Unrevised transcript of evidence taken before. The Select Committee on the European Union. Economic and Financial Affairs (Sub-Committee A)

Transcription

1 Unrevised transcript of evidence taken before The Select Committee on the European Union Economic and Financial Affairs (Sub-Committee A) Inquiry on GENUINE ECONOMIC AND MONETARY UNION AND ITS IMPLICATIONS FOR THE UK Evidence Session No. 10 Heard in Public Questions TUESDAY 1 OCTOBER pm Witness: Anton La Guardia USE OF THE TRANSCRIPT 1. This is an uncorrected transcript of evidence taken in public and webcast on 2. Any public use of, or reference to, the contents should make clear that neither Members nor witnesses have had the opportunity to correct the record. If in doubt as to the propriety of using the transcript, please contact the Clerk of the Committee. 3. Members and witnesses are asked to send corrections to the Clerk of the Committee within 7 days of receipt.

2 1 Members present Lord Harrison (Chairman) Earl of Caithness Lord Hamilton of Epsom Lord Kerr of Kinlochard Lord Vallance of Tummel Witness Anton La Guardia, the Economist Q121 The Chairman: Thank you Anton La Guardia for coming. We have had an interesting day so far. Just to put you in the picture on the Genuine Economic and Monetary Union, we have seen Olli Rehn and the Bruegel Director, Guntram Wolff who was very good. We are seeing Sir Jon Cunliffe. We have an array of colleagues tomorrow. We are focusing on GEMU but also have had something on the Financial Transaction Tax, so we are always open to asides on that as well. Just to make it formal: thanks for coming. We will make a transcript of our conversation and send it to you. Please correct it and add any further thoughts which you think the committee might find useful. We are always very open to that. We are doing GEMU now, having published on banking union at the back-end of last year. We hope to finish before Christmas and present our findings to the Government. We have dug up some very interesting information so far, but our final away visit will be to Germany, to the ECB in Frankfurt. We are seeing Mr Constâncio there and hope to see members of the new Government as they come in. Anton La Guardia: They may not be in place yet. The latest news today is that they are talking about January. The Chairman: We are telling everyone to hurry up because our committee cannot wait. Lord Hamilton of Epsom: What are the chances of another election, do you think?

3 2 Anton La Guardia: German politics tends to be quite consensual so I expect they will reach a deal eventually but it could take time. It is also very legalistic. They have very long government agreements that have to be lawyerised. The Chairman: I think our own coalition Government are struggling hard with the intricacies of having elections without clear outcomes. Lord Hamilton of Epsom: We have quite short coalition agreements and partners do not agree to things. The Chairman: You will discover our political allegiances as we go along. Can I invite you first of all to say who you are and your very outstanding background, which we are hoping to employ? Let us start from there and I will ask an opening question. Anton La Guardia: My name is Anton La Guardia. I work for the Economist and write a political column called Charlemagne about European politics. That appears weekly in the magazine or the paper, as we call it. I have been here since 2010, so not from the beginning of the Greek crisis or the first bail-out. I arrived in August 2010, so in time for Deauville. Lord Hamilton of Epsom: Were you with the Economist before that? Anton La Guardia: I was there for four years as defence correspondent. Lord Hamilton of Epsom: In London? Anton La Guardia: Yes. I should say two things, particularly because we are on the record. First, I speak in a personal capacity so what I say does not necessarily reflect the views of my paper. Secondly, although I work for the Economist I am not an economist. I am essentially a political journalist. Q122 The Chairman: It is for that reason that we have asked you to come along. We are hoping you will draw on that experience and supplement all the economic and financial stuff we are getting from other witnesses. To start with an economic question on GEMU, having looked at it, what elements remain essential for the European Union to achieve

4 3 financial stability? Are there any elements that are inessential or that may either be a waste of time or negative to contributing to the ambition to achieve that stability? Anton La Guardia: Your question presupposes that we know what the GEMU proposal is. That has changed. If you read the various iterations of Van Rompuy s report, it evolved from mid-2012 to December, at which point it was more or less torn to pieces by the European Council and very little was left of it. So the question is: at what point in those proposals are we talking about? They were most ambitious at the beginning and then they were reduced as we went along. I think Van Rompuy s fundamental framework was sound. First, when he says a genuine economic and monetary union, he presupposes that the one we are in is a fake one. Secondly, dividing it into four pillars makes sense. There had been a lot of talk about a comprehensive solution. I think he helped the thinking about what the elements are of that fundamental solution. I do not have a problem with that. The one he least developed was the political union because he did not quite know what to say about it and the one he most developed was the banking union because that was already in the works and being developed. Then he had what he called a common fiscal framework, which was basically his road to eurobonds, which was killed off quite quickly. Then he had economic policy coordination economic union. That is essentially how you develop all that stuff which is not strictly financial and banking, so economic policy, labour markets and so on stuff that had gone into the Euro Plus Pact, which turned out to be quite weak and no one really talks about it any more. Things come and go in the City. The Chairman: You might like to know that we were talking about that on the train coming over. Anton La Guardia: There is supposed to be an annual summit of the Euro Plus Pact. The Chairman: That is right. Interestingly, the political union or accountability side is not in our remit. Maybe that is to the good if your observation is right that that is the one that

5 4 we have adopted quickly. But we are interested in the integrity of the other three elements. I think my colleagues will want to explore parts of that. We want to ask you about François Hollande, who has said that the problem is over and we are all okay now. Given the two points of view, do you also identify, as I think many members of this committee do, that these fits and starts are characteristic of action in the European Union especially about GEMU? We wait for the next crisis to come along before there is a fit and something is done about it, and then there is a period when we wait for the next bus of financial disturbance to come along. I also want to take advantage of mentioning the French President to ask whether you think the French have the right view of the developments there. We are very conscious that the former axis of Germany and France has rather declined over the years. We would be grateful for your thoughts on that as well. Anton La Guardia: Is it over? Again, it depends on how you define it. The financial part of it is in abeyance. The sense that the euro is about to break up has receded. We are left with an awful economic mess. Southern Europe is still in recession and you have mass unemployment. In a sense we have gone from an acute disease to a chronic one, but the chronic disease can still kill you: it can turn acute again. There are any number of things that could make it worsen. It is being held in abeyance in large part because of Mario Draghi s We will do whatever it takes, but it is untested. No one knows how solid that commitment is. Is there really an unlimited amount of money behind it? I think not, but no one is willing to test the proposition. Secondly, it requires countries to sign up to some kind of programme, which they have been very reluctant to do. Thirdly, by signing up to a programme, it requires the Bundestag to vote knowing in the back of its mind that when it votes it is unchaining the ECB. All that stuff is quite complicated and we do not know how it would play out if it were ever called in.

6 5 There is a lot of political uncertainty. Economic growth is not going to rise to the level needed to bring down unemployment very quickly. Therefore you have very fragile politics, as we have seen in Italy this weekend. The grand coalition in Austria has only just got in and the Portuguese Government are taking a hammering at local elections. The uncertainty is political and it can come from anywhere. It is not over. Yes, it moves in fits and starts. It would be nice to think that they would adhere to the principle of a stitch in time, but they tend to do only a stitch at a time and only just in time, when the thing is about to fall apart. At the moment, given the lack of pressure from markets, I do not think that things are going to move very quickly. For the French, exports are still declining certainly, their share of world exports is declining, so they still have a severe competitiveness problem. They seem to be reforming very slowly. One of the issues in the City is the degree to which the Commission or the Brussels system can turn the screws on the French and say, You really must reform. We have had a couple of skirmishes in which recommendations from Brussels have not gone down well. Last week we had Pierre Moscovici, who brought the French budget here before he presented it to the National Assembly, which was a moment. How the National Assembly will take to the Commission s views when it reports back in November I have no idea, but it is one of the things to watch. Q123 The Chairman: Stepping back to that first question if we say that political union is not within our remit of the first three which you outlined, which ones do you think are really important to do? Banking union? The supervisory mechanism? Anton La Guardia: It makes sense to start with banking union, partly because they have started with it so they might as well finish it. Secondly, as a result of Draghi s intervention, yields on sovereign bonds have come down but borrowing costs for small and medium-sized firms for banks have not, particularly in southern Europe. So the ECB s intervention has

7 6 exposed the fact that in the real economy there are still real problems of credit. That is a very good reason for solving it. The other reason is that there is a suspicion that there are still a lot of problems in the banking sector that need to be dealt with, which are being hidden because of the fear of the impact they would have on sovereign balance sheets and are therefore not being dealt with, and restraining credit. If you can realise the losses, clean up the mess and move on through banking union, that should help get some normal activity going in the economy. Q124 Lord Hamilton of Epsom: Can I pick up on the politics of where this is all going? Do you see this ever by which I mean in the next five years arriving at a point where some political party might get in in the Club Med, which wanted to pull out of the eurozone? Anton La Guardia: I would not say never. If Golden Dawn came to power, things might change in Greece. Lord Hamilton of Epsom: Communists are more likely to come to power before that, though, are they not? Anton La Guardia: The point is that the politics is fragile, and it could therefore change. On current performance, nobody wants to leave. Even the Greeks have chosen to stay in, despite the pain they have gone through. The Cypriots have endured many of the disadvantages of leaving they have capital controls on but they have stayed in, and countries want to join. The Latvians are joining next year. The Estonians have come in. The Lithuanians want to come in, perhaps just for strategic reasons, but nevertheless there is still a queue of people at the door. I do not see anyone leaving. Perhaps the country most likely to leave, not the eurozone but the EU, is Britain. The Chairman: Perhaps we will come to that. Lord Hamilton of Epsom: On the question of Germany, they are pretty pivotal on this. Do you see the German elections making any difference to Angela Merkel s position,

8 7 particularly on mutualisation? Do you think she might get pushed into something like that with the next crisis? Anton La Guardia: The logic of banking takes you to mutualisation because, essentially, you are mutualising the banking risk, which is why it is going to get harder. Supervision was the easy part because that is control and we can do control centrally, but the wallet is national and therefore very hard to pool. One of the reasons for going down the road of banking union is that in a technical world that people do not understand so well, it might be easier to do some of this mutualisation. But we have seen all those small banks in Germany say no to banking union, or at least Carve us out of it. Does the election in Germany make a difference? Only at the margins. Any German Government will function between two rails. One is, do not let it collapse. Therefore, when it looks like it is about to go over the brink, they will intervene in some fashion. The other end of it is to limit liabilities on the German taxpayer. You have seen the SPD, which came out fairly strongly in favour of eurobonds at one point, retreating from that position. If I am not mistaken, they are now left with only a vague commitment to talk about redemption bonds. Lord Hamilton of Epsom: They would not be part of a coalition agreement? Anton La Guardia: I sit here and not there, so maybe when you go to Germany you will get a clearer answer to this. I doubt that any form of mutualised bonds is going to be part of it. There are a lot of red lines that Germany has crossed over the years in relation to what has happened in the markets and how bad the crisis has seemed. After all, the debt redemption proposal was made by Angela Merkel s council of economic advisers, so it is there. It is something that I presume one could come back to should the need arise but, at the moment, I do not think that they feel the need to go there.

9 8 Q125 Lord Kerr of Kinlochard: What is your prediction of the outcome on this dossier of the December European Council? Will any more be done before the Parliament is off to get re-elected? Anton La Guardia: They will get the single supervisory mechanism wrapped up. They will probably get something called a single resolution mechanism. Will it be any good? Will it be worth its name? Will it matter? Will it be the loose network that Wolfgang Schäuble speaks about or will it be a truly integrated authority in which there are no national vetoes and which has free use of their resolution fund? I doubt it. Schäuble has this image where he says, We will start with a timber-built frame and then we will have a steel one. I think it will be a wooden one for quite some time, but something that they will sell as a resolution mechanism will be there. Incidentally, time is running out, especially if you do not get a fully functioning German Government until next year. The window to get it all finished is quite small, and then it depends to some extent on whether the European Parliament wants to play games with it. Of the other elements, nothing is going to happen on the eurobond front. There is little more that can be done on the fiscal discipline front. The two-pack is just about to kick in, and we will see how that plays out. We have the fiscal compact. I do not think anyone is in the market for more legal change on the discipline side. On economic co-ordination, the people really doing this stuff are those under troika control; they are having to reform labour markets, taxation systems and so on. But for those outside the programmes, not much will happen on that front. On political union, nobody really wants to talk about that. The only dimension is whether the European Parliament has a Spitzenkandidat, a leading candidate with which they can then campaign and say, Oh, the President of the European Commission has greater democratic legitimacy. That is all that is envisioned, and even that may prove difficult.

10 9 The Chairman: Do you think this could happen by December or by the time of the parliamentary elections? Anton La Guardia: By the time of the parliamentary elections. That was the timescale I was talking about. I may have misunderstood you. Lord Kerr of Kinlochard: No, I think you understood correctly. Lord Hamilton of Epsom: Do you think that the troika is developing a useful template for other countries that might find themselves in trouble? Anton La Guardia: It is deeply unpleasant to be supervised by the troika, and there have been internal tensions. Typically, when you call in the IMF, the Prime Minister, the Finance Minister and the governor of the central bank are in front of him or her, on the other side of the table. In this case he has the Government, represented in part by the Commission on one side and the central bank on the other side, next to him, so he cannot impose the full range of requirements that are needed. That has made management of the crisis much more difficult. You have seen hints of that in the post mortem that the IMF did on the first Greek programme. Lord Hamilton of Epsom: What you are saying is that it would have been better if it had been only the IMF it had been diluted. Anton La Guardia: The original thought when the Greek crisis broke out was that there should be a European monetary fund to deal with this. That did not happen; the Germans wanted the IMF to come in to provide credibility and act as an enforcer. They did not trust the Commission because they thought it was weak. Therefore they were brought in. Increasingly, as the crisis has gone on, you have seen the IMF turn from being the enforcer of discipline on bailout countries to sometimes being chief advocate. The people who have most pushed for Greece to be given a break, to have its targets extended and to be given a debt write-off, have been the IMF. It has become perhaps the most powerful critic of the

11 10 way the eurozone has acted. It did a lot of the work on fiscal multipliers, saying, Austerity has gone too far too fast ; it has just produced a paper on the need for a budget to provide asymmetric rebalancing in case of shocks asymmetric shock absorption. It has basically tended to push them to have higher firewalls. The IMF has wanted the eurozone to do more. It is a really interesting process, in part because the fund itself is under pressure from some of its members to say, You ve got your hand far too deep into the mangle of the eurozone; you ve got to get out and you have to restore some responsibility. Q126 Earl of Caithness: I want to take you back to banking union. Do you reckon that there is a fair chance that there will be something on the single resolution mechanism by the time the Parliament goes? Do you think that is likely given the legal questions that have been raised and also what the involvement of the Commission should be? That seems to be quite a bone of contention. If you have not got that and you also have not got anything on the third prong of banking union, which is the common deposit insurance, have we really got a banking union that is worth anything? Anton La Guardia: We will have to see what the Germans say. They raise treaty change for two reasons, either because they want something more fiscal discipline or sometimes because they do not want something and say, I can t do that because it goes against the treaties. The informal word in this town is that they have dropped their objection on the legal base for the single resolution mechanism. It has not been said in public the Germans I have spoken to have said, You can do something under the single market article so that suggests an opening. You might want to look at a Reuters report of a leak after the Vilnius informal ECOFIN. You have the other problems of the scope, which perhaps would be included. There is a hint that they would like to carve their small banks out of a single resolution mechanism. That, by definition, limits the liability of Germany, because you have only one big bank.

12 11 As I said, something called the single resolution mechanism will probably be there, not least because the European Central Bank demands it. As part of its assuming its supervisory role, it does not want to be left holding the baby. So they will have to find a way of giving the central bank something because it is about to start its asset quality review. On the assumption that there are still problems with the banking sector and you reveal them all, and you do not have a means of dealing except to unload it back on the shoulders of the sovereign, you then have a difficulty. They will want to avoid that if they possibly can. Will there be an appeal to the Karlsruhe on the legal basis? Probably. Will it be dealt with in time? Who knows? Karlsruhe has tended to let things run and then come back and said, It s okay, but only so far. It is a break in the system. Deposit guarantee is not talked about by anyone in the City, although I think it makes eminent sense. Even the people at Bruegel will say, Well, it s of secondary importance. I think if you want the thing to be coherent it is better to build things that are solid so that you then do not need to do some of the other things you were going to do outside the banking domain. A single deposit guarantee makes sense. It so happens that the Germans have not one but four different systems. They say, We do not have a single one, so why should we have a single one for Europe?. The agreement has been not to talk about it it was dropped out of the Commission s proposals. There was a vague mention of it last year in a draft of the Commission communication, and then it was dropped. Can it still be called a banking union? Yes, of sorts. As I say, it is a wooden one, or maybe a Japanese paper house one. Q127 Earl of Caithness: Just two quick questions on that. Will the proposal, which you think might get through, break or dilute the link between sovereign and ordinary banks, and what will be the first thing to be done if there is another banking crisis next year?

13 12 Anton La Guardia: I think dilute rather than break. For example, on the question of legacy assets, the creditor states are saying, These are the results of decisions taken by national supervisors. Why should we pay for it?. It will dilute in the future. The thing about legacy assets is that if you take one logical extreme it means that you cannot mutualise anything. You can only mutualise things such as a new bank and new loans in future, which is plainly an absurd position to take. There is now a sort of sliding scale, so the first hit has to be taken by the bank itself through bailing, the second hit is taken by the sovereign, then if the sovereign gets into trouble maybe the ESM can intervene. The sovereign is still in the line of fire so it does not break the link. It may have some benefit if it resolves the problem of supervisors turning a blind eye to problems in their national banks they are not supervising them but protecting them. One of the problems has been that banks have feared being recapitalised by the Government and being bailed out because of the fear that they will then run into problems with competition law and Armenia would come in and force them to divest themselves of assets. Supervisors have tended to say, Our banks are okay; you don t need to do anything. I think that as with everything else, it will be a half-built thing. Lord Kerr of Kinlochard: I just want to check that I have this right. You think that the Parliament and the Commission, before the Parliament goes away, will settle for an SRM conclusion that is not a single resolution mechanism but a network of resolution mechanisms, with no firepower and no fund but simply national funding of resolutions and individual banks, possibly with a German carve-out again, to make sure that the little banks, where the problem is most likely to start, are exempt? Anton La Guardia: Not quite. I think the cursor will be somewhere between the loose network and a single authority. It will depend very much on voting weights and arrangements and who votes when, so it will be muddy. Then there will be an initially small fund because it will have to be filled by the private sector over time. There will be a shell called the fund. It

14 13 will not have very much in it but over time it should be filled. The question is: what happens in the interim period when the fund does not have much money? If you read the ECB statements, they all say that there needs to be a national backstop. There has to be a backstop of some sort behind this because it will take 10 or 20 years for the fund to be at full power. Even then, it may not be big enough to deal with a really serious debt report. Q128 Lord Vallance of Tummel: Can I come back to asymmetric shocks? Let us suppose that there is another one. Let us suppose even that the current mess-up on the US budget gets sufficiently nasty for the financial markets to take fright and for the wholesale markets to freeze up quite quickly. What do you think the impact would be? Is this Japanese paper house capable of dealing with the freezing of the wholesale markets? What would be the political reaction and the priorities? Anton La Guardia: I have not pondered the problem, partly because one assumes that it will not go on for ever. What would happen if there was a serious shock? As matters stand now, there is not very much from the single supervisor but everything is still national. It would be like There is a famous Sarkozy quote from 2008 when he was trying to get some joint action and said to Merkel, Let s do it together. She said no and used a German expression which means that everyone must wipe their own front doorstep. He turned around and, for those of you who understand French, said, [French quote unclear.16:08:00]. I think that will be the first reaction. Then, if the system does look as though it is about to fall apart, they will say, Okay, let s get the ESM to do something. Lord Vallance of Tummel: If you look at the timetable for all these things, some of it does not get in until It is quite possible that we may have something within a matter of weeks but certainly within a matter of years. With your ear to the ground in the City, do you think that the Commission has any contingency plans? Anton La Guardia: Specifically on the US shutdown?

15 14 Lord Vallance of Tummel: An asymmetric shock of that type which, let us say, froze the wholesale markets. Anton La Guardia: The only contingency plan is a national exchequer and the only thing the Commission does not have is money. It would urge a reaction that said, We must act together. We must at least act in the spirit of all these things that we are creating, but it will still be the taxpayer and the national leaders who decide how to use the money. Now that there is an ESM, I think that would be deployed there is a pot of money there in some way if there was a seriously big shock. If the ESM is not enough, replenish it or move faster. I certainly think that big bank bailouts are a lot more difficult. I think there will certainly be an attempt to bail in, so the contingency will be to bring forward bail-in proposals, as they did in the case of Cyprus. Q129 Lord Vallance of Tummel: Can we move on to an integrated budgetary framework? How likely do you think it is that there will be some kind of euro area budget proposal next year? Anton La Guardia: The proposal started in the French finance ministry, which came up with it. The idea was to use it to pay short-term unemployment benefit. That is the way you get the asymmetry: you do not deal with the underlying unemployment, so France chooses to live with 10% unemployed. You deal with the shock of the sudden spike in unemployment but only for six months. Van Rompuy ran with it and pushed it quite hard but was eventually shot down in December Lord Vallance of Tummel: So it is dead? Anton La Guardia: That was dead. The French wanted an automatic system that just works. You create it and it operates by itself. It somehow magically evens out in the end. There is no net transfer over time. There are transfers as cycles move up and down but, over time Germany would have been the beneficiary when it was the sick man of Europe. The

16 15 Germans say, If it s such a good idea, why don t you guys, France and Italy, do it together? The French said no. They are willing to consider something small, conditional and discretionary that, for example, helps with structural reforms. This is where these contracts came in. The idea is that you sign a contract and the eurozone helps you because it is expensive to set up a new apprenticeship scheme. However, it is very small-scale and very difficult. Lord Vallance of Tummel: The other question I was going to ask you has been partly answered. You do not think that debt mutualisation will be a runner in the foreseeable future? Anton La Guardia: No, I do not see it for some years. It would make sense for two reasons. First, it is a declaration of intent a sort of political act. Secondly, it provides safe assets for the banks to hold. That is one way of breaking the cycle between banks and sovereigns. I do not need to hold Greek bonds; I can hold eurobonds. I think you can use it as an incentive. You do not say, We ll do it now. You can say, In 10 years time, we will move down this road and here is a whole series of hurdles that you countries have to jump over to get there. That is more sustainable in the long term; it gives incentives. Italy and other countries had a spur for reform to get into the euro. They did not want to be left out. If we assume that the crisis will fade away, how do you sustain pressure for countries to reform? A strong incentive for that long road could be quite useful. Lord Vallance of Tummel: Is that what you meant when you said earlier that the logic of banking union leads to debt mutualisation? Anton La Guardia: No, I said that it leads to mutualisation of banking risk. Germany thinks that about debt mutualisation of liabilities of all sorts. So the initial debate with Juncker was, Let s mutualise debt. They said no and have come back to banking union through the resolution mechanism and the resolution fund, through which you are mutualising banking

17 16 risk. That is why they are very cautious about it. The logical consequence of banking union with three pillars supervision, resolution and the deposit guarantee is to have a safe asset. The Chairman: Would a big asymmetric shock hasten debt mutualisation? Anton La Guardia: So much political capital has been invested in saying no to it that it will be the last thing that is done. It is more likely to move faster down the banking track. Q130 Lord Hamilton of Epsom: Can I question the incentive for the Italians to go for eurobonds? Basically, the Italians would want to do that if eurobonds were much cheaper than their own. Their bonds would be very expensive because the Italian economy was in trouble, so they would not be allowed to issue eurobonds. The only time they would be allowed to issue eurobonds is when their rates had come down and the incentive was not there any more. Anton La Guardia: Yes. There is a liquidity effect, which you could argue about. You could create a bigger, deeper and more liquid market, and then everyone benefits. You could set the conditions for joining Europe and taking part in eurobonds to be that, when you have reformed so far that you have become a Finn, then you can have eurobonds. Tramonte was saying, Let s have eurobonds now to try to save us from these exorbitant costs. The ECB has stepped in and brought down the yield. If you listen to Hans-Werner Sinn, he is saying that mutualisation has taken place through the Target 2 imbalances, through the central banks, unseen, which is politically more palatable. Lord Kerr of Kinlochard: Tell us about us, please. Our policy seems to be that we do not want to obstruct banking union but it must take place in ways that in no way affect the integrity of the single market. Is that an achievable aim? The momentum of the single market seems already to have faded away because most of the key states are playing another game at the moment. They have to save the euro and develop banking, fiscal and economic union.

18 17 Is our position sustainable over time as we, with a diminishing number of friends, say that what really matters is the integrity of the single market and that the job of the Commission is to ensure that that is maintained? We are asking quite a lot of Mr Barnier, are we not? Will it work? Anton La Guardia: There are many threads to that conversation. Britain would have been in a much better position had it said in 2011 that they were champions of the single market. Instead it came out with stuff about the City and financial regulation, which sort of queered the waters and made it very difficult for people who really liked the single market to ally themselves with Britain. There was always the sense that the Brits are not really after the single market any more. Secondly, more single market actually means more European Commission, more enforcement powers and so on. How would that go down in the current climate? You almost feel that the Brits are not pushing the single market that hard any more. In any case, many people do not really want to be associated with them. People who should be natural allies will tell the Brits, Can you get the Germans to sign up, and when the Germans have signed up we ll sign too. We cannot really do it just with you. From the Italians, Letta was in London trying to say, Let s do more single market we want an energy and a telecoms single market. We are ready to work with you on this. Then there is the difficult position of saying, We want more single market but we want less Europe and to repatriate powers and so on. Really on that debate there are not a lot of people willing to play that game. They may be willing to do stuff in secondary legislation I know this is not the question that you asked me, but I may as well complete it. Nobody wants to talk about competences. You might want to ask Jon Cunliffe about the interesting moment yesterday. Apparently David Lidington was at the General Affairs Council talking about the balance of competences. The Dutch were cited, and the Dutch permanent representative stood up and said, Our exercise is different from yours. Ours is about setting a line and saying that we

19 18 have gone as far as we can in certain areas. It is not about repatriation. We don t want a treaty negotiation. I am paraphrasing. If even the closest ally of Britain on this question is saying, We re not like you, that is significant. Q131 Lord Kerr of Kinlochard: Would it help if, as you were saying about 2011, there was a positive British development of the single market agenda on the table? I agree that for the Government it would have the downside of more commissioners. But one problem is that, on the very good first bit of Prime Minister s Bloomberg speech the part which people in northern Europe tend to agree with can all be done without treaty reform and by votes in the Council we have not actually put forward any proposals. So people are wondering whether we really meant all that, because we are not doing anything about it. Instead, we keep talking about the need for treaty reform, and that must be about something else because none of that stuff needs treaty reform. Is that right? Anton La Guardia: Everything that the British are saying in Europe at the moment is now flavoured by the question of treaty renegotiation. What are the Brits trying to repatriate and undo? The real question is whether anyone would listen any more. The Chairman: They think that Merkel is going to listen. Anton La Guardia: Nobody wants the Brits to leave. Everybody would rather have the British there. The French do not want to be left with the Germans on their own, and the Germans do not want to be left with the French on their own. The smaller countries do not want to be left with the French and the Germans on their own. So everyone wants Britain in order to be able to triangulate and so on, but that does not mean that they will give Britain everything that it wants. There is space for negotiation, but it is at the margins, and I am just not sure that it is sellable back home. No one really wants to undo the big compromises of the past. That is what it comes down to. The tone of the debate in Britain is, We never liked this and we want to undo it get us out. For everybody else, the point is that they

20 19 know what the compromises were and that there were good reasons why they were made. It is not perfect for anyone, but on balance it serves their purpose. Q132 Lord Vallance of Tummel: I come back to the business of completion of the single market. I find it quite surprising that the Commission document that purported to be a blueprint for genuine economic and monetary union did not even mention the completion of the single market. That is a very strange thing. So here we are negotiating with the United States in the most important trade negotiations between the EU and the US, and we do not even have an open market in services in our own back yard, which is going to make it more difficult. Does this not seem to you a good time for a demarche on the completion of the single market? Anton La Guardia: There is a deal to be struck. What can we give Britain to keep it in? Well, let us deepen the single market, and have a deeper EMU and a deeper single market. Made to a country that wants to stay in and still wants to embrace the European concept, that could be an attractive proposition. My sense sitting here is that Britain has moved beyond that. It has moved to the point where we are now questioning the free movement of workers. It is very hard to have a deeper services market if you do not want the Polish plumber to turn up. So this is difficult. Services bring people here. You do not want the Bulgarian hairdresser. It is part of the whole package. If Cameron got the integration of the telecoms market, would that solve the problem for Britain? Lord Vallance of Tummel: If you do get a deepening of the single market in services, it would undoubtedly help. It would also help growth. We are looking at this thing, which is meant to be some kind of growth agenda as well as a fiscal agenda, and it seems very foolish not to be going for it.

21 20 Anton La Guardia: I agree that one of the things that Europe can do to promote growth is to deepen the single market. The thing about the single market is that it is a bit like a garden: regulation keeps cropping up, which gums up the system. The Chairman: It has to. The market always changes, so you have to change with it. Anton La Guardia: Sorry, can I make one further point? You mentioned TTIP. The equation is almost the other way around. We can get different services, and that forces Europe to create a single market in services. It actually has a good effect on Europe. Lord Hamilton of Epsom: As you know, there is a great dialogue among Government Ministers who say that they will renegotiate treaties and bring back great powers from Europe. On the face of it, that plays well with the Tory party in Parliament. However, anybody who knows anything about this you have really confirmed this knows that it is for the birds. It is never going to happen. There is not going to be a renegotiated treaty, because you need unanimity, and once you start down that road, you will dismantle the whole structure. So can this pretence be maintained until 2015? Anton La Guardia: The discussion about treaty change comes and goes constantly. One reason why it tends to come back is that Germany at some point feels that it needs treaty change to give itself a copper-bottomed assurance against Karlsruhe. However, it also realises how difficult Lisbon was. Therefore, it has tended to go for small treaty changes. One was to accelerate the simplified revision procedure to create the ESM, and the second was an intergovernmental treaty. If you are sitting in Merkel s office, you will think, Why can we not just keep doing this? We will just keep doing small treaty changes that allow us to evolve progressively. Most of the others do not want to go down that route. The British position is premised on the fact that there must be a treaty change because the Germans want it to reinforce the Euro Plus Pact, to clean up banking union and for any number of

22 21 reasons, and therefore sooner or later there must be treaty change. But I think that unless there is a crisis it will not come. Lord Hamilton of Epsom: Does that effectively mean a new treaty rather than changing an old one? Anton La Guardia: The Germans have always been in favour of incremental change to the old treaty, as small and easy as possible, preferably with rules that mean that you do not need unanimity. The fiscal compact had all kinds of interesting innovations. It came into force before anybody had signed it, not everybody needed to sign it for it to come into force, and so on. However, the British debate has evolved a little bit and is no longer about just the treaty, although that is the most obvious way to repatriate powers because the British hold a veto. It is to say, Let us reform the EU as a whole. Let us do more, for example, to get the Commission out of dealing with the sizes of nuts and bolts, or soil quality for some reason soil quality is something that really irritates Germans. But this is small stuff. It is less even than Wilson came back with. People will be willing to negotiate and strike a deal. I just do not think that the substance of it will be enough to satisfy the huge expectation that has been created. That is my point. One thing to watch is that there is a line in the most recent Franco-German agreement that states that they reserve the right to bring the ESM closer to the resolution mechanism. That is, quite consciously, a back door to a treaty change in which you say, Okay, forget about putting this stuff to the Commission, we will put it in the ESM. The ESM is an intergovernmental treaty, so we do not need the British. It is a eurozone-only treaty, so it will involve a smaller number of countries, we do not need the British, and if you create an obstacle, we can sidestep you. Q133 The Chairman: I have one final question before I wrap this up. Tomorrow we meet Thomas Wieser from the Eurogroup. We have asked Greg Clark in the past whether

23 22 he has meetings with the Eurogroup. I think that he meets colleagues at various European meetings. How important is that? Is it a trick that the UK is missing out on by not having better relations by the Eurogroup and Eurogroup Working Group? Anton La Guardia: The Eurogroup Working Group tends to work in the background. A lot of business gets prepared there. It basically prepares for the various councils. The Eurogroup Working Group prepares work for Eurogroup meetings of Ministers. Should Britain have a relationship with it? It is very hard to argue that the British should be in the Eurogroup Working Group, given that they are not in the euro. Should they have a close working relationship? Yes, in the same way that British finance Ministers should have a close working relationship with their eurozone colleagues. At ECOFIN meetings, the Eurogroup reports back to ECOFIN and says, This is what we have done. But it is at one remove. I do not think that that solves the fundamental problem. The Chairman: Mr La Guardia, you misled the Committee. You claimed that you were not an economist, which was like Maynard Keynes writing in his passport that he was chairman of the Arts Council. If I may use unparliamentary language, you have been absolutely superb and terrific. The Committee will think about the quality of all your answers, and the sharpness with which you gave your opinions. Your have been vital in helping us make up our minds on the subject of GEMU, and perhaps a few other items as well, over the coming months. We are eternally grateful. As I said, we have put one further burden on you. We will send a transcript of what you have said today, and will ask you to correct it and improve on it if you can, adding any further thoughts that you have. In the mean time, a million thanks. Anton La Guardia: Thank you very much for listening to me.