Yesterday, the Liaison Committee took evidence from the Prime Minister David Cameron on the impact of the Eurozone crisis on the UK economy and public policy. Bill Cash made the following questions:

Q1 Chair: Welcome, Prime Minister, to the second of what will be three sessions this year. We look forward to seeing you again in the autumn. It is possible that there could be Divisions this afternoon. I hope not but, if so, I will have to suspend the sitting for 15 minutes per Division and hope to reclaim some time from you at the end, if that is necessary. Let us hope that does not happen.

We are taking two subjects today. The first is the impact of the eurozone crisis on the UK economy and public policy; the second is civil service reform. To open on the eurozone crisis, you said yesterday something you have said quite often: "We recognise that the remorseless logic of a single currency means the eurozone may need closer economic and fiscal integration." Do you think, following the summit, that that is what they are doing?

Mr Cameron: They are certainly planning for it because two things happened at the summit on the eurozone front. The eurozone countries agreed a set of short-term measures about recapitalising Spanish banks directly and using the stability mechanisms to buy up bonds in countries with high interest rates. Those were short-term measures, but then there was this thing called the four presidents report. Only the EU could have four presidents, but they are of the Council, the Commission, the eurozone and the presidency itself. I am glad I remembered that.

The four presidents report goes into some of the remorseless logic of banking union, greater fiscal union and greater political union. As I said in the House yesterday, while there is a remorseless logic that if you want a functioning single currency, you need to do at least some of these things, there is also, if you like, a remorseless democratic logic that it is very difficult to do some of them. It is an open argument about how fast this will move.

Q2 Chair: Do you think it should be Britain’s working assumption that that is the way things are going to go and we should, therefore, be planning what we do in our decision making and so forth on the assumption that things are going to go in that direction?

Mr Cameron: Broadly, yes, because you can see the moves towards remorseless logic; you can see moves towards banking union and some elements of fiscal union. However, it is difficult to know exactly the direction that the eurozone will go in. That is why I said yesterday that we have to show some tactical and strategic patience about this, because these are momentous things that are happening in the EU.

Countries have got to make some very difficult decisions. It is not entirely possible to be certain which way they will go. I assume they will take further steps. To put it in very crude terms, you could think of it in three different ways. Option 1 is a very rapid move to an integrated eurozone, to clear up the long-term uncertainties. Option 3, over here, is that they can’t agree anything and the project goes off the rails. Option 2, somewhere in the middle, is that they make some progress on short-term measures and some progress on integration measures. If you like, the can is kicked down the road. I suppose a lot of people would assume that option 2, given how difficult this stuff it, is quite likely.

Q3 Mr Cash: Yesterday, Prime Minister, you used one of your own famous expressions with regard to the EU. You said: "I do not believe that the status quo is acceptable". I don’t know whether you recall, but in a pamphlet I wrote and sent to you called It’s the EU, Stupid, I said that the status quo is now untenable. That was last September. So we are now agreed on that.

Mr Cameron: We should leave it there, then.

Q4 Mr Cash: We could, but I have more questions to ask about the implications of that. The phrase "status quo" raises some serious questions regarding the legal framework of the existing treaties, which you will have to answer. They come not only from my taxi driver but the whole country, judging from recent opinion polls. What do you see as the implications for this unacceptable status quo, and for the UK within the legal framework of the EU, where it appears that the EU Council, which you have just attended, as a whole, as well as certain eurozone member states, have urgently proposed a banking or fiscal union by the end of 2012? Don’t you accept that that change in the status would be a fundamental change in our relationship with the EU?

Mr Cameron: I follow you some of the way. With regard to the point I was making yesterday, on the status quo not being acceptable, what I was saying is that in my view the exact status quo that Britain has in the European Union is not acceptable because I would like to see a better balance of powers between Britain and Brussels. I should like some powers returned. That is the manifesto I stood on and you stood on and that is why I say the status quo is not acceptable. I think the point that you are making is that the current status quo is not sustainable. I do not think it is sustainable because the eurozone countries are going to have to integrate more.

Coming exactly to your point about banking union, this particular one will depend on how it is done. If the 17 countries of the eurozone bring about a banking union for themselves which, frankly, they need to do-in a single currency you need to stand behind each other’s banks in some way-and if they do that at the level of the eurozone, at the level of the 17, and if we can get proper safeguards in place, it would not be a fundamental change for us. Our banks would still be regulated by the Bank of England. Our taxpayers would be standing behind British banks not European banks. So I don’t think that would, in of itself, trigger a massive change for us in Europe.

Q5 Mr Cash: So you are distinguishing between a status quo for us and a status quo for the EU?

Mr Cameron: When I spoke about the status quo yesterday I meant specifically for us. My view as the leader of the Conservative party, with a manifesto that we both stood on, is that the status quo we have in Europe, the balance of powers, is not right. We would like to see some further powers returned to nation states. I think there will be opportunities in the future for that to happen, which is what we were discussing yesterday. The point that you are making-equally valid-is that the status quo within the European Union is not sustainable because change is needed to make sense of the single currency. I think you then go on to say that that change, automatically, will fundamentally change Britain’s relationship in the EU. I don’t go all the way with you there because as, for instance, a banking union takes place, I think we can insure that that involves the 17 countries of the eurozone, not us. I think that is the right pathway.

Q6 Mr Cash: That is very interesting and helpful. Thank you. What do you think would be the effect of closer union on democracy in the European Union?

Mr Cameron: This is a decision for those countries. Clearly in our democracy we are able to elect a Government, to set our own tax rates, to have an independent monetary policy. Outside the euro, our democracy is a lot less constrained than those countries inside the euro. But the point about what I think is going to happen inside the eurozone is that these countries are going to have make very difficult decisions about giving up areas of sovereignty and, as I put it yesterday in the House of Commons, restricting elements of their democracy. Inside a single currency, if you have mechanisms where the stronger countries have to support the weaker countries, I think you will have more controls on what you can spend and what you can tax and the rest of it. That clearly has implications for their democracy. The point I would make is that that is a decision for them; it is not a decision for us. We have made our decision in not joining the single currency partly, in many cases, and in your case and my case, I suspect, because we did not want to give up that sovereignty. But those countries inside the eurozone will have to make those difficult decisions.

Q7 Mr Cash: So they would be less democratic as a result. I should have thought that had an implication for us as well.

Mr Cameron: If, for instance, the Spanish decide to restrict what they can do in terms of tax and spending; if they restrict the level of budget deficit they are able to have; if they enter into agreements with other eurozone countries about the debts they can issue and the rest of it, yes of course that restricts their freedom of manoeuvre. But that is something that affects them. As long as we stay out of the eurozone, which I think we should, it is not something that will affect us.

Chair: Except in this respect: if they don’t do those things, we will be affected by the continuing crisis.

Mr Cameron: That is correct. We need the eurozone crisis to be resolved. When I gave out my three potential options, clearly for the state of the British economy, the option that would be best for us is early short-term action to deal with the problems in the markets and yes, some moves towards fiscal and other forms of union for those eurozone countries so the euro makes more sense, as it were. That would give a long-term calming effect to the markets and that would help us. But as Mr Cash says, that has big implications for them. That is why it is very difficult for this to happen, but none the less that I think would be the best outcome for the British economy.

Q8 Mr Cash: So what real institutional changes in the EU will need to be made, which impact not only on the members of the eurozone but on those outside such as the United Kingdom?

Mr Cameron: I think that is a much more difficult question, because you can see the sorts of choices the eurozone countries need to make, and we have talked about them. How are those choices made-is it a series of small European treaties? Is it one large European treaty? Is it what is called enhanced co-operation under the existing treaties, where some members of the European Union can go ahead and do things under the existing treaties? I don’t know the answer to that question, and frankly I don’t think anybody does, which is one of the reasons why in fashioning what I have called a new settlement between Britain and the European Union I think we need to show tactical and strategic patience. We cannot tell exactly what mechanisms will be used, how fast this process will go or exactly what it will involve, but what we do know is that big change is happening and even bigger change, I suspect, is coming.

Q9 Mr Cash: It sounds to me as though you might be slightly attracted to Winston Churchill’s statement when he said that we should be "associated, but not absorbed." Does that ring with you?

Mr Cameron: Everyone puts it in their own way. William Hague said that we should be "in Europe, not run by Europe." I have always talked about a Europe of nation states, not a superstate. I think that if the eurozone is going to survive, it will have to make moves towards a more integrated state, and we will not be part of that. You can choose your phrases accordingly.

Q10 Mr Cash: So will you call for a convention without presumptions based on the existing treaties, so that the EU can decide what kind of Europe each member state and its voters actually want?

Mr Cameron: That is a perfectly reasonable suggestion. I am not there yet, because at the moment serious and proper conversations are taking place within European countries and between European countries about what needs to be done, and I think we are only at the beginning of those conversations. How fast will the eurozone move to integrate? What will the relationship of countries outside the eurozone be to those in the eurozone? When you look outside the eurozone, you have got a mixture of countries. You have got countries such as Britain and probably Denmark, which have said pretty clearly, "We are not in the euro, and we do not really want to join the euro," and you have got countries such as Poland that are outside the euro but have said that they would like to join it. There is a lot of work to be done, there is a lot of thinking to be done and there are a lot of conversations to be had before we get to any convention.

Q11 Richard Ottaway: Prime Minister, there seems to be a rare outbreak of unanimity between you and Mr Cash over the future, but may I just explore how we are going to get there? At the December 2011 Council, we famously did not get a number of safeguards that we had requested.

Mr Cameron: Yes.


Q31 Mr Cash: It is an unholy mess, isn’t it?

Mr Cameron: No, it’s not, Bill, I would not agree with that. I think we should not be frightened of a variable Europe, with variable countries involved in variable projects. Our national interest is the single market, trade and co-operation over foreign affairs, where we have a huge amount to bring to the table. Our interest is not in being in the Schengen agreement; our interest is not being in the single currency. We have to be a bit more relaxed about a Europe of different types of membership. I thought you would agree with me about that.


Q52 Mr Jenkin: Prime Minister, I think you are proposing a very interesting and positive sequence of events-general election and mandate for renegotiation, leading to a referendum-to address the issue of the unsatisfactory status quo, but can I just test my understanding? Is the lack of safeguards for the City an example of the unsatisfactory status quo?

Mr Cameron: On the lack of safeguards, it is a permanent battle we have with Commissioner Barnier about single market regulation. So far I think that the Treasury has done an excellent job of defending Britain’s interests over CRD4 and other such directives. The point I am trying to make is that if another treaty comes forward that specifically concerns this area, the need for safeguards gets greater.

Q53 Mr Jenkin: So you are saying that as the eurozone federalises and accelerates the dynamic of integration, it actually makes the status quo more difficult for the United Kingdom. ………Mr Cameron: It depends how they do it. If you take, for instance, the banking union- I am not trying to be evasive. This is very difficult, and I spend a lot of time thinking about this. …….Q54 Mr Jenkin: No, you are being very candid.

Mr Cameron: Well, that worries me, too. If the banking union is done in a particular way through the European Central Bank rather than the EBA, which is an institution of the European Union, and if, as it goes under enhanced co-operation, there are safeguards for the single market, that is less worrying than a different way of doing things. We have to see what instruments are brought forward and what the risks are, and make our views accordingly.

Q55 Mr Jenkin: But in addressing the unsatisfactory nature of the status quo, are you talking about nibbling back certain powers and competencies here and there, or are we talking about what one might describe as a more fundamental change in our relationship with the EU? Or, is that something that you do not feel able to decide at the moment?

Mr Cameron: I am obviously going to make a speech in the autumn when I will set this out in more detail, but I have always felt that powers over things such as the social chapter and a lot of Home Office legislation are areas that I think, frankly, the European Union should not have got into-and certainly Britain should not have got into with the European Union-so those are the ones that I would particularly highlight. There is an opportunity for not just our party, as I think that other parties will want to have their own debate. As the European Union develops and as the eurozone integrates, what is the right answer for Britain? I hope that we will be able to come up with some common answers in our party. I think there is every prospect of doing that. I think this is a big debate that, frankly, all of Europe will have.

Mr Cash: Do you-

Chair: Order. I do not wish to intrude on to this internal party discussion-

Mr Cameron: I was trying to broaden it out, Chair.

Q56 Chair: Let me ask a question that actually brings us back to what we were discussing earlier. Can I be clear what your view is? Is the use of EU institutions and EU treaties ever desirable-in Britain’s interest-to deal with matters in which Britain is not participating because we are more likely to have some influence on an outcome that might affect us if it is done through the institutions?

Mr Cameron: That can be the case. It is a very good question. There are some safeguards-unsatisfactory as I think parts of the Lisbon treaty are-so that when single-currency countries are talking about the single currency, they will not stray into the single market, so there are some safeguards in using the institutional structure. But, as I argued in December, if they come forward with a treaty change that is unbalanced and that thickens the single currency but does not safeguard the single market, that is why I need safeguards or otherwise the treaty cannot go ahead. You have all the time to be thinking very carefully about the consequences of the path that they are going down.

Q57 Mr Cash: But, to come back to my first question, is it not also a case of democratic consent? Each of the member states has its own democracy, but they are effectively-you conceded as much this afternoon-moving into a position where they will cease to have democratic control over their decisions.

Mr Cameron: Yes, but-

Mr Cash: This is so fundamental that I cannot see how you can possibly argue that it does not affect us.


Mr Cameron: They have to make those decisions. The fiscal compact that they have all signed severely restricts their ability to spend and borrow, and to do many of the things that democratic politicians choose to do. They have made that decision.

Q58 Mr Cash: But it affects us.

Mr Cameron: It affects them, actually. Does the fact that Spain in future is going to be limited to a structural deficit of 0.5% really affect us? I do not think it does. We are out of that: we are not in the fiscal compact; we are not in the single currency. I do not think that that, in and of itself, affects us.