European and External Relations Committee

Meeting date: Tuesday, November 15, 2011

Official Report 513KB pdf

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“Brussels Bulletin”

Agenda item 3 concerns the “Brussels Bulletin”, which, as always, has been compiled by Ian Duncan. Do members have any comments?

We are all aware of the issues around the euro zone. Ian, do you have any knowledge of the situation with regard to France? If Italy is too big to fail, France is considerably more so. If France is being targeted by the markets—I do not know why or how the markets benefit from that—would it make sense for France to have a go at taking the action that has been suggested, or would it back off at this stage?

That is the million euro question. It is often said that Italy is too big to be bailed out. Since the resignation of Berlusconi, there has been a slight easing in the markets with regard to Italy. You are right to say that the fund, as is currently constituted, could not support Italy. It certainly could not support France, were France to find itself in a similar predicament.

France’s chief problem seems to be the danger to its AAA rating. That is still an issue, and there is every likelihood that that rating may yet be lost, because it is not dependent on speculation in the market as much as on the strength of the banks and the likelihood that they will be able to cope with the various write-downs and debts among the other euro zone members. France may yet experience great problems with its status. If France moves towards anything like the Italian scenario, the euro zone as we understand it would almost certainly be at an end.

We seem to have been hearing some mood music from Angela Merkel and President Sarkozy about the reinvigoration of the decades-old idea of l’Europe à deux vitesses—a two-speed Europe—which was discussed to a great extent at the time of the Delors plan, when economic and monetary union was coming into force. Are those two countries simply flying a kite, perhaps for market purposes, or is there any substance behind the idea that we might have a two-speed Europe?

15:45

That is a good question. Eurocrats always liked the idea of a two-speed Europe as long as Britain was in the second speed because, some would argue, that allowed things to happen more efficiently inside the core countries. The reality now is of course different and Britain is not a factor, in a sense. Eurocrats are preparing for every eventuality. I will mention some of the more testing aspects. Angela Merkel’s party has begun to explore how individual member states could be eased out of the euro zone, which is a huge step from where things were even two or three months ago. There is a strong division between the member states that are talking about the reality of Greece or Italy, and President Barroso, who is still talking about the European dream and saying that everyone can be in it together and it need not be a two-speed Europe.

One big issue is that, before each of the Councils, we are witnessing a move away from bilateral discussions. There is a real polarising between those who are inside the tent—the euro zone—who are always talking together, and those who are outside, wondering what is going on inside the tent. There is far more debate within particular groupings. I am not sure whether there are different speeds, but they are certainly different focuses.

It is a serious concern that the euro zone might be an engine for that two-speed movement. Greater decision making would reside in that heartland, which would have implications for the non-euro zone members. How would those members influence the process? That is almost like the situation in which I suspect Norway finds itself. It is almost bound by various EU rules, but it has no voice to influence the EU. What would happen if member states that are not members of the euro zone were outside decisions that clearly have an impact on them through broader economics and funding?

One big concern in eastern Europe recently has been that money that is destined for countries there through structural funds might yet be cleaved off and moved gently towards the bailouts of other member states. That would be taking money from the whole and giving it to the part. That has implications that are a concern to a broad number of countries.

I understand that the UK’s deficit is more than Italy’s or Greece’s deficit. It is rather extraordinary that the measures to which Italy is being asked to sign up are things that we more or less take for granted in this country. They are simple things. It does not seem to be that hard for Italy to accept the things that it is being asked to sign up to. The measures that the Government there has already signed up to are terribly simple. In Italy, there seems to be a different concept of what is important.

I suspect that there is a cultural issue. It is sometimes easy to impose expectations, but to try to change a culture that has grown over generations is probably the most difficult thing to do. When we read about some of the largesse in Greece or Italy, we almost shake our heads in disbelief and wonder how any country could afford to continue under such rules. However, that is how those countries have functioned. To try to execute a cultural change is difficult when you have plenty of time, but it is nearly impossible when you have no time. The rioting on the streets in Greece shows that, when there is no time to draw a culture into a new world, the tensions can be almost unbearable.

I suspect that we are about to witness something not dissimilar in Italy. Italy is not like Greece, and I am not trying to equate the two, but we are witnessing a reality check there. It is one thing for a Parliament to pass austerity measures of greater severity, but the difficulty arises for the people who are made to bear the burden of the measures. The test not just for the Italian Government but for Italy is whether it can do that. If, for example, Italy pursued a similar route to Greece and there was significant rioting and strikes, the problems that the bailout fund is meant to address and adjust would become all the more difficult because the cultural change would just not be happening.

It must be very difficult and I do not think that we can appreciate, sometimes, the horror stories unfolding in the southern periphery of Europe and what that will mean to people who are planning a future or trying to work out—from the sublime to the ridiculous—how to buy their shopping or how to buy a house. How do you do it when your economy is in such a state of flux? Behind all that is the common-sense approach, with everybody thinking, “Well, I must ensure that I protect what I have.” A lot of money is flying from those countries into other areas as people try to get maximum protection for their savings, because the last thing that they want is to have significant savings devalued overnight by exclusion from the euro zone. Your point is understandable: why have they not already done those things?

Yes, that is my point.

I suppose the truth remains that the reason they have not already done it is that they never thought to do it. If we were ever called on to do things that were not in our cultural mindset, we too would struggle with whatever they happened to be, I imagine.

But that is why we still have our AAA rating, is it not? We have done those things.

Up to a point, although I imagine that our AAA rating is potentially as fragile as France’s. A lot will depend on our banks and our institutions. As with dominoes toppling over, you are never quite sure in which sequence it will topple on to you. Britain is not significantly exposed to the same euro debt as, say, Greece or Italy. Were the situation to develop in a similar fashion to Italy, the British banks would be in a serious situation. A lot of this is more to do with confidence, which depends not always on truth but on an impression of truth. You are right: we have an AAA rating. So does France. Whether we hold on to it and whether France—

We have, but our deficit is greater than Italy’s or Greece’s, yet we still have an AAA rating. That is the—

Shh.

You are absolutely right. The ratings are not always a true reflection of anything other than where things are going, and not necessarily of where they are right now. America lost its AAA rating because although nothing had really changed from one day to the next, confidence in the American style of government to resolve its issues had eroded and dwindled. The same is true in France. France has a AAA rating, but if things move in a certain direction and our banks become unstable, what exactly will France be able to do to address those things? They are being called on in some respects to adopt the Anglo-Saxon model, but I am not entirely sure that the French want to adopt that, any more than the Italians or anyone who is not Anglo-Saxon—

No more than they have in the past two centuries.

Indeed. If they had wanted to be Anglo-Saxon, they could have done that in the past, but it is not easy to do it now.

I want just to pick up on the points that Dr Duncan has been making. When we talk about what is happening in the euro zone, we can see that there are clear implications for the single market. We must consider the issues of influence between the euro zone and non-euro zone countries and the steps being made towards a closer fiscal union where more decisions will be taken that will impact on our financial services and banking sector. We need to ask what impact that will have on trying to create a single market in financial services.

You are absolutely right. It is a potential horror story for financial services, because confidence in the financial sector is probably about as low as it could be. You are witnessing serious problems in that banks are not always as up front and honest about the situation—I am not picking on any specific banks—and issues can often be concealed. There are stress tests that almost all European banks continue to pass until they collapse. They are either not testing the stresses or the stress tests do not mean anything. You cannot have the Dexia bank in Belgium, for example, passing a stress test with flying colours and then, within two months, flat on its back and being bailed out by other countries.

The EU has a role to play, too, in trying to ensure that it is being honest and transparent. One of the difficulties that we are witnessing is that so much goes on behind closed doors in Brussels. A lot is happening that cannot be seen and fully understood. That can be combined with the fact that there is now a lot of tension inside the Commission and it is feeling put upon to solve the world’s problems almost overnight with a limited capacity to do so and expectations that go through the roof. You are seeing a lot of eurocrats struggling to deal with those expectations.

I suppose that the difference with Italy is that a lot of the debt is internal because it is debt from the citizens, unlike Greece where it is external debt.

I am a bit concerned about the timescales mentioned in the “Brussels Bulletin” for reform of the common agricultural policy. Although there are not many farmers in my constituency, those farmers that there are have been more vocal of late. You make the point in the bulletin that some member states are particularly worried that CAP reform might increase the administrative burden on them. From what I know of farmers, they do not like the current burden and there are fears that it could get worse.

What is the scope for those farmers to make their voices heard? I am sure that Jamie McGrigor and others will pay attention to your answer because we want to ensure that our farmers are not penalised in any way.

I am concerned that the inequalities will persist in eastern Europe. From the point of view of egalitarian principles, it is a matter of concern for us all because the assurances that eastern Europe had at the beginning are not being fulfilled.

In a sense the CAP is the beating heart of the EU. It is the most significant pot of money around. The one important difference between this reform and previous reforms is the role of the European Parliament. Its ability to be a participant in the co-decision process means that we are hearing much more from the European Parliament, which is providing a new forum for farmers and other affected parties to participate in the debate and dialogue. There is a conference coming up on 23 November involving farming representatives in Brussels. That is a significant step forward because it provides another avenue for discussion and debate.

There are Scottish MEPs who have a strong influence in that area. The Rural Affairs, Climate Change and Environment Committee has been engaging with some of them on the issue and intends to engage further. We have asked each of the Scottish MEPs to provide an update on where things stand now with the CAP from their perspective, which will give us an insight into that side. I hope to have that back in the next few weeks.

On the time line, there is plenty of time if everyone agrees, but nobody agrees. That is the present challenge. You are right—the biggest concern will probably lie with eastern European nations, which feel that they were literally short-changed when they joined, because they joined mid-programme, so they did not get the full share. As you know, the biggest recipient of CAP funding is France. That does not seem to make an awful lot of sense if you see CAP money as trying to raise up a country, especially when you compare France with Romania, Bulgaria or any country in eastern Europe.

There will be a big fight. There will be to-ing and fro-ing between member states that do not want to spend money, member states that want money and the European Parliament, which has multifarious voices arguing for very different things—sometimes specific items and sometimes broad issues.

This is make or break for eastern Europe. They feel that they did not get a proper deal the last time and this time they want to ensure that they do. It is also make or break for France because France wants all the money that it can get out of this, and Sarkozy does not want to have his anti-Thatcher moment, when he loses all the things that he has. He wants to grab hold of the CAP and get as much money as he can.

The commentary in the “Brussels Bulletin” about the social business initiative is really interesting. How can we help to promote that? This the first time that I have been made aware of the initiative and I feel heartened by it. I should say that my entry in the register of members’ interests includes my membership of the Co-operative Party. I think that there is cross-party support for supporting social enterprise. I would like us to think about what we as a committee could do to promote that message.

I have a question that is linked to that. I see that there is huge emphasis on transparency in the initiative. The “Brussels Bulletin” says:

“The intention with the review is also to prevent investors from secretly building up controlling stakes in listed companies (‘hidden ownership’), which can lead to market abuse and lower investor confidence.”

That links back to my question about the euro zone.

One thing that bothers me about what has happened in the past few weeks in the euro zone is the impact that it has had on democracy. The fact that an organisation such as Moody’s can downgrade Lloyds just because the chief executive officer is sick causes all sorts of tensions and sensitivities in the market, which could have an impact on our AAA rating. I would much rather that the regime change in Italy and Greece had been brought about by democratic means rather than through financial pressure. It worries me that that trend will continue and that the only casualty will be democracy and open elections. That all ties in with the issues of transparency and the abuse of power.

16:00

I will answer that in two parts. It might be useful for us to write to the Scottish Government to find out how it is looking to engage with the social business initiative. If the committee were minded to do so, we could certainly take that step. The “Brussels Bulletin” will, of course, go to other committees that have an interest in such matters; they, too, may have initiatives that they want to explore. It will also go on the website. We now have quite a significant circulation list for the “Brussels Bulletin”, and I hope that those who are on it will spread the word further. Once we get a response from the Scottish Government, we can put the issue on the agenda and come back to it, which will enable us to consider how the Government intends to engage with such initiatives.

The convener has put her finger on the big issue at the moment—democracy. Two regimes have been changed because they needed to be changed, but in a way that is antithetical to how democracy normally functions. It is very unclear, even now, exactly how the Italian Government will be formed and how it will function, and when an election will take place to confirm it.

The convener’s question is one that it is difficult to know the answer to. This is when Europe can be at its worst, because it is not a great believer in asking questions that it does not want the answer to, and I think that we are witnessing a situation in which Europe does not want the answer to such questions. There is no doubt that Greece does not want to be in the situation that it is in and that it would like to have a Government that reflected that, but that is not what the euro zone wants. It is interesting that we are witnessing a far stronger influence from a collective mindset.

The EU is very concerned about the ratings agencies, which it is looking to regulate still further. There is work afoot in the Commission to—

Who are these people?

Exactly. The Commission wants far greater control over them. Just this week, there was a rumour that France’s AAA rating was about to be downgraded, but it turned out to be a mistake by a ratings agency. The fact that it almost caused a run on the market straight away begs the question how that mistake was made. Was it made just to test France, to find out whether it could be pushed? It is frightening. This is the nether, shadow world of democracy—or anti-democracy—which I imagine is what people are protesting about in various camps around the world.

Absolutely. Aileen McLeod and Jamie McGrigor both want to come in.

I have just two points, the first of which is in response to Helen Eadie’s question about CAP reform. As the European reporter on the Rural Affairs, Climate Change and Environment Committee, I know that that committee is highly engaged in the debate on the CAP reform process and is looking to take evidence from farmers and farming organisations across Scotland, as well as from MEPs. In fact, we were supposed to take evidence from our Scottish MEPs at tomorrow’s meeting of the committee, but that has had to be rescheduled. We will do that in the next few weeks, so Helen Eadie can rest assured that we will look at the issue extremely closely.

Helen Eadie might also like to know that today the Cabinet Secretary for Rural Affairs and the Environment is at a meeting of EU farm ministers in Brussels, at which CAP reform is being discussed. I look forward to the outcome of those discussions.

My second point is about public procurement. It would be helpful if we could get some information from the Scottish Government on how it is engaging with that process.

If the committee is so minded, we could write to it with that in mind.

Yes, that and the other issue that you mentioned.

I take Ian Duncan’s point about democracy and nations being forced into positions that may be against the wishes of their people.

I also note the reference in the bulletin to the Nord Stream pipeline, which will deliver enough gas from Russia directly to Germany to power 25 million households. Surely that will put Germany in an even stronger position and perhaps lead even more to a two-part EU zone.

Two-speed, you mean.

Okay—two-speed.

You are right. Other proposals are afoot to bring energy into Europe from different sides, if you like, but this is the one that, perhaps for other reasons, has been prioritised.

I do not have anything against it but I was interested in your comment about problematic neighbours such as the Ukraine. Are you suggesting that the Ukraine would charge a levy on the gas as it went through? Has Russia not threatened to cut the Ukraine off before?

This is a slightly troubling question because there have been a lot of issues between Russia and the Ukraine, usually relating to the movement of oil or the ownership of oil, pipelines or other infrastructure. Not so long ago—two or three years ago now, I think—flow simply stopped and the blackouts across central and eastern Europe that winter led to the movement for energy security to ensure that the lights kept burning. The Nord Stream pipeline is the first massive step in that direction. Other moves are afoot to bring energy from Europe’s south-eastern margins, and there is, as you know, a plan for a North Sea grid to bring renewables from Scotland and elsewhere into that area and then spread them out. There are also plans to bring energy up through the Iberian peninsula. That is all part of the recognition that energy is a fundamental aspect of Europe’s health and wellbeing.

Some people are slightly frustrated that energy efficiency is not being prioritised. Although progress has been made towards reaching all the other energy targets, which are binding, that is not the case with the non-binding energy efficiency target. You can bring in as much energy as you like but if you are just burning it away—indeed, squandering it—you must count it as a loss. Energy efficiency has to be prioritised but the fact is that member states simply do not want to do so, mostly because it comes with a cost. How do you ensure that buildings are more energy efficient? How do you ensure that your appliances conserve more energy? No progress is likely on these problems, because member states are simply refusing to make the target a binding target.

Perhaps my suggestion is more political than practical. Energy efficiencies might be expensive, but they also generate employment and manufacturing capacity and, if such measures were implemented Europe-wide, implementation costs would drop dramatically. Does it not take political will to do that?

Yes—and, surprisingly, there is none. I just cannot answer your question; your logic is sound but the member states seem to have no appetite to set any binding or time-limited targets on energy efficiency. They are not even close to meeting the current target. Although the UK will make a 9 per cent saving by 2020, the target is actually 20 per cent, which means that we are not even halfway there. Germany is not much further forward; I think that it will make a 14 per cent saving. No one is approaching the target; because it is not binding, member states are simply not prioritising the matter. You prioritise the things that are binding and there just seems to be no appetite to do so in this area.

Maybe we should send Stewart Stevenson on a recce to Europe with his climate change legislation.

You would not do that, convener.

Is the committee content to pass the bulletin on to other committees?

Members indicated agreement.

I thank Ian Duncan for that update.