The Bruges Group spearheaded the intellectual battle to win a vote to leave the European Union and, above all, against the emergence of a centralised EU state.

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The Destruction of Parliamentary Democracy

Martin Howe QC
Rt Hon. Peter Lilley MP

TheDestructionofParliamentaryDemocracy

RT HON. PETER LILLEY, MP
Secretary of State for Trade and Industry 1990-1992

&

MARTIN HOWE, QC
Author and specialist in EU law and the constitution

THE DESTRUCTION OF PARLIAMENTARY DEMOCRACY
Click here to listen online to Martin Howe QC and Rt Hon. Peter Lilley MP


RT HON. PETER LILLEY, MP
After a successful career in business Peter Lilley entered politics and joined Mrs Thatcher's Cabinet as Secretary of State for Trade and Industry 1990-1992. From 1992 – 1997 he was Secretary of State for Social Security. He also served as Shadow Chancellor and Deputy Leader of the Conservative Party.

His publications include, Do You Sincerely Want to Win? -Defeating Terrorism in Ulster. Taking Liberties. And, Too much of a Good Thing? A Balanced Immigration Policy.

Peter Lilley famously said in a speech in Parliament that because the EU makes 80% of our new laws, MPs pay should be cut to reflect their diminished role.

MARTIN HOWE, QC
As a specialist in EU law Martin Howe is amongst the most authoritative and respected spokesman against the encroachment of the European Union onto our democracy.

Along with Dr Brian Hindley, Co-Chairman of the Bruges Group, he authored Better Off Out?: The Benefits or Costs of EU Membership. His other publications include; Asylum and the European Constitution, Tackling Terrorism: the European Human Rights Convention and the Enemy Within, Europe and the Constitution after Maastricht, and Social Europe: Escape or Entrapment? Which analysed the threat of severe damage to our industries from social laws imposed by Brussels.

Martin is a member of the Bruges Group’s Academic Advisory Council.


Speech by Rt Hon. Peter Lilley MP

Thank you very much for that kind introduction. I’ve rarely had such a distinguished and learned warm up speech as I had tonight from Martin and it’s a daunting act to follow.

I had observed that you invited me here on Shrove Tuesday and I assumed that as it’s the day when we prepare for the rigours of Lent by making pancakes as our last indulgence and throwing all the remainders of what we’ve kept over from Christmas into them, I assumed you wanted a sort of pancake of a talk and that’s what you’re going to get.

I know in fact of course that I’ve only been invited because of the Ten Minute Rule Bill speech I made, which has been mentioned and it’s mentioned in your handout, which has been widely interpreted as me advocating a cut in MP’s pays as powers decline. I would however assure you that would be carrying Lent and self-denial too far, actually what I want is the reverse. I want powers to be regained from Europe and therefore Members of Parliament to earn and receive higher pay as I mentioned in rather coded language in the speech, but that seems to be an aspect which wasn’t taken so seriously, but I hope its one that would be welcomed in this room.

Now the roots of that speech lay actually in the Government’s refusal to give us the promised referendum on the Constitutional Treaty. I’ve been in Parliament for 25 years and nothing angered me so much as that arrant breach of promise. There’s a perfectly good case for not offering a referendum and there’s a case for offering a referendum and fulfilling your promise. What could not be justified was making that clear pledge to the Electorate before the election in order to take the issue out of the election and then after election failing to fulfil that promise. And so for that reason I sat through virtually every day of the debates, too few days in fact, but the relatively small number of days that we were allocated to debate the Lisbon Treaty, the Constitutional Treaty when it went through Parliament. And it became clear to me that Parliament was abdicating a further significant tranche of powers to Europe if it enacted this Treaty.

Now Edmund Burke once said, a king may abdicate for himself but it cannot abdicate for the monarchy. And I believe Parliament has no right to abdicate powers entrusted to it by the nation without first gaining the consent of the nation to that change in the constitutional arrangements and that’s what we had not and have not done.

Now how much power is being transferred by the Lisbon Treaty and how much power has already been given away? Figures for the latter range between 10% and 80%, the 10% figure is seized on by the Euro apologists who say that it’s attributed to a House of Commons library paper, which says that laws coming from Europe amount to 10% of those passed in the House of Commons and I dealt with that 10% figure in my speech. In fact the House of Commons paper says no such thing, it remarks that the number of statutory instruments laid under the European Communities Act 1972, amount to 10% of all the statutory instruments passed by the House of Commons, but it points out that an EU statutory instrument typically enacts a whole directive often the equivalent of an act of primary legislation, a bill or act of Parliament. Whereas domestic statutory instruments implement detailed regulations which are secondary to the primary bill, so to compare the two is like comparing apples and pears or rather pumpkins and pears because of the disparity in the size of the two being compared.

It also ignores that by far the most plentiful fruit coming from the European orchard are the regulations, most of which are never considered by Parliament at all. I made a point at one stage in my career of insisting that I receive a copy of every statutory instrument being passed by the House of Commons until my room could no longer contain them all they are so numerous. Very few of them, whether they emanate from Europe or under our own domestic legislation are even debated or considered in detail in the House of Commons, most of them are passed on the nod, which is a serious enough matter. But the total scale of that EU legislation is enormous. Last year or I suppose now two years ago, the European Union passed 177 directives, 2,033 regulations and a further 1,045 decisions. By contrast the UK Parliament passed just 31 acts and about 3,700 statutory instruments including of course all the acts and statutory instruments which enact European legislation.

Now even that relatively huge tally of EU legislation ignores the full extent to which Parliament’s power is diminished because it’s also in addition prevented from legislating as it would wish. When I was a Minister it was a frequent occurrence that officials would say to me, no Minister you can’t do that because it’s within the exclusive competence of the European Union. So there are lots of things that British Government do not do that they might like to do because it’s no longer within their powers to do it without breaching the original acts incorporating the Treaties.

At the other end of the spectrum is the 80% figure and many sceptics seize upon that 80% figure, its usually held to be the proportion of German legislation which is the result of European legislation. I think it’s a mistake to seize on the largest available figure for two reasons. First of all we can’t credibly claim both that virtually all of our powers have already gone and that vast further tranches are about to be transferred by the latest treaty and second because the 80% figure doesn’t actually ring true.

"compared the legal acts adopted by the Federal Republic of Germany between 1998 and 2004 with those adopted by the European Union in the same Parliament: results 84% came from Brussels with only 16% coming originally from Berlin"
The ubiquitous Denis MacShane – I should say the shameless Denis MacShane – has asserted that neither he nor the BBC can find any source for this 80% figure, which must therefore be the fruit of overheated imagination of eurosceptics but I did set myself, when I saw that you’d accused me of endorsing it, to tracking it down. I found it originally appeared in a paper and the first reference I could find to it was in a paper writing by the former President of the Federal Republic of Germany, Roman Herzog and his scholarly colleague Lüder Gerken, who in turn cite a study which they say the German Ministry of Justice carried out, which and I quote, ‘compared the legal acts adopted by the Federal Republic of Germany between 1998 and 2004 with those adopted by the European Union in the same Parliament: results 84% came from Brussels with only 16% coming originally from Berlin’.

Well I think their figures, though arithmetically accurate are misleading for the reasons the Economist for one has given in an article they called ’The 80% Fairy Tale’, which itself is fairly exaggerated in the other direction, but they point out that their comparing often regulations with laws and they are also ignoring laws passed by the Lander and so on. But in the course of reading those criticisms I found that the Economist referred to another useful study, which has been carried out by a German academic called Annette Toller, which shows that the proportion of Bundestag legislation influenced by European impulse – and I’ll come back to what she means by that – has doubled between 1983 and 2005 from 17% at the beginning of the period to 35% by 2005.

Now let’s take a closer look at exactly what is covered by the notion of European impulses. She evaluated 112 pieces of legislation in the last three years of the period she was covering and found that exactly one half of them concerned directives that were directly translated into German legislation, a further fifth were regulations that caused German law to have to be adjusted, sometimes it might be a single regulation or several regulations or a combination of regulations or a whole white book of regulations but each of those counts as one. A further 10% of European impulses were the result of council decisions, including framework decisions like that introduced by the Amsterdam Treaty on police and judicial cooperation and a further 6% referred to decisions by the European Court of Justice requiring changes to German law. Another 3% were directly flowing from the original treaties themselves and 11% or so were other factors.

Now she then goes on to say 35% of German law was directly attributed to these European impulses but then spelt out a series of caveats, which of course the Economist failed to mention. She says first of all that these statistics fail to include fields of total restriction where owing to the constraints of European law the Bundestag could not take legislative action which it might have wanted to do. Secondly, what is more these figures fail to indicate the qualitative change that the European impulses have produced in comparison with previous legislation, a much more comprehensive style of regulation. Third, the survey makes little or any reference to those fields where European impulses have a hidden effect. She says quite often new bills are introduced in the Bundestag which may be worded specifically to allow for the implementation of a foreseeable directive or a foreseeable regulation which hasn’t yet occurred but is being negotiated.

So she concludes that overall the percentages of German legislation as influenced by European policies, around 35%, only represent the tip of the iceberg. And I think its reasonable to suppose that much the same position is here, something like a third of our legislation overall probably is the result of European impulses, but that conceals the lower half of the iceberg actions which we take which are constrained by European law or which reflect forthcoming law or otherwise are influenced by European policy.

Now why do so few voters or for that matter MPs realise how many powers have been or are about to be transferred to Europe. There are two main reasons I think for this, the first is because Governments I regret to say of all persuasions deny that significant powers are being transferred when they are agreeing a treaty which does just that. And secondly and more sinisterly in a way, because once powers have been transferred, Ministers engage in a charade of pretence that they still retain those powers, that they are acting on their own discretion even when they are doing something which has been imposed upon them by Europe. Indeed Ministers often end up nobly accepting responsibility for laws which they actually imposed in Brussels. At first sight its odd that Ministers in this Government in particular who are not normally slow to blame others should nobly defend and accept responsibility for Brussels’ legislative progeny in whose conception they often played little part. But they prefer to claim paternity rather than admit impotence, the fate of the cuckold across the ages, which is to take responsibility for what others begot. And I think that’s it, they don’t like admitting they are impotent and therefore they pretend to be responsible for things which they actually opposed.

Now my Ten Minute Rule Bill, like all Ten Minute Rule Bills will not actually become law so MP’s pay will not be linked to their responsibilities and I guess turkeys don’t vote for Christmas. But I want to move on to another part of this pancake, the question of whether a parliamentary democracy has been destroyed as the title begave me implied. Its powers certainly have been sharply curtailed and they are set to be further reduced under the Lisbon Treaty. And its MPs are too subservient to the whips to exercise the powers that they retain, at least that is a widely held view. Certainly ever since Hailsham famously described our Constitution as an elective dictatorship in which the Executive could secure any legislation it wished because MPs were loyal lobby fodder for doing what the whips told them to, its been fashionable to deplore MP’s loss of independence and to contrast modern Parliaments with those that existed in the 19th century when Governments actually had to win the support of a majority in Parliament for each measure they introduced.

And I think Hailsham’s description of Parliament as an elective dictatorship was fairly accurate in the 1950s and 60s, but it became less and less true and has become less and less true in each of the Parliaments that I’ve served in over the last 25 years. Quite often we like to sneer at Parliament and write it off as a useless, toothless tiger, but actually in each successive Parliament, Members of Parliament have become more difficult for their whips to control. Rebellions have become larger and more frequent and involved a higher proportion of Members of Parliament. The House of Commons has become increasingly more like we imagine a 19th century Parliament to be. Governments have had to amend legislation, abandon legislation, make concessions in order to persuade members of their own party to support it or to win the support of other opposition parties when they can’t get enough support from their own parties. It has become much more like a 19th century Parliament.

The revolt over the decision to go to war in Iraq when 139 Labour MPs disobeyed the strongest three line whip it is possible to introduce, which was often reinforced by physical force by the whips, then that was the biggest revolt that has occurred since the Corn Laws, in fact I think including the Corn Laws, so the idea that the past Members of Parliament were all independent minded and willing to ignore the whips and they are not now is actually the reverse of the truth.

You can find plenty of quotes, I found one back in 1698, saying the trouble with Members of Parliament is that they are without honour and they simply vote in the same way all the time regardless of the arguments.

Now why has this change come about? I think it has important implications for those of us who want to revive parliamentary democracy in this country and restore some of the powers that have been given away. I think one of the reasons is that Members of Parliament have become much more open to and in correspondence with their constituents. Back in the good old days of the post war period; if a Member of Parliament got 12 letters a years from his constituents he was worried that they were getting a bit uppity. Now if he gets less than 12 a day he thinks, gosh that’s a relief, I haven’t got too much work to do.

And certainly when I was first elected, my constituents would write and say, I hope you’re going to vote against clause 18 of the such and such bill and I’d go to the Party Research Department and get the standard letter saying why I was going to vote for clause 18 of the such and such bill and send it off to them and think very little about it. Nowadays they write back and say the arguments that you sent me were wholly inadequate and I put forward these counterarguments. So I am then forced to think about it and I write back again saying well actually there are some quite good reasons which I didn’t reveal to you first of all and then they come back again and sometimes I think you know they’re right, just occasionally they’re right, I’m convinced they’re right and I do then go back and question the whips and say should we really be doing this and if they can’t give me some very good reason I – and its not just me, this is happening 650 times or at least quite a lot across Parliament – we are more likely to rebel.

Now this has implications for us, it means that actually Parliament can be influenced if you enter into reasoned dialogue with your Members of Parliament. Members of Parliament typically will not actually take much notice of things which are hysterical, over the top, too broad brush, but on a specific issue where you put a reasoned case, they will be slightly embarrassed if they have to dismiss what is a convincing case. And so arguments of that kind now I think have much more power and influence in generating thoughtfulness and ultimately changes of heart by Members of Parliament than was the case in the past.

And that brings me to my third and final point on the importance of referendum. A lot of people who would like to see powers returned from Europe to this country put their faith in referenda. I think they are mistaken to do so. Referenda are wonderful methods of resisting change not of causing change. If you examine referenda throughout the world, usually they were introduced when the governing party or some significant body of citizens thought they could get support for a particular change and the opinion polls showed that they had a majority. Almost invariably in the course of the referendum campaign the majority for change diminishes, sometimes its still, you know it moves down from 70% to 55% so they still win, but almost invariably the people begin to think, well actually there’s quite a good reason for leaving things as they are, why take the risk.

So referenda can be useful to us in resisting transfers of power, changes in the balance of constitutional power between us and Europe but it would be unwise on the basis of opinion poll data to assume that if we could somehow precipitate a referendum calling for the restoration of powers from Europe, even if initially the opinion polls show, which I’m sure they do, that 60% or 70% of the population would support it, that we’d win in a referendum. In any case you will only get a referendum if you’ve got a Parliament with a sufficient majority to call a referendum and if you’ve got a Parliament with a sufficient majority to call a referendum you don’t need to call a referendum, you can enact the transfer of power, negotiate it, go ahead and do it and then have the referendum afterwards when you’ve got a new status quo which people will not want to change. But just as a matter of tactics, a lot of what I hear from my eurosceptic friends that somehow all we’ve got to do is have a well worded motion that when presented to people in opinion polls will gain a majority and we’ll get that in a referendum simply is not the case.

Now I did have several other ingredients to this pancake but I’ll leave them possibly to come up in the form of responses to questions and if you don’t ask appropriate questions then I’ll just give you inappropriate answers.

Thank you.


Speech by Martin Howe, QC

Good evening ladies and gentlemen, thank you for inviting me here tonight. It’s always a pleasure to talk to the Bruges Group, whose members are well alive to the problems caused by the continuing incursions of the European Union into our democratic system.

Now I’ve been billed tonight to talk on the subject of parliamentary democracy and that of course is a huge field given the vast number of policy areas in which the European Union’s powers are expanding and consequently the powers of our own elected representatives to make the laws and to approve the policies under which we are governed are correspondingly restricted and progressively reduced.

I’d like to focus tonight on one quite specific area, but I’ll focus on that area because it is both very important and very topical and that is one of the basic powers of the State, the State’s control over the issue of money. Now we have heard recently quite a lot of talk about a subject whose euphemism is quantitative easing, otherwise known as printing the cash and handing it out in large wads, but because you do it through sort of bank accounts and things and it’s not material, it isn’t actually printing. Actually this is not a new phenomenon, I mean obviously its been practiced in places like Zimbabwe to very great effect in curing any problems they might have had regarding tendencies to deflation, but it used to be called in this country under funding, that is that Government expenditure would be under funded by the long term debt issued by the Government and instead covered by the short term issue of what was effectively money by the Bank of England.

Now I’m not here to discuss the pros and cons and the merits of whether it’s a good idea to quantitatively ease or print money or under fund, whatever you choose to call it. My basic thesis is that the decision whether or not to do that is a fundamental power of a nation state and the wisdom or otherwise of the circumstances in which that power is used should be a matter for our elected representatives ultimately to decide.

But there is here a very important difference between being a sovereign and a non-sovereign state or a sovereign or non-sovereign debtor and the impact of that is that the latter, that is non-sovereign debtors are not in control of their own currencies. The State of California is an example, which seems to be suffering deficit problems but of course both its assets and liabilities are denominated in United States dollars and if it doesn’t have the cash to pay the wages for its public employees then they wont get paid and the services will collapse and the state will go into default.

On the other hand a sovereign debtor can always pay its debts as long as they are denominated of course in its own currency and not in a foreign currency. But the risk with the sovereign debtor is dilution through inflation rather than, as in the case of a non-sovereign debtor, the fatal car crash of defaults and bankruptcy.

And in this sense, members of the euro currency zone are clearly non-sovereign debtors, but in this regard is the United Kingdom sovereign? Well the answer is not entirely because the United Kingdom did not actually opt out of the entire European monetary union project. Instead its legal status is that it is frozen in phase 2 of the EMU project and its sovereignty is subject to a number of constraints, not constraints that are as great as had we gone forward into phase 3, which is adoption of the euro as our currency, but still some constraints which arise from Articles of the Treaty of Rome, which were originally inserted into that Treaty by the Treaty of Maastricht.

I’ll mention three of them of significant importance: Article 101 of the Treaty of Rome states that overdraft facilities or any other type of credit facility with the ECB or with the central banks of Member States in favour of community institutions or bodies, central governments, regional, local or other public authorities and so on shall be prohibited as shall the purchase directly from them by the ECB or national central banks of debt instruments.

So in fact there is actually a prohibition in the Treaty against the Bank of England either extending an overdraft to the Government or buying debt instruments directly from the Government. Now the clever clogs say well this can be bypassed in that the Bank of England, instead of buying gilts directly from the Treasury, can go out into the market and buy gilts from third parties who have previously bought them from the Treasury. So there is a loophole to be exploited, although I think if this is right, the effect of that loophole is simply to pay a commission on middle men for no purpose.

The other Article of significant interest is Article 104 of the EC Treaty: Member States shall endeavour to avoid excessive government deficits. And the words ‘endeavour to’ appear in the version of that Article which applies to the United Kingdom. As regards members of the euro currency area, the words ‘endeavour to’ have been deleted and they ‘shall’ avoid excessive government deficits.

Now whilst this is a weaker obligation on the United Kingdom than it is on members of the euro area, it still does imply a significant Treaty obligation on this country, which again you know one may or may not be in favour of the gargantuan budget deficits which Gordon Browne’s policies seem to be heaping upon us. But if one is of the view that whether or not such deficits are incurred ought to be a matter for decision by Parliament rather than from outside bodies but this Treaty obligation is unfortunate.

And there is another third significant Treaty obligation which rests upon the United Kingdom, which is until the beginning of the third stage, well unless and until we join the euro, each Member State shall treat its exchange rate policy as a matter of common interest. In so doing Member States shall take account of the experience required in cooperation in the framework of the European monetary system and shall respect existing powers.

Now again this rather vaguely worded Treaty obligation applies to the United Kingdom. Our currency exchange rate has not been a political issue for the last few years simply because Stirling has been so high, but we have had an effective devaluation in Stirling against the euro of – I know economists or foreign exchange raters will know this better than me – something around 25% or possibly more, which of course has altered the equation as regards the relative competitiveness of the British economy versus the euro area. And again we are beginning to get calls on the continent saying this is unfair competitive devaluation, something should be done to stop it. And my concern is when they start reaching for arguments they can use to try and, not necessarily prevent it, but bring pressure on the United Kingdom to pursue an exchange rate policy which results in as it were less competition from us towards the euro area and therefore a higher external exchange rate.

So those are the obligations that apply to the United Kingdom and in fact to other Member States who are outside the euro block. I’d like to go on then to look on the relationship between sovereignty and the euro currency itself for those Member States who are members of the euro block. And this involves looking at the question of the legal foundations of money. A fairly fundamental question, why does something as intrinsically worthless as a paper currency have value, and economists would no doubt refer to the functions of money as a medium of exchange and a store of value, but I confess I look at it as a lawyer rather than an economist and I see that the underlying economic functions of money, there is a legal substructure which is essential in order that a paper currency can have a defined value and thereby be capable of fulfilling its economic functions. And that legal substructure consists of three main elements, all of which arise from the power of the State to make and enforce its laws. In other words they arise from the State’s coercive powers and the first is the power of the State to define by law what notes and coins may be used to discharge debts, the so called legal tender rules and in this country legal tender is pound notes.

The second is the State’s ability to maintain monopoly control over the issue of legal tender. And the third, also important, is the State’s ability to impose debts on its citizens by way of levying taxes and in this way a stable demand can be created for the notes and coins which only the State has the power to issue and by demanding of its citizens that they should pay to it sufficient quantities of notes and coins, which only the State is allowed to issue, and by appropriately limiting the quantities of notes and coins which it does issue, a state can maintain the value of the paper currency which is intrinsically completely worthless.

And of course there is a lot more to pursuing a successful monetary policy than merely having these three elements of state power in place, but they are necessary although not sufficient conditions for a paper currency to have value.

Of course the qualification is that in the modern economy only a minority of transactions are conducted in actual notes and coins, but such transactions are at the base of the whole system and current bank accounts are in law simple running debts payable in notes on demand and because there is or at least there was until the recent events, generally confidence that the banks will always be able to pay in actual notes and coins if called upon to do so, money in accounts of solvent banks is universally treated as being as good as cash and in many ways more convenient. But it is the ultimate ability of financial institutions to pay out in actual legal tender which underpins this.

Now economic historians I am told have found it difficult to find a convincing example of a single currency shared by more than one state aside from cases where small states choose to tag onto and utilise the currency of a much larger state. And one reason for this may be that there is an essential linkage between the coercive legal powers possessed by a state and the stability of a state’s intrinsically worthless paper currency. For example the United States Constitution prohibited the individual states from issuing coins and bills or from tampering with their legal tender laws, otherwise there could have been uncontrolled issue of legal tender from the individual states, a free rider effect which could have destabilised the currency of the whole union. And against this background the question arises in the context of the European Union of whether a single currency can be successfully shared in conditions of stress by a number of states.

Now legally the euro is legally only one currency shared by all participating Member States, but what does it mean to say that there is legally one currency? Well the practical answer is threefold.

First, and it ties in with what I said about the state and its coercive powers, euro notes and coins are legal tender for the payment of debts in each participating state regardless of in which country the particular note or coin is issued. So if you have a Spanish euro coin issued with the Spanish King’s head on it that is legal tender in every other euro zone country, just as much as a coin issued in that currency is. And euro notes are the only notes to have the status of legal tender within the community, which again is a Treaty provision.

Secondly, euro notes issued by national central banks but only on the authorisation of the European Central Bank, again a Treaty obligation. So the control over issue is centralised.

And thirdly, a system designed to prevent excessive deficits has been put in place, in other words a system designed to ensure that the Member States collectively will take in sufficient taxes to maintain the level of demand for euros.

So in these respects the European single currency attempts to mimic at a super national level the legal substructure which has in the past been provided by a single state in relation to its own currency. And one asks why then are there growing doubts in some quarters about the stability of this legal structure and the fundamental reason is that the legal structure of the European Union is at least as yet, and ignoring historical developments which may occur in the future, inherently much weaker than the legal structure of a single state. The European legal order with the European Court of Justice at its head claims to be a supreme system of law which overrides the laws of individual Member States, but the ultimate validity of this assertion depends upon the extent to which that claim is actually enforceable within and indeed against Member States.

Now with the progressive accretion of powers to the centre, the European Union may in time have the effective powers of the state to enforce its laws, but it has not at least yet reached that stage. Community law is dependent for its enforcement on the Member States themselves and it is questionable whether any state would enforce it in circumstances where its ultimate national interests are severely threatened.

Now this raises the question of what will happen to the single currency structure if severe strains emerge in the non-single European legal framework on which it is based and I want to expand on this point with an illustration.

Lets take a country and we’ll call it X to avoid becoming personal – although I am told from a recent meeting of what’s happening in the bond markets, that the initials P, I, I, G and S are alternative letters one could use in place of the letter X – and this country X finds it increasingly difficult to maintain its public sector deficit within the criterion laid down in the Treaty. After repeated breaches of the rules the Council’s Ministers impose a fine on X of many billions of euros. Given its existing deficits it cannot pay without crisis; tax increases, which its politicians are unable or unwilling to impose and it does not pay. No way can readily be found of forcing X to pay its fine since it is not a net beneficiary of the community budget.

And holders of X’s national debt become increasingly nervous, bond spreads widen, they suddenly realise that within the single currency zone they’re not really dealing with a sovereign debtor but with a non-sovereign debtor more akin to a local authority. X therefore finds it increasingly difficult to refinance its national debts at acceptable rates of interest. A cash crisis threatens with X unable to pay its public sector workers. At this point X’s central bank imbued with a national attitude to the EC legal order, which is not perfect, assists its government by issuing euro notes outside the limits permitted by the ECB and fails to make the required returns to the ECB at the level that its issue of euro notes.

At this point what is to be done? Doubts arise in other countries as to the wisdom of accepting euro notes issued in country X, we’ll call them euro X’s. They prefer safer euro notes printed in Germany and elsewhere, and you can tell by the serial number in fact. Citizens of country X start moving their funds into bank branches in other countries. Quite rapidly the banking system in country X is unable to provide enough specie in the form of notes or balances of the ECB to honour the instructions of their customers to transfer funds out of X to other Member States.

At this point X faces the total collapse of its banking system industry and indeed of the state itself. Only massive loans from other Member States could stabilise the situation and possibly Mr Peer Steinbrück may be willing to assist, maybe he won’t, but would such loans be forthcoming on terms which are acceptable to X.

Finally the national authorities of X take the only step realistically open to them and announce the severing of the link between the euro X and the euro. All debts payable under the law of country X in euros may now be discharged in euros printed nationally which are made legal tender for payment of debt under X’s laws. This may well be a breach of the EC Treaty but the European Union has no way of stopping it from happening and is compelled to acquiesce.

Euro X then trades its national currency at a discount to the euro. Some institutions with large cross-border exposures, which are unmatched i.e. with euro denominated credits in country X and euro debts in other countries, are wiped out.

It can be seen that once confidence disappears the single currency structure could become highly unstable. Because the European Union’s legal structure is too weak in an ultimate crisis to enforce its rules on the defaulting nation, this scenario could be feasible even if such a scenario were to be considered only faintly feasible it makes sense for cautious investors to avoid country X or at least to demand a substantial risk premium for loaning money to it or for placing money into its banking system or lending to its residents.

And this is why there are no growing differentials in interest rates within the euro single currency area. Of course this is a familiar concept as between different national countries, but the real difference comes in terms of stability of the system. A system of differing national currencies has stabilising mechanisms, when a currency goes down there comes a point where people say well the only way this currency can go now is up again. And indeed the ability to vary interest rates in different national currencies can be used as a deliberate tool to stabilise exchange rates if this is a policy goal.

But within the single currency area where is the stabilising mechanism? Instead a build up of differential interest rates presses hardest on the countries which are most vulnerable; those countries’ debts are repayable in inflexible euros. The system cannot bend so is there a risk that it will end up snapping altogether.

And according to the original dream, the original plan envisaged in the Delors Report on monetary union, the single currency was to be established after a prolonged period of closer and closer convergence of economic budgetary and monetary policy and corresponding exchange rate stability. However, for political reasons, the euro project was telescoped in time and perceived as like a big bang or a single step leap. And there were some commentators arguing that a single step leap was necessary to stop the speculators from breaking the project up. In this respect the period of long term progressive convergence of economies envisaged by Delors was bypassed. The test of long term stability in the public sector budgetary position was replaced by a one year hurdle jump, which I think in the case of France was fulfilled by transferring their public sector pension liabilities of the French telephone system out of the fund, which the state absorbed, and placing it into just a long term liability assumed by the state, which was uncosted.

Now to take that particular step implied an enormous faith in the strength of legal structures which hold the single currency together. Now as a lawyer I’m all in favour of legal structures, however I am concerned that people may put too much faith in legal structures and will want to give them more weight than they can bear. The stability of the single currency requires that the Member States should act rigidly as one unit in maintaining the three elements of the legal structure of a paper currency that I outlined. And there are now I believe reasons for questioning whether that faith will turn out to be justified now that the serious strains of complying with the long term disciplines of the monetary union begin to be felt, in which case the consequences of removing from individual states one of the aspects of their basic sovereignty, the right to control the issue and emission of money, may prove somewhat catastrophic, certainly if the worst case becomes a reality.

Thank you very much.