European and External Relations Committee

Meeting date: Tuesday, May 15, 2012

Official Report 411KB pdf

---

“Brussels Bulletin”

The next agenda item is our “Brussels Bulletin”, which is expertly put together by Ian Duncan. It is such a changing feast that we will just let him speak to the “Brussels Bulletin”. I have no doubt that there have been changes—probably in the last hour.

You will see again in this “Brussels Bulletin” that the only story is the euro zone. The situation is extremely volatile. When I wrote the bulletin last week, it was obvious that it would be out of date the minute that I stopped writing it. It is now considerably out of date on the Greek situation.

Two or three months ago, when people were discussing Greece’s exit from the euro zone, it was quickly and vehemently denied by almost everybody within the European institutions. The big change is that that has stopped. There is no denial anymore—there is euphemistic discussion about all options now being explored. Things are progressively moving towards what seems to be the end game for Greece. The bulletin says that discussions are on-going, but the bulletin is well out of date now. The discussions in Greece to form a Government seem to have failed, so there is a high likelihood of another election within four weeks. The consequences of that remain to be seen.

15:00

In Greece, the people who get the biggest support in an election have a bonus of an extra 50 seats. If, in the next election, the Opposition coalesces around opposition to the austerity measures, a single large Opposition is quite likely to emerge and to be rewarded with the top-up of 50 seats, so that it becomes the biggest force. That will create an almost impossible tension in the euro zone.

I will mention two things that are not in the “Brussels Bulletin”—two other elections that also have a significant bearing. In North Rhine-Westphalia in Germany, Chancellor Merkel’s party suffered quite a significant defeat. She will face an election next year. That was a sign that she must be careful about what happens next in Germany. In local government elections in Italy, the parties that have supported the austerity measures and the fiscal compact most have experienced significant defeats. The political persuasion of the party that is in power does not appear to matter particularly; the fact that it is in power seems to be enough to result in huge suffering at the polls. That is perhaps a reflection of democracy reasserting itself after a period of technocracy in government.

I will answer any questions if I can, but things have moved so fast that they have probably changed again since I started speaking.

We talk about the unthinkable future. If that happens and Greece leaves the euro zone, I understand that that will be particularly difficult for Germany, because it has much money—€644 billion—tied up in banks in other countries that could be dicey. However, what would be the practical result for the average European on the street if we lost Greece? Would everything be more expensive? We are told that such things would be terribly damaging. Who would they damage?

A thesis could probably be written to answer those questions. I will describe some points that strike me. If Greece moved towards an unstructured default, the situation for Greece would become difficult—it would have to seal the borders physically to stop money and people moving out until it adopted a new currency. It would have to stop all the flight of money—all flights would be halted until the restructuring and the new currency emerged.

That would be similar to the position under the Wilson Government of the 1960s in this country.

I think that it might be a bit worse than that, but yes—the idea of a free-fall would apply. Ultimately, Greece could benefit, because its currency would devalue and it would be able to find a way out of what has happened. However, the situation could be disastrous for the euro, because confidence in it could collapse.

The impact on the UK would be significant, because the pound would almost certainly benefit from the flight to safe havens. That would have a hugely adverse effect on trade, because the pound would suddenly become strong. As a significant part of our market is in Europe, Europe’s ability to buy our goods would be decimated—or possibly more than decimated. The result is that trade would be difficult in currency terms and in the reality of buying goods.

For a period, all bets would be off—nobody would be able to predict what was to happen next. The impact on the average person on the street could be anything from things becoming much more expensive to buy to companies experiencing such turmoil that they could not trade and their order books declined completely.

Would that all happen because one country left the euro zone?

That would happen because one country left. It is a bit like a crack in a wineglass—the crack might be only fine, but the wineglass is cracked, so it is no longer used.

Until this point, everyone has said, “That will never happen and can never happen.” The minute that confidence is lost in the ability of the people who say that, whatever they say thereafter becomes suspect. They would almost immediately have to say, “But this couldn’t happen in Spain or Italy,” but who would believe that? Their integrity would be devalued. The markets are voracious on such matters and would be much more predatory in trying to explore and expose all the chinks that could lead to further issues. It would be a different world.

I am sorry. That was a very broad question.

This is only educated guesswork, but it is guesswork for all of us. With Europe having almost a siege economy, do you think that the new French President’s approach to infrastructure development, expenditure and growth would be more likely to become the norm across the European Union than the austerity approach, because it would be necessary, particularly if the euro suffered traumatically against currencies such as the dollar and the pound, to generate a market internally within the euro zone, which would mean having to spend money internally—as you mentioned with Greece—in order to try to build up the economy again?

One of the figures that have come out in the past few days shows that the German economy has never been stronger and is booming. The problem is that the powerhouse of Europe—Germany—is doing well on an industrial level and that in order for the other parts of the euro zone to do better, Germany will have to do less well. Just as it is very difficult for Greek politicians to accept the austerity measures, it will be very difficult for German politicians to go to the polls and say, “We must take this strong powerhouse economy and all the good things that are happening here and depress that in order to help these individuals on the periphery.”

The issue therefore becomes very difficult. The success of Hollande is interesting, because it creates a very difficult scenario. His view is that austerity alone is not enough and that there must be a growth agenda alongside austerity to help to rebuild Europe. However, that begs the question of where the money will come from to apply the growth strategy, although it appears that Hollande may now be proposing a less severe austerity rather than an easily delivered growth strategy. I think that something will emerge from today’s meeting between the leaders of France and Germany, because it is clear that they will have to find out quickly how to work together. They need to be on the same page for confidence in the euro zone to be strong. If they are clearly at odds, market confidence will quickly be eroded.

I think that it is inevitable that we will see Greece exit the Euro. As Ian Duncan said, people are reasserting democracy across Europe. For the past 20 or 30 years, the political classes across Europe, whether of the left or the right, agreed that the way forward had to be convergence, the euro and bringing together economies and societies that were clearly hugely different. For example, a relatively backward economy such as that of Greece was merged with that of the industrial powerhouse of Germany, so it was inevitable that that would not work.

The rejection of austerity is welcome from wherever it comes. I watched the previous Greek Prime Minister several times on television. He marched into the EU saying “Right, we’ve no money for pensions, this, that and the next thing,” and they said “Right, the medicine is we’ll give you money and forced austerity.” He went away and cut more public services, pensions and wages. It did not work, so he comes back a week later and says “We’ve even less money now—what are we going to do?” They say, “We’ll give you more money as long as you make more cuts and more cuts.”

I think that it was Einstein who said that doing the same thing twice and expecting a different result is a sign of insanity—that Greek situation is insanity. Hopefully, we are seeing people reassert some democracy in Europe. However, I think that we face a rocky road ahead. It would be interesting for the committee to know what the Scottish Government’s contingency plan is for how the situation will impact on Scotland, because it most certainly will.

Yes; the committee might wish to explore that in the future. The issue of the democratic mandate is interesting. In Brussels, there is always an assumption that there is a ratchet—that things move only in one direction, even if there is a pause in that motion. There has been almost a dawning of reality in relation to the democratic aspect of countries being unable to fulfil what have been seen by the EU as obligations. We see the chair of the euro group, Jean-Claude Juncker, saying to the Greeks, “You have committed to these measures and you must follow through,” but failing to appreciate that the Governments that made those commitments have fallen, which means that the commitments are not endorsed by the democratic process.

There are European Governments with not one elected politician in the Cabinet, and we wonder why people are on the streets. A Greek politician yesterday was talking about civil war. That is how serious it is. We sat and watched Italian and Greek Governments being formed that had no elected politicians in them, and we wonder why people are sceptical about this whole project.

One of the things that you are probably not seeing is the fact that there are significant protests in Europe. They are almost endemic in Spain and Greece, but I think that the BBC has probably stopped reporting on them. They are large in scale and significant, but you are not hearing about them every day because the media have stopped covering the protests as much as they would if there were fewer of them. There is no doubt that the change that is about to happen will be a shaking of the foundations of the EU. The notion of democracy being at its heart is at question, because what people want and what the economies need are not necessarily the same thing.

That is a particularly important point. As Neil Findlay said, everyone will be impacted on, including us.

Earlier, the cabinet secretary talked about how much the £25 million for youth employment would actually be worth. We assume that the funding that we are applying for from the funds will continue to be there. However, if the nations of Europe that contribute to the central pot from which comes the money for the funds are experiencing severe financial problems, the money will not be there to be drawn on. Along with the fact that the euro is not likely to be worth as much, the fact is that there is likely to be a smaller amount of money for the funding that we are looking at in the lead-up to horizon 2020.

The big issue, of course, is the multi-annual financial framework—the budget for the next period—which is being discussed just now. A few weeks ago, when the committee was looking at the annual budget, we discussed the fact that the Commission is seeking a 6.8 per cent rise in the annual budget, at a time when no budgets anywhere are rising. The impossibility of the commitments in the EU, given the amount of money that is available to meet them, creates a tension. That will be writ large when it comes to the multi-annual financial framework, which has to be a certain size in order to deliver the projects, which are commitments themselves. Everyone has far less money to spend on that, and we must also consider the status of the euro with regard to how much or how little it will buy. Oddly enough, you could argue that the UK will benefit from that, as the pound will be stronger. However, whether that helps when the money comes back in the other direction is a different question. What is gained by one hand might be lost by another.

The tension in all those discussions is that it is impossible to have a discussion about the future economic situation in Europe until the situation is stabilised, because everything is uncertain.

There are serious calls for trying to put in place some kind of growth strategy. There will be a European Council meeting on 23 May to discuss how we can stimulate more growth in Europe’s economy and create more jobs.

15:15

Before Hollande was elected, he was standing on a platform that included suggestions about getting more capital into the European Investment Bank and reorienting the structural funds towards growth. The European Commission certainly moved quickly to try to do that, and the wording that it is using about a growth strategy plan demonstrates that it is considering how we get greater private and public sector leverage into large infrastructure projects, in broadband and in the transport and energy sectors, which the cabinet secretary talked about.

The difficulty is the dislocation in Europe, because those things are essential for places like Scotland and the UK, but if you talk to someone in Greece about broadband funding they will not be keen—they need the money to go somewhere else. The same is true all over Europe. There is still rhetoric in the EU about growing economies that need to develop in the ways that you described, and we are fortunate in that Scotland is probably one of the economies that could still benefit from the money. Elsewhere, the money is having to go into completely different areas, which are so fundamental that it is almost impossible to believe. I am talking about moneys for pensions and to support hospitals or whatever. The fearful thing is that the rhetoric does not always recognise that.

The discussion about the multi-annual financial framework will be critical in that regard. It is all very well to talk about renewable energy policy, but if people cannot afford to pay their bills the tensions will not be resolved by giving more money to the EU for such projects—or not easily, anyway.

I read one or two articles in the press that suggested that there could be separate agreements between countries in the EU, such as Germany and Greece—a sort of nannying of Greece by Germany, to a certain extent. Is that a possibility, to see one country through a period, to maintain stability?

Not easily. Some of the rhetoric that is emerging in Greece, as we saw with the growth of the fascist, far-right wing, is very reminiscent of the period before the second world war. The notion of control from outwith the country’s own borders is very unpopular. The EU wanted to appoint a—I am looking for the word; “master” is not the right one—

Mentor.

The EU wanted to appoint someone who could be on the ground in Athens, to ensure that everything that the Government was doing was compliant and was adhered to. That is a challenge for the Greek people. Suddenly to have someone from outwith the country who was responsible for its budget and how it was spent would be anathema to any people.

You will remember that there was a write-down of the scale of the Greek debt, of the order of 75 per cent. People have already taken a massive loss on their investments in Greece; the question is whether they will have to take further write-downs and be left with almost no value. Most banks have tried to ring fence their Greek debt and assume that it is lost.

Are the larger countries, such as Germany and France, which were keen on expansion in the first place, partly to blame, for having pulled the wool over people’s eyes in relation to some of the discrepancies in how countries such as Greece were being run, in relation to little things like taxes and so on? Surely the chickens are coming home to roost, for that very reason. I agree with what was said about technocracies; there is nothing worse than politicians who are not elected. However, elected politicians appear to have let the people down very badly, which is why the crisis has happened.

That debate is going on. The unpopularity of all politicians in Greece, both current and previous, is a reflection on the situation. Not long ago, Greece was celebrating a huge rebuilding programme. It staged the Olympic games and was making investments. It is not so long ago—just over a decade—that Greece was being held up as a success story, not only for what it had done in its own right but for the EU as a whole. I imagine that it will be difficult to find any individual responsible for the situation. Responsibility is collective and the finger will not be pointed at a single person, so nobody will be held to account.

However, the Greeks won that very important football match.

I am sure that that cheers them.

I am sure that the gate money was not enough to sort out the situation.

The way that things operate in the UK, anybody on the left or right of the political spectrum who challenged the orthodoxy of EU convergence being the right way to go was pointed at and marginalised as some sort of crank, left-wing nutter or right-wing nutter. However, many of them have been proven correct.

People who have been sceptical, for whatever reason—there are a wide variety of reasons why people have been sceptical—of the culture of the ratchet being able to go in only one direction have largely been shown to be right. I do not have any great satisfaction in being sceptical. If it all goes wrong, it will impact on me, my family, my friends and my community as much as it will on anybody else.

Perhaps it is a lesson for us that, when people speak out on issues about which they have genuine fears, we should not simply point to them as being cranks and lunatics because, in many ways, they are often proven to be correct.

That is, I think, one of the reasons why the use of referendums as a way of gauging support has fallen out of fashion throughout Europe.

As you know, the Irish referendum on the fiscal compact will happen on 31 May. One of the clauses of the compact is that, if a country votes against it, its money stops. Therefore, the Irish referendum would have immediate consequences. The Irish will recognise what that means: the dice are loaded and it would be insane for them to vote against fiscal compact, because it would interrupt their money and that would not be sustainable for them.

Ireland is the only country that is having a referendum. Other countries do not have the appetite for one. General elections are now being used as referendums on EU issues probably more than ever before.

Can we tie this item up? We are doing some work on our report on the crisis in the euro zone. Although we are close to completing the report, we are not close to concluding the issue, which will probably be a standing agenda item for the next wee while.

I thank Ian Duncan for his contribution. Is the committee happy to send the “Brussels Bulletin” to other committees for their information?

Members indicated agreement.

That moves us to agenda item 4, which we agreed to take in private. I thank members of the public for attending.

15:22 Meeting continued in private until 16:19.