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The Real Reason Why The Government Won’t Stop Bailouts

Last Updated: Friday, May 27th, 2011

Thirty Conservative MPs voted against their Party last Tuesday over bailouts for EU countries. This was the largest rebellion on Europe-related issues since last October, when 37 demanded a reduction on Britain’s EU budget contribution. Europe remains the most potent source of Tory backbench revolts. The issue remains fissile for the Party, with its memories of divisions over Maastricht during the early years of the 1990s and over the Euro during the later ones. A ConservativeHome poll of party members last year found that 49 per cent of them want to quit the EU altogether. And the bailouts issue is scarcely going away. How bad could it all get for the Government?

Perhaps the best place to start is with the speech of Chris Heaton-Harris, who moved what was in effect a Government amendment to the Conservative rebel motion. Heaton-Harris referred during his remarks to the EU negotiations over the replacement mechanism for the European Financial Stability Facility (EFSF). Britain doesn’t participate in the EFSF, though it does in the European Financial Stability Mechanism (EFSM), the main source of controversy during the debate. Heaton-Harris noted in relation to the negotiations that “we have a veto on that matter, and are expecting great things”.

This seemed to indicate that if necessary the Government should insist on pulling out of the EFSM, and be prepared to veto the EFSF replacement were this demand not met – exactly the position of his colleague Mark Reckless, who moved the original rebel motion. So why was the amendment tabled at all? For as I say, Heaton-Harris was keen to signal to his colleagues that his basic view was much the same as that of the rebels: “my endgame”, he declared, “is to spare the UK the costs of these bail-outs, leaving them as a matter for the euroland countries.” There seem to be two main reasons: one public, one private.

The reason Heaton-Harris gave was that for the Government to vote against the continued use of the EFSM at any forthcoming meeting of European Ministers – a requirement set out in Reckless’s motion – would be useless, since Britain has no veto in such meetings, which reach decisions by qualified majority vote. This is the public reason. The private one is more complex to explain, isn’t even briefed to newspapers off-the-record – for reasons that will become clear in due course – and is the property not so much of Heaton-Harris as of Downing Street, the Treasury and the Foreign Office.

The former said that he was opposed to bailouts. This was not quite the Government position set out by Mark Hoban, the Financial Secretary to the Treasury, in his speech. He said that the “responsibility for sorting out the problems of the euro area ultimately [my italics] rests with euro area Governments”. This form of words clearly leaves the door open for bailouts. So why is the Government willing to underwrite €7.5 billion abroad at a time of retrenchment at home? True, this sum is only one per cent of the total rescue package. And British taxpayers would be unlikely to lose all of it in the event of defaults. But €7.5 billion is none the less a very large sum – £500 per household, as Reckless pointed out.

Is the Treasury confident that any money lent will be repaid? This seems unlikely, given the potential slaughter facing the PIIGS. Does it believe, then, that the consequences of not bailing out endangered countries would be worse than doing so? Jo Johnson, Boris’s younger brother and a former Financial Times journalist, described some of these in his speech: fewer exports for British firms as foreign markets contract; reduced lending by foreign banks (Santander accounts for 14 per cent of household loans in the UK) – even a second banking crisis.

Reckless would doubtless answer that all this will happen anyway, and all that further bailouts will do is prolong the agony of the PIIGS while throwing more good taxpayers’ money after bad. Perhaps senior civil servants, who are inclined to believe reflexively that bailouts are essential to prop up Europe’s financial and political settlement, disagree. But it’s difficult to believe that the “soft” Conservative Euro-sceptics who now run the Party do so. Some of them campaigned to keep Britain out of the Euro. And one of the most prominent among their number is now Chancellor of the Exchequer: after all, George Osborne was William Hague’s Political Secretary, when the latter was Tory leader. And it was Hague who warned during the 2001 election that Britain had only “12 days to save the pound”.

So why don’t Cameron and Osborne do as Reckless wants, go to the next meeting of EU Ministers, and demand that Britain be freed from the EFSM – or else veto the EFSF replacement? One should dismiss as over-hyped a reason that Conservative Ministers would like to sell to the rebels – that they’d eagerly do so were it not for the requirements of coalition. Certainly, Nick Clegg would veto any move within Government to promise an end to British bailouts. His reasons would not only be economic, but political. For an end to British bailouts would be a public vote of no confidence by the Government in the Euro.

Britain would in effect be saying: “Apologies, but as long as the PIIGs can’t grow their way out of debt, bailouts are useless: indeed, they make things worse. And the growth won’t come as long as the PIIGs are in the Euro.” Such a proclamation would be a horror not only to Clegg, a “soft” Euro-enthusiast, but also to Osborne and Cameron, those “soft” Euro-sceptics. Why? Because such a declaration of no confidence could spark the collapse of which it warned. To say that the markets would take a serious view of Britain pulling the plug on the part in future bailouts is to put it mildly. If the Euro broke up in consequence, Britain’s EU partners would blame Cameron and Osborne – personally. Who could be sure that the diplomatic consequences wouldn’t be felt for a generation?

The Conservative leadership might be inclined to take the risk. But some Government thinking seems to run as follows. “In some way, this economic situation is like that of 1992. But the politics are very different. Then, exchange rate mechanism membership was the core of a Conservative Government’s political strategy. When Britain was forced out, its credibility went. Now, deficit reduction is this Government’s core strategy. Sure, €7.5 is a lot of money. But losing it in a default wouldn’t be the same sort of symbolic defeat. There’s no great media campaign against bailouts. There’s no Maastricht Treaty to give the rebels more opportunities. Labour isn’t a credible Euro-sceptic opposition.

“So if the Euro goes belly-up and defaults happen…well, we’ll just remind everyone how wise we were to keep out of it in the first place. Above all, think about this: if the Euro’s going to be broken up anyway, why should we take the blame for it?” This is the private reason for the tabling of Monday’s amendment which I referred to earlier – and it isn’t the sort of thinking that Conservative Ministers can use in the Commons. Nor is it the kind that they feel comfortable in briefing out to journalists. But it does seem, very broadly, to reflect the way in which some Ministers are beginning to think, now that the prospect of further bailouts loom into view.

It is all very well in its way. But being unwilling to set out what you really think is a problem in politics – especially in Parliament. For the moment, the Government can contain the Euro-revolts. But Ministers face a dangerous combination: both a Government that despite its 80 plus majority is inherently fragile (as the continuing fracas over the health bill proves) and the prospect of further bailouts. It’s worth noting that two groups of Tory Euro-sceptics, between which relations are tense, voted together on Tuesday. The first are Maastricht-generation veterans such as Bill Cash and Bernard Jenkin. The second is the younger generation such as Reckless and Douglas Carswell.

Ominously for the Government, they were joined by David Davis, who caused the Government so much trouble over votes for prisoners earlier this year. And there’s no guarantee that the Whips will be able to keep “soft” Euro-sceptics on board in the event of further bailouts: its worth pointing out again that Heaton-Harris declared himself opposed to bailouts during his speech, and that the motion passed suggested that the use of EFSM or EFSF money for them is illegal. Europe has been dividing the Conservatives since the 1950s – with damaging consequences since Mrs Thatcher’s Bruges speech. There’s no sign that the differences are about to end.

Paul Goodman

 

HIGHLIGHTS OF THE WEEK FROM CONSERVATIVEHOME

A reader writes
“-Who’s side are you on? I’m just saying, I sort of feel frozen now, because before, I just pushed stuff at ConHome, and I’d got used to the people who would read the things, could even cope with the sometimes rebarbative comments, but now I feel like, like, like Tony Blair, with the heavy hand of literary history weighing down on my shoulder, like every word or phrase has to contain scintillating, hitherto un-noticed insight… Graeme Archer, Winner of the Orwell Prize for Blogging, reacting to his prize on ConservativeHome. Read more: http://is.gd/mR1pB6

Inequality will widen until banking is reformed
“We need reform of the banking system, ending the Bank of England’s privilege, to prevent another crash and give savers and working people a break. If you print money, don’t be surprised that inflation increases. If you give it to bankers, don’t be surprised that bankers get richer. Blanchflower shouldn’t be so sanctimonious about the impoverishment of the working classes – that legalised theft was all of his own design.” Oliver Cooper. Read More: http://is.gd/rmUs6V

Introducing the Yellow B**tards League Table
“On Wednesday, we reported that Tory MPs at the 1922 Committee wanted to “get those yellow b**tards”, in reference to Liberal Democrats who were criticising Andrew Lansley’s NHS reforms, having voted for it before. In today’s Mail on Sunday James Forsyth writes that 10 Downing Street is at the end of its tether in having to deal with the Liberal Democrats. “It is like negotiating with an Italian,” reports James, “You think everything has been agreed and shaken on, only for the other side to start demanding concessions before the deal goes ahead.” So, who are the real troublemakers on the Liberal Democrat side of the Coalition? Here’s a rough guide…” Tim Montgomerie. Read More: http://is.gd/UyyybV

Parliament should decide if we pay for Euro bail-outs
“Tomorrow MPs will decide whether we should accept further liabilities as proposed by the EU and the French-led IMF. These would take our Euro bail-out commitments to £12.5 billion, double the savings we have so far made domestically. I do not believe that is something which we can justify to our constituents. Even the £12.5 billion sum, itself around £500 per household, is only for Greece, Ireland and Portugal, with potentially billions more to come for other countries in the Euro. I hope that my motion will attract support from all MPs who wish to uphold the principle that only the House of Commons may approve expenditure of our constituents’ money.” – Mark Reckless MP. Read more: http://is.gd/Go0zZA

John Hemming did Britain a service yesterday
“By naming Giggs, in much the same way as Lord Stoneham last week named Fred Goodwin, Hemming raised a fundamental constitutional question: who should make the law – MPs, who we elect, or judges, who we don’t? There is a double irony in yesterday’s events. The clash between the media, the Commons, and tens of thousands of Twitter users (on one side) and the courts (on the other) has been forced not by, say, some pressing security crisis, but by who a footballer may or may not have been shagging. And the man who dramatised that struggle, thereby dragging the Human Rights Act into question, is a member of the party which most supports it.” – Paul Goodman. Read more: http://is.gd/WkTtVL

Chris Heaton-Harris explains why he watered down Mark Reckless’s motion on Eurozone bailouts
“As I explained yesterday afternoon, Mark Reckless MP proposed a motion that would have required the Government to place the EFSM on the agenda of the next meeting of the Council of Ministers or the European Council and effectively mandated British ministers to vote against continued use of the EFSM unless a Eurozone-only arrangement relieving the UK of liability had been agreed. Reckless wrote about it for ConHome on Monday. However, Daventry MP Chris Heaton-Harris – at the behest of Tory whips, according to a variety of sources – tabled an amendment…which watered down the original motion.” – Jonathan Isaby Read more: http://is.gd/cFap3V

Which bits of NHS reform really matter?
“The debate over the NHS reform bill is becoming fraught, and we are risking losing even the modest advances made late in the Blair period…Suppliers to the NHS must compete on price and on quality, subject to meeting quality thresholds. The concept that there is something bad about competition should simply be rejected and dismissed as the antediluvian nonsense that it is. Of course, subject to meeting quality requirements, firms should be able to compete on price! We want more NHS output for the same cost. Price competition doesn’t mean healthcare being shoddy or unsafe – that’s the point of having quality thresholds!” – Andrew Lilico. Read more: http://is.gd/zQeoOG

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