And then there were the political consequences. I soon came to see that our European neighbours, predominantly Germany, would want to change the EU treaties to deal with the crisis. If they were going to have to pay to fix the crisis and save the euro, they would be looking to strengthen the ‘Stability and Growth Pact’ in a number of different ways. That was something we would all have to get through our respective Parliaments.
I hoped that no powers would be ceded from Britain to the EU, so the referendum lock wouldn’t apply and no referendum would be triggered. But the situation would need watching very carefully.
And you didn’t need a crystal ball to see that some Eurosceptic MPs, still smarting over Lisbon, would ignore whether or not the referendum lock applied, and just block any such treaty out of frustration with the whole EU system. What’s more, they would see the door open to their longed-for idea of treaty change and say: ‘If they can change treaties to sort out the Eurozone, why can’t we change treaties to get out of the Social Chapter, get rid of “ever closer union”, or get some of our national vetoes back?’
Moreover, as a Eurosceptic I thought it was a completely fair question. But such changes would be hard to achieve in coalition, and even harder in the midst of a global financial crisis.
So I had to manage a delicate balancing act to help unblock a currency crisis that was hampering Britain’s economic growth, while not standing in the way of any necessary treaty change that might help resolve the Eurozone crisis.
And so it began.
On 25 March came the first big European moment of 2011. I went to the European Council and agreed a small amendment to the Treaty on the Functioning of the European Union that would allow the creation of a European Stability Mechanism (ESM), worth €500 billion. This was basically a new bailout fund. It was for the Eurozone only. Britain would neither pay in, nor take out. But it was treaty change. The door was now open.
I saw straight away that a process was beginning that might allow us to make positive changes, changes I believed that Britain did urgently need. I also appreciated that without such changes it would be hard to get Parliament to go along with the moves Europe wanted to make. This wasn’t just about managing the parliamentary party (although that is essential in a parliamentary democracy). It was about responding to a growing public mood that couldn’t just be ignored.
I refer to the ESM as a ‘new’ bailout fund because the European Commission was already providing bailouts through an existing mechanism, the European Financial Stability Mechanism, or EFSM. This was the Commission at its most brazen: employing an article of the Lisbon Treaty which was meant to offer financial assistance in the case of natural disasters or exceptional occurrences. In other words, they were using something intended for the aftermath of earthquakes to prop up the euro.
What was wrong with that? Well, because this article was an EU mechanism, not a Eurozone one, the UK was expected to contribute. We could not block it, either; decisions were made by qualified majority voting, which allocated votes according to a country’s population. If we opposed, we’d lose.
On the Sunday in the middle of the coalition negotiations, with Alistair Darling still chancellor, he phoned George from the meeting of European financial ministers and consulted him. George told him he shouldn’t commit the government to a bailout. Our position was simple: while we didn’t rule out bilateral loans, or assistance through the IMF (both of which we did agree to), Britain wasn’t in the Eurozone and so shouldn’t be part of Eurozone bailouts. Even so, Labour did end up signing us up to the first Greek bailout by the EU.
On taking office, my team debated what sort of positive change this open door might allow us to get through. A note William Hague wrote to me said: ‘We have to propose something significant enough to satisfy UK public opinion, but not so unpalatable to our own EU partners that we end up being isolated and blamed for blocking the German proposals to underpin the Eurozone.’
I saw this as a moment to get one thing sorted. I told our fellow member states that our ratification of the treaty change was conditional on permanently stopping the Lisbon Treaty being used in this way; what I legitimately described as ‘getting Britain out of the euro bailout mechanism’.
It worked. It was a win for Britain – a major achievement. I had repatriated one power from Brussels to Britain.
But – and there was a but – it was not a legally binding change to a treaty. Rather, I got an explanatory note added to the text of the treaty. In a manner that was repeated over the next year, EU lawyers were mobilised to explain that it was not legally possible to make the changes I wanted.
This may have seemed a mere technicality, but it mattered. The Eurozone got the treaty change they wanted; I didn’t. It was a sign of things to come. Whenever there was pressure to transfer powers to Brussels, the lawyers always found a way, but when I wanted to take powers back, those same lawyers always opposed it.
Why couldn’t I get something so small and simple? The truth was, they didn’t like UK exceptionalism – ‘extrawurst’, or ‘extra sausage’, the Germans called it – as in the Brits always wanting a bit more than everyone else. They hated the fact that we would not join the euro. I would say to them: ‘Sterling is my currency, and the euro is yours. There are “ins” and “outs”.’ They would reply: ‘You are a member of the European Union, and the euro is the currency of the European Union.’
For them, there were no ‘outs’ – there was simply Britain being an irritant by keeping the pound. Our opt-out got us out of using the euro, but not of propping it up, because for them the single currency was at the very heart of the EU. It was almost theological – and our position thus wasn’t simply a disagreement with the others, it was a heresy against the scripture.
None of this was new. From Thatcher’s rebate to Major’s opt-outs, Britain had always been the awkward one in the club – something that was celebrated by the British press and Conservative backbenchers, and derided by Europeans. And my EU counterparts didn’t like the fact that – as they saw it – I was pushing for more on the back of emergency measures to deal with the crisis in the Eurozone.
However, this time Britain’s intransigence was a footnote, not the main story. As often happened in the EU, the big division wasn’t Britain versus the rest. It was between north and south, between those in the Eurozone who wanted greater fiscal discipline and a rigorously independent central bank – the Germans, Dutch, Luxembourgers and later the Finns and Estonians – versus those who wanted greater solidarity, like the Italians, Spanish, Portuguese and Greeks.
I saw this play out during my earliest European Council meetings in smoke-filled rooms (literally – I once counted eight leaders all puffing away).
The drill was always the same: arrive at the clinical Justus Lipsius Building in Brussels and make a brief statement to the banks of television cameras outside. Attend the main meeting around the gigantic hexagonal table to hear a report from the president of the European Parliament. Then pose for a ‘family photo’ with your fellow leaders before returning to the hexagonal table for the first leaders-only working session.
These started with often lengthy reports from the president of the Council and the president of the Commission, often followed by the president of the European Central Bank and the president of the Eurogroup. The fact that you’d often heard from five different EU ‘presidents’ before the lowly leader of a sovereign state got to say anything spoke volumes about the way the organisation worked – or didn’t.
At 8 p.m. or thereabouts the proceedings would break for everyone to reassemble on the eighth floor for a working dinner. These rarely started at the allotted time (nothing in Brussels ever does), and leaders would take time to deal with other matters in their delegation rooms – or in some cases assemble in the bar opposite the dining room for a drink and a gossip. When these dinners finally got under way they could – and often did – stretch on in
to late nights and early mornings. I would spend any downtime in the UK delegation room on the sixth floor.
The ‘artwork’ throughout the building had a strong Belgian, surrealist feel. A large neon sign outside our office always made me laugh when I passed it: ‘Order Emerges Again and Again from the Magma of Chaos’.
The contrast between the vital subjects under discussion and the grandiose but dysfunctional way this organisation addressed them had a contradictory yet consistent effect on me. I became more disillusioned about the way the EU worked, yet more convinced that, for the sake of our national interest, we had to remain a member of it.
I could see the power of cooperation with allies. I knew that decisions would be made without us even if we weren’t there. I came to understand how difficult it could prove to work bilaterally with each country if we refused to accept the way they wanted to work as an integrated unit. All this while my frustrations grew about both the procedure and the intransigence.
At both meetings and dinners it was ‘leaders only’. Just a handful of EU officials were allowed in the room, and officials from member states were excluded. Therefore it was essential that you were there, completely on top of your brief, using every opportunity to push your positive agendas and watching like a hawk for anything that went against your national interest.
I used technology to keep my team abreast of what was happening. A BlackBerry Messenger group for all my key officials was set up before any meeting started. If new documents were tabled I could get messages back to the team. Other delegations would wander up to the British team outside the meetings because they were usually the best-informed about what was happening inside the leaders’ meeting.
I’m not sure everyone else was as engaged. Sometimes I would sit there and count how many people around the table were asleep. Sarkozy would often be reading the French papers. Once Merkel had to be told to turn the football down on her laptop because she’d forgotten to plug her headphones in.
At the early euro crisis meetings I had some sympathy with the chain-smoking southerners in the Eurozone – Zapatero of Spain, José Sócrates of Portugal – and (the decidedly anti-smoking) George Papandreou of Greece. Yes, they had overdone it in the so-called good years of early Eurozone membership, but they were now being throttled by the conditions that the Commission (effectively Germany) had imposed on them. Their interest rates were going through the roof, their economies were tipping towards another recession, and their political positions were being threatened by emerging populist parties.
Theoretically, there were two approaches that could have been taken to ease the crisis. You could jettison the weaker members of the Eurozone, allowing them to devalue their currencies and trade their way out of trouble, leaving the remaining members to form what economists would call an ‘optimal currency zone’ of like-minded, mostly northern European countries. Or you could accept that far greater coordination of fiscal and monetary policies would be needed to make the Eurozone work, starting with the ECB letting it be known that it would do ‘whatever it took’ to defend the euro.
Yet Germany, the dominant player, with so much at stake, couldn’t seem to make a decision. When I argued with Angela Merkel that it might be better to let Greece leave the euro, she said she was undecided whether this would be ‘throwing off ballast to allow the rest in the balloon to rise’ or ‘knocking over a domino’ that would lead to a collapse of other weak member states. The ‘ballast versus dominoes’ argument raged inside German political circles, and the portmanteau word ‘Grexit’ – Greek exit from the Eurozone – began to creep into news commentary. But nothing happened. Meanwhile, in the weaker economies interest rates soared and unemployment rose.
Germany’s indecision over what to do about the Eurozone was, frankly, brutal. In October 2011 I decided to opt for some ‘public diplomacy’ – in other words, telling the Europeans, via the press, to get on with it. The course we advocated, via a Financial Times interview, had three parts.
One: the Eurozone shouldn’t rule out ejecting the weaker members, to set them free from these impossible constraints. If it did, it should follow the ‘remorseless logic’ of greater fiscal union and burden-sharing. What it mustn’t do was continue to fail to choose one course or the other.
Two: it should recapitalise the Eurozone’s troubled banks and stress-test them.
And three: the ECB should buy up bonds of Eurozone countries. This wouldn’t just act as ‘quantitative easing’ – putting central-bank cash into the system – but through buying bonds and pushing down yields it would also demonstrate to the markets that these governments should be able to borrow money at affordable interest rates.
That third part I likened to the ‘bazooka’ approach once advocated by former US Treasury secretary Hank Paulson: if you want to send the markets a message about defending the integrity of your currency and financial system, don’t use a popgun, instead wheel out the biggest weapon you can.
The response from Eurozone countries was distinctly mixed. Those in real difficulty welcomed anything that pressured the ECB to act, but disliked any speculation that a country might have to leave the Eurozone.
While the French always wanted a more activist ECB, they didn’t want to hear about any plan from the authors of what they saw as the ‘Anglo-Saxon capitalist model’, which they still wrongly blamed for causing the crisis in the first place. Unsurprisingly, Sarkozy was particularly frosty about this interference. Ahead of the G20 in November that year I got the Mexicans, Canadians, Australians, Indonesians and South Koreans to join Britain in writing to him saying what we needed to achieve at the Cannes summit. It was billed as ‘six weeks to sort things out’. He was furious.
Privately, Angela Merkel initially seemed to welcome our interventions, accepting that Britain had a huge stake in this, and acknowledging our expertise in financial services. But all German politicians – right, left and centre – are allergic to activist monetary policies and interventionist central banks. Memories of printing money and the hyperinflation in Weimar Germany in the 1920s linger on.
And so the crisis limped from one emergency European Council to another, with partial solutions and endless prevarication.
For mainstream parties there was a political price. The Eurozone suffering cannot be separated from the rise of far-left parties such as Podemos in Spain and Syriza in Greece, and the outrage at the bailouts from the rise of populists on the right, like AfD in Germany and PVV in the Netherlands, and the continued growth of the Front National in France. But there was an economic and human cost too – huge unemployment rates, vast cuts to public services, and uncertain prospects for many young people.
The episode confirmed to me that the Eurozone was indeed a potential disaster zone. But Germany and the European Commission drew the opposite conclusion – that because the single currency survived, the project had been vindicated.
This drama had an important domestic element too. ‘Some problems are just insoluble because they’re insoluble,’ is how I put it on tape. ‘The Tory Party and Europe is just one of those things that, like the Mississippi, keeps on rolling.’
In October 2011, the second big European moment hit me. I was facing the biggest Conservative parliamentary rebellion of my premiership so far, on a vote about whether to hold a referendum on the issue of Europe. With Backbench Business Days ceding some control of the parliamentary timetable from the government to backbenchers, and an EU referendum petition attracting massive public support, the stage was set. It became inevitable that MPs would schedule a debate and a vote on it.
The Backbench Business Committee had to decide exactly how this would be handled. It was left to Bill Cash to help pen the motion – and he chose one that would cause maximum discomfort for the government. The motion proposed a multiple-choice referendum that asked whether voters wanted (a) to stay in the EU on current terms, (b) leave the EU, or (c) renegotiate the terms of membe
rship to ‘create a new relationship based on trade and cooperation.’
The proposal was incoherent, especially without knowing if ‘c’ was even possible. But coherence wasn’t its point. The aim was to ensure that as many MPs supported a referendum as possible.
My aim was different. I didn’t believe it was the right time for a referendum. That would only come if the lock kicked in, and since we were so focused on fighting the economic crisis, I hoped it wouldn’t. It also seemed redundant to ask the public whether they wanted to renegotiate better terms for Britain in Europe when I was right there, in Europe, pushing for better terms. If proper treaty change was coming, surely we should wait for that opportunity rather than jump the gun.
Fortunately, a backbench vote isn’t binding. Such motions can be treated as ‘unofficial’, and therefore be dismissed by the executive as ‘expressions of interest’. But I decided to ignore that approach. I reasoned that if we did nothing, Labour would abstain and we’d be left with 120-odd Tories voting for this referendum. That would probably be sufficient to carry the motion. Not only would we look divided, but I’d be asked at every PMQs: ‘This House – and your party – has voted for a referendum on Europe. Why aren’t you having one?’
A referendum was not government policy. We had the power to stop a defeat by whipping the vote, and that’s what we did. We moved it to a Monday, 24 October 2011, so William Hague and I could attend. In the end, we won – but eighty-one Conservative MPs rebelled.
I wasn’t angry. As I confided at the time, ‘It wasn’t bad blood, it wasn’t like Maastricht, it wasn’t bastard talk.’ The rebels were a mixture of people who were absolutely committed to an in/out referendum, and a crucial and larger group, those who had campaigned for referendums on the Lisbon Treaty and felt that the words they had used then bound them to support other reasonable-sounding proposals for a referendum.
For the Record Page 42