Open Europe blog

In a debate with Francois Hollande and François Bayrou, a youthful Nicolas Sarkozy calls the Tobin Tax an “absurdity”. You heard that right. Sarkozy - who recently announced his plan to introduce a Financial Transaction Tax(FTT) by the 1st of August “with or without the others” - warns in a 1999 TV debate of the dangers of excessive financial regulation.

In particular, he argues:

“If we tax, none of the other countries will do so,” adding that “penalising wealth creation in our country will only serve to benefit wealth creation elsewhere, unemployment for us and jobs for the others”.

He’s clearly changed his mind.

Labels: eu, eurozone, financial regulation, financial transaction tax, France, FTT, Sarkozy, tax, transaction tax

Over on the Telegraph blog, we argue:

MPs and MEPs – from different parties and for different reasons – have lined up over recent days to explain how David Cameron lost the plot over his EU veto, as it has become clear that the EU institutions are now involved, albeit on the margins, of the fiscal treaty that 25 out of 27 EU countries signed up to earlier in the week.

As we've noted before, the veto that Cameron pulled at the December EU summit was never the best of the possible outcomes. However, the veto hasn't left Cameron empty-handed. In fact, contrary to popular belief, if played cleverly, the veto could remain a source of UK leverage in Europe for years to come. Here’s why.

In the treaty that was signed off, the role of the Commission and the ECJ is very limited. All the ECJ can do is impose a hypothetical fine on countries that fail to transpose spending caps into national law – but not prosecute states that break these spending limits. This makes virtually no practical difference to the UK.

However, as we have pointed out before, it still sets a worrying precedent, which the UK needs to be all over like a cheap suit. But the most effective way to disarm this potential threat is not to seek to blow up the dam by launching an all-in legal challenge.

Instead, Cameron should keep his cards close to his chest. The threat of legal action is Cameron's greatest asset at the moment. Any legal challenge would be a messy, lengthy affair, involving a lot of uncertainty. The Germans in particular – ever conscious of their Constitutional Court – know that the current arrangement involving an ad hoc euro treaty is legally dubious. As long as the Germans feel uncomfortable, Cameron maintains his leverage.

Given that the role of the ECJ is so limited, by holding the option of a legal challenge in reserve, Cameron can tackle the use of the EU institutions head on if it ever genuinely threatened the UK's interests: ie if the ECJ or the Commission started to dabble in single market issues under the auspices of a euro treaty.

In other words, Cameron can credibly tell Merkel: we want you to get on with the business of saving the euro (whether the current policies will actually work is a different matter), but stick to the rules, or it's game over. Just as Merkel is seeking this treaty to assuage domestic political opinion, Cameron can point to his MPs. They will not allow him to stand by should he fail to launch a fully fledged legal challenge if the circumstances require it.

In contrast, playing all his cards now would be far riskier. Since the role of the ECJ is minimal, it’s not certain that a legal challenge would be successful at the moment (see here for our thoughts on this). If he lost a court case over an issue of little practical importance to the UK, he would lose his leverage and set an even more worrying precedent.

And remember, it's still the explicit aim of the fiscal pact members to incorporate the treaty into EU law within five years – over which the UK retains its veto. This sets the UK up for another round of negotiations where it will be free to make demands of its own.

At the end of the day, there’s no escaping that Britain, and most other euro outs, need a different set of arrangements under EU law than euro members – on an increasing number of issues. If the EU, for all practical circumstances, becomes equivalent to the eurozone, then the UK is out, and life won't be easy for the Swedes of the world either. For all the posturing, all EU countries will want to avoid this.

In any case, the fiscal pact is big on talk but small on action – non-euro members are invited to one eurozone summit a year if the fiscal pact is being discussed at that summit. In itself the fiscal pact won’t change the world. Sorry everyone – there’s not that much to see here.

Better then for Cameron to save his ammunition – there are many, many EU negotiations to come.

Labels: britain in europe, david cameron, ECJ, Merkel, treaty change

The politics of the eurozone crisis took several new twists and turns over the weekend, including the news that Angela Merkel intends to step in and “actively” support Nicolas Sarkozy’s Presidential re-election campaign (although he is yet to formally announce his candidature) against the Socialist candidate Francois Hollande. It is understood this involvement could take the form of joint campaign appearances.

Moreover, Hermann Gröhe, a senior member of Merkel’s CDU party did not mince his words when he commented on the election, claiming that:

“[Sarkozy] is the right man in the Elysée now and in the future…We need a strong France with a strong president in charge…The Socialists are stuck in their dreams of the past. All they are doing is bringing out dusty concepts and wealth distribution fantasies from their moth-ridden policy cupboard.”

In recent months, Hollande’s candidacy has become the focal point of opposition to Merkel’s crisis management strategy and the ethos that underpins it - symbolised by the treaty on closer fiscal integration and discipline. Hollande has promised to focus less on austerity and more on promoting jobs and growth, both in France and the eurozone; he has pledged, if elected, to re-negotiate the treaty so that it focuses less on 'stability' and more on 'solidarity'. Although Sarkozy signed up to the treaty at yesterday's summit, the French parliament will not have an opportunity to ratify it before the presidential elections.

The stakes are therefore high for Merkel who has a lot political capital – both domestically and internationally - riding on the successful transposition of the treaty into domestic law throughout the eurozone (even if it is debatable as to whether it will address the root causes of the crisis). Given that polls consistently give Hollande a clear lead, Merkel has decided that in order to protect the treaty in its current state, she will have to intervene. While it may be unpopular with her own MPs who consider it to have been watered down too much, she knows this is nothing compared to how it would be affected by a likely Hollande victory.

The big question is whether Merkel's endorsement will be to Sarkozy's benefit or detriment; it certainly jars with his recent media strategy of playing the humble do-gooder trying to make the best out of a bad situation. It is likewise no secret that due to Merkel's (perceived) lack of willingness to compromise on issues such as eurobonds or the ECB, both she and Germany as a whole have become the pantomime villains of the crisis. There is also potentially the risk of a backlash against Sarkozy if the French public feels that Merkel has crossed the line and is actively trying to meddle in their domestic political arrangements.

Ultimately however, both Merkel and Sarkozy will hope that as suggested in the FT’s editorial this weekend, the French public will vote with their hearts in the first round, and with their heads in the second. While they cannot win in the popularity stakes, they will count on the fact that the public will at least recognise that they have taken tough but necessary action to tackle the eurozone crisis, and that for all his rhetoric, Hollande lacks a credible plan for making the French economy competitive. There are some grounds for optimism - a poll earlier this month found that 82% of respondents had a positive view of Germany, in particular regarding its leadership and work ethic. Finally, it is worth remembering Merkel is not renowned as an astute political operator for nothing; evidently she has decided Sarkozy's re-election is not a lost cause.

Merkel's intervention should add further spice to what is shaping up to be a fascinating election campaign - as ever we will keep you updated on the ins and outs...

Labels: crisis, eurozone, franco-german axis, Hollande, Merkel, presidential election, Sarkozy

Despite being locked together in economic turmoil for almost two years, the reports which emerged over this weekend further suggest that Germany still does not understand the depth of some of the problems facing Greece (and that they cannot be tackled by a one dimensional policy).

We are of course referring to the leaked German proposal calling for Greece to cede budget sovereignty to the EU. Naturally, this is an impossible claim and was roundly rejected by Greece and the Commission, while German officials have spent the weekend trying to douse the flames behind the scenes.

It is not clear whether or not this was ever a serious proposal on the part of the German government, although stern talk from the German Finance Minister Wolfgang Schaeuble and the Economy Minister Philipp Roesler suggested that the sentiment behind the proposal was real enough. We will not dwell on the obvious and well documented political and democratic questions which this raises – it is clearly a step too far which could and would not ever be accepted by the EU in the current framework. There has been talk of a Eurozone finance ministry at some point in the future, but this stands apart from asking a single country to undemocratically cede control of taxation and spending to the EU- meaning the proposal was destined to sink as soon as it hit the water.

This substantial issue aside, the sentiment behind the proposal reveals a continuing misunderstanding of the Greek problem from the German government. Despite all the talk of “growth and jobs” in recent days, it is clear the emphasis is on austerity above all else. It also raises serious questions about Germany’s belief that Greek debt could ever be sustainable under Greek control – which should be a concern for German citizens since they are about to finance the largest share of another €130bn bailout.

Fundamentally though, as a recent OECD report noted, the problems within Greece run a lot deeper than just the ability to agree on the ‘right’ policies. For all its shortcomings, the Greece has instituted a multitude of deficit and debt reduction plans over the past year. However, the real issue comes with the implementation of these reforms, as the OECD comments:

“Ministries take decisions but these are often not reflected in concrete results. A succession of reforms launched in recent years (including reforms of the administration) did not bring the expected results, due to poor implementation.”

So, the problems do not necessarily lie with the politicians or the top level civil servants (or at least they do not stop there) meaning that shifting top level control to the EU would make very little practical difference.

These problems cannot be tackled overnight or by simply imposing more austerity. Germany has continually refused or failed to understand the nature of the problems facing Greece despite much of the public posturing. With the outcome of the Greek restructuring negotiations still far from clear, a change in tact is needed - although it could well already be too late.

Labels: austerity, bail-out, emu, eurozone, finance, fiscal compact, germany, Greece, sovereign debt, sovereignty

Thanks to La Stampa Brussels correspondent Marco Zatterin's blog, we've just got hold of the fifth (maybe last) draft of the new 'fiscal treaty' on budgetary discipline, due to be discussed at today's meeting of EU leaders in Brussels.

As we are at the 'finishing touches' stage, changes from the previous version are getting more subtle and harder to spot. However, there are still a few interesting changes, including:

• In Article 3(1b), the so-called 'balanced budget rule' seems to have been further watered down. The wording "with the annual structural deficit not exceeding 0.5% of the GDP at market prices" has been replaced by "with a lower limit of a structural deficit of 0.5% of the GDP at market prices." We wonder how the markets will react: There's quite a substantial difference between imposing a maximum cap and a blander lower limit. We interpret this as meaning that the lowest the limit will be set for any country will be 0.5% (where as previously it could have been even stricter). Since the article still refers the the Stability and Growth pact we can infer that the new balanced budget targets will probably fall somewhere between 0.5% of GDP and 3% GDP (the deficit limit in the treaties);

• Non-euro countries will no longer need to implement at least part of the budgetary rules set out for eurozone countries in order to qualify for a place by the table at future summits of eurozone leaders. However, invites will still be allowed only for meetings which specifically focus on the implementation of the 'fiscal treaty'. In light of the recent agreement with the opposition Social Democrats, this is probably enough to have the Swedish government sign up. Poland's stance remains more uncertain, as the Polish government is clearly seeking greater participation;

• In a bid to win Denmark's support, the latest draft stipulates that fines imposed by the ECJ will be paid into the eurozone's permanent bailout fund, the ESM, only if they are imposed on eurozone countries. Otherwise, the money will be channeled into the EU's general budget;

• Regarding the fines, there's an aspect of the 'fiscal treaty' that is worth flagging up. Under the agreement, the ECJ will impose fines of 0.1% of GDP on countries that failed to comply with its previous ruling (on whether the countries have correctly incorporated the balanced budget rules into their national laws). This is a power that the ECJ seems to have under Article 260 of the Lisbon Treaty. The power to impose fines in such circumstances is therefore not a new power (and the ECJ still does not have the power to punish countries for missing their deficit targets). However, questions still remain over the eligibility of the ECJ to rule on whether the balanced budget rules have been correctly incorporated in the first place;

• Countries who want to join the agreement at a later stage will not have to wait for other Contracting Parties to "approve the application by common agreement." Under the latest draft, accession will become effective as soon as a country deposits the necessary instruments of accession - i.e. when it decides to ratify the 'fiscal treaty'.
  

Most changes aimed at convincing the remaining holdouts to sign up while keeping the tone of the treaty the same, but the 'lower limit' change does suggest a further watering down of the rules.

Update, 30/01/12, 1pm

Over on the Telegraph's live blog, it has been noted that this version of the pact does allow for some of the fines to go into the EU budget (as we also note above). The Telegraph suggests that this could benefit the UK, since budget surpluses are distributed to all member states. In theory this is true, but the fines which are paid into the EU budget will be those levied on non-eurozone countries. However, as we point out above, non-eurozone countries no longer need to incorporate any of the rules in order to be invited to attend future eurozone summits. In other words, non-euro countries would have no incentive to accept the rules set out in the 'fiscal treaty' before joining the single currency. What would they be fined for then? It seems very unlikely that non-eurozone countries would ever be fined and therefore that it could ever benefit the UK.

Labels: Cameron, crisis, ECJ, eurozone, eurozone bail-out, fiscal compact, fiscal treaty, veto

This is an interesting development. Amid everything else that's happening on the Europe-front, a bunch of Labour MPs today come out in force, backing the idea of devolving EU structural funds back to the UK. In a letter to the Guardian, 17 Labour MPs, including former Cabinet Ministers Bob Ainsworth and Jack Straw, urge the Coalition to adopt the policy first floated by Gordon Brown, to focus the structural funds exclusively on the poorer member states.

The letter reads:

In the context of the growing euro crisis, it is interesting to note that Gordon Brown – while he was chancellor of the exchequer – argued strongly for the repatriation of EU structural funds. Writing in the Times in 2003, he said: "When the economic and social, as well as the democratic, arguments on structural funds now and for the future so clearly favour subsidiarity in action, there is no better place to start than by bringing regional policy back to Britain."

The article was written in support of a Treasury document called A Modern Regional Policy for the United Kingdom, published in March of that year. The paper argued that there was much time and money being wasted in processing contributions from countries such as Britain, only to send the contributions back in the form of structural funding.

Much easier and simpler, the then chancellor seemed to be saying, to let Britain keep the cash and get on with the job of using our own structural funds. The pressure group Open Europe has calculated that Britain would have been better off by something like £4.2bn if Brown's system had been adopted. What is more, some of the most deprived UK regions are currently short-changed by the structural funds, because EU allocations are based on inflexible, one-size-fits all criteria. For instance, the West Midlands has the lowest disposable income per capita in the UK, yet pays the EU £3.55 for every £1 it receives back in structural funding, according to Open Europe estimates. In contrast, if Labour's policy had been pursued, each region would have experienced a rise in the amount of subsidies they receive by around 45% compared with now. For example, Cornwall would have received an additional £207m over seven years.

Alan Johnson, also argued in 2003, that regional policy ought to be "resourced domestically in richer member states, like the UK, with the institutions and the financial strength to do it. This would end the unnecessary and inefficient recycling of funds between richer member states, like the UK, via Brussels ..."The Cameron government seems to have abandoned any attempt to change EU structural funding to concentrate on trying to freeze the EU budget – a strategy which has already failed. Perhaps this government could take a look at what was being argued for a few years ago – it could benefit us all.

John Cryer MP, Jack Straw MP, Katy Clark MP, Thomas Docherty MP, Dennis Skinner MP, Gisela Stuart MP, Andrew Smith MP, Mike Wood MP Robert Ainsworth MP, John McDonnell MP, Kelvin Hopkins MP, Jeremy Corbyn MP, Grahame Morris MP, Ian Lavery MP, Ian Davidson MP, Frank Field MP, Graham Stringer MP

One for the Coalition to ponder...

Labels: EU reform, Gisela Stuart, jack straw, Labour, structural funds

A recent Franco-German paper (leaked to EurActiv and others) outlined a set of proposals on how to achieve a better balance between austerity and pro-growth measures in tackling the eurozone crisis. One suggestion was:

“the establishment of a fund for growth and competitiveness in programme countries and other countries facing serious structural challenges should be considered. At this stage, this fund should pool a certain amount [25%] of the 2011 automatic decommitments of these Member States from the Structural and Cohesion Funds”

Decommitments refers to money that has been allocated to a member state from the structural and cohesion funds (SCF) and not spent two years after the year in which it was allocated.

Unsurprisingly many EU politicians were very excited about a potential fresh pot of money to pump into lagging economies, with Merkel stressing there was “a lot of money” in the structural funds, while Spain’s Europe Minister, Íñigo Méndez de Vigo, speculated the amount could be up to €100bn (although it is not clear if he was referring just to the SCF or other EU funds as well – the EU has a lot of different, overlapping funding instruments). Rumour has it this idea will be further discussed at today's EU leaders’ summit.

However, EU Commissioner for Regional policy, Johannes Hahn, popped up on Friday with an interview in Süddeutsche to puncture this particular balloon, describing the plan as “unrealistic”, and claiming that the total value of funds unused in 2010 and 2011 only amounted to €30m.

Hahn said that about three-quarters of the total €350bn value of the SCF over the current 2007-13 budgetary framework had been allocated to projects, meaning:

"This leaves 25%, and there is always the misconception that the money was not used. But it is used. It is budgeted, which means that it has been assigned to individual countries, but not yet mapped to specific projects."

There is a huge difference between €30m and €100bn – so clearly there is a lot of ambiguity as to what portion of the funds is theoretically still available. Quite possibly the Frano-German paper treated funds allocated to countries but not projects as ‘unused’ – something Hahn clearly disputes.

However, irrespective of how much extra funding could be found from this source, as shown in our recent report on EU regional policy (which we hope Mr. Hahn will find the time to read), and as we have argued previously, the nature of the funds means that they are simply wholly unequipped to serve as a backstop in a debt and solvency crisis.

We argued that countries such as Greece, Spain and Italy (all with a national income over 90% of the EU average) should no longer be eligible for SCF, as their record in these countries was at best inconclusive, while their pro-cyclical nature may even have exacerbated the credit bubble. Our report argued that a new fund could, in theory, avoid the many faults built into the structural funds (see section 2 of the report for a detailed cost/benefit analysis) and prove to be a huge benefit to countries such as Greece, Spain and Italy in bouncing back from the eurozone crisis; for instance by better targeting labour market mobility and re-skilling significant sections of the labour force.

However, this would have instead of, and not an aside to, the existing SCF framework. This could feasibly only be achieved in the next long term budget, as allocations for every country up until 2013 have already been agreed. As Hahn pointed out in the interview, channelling money from the SCF to a new purpose-built fund will require the agreement of member states (and the European Parliament). Given how territorial member states are over payments from the EU budget, it is far from certain they would agree to something which would fundamentally alter the balance of their payments and receipts.

Either way, given the fundamental structural failings in the eurozone, this looks like yet another classic example of eurozone leaders tinkering around the edges of the problem…

Labels: crisis, EU regional policy, eurozone, franco-german axis, structural funds

Ahead of the first (full) EU summit of the new year, we've put together our thoughts on what progress to expect.

As per usual there are lots of topics to be discussed but we don’t expect too many concrete decisions. We’d expect a final draft of the euro fiscal pact to be completed, some progress on ESM - the eurozone's permanent bailout fund - and a commitment to "growth and jobs" (as opposed to recession and unemployment..?). Huge questions over Greece and size of bailout funds will probably remain. Below we outline the key issues to watch out for (take 2):

Fiscal pact: This should be last round of discussions on the new European treaty. The aim has always been to have the final draft completed by end of January. However, there are still a few issues which need to be resolved.

The key interaction is between how the rules will apply to those non-eurozone which sign the pact and how much influence they will have (i.e. how many meetings they get to attend and what decisions they will have an impact on). Sweden, Poland, Denmark and the Czech Republic will make their decision on whether to sign based on how this plays out. The final agreement won’t be finalised as the Czechs and Irish will still have to decide whether to hold a referendum on the treaty. Expect it all to be tied up at the March summit.

Our bet is on the Poles, Danes and Swedes signing up if they're guaranteed some sort of place at the table and if the rules of pact actually don't apply to them - creating a rather bizarre situation.

The UK and the use of EU institutions: We suspect that Cameron will reluctantly accept the formulation in the fourth draft of the fiscal compact which gives the ECJ the right to slap fines on member states for not implementing the pact's spending ceilings. Technically, this marks an overlap between the fiscal compact and the EU treaties - something which Cameron has argued against in the past.

ESM treaty: Behind the scenes negotiations have been on-going, so the draft should be fairly far along. The biggest sticking point was the use of Qualified Majority Voting (QMV) to make decisions within the ESM, which Finland objected to. There now looks to be a compromise. The Finnish Constitutional Committee announced today that it approves of the new wording in the ESM treaty, whereby QMV is used to disburse loans but for any change in the size of the ESM a unanimous decision is needed. The Grand Committee (representing the Finnish Parliament) will rule on Monday and is expected to support this position. This is pretty big.

Additionally, there should also be a discussion on the size of the ESM and whether the ESM and EFSF can run in parallel. It's hard to read Germany on this issue. There have been indications that Germany may be willing to let ESM and EFSF run together, but it would want the fiscal pact and Greece sorted before it is considered. It's likely the topic will be broached but final decision will be delayed until March.

Greek restructuring: EU leaders are unlikely to have a deal ready to present at the meeting so it may be more of a general discussion. Even if a deal is achieved, which reconciles the differences between Greece and its bondholders over the level of interest paid on the new bonds, there is still the huge question of holdouts and ECB. Expect these issues to be covered along with talk of increasing the size of the second Greek bailout and losses for public sector - but don't expect any big movements (at least not publicly).

Growth and jobs agenda: EU leaders have been pushing this 'new' agenda recently. After coming in for massive criticism for their undying commitment to austerity, they are keen to focus on boosting competitiveness, promoting growth, creating jobs and the like. Despite that, as of yet a coherent policy agenda to achieve this has not been formulated - most of the time there is just a broad commitment to ‘structural reforms’.

We expect much of the same from this meeting - leaders (David Cameron in particular) will play up the renewed focus on growth rather than just austerity but it remains unclear how much difference the EU can make on this front. Ultimately, national governments need to push ahead with long term changes to the structure of their economies (labour market reforms, increased education and training, investment in R&D, increased competition etc.) This will take time, money and political will, all of which the eurozone is short of at the moment.

Labels: bail-out, EFSF, emu, esm, EU summit, eurozone, fiscal compact, France, franco-german axis, germany, Greece, growth, restructuring

In a blog post for the Telegraph, we argue,

In his speech in Davos yesterday, David Cameron outlined some very sensible proposals for how to deal with Europe's economic crisis. But, almost in passing, he also called for a eurozone “central bank that can comprehensively stand behind the currency and financial system”, implicitly suggesting that the ECB must be ready to provide more cash to struggling banks and governments around Europe. Unfortunately this statement completely misses the intricacies which the ECB and the eurozone face in the coming months.

The ECB’s balance sheet now stands at a pretty scary €2.7 trillion, higher than that of the money-printing Federal Reserve in the US. By buying government bonds and providing cheap cash to banks around the eurozone, the ECB is now leveraged 33 times – up from 24 times only last summer. This means that for every €1 the ECB holds in reserves and cash, it has €33 swirling around somewhere in the eurosystem.

But it isn’t the size of its balance sheet that keeps ECB officials awake at night – all central banks are leveraged – as much as the circa €60bn of (nominal) Greek bonds festering on its books. This (relatively) tiny item has become political dynamite, as Greece is set to default on its debt in March, either through a voluntary agreement with its creditors or by simply running out of money. As creditors and the Greek government are locked in to talks over which one it’ll be, big question is: will the ECB be forced to take a hit?

The question is crucial as the ECB has said in the past that it will not take losses on its eurozone exposure – ever. For the Germans, losses for the ECB would mark a huge betrayal of the Bundesbank-model, in which a central bank is trusted and prudent, and doesn't take on excessive risks – and therefore has the credibility to control inflation. Many German commentators have spent the past year grumbling about the ECB’s back-handed Quantitative Easing and illegal financing of state deficits. The ECB has got around this by purchasing the bonds on the secondary market, but if it took losses on Greek debt, this argument falls.

But at the same time, if “public” bodies, including the ECB, holding Greek debt don’t accept losses in a Greek default, the write-down may not be large enough to give the country even a hypothetical chance of bouncing back, meaning the EU/IMF cannot give it more loans. For the ECB, this amounts to a pretty awful catch-22: accept losses and see your credibility and rationale undermined or reject losses and at worst prompt a disorderly Greek default or possibly just massive distortions in eurozone bond markets.

So what’s the best solution? We’ve long argued for a full restructuring of Greece’s debt (now 60-70%) and reassessment of Greece’s position in the euro. But that looks unlikely right now. Instead, the ECB could be offered an escape route. It purchased its bonds at around a 30% discount. It could accept a 30% write down without taking any losses and would give Greece some additional debt relief. Another option would be for ECB-held bonds to be bought by the euro bailout fund, the EFSF (at cost price), and then submitted by the EFSF to the voluntary restructuring. The EFSF could absorb the losses, though it too may have to deal with some very uncomfortable questions from taxpayers who will have lost money. But arguably it’s better than sacrificing the credibility of the ECB.

Both options would still be a tacit admission of failure by the ECB, since it always claimed it would hold the government bonds it bought to maturity, but it may have little choice.

All of this should concern the British. Not only because the eurozone crisis is linked to the fate of the UK's economy. But also, as Anglo-Saxon commentators are coming out in droves – alongside the UK government itself – in calling for the ECB to load up on yet more eurozone government debt if need be, it should be a reminder: in the eurozone as in the UK there’s still no such thing as a free lunch.

In the end, someone has to pay – and if you want to keep the Germans fully on board, it best not be the ECB.

Labels: britain in europe, david cameron, default, ECB, Greece, sovereign debt

On Monday Brussels announced an EU-wide ban on oil contracts between Iran and member states. The hope is that these sanctions will choke the Islamic republic’s finances, and prevent its nuclear programme from progressing further. However, as with countless other EU foreign policy objectives, the goals look to have been undermined by the lack of consensus between EU member states.

Diplomats admitted that negotiating the embargo had been difficult. Quite an understatement given that the enforcement of the embargo has been delayed six months just to ensure that an agreement could be met. The key dispute comes from the fact that Greece, Italy and Spain are far more dependent on Iranian exports than their Northern neighbours. Greece imports up to a third of its oil from the Islamic state, with which it has negotiated a favourable rate. Italy and Spain buy 10% of their oil from Iran.

Forcing these countries to source such a large percentage of their oil from another producer in such a short time frame will undoubtedly put additional costs on their economies (not to mention the potential for higher prices which we discuss below). This seems slightly counterproductive to say the least when they are already struggling to stay afloat in the storm of the eurozone crisis. Not that you can abandon all policy goals on the basis of economics, but it highlights the breadth of impact which the eurozone crisis will continue to have until a lasting solution is found.

That said, fears of an impending energy crisis are alarmist. For one, Saudi Arabia has assured European governments that it will increase its production capacity to replace Iranian imports, which represent a fairly small share of overall EU oil consumption. Gaps in supply can also be met by Libya, which is set to boost exports after a year in remission.

A massive price hike is also unlikely, with refineries taking the hit more than consumers. Providing it does not switch to other Middle Easter suppliers, China will become the biggest consumer of Iranian oil, creating a monopsony through which it can drive down prices. Iran has shown itself willing to sell oil under the market price during previous embargoes. An interesting side effect then is that China could end up benefitting most from this ban by sucking up the excess Iranian supply at low prices. Not the EU’s fault, but it seems to undermine any prospect of the embargo having a huge financial impact on Iran.

Will Europe’s energy future be unaffected then?

Possibly, if two conditions hold:

- First, Iran must not blockade the Strait of Hormuz, through which Europe accesses Saudi oil. This seems unlikely since doing so would likely cause a full scale military conflict as the US has vowed to defend EU cargoes.
- Second, Iran must not throw a spanner in the works by cutting off oil supply immediately (something which Europe could not cope with as the delayed start of the embargo shows).

Will any of this bring Iran ‘back to the table’?

As EU High Representative on Foreign Affairs Catherine Ashton outlined, the aim is to “bring Iran back to the table”. It’s not clear this will be the case - Iran has survived previous embargoes, some of which have even hardened support for the regime. Without China and India joining the embargo (highly unlikely) Iran may not feel much of a squeeze. Even if they did, oil prices would skyrocket creating even more problems for the eurozone.

All in all then, this embargo has been a bit of a mess. Whether or not the aims are valid, it has once again highlighted the disparities in foreign policy goals within the EU, and therefore the limits of a combined foreign policy. It also brings home that, despite its size, the EU’s power is to some extent dwarfed by that of China and the US. Ultimately, their decisions will make or break this embargo, not the EU’s.

Labels: catherine ashton, embargo, EU foreign policy, eurozone, Greece, Iran, oil

In a weighty new report published today we take a critical look at the EU’s structural funds which are the means through which the EU implements its regional policy. We estimate that over the course of the current 7 year EU budget, the UK will pay in around £30bn to the EU’s so-called structural and cohesion funds, but will get back just under £9bn.

In our press release, we argue that:

“Limiting EU regional spending to poorer countries would be a win-win situation for both Britain and Europe. It would channel more cash to the newest member states and allow the UK to spend exactly the same amount on its regions as it does now, with the option of adding the several billion that it would save from streamlining the structural funds. It would also eliminate a range of additional costs and allow the Government to radically improve the targeting of funds towards poorer areas and to viable projects.”

The EU aims to reduce regional disparities but under the current system, every region in every member state receives at least some financial support, regardless of how wealthy it is. This means a significant part of the UK’s contribution goes to member states with a comparable level of income. According to our calculations, of the UK’s overall contribution, 70% goes to other member states, 25% is redistributed within the same UK region in which the funds were raised, and only 5% is redistributed between richer and poorer regions within the UK.

This recycling exercise is fundamentally economically irrational, and even the Commission has recognised that it creates “considerable administrative and opportunity costs.”

It also means that most UK regions, even the most disadvantaged, are short-changed because they pay in more than they get out. For example, the West Midlands, which has the lowest disposable income per capita in the UK, pays £3.55 into the structural funds for every £1 it gets back. Other regions that do badly from the current set-up include the North-East, Merseyside, Lincolnshire, Northern Ireland and parts of inner London.

While there is a strong case for having an EU regional policy to assist the poorer member states that have joined the EU since 2004, there is literally no “added European value” – the criteria for justifying EU-level as opposed to national-level decision making – to keeping all member states locked in.

So what can be done?

Our proposal would see the implementation of an eligibility threshold of 90% of EU average income, above which member states would no longer receive any support. This would on one hand enable the remaining funds to be focussed exclusively on the poorer member states, while allowing richer member states to still make significant savings and regaining control over their regional policies and spending. This is broadly in keeping with the position adopted by the previous Labour Government.

What impact would this have?

Such a measure would create a whole range of winners, and a handful of ‘losers’. To illustrate, if this policy had been adopted for this EU budget period (2007-2013):

Labels: coalition govenrment, EU reform, EU regional policy, Gordon Brown, structural funds

Swedish Finance Minister Anders Borg - whose country is currently grappling with whether to sign up to the euro fiscal pact - is not impressed by Greece's implementation of its EU-led austerity programme.

This is what he reportendly told journalists in Brussels this morning:

“There are pretty obvious things that haven’t been achieved on the structural side and in terms of public finances. This is probably one of the worst programmes we’ve ever seen. There has to be a radical improvements in the implementation before there can be a discussion about additional programmes.”

Harsh.

Labels: anders borg, austerity, Greece, Sweden

Labels: Bild Zeitung, germany, Hungary, structural funds, taxpayers

We have just got our hands on the fourth draft of the European 'fiscal pact' (this time, the Telegraph's Bruno Waterfield - who is always quick off the blocks - beat us to it), which is being circulated among national delegations tonight. At a first glance, a very limited number of Articles have changed from the previous version - but all the changes look pretty significant:

• At the request of Germany, the preamble of the agreement makes now clear that, as of 1 March 2013, struggling eurozone countries will be allowed to apply for a bailout under the eurozone's permanent bailout fund, the ESM, only if they have ratified the 'fiscal pact'. The previous version only required that countries incorporate the balanced budget rule.
  

The new draft gives the European Commission a greater role, compared with the previous version. In fact,

• The Commission will set out "common principles" on the establishment of the national corrective mechanisms which, under the agreement, should be triggered automatically every time governments fail to comply with their deficit targets;

• Furthermore, the Commission is now allowed to issue a report on whether governments have correctly transposed the balanced budget rule into national law on its own initiative (under the previous draft, it needed to be "invited" to do so by a member state);
  

• More importantly, if the Commission's report concludes that a country has failed to transpose the balanced budget rule properly, "the matter will be brought to the ECJ by one or more of the Contracting Parties." In other words, a government can only be taken to the ECJ by its peers, at least formally. However, what the Commission says in its report plays a key role in the process.

In regards to the ECJ, its jurisdiction remains limited to Article 3(2), i.e. how national governments implement the balanced budget rule. But some very relevant changes have been made in Article 8, in particular:

• If a member state fails to comply with the first ECJ ruling (see above), it can be taken to the ECJ again. If the ECJ confirms that the government concerned has actually ignored its previous ruling, it can now impose a fine (no more than 0.1% of the country's GDP);

• Interestingly, under the latest draft, the fines "shall be payable" to the eurozone's permanent rescue fund, the ESM;

• In addition, a new paragraph has been added, which makes clear that Article 8 "constitutes a special agreement between the Contracting Parties within the meaning of Article 273 of the Treaty on the Functioning of the European Union".

What does that mean in practice?

This new paragraph really reads like an insurance against any possible objections from the UK regarding the use of the ECJ outside the EU Treaties. For those who, unlike us, do not remember the Lisbon Treaty by heart, this is what Article 273 says,

"The Court of Justice shall have jurisdiction in any dispute between Member States which relates to the subject matter of the Treaties if the dispute is submitted to it under a special agreement between the parties."

Therefore, this small paragraph makes the use of the ECJ (albeit still limited to a legislative rather than enforcement role) 100% legal under the EU Treaties.

One last thing is worth noting. Following suggestions from the Polish government that Poland might decide to stay out of the agreement in the end, unless non-euro countries are allowed to be present at future meetings of euro leaders, the latest draft establishes that:

• Non-euro countries that decide to sign up to the agreement must be kept "closely informed of the preparation and outcome" of eurozone summits;

• The leaders of non-euro countries must be invited to eurozone summits at least once a year. However, the invites would be restricted to non-euro countries that not only signed and ratified the agreement, but also "declared their intention to be bound by some of its provisions."
  

Sounds like a tricky trade-off: the Poles are unlikely to take too kindly to having to institute the eurozone fiscal rules before they've joined the euro...

Labels: bailout, crisis, eurozone, fiscal compact, germany, Greece, italy

"Our efforts aim at a fiscal agreement the shape of which does not make the division of Europe into two clubs - the eurozone and countries outside the club - more lasting than is safe in our opinion."

Meanwhile, a fourth draft of the agreement is being finalised, and should be made available ahead of the next meeting of finance ministers on 23-24 January. The way ahead still looks quite rocky...

Labels: czech republic, eurozone, fiscal compact, ireland, Poland