UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1817-i

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

European Scrutiny Committee

Reinforcing the eurozone

Tuesday 7 February 2012

Professor Simon Hix and Professor Paul Craig

Charles Grant

Evidence heard in Public Questions 1 - 60

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Oral Evidence

Taken before the European Scrutiny Committee

on Tuesday 7 February 2012

Members present:

Mr William Cash (Chair)

Mr James Clappison

Michael Connarty

Chris Heaton-Harris

Kelvin Hopkins

Chris Kelly

Stephen Phillips

Jacob Rees-Mogg

________________

Examination of Witnesses

Witnesses: Professor Paul Craig, Professional Fellow in English Law, University of Oxford, and Professor Simon Hix, Professor of European and Comparative Politics, London School of Economics, gave evidence.

Q1 Chair: Gentlemen, thank you very much indeed for coming. Of course, the Maastricht Treaty, on which many of these questions turn, was in fact signed on this very day 20 years ago. The question that we are going to be looking at, to some extent, is whether the issues that are before us and this new treaty that is proposed will in fact remedy deficiencies that have occurred in relation to the question of the convergence criteria and the deficit. At the root of all this it is not just a legal question; it is also a very political question, and the eurozone crisis speaks for itself.

One or two other questions are, of course, whether or not this is an EU treaty-there are those who have suggested already on the floor of the House that it is an EU treaty and others have said it is not. The other question might be whether or not this was a veto, and that is also being debated in the public domain. There is the question of whether or not there should be a legal challenge. There is also the fundamental question about the rule of law, and whether the use of these mechanisms, which are there in this treaty entitled Treaty on Stability, Co-ordination and Governance in the EU, is justified. Will it work? Why is there no reference to an override of Article 126(10) in relation to the question of the prohibition on bailouts? We have a lot of important questions that are extremely relevant to the future conduct of the economy of the European Union and, though the UK has vetoed the treaty, there is still an impact upon us as well.

I just thought I would present that, because we have some detailed questions. I would like to thank both of you very much for the extremely comprehensive and detailed evidence that you have given. If I may say to Professor Craig, it was a virtuoso piece of analysis, if I can put it that way round, and we are deeply grateful to you. We will now move on to the questions themselves. The first question I will put is as follows: to what extent does this agreement increase the obligations on eurozone states that are not already contained in existing or draft EU rules? Professor Craig.

Professor Craig: In answering that question, one needs to look at the detail of the existing obligations. The detail of the existing obligations is contained not only in the Lisbon Treaty rules, but in the Stability and Growth Pact and, in particular, the upgrading of the relevant rules in the Stability and Growth Pact from December 2011 in the revised regulations. My own view in the light of that material is that, although there is some difference in the nature of the obligations that exist on states under the SCG-the Stability, Co-ordination and Governance treaty-and the obligations presently applicable to member states under the Lisbon Treaty and under the Stability and Growth Pact, it is not very much.

The devil is always in the detail. If you look at the detail, what you find is that, although we have a rule about balanced budgets, the detailed definition of what constitutes a balanced budget-which is the plus or minus 0.5% rule-differs not very greatly from the detailed obligations specified in the Stability and Growth Pact as revised in 2011, which is plus or minus 1%. Professor Hix knows more about this than I do, but it does seem to me that, given some of the difficulties in the actual computation of budgets, surpluses or deficits, 0.5% one way or the other is not going to be of tremendous significance. In my view, the fiscal stringency introduced by the SCG treaty, in terms of what it does over and beyond what was there before, has been overrated.

Q2 Chair: Could I ask you another question following up from that? Do you regard the legislative overlap as necessary, or do you think that there might be adverse consequences?

Professor Craig: The legislative overlap between what is there in the new "treaty" and what is there in the existing provisions of the Lisbon Treaty?

Chair: Yes, this is raised by Professor Peers.

Professor Craig: I agree with Professor Peers in that respect: I think it is a problem. In effect, even before we had this new treaty, we had what one might call a veritable wedding cake of regulatory provisions. Starting off, we had the Lisbon Treaty rules; we had the broad economic policy guidelines; and then we had the legislation made pursuant to that, some of which was applicable to all states, and some of which was also applicable over and beyond that to the eurozone countries.

The existing framework is still law and it has not been altered by the new treaty, and indeed the new treaty cannot alter those previous provisions. What we have now are those preexisting provisions overlaid by this new set of rules, and the new set of rules draws in part from the previous set of rules, though the way in which it does so is rather complicated, as I tried to explain in the written brief that I presented. It does seem to me that there are going to be real problems about transparency and clarity of the legal provisions that are going to be applicable in any particular instance.

Q3 Chair: Just before we move on to Professor Hix, I would like to ask a very simple question, which is something I mentioned in my opening. Just to get it completely out of the way, that question is: is this an EU treaty?

Professor Craig: No, it is not an EU treaty. It is not an EU treaty in the sense that it does not in any legal way modify the primary rules presently contained in the Lisbon Treaty. Unanimity is required for that and there is not unanimity. In that sense, while one might debate in rather different ways whether the veto was a veto, it was unequivocally and unreservedly a veto in the sense that the rules contained in this treaty are not and do not alter the formal rules in the Lisbon Treaty that previously existed. In that sense it is not an EU treaty.

Q4 Chair: Could I therefore ask Professor Hix to perhaps comment on some of those questions before I move on to specific questions to him?

Professor Hix: From a political point of view, the one thing I would comment on is this new treaty versus the existing legislative rules as set out in the SixPack, for example, of the economic governance legislation. What we have to understand are the incentives of why Heads of Government and why Governments would want a treaty and want a treaty basis. This is because they see that, to make economic governance and to make these fiscal constraints work, they need to have some legitimacy that is different from the legitimacy you would get from just a piece of EU legislation. That is really behind why there is this treaty. Treaties require transposition and ratification in national Parliaments, and we may see demands for referendums. In fact, we are already seeing that in some states, like Ireland. Therefore, I think if this is ratified-and that is quite a big if-it does have a different level of legitimacy and credibility from the current legislative rules. I can then comment more on whether I think it is sufficient or not.

I just had one comment: I wrote the evidence I submitted before we actually saw the text. I have now seen the final text in detail.

Q5 Chair: When we get on to the questions that we want to put to you, we will be referring to the text rather than to your previous evidence. However, I do get the impression that you are somewhat concerned about the extent to which devices are used in order to get around the difficulties inherent in the failure of the compliance with the existing EU treaty arrangements. Is that about it?

Professor Hix: Yes. Part of the problem goes back to Maastricht, the first version of the Stability and Growth Pact, the second version of the Stability and Growth Pact, the rules in the Six-Pack economic governance legislation, and now even the rules in this treaty. A common thread I see through this is: how do you design a set of procedures to make a credible commitment to balance budgets? That goes all the way back to Maastricht and all the bells and whistles that have been added on ever since then. In a sense, this is adding something completely new, which is the quasi-judicial enforcement of a balanced budget rate. We have the most restrictive balanced budget rules that you can possibly envisage and some quasi-judicial enforcement of those, but I still do not think that is credible, no matter how much you add. I still do not see any evidence anywhere in the world in democracies where courts are able to force governments to meet budgetary commitments. It is not like a court exercising judicial review over legislation, because if a court strikes down legislation, you just do not have the legislation. If a court strikes down a budget, you still have the old budget.

Chair: Essentially, what you are saying is that there is perhaps a problem in trying to achieve a political objective by using a legal method.

Q6 Michael Connarty: Professor Craig, you refer to the fact that enhanced co-operation is in the Lisbon Treaty but it is not used. You also refer to the fact that you could have a treaty like the Schengen arrangement, where it is specifically a treaty which has excluded members, as we are at the moment. If the Schengen-type arrangement had been used, would that have been a treaty that would have required ratification by all of the 27, or could that have been done without the UK having to take part-or any other country that did not want to be part of it, such as Czech Republic at the moment-and therefore not having this problem that we have? In this country our Government said that they will have a referendum lock for any change. Would the referendum lock have to be used if you used the Schengen method? I am trying to work out why they came up with the arrangement they have come up with, before we get down to the substance of the arrangement.

Professor Craig: Could I answer the question in two very brief stages? One is following on from what Professor Hix said. The political imperative from my reading of the situation back in December is that the French and particularly the Germans wanted this new balanced budget rule enshrined in primary law. They wanted it elevated above the status that it would have if it had been merely EU legislation. No one has seriously questioned whether you could have achieved the same end via EU legislation under the existing rules. For the Germans and for the Bundesverfassungsgericht, that was not good enough-or that was the argument.

Again, the political story seems to be one in which, once our Prime Minister decided to veto that, and said no, you couldn’t introduce it into the primary treaty in that way, then of course in theory it would have been open for the French and the Germans to back off and say, "All right, we’ll achieve the same ends through EU legislation." But my strong sense is that they were not inclined to do that; that would have been a loss of face politically, and they still believed in the enshrining of this precept in something at least analogous-or the closest thing they could get-to primary treaty law, which ended up as the SCG treaty. I do think it is paradoxical, though, that having gone down that route, the legal force of this will almost certainly be less peremptory than it would have been if the same rules had been embodied in ordinary EU legislation. That’s the first part of the answer.

Coming very briefly on to the second part, if the exact form of this had been enshrined in a Schengentype modification to the EU treaties, my own view is that would still have required ratification, and the consequences of ratification, by the UK. There are certain provisions of the SCG treaty that do, albeit to a relatively minor extent, modify the preexisting obligations. In that sense, it would have to be ratified.

Q7 Kelvin Hopkins: I have a small group of questions for Professor Hix. In a sense, the first two you have answered already, but I will ask them formally in any case. In your written evidence you questioned the credibility of the enforcement mechanisms. Now we have the Fiscal Compact, are your reservations confirmed?

Professor Hix: Yes, my reservations are confirmed. If Governments are faced by publics and an economic situation that demand they do not run a balanced budget, I can see them being under intense domestic pressure, and in that situation I just don’t see Governments willing to give in to the will of either the Commission, ECOFIN or the ECJ. I can see this being a recipe for real political conflict within the eurozone. One thing that really surprised me in the final text, given what they said in the statement of the Heads of Government of the eurozone states in December, was my understanding that there was a quid pro quo. The quid pro quo would be these fiscal constraint rules in return for the big bazooka-the big bailout fund: the significant increase in the EFSF and ESM-and this would be constitutionalised by putting this in the treaty parallel to the fiscal rules.

We have the fiscal rules, but I don’t see any evidence of the other side of this. I thought that was what the quid pro quo was going to be, and that was, in a sense, saying to states, "Politically, you are precommitting to have balanced budgets in return for us precommitting to have, essentially, a bailout fund that is going to help you through this." Without that precommitment, I just don’t see, politically, how this is enforceable.

Q8 Kelvin Hopkins: So it is no more credible than the Stability and Growth Pact?

Professor Hix: I don’t think so.

Q9 Kelvin Hopkins: You also referred to the lack of democratic legitimacy of the proposals. Do Articles 12.5 and 13, the Fiscal Compact, do anything to meet concerns in this regard?

Professor Hix: No, I don’t think so. I share the views of a colleague of mine at LSE, Charles Goodhart, who has written on this. I just don’t see there being sufficient political mandate for the Commission to act in this way. The Commission has sufficient political mandate to oversee the implementation of EU legislation; it has sufficient political mandate to initiate legislation. I don’t see it having sufficient mandate to essentially pass judgment on national budgets. To be able to do that, I think you would have to upgrade the democratic political legitimacy.

To be fair to the German CDU, this is exactly what they were saying. They were saying that what they actually wanted, from their Congress in November, was a more democratically accountable Commission. From their logic, this makes sense. If we are going to take a major step forward in fiscal integration, we need to take a major step forward in political integration to match that. They have had that line consistently. My understanding is that it was France that blocked that, because Sarkozy did not want a more democratically accountable Commission.

Q10 Kelvin Hopkins: Do you remain of the view that the only effective and legitimate solution to the eurozone crisis is some form of fiscal union? Essentially, you have answered that, but if you take that view still, isn’t there one other alternative that is more likely-the at least partial dismantling of the eurozone?

Professor Hix: We can follow this logic, but I am always wary of the fact that I should not underestimate the EU’s ability to find a way to muddle through. It might be quite a long time before it all unravels and before we really do see some of the internal inconsistencies within the current design. The bond markets might get bored with Europe and pay their attention somewhere else, but I still think it is not clear to me how this fiscal austerity union being set up really resolves some of the major structural problems within the EMU. It does not resolve the problem that several of the periphery states are just uncompetitive at the current lockedin exchange rates that they have. It does not resolve the fact that Germany is essentially exporting to these states and then lending money to the banks in these states. It does not add up from a political economy point of view, and I see this very much as driven by an incentive, essentially, to appease the German Supreme Court and to appease German banking opinion. I don’t think that is sufficient to make this work.

Q11 Chair: But isn’t it perhaps dangerous to do something for political purposes that purports to be within the framework of the rule of law, which is what the European treaties are meant to be all about, and then simply to use a series of devices to achieve a political solution? Does this not raise the rather difficult question about whether or not there is an integrity in the system that is actually represented by a proper rule of law rather than a purported one? Perhaps Professor Craig might like to answer that as well.

Professor Hix: I can comment from a political point of view. I don’t want to be particularly critical of Germany on this, because I can see the logic from their point of view. You have to see the difference between a German constitutional tradition and a British or a French constitutional tradition. The German constitutional tradition is very much the idea that you can write down within a constitutional framework a set of political objectives, and that will constrain politicians to achieve those objectives. We don’t operate within that sort of framework, so it looks rather odd from our perspective. But from the German perspective, it is quite consistent within their constitutional tradition.

Q12 Chair: Professor Craig, would you like to comment on that last point before we move on?

Professor Craig: The only thing I would add, and I simply don’t want to take the Committee’s time, would be that I think the question you raised is a question that has been nagging at many commentators or observers. It is the question I addressed in the first part of the paper, which I called the background principle. I think that, whichever way you look at it, the bottom line is that you have a decisional rule-you have a rule about how decisions are meant to made-that is embodied within the Lisbon Treaty. It is a rule about how change should occur, and it is a rule that says you should undertake change if there is unanimity. It also contains quite sophisticated rules for further change to be able to take place through enhanced co-operation within the framework of the Lisbon Treaty. Whatever one believes about its desirability or not, this new treaty does raise an issue of principle, which you can call a rule-of-law issue of principle, that is concerned with whether we should bear with equanimity the idea of those decisionmaking rules being circumvented by a treaty outside the fabric of the Lisbon Treaty in circumstances where the rules as to how change should be undertaken within the Lisbon Treaty are not capable of being met, particularly given that the SCG treaty can only work through the participation of the EU institutions in the way that is written into that treaty. That does raise an issue of principle, which is a rule-of-law issue.

Q13 Michael Connarty: Could I ask Professor Hix to expand a little on the reservations about the actual enforcement mechanism? The point you made was that when a court strikes down a law, the law ceases, but if you strike down a budget, budgeting goes on-income and expenditure continue to flow. Have you thought through how it might work out should the ECJ ever be called to judge on this?

Professor Hix: There is an inherent contradiction in it, because on the one hand the requirement is for the member states of the eurozone to incorporate it into their domestic primary constitutional law or, if not possible, in some secondary instrument. The idea there is that presumably domestic courts would have access to this, so the first port of call would be a domestic court enforcing these primary rules. Then there is a belt and braces, which is that the Commission could then refer it to the ECJ.

Q14 Michael Connarty: I understand from reading the treaty that it has to be another partner, so it has to be another country that basically shops an errant country to the ECJ, having read the Commissioner’s report.

Professor Hix: Presumably, if it is part of domestic constitutional law, any citizen of that state could take it to the domestic court and enforce it, or a domestic party who has recourse to a court could enforce it. My first analysis was the idea that it is a domestic court ruling on whether or not a national budget is in breach of the balanced budget rule. In that situation, I would reiterate the point: what happens if a court strikes down a budget? The Government still has to carry on running; the Government still has to carry on spending money. Presumably you would go back to the previous year’s budget, which just rolls over, and that may well be in breach of the plus or minus 0.5% rule anyway. It is not as simple as saying you give a court judicial review over legislation. It is not so straightforward.

Q15 Mr Clappison: Can I ask Professor Craig a few questions, following on from what he has said to the Chairman already, about the way in which the EU does things generally-the general framework, and acting outside that framework, which requires unanimity-and what has happened here? Is there a doubt in your mind as to the legality of giving powers, through a nonEU intergovernmental treaty, to the EU institutions whose powers have not been conferred on them by EU treaties?

Professor Craig: Yes, there is a doubt. There is no doubt that I have doubts about that. I tried to set out my thinking about this as clearly as I could at the time in the evidence I submitted, because it does seem to me that lawyers have duties as well as rights. One of the duties they have is to try to be as clear as possible about important things of this kind. My own view is unequivocally that you cannot give, through a treaty of this kind, new powers to the institutions. That is point one. That still leaves open an arguing point about whether there are new powers, and that is an issue on which people might disagree. But on the point of principle, I am absolutely clear in my mind that you cannot confer new powers on institutions, and I have set out the argument in the evidence I gave.

The perhaps more interesting point in practical terms is whether there are problems about the EU institutions using existing powers under the SCG treaty. I must admit, when I first looked at this and I read material on it out there from commentators, most people were regarding this as unproblematic. Part of the reason why they were regarding it as unproblematic is of course the very nature of the language. There is an existing power, so you think, "All right, there’s not a problem then; they are just using an existing power, so there’s no legal problem." It was only when I started just turning this over in my mind, started talking to a colleague and started probing it further that I thought, "No, this is not that straightforward." It is not that straightforward because to say that there is an existing power to do X, whatever X is, under the Stability and Growth Pact, does not per se legitimate the use of that very same power in the context of a different treaty.

Professor Hix: Do you see the powers as fundamentally different here from what is set out in the legislation that has been passed already?

Professor Craig: It does not matter whether they are different or not-it actually fundamentally does not matter whether the powers are different. What you are trying to do, and what you still need to do, is find a legal foundation for the use of those powers. The legal foundation logically has to come from one of two roots. You either say that the reference in the Stability and Growth Pact or the reference in provisions of the SCG treaty to provisions in the Stability and Growth Pact means that the provisions of the Stability and Growth Pact can be applied in this context. That is fine; you might make that argument, and that is the framing of some of these provisions of this treaty. But the fact that they are framed in that way-and my point is simply one of principle-cannot prove that the provisions of the Stability and Growth Pact can be used in that way. Whether they can be used depends upon an interpretation of those very provisions themselves.

Q16 Mr Clappison: Is part of the problem here that the Stability and Growth Pact came about within the accepted way of making and conferring powers within the EU and not this new way?

Professor Craig: Exactly, yes.

Q17 Mr Clappison: You use in your paper the image of cut and paste, which rather captures it in a layman’s way, for me anyway. Regarding these member states of the EU who are party to this new treaty, and perhaps the Commission as well, which seems to be a party to it in some way as well, do you think there is something new here in the way in which things are developing? Is this a precedent-a new development?

Professor Craig: Can I just ask for a little clarification? Do I think that the very existence of the SCG treaty outside the existing framework is a precedent?

Mr Clappison: Yes, this is a new development where EU states have come together when they have not been able to go along the traditional route, the accepted legal framework, and they have said, "Very well, we’ll go our own way and go down this route."

Professor Craig: There is absolutely no doubt that, if this is ratified, it will be a precedent in the sense that it will be a solid piece of evidence that the EU as a whole, having been blocked or stopped from achieving its goals through the normal methods of treaty revision, will have recourse to a treaty of this kind outside the existing Lisbon Treaty, and that EU institutions will be involved in it. That is a precedent.

Q18 Mr Clappison: Thank you for that. In this context then, can I ask you about Article 16, which I think you might be familiar with? It contains a commitment, it seems to me, reading it as a layman, to bring this into the legal framework of the European Union within five years. This is a commitment that these particular states who have entered into this treaty have agreed between themselves, but it will affect the whole European Union. Not being a constitutional lawyer and without knowing the exact legal constitutional effect, what it seems to be saying to me, as a layman, is: "We are agreeing amongst ourselves that we are going to go ahead down our own route. At the end of five years, everyone is going to get it anyway, even if they did not want it in the first place."

Professor Craig: I don’t think Article 16 can be read in that way, even if that is what they want.

Q19 Mr Clappison: What is the legal effect?

Professor Craig: In strict legal terms, the position on that is straightforward. Article 16 contains a commitment by the existing 25 who signed up to this treaty that they will, at least by the end of five years, try to incorporate these provisions into the ordinary primary law, which is the Lisbon Treaty. It is a commitment to try to achieve that. They cannot achieve it unless there is unanimity, so it depends on what the UK and the Czech Governments decide in five years’ time. If they decide that they don’t want these changes brought into the Lisbon Treaty, you don’t have unanimity and they cannot be brought in. I should also add that, of course, it would be open to one of the existing 25 to say, "Actually, we really don’t like the experience from the last five years, and we don’t want these rolled into the primary treaty. We don’t think this was a good idea and, therefore, we, even though we were party to this treaty, are not going to agree to the revision of the Lisbon Treaty to allow this to be folded into the Lisbon Treaty."

Q20 Mr Clappison: I take your point about the two nonmember states retaining their legal rights of veto and so forth, but this is an expression of political will, none the less, which may contain some implications for the future.

Professor Hix: If I may come in on that point, I read this the other way round, which is as security for the UK. There is an intent that this is largely temporary and their hope is this could be part of the treaties. At that point, the other member states who are not signatories-currently the UK and the Czech Republic, but there may be others who do not ratify this, by the way-are in a position at that point to then exercise a veto on whether they want this to be part of the treaties or not, and can make a judgment on how this is operated vis-à-vis the other member states. In a sense, I read this as a security device for the others as much as it is a political commitment.

This goes to your first question about precedent. The one thing that worries me more than anything else, rather than the legal precedent, is the political precedent of what this means for the EU operating a sort of super club of the eurozone member states, particularly at the level of the Heads of Government in the eurozone summit and what this means for Finance Ministers. I worry politically and symbolically about the situation of the eurozone Heads of Government meeting, with the British Prime Minister and the Czech Prime Minister waiting outside the door to be called in once they have already decided, and then going through the charade of pretending that they are now discussing things with these other member states, when actually all the signatories of these states have qualified majority. If they can come to an agreement amongst themselves, they have a qualified majority.

Almost all single market legislation is qualified majority, and they themselves have a qualified majority vote, so this sets the precedent of allowing them to get together in a room and come to an agreement. They can conceivably have an agreement that relates to single market legislation, even though, of course, it is not mentioned here. There is nothing to stop them, saying, "You can’t talk about single market legislation at a meeting of Heads of Government or a meeting of eurozone Finance Ministers without the British representatives being in the room." That sets a really dangerous precedent from the point of view of the UK.

Chair: We move on to Chris Kelly, and I think your question is addressed to Professor Craig.

Q21 Chris Kelly: Do you agree that the Commission has de facto infringement powers in Article 8? In other words, the trigger for legal proceedings is the Commission, and the member states are obliged to carry out its recommendations?

Professor Craig: Yes, I do. There is no doubt in my mind that, under Article 273-and the Council legal service agrees with this too-the Commission could not have an independent right to bring suit in its own name. For that very reason, the Council legal service devised the wording that is presently contained in Article 273. I do not believe that this is sustainable legally-that is my view. It does not mean that, if it were tested before the ECJ, they would not take a contrary view; they might. I believe that as a matter of principle it would be wrong to do so, for the very reason that you have mentioned. If there is an injunction under Article 273 and if 273 cannot be used by the Commission as prosecuting authority in its own right, what we have in the first half of Article 8 is simply a legal contrivance to try to circumvent that injunction.

It really is not open to question that this is just a way of trying to get round the fact that the Commission cannot bring the action in its own name. Once the Commission has delivered a negative report on the particular state for being in breach of Article 3(2), the legal reality is there is a mandatory obligation on one or more of the other contracting states to sue the recalcitrant state. Not only is there a mandatory obligation, there is no doubt whatsoever that the substance of the legal argument would be the negative report by the Commission. So, it seems to me from every perspective this is de facto still the Commission bringing the suit.

Q22 Chris Kelly: Thank you. Further to that, is the role of the Commission in Article 8 provided for in the existing European Union treaties?

Professor Craig: There is no provision for the Commission to bring an action under 273 of the TFEU. Indeed, so far as there is anything in the existing treaties, what is in the existing treaties points in the other direction, because the Commission is not able to use the ordinary enforcement mechanism under Articles 258 to 260 of the TFEU in relation to matters covered by Article 126, paragraphs 1 to 9 of the TFEU. Basically, if you have an excessive deficit issue under Article 126, paragraphs 1 to 9, then what the treaty says is that the Commission cannot use its ordinary enforcement mechanism in those circumstances.

Could I just add one thing in this respect, going back to something that Professor Hix said a moment ago about how this kind of case might get to the European Court? One of the initial versions of this treaty did contain an express provision whereby national courts could check whether a member state was in compliance with the correction mechanisms demanded by Article 3(2). That has been stripped out; that has been removed. Professor Hix, none the less, is still right. It could be possible in principle, even though that has been removed, for a national court to be seized of the dispute, but it is more difficult. This is because of other changes to Article 8 and Article 3(2), because the obligation on member states at the beginning was to enshrine the balanced budget principles in rules of a constitutional nature, which would at least allow a national court, if a case could come before it, something to bite on. It could look at a provision of a constitutional nature. That has been very significantly watered down now.

There is now no obligation for the balanced budget rule to be enshrined in a rule of a constitutional nature or, indeed, even of a statutory nature.

Professor Hix: I disagree with that. The wording of Article 3(2) still says "through provisions of binding force and permanent character, preferably constitutional". That is the text that I have of 31 January, although it does keep changing.

Professor Craig: What it says in Article 3(2) is "through provisions of binding force and permanent character, preferably constitutional or otherwise guaranteed to be fully respected". That change was a change expressly made by version four.

Professor Hix: No, I agree.

Professor Craig: If you look back at version four, the wording was expressly changed. Prior to version four, it said "through provisions of binding force and permanent character, preferably constitutional, that are guaranteed to be fully respected" etc. It was an express change of wording from "that are guaranteed" to "or otherwise". It seems to me unimaginable that the substitution of "or otherwise" for "that are guaranteed" was fortuitous, chance or happenstance. It is a watering down. What it now says is that you can have "provisions of binding force and permanent character, preferably constitutional or otherwise guaranteed". I cannot see how you could read it otherwise.

Professor Hix: I agree, yet "preferably constitutional" I assume means that certain member states will make this constitutional, and there is still an expectation that it should have permanent binding force. If it is constitutional as part of domestic constitutions, by definition there will be recourse to domestic courts.

Professor Craig: On the version of Article 3(2) as we have it at present, it seems to me impossible to read it otherwise than to say that, if a particular state were sued by the Commission or if a suit was brought pursuant to Article 8 saying, "You do not have a proper correction mechanism," and if the Commission in its report said, "You don’t have something in a permanent statutory form or in a permanent constitutional form," the state could perfectly well turn around and say, "That is not what is demanded by 3(2)." They could say, "We have guarantees in our normal budgetary process," and that that suffices.

Q23 Chair: I think the disagreement has more or less been resolved. Because we are limited in time, and without wanting to inhibit these excellent answers, could we have slightly shorter answers to the questions for the moment? We have somebody else coming very soon, and I don’t want to crowd him out. I will move on to the next question. In EU terms, Professor Craig, is it lawful for this agreement to prescribe such a role to the Commission? That is under Article 8.

Professor Craig: Under Article 8?

Chair: The previous question was whether the role of the Commission in Article 8 was provided for in the existing EU treaties. You have answered that, and I am now asking: in EU terms, therefore, is it lawful for this agreement to prescribe such a role to the Commission?

Professor Craig: No.

Q24 Chair: Were you surprised when you saw the legal advice to the European Council-the 10 pages of analysis-and the conclusion that seemed to include a reference to the author’s belief that Article 8(2) is compatible with Article 273? He then noted that the "substance of the draft treaty is intended to be incorporated into the law of the Union"-this is the Article 16 point-"following steps to be taken within five years at most of the entry into force". Then he says, "When this happens, Article 260 will be directly applicable to the norm concerned." Is it a slightly unusual way of approaching legal advice to make an assumption that something predicated on the basis that it might happen is then used by way of a conclusion, using the words "when this happens"?

Professor Craig: It is unusual.

Q25 Chair: That is all I wanted to find out. If such a role for the Commission is to be prescribed, would you expect all member states to have to agree to it, and if so why?

Professor Craig: A role under Article 8?

Chair: Yes.

Professor Craig: Just for clarification, did you mean that if after five years it is folded back into the treaty, or do you mean now?

Chair: Now.

Professor Craig: The answer to that is no, for the following reason: whether what is presently contained in Article 8 is lawful or not will ultimately depend on the interpretation by the ECJ of the meaning and scope of Article 273 of the TFEU, and it will depend upon whether the ECJ, if the question is put to it, finds that the present mechanism whereby the Commission, in effect, triggers the action-albeit not as the nominal plaintiff-is lawful under the Article 273.

Q26 Chair: How likely do you think it is that member states will take each other to the European Court under Article 8(2)?

Professor Craig: I think the alternative scenario of interstate suits without the Commission holding the gun, as it were, is almost nonexistent. It is simply not going to happen. Member states are not going to sue each other for breach of their respective balanced budget rules.

Q27 Chair: At least not any more than they took action under the old Stability and Growth Pact, which comes back to Professor Hix. Lastly on this section: do you see a conflict between the role of the Commission in Article 8 and the prohibition against it bringing infringement proceedings in the context of the excessive deficit rules under Article 126(10) of the TFEU?

Professor Craig: I think the very fact that you have the prohibition on the Commission bringing enforcement action under Article 126, 1 to 9, which is the prohibition contained in Article 126(10), reinforces very considerably the conclusion that to construe Article 273 as allowing de facto a Commission enforcement action for breach of the selfsame rules looks very odd indeed, which is why I said in my paper that to construe the rules under 8(2) as lawful runs the risk of coming into significant tension with the present rule in Article 126(10).

Q28 Chair: So you are not really happy with the advice of the legal adviser to the European Council?

Professor Craig: Let me just say in that respect: the Council legal service is giving something its best shot. If Government lawyers in any country are asked, "Give us a view about whether this will withstand scrutiny or not," they are going to give you the best shot they can, and I do not mean that at all pejoratively.

Chair: It did take 10 pages.

Professor Craig: Yes, and I think part of the reason they went through 10 pages is that they wanted to try to give it as good a shot as they could. Even the Council’s legal service in that document does admit that the Commission has "a very decisive role within Article 273 as it is presently formulated under Article 8".

Q29 Stephen Phillips: If I may, Professor Craig, I am going to begin by asking you to give something else your best shot. What do you think the ECJ will say in relation to Article 273 as to the legality of this proposed treaty if and when it comes before it?

Professor Craig: If or when the issue comes before the ECJ, I would think that they will, with some certainty, say that Article 273 can, in principle, be used in interstate suits. Pure interstate suits-where Germany sues Greece, or something of that kind, and the Commission is not involved-are a special agreement for the purposes of coming within Article 273. In that sense they will legitimate the use of 273.

I simply do not know what they will do about the first half of Article 8. I find that one more difficult to guess. There will be a temptation to validate it, to legitimate it, and say that the Commission is not formally bringing the action and that is good enough and therefore you can use 273. The problem with that conclusion is that it looks pretty artificial and, as I intimated in my paper in the evidence I gave, on many occasions in the past where member states have tried through various contrivances to get round a rule in the treaty by factually organising their behaviour in such a way as to minimise the likelihood of engagement with a particular treaty Article, the Court of Justice and the Commission legal service and the Council legal service have quite rightly said, "No, we are not going to allow that to happen. We will look at the substance."

Q30 Stephen Phillips: I suspect we can at least agree on this: there is at least the potential that the European Court of Justice would, effectively, strike down this treaty by saying that, in relation to the enforcement mechanisms and possibly the Commission’s role as well, "The Commission can have no role, and we have no jurisdiction."

Professor Craig: I don’t think they would say, "We have no jurisdiction," because it will still leave pure interstate suits intact. Even if they did find against what is, in effect, the first half of Article 8, I don’t think it would lead to the striking down of the entire treaty. I think they would merely say that provision is ineffective as it presently stands and that the rest can remain.

Chair: We find your answers, both of you, extremely helpful. I would like to move on now to Michael Connarty.

Q31 Michael Connarty: Article 10 refers to enhanced co-operation within the eurozone. Is it talking about enhanced co-operation by the eurozone, in other words, acting as a bloc in some way?

Professor Craig: I think that is what it is envisaging, yes. I think that is what it is envisaging in Article 10.

Q32 Michael Connarty: Within the eurozone, or acting as a bloc as the eurozone?

Professor Craig: I had imagined that this was an encouragement for those countries to make use of the rules of enhanced co-operation as they presently exist within the Lisbon Treaty.

Q33 Michael Connarty: Which was among themselves?

Professor Craig: Yes.

Q34 Michael Connarty: There are clearly ongoing and parallel debates about whether the EU will act as a bloc, and vote as a bloc, if it signs up to the European Convention on Human Rights and becomes a member. The question is, does this then impact on those people who are not in the eurozone, such as the UK, in a negative way? How do you think Article 10 is to be interpreted? Do you think it is only those within the eurozone acting among themselves-in other words adhering to the rules within the eurozone?

Professor Hix: No, I read this as a way of meeting the demands of, primarily, the French Government but also the concerns of the German Government that this Fiscal Compact is not going to be enough and there is going to need to be some harmonisation of other public policies as part of macro-economic integration. This goes along with the discussions of what was an intergovernmental agreement of the Euro Plus Pact. If they decide that the elements of that Euro Plus Pact aiming to harmonise pension provisions, retirement ages and these sorts of things are not working through purely intergovernmental co-ordination, they could try to do this through enhanced co-operation through the EU treaties. That is how I read this, and I read then the last sub-sentence there, "without undermining the internal market," as a way of appeasing the UK, who are concerned that any enhanced co-operation as a result of this would not relate. I primarily see this as enhanced co-operation relating to macro-economic policy co-ordination and not to the single market.

Professor Craig: I do not disagree with that.

Q35 Michael Connarty: Obviously you do not see the danger signals that I see, when you get people acting in a bloc, for the people outside the interests of that bloc, given-you would have heard earlier when I asked Professor Craig-that Germany was keen to have something that was even supra-treaty have control over the budgets of all of the 27 EU member states. If you have got somebody not co-operating and you are acting as a bloc-it may be a political science rather than a legal question-you use that bloc as a wedge or a battering ram or a pressure point on those who are outside to make them comply. That would be the history of how power blocs operate. That is a danger I see in Article 10: that "without undermining the internal market" is the only thing in there that you seem to be hanging your more positive analysis on.

Professor Hix: No. I think it is right that we have to consider the political as well as the legal elements of this. Legally this commits the member states who have signed up to this and who are part of the eurozone to try to use other mechanisms in a treaty that would enhance this treaty agreement. This commits them to think about the possibility of whether they do actually need enhanced co-operation, but they could do that anyway. They do not actually need this Article to do that. They could do that anyway within the rules of the treaty. In a sense this Article is largely moribund.

Professor Craig: Could I just reinforce that? I do not see Article 10 as particularly significant in that respect, just because it is merely declaratory of powers that already exist. If a group of states wish to use the rules on enhanced co-operation-and I agree with Professor Hix as to why they may wish to do so-they may wish to make more detailed rules that are formally legally binding within EU terms to carry forward the type of endeavour that they have outlined in this treaty, though that leads to complexities in and of itself. So it is merely declaratory of powers that already exist. I don’t think it is constitutive or creative of any new powers that are not already there.

Q36 Michael Connarty: Some people on either side of this argument-and I just identified myself-might harbour suspicions that having this new bloc with this new arrangement will in fact begin to impact on those people who are not in the eurozone, particularly countries like the UK that have not signed up to this agreement. You did refer earlier, Professor Craig, to some small impacts it might have on the UK.

Professor Hix: That is a major concern that I have. Without a shadow of a doubt, we are now entering a fundamentally new phase of European integration. I see this as a qualitatively different project. I want to think of it as not two tiers, but two tracks. If we recognise it as two tracks, we have a set of states that are committing themselves to deeper fiscal integration through a set of fiscal rules and, in parallel to this, some arrangements. Ultimately, I think they will have to discuss the issue of whether there should be EU bonds. They will have to discuss the issue of the exact rules and procedures for the allocation of bailout funds, and they will have to move on to thinking about how they have more quasi-judicial or constitutional rules governing co-ordination of other areas of macro-economic policy. All of this inevitably leads to a deeper economic and fiscal integration.

Q37 Michael Connarty: So, they start to act like a bloc in reality.

Professor Hix: Inevitably they will. I think this will inevitably have an impact on a range of other issues in the internal market, and this is going to be a big tension and I see this as a major concern for the position of the UK.

Q38 Michael Connarty: Is it security enough to have that statement, "without undermining the internal market", when what you seem to have indicated is that inevitably it will begin to impact on the internal market? We are not in the eurozone; we are not in this treaty; but we are in the internal market. It could be to the detriment of this country.

Professor Hix: There is nothing you can write down in law that could stop a political agreement amongst states acting together in the Council. A group of Governments can get together in the Council behind the scenes and say, "We agree that this is what we would like to happen in EU legislation"-this happens on legislation all the time.

Q39 Michael Connarty: The countries might say, "The Brits won’t like it-well, that’s tough."

Professor Hix: It is tough. If the rule says you can adopt legislation by qualified majority voting on the basis of a proposal from the Commission and, under codecision, going through a majority in the European Parliament, and they decide that they want something in the internal market because they want some internal market legislation as part of this, I think it would be very difficult for the UK to stop that.

Q40 Chair: Yes, but at the same time the question of the use of the institution still remains an obstacle to the question of whether or not it could be justified legitimately or legally.

Professor Hix: Can you clarify what you mean by that question a bit more?

Chair: Yes. If you are going to go down the pragmatic, de facto route that you have been mentioning, you still have to overcome the question of the use of the institution. If you are going to organise whatever it is that you wish to achieve within the framework of the rule of law, you have to ensure that it is justified in law, and the question of whether or not use of the institutions is a matter of law as respects the EU treaties still remains.

Professor Hix: The scenario that I am envisaging, which is purely hypothetical, is the situation where at some point the member states, as part of deeper macro-economic integration, decide they would like something as part of the internal market. People have discussed the issue of a financial transactions tax. A financial transactions tax actually requires unanimity, so it could be vetoed anyway. There may be other areas of the treaty that might relate to regulation of labour markets, for example-working time rules-and there are plenty of provisions within the treaties that allow labour markets to be regulated or de-regulated through normal legal mechanisms of the treaty. They could do that.

Q41 Michael Connarty: I think we are heading towards something. You mentioned one example. The reality is that in the EU treaty the requirement of enhanced co-operation was seen as a last resort. Article 20(2). I am concerned that this is a significant inconsistency that might change the way enhanced co-operation is used-in other words it becomes the normal way of behaving-from what was agreed in the treaties. You seem to say, "They can do it if they like," but this is in a sense putting it in as almost the normal method of doing economic political business.

Professor Craig: If that happened, it would be a real sea change. I hear what Professor Hix is saying. I can see the force of it. I think I am just not quite as persuaded that we are going to have a core of 25 or 23 or whatever states that are really going to forge a different kind of economic and political union from the three or four other states outside, for a whole variety of reasons. One is that I don’t believe that there will be unity with those states. I think the tighter rules contained within the SCG treaty will do as much to tear them apart as they will to bring them together.

Professor Hix: That may well be the case.

Professor Craig: I don’t see that vision. In any event, just very briefly, to directly answer your question: if the rules on enhanced co-operation were used in a regular fashion, it would be a complete sea change. It does not mean it may not happen. They have been used once ever since they have been in the treaty.

Q42 Chair: Could I just butt in on that, because I want to ask a very important question relating to the use of enhanced co-operation? Article 10 encourages contracting states to use enhanced co-operation to ensure the smooth functioning of the euro area-and I am now quoting what they say-"whenever appropriate and necessary". However, the EU treaty requirement is that it should be used-and I quote, again, from Article 22(2) of TEU-"as a last resort". We are concerned that this is a significant inconsistency that might change the way enhanced co-operation is used from what was agreed in the treaties. The question is: are you?

Professor Craig: On that issue, Article 10 of this treaty cannot alter the meaning of Article 20 of the TEU or Articles 326 to 324 of the TFEU. Insofar as they lay down different criteria, and they do, the provisions in the TEU and the TFEU govern. So, if push comes to shove, as it were, or if legal push comes to legal shove, Article 10 of this treaty falls. Indeed, not only is there the inconsistency that you have pointed out; it is also the fact, as other people have pointed out, that the very last phrase, "without undermining the internal market", is only one of the conditions in Article 20 of the TEU for the use of enhanced co-operation. There are other conditions-for example, that it should not discriminate between states, and about two or three other conditions that have to be met as well-and Article 10 cannot alter those conditions.

Q43 Michael Connarty: I come not as a legal person but as an economics graduate, and therefore I look at it politically and economically, but it seems to me that if you could talk about them doing things on working time and employment law, then obviously the temptation would be for some countries to move in that way in terms of taxation. Employment seems to be a very fundamental area of law, and taxation another.

Professor Hix: It is possible. The security for the UK, though, is that these provisions on taxation require unanimity. Whether it is harmonisation of tax bases or whether it is harmonisation of tax rates, these all require unanimity, so in that sense I don’t see this as necessarily threatening that particular issue.

Q44 Chair: It seems to me from some of the answers you have been giving that you have some grave reservations in general terms about the methodology that is being approached here, the objective and also the question of the legitimacy, if not the legality of it. Would you like to comment on that and also, lastly, what do you think overall the United Kingdom has achieved by exercising its veto?

Professor Hix: I am happy to go first. That is a very big question. I am less concerned legally by this, because I think where there is a political will, the EU will find a way around this. I would be very surprised if a challenge before the ECJ really threatened this. I would be very surprised if a challenge before the German constitutional court really threatened this. I am more concerned about whether or not the objectives in this are actually achievable politically, and also whether or not the objectives set out in this treaty will actually resolve some of the structural problems within the eurozone. I am concerned about those issues.

That then raises the question of what the fallout of that might be. The issue of whether the eurozone needs to take another major step forward to resolve its structural problems, and what that means for states that are not part of that, will come very quickly on the horizon. For example: should there be EU bonds? That issue is not going to go away.

I am sorry. What was the final part of your question?

Q45 Chair: What do you think the UK has achieved by exercising its veto?

Professor Hix: Having seen the text of the treaty, and having seen how the text changed quite significantly from what the text was expected to be on that night in December, I am not convinced that the UK could not have actually said, "I will agree to this on condition that I am happy with the final text that comes out." At this point it would be interesting to know whether the UK Government would have vetoed this being part of the treaty, because this being part of the treaty would not have required a referendum in the UK, because it has no obligations for the UK. This is much more watered down than was the fear of the UK Government on that night in December. I am not sure really that the veto has achieved anything in the short term. In the long term, the veto may well have led to a growing separation of European integration into two tracks, and that I am concerned about.

Q46 Chair: Could I just put the simple question about the veto to you, Professor Craig? What do you overall think the UK achieved by exercising the veto?

Professor Craig: On that point, I echo the same thoughts as Professor Hix. When our Prime Minister exercised the veto back in December, he exercised the veto on the basis of the knowledge he had of the projected agreement at that time. That was six or seven paragraphs. Not only was it a very bare document, what was in the bare document looked a lot tougher than what we have now. It really did look like we were going to have automatic, constitutionally driven correction mechanisms with real force, monitored by the ECJ and by national courts.

Now, not surprisingly, a lot of that has been watered down over the five versions of this treaty that have been written and amended between December and January 2012. Whether the UK Government would then feel inclined or less disinclined to veto this now, or whether it would feel inclined to take part in it now, is a political decision. But I repeat: in substance, the reality is what is contained in this treaty over and beyond existing obligations really is not very much, and therefore if one was concerned with substance in that sense, the fact that there is a balanced budget principle does not alter the fact that the devil is in the detail, and that means that you look to see what the definition of a balanced budget is, and that is not very different from the rules as they presently stand.

Chair: Thank you very much indeed. Thank you.

Examination of Witness

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

Q47 Chair: We are taking evidence from a number of lawyers as to the legal compatibility of the fiscal compact with EU treaties, but what, in your view, is its political compatibility? Is it evidence of an increasing trend to intergovernmentalism to a two- or multi-speed EU?

Charles Grant: I should start by saying that I do not have the legal and technical expertise that some of your previous witnesses have had. If I can add any value, it is probably on the political and economic context behind the treaty, and the general situation of the euro crisis.

I have certainly had a fear that this would turn out to be a very intergovernmental treaty. My own view is that there has been a long-term trend towards greater intergovernmentalism in the EU, for reasons we may wish to discuss, driven particularly at the moment by France and Germany having a very negative view of the Commission. Their belief, hard as it may be to imagine in this country, is that the Commission is pursuing Anglo-Saxon ultra-liberal interests. For various reasons, therefore, France and Germany have for several years wanted to turn the EU institutions in an intergovernmental direction. Their initial comments on this treaty before it was drafted implied that it would move in that direction, and you have seen that in the ESM treaty and the EFSF the Commission plays a relatively small role.

However, having seen the final treaty, people like me, who are worried about intergovernmentalism, are reassured to some degree, because the EU institutions, particularly the Commission and the Court, do play a significant role. I have to say the British debate on the use of institutions has been, in my analysis, completely wide of the mark. The Government has been criticised for allowing them to use the EU institutions. My point would be that it is very much in the British national interests that the EU institutions should be involved. We are not going to be in the room when these people discuss economic policy, and the Commission has the task of making sure that the new arrangements are compatible with the existing treaties, and that the new arrangements do not disadvantage member states outside the room or damage the single market. I am personally delighted that the Commission seems to be playing, as far as I can see, rather a large role in the new setup.

Q48 Chair: But you would none the less be aware of the question of the rule of law and the question of whether an organisation or a treaty-based organisation operating outside the rule of law, if that were the case, would be a serious matter.

Charles Grant: Sorry, could you just repeat that, please?

Chair: We are talking about a treatybased organisation, which is the European Union, which purports to operate according to the rule of law. Would you not be concerned if it were established that what they were seeking to do by an agreement between 25 member states-actually by use of institutions that belong to the other organisations-infringed the rule of law?

Charles Grant: Yes, that would be a concern. I think it is important that these new arrangements are totally compatible with the existing EU arrangements, and that there is a system of policing to make sure that they are, namely the involvement of the Commission and the Court.

Q49 Chair: What sort of agreement does this represent for the relationship between the very large member states, particularly Germany and France, and the smaller states? Can you see any question of difficulty that could arise between the bigger states and the smaller ones?

Charles Grant: There is obviously, as you rightly infer, a lot of tension between large and small. There has been a battle fought between the 9 December summit and the agreement on this agreement, treaty-whatever you want to call it-on this principle, which has been totally unreported by the British press; even the Financial Times has not referred to it. The French during the last six weeks have been trying very hard to intergovernmentalise it, which means giving a more important role to large countries, de facto-that is what it means. The smaller countries and the Commission, with some support from the Germans, have fought back. My analysis, from talking to some of the Ministers involved in the negotiations, is that the French have basically been defeated. They have lost a lot of the arguments, which is why the final result does not, as far as I can see, greatly skew the power relationship in favour of large countries against the small, but I believe the French tried very hard to do that.

Q50 Mr Clappison: What consequence from their position in the EU do you see for the UK and the Czech Republic in standing aside from the Fiscal Compact?

Charles Grant: The big danger-and I guess some of your previous witnesses have referred to it-is, if the British are not in the room when decisions are taken on economic policy, or even when discussions happen on economic policy, we will be unable to influence the discussions and unable to steer the argument. That is the big danger. I am afraid I am very traditional in these things. I go along with the old-fashioned Foreign Office view that Britain should be in the room when other Europeans discuss economic policy.

There are of course safeguards in the treaty, and legally they are not allowed to talk about the single market, but I have talked to one Europe Minister of one large member state who is generally sympathetic to Britain, and he said, "That is not going to work in practice. In practice, if we are talking about the European economy, we will talk about the single market. We will not take decisions on it; that would not be possible legally, but we will talk about it and we may informally caucus on it." That is the danger for Britain. I worry that with the arrival of these "twin tracks", to quote Simon Hix, we will not be in the room when economic issues are discussed that are relevant to the UK.

Q51 Kelvin Hopkins: What consequences do you see if the Fiscal Compact fails in its aim of helping to solve the eurozone crisis?

Charles Grant: I am worried about the economic implications of the Fiscal Compact. Clearly, I go along with the view of many analysts in this country, the United States and France that fiscal discipline alone will not solve the eurozone’s ailments and that there is a problem of a lack of growth and a lack of demand in southern Europe. This Fiscal Compact seems to essentially outlaw Keynesianism, which is not to say that fiscal discipline is not needed, but you need fiscal discipline plus efforts to promote growth.

The only possible reason for having this Fiscal Compact is to make the Germans feel more relaxed that southern countries will not spend too much, and the Germans will then feel more relaxed about shifting their policies towards the eurozone, namely on the ECB, on the size of bailout funds, and on eurobonds. I think there is some tentative evidence that the Germans are shifting their policies, at least on the first two things I mentioned. They are quite relaxed about the ECB’s more interventionist role; they are going to agree to a bigger bailout fund, namely that the ESM should exist at the same time as the EFSF. They are not really moving on eurobonds, but that would take a long time anyway.

As far as I know, of the 25 countries involved, probably 24 of them think the Fiscal Compact is a pretty silly idea in itself. It is only relevant in the sense that it will persuade the Germans to shift their policies.

Q52 Chair: Before you came to the witness stand, you heard the discussion with Professor Craig and Professor Hix regarding enhanced co-operation. Did you form any sense of where you thought the question of enhanced co-operation was going? Did you have any sense that there were problems there that would concern you?

Charles Grant: I did hear some of that conversation. I am not too concerned, because I think I would agree with Professor Craig that the existing EU treaty’s rules on enhanced co-operation would still pertain, that they are quite strict and that they do not allow any kind of enhanced co-operation that could damage or impair the single market. I think he said it has been used once. I thought it had been used twice: once on family law and once on the patent. Perhaps the patent one has not been fully finalised, which is why he said once. It seems to me that the Commission has to approve enhanced co-operation before it can happen, and the Commission would not want enhanced co-operation to happen if it was creating obstacles to or impairing the operation of the single market, so I am relatively relaxed about that.

Q53 Michael Connarty: I had taken those questions to put to you as someone who is coming from an economic reform perspective. The point to be made is that the compact says to use enhanced co-operation "to ensure the smooth functioning of the euro area…whenever appropriate and necessary", but the treaty and all of the references to the articles in the treaty say that the requirement is that it should be used "as a last resort". Now, there has been a sea shift or they have crossed a Rubicon, it would appear to me, from where it is used only as a last resort-it is necessary-to where it has become the method of operation. In any economic arrangement, whether it is in the private sector between companies or institutions or whether it is between Governments as economic units, the people who are in the deal look to their interests first before they think about the consequence for those outside the deal. Given that most of the people who are now in the EU seem to be in the deal and the UK and others are outside it, that gives precedence and more power to the eurozone countries, clearly. It does seem to me that you are being optimistic that somehow the Commission will think always of the people who might be outside who would be affected by something that would help the eurozone. Clearly, they set out in this process to have a treaty governing all 27 countries. They did not get it, but continued with the project in a different form, even in a watered-down form, as has been said of this fifth version that we have before us now. But it does seem to me that the first consideration will be: "What is good for us inside the deal, rather than those outside?" You say the Commission will somehow be disciplined and always look at the interests of the internal market for the 27. If they think it is better for the internal market, for example, to have common tax bases or even common levels of taxation, including particular business taxes, then why should they not pursue that? Or employment decisions: we would see that as the interest of the internal market, even though it might not be what is wanted and would be resisted by those who are outside the eurozone. I would like you to expand on it. Do you have evidence that leads you to believe that the Commission will act in anything other than a single-minded, competence empowerment position, which it has always done in my view for the last 25 years?

Charles Grant: You make some fair points. The one area where perhaps I do see the kind of danger that you refer to is banking supervision-financial regulation-because arguably the interests of the eurozone countries there are to have a much more centralised system of supervision, which probably would not be in the interest of Britain because we are outside the eurozone. One could conceive of the eurozone countries trying to have an enhanced co-operation on banking supervision, which would have implications in the UK, though it would not necessarily be damaging to us if we are not part of it. I have tried to think of other areas where this might happen. I have not thought of many other than banking supervision.

In general you are assuming, Mr Connarty, that the interests of the 25 or at least the 17 friends are coherent and cohesive and similar, which could be the case some of the time but, as one of your earlier witnesses said, they have very different views on many economic questions. It is not just the Irish who do not want to harmonise taxes, it is most of the Central Europeans as well, so there is a big split down the middle on that one. On the single market, the Swedes and the Danes, who will be inside this group, and most of the Central Europeans and the Italians, so long as Monti is there, are passionate for the single market.

We should not forget that Britain does have quite a lot of friends despite the fact that on the morning of 9 December we were isolated. Since then there has been a big effort to try to build bridges to us and work with us. A lot of people understand that an EU dominated by France and a few other protectionist countries would be disastrous and not in their interests. I see other countries going out of their way to try to not do things that would damage the market or damage British interests.

As for the Commission just pursuing the interests of the majority, I agree that it could, perhaps. On an issue like financial regulation, if it thought that the interests of the fiscal compact countries were different from the British, it might well pursue their interests, but in general, I perhaps have a different view of the Commission. I think it is a stickler for the rules most of the time and does believe in the single market, and that puts it inherently in a more similar position to the British than the French on many issues, which is why if you ever go to Paris you will find that the Commission is hated there much more than it is hated in this town, and the same could apply to Berlin.

Q54 Chair: If we go back to your comments on the events of 9 December, those events could be seen as the example of political will coming into conflict with the community of law, and political will won the day. Where does this leave the ability of a single member state to rely on the use of institutions to be limited to what has been agreed in the EU treaties as a whole?

Charles Grant: As I have already said, I think the new arrangements reassuringly seem to be based on very similar arrangements to the EU as a whole, with a strong role for EU institutions, which should ensure that the interests of all parties are protected. I accept that, because this is a more intergovernmental set of arrangements than the EU per se, there is a risk that the new arrangements will be driven more by political will than legal process, which is why, from my point of view, it is unfortunate that this has happened-that we have these twin tracks and that the UK is outside.

What can one member state do to ensure process is defended? One thing we can do, obviously, is use the rules as they are. Enhanced co-operation, for example, cannot happen unless it happens under the EU’s own arrangements. The other thing we need to do is more political: we need to have friendships and alliances and people who agree with us. Under governments of the left and right in this country, we have not been very good at building friendships and winning allies. In practice, because the EU is about power as well as rules, what is needed to promote British interests in the EU is a network of friends and allies who will help us when we need help. That is what we have not been very good at doing.

Q55 Kelvin Hopkins: If I return to the Fiscal Compact and austerity being forced upon weaker nations and so on-your emphasis is economic like mine-isn’t the only real solution to allow states to leave the eurozone, recreate their own currencies and devalue to regain competitiveness, and to retain currency flexibility after that to survive? Austerity is just going to drive them into the dirt, isn’t it?

Charles Grant: I think that is a very fair question, and with hindsight it is obvious that the southern European countries should not have joined the euro because they are not competitive, they are not flexible and they cannot adjust to the strains of being in the euro. But just because they should not have joined in the beginning, it does not mean it is necessarily right for them to leave now.

My own view-and I have written this-is that probably Greece should leave, because Greece is a special case. It seems incapable of adjusting easily; the structure reforms that the EU has been asking for for the last two years have not been implemented. I am not sure about Portugal, and I think Spain and Italy are very different. They have quite considerable economic strengths as well as problems, and with a bit of good governance and good reform, they could do what is necessary to stay in the euro.

One key question is, of course, if Greece leaves the euro, does the whole pack of cards collapse? I have talked to some of the best economic experts on this and they do not agree. Some people think a Greek departure would lead to a kind of run of everybody in Spain and Italy to take their money out of their country, and the markets would lose confidence in the ability of the euro to survive. My own view is as long as the firewall is sufficiently large, the bailout funds are there and you have good policies in place, probably the eurozone could survive a departure of Greece. Nobody knows and the best experts disagree on that question, which is why everybody is keen to keep Greece in for now. In any case, the firewalls are not yet fully in place.

Q56 Michael Connarty: In the context of both what you heard and what you have said, what overall do you think the UK achieved by exercising its veto-and I am not just asking for your assessment of what they achieved in a positive sense? What do you think they achieved overall by exercising their veto and preventing this being a full EU treaty?

Charles Grant: To be honest, I don’t believe it achieved very much at all. The request for a special deal defending the interests of the City was justified, because there is a real problem that, with qualified majority voting, countries that know nothing about financial markets and have no interest in them-and certainly have no interest in Britain having large financial markets-could outvote Britain and damage the UK one day. It has not happened yet; we have never been outvoted on a significant piece of financial regulation, but there was a real risk, so I think the British Government was quite justified in saying, "If you want this new treaty, let’s try and see how we can protect the City’s interests."

I happen to believe that the particular tactic they chose was the wrong one, namely asking to change voting rules. I would have gone for something like an emergency brake; something a bit softer and vaguer and more fungible. I don’t think it was ever likely that the others would agree to change voting rules on single market issues. Having said that, they failed to achieve that protection for the City; the City has got no particular protection. I believe the main consequence of 9 December is that other countries will get together and discuss the European economy and economic policy and probably the single market, and we are not going to be in the room. That is potentially injurious to the British national interest.

Q57 Chair: If we were not to have exercised the veto and we were therefore party to all the rules set out in this Treaty on Stability, Co-ordination and Governance in the EU and it was actually an EU treaty, would you not accept that the consequence of that would be that we would have imposed upon us a series of rules relating to the question of the running of our economy and all the changes that are being made? We would then have less control as an independent nation state in this context. Would you agree that would be a big change of such a kind that would warrant the exercise of the veto, even though the reasons that were given were to protect the single market and the City of London?

Charles Grant: I would not agree with that analysis, no. As far as I understand it, if Britain had been part of this treaty, we would not have been subject to the fiscal discipline-the particular rules that I think many of us agree are probably not desirable. In the past few days I have talked to a Swedish Minister who says that he has no desire to have these rules applying to Sweden, and he believes that as part of the treaty Sweden will not have to follow these particular rules and certainly would not fact penalties for not following them. I think Britain could have been part of this treaty without losing its ability to run its own economy in the way it wished, so long as it did not want to join the euro.

Q58 Chair: That is the question, because under the arrangements of the Maastricht Treaty-and I hesitate to remind you that it was 20 years ago to the day that it was signed-the provisions relating to monetary union are described as irrevocable and, furthermore, although we have an opt-out from it, it does not mean to say that, short of a resolution in the House of Commons, we are not actually part of the framework. We have the framework which gives us the opt-out, but in terms of the legal construction of the Maastricht Treaty we are still actually part of that framework.

Charles Grant: Yes, but I don’t see anything in the treaty agreed a few days ago that would impose extra constraints on the way Britain could run its economy. I don’t see any provisions that imply that.

Q59 Chris Heaton-Harris: I just wonder if you see any sort of danger for us in the extension of the competence of the institutions, or part of the institutions, in relation to the co-ordination of economic policy?

Charles Grant: I think that was a contentious issue during the negotiation of this treaty, and I believe the French tried very hard to do so, even at one point saying that this article on co-ordination could include discussion of the single market. This was one of the battles I referred to earlier, whereby the French tried to push the treaty in an intergovernmental direction, in a broader direction, in a direction where they would like to talk about anything at all, and other people-the Commission, Britain’s friends, and the Germans-fought back and defeated the French on that point.

As it is worded now, I think there is the danger that they will talk about the single market. As I said, one Europe Minister of one large country who is a friend of Britain said to me, "We will talk about the single market, whatever the treaty says. What we cannot do, of course, is take decisions on it, but we will talk about it." That is why this treaty in some ways could be bad news for Britain, because we will be less able to steer the discussion if we are not in the room. I regret very much that we don’t seem to have got any observer status. I don’t know why we have not demanded that. Perhaps we would not have got it, but it would have been nice to have the right to observe and even speak when our own interests are touched upon by these new arrangements.

Q60 Chair: Picking up the point that you have just made about the use of qualified majority voting in relation to the single market, you are obviously aware that there are, I think, 213 votes of those countries within the eurozone and 131 not in the eurozone. Prima facie, but not necessarily consistently, there is a union between the possibility of a union and the continuation of the use of qualified majority vote by those in the eurozone to outvote the others. However, there is also the fact that there are certain member states not in the eurozone who have indicated that they would be inclined to vote with those in the eurozone on the single market questions. For practical purposes, cutting through all the opaque legal provisions, there appears to be a considerable number of states who would continue to use their voting arrangements in a way that could be inimical to British national interests. Are you familiar with the work of Professor Roland Vaubel, Professor of Economics at Mannheim University? He argues that there is a process of regulatory collusion that operates within the EU so that certain blocs of member states achieve their objectives. Do you ever feel that that is something that does happen, and that therefore, to protect the single market, you really do have to be extremely vigilant, and furthermore that the use of qualified majority vote could be, in certain circumstances, extremely disadvantageous to the UK under the arrangements prescribed by this treaty?

Charles Grant: I am much more relaxed about that than I was before the arrival of Monti. Now, Monti may not last forever. We have a large member state with a Prime Minister who is passionate about the single market and who wrote a report on the market a year before last, which is essential reading. He is an integrationist, yes, so not everybody in this country would agree with that side of his thinking, but he is passionate about the market. This has changed the balance of power hugely.

France is quite isolated now. There are discussions going on at the moment between the British Government, the German Government, the Italian Government, the Swedish Government and the Polish Government on how to revive the single market programme-how to push it into digital goods and into services. The risk of us being outvoted on these issues now is significantly reduced. Now, if Berlusconi returned, that would change things a bit, but you have very few Governments now in the French camp of resisting liberalisation of services. Things will happen in the next year or two to promote the market, because Britain’s friends see this as a way to bring the British back on board.

I don’t see much danger of the eurozone countries colluding to push through antimarket measures. That is not the way the balance of power is shifting at the moment. Of course, things could change, but at the moment things are shifting rather in the opposite direction.

Chair: Does anybody else have any further questions? Thank you very much, Mr Grant.

Written evidence submitted by Simon Hix, Professor of European and Comparative Politics, London School of Economics and Political Science

Written evidence submitted by Professor Paul Craig

Prepared 9th February 2012