Open Europe in 2012: a short summary of our achievements and a review of our eurozone predictions

2012 has been an important and very successful year for Open Europe, with Prospect Magazine judging us “International Affairs” think-tank of the year in recognition of our research and analysis’ increasing influence in the UK, Europe and beyond. This year, many of Open Europe’s research publications and ideas have had a direct influence on policy and decision making regarding the UK’s relationship with the EU.

We also hosted prominent figures from the world of politics, economics and business in our 2012 events programme, discussing a range of topics from the UK’s future role in Europe, Anglo-German relations to the finer points of the eurozone crisis. Perhaps the icing on the cake, in October this year, was the launch of a new independent partner organisation in Germany, Open Europe Berlin gGmbh.

To read the full review of our year, click here. Below we would like to focus on some of the predictions we made about the eurozone over the last 12 months (always a dangerous undertaking). Here is how we fared in predicting some of the key developments:

The bailouts for the Spanish banking sector and Spanish regions: In April, Open Europe’s Head of Economic Research Raoul Ruparel argued that Spanish “banks may be forced to tap the eurozone bailout fund” and highlighted that the build-up of debt by Spain’s regions would mean that they too could require bailouts. In June, Spain announced that it would request €100bn from the eurozone’s bailout funds to recapitalise its banks, while in July, several Spanish regions requested bailouts from the state which sent sovereign borrowing costs to record highs.

Second Greek bailout falling short...: In March, Open Europe predicted that, coming in at just 2% of GDP, the debt write-down of Greek debt under the country’s second bailout would be “far too small to allow Greece any chance of recovery”, with further assistance required in the future. In July, it became apparent that the second bailout had failed and in October, Greece received a two-year extension to its bailout programme, duly confirmed in late November. 

...but with Greece staying in the euro for now: While others put the risk of Greece imminently leaving the euro at 80%, Open Europe’s Mats Persson argued in January 2012 that “I doubt eurozone leaders will have the nerve to force Greece out this year.” 

Credit rating of France and eurozone bailout funds downgraded: In January, we predicted that “France could well be downgraded at least one notch…this would [also] hit the creditworthiness of the euro bailout funds”. On January 16, S&P downgraded France’s triple A rating, with Moody’s following suit on November 19, and on November 30 it also downgraded the eurozone’s two bailout funds.

LTRO would run out quickly: In December 2011, in a briefing looking at the potential impact of the ECB’s programme bank liquidly provision (LTRO), Open Europe’s Raoul Ruparel argued that while it may be welcome in the short-term, “hopes, and plans, that this funding will lead to a boost in purchases of sovereign debt look misguided.” By the summer of 2012, both Spain and Italy were seeing their funding costs rise quickly, and eventually the ECB would have to take additional action. 

Monti would struggle to fundamentally reform Italy’s labour market: In March, Open Europe’s Vincenzo Scarpetta warned of the risk that Mario Monti’s lack of a popular mandate could undermine his efforts to reform Italy’s labour market. With Monti set to step down in the coming months, the OECD has recently highlighted that Italy has undertaken limited labour market reforms, with its labour costs now amongst the highest in the eurozone. 

So not a bad record for 2012, click here to check out our predictions for 2013.

The OECD, bearer of bad news at Christmas?

A quick post on a topic which we have already explored in our internal devaluation paper and plan to look at in more detail in the New Year: competitiveness in the eurozone.

The OECD released it latest assessment of unit labour costs (ULCs) in the eurozone a couple of days ago and they do not make pretty reading for Italy or France and only slightly better for Spain:

(The graph shows ULCs indexed to 100 in year 2000. Greece= light red, Spain= green, Germany= dark red, Italy= blue  and France = turquoise).

ULCs are often taken as a measure of a country’s competitiveness, it is by no means the only measure but it is a useful indicator of the situation. As the graph above shows Italy will have higher ULCs than Spain, Greece and, obviously, Germany at the end of this year. This trend will only get worse and France could well find itself in a similar position in 2013/14 if things continue on their current path.

This highlights a point which we have made previously – for all his good work on the fiscal side, Italian Prime Minister Mario Monti has failed to provide sufficient reform of the labour market or boost productivity and improve the business climate (other areas which would also help improve the country’s competitiveness). Elections in Italy in early 2013 mean there will be little opportunity for reform in the first quarter of the year. That may be irrelevant depending on the format of the new government – there is no guarantee of a stable pro-reform coalition in Italy.

The results are similarly worrying for France which can ill afford to fall behind other eurozone states, not least because many of these countries are also improving their budget and current account deficits, while making significant product market reforms and deregulating – all of which the French government has shown little willingness to do.

As for Spain and Greece the reading is a bit more positive with their adjustments clearly having some impact – although as the OECD notes much of this has come from cuts to employment and falling domestic demand rather than successful reform. It is also clear that there is some way to go before they reach the levels of Germany (or get firmly within the bounds of acceptable differences, as we have pointed out before). With unemployment already sky-high in both places this remaining adjustment is likely to be painful.

Plenty for eurozone governments to ponder over the festive period then.

What to expect from the EU in 2013

As 2012 draws to a close Open Europe has put out its take on what to expect from 2013. Reviewing our (admittedly milder) effort at this last year, shows that we didn’t do too badly, especially for what turned out to be a very volatile and difficult year for Europe (with plenty of government interventions, which are notoriously hard to predict).

See here for the full report where we lay out our view on three key topics to watch in 2013 – discussions of a ‘Brixit’, the formulation of the new eurozone banking union and, of course, the continuation or otherwise of the eurozone crisis.

Section 1: The eurozone crisis – survival but stagnation

2013 looks likely to be a calmer, but still painful year for the eurozone, with several political flashpoints (notably German, Italian and Austrian elections) that could quickly trigger a fresh flare-up in the crisis – particularly as many of the campaigns could become de factor judgements on the eurozone crisis and the bailouts. The eurozone is unlikely to fully turn the corner, with low growth and high unemployment continuing to plague many countries. Activism from the ECB is likely to help ease concerns, with its new bond buying programme the OMT potentially activated to aid Spain at some point. This will be needed as markets will still be on edge with Italy, Spain and France face funding costs of €332bn, €195bn and €243bn respectively.

Section 2: Banking union – slow or even slower?
A decision on the second step of the banking union – a joint fiscal backstop – is unlikely to be taken amid continued disagreements and domestic pressures. Even plans to have the ESM recapitalise banks already look to have been pushed back to 2014. During the year it may become increasingly apparent that, as is, the banking union does not represent a solution to the crisis.

Section 3: Britain in the EU – a mid-life crisis or full divorce?

We don’t see any fundamental changes to the relationship, but positioning and political manoeuvring will set the stage for the 2014 (European Parliament) and 2015 (General) elections – that in turn could decide the exact nature of the EU-UK relationship in the future. Two important issues to watch will be the opt out (and back into) EU crime and policing laws as well as the negotiations on the EU budget. The general tone of the debate within the government and Conservative party will be an important test ahead of the elections.

Obviously then, this is far from an exhaustive list but simply represents our thoughts on some key points of interest to watch in 2013. Feel free to share your thoughts for 2013 in the comments below!

Silvio mentions euro exit (again), but everyone is waiting for Mario: An update on Italy

Time for a quick update on Italy, with Silvio Berlusconi and Mario Monti in the spotlight again. Over the past few days, Berlusconi's air time has increased exponentially. The gist of his interviews remains broadly the same (see our previous posts here and here). Yesterday, on Italian public broadcaster Rai Uno, he said,

"Either Germany understands that the ECB must act as a real central bank, and therefore print money, or unfortunately we will be forced to leave the euro and return to our currency."

Believe it or not, his anti-German rhetoric is paying off. Several opinion polls indicate that support for Berlusconi's party is on the rise - although it remains well behind the clear front-runner, the centre-left Democratic Party. This explains why Il Cavaliere is now urging not to "rush" to the elections - suggesting that the vote should be postponed by 1-2 weeks, to 24 February or even 3 March. Perhaps he believes that two extra weeks of electoral campaigning could make a big difference.

Therefore, it is no surprise that Berlusconi's MPs and Senators are now using all possible parliamentary tactics to delay the final approval of the budget law for 2013-15 - which amounts to pushing Monti's resignation back. For the moment, Monti has postponed his end-of-year press conference, initially due on Friday - probably a sign that the budget law will not be adopted by then.

In the meantime, uncertainty remains over what Monti will do after his resignation. According to Italian daily La Stampa, he has decided to stay out of the race, while at the same time making a strong endorsement for a group of small centre parties supportive of his reform agenda as early as this weekend (see our overview for further details about where Italy's main political parties stand ahead of the elections). 

From outside the electoral race, the article suggests, Monti would have the possibility to act as a mediator and facilitate an alliance between those centre parties and the Democratic Party. Sounds plausible, and it might turn out to be a good idea for at least two reasons:

• Opinion polls show that the Democratic Party and the smaller centre parties - that is, the political forces which have pledged to continue with Monti's reforms - would together have the numbers to build a stable government. However, the possibility of them forming a coalition cannot be taken for granted at the moment. Monti's clout could give a decisive push in this direction - which would in principle be good news for Italy and the rest of the eurozone.
• Monti's candidacy would not be risk-free. In particular, it may 'personalise' the electoral campaign too much and turn the upcoming elections into a referendum on Monti himself, rather than his reforms - which are what ultimately matters for Italy's future.

We will continue monitoring the situation closely, so keep following us on Twitter @OpenEurope for real time updates.

David Cameron says he can imagine the unimaginable: Brixit

Cameron pondering life outside the EU?

In his statement on last week's European Council summit, David Cameron was asked if he could imagine Britain leaving the EU. In the past he has usually batted away at these sorts of questions - but not this time. He said it was not an outcome he wanted, and that he does not spend much time thinking about it, but that:

"All futures for Britain are imaginable. We are in charge of own destiny, we can make our own choices." 

He added that:

"I believe the choice we should make is to stay in the European Union, to be members of the single market, to maximise our impact in Europe, but where we are unhappy with parts of the relationship we shouldn't be frightened of standing up and saying so." 

Significant? Well yes. This is the first time that David Cameron has publicly hinted at the possibility of a Brixit - the UK leaving the EU. This follows several interventions from Tory Bigwigs who've said that leaving the EU would not be a disaster, or should at least be the back-up option in case renegotiation fails. With Cameron's 'Big Europe Speech' now set for mid-January, it'll be hard for him not to frame the issue as "renegotiation or bust".

The debate is certainly heating up.

Poland has nothing to gain from rushing to join EU banking union

As we pointed out last week, the number of eurozone outs remaining outside the EU banking union is critically important for a number of different reasons. As the second largest non-euro member, Poland's decision will be an important one, not least because it will also affect the choices made by its neighbours. On our new blog platform at Rzeczpospolita - Poland's second most widely read daily - Open Europe's Pawel Swidlicki takes a closer look at the choices facing the government:

"What does this mean for Poland? Well, since 2008, EU states have in total offered around €4.7 trillion in guarantees, capital, liquidity and asset relief measures to the European banking sector. Under an illustrative scenario, were a joint resolution fund been in place during the crisis (we assume the bailed out countries would have been unable to participate) the Polish state would have had to stump up over €200bn – 74% of its GDP – whereas in reality it only had to put up €9bn. These figures are clearly purely illustrative but they highlight that such a burden sharing arrangement – based roughly on each state’s GDP and population size – would be hugely iniquitous given that Polish banks only hold 0.73% of EU wide bank assets. It should not be forgotten that this is the clear and stated, but also necessary (if it is to offer any solution to the crisis), end goal of the banking union." 

"Likewise, for similar reasons, Poland and other EU member states should be hugely pleased that the UK, with its €10.2tr of bank assets – four times the size of the German economy – is staying out of the EU banking union, and that Polish taxpayers will in no way be exposed to any of their associated risks. Fortunately, there is no realistic prospect of Poland joining the euro within the next couple of years, and the government is absolutely right not to jump the gun on declaring whether it will join the banking union or not, especially with the additional safeguards detailed above. Poland’s interests will best be served by staying out in the immediate future and seeing how the later stages, such as the joint resolution scheme, develop."

In Europe, a commitment is for life (unless you're France)

Give the French credit, they have an amazing ability to convince others that whatever the French position is, is also the 'pro-European' position.

At times, this can become laughable. Like today for example, when a UK journalist asked French President François Hollande to comment on David Cameron's hints at the 'repatriation' of EU powers. 

Hollande's answer,

To repatriate? Listen, generally when a country commits it is for life. Therefore, I believe that treaties are meant to be complied with. For the moment, I haven’t heard Mr Cameron asking to get out of certain [EU] competences during a European Council [meeting]. This discussion could take place but Europe is not a Europe in which you can take back competences. 

Right. Contrast and compare to François Hollande, March 2012 (during the presidential campaign),

I will renegotiate the fiscal discipline treaty not just for France, but for Europe as a whole. 

The [fiscal] treaty has been signed, but not ratified. Therefore, there’s some room for negotiation…My determination will be total.

Fair enough, "signed but not ratified" but still, hardly a display of cohérence by the French President. And with regard to France's record on the "when a country commits it is for life" stuff, we can't help but to think of this...

Just saying...

Banking union: are you in or out?

Ask what is the ideal outcome for the UK from the talks on EU banking union and - much like when the super-computer in the Hitchhikers' Guide to the Galaxy is asked about the meaning of life, the universe and everything - you'll get a number: in this case 5 as opposed to 42.

This is the number of countries that should stay outside of the banking union for the UK to have the greatest leverage at the European Banking Authority. Anything less and, as we've noted, there may be a risk that the very beneficial "double majority" voting rules will be re-written, with Qualified Majority Voting amongst ministers and a simple majority in the European parliament (though there's a political agreement to solve the matter through unanimity in the European Council). Any more wouldn't be a disaster, but would proportionally dilute the UK's influence.

That's of course only one of many reasons why the exact membership of the banking union matters for everyone. So, who's in and who's out? This is the current state of play:

Definitely Out

The UK: As we've noted, even if the "referendum lock" and virtually every Tory backbencher weren't  enough to keep the UK out, add €10.2 trillion worth of UK bank assets, and there's no chance that the eurozone would ever allow Britain to join. The UK could not be more out.

Out "for now"

Czech Republic - Czech Prime Minister Petr Necas wrote an op-ed for Lidove Noviny arguing that Czech taxpayers can’t be asked to save troubled European banks. The government has said the country is out "for now", and requested guarantees that its domestic banking supervisor, the central bank, will have a decisive say if a foreign bank seeks to turn its operations into a branch from a subsidiary, which is subject to stricter local regulation.

Sweden – Swedish Finance Minister Anders Borg said that "These were tough negotiations. Sweden will remain outside the banking union, but we believe this is a good compromise." However, the Swedish Government has also left the door open for joining at a later stage.

"Wait and see"

Denmark – Both the centre-left coalition government and the main opposition party, Venstre, have said they have not yet decided whether Denmark should join the banking union. Two other opposition parties, the People’s Party and Enhedslisten, have called for a referendum on whether the country should join, saying it’s required under the country's constitution. Other than the UK, Denmark is the only EU member state with a legal opt-out from joining the euro. 

Hungary – Having been very strongly critical of the original proposals, Hungary's position is  somewhat ambiguous. PM Victor Orban is playing his cards close to his chest: "In view of the proposals, we are in a much better position than anticipated... The non-Eurozone countries are now free to decide whether or not they wish to join the European banking supervisory system. Sometimes even we can be lucky”. 

Poland – Polish Europe Minister Piotr Serafin said that Poland had not yet decided whether to join, and will not declare a position at this week’s EU summit. He argued that “Our job over the course of the last few months was to create a better balance between the rights and obligations of non-eurozone countries. I think a lot has been achieved, although there is still room for improvement in some areas”. Polish PM Donald Tusk announced he will be consulting the finance ministry, central bank and the national regulator prior to making a decision. Polish daily Gazeta Wyborcza suggests the government will wait for further details on the second part of the banking union proposals to emerge, in particular concerning the common resolution fund.

Latvia – Latvian Finance Minister Andris Vilks tweeted yesterday that Latvia’s three biggest banks may fall under European Central Bank supervision, but without giving additional details. Latvia hopes to join the currency bloc in 2014, the year the new supervisory mechanism should be fully ready, so looks likely to join.

Lithuania – No official position has yet emerged from Vilnius, but like neighbouring Latvia the country wants to join the single currency by 2014 so we would expect it to opt in.  

Romania - We are still waiting for official confirmation to emerge either way, but we hear rumours from Romanian officials that "the vibe is positive". Romania could therefore well opt in.

Bulgaria – According to Bulgarian National Radio, Prime Minister Boyko Borisov seemed to suggest ahead of the EU summit that his country would definitely join the system of single supervision. However, following a number of conflicting reports, we were able to clarify that the official position is that Bulgaria is ready to join, but it has not committed to a timetable for doing so.

So the UK remains the only one that is out - indefinitely - while the Swedes and Czechs are unlikely to join any time soon. On the other side, Latvia, Lithuania are the most likely to join while Hungary, Poland and in particular Denmark are very difficult to call at the moment.

So on current count - though this is an exceptionally moving target - two probably in, three out and five uncertain.

NB This blog post was updated at 11.21 on December 18 to reflect that Bulgaria was in the "wait and see" camp rather than being definitely in.

ECB as the single bank supervisor: How high is the Chinese wall?

We’ve already assessed the impact of the new single supervisor with regards to the UK and the EBA, here and here, but there is also the obvious question of how the ECB will fare as the single supervisor.

The utmost attempt has been made to stress the separation of supervision and monetary policy within the ECB, but the fundamental fact remains that the ECB Governing Council still has a veto over the decisions of the supervisory board.

The regulation introduces a ‘mediation panel’ to “resolve differences of views” between the Supervisory board and the Governing Council (GC). However, it seems fairly clear that this panel will not be able to vote to overturn the GC decisions but simply provide another talking shop to resolve any differences. As we pointed out before this is the maximum separation allowed under the treaties and therefore the limits how high the Chinese wall between supervision and monetary policy actually can be.  Practically, separation may hold in placid times but in times of crisis it is not clear whether this will be sufficient.

There are also a few other remaining concerns and questions:

• A non-euro country can reject a decision which has been altered by the ECB GC, however, it then runs the risk of being kicked out of the banking union.
• When exactly can the ECB take over supervision from national regulators? This seems to be mostly the ECB’s own decision, however, the instances are very loosely defined and the relationship between the ECB and the national supervisors remains fairly vague. Expect turf battles.
• What does the €30bn asset threshold apply to – i.e. does it include off balance sheet items – and who determines this?
• The regulation goes to great lengths to ensure that there is a clear flow of all “relevant” information between national supervisors and the ECB. However it is not clear who decides which information is “relevant”, meaning that the "principal-agent" problem still holds. In other words, the national supervisors are likely to have superior information about the banks still under their direct supervision and may have interests which run counter to the ECB.
• As we have noted previously, this puts a huge number of tasks under the ECB’s purview – there is yet to be a clear declaration of the democratic oversight of tasks (such as supervision) which should be held to account. There is also the practical question of how it will manage these tasks in terms of staffing, offices and funding.

Plenty of details still to be fleshed out then and questions remain about how effective a single supervisor the ECB will become. And as ever, though significant, this is only the first part of what will be a very, very long journey towards an EU banking union.

A big leap towards banking union - and a victory for the UK?

Leaving aside whether David Cameron actually is right to actively back and call for an EU banking union (and our views on that should be well known), Britain did just score a diplomatic victory in Europe, securing safeguards similar to those we have previously proposed. It has also established a very important principle in the battle against "not in the euro but run by the euro" scenario.

In the early hours of this morning, EU finance ministers reached a technical agreement on the plans for a single financial supervisor under the ECB.

This deal is pretty big, as it links to a number of key questions surrounding the future of the eurozone, including whether the permanent bailout fund (the ESM) can directly recapitalise banks. It was always going to have important implications for the UK, given the threat of eurozone caucusing - the 17 writing the rules for the 27 - in the European Banking Authority (EBA) and changes to EU financial regulation (as we discussed here).

The details on the deal are still emerging and we'll look at the ECB-side later (our assessment from last night still stands). But the Chancellor George Osborne stressed that the UK (along with Sweden and the Czech Republic who also decided not to join) got a “very good deal” and that the “single market was protected”. He would, wouldn't he, so what deal did the UK actually secure and how good is it?

Double simple majority within QMV – This means technical rules at the EBA will (as before) need to be approved under QMV. Additionally, within this vote, there must be a simple majority of ‘ins’ and a majority of ‘outs’. So say that no non-eurozone country will join the banking union (which is very unlikely), this means the UK along with 4 other ‘outs’ can block any regulations which they do not support.

Revised voting rules once there are only four countries left: For the UK, there's one potential weakness, if the number of 'outs' gets below 4 then the rules will need to be reviewed - and could be completely rewritten. Currently only three countries have explicitly said they won't join: the UK, Sweden and the Czech Republic. If all remaining countries decide to join, then these rules could need to be changed almost immediately. Here's a concern: the EBA regulation is decided by QMV, the ECB regulation by unanimity. Once the UK has agreed to the ECB regulation, it loses much of its leverage. The concern is that at a later date, the double majority principle is watered down using QMV, meaning that the UK gets stuffed anyway. Also, remember, MEPs must also approve this deal. Any changes made by the EP would also be subject to QMV approval. However, as a further guarantee, there seems to a provision making clear that the revised voting modalities will need political approval at the European Council (where unanimity applies). This is not a legal protection but a political one, so not completely watertight but clearly a useful addition.

Non-discriminatory clause – The separate proposal giving the ECB supervisory powers (see Article 1 here) also includes a provision meant to commit the ECB to not discriminate within financial regulation against a single or a group of countries. 

 So a big question remains:

Who are the ‘ins’ and who are the ‘outs’? Currently the UK, Sweden and the Czech Republic have said they definitely will not join the single supervisor, while all eurozone countries are obliged to. The other non-euro countries have suggested they will have a ‘close cooperation’ deal with the single supervisor (expect for Denmark) – this basically makes them count as ‘in’. For the UK point of view, 5 non-participants seem the ideal number as it will be much easier to block unwanted regulations, while 4 could trigger the review referred to above.

Will Croatia be an ‘in’ or ‘out’? This could alter the necessary majorities in EBA. 

On current count, this is a pretty good deal for the UK and it does establish that principle that the eurozone cannot run over none-eurozone countries.

ECB's Chinese wall still full of holes?

We've had a look at the latest compromise proposal to turn the ECB into the eurozone's single banking supervisor. It has been put together by the Cypriot Presidency in a bid to finalise a deal at today's meeting of EU finance ministers. Below are some of our initial thoughts (we may update in due course).

Arguably, measures aimed at reaching a clear separation between the ECB's monetary and supervisory tasks - Germany's main concern - are the most interesting part. This is what the proposal under discussion says:

Composition  of supervisory board
Chair (can’t be a member of the ECB Governing Council)
Vice-Chair (is a member of the ECB Executive Board)
3 ECB representatives (with voting rights, but can’t perform ECB monetary policy-related duties at the same time)
National supervisors of participating member states – i.e. including non-euro countries that want to join

Decision-making 
Simple majority (Chair can cast vote in case of draw)
QMV for regulations on matters “having a substantial impact on credit institutions” – although there is no clear definition of what “substantial” impact is or who determines it.

What does the Supervisory Board do? 
Tables draft decisions and submits them to ECB Governing Council for adoption, “pursuant to a procedure to be established by the ECB” – so the details have yet to be fleshed out. Governing Council has up to ten days to object to draft decision, but has to give written justification – and is encouraged to voice any monetary policy concerns in particular.

If a decision taken by the Supervisory Board is changed following objections by the Governing Council, a non-euro country can express its disagreement (a safeguard, given that non-euro countries don't sit on the Governing Council).The country also can notify the ECB that it will not abide by the relevant decision if it is still not happy with the outcome. However, in this case the ECB will "consider the possible suspension or termination of the close cooperation with that Member State" - so if a country objects to a single proposal it runs the risk of being excluded from the banking union.

This draft then, contains some progress on the make-up of the boards and a bit more in terms of how they will interact, but the crucial decision making process still lacks some detail. Particularly over the exact interaction between the Governing Council and the Supervisory Board if the Council objects to a proposal.

It is also clear that ultimate power resides with the Governing Council and although non-eurozone countries do have somewhat of a get-out-clause, the separation between monetary policy and financial supervision still seems limited. (As we suggested would always be the case due to the legal constraints).

Much work to be done, especially on the finer points.

Three months is a long time in Dutch politics

Since the elections in September, international attention on the political situation in the Netherlands has faded.

But, over the weekend, a new opinion poll by Maurice de Hond revealed a big change. Only three months after his defeat, the party of right-wing populist Geert Wilders (photo), who campaigned on a platform in favour of the Netherlands leaving both the eurozone and the EU, is resurgent.

Wilders' PVV would be the country's most popular party were these results repeated at an election. That this would be with only 16% of the vote illustrates how volatile Dutch politics has become (it should be noted that at the last election many voters made their minds up at the last minute). But it is still striking that Wilders' Party for Freedom would jump from 15 seats in the September elections to around 24 now, according to this poll.

The two governing parties, the liberal VVD and social democrat PvdA, would fall from 41 to 22 and from 38 to 23 seats respectively, after only a few months in power.

The far left SP, which is also critical of the EU, has likewise profited from the fall in support for the government parties, increasing its number of seats to 22 from 15. The opposition D66, 50PLUS and the Christian Democrats would also see a large increase in votes.

The September election squeezed out the centrist CDA and forced together the VVD and PvDA, which are not natural political bedfellows (besides their shared 'pragmatic' attitude to Europe). The coalition has therefore resulted in several unpopular decisions among each party's supporters. The VVD had to backtrack on the agreed introduction of an extra healthcare levy which would have hit the Dutch middle class hard. In return, it was also forced to sacrifice a number of tax cuts which the party thought it had secured.

However, another important conclusion we can draw from the renewed success of both Wilders and the SP is that criticism of the eurozone bailouts and the EU in general is not going to go away. We noted this in our pre- and post-election analysis of the elections, with the parties of the centre increasingly taking their cues, if not their entire narratives, from the parties on their flanks.

One example of this was Mark Rutte's election promise not to send any more money to Greece. A few weeks ago, at the occasion of the third Greek bailout - or extension of the second - Rutte was forced to admit that he thought it was a real pity "he couldn't entirely keep" his promise, describing it as a "necessary concession".

Some were quick to proclaim the September election as a sign that the Dutch had "voted for Europe", but this was always a simplistic reading of the results and downplayed the potential for future volatility. These results would suggest that Dutch politics remain very unpredictable, and that Wilders and the Socialists are rubbing their hands in the wings.

Silvio: Who cares about increasing borrowing costs?

We noted on our blog yesterday (and in a piece in today's City AM) that Silvio Berlusconi was likely to opt for populist, anti-austerity (and, potentially, anti-German) rhetoric to regain some ground ahead of the Italian elections.

It took Il Cavaliere 24 hours to prove us right. He told Canale 5 this morning,

The fact that the elections have been brought forward following Monti's resignation is irrelevant, because we are talking about [holding them] just over a month earlier. Therefore, there's absolutely no real reason for the markets to be upset. 

With regard to borrowing costs, let's stop talking about this imbroglio, please. No-one had ever heard about the spread before. We have only heard about it during the past year. Who cares about how much interest we pay to people who invest in our [debt] obligations compared to what is paid to investors who invest in German public debt?

When the euro was introduced, we used to pay a 4.3% [interest rate on our debt], and Germany used to pay a 3.3%. Germany then decided to do one thing in its own interest. It ordered all its banks to sell all the Italian Treasury obligations they had in their coffers...The other American and international funds thought, 'Well, if Germany is selling [Italian debt] there must be something wrong with it.' So they started selling too. 

What matters to us is that the interest rates [on our debt]...have gone up by 2% - which, in a year, means less than €5bn to be added to the €80bn [Italy pays] to service our debt.

Therefore, all the stuff that was invented about the spread is a real imbroglio. The truth is that the spread was used to try and bring down a majority voted by Italians.

Enough German-bashing for one day? Nope,

I was one of the 2-3 most influential leaders in the European Council...[but] I continuously opposed German proposals and demands. I said 'no' when Mrs Merkel was demanding that Greece suffered cuts which, in my opinion, would have brought Greece - as it then happened - almost to civil war. I said 'no' to the Tobin Tax...I said 'no' to the fiscal pact, and I even used the veto...to flag up that Italy could not commit to reducing its [public] debt by €50bn a year.

As we noted before, it will be interesting to see how receptive Italian voters will be to this kind of rethoric - and if the promise of an end to German-imposed austerity will make them forget about Berlusconi's trials and all the rest. 
 

The Greek bond buyback: Greek banks are putting up a fight (as we predicted)

As we predicted two weeks ago the Greek bond buyback is turning out to be much trickier than almost everyone else expected, and for exactly the reason we suggested – the Greek banks.

Despite positive declarations throughout last week that the Greek bond buyback would reach its target of €30bn bonds submitted by the Friday deadline, the Greek government has announced that the deadline has now been moved to 12pm Tuesday 11 December.

Throughout the buyback process the Greek banks have made it clear that they want to keep their participation to a minimum and are not keen on the buyback plan generally. The reasons for why have been discussed here and here (potential losses and hit to liquidity). Needless to say, the Greek government has exerted significant political pressure to ensure that the Greek banks do participate fully.

Despite this, Kathimerini reports that the Greek government decided to extend the deal after hedge funds submitted €16bn in bonds (much of which they will make a profit on) while Greek banks submitted around €10bn. This was short of €16bn which the banks were expected to submit, and which they are likely to be pushed into submitting by tomorrow.

As FT Alphaville highlights, this did not go down too well and the press release on the extension contains a (very thinly veiled) threat that those bond holders who do not take part may not end up getting paid back at all. Stelios Papadopoulos, the head of the Public Debt Management Agency, is quoted (in the actual press release) as saying:

“Investors should bear in mind that even if Greece accepts all bonds tendered in the Invitation, it will continue to engage with its official sector creditors in considering further steps to put its debt on a sustainable path. Future measures may not involve an opportunity to exit investments in Designated Securities at the levels offered for this buy back.” 

The buyback still looks likely to be completed, but all of this highlights just how weak Greek banks are - the last thing the Greek economy needs is even weaker domestic banks (and therefore even less lending to the real economy).

Silvio is back, Mario is out: What lies ahead for Italy?

The past weekend was a particularly eventful one for Italian politics - and we followed it on Twitter @OpenEurope.

After lengthy talks with Italian President Giorgio Napolitano, Mario Monti has announced that he will step down as soon as the budget law for 2013-15 is passed. The announcement caught many off guard in Italy, but the situation had got to a point where Monti really had little choice - since he had de facto lost his majority in both chambers of the Italian parliament after Silvio Berlusconi's party withdrew its support. 

What happens next? A timeline

Monti's early resignation paves the way for early elections. The exact date will be announced in the next few weeks, but a reasonable estimate is already possible at this stage.

• The budget law is due to be submitted to the plenary of the Italian Senate for approval on 18 December - although the calendar of works may be tweaked to speed up the process. Once Italian senators have given their green light, the bill will go back once again to the lower chamber for the formal final approval. 

• Therefore, it is fair to assume that Monti could resign and the Italian parliament could be dissolved before Christmas - or immediately after, at the latest.  

• Italian law establishes that the elections have to take place at least 45 days and no later than 70 days after parliament is dissolved. Hence, we are looking at either 17 or 24 February as possible dates - with the latter already mentioned by Berlusconi to reporters yesterday night. 

What are the short-term consequences for Italy?

The next general elections in Italy were originally due in early April - meaning that the latest events have actually brought them only a few weeks forward. However, there are at least two short-term implications for Italy:

• With Monti's government leaving office earlier than planned, there will be no time to approve a new electoral law. The one currently in place envisages two different systems for the distribution of seats in the two chambers of the Italian parliament. In short, the existing law guarantees a solid majority in the lower chamber to the party or the coalition that wins the elections, but risks creating an unstable majority (or no clear majority at all) in the Italian Senate. A risk Italy should have avoided running.

• The latest events can easily be interpreted by the markets as a signal that Italy is about to go back to the pre-Monti squabbling between political parties, putting the reform agenda at risk. And in fact, Italy's borrowing costs have gone up quite substantially already this morning.

What are the potential implications for the eurozone and the EU?

Italy's eurozone partners and the EU institutions will be watching the upcoming elections very closely, for obvious reasons. It will be very interesting to see which tones will be used by the different parties during the electoral campaign, and how big an issue the eurozone crisis (and Europe at large) will be. This is what makes Berlusconi's comeback particularly relevant at this point in time.

Over the last few months, Il Cavaliere has pulled no punches in his attacks on a "hegemonic" Germany which is imposing a tough austerity cure on the rest of the eurozone. Crucially, he repeatedly argued that the "disastrous" economic policies implemented by Monti's government ought to be overturned to drag Italy out of prolonged recession and make it return to growth.

Berlusconi is well aware that his party is trailing the centre-left Democratic Party by a wide margin in all opinion polls. Given his undoubted abilities as a communicator, he also knows that he may have to insist on a quite populist, anti-austerity (and, potentially, anti-German) rhetoric to try and regain some ground on the road to the next elections.

All the more so if, as Berlusconi himself suggested yesterday, the historic alliance between his party and Lega Nord - which makes no secret of its opposition to the euro and has recently called for a referendum on Italy's membership of the single currency - is going to be restored.

Add Beppe Grillo's Five-Star Movement - another supporter of a euro referendum - to the mix, and we may be looking at an election where, if these three parties perform accordingly to what the latest opinion polls are saying, around 40% of Italians would vote for political forces which are against excessive austerity (all of them) and even against the euro (Lega Nord and the Five-Star Movement).

Meanwhile, centre-left candidate Pier Luigi Bersani has an interview in today's Wall Street Journal, where he says,

We will respect the very stringent commitments taken...and we will take them on as our own.

Good news for the European Commission, the ECB and Italy's eurozone partners? In principle yes, but we doubt Nichi Vendola - the leader of left-wing SEL party which is going to back Bersani's candidacy to Palazzo Chigi - agrees with such a statement.

In other words, it looks as if Italy is gearing up for an electoral campaign where the future of the eurozone crisis and austerity will be among the core issues - somewhat similar to what happened during the Greek elections earlier this year. Indeed, there is clearly some way before the Italian debate becomes as poisonous or categorical as the Greek one.

Extremely interesting stuff on the horizon, so keep following us for further updates.

The Four Presidents Report?

Or was it the Van Rompuy report...looking at the report on moving "Towards a genuine economic and monetary union" released earlier today its hard to judge how closely involved the other Presidents were, notably ECB President Mario Draghi and Commission President Jose Manuel Barroso.

So to recap, this was meant to be a report reflecting the views of the EU's four Presidents (in addition to the three already mentioned, also Jean-Claude Juncker, the outgoing head of the Eurogroup).

First, we've spotted a couple of areas of confusion between what European Council President Herman van Rompuy and Draghi have been saying.

The report suggests that,

"The ECB has confirmed that it will establish organisational arrangements guaranteeing a clear separation of its supervisory functions from monetary policy." 

However in his monthly press conference today, when pushed on the ECB's view on the single supervisor Draghi stressed that the ECB is a "passive actor" in all of this and was not involved in designing the legal structure of the new supervisor. Clearly these two views are directly at odds, which fails to fill us with confidence that the new tasks of the ECB will be combined with its current ones in a legally sound and practical way. A concern which has previously been voiced by ourselves and many others.

Draghi was also at pains to stress that the link between sovereigns and banks can only be broken when the banking union is complete, i.e. with a common resolution mechanism. The report argues that the set up of the single supervisory mechanism (SSM) will play an important role in "contributing to breaking the link between sovereigns and banks". Not necessarily directly at odds, but it again peaks concerns that the Council plans for banking union over-estimate the impact of the SSM.

Additionally, as the FT's Brussels Blog notes, Van Rompuy also disagrees with European Commission President Jose Manuel Barroso on the issue of debt mutualisation, with the latter favouring eurobonds.

We at least can't blame Draghi for struggling to find the time to help write the report while also running a giant institution. But if the supposed authors can't agree on the logistics it doesn't bode well for next weeks EU summit...

Berlusconi's Senators fire warning shot across Monti's bow

We told you that the four months to the next Italian general elections could be a very long time. And the political situation in Italy could be set for more ups and downs due to the events of the last 24 hours.

This is what happened:

• Last night, Silvio Berlusconi put out a communiqué saying that he is "besieged" by people asking him to run in next year's elections, and will make his final decision "within the next few days". 

• This morning, Italian Economic Development Minister Corrado Passera (in the picture) was critical of Berlusconi's declarations, arguing that "anything that can make the rest of the world even only imagine that we are going backwards is not good for Italy". A clear invitation to Il Cavaliere to enjoy a peaceful retirement.

• Retaliation has been immediate. Mario Monti was facing a confidence vote in the Italian Senate this morning on a new set of (badly needed) measures to boost the competitiveness of the Italian economy, drafted by Passera himself. A majority of senators from Berlusconi's party did not take part in the vote, while a smaller group abstained. 

• Crucially, the leader of Berlusconi's senators, Maurizio Gasparri, said ahead of the vote, "Our attitude [today] signals...the shift of our group to a position of abstention towards the government." This seems to suggest that Berlusconi's party has withdrawn its support for Monti's government.

Monti, who rushed to Palazzo Madama to cast his vote, given that he is a 'senator for life', survived this time. But if all of Berlusconi's senators show next time and abstain (which, by the way, cannot be taken for granted, given the internal divisions created by Il Cavaliere's latest hints to a comeback), Monti would be in danger of losing his majority - since absent Senators' votes do not count and bring the required majority down, as happened a couple of hours ago.

The big question is: was today's an isolated incident or a definitive change of position? Gasparri's words seem to suggest the latter could be true. Should this be the case, Berlusconi could be about to trigger another round of political uncertainty Italy really doesn't need.
 

The OBR's new forecast and the EU budget: What's in there?

On the same day as George Osborne's Autumn Statement, the Office for Budget Responsibility (OBR) published its new Economic and Fiscal Outlook. As usual, the first section we looked at was the one about how much the UK pays into the EU budget. Here is a reader-friendly table we put together, comparing the UK's net contributions to the EU budget in the latest outlook published yesterday with those in the March 2012 outlook (click to enlarge).  

So, the numbers tell us that the UK's net contribution for 2011-12 turned out to be £1.3 billion lower than expected, but the net contribution for 2012-13 is going to be £2.1 billion higher than the previous forecasts indicated. Why?

The OBR is not exactly forthcoming with a clear explanation, but the report (on page 148) notes:  

The largest change [in expenditure transfers to the EU institutions] is in 2012-13, where we have increased our forecast by £1.5 billion [N.B.: Expenditure transfers to EU institutions are something slightly different from EU budget contributions as a whole]. This mainly reflects revised estimates of GNI and VAT bases for all EU countries in 2012 and 2013. Partly because of exchange rate changes these revisions increased the UK’s relative share in both the GNI and VAT bases, particularly for 2012, and thus increased our GNI contribution. 

This increases our expenditure contributions in all future years, but the effects are partially offset by increases in the abatement [the UK rebate] after 2012-13. The expenditure transfers [to the EU institutions] have also been increased in 2012-13 because of lower than expected surpluses carried forward in the EU budget from the outturn for 2011, and to reflect increases in amending budgets in 2012.

Therefore, essentially the OBR suggests that because the UK economy has done relatively well compared to other EU countries, its share of contributions in terms of Gross National Income (GNI) and VAT base have increased. This is natural given the way the budget is calculated, although it once again highlights the fallibility of economic forecasts at the national and international level - clearly the OBR's early forecast of how the UK economy would develop relative to the rest of the EU was some way off.

The OBR also notes the impact of exchange rate changes which have also increased the UK's contributions in sterling terms. Again this is hard to avoid, although the assumption that this will hold in the longer term is far from certain - and paves the way for future forecast revisions. All this is offset to some extent by the automatic adjustments in the UK rebate (designed to account for these sorts of changes), although as we have noted recently the UK rebate could decrease in the next budget period, hampering this offsetting process.

Finally, though, as the OBR warns, much of this is rather academic given the ongoing EU budget negotiations:

The forecast is subject to risks depending on the outcome of the negotiations for the EU budget for 2013, where we have assumed an increase of 2.8%, and for the new EU budget envelope for 2014 to 2020, where we have assumed a small real terms increase.

The first assumption sounds about right - given that MEPs now seem more willing to accept a 2.9% increase in payments in next year's EU budget, as opposed to the inflation-busting 6.8% increase proposed (twice!) by the European Commission. The second assumption is perhaps a bit pessimistic, given that David Cameron has said that he will veto anything different from, at worst, a 'real terms freeze' in the next seven-year EU budget - and Germany, Sweden and the Netherlands are also pushing for a similar freeze.

This is all clearly but another round in the series of forecasts of UK contributions to the EU budget, and far from the last since the negotiations on the next long term budget are under way. But if you are still confused by all these numbers and wondering how it could all end up, we would recommend reviewing our analysis of what could come out of the negotiations on the next long-term EU budget, and how much the UK would have to pay under each scenario.

Banking union and the EBA: where do we stand?

Yesterday, EU finance ministers failed to reach an agreement on a single eurozone banking supervisor. Ahead of the meeting, the Cypriot Presidency put forward a new compromise proposal aimed at concluding a deal before the next EU summit on 13-14 December.

We have had a look at the latest drafts. Starting with the new voting rules within the EU-27 banking watchdog, the European Banking Authority, these are the most interesting changes proposed by the Presidency:

Voting on technical standards/end of restrictions on financial activities/EBA budget

European Commission proposal: QMV - meaning that countries outside the eurozone which do not want to join the new ECB-led Single Supervisory Mechanism (SSM) risk being in permanent minority

Cypriot Presidency proposal: QMV stays, but it must include at least a simple majority of countries participating in the SSM (say at least nine, assuming that only eurozone countries join the SSM) and a simple majority of countries not participating in the SSM (say at least six, assuming that none of the non-eurozone countries joins the SSM)

This goes in the right direction, although we proposed going one step further and having all decisions in this group adopted by 'double QMV' - i.e. a qualified majority of participating countries and a qualified majority of non-participating countries.

Voting on breaches of EU law/dispute settlement

European Commission proposal: An independent panel (composed of three people) takes a decision. The decision is considered as automatically adopted unless it is rejected by a simple majority of member states - including at least three countries participating in the SSM and three countries not participating in the SSM

Cypriot Presidency proposal: A larger independent panel (composed of seven people) takes a decision. The decision is considered as automatically adopted unless it is rejected by a simple majority of member states participating in the SSM and a simple majority of member states not participating in the SSM

And here is where the main problems with the Presidency's proposal lie, according to us:

•  A larger panel is good in principle. However, the proposal fails to specify how many of the seven members should be from countries not participating in the SSM;

•  Even assuming a three 'ins' + three 'outs' + the Chairperson composition of the panel, decisions would still be taken by simple majority - i.e. four of seven members;

• Overturning a decision taken by the panel becomes even more difficult under the Presidency's proposal, given that a simple majority of 'ins' and a simple majority of 'outs' are both needed to do so. Therefore, the proposal would end up giving the independent panel (and the EBA) more power. This is why we proposed that, instead of this 'reverse majority' system, decisions taken by the independent panel should be confirmed by both a qualified majority of countries participating in the SSM and a qualified majority of countries not participating in the SSM.

Enough technicalities for now - we will look at the ECB Regulation in a separate blog post.

Support for a Single Market+ deal grows: Boris calls for renegotiation of UK's EU membership terms

The Mayor of London, Boris Johnson, in a speech earlier for Thomson Reuters called for the UK to renegotiate its EU membership terms in order to, as he put it, "maximise the benefits of EU membership and the single market without being kicked out". He argued that "The choice is staying in on our terms or getting out" but that "A pared down relationship [with the EU] is essential and deliverable". He went on to say that after a renegotiation, (to remove areas not related to the single market such as social policy and fishing) the package should be put to a referendum with the question being "Do you want to stay in the EU single market as renegotiated? Yes or No?".

This is very close to what we have argued for and what our Chairman Lord Leach set out in a Times article yesterday. 

In questions afterwards, Johnson was asked about UK Government policy towards the eurocrisis, to which he said, "I do not understand why we urge countries to go forward with fiscal union" - setting himself apart from David Cameron and George Osborne who actively call for the eurozone to press ahead with more integration. He also said that the euro would limp on as the "Germans are trying to bubblegum the thing together" and backed Open Europe's suggestion of a  "double majority" voting safeguard in the European Banking Authority to counter eurozone caucusing.

Cleverly, he ended his speech by asking the audience of journalists, commentators and finance professionals, whether they would back more EU powers, withdrawal or renegotiation. Nearly the entire audience backed renegotiation.

Political risk and uncertainty remain Italy's Achilles' heel (an early pre-election overview)

We have not looked at Italian politics for a while on our blog, but do not think the Italian political scene has been uneventful, with the general elections scheduled for April (although they could still be brought forward one or two months).

There is still huge uncertainty in Italian politics and one important question remains completely unanswered: will the next Italian government be able to continue Mario Monti's reforms, needed to convince markets and EU partners that Italy can be competitive inside the euro?

As we have argued before, while the short-term risks in Spain relate to banks and funding needs, the trigger points in Italy are largely political.

An overview of where Italian politics is at explains why. Bear with us:

The Five-Star Movement: The one to watch

The Five-Star Movement, led by comedian Beppe Grillo, remains the dark horse - not least since it remains broadly 'anti-euro' and in favour of a referendum on the country's membership of the single currency. Grillo is not himself going to run for Italian Prime Minister. Instead, the party is currently selecting its candidate through a four-day online internal election - with over a thousand candidates taking part in the experiment. Grillo and his grillini are still polling at around 20% but have ruled themselves out of any alliances with the 'old political establishment'.

The question is whether people will actually vote for the party in the end, given that it has said it will not be in government no matter what happens (perhaps not wanting to 'waste' the vote). But if the party does perform according to current polls, expect shock waves through Italian politics.

The centre-left and the alliances dilemma

On Sunday, Italy's largest centre-left party - the Democratic Party (PD) - named Pier Luigi Bersani its candidate, the party's Secretary General, who won the final run-off of an internal election against Florence Mayor Matteo Renzi. Not exactly the 'fresh face' many think Italy needs - he has already served four times as a minister. He is also an old communist.

However, despite his political past, Bersani did push through a couple of laws aimed at opening up certain 'closed' professions during his years as Economic Development Minister (2006-2008), so he may not be all bad news.

Alliances are the real problem for Italy's centre-left, though. It looks certain that Bersani's candidacy will be backed by the smaller Left, Ecology and Liberty (SEL) party - led by Nichi Vendola, the Governor of Southern Apulia region. Vendola has already made clear that he wants to support a government whose agenda "has the scent of the Left". Therefore, his presence in a hypothetical coalition will make it far more difficult for Bersani and his party to pursue the necessary reforms - particularly when it comes to Italy's labour market, which clearly still needs to be opened up.

In addition, according to the latest opinion polls, PD and SEL would together secure around 36% of votes - which means that more allies would probably be needed to form a stable government (unless the existing electoral law remains in place, which may be the case in the end). Bersani has floated the idea of joining forces with Pierferdinando Casini and his centre UDC party. But Casini addresses a Catholic, socially conservative electorate - which does not sit well with Nichi Vendola, who is, among other things, a staunch supporter of gay marriage in Italy.  

The centre and the 'List for Italy': Working for 'Monti reloaded'

Given the difficulties in finding a place in the centre-left coalition, the UDC party is working on a 'List for Italy' along with two other smaller centre parties - Future and Freedom for Italy (FLI), founded by Silvio Berlusconi's former ally, Gianfranco Fini, and Italia Futura, the new movement founded by the Chairman of Ferrari, Luca Cordero di Montezemolo.

The aim is to give Mario Monti a political platform to remain as Prime Minister. This would make Monti a 'phantom candidate'. On paper, this is a smart way to get around the fact that Monti cannot stand in the elections, because, as a 'senator for life', he already has his seat guaranteed in the Italian parliament. However, the latest polls show that, together, the three parties would only win less than 10% of votes. And Monti's support amongst Italian voters is in free fall.

The centre-right: Silvio still hasn't left the building

The fate of Italy's centre-right depends on Silvio Berlusconi's final decision - in case you thought Silvio was going anywhere. Will he run for Prime Minister or not? On this blog, we followed all Il Cavaliere's deliberations closely (see here and here). The Italian press speculates frequently about the risk/chance of Berlusconi announcing a comeback. There are also growing rumours that Berlusconi may set up a new political party.

For the moment, the internal elections to choose the centre-right candidate for Italian Prime Minister have  been put on ice - waiting for Berlusconi's decision. Berlusconi's comeback - given that the guy has so far faced around twenty different trials, a couple of which still under way - would raise a lot of eyebrows but also upset many people within his own party. PdL is also currently polling at less than 15% and seems to be heading for a bitter defeat.

So all of this points to a lot of post-election political uncertainty in Italy - as we have noted before. A new, quite complicated electoral law, that would make 38% of votes sufficient to secure an absolute majority of seats in the Italian parliament, is currently being negotiated and could also change the dynamics (although it is far from certain that the law will be passed).

Four months can be a very long time in Italian politics, so watch this space for further updates.   

Fact-checking Commissioner Lewandowski (Spin alert!)

When the Commission talks about the EU budget, it's always worth taking their "facts" with a pinch of salt - they have a record of spinning the figures pretty shamelessly.  

The issue of the EU budget is refusing to go away – the torturous discussions over the 2014 – 2020 financial framework have only been deferred, while the European Parliament and member states are still at war over the 2012 and 2013 annual budgets. However, rather than working on constructive proposals to trim expenditure, EU Budget Commissioner Janusz Lewandowski (pictured) seems to be conducting a PR campaign in favour of greater EU spending.

And you guessed it, he's being generous with the truth. 

In an interview with Bild, he made a few points that were either highly contestable or outright factually incorrect. Here is our quick fisk of some of his arguments:

Bild: Why is the Commission not making any savings?
Lewandowski: That is not quite true. With regard to 2013 our proposal is consistent in real terms, which means we are only seeking an adjustment in line with inflation. 

Lewandowski is being disingenuous – the latest draft for the 2013 budget forward by the Commission foresees a 6.7% increase in spending, well above inflation. The real terms freeze refers to the ‘commitments’ section of the budget, not the actual cash contributed by member states.

Lewandowski: Many German states such as Brandenburg, Schleswig-Holstein and Saxony are dependent on EU funding. 

Well, "dependent" is an interesting choice of words. For richer member states, the structural funds involve recycling cash. As we have shown, there's no good reason for the EU’s continued involvement in the regional policy of wealthier member states such as the UK and Germany. In fact, there's no conclusive evidence that the structural funds offer the best comparative use of public money considering their contradictory criteria, and their deadweight, opportunity, and administrative costs.

But Lewandowski also shows poor understanding of the redistribution flows within Germany - and the relative wealth of German länder. If by "dependent" he means "net recipient", he is correct that Brandenburg and Saxony (both formerly in the DDR) are net recipients of EU structural funds. However, Schleswig-Holstein is definitely a net contributor, and a big one at that. According to recent research published by Open Europe’s German sister organisation, Open Europe Berlin, Schleswig-Holstein pays €3.80 into the structural funds (via general taxation) for every €1 it gets back. If Lewandowski wanted to prove our point that the structural funds suffer from irrational redistribution patterns, he did a good job. But such a poor grasp of the basics is worrying from the Budgetary Commissioner.

Bild: All member countries have to save - why not the EU?
Lewandowski: It is misleading to use national austerity programmes to justify cuts to the EU budget. The EU budget is far too small to significantly affect the deficits [in national budgets]. It accounts for only 1% of EU GDP. 

Leaving aside the boring and completely arbitrary debate about the EU budget ‘only’ being 1% of EU-wide GDP, Lewandowski is on shaky ground when asserting that contributions to the EU budget only have a negligible impact on national deficit targets. For example, France is seeking to reduce its budget deficit by €33bn next year (a mix of cuts and tax increases) whereas its contribution to the 2013 annual budget is set to be €21.8bn - hardly insignificant. 

Lewandowski also ignores the symbolic impact of the EU demanding higher contributions at a time of national austerity – one of the factors contributing to citizens’ widespread disillusionment with the EU. 

So not Lewandowski's finest hour. If he is stuck for inspiration we would recommend he takes a look at our ‘alternative EU budget’ for 2012 which cut EU spending by €41bn (almost 30%) while also re-focussing the remaining spending far more effectively on boosting jobs and growth.

Britain has the perfect chance to work out how to loosen its ties with Brussels

Open Europe Chairman Lord Leach of Fairford has an op-ed in today's Times, where he argues,

If Britain pulls out of the EU, that will be as much due to our condescending Eurozealots, who have called every turn wrong for 30 years, as to UKIP. Both alike tell us that radical change in the European structure is out of the question.

Moderate sceptics, who want to stay in the EU but might want “out” if the Government can’t negotiate a changed relationship, are the majority of the electorate, but their voice is too seldom heard. The BBC neglects them, presumably calculating that pitting Nigel Farage against Denis MacShane does more for its audience ratings than analysis of the most important issue facing the country.

Circumstances, however, have conspired to deliver our fate to the moderates. While the eurozone faces a polarised choice between economic union or break-up, Britain has three options: “more Europe”, exit or renegotiate. And since “more Europe” has become unthinkable, the effective option is exit or reform. In a word, the Europhiles have lost. The sceptics, however, have not yet won. For this, the coalition is to blame for its failure to articulate a constructive vision of a Europe that would meet the aims both of the integrationist countries and of those that put self-determination first.

Whether Britain withdraws or remains, it will have to negotiate terms with an EU that has lost its way after the triumphs of its first 50 years, when tariffs were cut, enemies reconciled and a haven given to victims of dictatorships. Its icon, the euro, has awakened resentments unknown since the Second World War. Unemployment in the South is at 1930s levels, with nothing but depression and endless financial chicanery in sight. The region has slid inexorably down the global economic league tables.

Brussels treats the catastrophe predictably as a pretext for “more Europe”, but Germany’s reaction, caught between the appeal of European solidarity and reluctance to be the milch cow for Mediterranean indiscipline, has been cautious and ambivalent. There is nothing in Berlin’s response to suggest a closed mind to a new deal with the countries outside the eurozone. They know that a British government that signed up to deeper economic integration wouldn’t last a week. They also read the polls, showing UKIP neck-and-neck with the Lib Dems. It is not in Germany’s interest to drive Britain to withdraw, depriving the EU of its financial centre, its principal advocate of democracy and free trade, and one of its two foremost military powers, not to mention its highly lucrative market.

Germany is ripe for change. After two thirds of a century’s atonement, it no longer has to disprove a wish for domination or to pretend that without uniformity there can be no peace in Europe. It can admit that the proudest European heritage - German music, Italian painting, French civilisation, English literature - is utterly removed from the integrationist obsessions of the European political class. Liberated from guilt, Germany begins to recognise again democracy’s ability to reconcile voters to political defeat, to repeal unworkable laws and dismiss bad leaders, and to tackle difficulties with the grain of national traditions, institutions and instincts, not by the imposition of one-size-fits-all European-level solutions.

The shape of a new Europe therefore writes its own script - a neighbourly alliance, partly federal, partly by treaty between independent states, in which those who want to share a currency and economic sovereignty and those who just want co-operation would be equally welcome. Only trade, the bedrock of the original Common Market, would be universal.

In truth, it is not the eurozone that is the “core” of Europe - it is the single market. In the new, flexible model for EU integration, the UK would remain a full member of the customs union and single market and maintain its vote on making Europe’s trading rules. But it could limit Brussels’ involvement in areas such as policing and crime, fisheries, farming, employment law and regional policy. 

The EU’s institutions would be adapted so as not to discriminate against countries who have chosen to be less integrated. Likewise, the UK would not vote on EU laws that did not apply to itself. The presumption of travel towards a common destiny would cease to apply, since all forms of EU membership would be equally legitimate. 

 Instead of institutional tinkering and going round in circles on the euro, national democracies would start working out how to succeed in the globally networked modern world. Each country would find its own way back to prosperity. That, after all, was how Europe became rich and civilised in the first place. Relieved from unwanted legislation and desperate sacrifices for the euro, we would rediscover the amity of neighbours. 

We might even find that a confederate EU had become a magnet for Norway and Switzerland. That would be a delicious irony - sceptical Britain bringing about a strengthening of Europe that has eluded the zealots.