen catch all the fish. It is outrageous.

Our ministers need to make the point strongly. The idea that we will make a decision in three months’ time is ludicrous. We are looking for action and we are looking for it now. We have been put under so many restrictions. It is only fair that when others abuse our systems they face the same penalties. We need to protect our stocks.

One sad reality of the cod war is that we lost it. The Royal Navy intervened, but Iceland literally excluded the British vessels from its water and—Iceland would argue—protected the stocks inside its territorial waters by doing so.

The interesting dilemma this time is the inverse of that situation. The stocks are technically in Iceland’s waters, but it wants to go against all the advice on sustainability and maintaining stocks. Iceland is turning on its head its past policy of sustainable fishing.

I think that we have given the “Brussels Bulletin” a fair hearing. Are members content to send it to the relevant committees for their consideration?

Members indicated agreement.